The Block - Research Recap January

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THE BLOCK GENESIS

Latest Research &

Analysis
January 2020

The Block Genesis consists of the most in-depth, timely and impactful articles, giving
you an informational edge over the entire financial and technology industry. The
Block Genesis is the first and last word in the world of digital assets,
cryptocurrencies, and blockchain.

DISCLAIMER
This report has been prepared solely for informative purposes and should not be the basis for making investment decisions or be construed as a
recommendation to engage in investment transactions or be taken to suggest an investment strategy in respect of any financial instruments or the issuers
thereof. The Block will not be liable whatsoever for any direct or consequential loss arising from the use of this publication/communication or its contents.

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Contents
Contents 2
Meet the Research Team 3
MACRO 17
A look at CFTC-regulated, and self-reported bitcoin derivative data: 18
hedge-funds at an all time high in CFTC net short position this month
Evaluating exchanges based on the liquidity of its Bitcoin pairs 28
Analysis of volume per website visit indicates larger traders are re-entering the game 31
Bank runs 2.0: Exploring the relationship between on-chain lending and staking 37
Examining the value settled on Bitcoin 44
Projects 52
MakerDAO: Multi Collateral Dai 53
Maker (MKR) Price to Burn Analysis: Still "relatively expensive" to peer group 67
as investors continue to pay a massive premium for a credit facility
An analysis of Zcash's private transactions 78
CEO of DigixGlobal considers full liquidation of DigixDAO's $54M treasury holdings 84
Stellar lumens token burn displaying market price inefficiencies 87
Company 90
Crypto finally gets its U.S. IPO, and the Cliff of Valinor 91
Overstock 3Q19 Review: Weak earnings and SEC subpoena sends shares tumbling 17% 98
Org Chart: Kraken 101
A look at Binance US' growth and volume after its first month in business 109
Trends 113
2019 funding trends within blockchain and crypto sub-verticals 114
Crypto exchanges are experiencing a 37% traffic drop since June 120
Transaction fees are less than 3% of the total revenue in the bitcoin mining industry 124
Exchange volumes suggest decreased interest from Asian investors 129
Spot Market Trends: Binance’s dominance on the rise while Bitfinex 133
continues to underperform
Money 2.0 Stuff: Making money making money 140
Ecosystem Maps 145

Mapping out Binance Labs' Portfolio 146
Mapping out the 10 most active crypto funds' 2019 investments 154
Mapping out Crypto Custody 173
Org Chart: Huobi Group 179

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Meet the Research Team

Larry Cermak Matteo Leibowitz Ryan Todd
DIRECTOR OF RESEARCH RESEARCH ANALYST RESEARCH ANALYST

Steven Zheng Matthew John Dantoni
RESEARCH ANALYST Yamamoto RESEARCH INTERN
RESEARCH ANALYST

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Market Outlook Insights

January was a good month for cryptocurrency investors, according to the numbers.
Bitcoin’s price increased by more than 32%, adding roughly $40 billion of market
capitalization. Ether’s price rose by about 42%. BSV had the strongest performance
among the top 12 cryptocurrencies – more than tripling its price in January. Tezos
and XRP had the worst relative performance, but their price still increased by more
than 20%.

As is apparent from the chart below, other than the clear outlier in BSV, prices
remained closely correlated in January.

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Volatility
Bitcoin’s and Ether’s volatility increased slightly in January. After converging in
December, Ether is now, once again, more volatile than Bitcoin.

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Value settled
Adjusted value settled saw an increase of 19.7% in January. The amount still remains
lower than it was in November, however.

Spot exchanges
Cryptocurrency traded volumes in January increased by 70% and reached a 6-month
high.
The volume on legitimate exchanges was about $67.53 billion in January when
compared to $39.83 billion in December. It was the largest month-to-month increase
since May.

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January 14th was the most active trading day in the month and also the third-most
active trading day in nearly 6 months. The volume on Coinbase alone reached $578
million.

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As for market share, Binance continues to dominate.
In January, Binance captured 53% of the legitimate traded volume. Coinbase

captured 9.4% of the volume, followed by Kraken (8.1%), LMAX (7.7%), Bitfinex (6.2%),
and Bitstamp (4.4%).
Since its acquisition by Circle, Poloniex’s market share grew from less than 1% to
about 3.3% now, which has been mainly achieved by eliminating fees for some time
and adding trading competitions. The remaining exchanges all captured less than 2%
of the total volume.

