Crypto is (almost) all grown-up

Reflections on Ethereum’s DevCon5 and an evolving industry

Landing back in San Francisco from a week of talks, meetings, and Matrix-themed social events at Ethereum Foundation’s DevCon5 in Osaka, Japan, it’s hard not to reflect how far we have come.

Silhouettes of people’s heads retained for dramatic effect.

With Bitcoin turning 10 years old earlier this year and Ethereum just barely over 4 years old, it’s easy to think we are old, yet young. Working in the space, we like to harp on how the user experience is like a Chinese finger trap at times where complexity traps some users and scares away the rest of the users. Developers have a laundry list of Medium post (rants) of reasons the technology barely works or, at least, does not work as we expect in the age of cloud computing.

Zooming out, however, it’s pretty clear breakneck innovation can be messy but Bitcoin, Ethereum and the greater blockchain industry are starting to grow up.

Controversy among revolution

On the second day of DevCon, attendees woke up to a story of “‘[Is Ethereum a] Scam’ or Iteration?” controversy on Twitter ignited by Leigh Cuen at Coindesk as she tried to address the need for the Ethereum protocol to be upgraded against early Ethereum marketing claims ignoring obvious scaling issues. With a planned upgrade (hard fork) planned for 2020, we can all agree that the current system will not work as we grow.

James Prestwich “What to Expect When ETH’s Expecting” is a great guide to understanding the implications of an ETH 2.0 upgrade, or upgrades I should say. Some of the most attended sessions at DevCon5 covered the multiple steps to upgrading the Ethereum blockchain from a proof of work chain (PoW) to proof of state (PoS). The first phase is slated for January but I’m calling late Q1-Q2 2020 due to typhoon-like delays.

Making decisions is ~easy~ when (dead)lines (etymology) are drawn.

Beyond ETH 2.0 discussions, decentralized finance (DeFi) and related financial products were the most exciting talks at DevCon5. From a great whiteboard session on tBTC ‘s protocol for depositing $BTC into Etheruem and Ampleforth’s protocol seeking price supply equilibrium to UMA’s flexible smart contract infrastructure for creating synthetic assets, it’s hard not to be impressed by the speed and breadth of innovation in the space.

So is Ethereum a scam? Cuen followed up her piece the following day stating “Ethereum’s World Computer is a movement, not a product” recognizing that current capabilities are different from what is possible on a longer time scale.

Read: software, like life, is not static and what really matters is evolving and creating a better future.

How long will this take? The Internet, the consumer version at least, is approaching 30 years old. The fiat version of the U.S. Dollar will turn 50 in 2021. Maybe, just maybe it will take a little more time than 4 years for the Ethereum community to get it right.

Regulatory clarity

The year of 2019 has been jam-packed with regulatory announcements. Depending on whether you believe one token will rule them all or multiple tokens can coexist and compete, you loved or hated this guidance.

In September, EOS reached a settlement with the SEC for $24 million for its ERC-20 token sale pre-launch of the blockchain. The SEC’s stance on the settlement seemed to confirm a presale of a cryptocurrency is a security offering while the subsequent release of the EOS blockchain and native $EOS token is a separate asset which may be transferred between users without triggering securities laws. Stated differently, the manner of sale of EOS ERC-20 on Ethereum created an investment contract to build the EOS blockchain while the subsequent native $EOS token looks like a commodity rather than an investment contract. This stance is aligned with the SEC’s early statements that a cryptocurrency sold under a security offering does not necessarily taint the subsequent asset such as the Ethereum presale vs. Ether ($ETH). The CFTC confirmed these views as the new chairman stated, “ether is a commodity”. Confused? Coin Center does its best to explain.

In July, the SEC gave the go-ahead for non-custodial broker-dealers to transact with security tokens opening the door for Alternative Trading Systems (ATS) like Open Finance to enable peer to peer trading settlement of stablecoins, a nod to the crypto ethos of removing counterparties. I expect several ATS to be approved with this model in addition to an expansion of the role of transfer agents which we support at TokenSoft.

All of these statements and settlements are welcome news to the industry and its proponents, hopefully moving beyond 2017 misdeeds. Personally, I think we all owe a donation to Coin Center for these results.

Trend towards compliance

When TokenSoft first launched in the fall of 2017, ICOs and token sales were still on a prolonged ‘Spring Break,’ drinking the kool-aid of rocketship prices and over-exuberant investors. The price corrected and so did compliance.

Talking to our customers, it’s obvious that 2020 is going to be an incredible year for compliant token sales with almost $3 billion in security token sales in the pipeline. Yes, $3 billion. The number is just as crazy to me as it is to you. INX, a TokenSoft customer, is planning the first tokenized IPO in the U.S. in an attempt to raise up to $130 million. Funds have been the largest segment of customers for TokenSoft with both privately placed venture capital funds and ’40 Act funds tokenizing and selling to a broader public. Abroad a Swiss bank plans to use TokenSoft’s services for upwards of 15–20 token issuances for varying use cases and several other Asian financial institutions are looking for best in class partners. This traditional finance customer segment did not come looking for fast money. Instead, their primary purchasing drivers are compliance, reputation risk, and improving current financial products with better technology. I cannot speak about some of the technical specifics, but you’d be surprised how even traditional finance wants a revolution in how things work. From streaming dividends to on-chain collateral, we are going to see a lot of very interesting upgrades to old finance ideas.

Similar to 2017 token sales, decentralized exchanges (Dexes) started without much thought on compliance and in late 2018 began adding know your customer (KYC) and anti-money laundering (AML) checks.

Looking at the almost $500 million investors put into DeFi applications like MakerDAO and Compound this year, it’s not hard to imagine the same trend towards compliance for certain service types. Lending is the largest use case today, but how do you make a smart-contract follow usury law or fair lending laws? The answer, like service providers around dexes, is you don’t. You make the service providers wrapping these protocols meet the compliance requirements of their jurisdiction.

Privacy and the impending battle

While we move forward in some areas, we move backward in others. Regulators are back-peddling on privacy coins as the “Travel Rule” leads to a string of privacy coin delistings in Japan and Europe. A little birdy tells me that New York is next.

It’s very clear that we, the people, must enable privacy by default if we ever want to realize this dream of censorship-resistant money. This arguably is a requirement in a mature market for money built for an Internet that technically has no border. Netscape already fought this battle for SSL encryption in the browser to protect our Internet communication. We must do the same for our magic internet money, too.