Wednesday, October 14, 2020

Vitalik Buterin: Ethereum Users Should Move to Layer 2s as Gas Prices Surge

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October 14, 2020

By Daniel Kuhn

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At stake

Invest: ethereum economy, a full day of conversation, workshopping and networking around the future of money, is streaming live today until 6:30 p.m. ET.

Today’s special edition of Blockchain Bites is covering all the news you need to know from invest, as well as the Top Shelf (down below) crypto news from elsewhere in the cryptoverse.

The most in-depth conference to date dedicated to the Ethereum economy is a gated event. You can register now to gain access to the day’s panel as well as video-on-demand content released in the coming days.

Now, what you need to know from invest: ethereum economy.

Invest news

Power users
In the face of Ethereum’s recent rocketing transaction fees, Vitalik Buterin called for users to move over to scaling solutions that are “already here for many classes of applications.” Speaking at the opening keynote of invest: ethereum economy virtual conference, Buterin reiterated his enthusiasm for so-called layer-2 scaling solutions such as “rollups,” which essentially keep transaction data on-chain while pushing the computational load off the chain. “If you’re listening to this and you are an exchange or you are a wallet or you are a mining pool or you are a major user – even just a regular – then you should be aware of what rollups are and what they do,” said Buterin. “Basically, what your strategy is, in terms of moving over to them.”

Staking solution
Blox, a non-custodial Ethereum 2.0 staking platform, is developing a solution that will allow users to pool their ether (ETH ) cryptocurrency to get past the threshold required for staking when the upgraded network goes live. Staking on the much anticipated Eth 2.0 upgrade requires a minimum of 32 ETH in order to participate and is expected to see an estimated 4.6%-10.3% rate of return on a user's initial stake. Blox’s solution, built alongside the Ethereum Foundation, utilized "secret shared validator" nodes to allow users to aggregate their ETH and reach the required 32 ETH to stake on the network. "Allowing ETH stakers to join the network and generate rewards with any amount of ETH is pivotal for making Eth 2.0 accessible for everyone," said Blox's CEO Alon Muroch.

Composability questions
Will composability work as well on Ethereum 2.0 as it does now on the original version of the world computer? The ease of composability is running up against the reality of Ethereum’s throughput capacity, CoinDesk’s Brady Dale reports. To rectify that, some projects are moving to sidechains, but many look forward to Eth 2.0 providing massively more room for transactions to go through. The core of the new throughput capacity will come from a new architecture called “sharding.” Effectively, there will be multiple blockchains that check-in with each other via a beacon chain. Though there are still hard questions to answer. Dale digs in.

Rolling out rollups
Ethereum’s top dapps are increasingly turning to rollups to solve scaling impediments, CoinDesk’s Will Foxley reports. A rollup is an off-chain aggregation of transactions inside an Ethereum smart contract. Ethereum users can transact inside the contract with security guarantees their transactions won’t be misused and they will settle to the mainchain. The main advantages of transaction aggregation for dapps were witnessed this summer as the average Ethereum transaction fee broke historical records numerous times. Though these methods – typically Zero knowledge proof rollups (ZKR), relying on math, and Optimistic rollups (OR), relying on financial incentives – come with their own drawbacks.

Ethereum update
In the run up to our invest: ethereum economy event Oct. 14, get up to speed on recent developments in the Ethereum ecosystem. CoinDesk Research's recent note covers ETH's performance, the impact of decentralized finance and stablecoins, and an update on the launch of Ethereum 2.0.

Download the free report on our Research Hub.

The ledger

Tim Ogilvie is the CEO of Staked, which runs staking infrastructure for institutional investors, exchanges, custodians, and wallets. In this excerpted essay, he argues once Ethereum 2.0 rolls out, ETH holders will be incentivized to stake their bags, rather than hold or trade it, because the rewards are higher.

High stakes

Tokenized staked ETH is going to replace ETH itself.

Ethereum is finally set to shift from a proof-of-work infrastructure to proof-of-stake. The end result of this upgrade will effectively take ETH out of circulation, replaced by a tokenized version of itself.

In almost every instance that you can imagine people wanting to hold ETH, it will be preferable to hold a staked version rather than the original real asset. This tokenized version of ETH will perform all the same functions of ETH, but it will also be more valuable, because it will earn staking rewards and can simultaneously do other things.

Rather than remain on its own, separate island, staked ETH will inevitably be tokenized and form the bridge that will bring Ethereum 2.0 across to its killer app.