GBTC
Grayscale Bitcoin Trust (GBTC), a closed-end fund that invests exclusively in bitcoin,
lets investors get exposure to bitcoin through a traditional investment vehicle with
shares titled in the investors’ name.

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After less than four years since launching GBTC, Grayscale currently holds
approximately 285,000 bitcoins on behalf of its customers, which is about 1.57% of
all BTC in circulation.

GBTC is not open for investment all the time, though, which is apparent from the
chart below.
In aggregate, there was $64 million of inflows in 2017, $220 million in 2018 and $438
million in 2019. However, Grayscale previously said that 71% of inflows in Q2 and
nearly 80% in Q3 were “in-kind,” which means that investors were allowed to deposit
their own BTC in exchange for GBTC shares.
Ultimately, that means that there likely hasn’t been much more new demand for BTC
but rather just investors trying to arbitrage away the premium.

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Futures
Following its underwhelming start in late September, Bakkt has continued to attract
more volume. Open interest reached an all-time high of $12 million at the end of
January. Bakkt’s average daily volume reached $26.45 million in January; up from
$21.55 million in December.

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Bakkt is still relatively small compared to bitcoin futures on CME. On average, CME’s
volume was 17x higher than Bakkt’s in January. CME’s daily average volume increased
by 144% in January; from $187.71 million to $458 million.

The volume of Bitcoin perpetual swap on BitMEX jumped by 55% in January, marking
the first increase in 8 months.

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Exchange tokens
The total market cap of exchange tokens grew from $4.57 billion in December to
$5.69 billion in January.
Binance’s BNB remains the largest exchange token, by far, with a market cap of $2.79
billion. It is more than three times larger than the trailing exchange tokens by OKEx,
Bitfinex, and Huobi. BNB is currently 49.1% of the total exchange token market cap;
trailed by OKEx (16.1%), Bitfinex (15.1%), and Huobi (14.3%).

Binance’s BNB outperformed other large-cap exchange tokens and returned 32.56%
in January. Bitfinex had the lowest large-cap return with 6.35%. CoinFLEX was the
only exchange token with a negative return in January.

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Macro

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2019: a year in blockchain

investment deals
January 2, 2020

Quick Take
● The blockchain/cryptocurrency sector saw approximately $3.7B in investments
across 741 different deals in 2019
● 2019 was the first year where we saw the frequency of blockchain deals
decrease, breaking a five year over year trend dating back to 2013
● North America, Asia, and Europe represented about 99% of the total number
of investment deals.
2019 was the first year in which the frequency of blockchain-related deals fell,
breaking a five year-over-year trend that dates back to 2013.
The overall sector still saw approximately $3.7B in investment across 741 different
deals. In this piece, The Block looks at the 50 largest funding deals for the year and
the most substantial, broken down by region.
Geographically, Africa and South America saw the fewest number of deals,
accounting for less than 1% of the reported total. Despite little traction in
investment, Africa did serve as an outlier and had about 88% more capital invested
than the previous year, which may show a sign of changes to come.
Blockchain Investment Deals over Time
Since 2013, the blockchain industry experienced five consecutive years during which
the total funding deals per year increased. 2019 marks the first year to break the
trend.

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According to Pitchbook, there were 741 blockchain deals in 2019 compared to 1,050 in
2018, a decrease of approximately 29%.

Blockchain Investment Deals Over Time By Value
When analyzing the deals by their value, one highlights how the amount of capital
going into the sector dropped off more significantly than the total number of
transactions.
Investment for the industry went from $7.9B in 2018 to $3.4B in 2019, a decrease of
approximately 57%.
Mergers and acquisitions (M&A) experienced the most significant drop from the
previous year, decreasing by about 54% from $161M to $74M.

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50 Largest Blockchain Deals in 2019

We will now examine the 50 largest deals in 2019. These specific funding deals
represent a total value of $2.3B, or approximately 67% of the amount that circulated
through blockchain investment deals for the year. Of these deals, the median deal
size was about $27.8M.

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Largest 50 Deals in 2019 to Scale

The two largest deals were Blockchain Exchange Alliance in April and Ripple in
December, both Later Stage VC and valued at $200M. Early Stage VC was the most
common deal type among the largest, representing exactly half of the 50 deals.
Later-Stage VC was the second most common, constituting ten deals or 20% of the
total.

