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TENTH CRYPTO RESEARCH REPORT Q2 2020 PUBLISHED

Crypto Research
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TENTH CRYPTO RESEARCH REPORT Q2 2020 PUBLISHED

On June 23th, the newest edition of the quarterly “Crypto Research Report” was published. Endorsed by Bitpanda and Coinfinity, the tenth report includes an in-depth analysis of Irving Fisher’s Equation of Exchange model, Tether’s risk to Bitcoin’s price, and an Exclusive interview with the team behind MimbleWimbleCoin. Since the last edition of the Crypto Research Report published on February 10th, Gold is up 10.6% and Bitcoin is down 5.91%.

The Crypto Research Report can be downloaded from the following links:

Crypto Research Report – English

Crypto Research Report – Deutsch

In three chapters and more than 60 pages, the authors provide a critical and academic perspective on the legal, technical, and economic aspects of cryptoassets. Key topics covered in the report:

• Modeling Bitcoin’s Price with the Equation of Exchange. The target addressable market for crypto assets is approximately $212 trillion. The largest use cases include medium of exchange, which includes all global fiat currencies worth $126 trillion, and consumer loans with a global value of $42 trillion. If Bitcoin penetrated 10% of this market over the next ten years, each Bitcoin would be worth $397,000 by the end of 2030.
• Is Tether a Catastrophic Risk for Bitcoin? This guest article by Schlossberg&Co’s Pascal Hügli investigates if Tether is really being used to manipulate the price of Bitcoin or not. Since the beginning of this year, $5 billion worth of Tether USDT has been issued. If the new Tether is not fully backed, and if Tether eventually collapses, this will most likely bring down at least one exchange and wreak havoc on the price of Bitcoin.
• Exclusive Interview with the Team behind MimbleWimbleCoin. MimbleWimbleCoin is a new privacy-based coin that was airdropped to Bitcoin holders for free in December. Since December, the price has soared 6000%, and the authors argue that their token economics are superior to the privacy coin Grin, and that they are more scalable than Monero.

Figure 1: Federal Reserve Assets Almost Double and Dollar Index Stays Flat

Source: St. Louis Federal Reserve FRED, Yahoo Finance, CryptoResearch.Report

For the first time in Bitcoin’s young life, the global economy briefly plunged into recession. Covid-19 resulted in 40 million Americans unemployed representing an unemployment rate of 15%. In Austria, there are 571,477 unemployed (12%). In Germany, 2.639 million (5.8%).

Despite having an entire quarter’s GDP erased from 2020, hedge fund managers are all singing the slogan, “All Time High by the Fourth of July”. What this slogan means is that the S&P 500 is expected to hit a new all-time high by July. Although, this sounds unbelievable, central banks around the world have the power to make this happen, and so far, they seem to be doing everything they can to weaken their currencies and artificially prop up asset prices.

Despite unprecedented quantitative easing, trillions of short-term credits to the repurchase agreement market, and lowering interest rates to zero, the US dollar index (DXY) barely moved. This means that the dollar can take a lot more abuse from the printing machines before it starts to devalue against other fiat currencies. Also, the 5-year forward inflation expectation for the US dollar is sitting at a low 1.43%.

Traditional markets are no longer reflecting the state of the economy. Instead, they are reflecting the central bank’s effort to keep the pension system alive and to get Trump reelected. Unfortunately, there is no turning back now. Every hiccup in the economy needs to be met with even greater inflation, leading to an even wider gap between reality and finance.

And where was Bitcoin during all of this? From $3,600 in March to $10,000 in May and then back down again to $9K, the ride on the Bitcoin rollercoaster has made some nauseous and some rich. Many cryptocurrency companies are in dire shape due to the shut-down and lack of customers, but Bitcoin hodlers just keep holding on in hopes of a post-halvening bull market. So far, the halvening has been a non-event. Bitcoiners around the world joined in on Zoom webinars to celebrate Bitcoin’s special day, but the Bitcoin price hardly budged. The uncertainty surrounding the economy has definitely put a damper on the crypto market. However, there is still hope yet. As governments around the world wage currency wars to protect their export markets and inflate away their burdensome debt, some households may turn to Plan B.

We are happy to announce that the Crypto Research Report has struck a strategic partnership with CoinTelegraph, the largest crypto news company in the world. The September edition of the Crypto Research Report will be distributed by CoinTelegraph on their website, which gets 6 million views a month. The goal of the joint effort is to publish the results of a landmark study on institutional demand for crypto assets in the German-speaking countries. This study is being conducted by Professor Dr. Philipp Sandner from the Frankfurt School of Finance and Management, Professor Dr. Alfred Taudes from the Vienna University of Economics and Business (WU), and the editor of the Crypto Research Report, Demelza Hays.

This edition of the Crypto Research Report is especially thankful to the Crypto Research Report’s Premium Partners, Coinfinity in Graz and Bitpanda Pro. Coinfinity is a broker in Austria that is famous for creating an easy to use Bitcoin cold wallet called The Card Wallet. Coinfinity also enabled Bitcoin purchases at 4.000 retail outlets across Austria via the Bitcoinbon program. In addition to Coinfinity, we are exuberant that Bitpanda has joined as a Premium Partner of the Crypto Research Report! Bitpanda is a fully licensed exchange based in Austria. They have recently added Bitpanda Pro, which offers more liquidity and lower fees. We are personally excited about Bitpanda Metals, which allows investors to diversify their portfolio with physically backed and 100% insured precious metals.

Bitcoin vs Bitcoin Cash: What’s the Difference?

Crypto Research
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Bitcoin vs Bitcoin Cash: What’s the Difference?

Bitcoin, the most valuable and widely-used cryptocurrency, has catalyzed an explosion of innovation, disrupting a broad spectrum of markets across hundreds of different industries around the world. The king of crypto, however is not without flaws — issues that many alternative cryptocurrencies attempt to address, the most visible of which is Bitcoin Cash.

What is the difference between Bitcoin and Bitcoin Cash, though, and why does it matter? 

In this post, We’ll break down the fundamental differences between BTC and BCH.

How Bitcoin Works

In order to understand the difference between Bitcoin and Bitcoin Cash, it’s necessary to first develop an understanding of Bitcoin and how it works.

The release of the Bitcoin white paper on 31 October 2008 by Satoshi Nakamoto was a game-changer for the world of digital currency. The idea of digital currencies can be traced back to as early as David Chaum’s ideation of “eCash” in 1983, which was first implemented in 1995 as “Digicash.”  Several other digital currencies were launched before the release of Nakamoto’s white paper, but all of them suffered from the same problem — double spending.

The Double Spend Problem

The “double spend problem” relates to the digital nature of digital currencies — at a fundamental level, these currencies are just digital files. In order to ensure a digital currency has value, the system upon which it operates must ensure that the files that the currencies consist of cannot be copied in the same way a regular file on any given computer can be copied. 

The solution to the double spend problem was first published by Nakamoto in the “Bitcoin: A Peer-to-Peer Electronic Cash System” white paper. The Bitcoin system uses a distributed encrypted ledger spread across all network participants, leveraging a Proof of Work system first ideated in 1999 by Markus Jakobsson and Ari Juels. 