Compelling returns
Ethereum 2.0 is a big deal. A blockchain with the size and value of Ethereum has never transitioned users and assets to a completely new network while the previous version continues running. The notion, therefore, of replacing ETH may sound foreboding.

But, in fact, it is positive in three key ways: Now users will be able to secure the Ethereum network by staking, earn yield for doing so, and have the ability to use that ETH as yield-generating collateral elsewhere.

Ethereum advocates may chafe at the idea due to a preference for users only to stake. But the outcome is the proverbial win-win. The security ramifications are significant for Ethereum because staked ETH creates additional incentives to stake ETH and simultaneously participate in DeFi activity. That’s a good thing. In the end, securing a network is what proof-of-stake is all about.

There has been a proliferation of PoS networks, such as Polkadot, Cosmos, and Tezos, among others, but none come close to the significance of Ethereum. It is no wonder there is increasing attention on the approaching day Ethereum 2.0 goes live. Although there have been delays and progress hasn’t always gone smoothly, the testing has now been robust and the results raise the confidence that the new network will be ready within only a few weeks.

At Staked, we run 25 other proof-of-stake networks. But the size and complexity of running Ethereum 2.0 staking infrastructure is like none other. That said, every indication is Ethereum 2.0, phase 0, is now ready for prime time, starting with the deposit contract. Once testing for Ethereum 2.0 is complete, a validator deposit contract will be created on ethereum.

This deposit contract is where all users interested in being a validator for phase 0 can lock in their ETH.

Many in the space will be attracted to the staking rewards. Ethereum 2.0 uses a sliding scale for staking rewards. We estimate yields will be between 8%-15% annually. That’s not as eye-popping as YOLO-ing into the latest DeFi craze, but offers lower risks and predictable returns that will appeal to larger institutions.

In it for the long haul
So, faced with compelling rewards, a word of caution is required. Staking, at least initially, may not be for everyone. Ethereum 2.0 requires many servers (one for every 32 ETH you stake), significant technical resources to ensure all those servers are always available and secure, and funds that will not be liquid until Ethereum 2.0 reaches phase 1, which could be years away.

It is a simple but important fact: once ETH is transferred to the Ethereum 2.0 network, it cannot be transferred back to the original Ethereum blockchain. This one-way trip means your funds are not liquid, so the only direct activity available is to participate in staking.

This is why we should expect tokenized staked ETH. Staked ETH indeed does have to remain locked away until further Ethereum 2.0 developments. But the world of DeFi won’t wait. Staked ETH will be tokenized and will replace ETH. It is not a case of if, but when.

DeFi on Ethereum has taken the crypto world by storm this summer and set the stage for the long anticipated ETH 2.0 transition, expected to begin in late 2020.

Let's face it: These protocols can be rather clunky and difficult to use, and that's a big turnoff for new entrants into the ecosystem. At #investeth Unlocked, you’ll leave with a high-level understanding of where the Ethereum and DeFi ecosystems are heading and how you can utilize these tools on their own. Before you register for invest: ethereum economy, here's a primer on the journey to Ethereum 2.0.

Top shelf

Crypto allocation?
Fidelity Digital Assets said bitcoin’s market cap has plenty of room to grow in a Tuesday report on the benchmark cryptocurrency’s uncorrelated nature. Director of Research Ria Bhutoria wrote that the crypto’s current market capitalization “is a drop in the bucket compared with markets bitcoin could disrupt,” arguing further that crypto is “fundamentally less exposed” to the “economic headwinds” that other assets will likely face. Bitcoin is therefore a “potentially useful” asset for uncorrelated return-seeking investors. “In a world where benchmark interest rates globally are near, at, or below zero, the opportunity cost of not allocating to bitcoin is higher," the report said.

Grayscale results
Digital asset manager Grayscale Investments has posted its best quarterly results to date, having brought in just over $1 billion in investment across all of its cryptocurrency products. In its financial report for Q3 2020, the company – which is owned by CoinDesk's parent firm Digital Currency Group – said it had seen inflows of $1.05 billion across all products. For the year so far, the figure stands at $2.4 billion, which Grayscale said is more than twice the total amount raised for the years 2013-2019. Its most popular product, the Grayscale Bitcoin Trust, saw inflows of $719.3 million in the third quarter, while bitcoin assets under management (AUM) have grown 147% in 2020.