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The month of April had the most aggregate value, totaling $316M in funding. What
largely contributed to April was Blockchain Alliance’s $200M deal. Innoplexus also
had a Later Stage VC deal worth $20M.
Early Stage VC saw three deals: Celo for $30M, Chainalysis for $36M, and Instant
Exchange for $30M.

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Largest Deals of 2019 by Region

Globally, North America dominated blockchain investment, accounting for nearly 54%
of the value that went into blockchain deals in 2019.
Asia and Europe had the second and third most valuable deals, coming in at $845.5M
and $789.8M, correspondingly.
All told, North America, Europe, and Asia accounted for approximately 99% of the
investment deals in 2019. And despite the narrative of blockchain technology
“banking the unbanked,” regions that need improvements to its financial
infrastructure the most, such as South America and Africa, represented less than 1%
of investment deals.

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Although Africa has had little investment in this area, the region did serve as an
outlier to declining investment overall for 2019, where it grew by approximately 88%.
The growth is in large part due to a $15m deal by AZA Blockchain, formerly known as
BitPesa. The one deal represented 88% of investment in the region for the year.

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Source: The Block, Pitchbook *deal count excludes deals without figures
North America had a total of 324 blockchain deals in 2019, which was approximately
268% more than the second most active region in Asia. While Asia only had 88 deals
compared to 324, Asia led with the largest median deal size at about $2.3M.
Europe had about 75% more deals in 2019 than Asia with 154; however, a smaller
median deal size of $1.1M explains why it had slightly less total investment for the
year.
Oceania, Africa, and South America only had 16 investment deals combined,
illustrating the extent to which investment in the sector is flowing into companies
and projects based in North America, Asia, and Europe.

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Correlation between
cryptocurrency prices
increased in 2019
January 9, 2020

Quick Take
● The prices of cryptocurrencies continued to be highly correlated in 2019; in
fact the correlation has increased
● Bitcoin is the only cryptocurrency whose correlation to other cryptocurrencies
decreased in 2019
● The trend of the growing correlation between cryptocurrencies is troubling
One of the issues not talked about enough in crypto is the inability to truly diversify
cryptocurrencies simply because cross-asset correlations are high.
If permissionless finance wants to progress, there is a dire need for on-chain

crypto-collateralized derivative markets with sufficient liquidity. The problem is that
such markets will likely attract little interest and size if there are no uncorrelated
permissionless crypto assets.
It’s possible that the emergence of tokenized securities can help mitigate this
problem since their price will logically be uncorrelated with permissionless
cryptocurrencies. But of course, tokenized securities will all be permissioned just like
fiat-collateralized stablecoins because of the need to comply with KYC/AML
regulations. Therefore it’s crucial that the price of permissionless cryptocurrencies
decouple from each other.
In order to measure the correlation between the cryptocurrencies, the Pearson

correlation coefficient can be used. The coefficient ranges from -1 to 1. A correlation
of 1 shows a perfect positive correlation while -1 shows a perfect negative

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correlation. A correlation of 0 shows no relationship between the movement of the

two variables.
Daily returns of Bitcoin and 11 other cryptocurrencies are used (Ethereum, XRP,
Bitcoin Cash, Litecoin, EOS, BSV, Monero, Cardano, Stellar, TRON, and Tezos). The
table below shows that the largest cryptocurrencies are all positively correlated with
each other.
2019 cross-asset correlation

Price data from CoinMarketCap
Ethereum correlated the most with the other cryptocurrencies while BSV and Tezos
the weakest. When reviewing correlations between two specific cryptocurrencies, the
most correlated pair was Ethereum and EOS (86%) while the least correlated pair
was BSV and Tezos (31%). The cross-asset correlation is nearly identical to 2018.
2018 cross-asset correlation


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Mean cross-asset correlation

Bitcoin is the only cryptocurrency whose correlation to other cryptocurrencies

decreased in 2019. Correlation of EOS and TRON with other cryptocurrencies
increased significantly in 2019 while the already low correlation of Tezos remained
low even this year. Overall, the correlation between cryptocurrency prices increased
in 2019, albeit not significantly.
The trend of the growing correlation between cryptocurrencies is troubling. It shows

that the market is still long ways off from maturing and that diversifying
permissionless cryptocurrencies is still impossible.