Nakamoto’s’ solution to the double spend problem draws from previous digital currency research much in the same way that Albert Einstein drew upon the works of Lorentz and Poincaré in the composition of his theories of special relativity and general relativity, but is the first solution to wholly solve the double spend problem.

The Importance of Blocks

A key feature of Satoshi Nakamoto’s Bitcoin solution is the implementation of the blockchain — the Bitcoin network uses Proof of Work to keep network participants honest, and writes transactions to an ongoing chain of encrypted blocks. These blocks ensure that the ledger which keeps track of all balances cannot be changed retroactively — transactions from a given period are encoded into an immutable block, with the encryption process incorporating the output of the previous block in order to make retroactive artificial block creation functionally impossible. 

This architecture solves the double spending problem, but presents an important question, one that catalyzed the creation of Bitcoin Cash — how big should blocks be?

The Block Size Debate

Each transaction that occurs on the Bitcoin network takes up a specific amount of size. Depending on the complexity of the transaction, the size of an individual Bitcoin transaction can typically range between 250 and 600 bytes of data. 

In the early days before the launch of the Bitcoin network, there was no limit to the size of a block. In 2010, however, Nakamoto — who was still actively interacting with the Bitcoin community and publicly contributing to Bitcoin code — implemented a 1 MB block size restriction, hardcoding it into the architecture of the Bitcoin network.

This hardcoded limit was implemented for a number of reasons. Early Bitcoin developers cited the unforeseen development of pool mining, the creation of dedicated mining hardware, and an evolving fee market as reasons for the implementation. Satoshi, apparently realizing that there would need to be a maximum block size in order to prevent the creation of blocks larger than miners would accept, implemented the 1 MB Bitcoin block size limit in late 2010.

The Impact of Block Size Limits

The Bitcoin network collects transactions into batches that are encrypted into blocks every ten minutes. Limiting block size therefore limits the total amount of transactions that can be processed in that time period — at an average of roughly 500 bytes per transaction, the Bitcoin network can process a little over 2,000 transactions per block. 

This restriction limits the Bitcoin network to a transaction throughput speed of around 7 transactions per second, which is not sufficient for large scale payment networks — the VISA network, for example, is capable of processing 24,000 transactions per second. 

With Bitcoin increasing in popularity and value, the impact of block size restrictions on transaction throughput sparked a debate in the cryptocurrency community, with many community members calling for an increase in block size limits in order to expand the transaction throughput capacity of the network.

The core problem with block size expansion highlighted by opponents of the size increase is the inflation of block size — the larger the block, the more complex the process of encryption is, eliminating smaller network participants with access to fewer resources from participation. A Bitcoin network with a larger block size could potentially lead to the centralization of computing power directed at maintaining the Bitcoin network, which is antithetical to the core decentralization ethos of the Bitcoin project.

The Origin of Bitcoin Cash

Bitcoin Cash was created as a direct solution to the issues created by block size restrictions. Removing the block size limit, however, required a “fork” in the Bitcoin blockchain — creating a new, altered implementation of the Bitcoin code that would create a new blockchain.

On August 1st, 2017, block size increase proponents forked the Bitcoin blockchain to create Bitcoin Cash, a new implementation of Bitcoin code that increased the block size limit to 8 MB. This new block size allowed for far more efficient transaction throughput, and created a new chain that provided everybody with Bitcoin in their Bitcoin wallets at block 478558 with an equivalent amount of Bitcoin Cash on the new Bitcoin Cash blockchain — free money!

Bitcoin & Bitcoin Cash Compared

Bitcoin and Bitcoin Cash have divided the cryptocurrency community, with proponents of each arguing for the supremacy of their chosen side. Here are the basic differences between the two:

Transaction Speed:

Bitcoin: As of Q3 2018, the speed at which the Bitcoin network is able to process transactions ranges between 10 and 20 minutes, with occasional spikes in network traffic causing transaction confirmation times to surge beyond one hour. 

While second-layer scaling solutions such as the Lightning Network promise to reduce transaction confirmation times to less than one minute, Bitcoin transactions are still not fast enough to facilitate instant purchases.

Bitcoin Cash: The relatively small load on the Bitcoin Cash network compared to the Bitcoin Network, roughly 10% in size, currently allows the Bitcoin Cash network to confirm transactions at a far higher rate. Bitcoin Cash transactions are typically confirmed within ten minutes, but are often almost instantaneous. 

Centralization

Centralization is a key issue in the BTC vs BCH debate. The development of dedicated mining hardware and the forming of mining pools, in which miners rent hardware located on massive server farms, has led to the centralization of both Bitcoin and Bitcoin cash.

Bitcoin: Mining pool juggernaut Bitmain currently operates a large portion of the hardware dedicated toward Bitcoin hash power. Data from Blockchain.com demonstrates that BTC.com and Antpool, both operated by Bitmain, contribute roughly 32% of all Bitcoin hashpower.

Bitcoin Cash: Data published in July 2018 demonstrates that almost 50% of all Bitcoin Cash hashpower is located on server farms operated by Alibaba and Amazon. More recent data shows a split between CoinGeek at 25%, BTC.top at 14%, and BMG Pool at 14% as the largest players in the Bitcoin Cash mining industry.

While both networks are actively mined by different mining pools, the hardware that is performing the mining is largely centralized in server farms, presenting centralization concerns for both Bitcoin Cash and Bitcoin.  

Bitcoin Vs Bitcoin Cash 

Bitcoin Cash and Bitcoin are fundamentally similar, with the only difference consisting of block size. While the Bitcoin Cash block size increase does solve the transaction throughput issue for the short and medium term, it’s entirely possible that block size would need to be increased again, further reinforcing network centralization.

Bitcoin’s centralization solutions such as the Lightning Network, however, have also demonstrated their own centralization concerns. 

Ultimately, there is plenty of room for both cryptocurrencies, and both have something unique to bring to the cryptocurrency ecosystem.

About the Author

This is a guest post submission written by Kieran Smith. Kieran Smith provides content strategy and copywriting services for cryptocurrency companies at Bitcopy.

How long until the Bitcoin Halving is priced in?

Demelza Hays
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How long until the Bitcoin Halving is priced in?

The market sentiment in the crypto markets since the halving can be described as cautiously optimistic. So far the event itself has had little impact on the price but this impact is still anticipated by many. In this situation it is worth considering the question of when and in what form we can expect to see these effects taking place. A look at the history of Bitcoin is certainly important.

Every four years, Bitcoin’s number of coins released to the network every ten minutes drops in half. There are currently 6.25 Bitcoins released every 10 minutes. This number has dropped from 12.5 with the halving event a few weeks ago. Holding demand constant as we say in economics, and cutting the supply in half, should theoretically increase the price of Bitcoin. But the question is, by how much will the Bitcoin price increase, and have investors already priced this into the market?

A similar reduction in supply applies to Dash. Every 383 days, the amount of new Dash released to the market decreases by 7.14%.