Retail interest
Square’s recently announced $50 million investment in bitcoin (BTC) is a “strong vote of confidence for the future of bitcoin” and a signal the payments company sees “a lot of potential” for the cryptocurrency as an asset, JPMorgan analysts said in a report dated Tuesday. JPMorgan's global market strategists wrote that Square is likely to make more purchases, with other payment firms following in this direction to avoid being shut out of a growing market. While noting that options contracts to BTC have risen, due to institutional interest, the JPMorgan strategists said retail traffic is likely driving the surge in options.

Major investor
Venture capitalist Tim Draper’s investment office Draper Goren Holm is sinking larger investments in virtual currency-only startups. Draper Goren Holm, a cryptocurrency investment firm in Los Angeles, said that it raised $25 million for its first venture capital fund to buffer its startup accelerator and back blockchain companies at higher investment valuations. The venture fund, announced last week, is planning to invest $250,000 to $500,000 in seed, Series A and a few later investment rounds, the firm said, whereas the accelerator funds pre-seed rounds for between $10,000 and $50,000 and 4% to 10% ownership stakes in startups.

Banking blockchain
After the latest addition of 42 banks, about 100 Italian banks are officially operating on the country’s banking blockchain network, Spunta, built on R3’s Corda, the Italian Banking Association (ABI) announced Tuesday. Banks first joined the blockchain project designed to improve interbank data transfer and settlement speeds back in March 2020 and by May, 55 banks had joined the network. According to ABI’s announcement, since March 204 million transactions were processed on Spunta’s infrastructure, and the association predicts this number will exceed 350 million by the end of the year.

Quarterly review
The latest quarterly review from CoinDesk Research is out! In this 24-chart report, we look at major developments in crypto markets over the third quarter, focusing on growth in stablecoin liquidity, surging interest in decentralized finance applications, and the notable uptick in crypto derivatives volumes.

Download the free report from our Research Hub.

Quick bites

300 Investors Contribute to INX’s Ethereum-Based IPO, With More Waiting (Nathan DiCamillo/CoinDesk)
Validator Vote Transitions NEAR Protocol to Proof-of-Stake Mainnet (Will Foxley/CoinDesk)
Libra’s two-year delay (Leo Jakobson/Modern Consensus)
The Ownership Economy (Jesse Walden/Bankless)
Even More Satoshi-era Bitcoin Moves—What's Going on? (Liam Frost/Decrypt)

Best background from #investeth

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Your guide to invest: ethereum economy

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October 14, 2020

By Daniel Kuhn

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At stake

Invest: ethereum economy, a full day of conversation, workshopping and networking around the future of money, goes live today at 9 a.m. ET.

Starting off with a keynote speech from Ethereum co-creator Vitalik Buterin, the virtual event will also see appearances from MakerDAO Co-Founder Rune Christensen, Gauntlet CEO Tarun Chitra and CFTC Chairman Heath Tarbert, among many, many more.

The most in-depth conference to date dedicated to the Ethereum economy is a gated event. You can register now to gain access to the day’s panels as well as video-on-demand content released in the coming days.

First, a few words from Leigh Cuen.

Value proposition?

The fully virtual CoinDesk invest: ethereum economy is kicking off with a keynote from none other than Ethereum creator Vitalik Buterin, delivering a speech titled “Eth 2.0 and the Road Ahead.” This raises the question of whether people should invest in a project that failed to scale the first time around. The answer may be more complicated than a simple yes or no.

The fact is, Buterin and dozens of his co-founders created something real, a robust community that ships code, lobbies lawmakers, tests and uses products, broadcasts marketing materials and orchestrates live events.

Sure, Buterin and Ethereum co-founder Joseph Lubin subsidize this community development through organizations like ConsenSys and the Ethereum Foundation. But there are plenty of people taking on such responsibilities for themselves, without any direct connection to the founders.

The real question is, can a volunteer community that reaches *beyond* the traditional tech industry make reliable software?

Many skilled and experienced technologists contributed to Buterin’s Eth 2.0 roadmap, but the community’s diversity is also a hindrance. These people have different goals and skill levels. Computer systems rely on simplicity, not complexity. Complex systems break easily. In order to work efficiently, Ethereum’s builders may need to prioritize and focus with more rigor than they did in the past.

The first version of Ethereum built a proof-of-concept using a new software toolbox, with all kinds of gadgets. That initial model was uneconomical to use in times of high traffic, which isn’t ideal for any “mainstream” platform.