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An analysis of angel investors

with the most
blockchain/crypto exposure
January 14, 2020
Quick Take
● Angel Investors with the most blockchain/crypto exposure have a total of 138
companies in their portfolios
● Approximately 38% of the investments fell under the Exchange/Commerce
category
● The makeup of Investor’s portfolios widely varies where for some it is 100%
blockchain-related and others is closer to 12 to 14%
The blockchain/cryptocurrency sector saw approximately $3.7 billion in investments

across 741 different deals in 2019 – but who were some of the players behind them?
Using Pitchbook, Angel.co, and our own research methods, The Block Genesis
mapped out the existing investments held by angel investors with the most
blockchain/crypto companies in their current portfolio.
By mapping out their investments, we'll be able to see if there is a specific sector
that angels are allocating more into compared to others. The top 10 active angels
investors and their investments are depicted below:

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1. Naval Ravikant: CEO and co-founder of AngelList. Advisor at Republic,

Anchorage and StarkWare.
2. Tim Draper: Co-founding partner at Threshold Ventures. Special limited
partner at Draper Dragon. Mentor at Boost VC. Co-founding partner at Draper
Fisher Jurvetson. Co-founder at Draper University.
3. Ben Davenport: Co-founder at BitGo. Venture partner at Blockchain Capital.
Co-founded Beluga.
4. Roger Ver: Early-investor in many Bitcoin startups including Bitcoin.com,
Blockchain.com, Electric Coin Company, and Kraken.
5. Fred Ehrsam: Co-founder at Paradigm. Co-founded and served as president &
board member for Coinbase.
6. Barry Silbert: Founder of Digital Currency Group
7. Paul Veradittakit: Partner of Pantera. Board member at Blockfolio and Staked.
Advisor to Set Protocol, Origin, Audius, Ampleforth, Opentoken and Alphaslot

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8. Balaji Srinivasan: Technical advisor at 1Confirmation. Board member & general

partner at Andreessen Horowitz. Former chief technology officer for Coinbase.
Co-founded Earn.com (previously 21 Inc) and served as its CEO.
9. Calvin Ayre: Founder of Coingeek. Founder of the online gambling site Bodog
10. Elad Gil: Co-founder & chairman of Color Genomics. Advisor at Origami Logic,
Bitwise and Anchorage. Former VP of corporate strategy for Twitter.
Top 10 Angel Investors with the most blockchain companies in their active portfolio:
Among angels with the most existing blockchain investments in their portfolios, the
median investment amount is approximately 14.
Naval Ravikant has the most, with 21 investments spread throughout the
blockchain/crypto sector, and Tim Draper sporting the second most at 19.
The difference between the most extensive portfolio (Naval Ravikant) to the
tenth-largest is quite a difference, where Ravikant has 13 more blockchain/crypto
companies in his portfolio than Gil.

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Investments by category
We have broken down all of the publicly known blockchain investments held by
these angels into specific sub-categories.
The most popular investment for seven of the ten angels or 70% has been in
Exchanges & Payment companies catering to the cryptocurrency ecosystem.
Exchanges have historically been profitable and employ the highest share of
employees in the blockchain/crypto ecosystem, according to past research findings
from The Block.
Out of the total 138 investments across the ten angels, 52 of them or about 38% fall
under the Exchange/Commerce category. The next highest group with 19 investments
or 14% are investments in tokens of a specific blockchain/smart contract platform.

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Calvin Ayre is the only investor who does not have at least one investment that
overlaps with any of the other investors. All of his investments are focused on
Bitcoin SV, a cryptocurrency that forked away from Bitcoin Cash.
A specific investment that overlaps the most is in Electric Coin Company, the
development firm behind the privacy-focused cryptocurrency Zcash, where 6 of the
ten angels or 60% have exposure to it in their portfolio.
After ECC, eight companies are in 3 of the ten investor’s portfolios or 30%.

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A rough estimate of portfolio in blockchain
Although Naval Ravikant and Tim Draper currently have the most blockchain/crypto
investments, they both rank the lowest as a percent of their total portfolio at about
14% and approximately 12% being blockchain-related.
These percents can largely be attributed to the fact that they both have the most
total investments by far with 147 and 160, respectively, whereas the median portfolio
size is 19, and the average is about 52.
For example, Calvin Ayre is 100% blockchain-related, although his total portfolio
makes up only nine companies.
Recap
Angel investors with the most blockchain/crypto exposure in their current portfolio
make up a total of 138 investments.