Historically, the price of Bitcoin went up substantially in the year following the halving. For example, Bitcoin had a 5,569% return in 2013 after the 2012 halving. Bitcoin had a 1,334% in 2017 following the 2016 halving. Dash also had its best year in 2017, the year after the second Bitcoin halving. Dash went up + 9,186%.

We are specifically interested in how many weeks it took for Bitcoin to reach its new all-time high after the halving. In recent research by Binance, they show that Bitcoin took over a year to reach its next all time high after the 2012 (52 weeks) and 2016 (75 weeks) halvings.

https://cdn.substack.com/image/fetch/c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F2844c08c-3290-4c5c-9eea-9f6bdbb8439f_1302x898.png
https://cdn.substack.com/image/fetch/c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F04999164-085d-476f-995d-e5a5dc936da4_1314x898.png
Source: Price Data from Coinmarketcap.com, CryptoResearch.Report

Overall, we are not convinced that the halving has been priced in yet for Bitcoin. Bitcoin’s return for the year is 25% while Dash is up 75%.

Answering the question of how long this process could take this time is particularly difficult. It is also not clear, how much altcoins will follow the lead of Bitcoin but if the future is anything like the past, we could be looking at over one year before the reduction in supply is fully priced into Bitcoin’s price.

We are in a Bitcoin Rally, not an Altcoin Rally

Demelza Hays
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We are in a Bitcoin Rally, not an Altcoin Rally

Several weeks have passed since the Bitcoin Halvening. Weeks in which large parts of the market have been relatively quiet. Hardly any major cryptocurrency today differs from its position on May 9th, two days before the halving. Compared to mid-February and mid-March, however, a clear difference can be seen in the performance of individual projects during the Corona crisis. This article attempts to get to the bottom of this phenomenon and to draw parallels to the halving of 2016.

In an economic expansion, small firms tend to have better returns than large firms. In an economic recession, the reverse tends to be true: large firms tend to outperform small firms. This is because in an expansion, fiat inflation pushes investors into increasingly risky investments, but during a downturn, investors seek conservative safe havens to store their wealth.

For example, the small-cap Russell 2000 index dropped 38.6% between February 19th and March 17th, when the S&P 500 large-cap index was only down 29.5%.

A similar pattern may exist with cryptocurrencies.

When the global economy is in an expansionary period caused by easy credit lending policies, diversification into alt-coins tends to outperform Bitcoin. However, when the global economy is hit hard, Bitcoin tends to outperform a diversified portfolio of alt-coins. For example, trading volumes of the altcoins in the Top 10 on Coinmarketcap.com decreased by 30% between March 6th and April 1st, while Bitcoin’s trading volume didn’t decrease at all.

Figure 1: Trading Volume of Bitcoin vs. Altcoins

https://cdn.substack.com/image/fetch/c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Ff5733422-1c4c-43c4-a87c-4ea06decef1d_1256x664.png
Source: Coinmarketcap.com, CryptoResearch.Report

The market capitalization of the altcoins in the Top 10 on Coinmarketcap.com decreased by 37% between March 6th and April 1st, while Bitcoin’s market capitulation decreased 27%. Unlike Bitcoin’s trading volume, Bitcoin’s market capitalization did drop significantly in response to the Corona Virus. This is because the majority of crypto asset investors only have exposure to Bitcoin and not to altcoins. When an economic recession occurs, altcoin investors may see Bitcoin as a safe haven, but the overall market sees government bonds as a safe haven. Therefore, an economic shock puts selling pressure on Bitcoin as investors go into bonds and large-cap stocks like Facebook, Apple, Netflix, and Google. The buying pressure that altcoin investors have as they flee altcoins and go into Bitcoin dampens the selling pressure that Bitcoin experiences during an economic crisis.

Figure 2: Market Capitalization of Bitcoin vs. Altcoins

https://cdn.substack.com/image/fetch/c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F06c6b034-834b-47ec-a984-8aacf2c8a858_1284x626.png
Source: Calculation of Top 10 market cap excludes Bitcoin and Tether, Coinmarketcap.com, CryptoResearch.Report

Figure 3: Return of Bitcoin vs. Altcoins During Corona Virus

During the same time, Bitcoin’s price lost 28% while altcoins in the Top 10 lost 38% on average with Tezos and Ethereum being hit the hardest, and XRP being the most stable.

https://cdn.substack.com/image/fetch/c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F7d3841b8-9c9c-4e59-853b-8425bef13121_924x520.png
Source: Coinmarketcap.com, CryptoResearch.Report

So the big takeaway: During an economic crisis, Bitcoin is expected to out perform altcoins.

Another time when Bitcoin is expected to outperform altcoins is during the Bitcoin Halvening. During the last Bitcoin Halvening on July 9, 2016, Bitcoin’s dominance was 83%. Bitcoin’s dominance did not begin to drop until March of 2017, over half a year later. By January of 2018, Bitcoin’s dominance had reached an all-time low of 32%.

Currently, Bitcoin’s dominance is 65% and shows no signs of weakness. In light of a Bitcoin halvening, many cryptocurrency investors are exchanging altcoins for Bitcoin.

Between the economic shock that caused a flight to safety for altcoin investors and the reduction in Bitcoin’s supply, which will take months to impact the market, there is strong evidence that Bitcoin’s dominance will grow compared to altcoins in the Top 10. The altcoin season is not expected to begin until the global economy has reopened, investor sentiment has increased, and economic uncertainty has decreased.

This can be clearly seen from the fact that, apart from Bitcoin and Ethereum, hardly any cryptocurrency was able to restore its price level of mid-February. Economic uncertainty offers no fertile ground for high-risk speculation. In general, the risk tends to rise with falling market capitalization. Only general economic stability will help the altcoin sector to stabilize.

Discrepancies identified in the transparency data provided by PAX Gold and Tether Gold

Crypto Research
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Discrepancies identified in the transparency data provided by PAX Gold and Tether Gold

A recent analysis of PAX Gold (PAXG) and Tether Gold (XAUt), specifically with regards to reporting and transparency on the underlying gold backing their tokens, raised multiple questions due to inconsistencies in the data provided. In both cases there were inconsistencies between the number of tokens issued and the amount of gold backing the tokens in aggregate as well as inconsistencies in allocations to multiple specific addresses according to the data provided by PAX Gold and Tether Gold themselves.

Due to the fact that Tether Gold was held by only 64 individual addresses at the time of initial analysis and also had relatively infrequent on-chain transactions, it was trivial to audit the underlying gold using the data provided by Tether’s “Gold Allocation Lookup” tool.

Findings Regarding Tether Gold’s Backing as of Approximately ~14:00 UTC April 19, 2020

1) There were six addresses that did not have the same amount of gold allocated to them on the blockchain as indicated by Tether’s “Gold Allocation Lookup” tool.

2) One address was over-allocated by the same amount another address was under-allocated by, netting each other out. However, the discrepancy on each address was still significant (2.264 troy ounces).  