Will people use the Eth 2.0 toolbox to build a sturdy, secure platform? Or will it remain a playground of unicorn-themed experiments with friends? Even for a trust-minimizing technology, Ethereum’s long-term value is reliant on trust in the community’s ability to focus and deliver. This event, Invest: Eth, is their pitch to the public on their competence to do so.

What not to miss

Here’s a quick guide to the virtual panels you won’t want to miss.

9:00 a.m. - 9:30 a.m. ET. Keynote: Eth 2.0 and the Road Ahead
Vitalik Buterin will discuss the future of the “world computer,” why the transition from Proof-of-Work to Proof-of-Stake consensus is necessary to fulfilling its mission and how the Ethereum community will get there.

10:00 a.m. - 10:30 a.m. A New Age: A Primer on Eth 2.0 Monetary Policy and Game Theory
Delphi Digital’s Alex Gedevani will break down Eth 2.0's new monetary policy and incentive structure fundamental to understanding Ethereum as an investment opportunity.

1:00 p.m. - 1:30 p.m. Can CeDeFi Eat the World? CZ Talks 1:1 With Leigh Cuen
Binance CEO Changpeng Zhao offers a vision for the centralized exchange he built to cannibalize itself. By promoting decentralization on all fronts and relying on the BNB token for value accrual, Binance Chain has quietly become among the most important chains in the ecosystem. As the DeFi economy ramps up and fierce competition from both centralized and decentralized counterparts continues to mount, can Binance’s “CeDeFi” ambitions prevail?

2:00 p.m. - 2:30 p.m. Wall Street and Off-Chain ETH
Grayscale’s Michael Sonnenshein, ErisX’s Thomas Chippas and OKex’s Lennix Lai will discuss the fundamental value proposition of ether and the litany of tokens and financial products Ethereum has wrought.

2:45 p.m. - 3:00 p.m. Trade Secrets: The "Triple Point" Bull Case for ETH
David Hoffman of Bankless argues that, with the migration to Eth 2.0 and the implementation of EIP-1559, ETH is poised to become the world's first "triple point" asset – one that creates value through being locked in DeFi, staked or consumed outright.

3:30 p.m. - 3:45 p.m. Trade Secrets: Fast and Cheap – Why Sam Bankman-Fried Chose to Build on Solana
SBF lays out the calculus behind the decision to move Serum from Ethereum to the Solana blockchain and what might happen to Ethereum if faster and cheaper alternatives catch on.

4:30 p.m. - 5:00 pm Stablecoins, Hyper-Collateralization and the DeFi Economy
The rise of fiat- and algorithm-backed stablecoins has largely put crypto's volatility narrative to rest. Now, they have become the bridge into the DeFi economy as well as an engine of hyper-collateralization and "money games." Circle CEO Jeremy Allaire will discuss these programmatic tools with Aave’s Stani Kulechov and dYdX’s Antonio Juliano.

9:00 p.m. Keynote: Andre Cronje + Ian Lee (Ideo CoLab)
DeFi luminary Andre Cronje and IDEO CoLab Managing Director Ian Lee will appear for a late night discussion.

The ledger

Camila Russo, the founder of The Defiant and the author of "The Infinite Machine,” writes about the “internet of value” being built on or using Ethereum. This section has been excerpted from its original.

Decentralized web

The internet is at the cusp of entering a new phase, one where entrenched rulers are dethroned, more power is reclaimed by individuals and value moves as freely as cat GIFs.

To understand why we need a better internet in the first place, consider this question: Isn’t it weird the internet isn’t good at money? Think about it. The applications we use every day to search, to communicate, even to shop; the companies that dominate the web are very bad at dealing with money, even if they’re very good at making it. There’s a separate checkout process, where you repeatedly enter all your information. Cards issued in some countries don’t work on local websites in other countries. Sometimes you wait for what feels like an eternity watching that tiny wheel turn, to have the transaction fail.

More complex transactions are almost unthinkable. Influencers and creators should be able to monetize their likes, retweets and views, with micropayments streamed from followers, without any platform taking a cut. Less-famous mortals should get paid if they opt in to view ads or consent to sharing their information. Transferring ownership of valuable assets, from art to real estate, shouldn’t take several intermediaries and tons of paperwork.