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The median amount of investments for the top 10 angels is approximately 14.
Investment in exchanges and companies that cater to commerce for
cryptocurrencies is the most popular trend, making up about 38% of the total
investments.
The makeup of each of the investor’s portfolios is widely varied, where

blockchain/crypto companies make up 100% of their portfolio. By contrast, for others
with a much more extensive portfolio, it only makes up 12 to 14%.

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Projects

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PoolTogether: No-loss Lottery

January 27, 2020
Quick Take
● Ethereum-based no-loss lottery, PoolTogether, continues to see rapid growth,
with the most recent DAI-based pool amassing over $195,000 from 1,187
unique players,
● The addition of sponsored funds has transformed PoolTogether into a positive
expected value experience, with players expected to earn more from
participation than they would by lending out their assets through Compound
themselves
● With a multitude of avenues for experimentation, PoolTogether has the
potential to serve as one of Ethereum’s first mainstream breakout applications
Officially launched in September 2019, PoolTogether is an Ethereum-based no-loss

lottery system. Initially designed by governments to combat inflation and encourage
saving, no-loss lotteries have since been adopted by corporate enterprises.
The basic structure of no-loss lotteries is as follows: users purchase tickets, with
payments subsequently directed into a savings instrument. After some period, the
yield earned is distributed to a single ticket holder, with the principal returned on a
pro-rata basis. The savings instrument, duration, and fee structure are subject to
change according to the issuer’s preference.
PoolTogether’s mechanics work as follows: users purchase tickets for 1 DAI. This DAI
immediately starts earning a variable rate through Compound’s DAI money market.
Each lottery lasts 7 days, with prizes distributed each Friday. Purchasing a ticket
makes a user eligible for the following week’s prize pool and all future prize pools,
assuming the user does not withdraw their funds. Users can withdraw their principal
at any time.
Lotteries have long been a ripe subject for disruption via blockchain technology.
Ethereum’s permissionless properties ensure that anyone around the world can
participate, paving the way for unprecedentedly large prize pools. The open-source

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nature of Ethereum ensures that the mechanics of the lottery can be carefully
audited while smart contracts serve as trusted escrows, preventing manipulation
from central parties and reducing administrative operating expenses (note: at
present, PoolTogether's contracts are entirely replaceable by the team: as a result,
funds should currently be not be considered self-custodial). Finally, the inherently
interoperable nature of Ethereum-based applications allows third parties to leverage
PoolTogether’s liquidity, while PoolTogether itself can draw from financial service
infrastructure built by third parties.
PoolTogether currently runs parallel SAI and DAI-based pools, although deposits into
the former have been halted in expectation of impending deprecation of the
single-collateral MakerDAO system. To date, PoolTogether has seen material success,
with active user and prize pool figures growing week on week.
Source: The Block, PoolTogether
Source: The Block, DuneAnalytics

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Cumulative net deposits continue to grow week on week, with the DAI pool now
surpassing the SAI pool's all-time high cumulative deposits.
Trends in median and mode entry size suggest that pools are becoming increasingly
adopted by players of average wealth, although the top ten players by entry size
continue to make up over 30% of total entries.

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The long-term success of no-loss lotteries will likely depend on the extent to which
operators can ensure that the experience is ‘positive expected value’ — that is to
say, users must probabilistically earn more by participation than they would by
simply lending their funds via money markets. PoolTogether has been effective in this
regard, seeding each prize pool with their own funds: there is currently just under
$250,000 of sponsored funds in the DAI pool.
As a result, participation has been positive expected value (EV) for each pool, with
the charts below illustrating the expected additional earnings per dollar entry versus
lending on Compound: the most recent DAI pool had an expected value of $0.0025
per $1.00 entry. SAI EV has naturally declined over time as sponsorship funds have
been redirected to the DAI pool. Long term, EV will be a function of both the
relationship between natural deposits and sponsored deposits and the timing of

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deposits. For context, expected value for the October 2018 $1.5bn Mega Millions
Lottery was -$0.30 for each $1.00 entry.
Source: The Block, PoolTogether, LoanScan
PoolTogether’s position as a hybrid-speculative application gives it the potential to

serve as one of Ethereum’s first breakout mainstream applications, appealing to both
risk and non-risk averse users. While its transparency, programmability, and secure
custody serve as notable advantages over legacy operations, PoolTogether’s potential
to serve as a global prize pool with global-level liquidity will likely be the most
appealing factor.
In the short term, PoolTogether has three major goals on its roadmap: fiat on-ramp
integration, smart wallet integration, and experimentation with respect to novel
assets (USDC, USDT) and pool duration. However, there are numerous possible
avenues for iteration, including:
● Leveraging fixed-rate yielding products, whether through Yield Protocol’s

zero-coupon bonds or applying interest rate swaps to Compound’s variable
rate through protocols like Rho.