3) Two of the six addresses with discrepancies had no gold allocated to them at all but indicated 1/10th of an ounce (~$170) on the blockchain.  This can not be explained by a minimum precision in the system as there were other addresses with lower total XAUt balances with the correct amount of gold allocated both on the blockchain and according to Tether’s “Gold Allocation Lookup” tool (see also Tether’s assertion about precision on their transparency page that physical gold is tracked to 1/1000th of a troy ounce and XAUt tokens are tracked to six decimal points of precision).

4) These discrepancies cannot be explained due to transactions that occurred while completing the analysis because the most recent transaction was almost 24 hours prior. The analysis was performed between ~11:00-14:00 on April 19, 2020 UTC.

5) Tether’s “Gold Allocation Lookup” tool showed 34.0173 troy ounces (~$58,000) less backing (40,094.657 ounces) than was indicated by the number of tokens issued according to the blockchain at the time of analysis (40,128.674 ounces).

6) Tether had 100 bars listed as backing assets ranging in weight between 373.762 to 415.408 troy ounces which is well within the expected weight range for LMBA 400 oz good delivery bars according to LBMA specifications. However, Tether’s “Gold Allocation Lookup” tool does not provide the fineness, gross weight or fine weight of the bars so it was impossible to determine if any given individual bar was over-allocated with respect to its actual weight.

7) The data suggested that Tether Gold does not partially tokenize any individual bar as evidenced by the fact that the allocation of every bar fell well within the expected weight range for LBMA 400 oz good delivery bars although this is impossible to verify without additional information. 

8) Tether’s transparency page did not shed any light on any of the discrepancies at the time of the analysis. 

9) Tether’s transparency report showed more physical gold backing Tether Gold than could be verified with their “Gold Allocation Lookup” tool. The transparency report and blockchain both indicated 40,128.674 ounces vs. 40,094.657 ounces reported by the lookup tool.

10) The data presented above raises the question as to whether or not Tether Gold is in fact tracking the underlying gold to 1/1000th of an ounce precision as stated on their transparency page. 

11) Tether’s “Gold Allocation Lookup” tool fails to provide bar photos, bar gross weight, bar fine weight, bar purity, bar refiner/brand or bar location (see the difference as compared PAX Gold below). PAX Gold also provides a time stamp on their allocation reports while Tether Gold does not. 


While there could be any number of potential explanations for the discrepancies, such as the “amount is not statistically significant” (0.085% of the total), there should be no discrepancy greater than the three decimal points of precision Tether Gold itself says their underlying gold is tracked to and this was not the case.  

Findings Regarding PAX Gold’s Backing as of Approximately 15:30 UTC April 30, 2020

1) PAX Gold’s single largest holder is 0x5195427ca88df768c298721da791b93ad11eca65 which at the time of analysis on held just under 63% of the total PAX Gold supply (16,051.0676 tokens, over $27 million USD) but PAX Gold’s “Gold Allocation Lookup” toolindicates 0 ounces of physical gold backing the tokens stored on this address. This discrepancy has appeared consistently for more than two weeks.


2) As of the time of analysis, PAX Gold had issued 25,497.096 PAXG tokens, but only reported holding 9,616.175 troy ounces of gold bars (gross weight) through their “Gold Allocation Lookup” tool and only 9,446.024 troy ounces of those bars were allocated to Ethereum addresses holding PAX Gold tokens.

3) The data suggested six bars may have been over-allocated as compared to both their gross and fine weights. 

4) The data suggested that five bars may have had allocations that exceeded the maximum weight of the LBMA good delivery bar specification which is 350 – 430 troy ounces in gross weight. The five over-allocated bars ranged from 463.88 to 652.65 troy ounces in allocation.

5) These discrepancies are far too big to be considered rounding errors and are significantly greater than the discrepancies found in Tether Gold despite the fact that PAX Gold is licensed and regulated. 

6) PAX Gold’s “Gold Allocation Lookup” tool does not provide bar photos or bar locations.


7) Any potential claim that 0x5195427ca88df768c298721da791b93ad11eca65 is an “unbacked treasury address” (or similar) is not consistent with data reported on CoinMarketCap.com which indicates that PAX Gold has a supply of 25,497 tokens in circulation with a market cap of over $43 million USD.  

Conclusion

The “Gold Allocation Lookup” tools provided by both PAX Gold and Tether Gold fail to provide critical details regarding the underlying gold and both show less underlying gold than tokens issued. 

Caveat to these findings: Due to the fact that PAX Gold has far more frequent on-chain transaction activity and there are far more addresses holding PAX Gold than Tether Gold, some of the discrepancies outlined above may be due to timing.  This data has not yet been analyzed with a full archive Ethereum node to mitigate any potential timing discrepancies. However, the discrepancies are too large and too frequent to be explained entirely by timing alone. Timing also could not explain the lack of any physical gold allocation to 0x5195427ca88df768c298721da791b93ad11eca65.

PAX Data: https://drive.google.com/open?id=1NlGfMhL5IWxJMtAJv4MwN7kC_TzsEbLY
Tether Data: https://drive.google.com/open?id=1cUv5YvrHhVCycEVmsBn8QPsb9VamsZoN

Disclaimer: The findings above are based solely upon the publicly available data provided by Tether Gold and PAX Gold and the Ethereum blockchain and do not necessarily correspond to the actual physical gold holdings of either entity.

Author Bio: Brian Hankey is an entrepreneur and Co-founder of CACHE.  CACHE is a provider of transparent, regulated, redeemable gold-backed tokens with GramChain physical asset tracking.

Exclusive Interview with Jonas Groß and Manuel Klein on the Academic Blockchain Podcast

Crypto Research
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Exclusive Interview with Jonas Groß and Manuel Klein on the Academic Blockchain Podcast

Listen Now to our exclusive interview with Jonas Gross and Manuel Klein who recently co-authored an article discussing what central banks are going to issue new digital currencies, and which ones actually use blockchain technology.

In this podcast, we discuss how most of the countries that are issuing central bank digital currencies (CBDCs) are actually NOT using distributed ledger technology (DLT) or blockchain. The only country that is confirmed to be using DLT for their CBDC is the Marshall Islands, and they are using Algorand, which is a permissioned database structure. There is NO country that is using a public and permissionless to issue a CBDC currently. Not really surprising.

We discuss the history of money and the difference between retail and wholesale central bank digital currencies. We also discuss potential risks of this newly issued currency.

Jonas is the author of the World Economic Forum’s recent paper on Central Bank Digital Currencies that was published in Davos in January. He is working at the Frankfurt School of Finance and Management in Germany, and he is doing his doctoral degree in Bayreuth. Manuel is working for Factset, and is involved in many monetary reform groups. They can both be found on LinkedIn if researchers would like to further discuss the results of their paper.

The paper is here: https://medium.com/the-capital/how-will-blockchain-technology-transform-the-current-monetary-system-c729dfe8a82a

Our weekly newsletter this week discusses how Bitcoin outperformed altcoins in the Top 10 during the economic crisis. To read about the two main reasons that Bitcoin is forecasted to outperform a broad index of altcoins over the next few weeks, subscribe now!

https://cryptoresearchnewsletter.substack.com/

What is the Best Gold-backed Token?

Demelza Hays
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What is the Best Gold-backed Token?