There’s the internet’s TCP/IP protocol. There are apps built on top of it. And, separately, there’s the financial system, which relies largely on infrastructure built before the internet was invented. SWIFT, IBAN, the rails handling most international money transfers, weren’t designed to handle actual money. They’re messaging systems where transfers can take up to five days and cost around $50. National money transfers fare a bit better, but in the U.S. they still take at least one business day to settle (money rests on weekends, apparently).

Attempts to update these systems – SEPA in Europe, the Faster Payments initiatives in the U.S., VisaNet for card payments – have resulted in a messy patchwork that doesn’t solve the core problem. Fintechs try to improve the situation, but they’re building on the same old carcass.

At a time when we have global, cheap, fast communications, we should have an equally global, cheap, fast financial system.

An internet of value
The internet is ruled by innovation-stifling monopolies that have stopped us having an internet-of-value. Organizations built on top of the current internet network have almost no other option than to become for-profit corporations, with code that’s proprietary and closed to the public. But when the network itself is designed to transfer value, it enables different business models to emerge.

In this new frontier, users retain control of their funds and their personal information. They roam freely without bowing to any king. Value – that is, money, assets, securities, property – is as native to internet apps as cat videos. And it’s already happening.

This is not about “crypto.” It’s not about the next bitcoin, or getting in on the next hot token that will pump.

This is about a shift in the very foundation of the web.

There is a money layer that’s being added on top. A distributed network that transfers value without relying on banks, settlement and clearing agents. Money moves faster, cheaper and globally – just like the rest of the internet does.

And this network isn’t only good at transferring value. It can also process anything a computer can, allowing developers to build applications on top. The difference from the internet apps we’re used to is that in these applications value isn’t an afterthought; it’s at the very core. The name of this new base layer for value is Ethereum.

Payments can be made seamlessly, and that’s just the start. More complex financial services are now at the fingertips of anyone with access to the network. Users can trade tokens at a few taps, and because value can be programmed this can range from the network’s native token ether, to synthetic representations of everything from gold to a Tesla stock. It can even tokenize San Francisco’s “poop index,” where people can profit from the city’s rising number of feces sightings.

Venezuelans can buy tokens linked to the value of the dollar. And not only that, they can deposit them in lending protocols and earn interest on those tokens. Speculators can borrow from those asset pools to trade. Others can have a computer program automatically execute a trading strategy, like a robo-adviser on steroids. There’s a no-loss lottery, streaming salaries almost by the second, tokenizing and trading limited-edition T-shirts, which are delivered in their physical versions, and can also be worn in virtual reality worlds.

For developers, financial applications are the low-hanging fruit to build on top of a value network, but it’s only the beginning.

Who won #CryptoTwitter?

All Aboard the ChooChoo Train: Ripple takes holders for a ride to the moon. Stellar holders not far behind with the announcement of a new staking marathon.

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By Michael J. Casey
Chief Content Officer

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First, we feast

The price of XRP might be a little stagnant, but Ripple seems to have the solution. Their latest community program will see 4.8 Billion XRP moved from reserves to holders. EOS and XLM holders have reasons to celebrate too, as alts compete for market share.

Qualifying XRP wallets can participate in a new initiative launched by Ripple. The news has emerged as top trending, as we keep getting requests for more information. The sheer size of this move might have something do to with it. Learn about requirements and latest official news here.

FOMO hits new highs as Stellar reveals a new, time based, staking algorithm. Exchanges are reporting mass exodus, as traders and investors alike are trying to gather their funds in qualifying wallets of XLM. With such high returns on Lumens, the program has quickly gained popularity. Interested parties can check the Stellar Foundation's blog post.

Wrapping up the good news for alt holders this week, in third place, comes EOS. Despite different circumstances, the outcome could be quite the same for informed holders. The SEC has ruled in BlockOne's case that the company must be taxed on their respective 90+ Million in the form of EOS tokens, causing Dan Larimer & friends to consider giving up their holdings, in a new allocation. Our staff is hard on the story.

Getting Internet Identity Right, 30 Years On

We tend to think of governments, with the data they collect on births, drivers licenses, tax returns and passports, as humanity’s primary identity managers.

Arguably, internet platforms have usurped that role. Some store more identifying records than China – Facebook has 2.7 billion active users; Google manages 1.5 billion email accounts. Just as important, they can tie those records to our online behavior and gather immense predictive power. Facebook’s algorithm even knows if you are going to break up with your partner – before you do.