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● Using bonding curves to reward early liquidity providers. At present, a rational

user should only deposit in the moments before the end of the current lottery
so that their funds accrue interest for as long as possible. In the future, ticket
distribution could be structured in a way that disproportionately benefits
those depositing earlier.
● Prizes could be distributed among multiple participants rather than a single
winner and, additionally, the prizes could be structured in a way that all
participants still earn some yield.
● Experimentation with non-stable assets, including ETH, tBTC, and synthetic
S&P 500 exposure. While yields will likely be significantly lower than yields for
stablecoins, this allows players to remain speculative exposure.
● Using lending aggregation platforms like Topo Finance in order to guarantee
the highest possible yield at any given time. An extension of this, PoolTogether
could diversify its yield strategies across alternative financial services, such as
Uniswap or DutchX market-making, in order to hedge against declining interest
rates.

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I2P: The Invisible Internet

Project
January 16, 2020
Quick Take
● I2P is a protocol for using the internet privately, offering more robust
resistance to traffic analysis than Tor
● I2P relies on a technique called garlic routing, which is an extension of Tor’s
onion routing
● I2P has significant usage but is much less commonly used than Tor. Accessing
hidden services on I2P can be faster than on Tor, but users looking to browse
the clearnet should use Tor instead
● An implementation of I2P used to obscure the IP addresses of Monero nodes,
Kovri, is currently under development.
Staying private online is difficult, and most web browsers make no attempt to
preserve their users’ privacy from their internet service providers (ISPs) and
governments.
There are, however, several projects seeking to make internet privacy more
accessible, the best-known of which is Tor. Tor ensures that nobody but the user
knows both the user’s IP address and the content being accessed, and primarily
relies on a technique called onion routing by which messages are wrapped in
successive layers of encryption.
This article assumes some understanding of the technical underpinnings of Tor and
onion routing, which you can learn more about in the previous Genesis Article about
the topic.
While Tor goes a long way toward securing privacy on the internet, it’s vulnerable to
traffic analysis, a technique through which an attacker deanonymizes a user by
tracking the timing and size of messages. I2P seeks to address this weakness and

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create a more private internet access protocol by using a technique called g

arlic
routing, which is more resistant to traffic analysis than Tor’s onion routing protocol.
The I2P Protocol

I2P is a peer-to-peer service for browsing the internet anonymously. I2P can be used
to access hidden websites known as e
epsites, which use the .i2p top-level domain
(TLD). Eepsites are analogous to Tor hidden services, and I2P may be faster for
accessing hidden services than Tor. Users can also access the clearnet and Tor
hidden services through an o
utproxy, which is analogous to a Tor exit node.
Participants in the network are known as r outers. Each router is identified by its
RouterInfo, which specifies a R
outerIdentity, which is a cryptographic public key used
to identify the router, as well as optional IPv4 and IPv6 addresses. RouterIdentities
are typically long-lived, but nodes may cycle through many IP addresses or choose
not to expose an IP address. All RouterInfos are stored in a distributed hash table
(DHT) operated by a volunteer pool of f loodfill nodes. I2P’s DHT is called netDB, and
operates a variant of the Kademlia protocol.
I2P peers connect to one another using unidirectional, garlic-routed t unnels. Peers
can communicate with one another either directly through a tunnel, or over several
hops through intermediary gateway routers. Peers can communicate over a
user-specified number of hops, where a greater number of hops entails tradeoff
between increased anonymity and decreased performance. Routers specify the
contact information of their inbound tunnels in their leases, which include the
RouterIdentity of the gateway, the TunnelId that identifies the tunnel, and an expiry
date for the tunnel. These leases are aggregated into a LeaseSet, which are in turn
stored by netDB.
When connecting to the network for the first time, I2P peers receive a list of other
peers to which they can initially connect from a reseed host. Unlike Tor directory
nodes, reseed hosts are only used to bootstrap a node’s connection to the network.