Perth Mint’s Gold Token (PMGT), Paxos Global’s PAX Gold (PAXG) token, DIGIX Dao (DGX) vs. buying physical gold with crypto via Vaultoro or Bitpanda

Dear Crypto Asset Investors,

As the investment consultant of the Cayman-based Dash Investment Foundation, I designed a Dash and Gold rebalancing strategy that suggests for the Foundation to buy gold on a regular basis. I had to do extensive research on the fees, stability, liquidity, and risks of several gold-backed tokens.

In the end, the Supervisors and Directors of the foundation, decided not to buy a gold-backed token but rather to directly buy gold from a company that stores the gold on the Foundation’s behalf in vaults in the Alps (Liechtenstein and Switzerland).

However, the Foundation may make a position in one gold-backed token, and the questions that matter the most for us are:

  1. Do we as the token holder or buyer legally own the gold that backs the token?
  2. If the company goes bankrupt, do we lose our investment or is our investment ring-fenced on their balance sheet?
  3. How liquid is the gold-backed token? If the foundation invests in Paxos Global’s PAX Gold (PAXG) token, will we be able to sell our gold-token and close our position?
  4. How correlated is the gold token with the price of gold? Does it trade at a premium or a discount?
  5. What are the fees?

This article briefly compares three gold-backed tokens including the Perth Mint’s Gold Token (PMGT), Paxos Global’s PAX Gold (PAXG) token, and DIGIX Dao (DGX). As you can see from Figure 1 below, the blue dots show that DIGIX Gold Token traded at a discount to the gold price while the gray dots, PAX, traded at a premium until mid-March of 2020, when all gold tokens began primarily trading at a premium. Out of the three coins, Digix Gold Token is the most volatile and Perth Mint Gold Token is the most stable when comparing the price of the coin on the market and the spot price of gold.

Figure 1: Stability of Gold-backed Tokens 12/01/2019 – 04/24/2020

Source: Coinmarketcap.com, barchart.com, CryptoResearch.Report

Figure 2 below shows that PAX gold token has the highest liquidity or daily trading volume. However, even PAX’s daily trading volume liquidity is quite low, averaging a little over $ 1 million per day during 2020.

Figure 2: Trading Volume of Gold-backed Tokens 01/01/2019 – 04/24/2020

Source: Coinmarketcap.com, barchart.com, CryptoResearch.Report

Figure 3 shows that PAX is the gold-backed token with the largest market capitalization and liquidity.

Figure 3: Market Capitalization of Largest Gold-backed Token, PAX 01/01/2019 – 04/24/2020

Source: Coinmarketcap.com, barchart.com, CryptoResearch.Report

Perth Mint’s Gold Token (PMGT)

The Perth Mint’s Gold Token (PMGT) is the world’s first digital asset backed by government-guaranteed gold stored at the Perth Mint. PMGT is issued by a company called InfiniGold and trades on the KuCoin Exchange. The Perth Mint is the world’s largest refiner of newly mined gold and has AUD 4.5 billion worth of gold under custody for clients. Each token is backed 1:1 by Perth Mint digital GoldPass certificates which represent one ounce of physical gold held in storage at The Perth Mint. The weight and purity of every ounce of gold backing PMGT is assured by the Mint’s sovereign owner, the Government of Western Australia. Regarding fees, PMGT on their website proudly states that they have apparently no fees for custody, storage, insurance or management. However, if you read the small print in their terms and conditions, you can find they charge a fee called the “certificate fee”. This is basically when you buy or sell gold using their phone application, the company creates a digital certificate that involves creating or destroying an ERC-20 token.

Source: GoldPass Users terms and conditions, PerthMint.com

If you trade PMGT on secondary markets like the cryptocurrency exchange KuCoin, then the certificate fee does not apply. The certificate fee only applies when buying or selling directly to InfiniGold. But be careful what price they charge for buying gold or selling gold, because they may put a spread on top of the spot in order to extract profits. If you have bought Perth Mint Gold Token directly from the issuer before, please comment or email us below about your experience and the spread on gold’s spot that you paid.

Paxos Global’s PAX Gold (PAXG)

Each token represents one fine troy ounce of a 400 oz London Good Delivery gold bar, stored in Brink’s gold vaults. Anyone who owns PAXG owns the underlying physical gold, held in custody by Paxos Trust Company. Regarding fees, PAX has similar fees to Perth Mint’s Gold Token. For example, whenever you buy or sell PAXG from your Paxos account (on either the wallet or PAX Gold pages), Paxos charges small fees to process both the creation and destruction of PAXG tokens (see fee schedule below). This includes all sales or conversions of PAX Gold to or from USD, PAX, gold bars or unallocated gold. These fees do not apply on the itBit exchange or anywhere else outside the Paxos wallet. 

Source: Paxos.com

However, in addition to Perth Mint’s certification or creation/destruction fees, PAX also has fees for transferring. Whenever PAXG tokens are sent via Ethereum, Paxos charges a small (0.02%) transaction fee, and the Ethereum network charges nominal gas fees (in Ethereum). This paragraph is included on their website:

“Sending a PAX Gold (PAXG) token from one ERC-20 address to another, such as when moving funds from a wallet to an exchange, is an on-chain transaction; possession of the token is transferred and recorded on the Ethereum blockchain. 

There are two kinds of fees that occur when you send PAXG on the blockchain: 

  • Standard ‘gas’ fee: Sending digital assets on Ethereum, requires computing power, or ‘gas.’ Just like any other Ethereum token, PAXG requires standard gas fees paid in ETH to compute the transaction. 
  • PAXG on-chain transaction fee: PAXG charges an additional fee. That fee is set to 0.02% of the amount of PAXG sent on the blockchain.

For example, if you want to send 10 PAXG from one Ethereum address to another, and you want to ensure that the receiver gets at least 10 PAX after fees, you should send at least 10.0020004001 PAXG total to cover the cost of the on-chain transaction fee. If you initiated a transfer of 10 PAXG, the receiver would get 9.998 PAXG after fees.”

Digix Dao (DGX)

There are two tokens associated with this company: DGD and DGX. The one that matters for the gold market is DGX, which equals one gram of standard gold.[1] The company reportedly procures its gold from LBMA-approved refiners. The tokens are issued by Pte. Ltd. in Singapore, and the gold is stored at The Safe House in Singapore.

DGX does not have a creation/destruction fee or certification fee like PAX and Perth, but DGX does have a storage fee, and they also have a transfer fee similar to PAX. Every time a DGX transaction takes place on the Ethereum Blockchain, a 0.13% transfer fee is charged. There is also a 0.60% per annum storage fee that is charged on account balances.

Conclusion

To summarize the three gold-backed tokens, we find the Perth Mint’s custodial risks and fees to be the lowest, however, PAX has the highest liquidity, which matters. DGX has the highest fees.

In the cryptocurrency world they say, “Not your keys, not your crypto.” Well, the parallel for gold would be something like, “Not your vault, not your gold.” All of these gold-backed stablecoins have counterparty risk. Perth’s vaults could be seized by the government or Perth Mint could freeze just one person’s gold account if instructed to do so by the government. Therefore, diversification in custodians is a good rule of thumb, and even owning some physical gold privately to eliminate counterparty risk is an option as well.