This isn’t another Facebook-bashing column. It’s just that its all-knowing power highlights how the fundamental human question of identity has changed in the internet age.

It also illustrates why we need a new “self-sovereign” model of identity to match our digital existence and why the latest moves toward that deserve widespread support.

Flawed from the start

An original sin was committed at the internet’s conception: its underlying, decentralized architecture was built without an identity layer.

The internet’s founders had good intentions. To ensure universal availability, the system controlled access by assigning addresses to computers but was agnostic about the identities of the people, companies and devices using them. As a famous New Yorker cartoon quipped in 1993, “On the internet, nobody knows you’re a dog.”

This became a problem when entrepreneurs started building e-commerce businesses in the 1990s. Users needed to trust the person on the other side of a transaction, which, according to offline practices, meant identifying them to hold them accountable.

So a jury-rigged solution was installed at the internet’s application layer. Certification powers were introduced, allowing web-based companies to gather and verify users’ identifying information. Over time, this gave rise to a new class of immensely powerful gatekeepers.

We ended up with the worst of both worlds. On the one hand, end users still don’t know who’s controlling disinformation bots. On the other, as CoinDesk’s Ben Powers put it in a great contribution to our “Internet 2030” series, the centralized data gatherers “not only know you’re a dog, but also what breed you are, what your favorite kibble is and whether you’ve been microchipped.”

This power asymmetry has fueled a severe deterioration in societal trust, and solutions have been hamstrung by a pre-internet mindset. We’ve placed responsibility for policing behavior with intermediaries, which has further empowered centralized data gatherers.

This contradicts the internet’s decentralized, identity-free base layer, creating unique opportunities for abuse. Web sites accumulate giant honeypots of personal identifying information (PII), which are constantly breached by unidentified hackers.

Meanwhile, even though companies complain about the liability in storing user data, they find it hard to resist surveillance capitalism, the data-exploitation practice that has become the core business model of the internet.

We need a new mindset. Because the internet’s underlying architecture is decentralized, the identity solution must also be decentralized. Control over PII must reside with those to whom it refers – with you and me, in other words. This is the principle behind the “self-sovereign identity” (SSI) movement.

Controlling attributes, not identity

Let’s be clear: This isn’t easy. Identity is an extremely complex concept.

In the metaphysical sense of “who I am,” identity is at once highly personal and completely social. We value a unique selfhood, but it’s meaningless without reference to the society within which that self exists.

It’s also fluid and multilayered. We occupy – or "perform”– different versions of our identity, or personas, depending on context. We all play a different persona in job interviews than the one we play at home with family.

And in the wider economy, where proofs of identity solve the deep-seated challenge of trust, allowing us to transact, what matters is not our selfhood but the distinct attributes that comprise it. Do you have a degree? A driver’s license? A credit score over 740? These are isolated attributes. They are not our identity per se.

With SSI, sophisticated cryptography allows individuals, as sole custodians of their data, to prove they have the credentials that describe their attributes and selectively reveal them in an encrypted form to service providers.

In an oft-cited example conceived by identity expert David Birch, you could legitimately enter a bar after furnishing a cryptographic proof that answers one question: Are you over the designated drinking age? The bar owner doesn’t need to know all the other information displayed on your driver’s license: not your name, your address, your license number or even your actual birthday.

ID Ideation

A host of entities are working on SSI, from big players like IBM and Microsoft to startups such as Gataca and Hyland Credentials . Some governments, including the Canadian province of British Columbia, are supporting special ID apps for their constituents.

Still, standardization across the internet will be critical. An important piece is the decentralized digital identifier, or DID, being developed within the world wide web consortium, or WC3. Groups of tech and finance heavyweights have also formed associations to promote open-source collaboration, including the Digital Identity Foundation and the Trust Over IP Foundation.

Within the standard SSI model, blockchain technology plays an important but minor role currently. Some SSI projects have dabbled in tokenization to raise funds and incentivize stakeholders such as credential providers. But the troubles caused by the Sovrin Foundation’s token sale have quelled enthusiasm for that.

A blockchain is not used for storing identifying data. That’s up to the individual data owner, who could choose to store it on a hard drive, for example, or with a cloud account he or she controls. Rather, a blockchain is used as a public key registry and management system to prove the private keys with which a user enables access to encrypted credentials are associated with the right person or company. In this way, a hospital can decode and validate medical records shared by a patient, while keeping its privacy compliance officer satisfied the patient is indeed authorized to do so.