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The I2P Network. Source: I2P Data Communication System.
Garlic routing differs from onion routing in that it clusters multiple messages and
encrypts them together, with each message representing a c
love in a head of garlic.
This approach provides robustness against traffic analysis. Because I2P’s
implementation of garlic routing uses unidirectional tunneling rather than the
bidirectional tunneling used in Tor’s implementation of onion routing, an adversary
must compromise twice as many nodes to obtain the same amount of information.
I2P routers located in countries with poor Press Freedom scores by default operate
in hidden mode, in which their RouterIdentity is exposed but not their IP address.
These nodes can participate in the network but do not relay traffic for other peers.
Firewalled peers can also participate in the network through similar means.

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Weaknesses and responses

No privacy tool provides absolute anonymity, and I2P has some vulnerabilities,
although most are difficult to exploit.
To partially address these weaknesses, I2P uses several secondary techniques to
secure users’ privacy. Random port selection is used to make traffic analysis slightly
more difficult, and I2P’s peer selection algorithm provides some robustness against
traffic monitoring by malicious nodes. To protect themselves even further, users can
choose to batch requests or increase the latency with which they are relayed to
provide some resistance to intersection attacks—unfortunately, these measures
come at the cost of speed. Like Tor, I2P supports transports to protect against deep
packet inspection, which would otherwise allow users’ ISPs to see that they’re using
the program, which can potentially be seen as incriminating.
I2P’s use of a DHT for RouterInfo management alleviates the single point of failure
created by Tor’s use of directory nodes, which in Tor is only patched over through
the use of bridge relays. However, I2P remains vulnerable to denial of service attacks
by floodfill nodes. Eclipse attacks may also be executed on the network.
I2P is significantly less used than Tor, and as a result, the anonymity set provided by
using I2P is smaller. It’s also been around for less time, and is significantly less
battle-tested, so potential bugs aren’t as likely to have been uncovered.
Accessing the clearnet or Tor hidden services through I2P requires using an outproxy,
and unfortunately, there are currently very few of these, making it potentially
possible for the outproxy operators to monitor user behavior. As such, using I2P is
not recommended for browsing these networks; instead, I2P should only be used to
browse eepsites.
Usage
The I2P team, like The Tor Project, publicly provides a substantial amount of
anonymized data available to the public through I2P Metrics, maintained by Nguyen
Phong Hoang et al. This data contains information on the number of I2P routers by
country, as well as metrics serving as proxies for usage.

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Unintuitively, there are more I2P routers than unique IP addresses on the
network—this is because many routers do not publish a valid IP address, as they are
firewalled or hidden. This occurs despite the fact that many routers cycle through
multiple IP addresses. IPv4 addresses are more frequently exposed on the network
than IPv6 addresses.
The countries where I2P is most popular are the United States, Russia, the United
Kingdom, France, and Canada. Interestingly, the only one of these countries that is
not a liberal democracy is Russia—this makes intuitive sense, as routers in countries
with poor freedom of speech protections are by default hidden, so their locations
cannot be easily determined. The number of routers located in the United States is
much greater than in any other country.

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The total number of I2P routers exceeds the number of Tor nodes, likely due to the
fact that all participants in the I2P network serve as routers.
This means that at any given time, the number of I2P users is bounded above by the
number of active routers. The estimated number of Tor users, omitted from the
graph below, is about two orders of magnitude greater than the number of I2P
routers, at approximately 2 million per day.
Nonetheless, the number of I2P routers, and likely the number of daily users, is
significant. The number of I2P routers is more volatile than the number of Tor nodes,
but both populations have remained roughly stable over the last year. There does not
appear to be a relationship between the number of active I2P routers and the
number of active Tor nodes.

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Kovri
Kovri is an implementation of I2P for use with Monero.
The project is in alpha and is not yet integrated with the currency. Kovri obscures the
IP address of Monero nodes, reducing the risk of the sender’s deanonymization and
limiting the effectiveness of node partitioning attacks. The usage of an I2P
implementation in this context mirrors the use of Tor in privacy-focused Bitcoin
wallets like Samourai and Wasabi.