In addition to the Paxos Gold-backed token’s daily liquidity and market capitalization, the coin pays an annual interest rate of 4% on cryptocurrency lending platforms like Crypto.com. The Crypto Research Report portfolio has 15% allocated to PAX Gold, and is staking that gold on Crypto.com.

Perth Mint’s Gold Token would almost be the best gold-backed token on the market, except, you can only trade the token on KuCoin Exchange currently. In contrast, PAX is traded on reputable exchanges like Kraken.

As an alternative to buying a gold-backed token, companies like Bitpanda and Vaultoro allow users to directly buy gold with cryptocurrencies. Vaultoro’s solution for example allows investors to own the underlying physical gold and the gold is held in custody by Vaultoro at Philoro Vaults in the Alps. Vaultoro’s solution has a 1.9% fee for buy or sell limit orders and and a 2.5% fee for boy or sell spot orders. Vaultoro also has a spread between spot and bid-ask, therefore, the amount of premium that you pay can be quite high. Liquidity is also an issue since the Vaultoro orderbooks do not have that many trades.

Winners and Losers

What comes up, must go down. Last week, Hive pumped 525%. This week, down 55%. The week’s biggest losers also include Dash with -5% and Atom with -5%. Dash’s correction may be because their annual reduction in supply by 7% just occurred last week, and the price pumped prior to the reduction in supply. The CRR Portfolio contains two of the coins that are in this week’s biggest loser list.

On the biggest winners list, we have Ethereum and Bitcoin both up 13%, and Stellar up 12%. The CRR portfolio is holding one of the coins that are in this week’s biggest winner list.

Figure 1: Largest 7-Day Returns for Top 50 Market Capitalization Coins

Source: Coincodex.com, CryptoResearch.Report

Crypto Research Report Portfolio

Almost two weeks ago, we added MimbleWimble Coin (MWC) to the portfolio and we have gained 78.87% so far. We bought in at $13.49, and the price is currently $24. We added the coin after having a very deep and close talk with one of the founders of the coin, who remains anonymous, but is open to discussing the technical concepts of privacy. He or she is truly an expert on Internet privacy.

This week, we closed our position in Zcash after speaking with the CTO of Ledger, Charles Guillemet, about Zcash’s inflation bug that means we are unable to prove the total supply of the coin. There could be an infinite amount of Zcash, and we would not know.

Our second trigger of five triggers to sell Crypto.com’s CRO at 0.064 was briefly breached this week (please see newsletter from March 29), So, we are planning to sell the second tranche of our CRO once CRO’s price hits 0.064 again. We bought into CRO on March 26th for 0.044. We are up 27% on this trade over the last five weeks.

The CRR Portfolio is up 19.62% for the year.

Source: Price Data from Coinmarketcap.com, CryptoResearch.Report

THE REST OF THIS SECTION IS FOR OUR MEMBERS ONLY. TO SEE OUR ENTIRE PORTFOLIO IN THIS WEEK’S CRYPTO RESEARCH NEWSLETTER, SUBSCRIBE HERE.

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The Crypto Research Portfolio is staking Dash on the Celsius network and earning 6.71% per annum. The portfolio is also earning 8.32% on USDC and 2.53% annual interest on Bitcoin on the Celsius network. We are also earning 12% APR on our CRO coins and 4% on our Pax Gold coins on Crypto.com.

Beware! The popular crypto lending company, Celsius, has changed all of their Bitcoin and Dash addresses for all clients. This means that all Celsius users should create new Bitcoin and Dash addresses. Any Bitcoin or Dash sent to old Celsius addresses after May 1st may result in permanent loss.

That’s all for this week folks! If you would like to read our free 50-page quarterly report supported by Coinfinity AG and Falcon Private Bank please visit www.CryptoResearch.Report. The report is available in English and German. 

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Disclaimer

In 10 out of 10 Years, Value Average Investing Gave a Higher Return than Dollar Cost Averaging on Bitcoin

Demelza Hays
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In 10 out of 10 Years, Value Average Investing Gave a Higher Return than Dollar Cost Averaging on Bitcoin

A small change to the Dollar Cost Average strategy increased Bitcoin’s return by 20% over the last decade.

Dear Crypto Asset Investors,

Everyone talks about Dollar-Cost Average (DCA) but no one ever talks about Value Averaging (VA). The article discusses how VA beat DCA for the past 10 years for Bitcoin investors.

Figure 1: Value Averaging Beat Dollar-Cost Averaging for Bitcoin (2010-2019)

Source: Coinmarketcap.com, CryptoResearch.Report

If you want to invest in Bitcoin and other cryptocurrencies, you have to decide if you want to dump all of your money into Bitcoin at once or spread out your investment over a certain period of time, normally a year.

People tell you to do the latter and spread out your investment over a period of time. The famous Crypto YouTube personality Ivan on Tech tells his listeners to Dollar-Cost Average in almost every episode.

But does Dollar-Cost Averaging really work with Bitcoin? The answer is that DCA works, but Value Averaging works even better as the backtest shows. In our research, Value Averaging beat Dollar Cost Averaging every year of Bitcoin’s existence.

In this article, we compare Buy and Hold, Dollar-Cost Averaging, and a little known strategy that only seasoned stock traders use, called Value Averaging. We also provide the dataset for any analysts that would like to play with the raw data.

When prices are going down in the cryptocurrency market, some sellers panic and sell. Investors that are convinced of the blockchain technology, do not sell, but whether ask, “Should I buy the dip?”

Value Average (VA) investing helps investors to buy more when the price of Bitcoin and other crypto assets are going down during a dip and to buy less when the price of Bitcoin and other crypto assets are going up during a rally.

When an investor wants to invest in an asset, there are two common strategies. The most common approach is just to go all in at once called Buying and Holding. The second approach is to spread out their investment over a period of time, normally a year called Dollar-Cost Averaging (DCA). For example, an investor that wants to buy Bitcoin today and has $10,000 to invest can buy Bitcoin at the current spot price of $8,750, or they could invest $1,000 a month for the next ten months.

Many investment advisors would recommend do the latter approach, because DCA smooths the portfolio’s volatility and maximum drawdown. DCA especially makes sense in a bear market, when the price of the asset is going down. Imagine investors that went all in during the December 2017 rally to $20,000 a Bitcoin. These investors suffered enormously. If they had dollar-cost averaged in, they would have faired better.

However, there is a simple change to the DCA strategy that has been found to provide even higher results in traditional asset markets like the stock market. This strategy is called Value Averaging (VA).

Here is how value averaging works: Suppose you determine that you want to invest $1,000 in cryptocurrencies. If you dollar-cost-average, this means that you would invest $1,000/12 = $83.33 each month. With value averaging, you take the $83.33 as the goal amount to invest, but some months you invest more (when the price of BTC is going down) and other months you invest less (when the price of BTC is going up).