More important is how SSI could help other blockchain applications. If decentralized finance (DeFi) applications are to spread to traditional finance, for example, there must be a way to identify market participants without inserting a centralized authority into a necessarily decentralized environment.

Human empowerment

The most important use case for SSI lies in protecting our humanity. In an age when data leads to economic domination, shifting control to those who generate it is a really impactful way to empower individuals.

Instead of thinking of digital data as a sinister threat to our privacy, SSI could turn it into an asset sold or used to get credit or obtain other services. Think of people who live without credit cards and can’t generate credit scores but whose trail of internet connections – their so-called web of trust – show a history of fulfilling commitments.

Within an SSI framework, we can use our data to safely connect our identity to the society with which it is intrinsically associated. We could map and measure our social connections, capture that data as an attribute and then communicate it to others so they’ll trust us enough to transact.

Courtesy of COVID-19 and the public interest in contact tracing, there’s now an immediate use case for this kind of controlled measurement of social activity. It’s why Hyperledger Executive Director Brian Behlendorf, appearing in this week’s Money Reimagined podcast, argues the first prominent deployment of SSI would come next year in the form of a “digital yellow card” for vaccination records.

Whether we like it or not, society is digitalized and decentralized. We need an identity system that aligns with that.

DeFi’s Mini and Maxi Bubbles

The “phssssssttttt” sound you hear? It’s the DeFi bubble deflating.

After a stunningly buzzy summer for decentralized finance, when new wild-idea projects were being announced on a daily basis, bringing new speculative money surging into the DeFi ecosystem, the once-soaring prices for those projects’ tokens have fallen sharply and deeply. This chart of DeFi-wide market capitalization over the past six months, produced by CoinDesk’s Shuai Hao, tells the story.

It shouldn’t come as a huge surprise. This had all the hallmarks of a bubble, with some parallels to the initial coin offering (ICO) mania of 2017. (Though there was nowhere near the kind of speculative investment by retail crypto “newbies” that we saw three years ago, partly because this is an inherently more complicated space.)

But I for one think the DeFi bubble contained something very exciting, more so than the ICO bubble, though both are important for reasons that are lost when people dismissively focus on investors’ crazy excesses. (I subscribe to Carlota Perez’s theory of technological revolution, where excessive speculation is treated as a fundamental, unavoidable and even necessary element of how new technology is introduced to society, how it breeds innovation “waves” and “surges.”)

Among the most interesting aspects of it was how DeFi’s composability enabled “lego” innovation, where one new protocol became a building block for a new developer to build their next new innovation on top of it and how that new idea breeds its own new surge of speculation. In the process, an entirely new decentralized financial system is being organically created and incentivized.

That effect plays out if you look underneath the overall market DeFi bubble at the trends shown by individual governance tokens. In this second chart from Shuai, we zero in on the “DeFi summer” that began in mid-June and on two governance tokens in particular, Compound’s COMP and Yearn.Finance’s YFI. You can spot quite separate mini bubbles within the one maxi DeFi bubble. By the end of June, COMP had already peaked, before YFI had even been launched. Both are now down, but the chart shows that the timing of their respective mini-bubbles isn’t very correlated.

Will there be a revival of the DeFi? I think so. Hopefully in a more orderly way, through the long-tail consolidation phase. You can’t stop innovation. And who doesn’t like playing with Legos?

The Global Town Hall

FCA FAIL. Crypto regulators might mean well. But sometimes they can be extremely out of touch with the realities of a market that’s global, nimble and easily enables entirely legal workarounds against the rules those regulators put in place. As commentator Ajit Tripathi points out, the U.K. Financial Conduct Authority’s move to ban crypto derivatives seems to be an overzealous effort to save British residents from themselves – a rather pointless one, at that, because it will just drive them into unregulated overseas markets, where they can harm themselves to their hearts’ content.

As with the DeFI craze described above, it’s very hard to stop people from speculating in a way that’s more or less the same thing as gambling. And as Triphati observes from his home in the U.K., it seems to go against a British way of life. “We live in the country of racehorses and epic sports betting,” he writes. “We are legendary gamblers, and it’s one of the traits that made Britannia rule the seas for at least four centuries, and then run global investment banking for at least one. When asked to stop, we tend to simply gamble elsewhere (e.g., in shadow banking instead of banking).”