This is how VA looked in 2019:

  • On January 1, 2019, you would have invested $83.33 at $3,843.52 per Bitcoin and received 0.021681514 Bitcoin.
  • On February 1, 2019, you should normally have to invest $83.33, so that means that your total investment at this point should be $83.33 (from January) + $83.33 (from February) equal to $166.66.
    • Since the price on February 1, 2019 was $3,487.95 per Bitcoin, your original investment from January is now worth $75.62 (0.021681514 times $3,487.95).
      • Since the price of Bitcoin went down, you need to invest more this month than the normal $83.33 goal. Specifically, you need to invest $166.66 (how much you should have in your portfolio by now) minus $75.62 (the value of your portfolio).
      • This is equal to $91.04. So you should have invested $91.04 at the beginning of February 2019 instead of $83.33.
  • Repeat this calculation every month to determine how much you need to invest.

As you can see in this example, you have invested more because the price of Bitcoin rose, and the opposite would be true if the price had risen.

Figure 2: Value Averaging Increased Return Every Year for an Investor that Invested $1000 a Year

Source: Coinmarketcap.com, CryptoResearch.Report

So what would a sample strategy look like for 2020? If the price of Bitcoin goes down, the Value Averaging strategy suggests to buy more.

Figure 3: Sample 2020 Value Averaging with Fake Bitcoin Prices

*These values are fake values. Source: Coinmarketcap.com, CryptoResearch.Report

As you can see, some months the strategy says not to buy any cryptocurrencies at all. This is because the portfolio grew enough in value to reach the target invested amount. This is one benefit of the Dollar Cost Averaging strategy compared to Value Averaging. With Dollar Cost Averaging, you at least buy a little amount every month, which means more satoshis in the end or “stacking sats” as they say online, even if you paid more for them than you would have with Value Averaging.

This article was originally published in March to the subscribers of the Crypto Research Report weekly newsletter. If you would like to receive professional financial analysis without waiting, subscribe.

THIS SECTION IS FOR OUR MEMBERS ONLY. TO SEE OUR ENTIRE PORTFOLIO IN THIS WEEK’S CRYPTO RESEARCH NEWSLETTER, SUBSCRIBE HERE: HTTPS://CRYPTORESEARCHNEWSLETTER.SUBSTACK.COM/

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The Unessential Elite: Blockchain and Crypto Jobs for the Bored and Newly Unemployed

Crypto Research
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0
The Unessential Elite: Blockchain and Crypto Jobs for the Bored and Newly Unemployed

If you’re like the many employees who have recently found themselves furloughed- you’re looking for something at home to keep you busy. Look no further.

Perhaps the most exciting thing about securing a job in crypto is that this doesn’t mean you’re actually working with currency. Crypto jobs are essentially any occupation that exists within a peer-to-peer, decentralized framework- occasionally compensated with these digital tokens of lore.

This means that you don’t have to be one of the wall streets suited elites to gain a crypto paycheck. While day trading in crypto can definitely be a boon for your bank account in these rather economically uncertain days- just make sure that you’re using a decent exchange platform. One preferably made with newer users in mind. Exchanges like https://bitvavo.com/en are ideal for anyone who’s looking to get in on the trading side of crypto jobs- but for everyone else, common requisites need not apply.

COVID-19 has not only had a massively detrimental effect on our health, but it’s also put millions out of work- leaving them without an outlet for creativity, usefulness, and a much-needed paycheck. While some believe that getting paid in cryptocurrency doesn’t sound like the best way to fund your family’s toilet roll needs, what it can offer is something positive to focus on. Cryptocurrency not only allows you compensation for your you may likely be doing anyway, but it also offers you the ability to speculate on future markets- which may offer many some much-needed hope for tomorrow.

Remote Working on the Rise

The remote workforce has exploded in the last few years, even before the rise of COVID-19 and it’s newfound “Unessential” workforce. In the wake of this virus, millions of people have found themselves outside of work, as their particular skill sets may not illicit “essential” status, or their jobs won’t allow them to work from home… yet.

Crypto employment opportunities are available to more people than one might think. While programmers and developers will always sit on the front lines of this profession, artists, entrepreneurs, and even trade workers can possibly find good-paying work in the digital sphere.

In fact, many of these jobs are fairly far from the beaten path, as few require degrees or job history- just proof that you can do the work desired in a satisfactory manner. Which opens up new avenues for artists and other traditionally vague freelance work. So long as you don’t mind your paycheck in cryptocurrency. Meme generation specialists, street artists, content creation, and even public speaking jobs are coming under the crypto compensation banner.

If you’re flexible with which crypto you’re comfortable earning, as well as clever with social networking platforms like Facebook and Reddit, you can get paid purely by posting random things that others are interested in. Influencers are where the big money is made, but there are a number of sites that will allow you to make crypto based off of ad engagement or social engagement on your posts.

Where to Look for Crypto Jobs

Apart from earning a much-needed paycheck, working from home at this time may actually help protect your mental health. A survey released by Flexjobs in February, employees and employers alike said that working from home and promoting flexibility would likely lead to increased morale and productivity. With 80% of remote employees reporting less job-related stress, which is something we could all enjoy right now.

The Mental Health Foundation also says that “employment is vital for maintaining good mental health”, meaning that many of us should be looking for something to keep us busy and make us feel valued during these uncertain times. There are a number of places that one can easily go to sniff out a gig that pays in crypto. Especially when you can’t roam far from your couch, these jobs are ideal. AS many of them have extremely flexible hours and are more focused on output than anything else.

There are always the popular part-time or freelance job sites, like Upwork or Freelancer- but make sure that you don’t discount career classics like LinkedIn or Indeed.com. Searching for terms like “cryptocurrency” or “blockchain” on these sites can be fairly rewarding for the crypto career explorer. There are also sites that collate crypto jobs specifically. Sites like Cryptocurrencyjobs.co, Cryptojobslist.com, and crypto.jobs all focus solely on jobs within the blockchain and crypto sphere, making it even more simple to snag a crypto job without ever leaving the house.

MWC – Extremely scarce scalable ghost money has finally arrived

Crypto Research
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0
MWC – Extremely scarce scalable ghost money has finally arrived
mimblewimble coin ghost-money

What makes good money [https://www.mwc.mw/good-money] in the Information Age? The quality of a monetary product is primarily attributable to it being (1) recognizable, (2) scarce, (3) censorship resistant, (4) durable & indestructible, (5) extensible, (6) salable, (7) portable, (8) fungible, (9) private and (10) divisible.

The greatest disruptive innovation in monetary history was published on October 31, 2008 by the pseudonymous Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System [https://bitcoin.org/bitcoin.pdf] which outlined a tamper-proof, decentralized peer-to-peer protocol that could track and verify digital transactions, prevent double-spending and generate a transparent record for anyone to inspect in nearly real-time.

As shown with Bitcoin over the past decade the market takes a monetary product as it currently is along with speculation of what it may become instead of what it was.

It took approximately eight years before a similar disruptive monetary innovation was published when the pseudonymous Tom Elvis Jedusor placed the original MimbleWimble white paper [https://github.com/mimblewimble/docs/wiki/MimbleWimble-Origin] on a Bitcoin research channel and then disappeared.

In the 49 page formal math proof published in 2018 titled Aggregate Cash System: A Cryptographic Investigation of Mimblewimble [https://eprint.iacr.org/2018/1039.pdf], Fuchsbauer, et. al. concluded, “In this paper, we provide a provable-security analysis for Mimblewimble. We give a precise syntax and formal security definitions for an abstraction of Mimblewimble that we call an aggregate cash system. We then formally prove the security of Mimblewimble in this definitional framework. Our results imply in particular that two natural instantiations (with Pedersen commitments and Schnorr or BLS signatures) are provably secure against inflation and coin theft under standard assumptions.”

A Mimblewimble based coin enables greater network scalability, privacy and fungibility than legacy blockchain protocols. All transactions on the base layer use CoinJoin with Confidential Transactions and signature aggregation. Whale alerts are not even possible with extremely scalable ghost money. But as with everything there are trade-offs in fundamental characteristics that each monetary product must make.

In a 2016 podcast [http://diyhpl.us/wiki/transcripts/mimblewimble-podcast/] Bitcoin core developer Peter Wuille stated,

“Introducing Mimblewimble into Bitcoin in a backwards-compatible way would be a difficult exercise. It may not be impossible, but it would be hard. I think the way if people were experimenting with this, I would expect it to be an experimental separate chain or sidechain. In a sidechain we would not introduce a new cryptocurrency but it would be a separate chain. There are some downsides to Mimblewimble. In particular, it does not have a scripting language…a scripting language is very neat to play with, but it has a privacy downside. Mimblewimble takes this to the other side where you have very good privacy but at the expense of no other features any more.”

Fortunately, there has been significant research done since then and with Mimblewimble these types of scripts and applications are possible: Multi-Signature transactions, time locks, atomic swaps, and hashed time-locked contracts which are the building block of payment channels and Lightning Network.

In January 2019 GRIN and BEAM both launched to extreme anticipation as Mimblewimble base layer coins. However, both have extremely low stock to flow ratios and GRIN does not have a supply cap.

On January 18. 2019, before GRIN launched a developer opened an issue on Github [https://github.com/mimblewimble/grin/issues/2423] about GRIN’s emission rate and supply cap but was summarily dismissed. Because of GRIN’s lack of interest in a supply cap the developer interpreted that as a green light to experiment with a sounder monetary policy.

In February 2019 MWC was announced as a fork of GRIN. The initial stock of both BEAM and GRIN were created by mining which was highly inflationary. For software development funding, GRIN relies on donations and BEAM allocates part of the block reward to a foundation.

In October 2019 a Bitcoin and MWC atomic swap [https://www.mwc.mw/mimble-wimble-coin-articles/update-on-atomic-swap-progress] was completed on testnet.

In November 2019 MWC mainnet launched as an experimental separate chain and has functioned flawlessly according to the consensus rules ever since. The consensus rules [https://github.com/mwcproject/mwc-node/blob/master/core/src/consensus.rs] provide for a total of 20,000,000 MWC. 10,000,000 will be proof of work mined and the initial stock of 10,000,000 were created in the genesis block.

The MWC initial stock was distributed differently than either GRIN or BEAM by using these three ways: (1) 2,000,000 to the developers for software development work immediately after the genesis block was mined; (2) 6,000,000 about a month after mainnet launched via an airdrop program [https://www.mwc.mw/airdrop-info] that has primarily gone to the most grizzled and sophisticated veterans in the crypto-industry: Bitcoin holders who registered with more than 148,000 BTC at the bottom of the bear market between April and July 2019. Some were unclaimed and will either be burned, airdropped or added to the HODL program; and (3) 2,000,000 will be distributed over the infancy years of the project via a HODL program [https://www.mwc.mw/hodl] to those who continue to hold MWC. Registration is functional and over 6.7m of 8m MWC are registered. Registered MWC are still fully liquid and can be moved at the user’s discretion.

The MWC developers have stated in the Roadmap [https://github.com/mwcproject/mwc-node/blob/master/doc/roadmap.md], “There are many potential places development resources can be allocated and they will be chosen based on market needs with highest priority given to requests that will primarily benefit and come from the buyers and hodlers of last resort.”

Just because a new monetary product is created does not mean that the market ascribes it any value. Such was the case from January 3, 2009 to January 2011 where Bitcoin traded at less than $0.25.

And such was the case on December 2, 2019 when the MWC airdrop began to be distributed. On December 3rd MWC hit an all-time low of about $0.25 or a market cap of less than $2m.

Bitcoin has clawed its market cap from nothing. Likewise, MWC was nearly worthless, nevertheless, a heartbeat was detected and the speculation network effect started. Some people have started to acquire and hold MWC just in case it might catch on. It seems that fundamentally good products always do eventually.

The MWC difficulty algorithm is based on pure proof of work. Inherited from GRIN was the use of C29 and C31 and, in the future, C32 and C33. Under the consensus rules C29 is scheduled to phase out around November 2019 at a rate of 1% per week. Pure proof of work, which the MWC team considers a superior form of security compared to alternatives like proof of stake, requires a tradeoff between emission rate and security.

As MWC’s price began firming the decision was made unanimously by all interested stakeholders to hard fork MWC, remove the C32 and C33 parts of the consensus code and rapidly harden the MWC emission rate. This would leave MWC the sole coin on the C31 algorithm.

An algorithm for which there is an ASIC designed but not put into production. On January 17, 2020 Innosilicon announced [https://www.innosilicon.com/html/news/39.html],

“We are sorry to inform you that our Grin product G32 GPU ASIC fabrication has not been supported well by the foundry… so we have to put this production on hold till future clearance. Innosilicon invested huge amount of R&D dollars to complete the innovative CC31/CC32 Grin GPU ASIC design to our satisfaction because we believe in Grin and its core team.”

On March 31, 2019 the MWC hard fork went flawlessly and on April 7, 2019 the emission rate decreased by approximately 75%. The stock-to-flow changed from 6.4 to 25.7. By February 2021 the MWC stock-to-flow will be over 62.

Although still in its infancy, MWC has been consistently trading above a $100m market cap with a monthly mining emission around $500,000. By market capitalization, this makes MWC the #3 privacy coin behind Monero and Zcash and in the top-15 proof of work coins around Ravencoin and Decred. But in nominal numbers MWC is miniscule compared to Bitcoin’s $90m of weekly emissions.

MWC is designed to be extremely complimentary to Bitcoin and atomic swaps will only strengthen that relationship. Bitcoin can function as an extremely effective monetary VPN.

There seems to be significant information asymmetry regarding Mimblewimble and even the existence of MWC [https://www.mwc.mw]. As a result, it will be very interesting to see how the market responds to this six month old monetary product. When performing economic calculation the profits will go to those who calculate correctly and the losses to those who calculate incorrectly. The order book will be the arbiter of opinions.

After all, in an era of pandemic lockdowns, infinite bailouts, rising inflation, draconian wealth taxes and other financial, political and geo-political turmoil it just might be that the market is interested in a monetary product that delivers on being extremely scarce scalable ghost money.

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