While derivatives in general have a reputation for being, as Warren Buffett said, “weapons of financial destruction,” they do ultimately serve a real purpose in fueling overall liquidity and enabling sophisticated risk management. If you believe, as I do, that blockchains, tokens, smart contracts and decentralized exchanges will eventually evolve to a point that they form the foundation of a new financial system, the emergence of that more mature derivative market structure will benefit everyone, not just crypto speculators. Since crypto markets are still in their infancy, the speculative part naturally gets more attention than that market structure aspect right now. But the only way to get to the latter is through the former. Banning it isn’t constructive.

MONEY MAXIGELISTS. It’s not uncommon for people to describe crypto believers as members of a cult. Typically, that reference just refers to their fanaticism. But this piece by a fan of the privacy coin zcash , who uses the name Sixten Hodler, takes it to an entirely different level. The writer coins the term “maxigelism” – a portmanteau of “maximalism” and “evangelism” – to describe the zealotry of early Christian missionaries, who combined an insistence on their being only one true God with the claim that any disbelievers would go to hell, and compares it with a logic that will eventually deliver mass adoption of zcash, or “HyperZcashization.” Whether you swallow the argument or not, it’s a wild read.

Sixten Hodler claims that Bitcoin’s protocol – and the most fervent supporters – are like Judaism, which the writer describes as a solely maximalist position. (And indeed, Bitcoin maximalism, which rejects the legitimacy of all other cryptocurrencies, is a term used by many diehard bitcoin believers to describe themselves.) Both are exclusionary in that they have no room for other gods or currencies yet, Sixten Hodler maintains, both are also “missing the terrifying incentive that made Christianity evangelist.”

It’s zcash, which establishes the value of its privacy features as protection against the impending threat of the “surveillance state,” that best captures that early expansion in Christianity after it was created as a “fork of Judaism,” a nod to the idea that zcash is a fork of bitcoin. Bitcoin maximalists, with their belief in “radical transparency,” do not want their religion/currency community to grow too far, as that would expose users to the encroachment of the surveillance state, much as the Hebrews were always eager not to give imperialists an excuse to oppress them.

So, there you have it.

CoinDesk Live: Eth Ep2

At invest: ethereum economy on Oct. 14, we will address the ramifications for investors as decentralized finance takes the crypto world by storm.

In a run-up to the event, our two-part CoinDesk Live: Inside the Ethereum Economy virtual miniseries introduces trending narratives we will break down at the main event: Why all the hype behind yield farming and food-inspired tokens? Should investors take them seriously or are they a fading trend?

Whether it’s wBTC, renBTC or tBTC, tokenized bitcoin is the hottest thing on Ethereum right now. A phenomenon that hardly existed at the beginning of this year has pushed the total value locked in bitcoin past $1.3 billion.

On Oct. 12, CoinDesk markets reporter Zack Voell discusses the yield farming phenomenon with Matt Luongo of Thesis, Jeff Garzik of Bloq, Loong Wang of Ren Project and Kiarash Mosayeri of BitGo.

Watch Bitcoin's $1 Billion Crop: Why Hodlers Are Harvesting Yield on Ethereum on Oct. 12, streaming on CoinDesk.com, Twitter and YouTube.

Relevant Reads

Square Puts 1% of Total Assets in Bitcoin in Surprise $50M Investment. Square is now the second mainstream, public company to decide that a decent chunk of the excess cash on its books should be held in bitcoin, the other being Microstrategy. This is an interesting trend. Not a big surprise that bitcoin rose on the news Friday. Here’s how CoinDesk’s Danny Nelson reported it.

Stablecoin Growth Knocks Silvergate Exchange Network Volume Over $100B. Silvergate is profiting from its status as the most crypto-friendly bank and taking advantage of the growing use of dollar-pegged stablecoins as a fluid way to move money around and into and out of other cryptocurrencies. Now that banks have been greenlighted by the Office of the Comptroller of the Currency to provide digital asset services, will others follow suit? Nathan DiCamillo reports.

The Top Universities for Blockchain. Education is vital if blockchain technology is to scale to the extent that it can be relevant to all of the world’s 8 billion. So CoinDesk is proud to reveal its rankings of the top U.S. universities servicing this sector, a selection based on the most comprehensive and rigorous process applied to date. (Full disclosure: The top-ranking university was MIT, where I was previously on staff within its Digital Currency Initiative and remain as an unpaid adviser. I had no involvement in the selection process.)

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