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MakerDAO: System healthy

less than three months post
unprecedented migration
January 30, 2020
Quick Take
● Just two and a half months after launch, MakerDAO’s Multi-Collateral Dai has
originated over $280 million in loans, $105 million of which remains
outstanding
● Over 48.6 million Dai is currently earning the Dai Savings Rate, with $250,000
paid in interest to date
● Discussion around whether hold-out CDPs from Single-Collateral Dai should
be forced to pay $2.6m in outstanding stability fees in the event of emergency
shutdown remains ongoing
The charts below will auto-update every day. All figures cited are relevant as of
January 30th, 2020.
MakerDAO is an Ethereum-based credit facility and synthetic issuance platform. First

launched in December 2017, MakerDAO recently transitioned to its Multi-Collateral
state, bringing with it potential alternative collateral assets and various significant
changes to both the underlying system and its chief governing token, MKR.
Despite enormous logistical complexity, the migration process has proven to be an
enormous success across a variety of metrics.
Net Dai generated per day continually exceeds 1 million, while total outstanding Dai
has now surpassed 100 million on 281 million originations (for context, Compound
originated roughly $70m over the same period). The debt ceiling will have to be
re-adjusted up once Dai outstanding supply hits 125 million. With close to $380
million worth of Ether and Basic Attention Token locked systemwide, each Dai is
backed by over $3.58. The 24-hour volume-weighted average Dai price across the

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most liquid non-custodial exchange markets sits at $0.999: we should not expect a
downward adjustment to the current 8% APR Stability Fee in the coming week.

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Source: The Block, Dune Analytics
Nearly 50% of outstanding Dai is currently locked in MakerDAO's Dai Savings Rate
(DSR), which pays savers a variable rate set by MKR holders. Since launch on
November 18th, these savers have collectively earned over $250,000 in interest.

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Excluding the first week proceeding Multi-Collateral Dai launch, daily creation of
Collateral Debt Positions, since rebranded to Vaults, oscillates between roughly
25-45.
Protocol earnings accelerated after the Multi-Collateral Dai launch, with legacy CDP
holders forced to pay off their outstanding interest before migrating to the new

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system: all-time net income now sits at over $6.1m. As a result, MKR's 12-month
trailing price-to-earnings ratio has rapidly improved, falling from 215 at the start of
November to just over 90 today. Observing MKR market activity over this period,
there seems to be little correlation between the remarkable improvement to P/E and
MKR price.
While the Single Collateral Dai system has over $2.6m in outstanding unpaid fees, it
remains unknown as to whether hold-out CDP owners will be required to pay
interest in the increasingly likely event of an organized SCD system shutdown.
Representing over 25% of system income to date, the outcome of this decision
should have a material impact on MKR price. The conversation regarding whether to
tax these hold-out CDPs can be followed here. This scenario will not arise in MCD,
where interest is effectively paid on a continuous basis rather than at the end of the
loan term.

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Under MCD, MKR holders are now the recipients of a 10% penalty levied on liquidated
Vaults. However, since launch, earnings from liquidations —just over $60,550 — have
only made up just 0.98% of protocol income, likely explained by the rapid influx of
Single Collateral Dai related fees. It may be reasonable to expect liquidation
penalties as a percentage of total revenue to increase drastically after the migration
is fully complete and then decline over time as vault-protection services like

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DefiSaver, Atomica, and CDPSaver become increasingly prevalent and increased

liquidity in the Ether market allows for less strict liquidation parameters.

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A look into the growth of USDC

January 22, 2020
Quick Take
● Launched in 2018, USDC has experienced early success
● The stablecoin currently makes up 5% of total fiat-backed stablecoin trading
volume on exchanges and roughly 3% on decentralized exchanges
● Excluding USDT, USDC makes up 70% of total fiat-backed stablecoin trading
volume
2018 saw the launch of a handful of new fiat-backed stablecoin projects gunning for
a piece of the market share long dominated by Bitfinex's controversial Tether.
Still, two years later, only one of these projects has seen noteworthy success: U.S.
Dollar Coin or USDC. Initially announced by Circle in May 2018 and later supported by
Coinbase via the CENTRE Consortium, USDC has grown to be a strong contender
among the newly launched stablecoin projects.
In this piece, The Block will take a look at USDC’s growth compared to its 2018
stablecoin cohorts: TUSD, PAX, and GUSD.
Of the four aforementioned stablecoin projects, USDC was the third to come to
market — officially launched in September 2018. TrueUSD (TUSD) from TrustToken,
the first-mover of the batch, had a nearly three-month head start.
Despite its first-mover advantage, TUSD could not maintain a dominant position in
the ecosystem, as shown by the stablecoin supply growth chart below.

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Source: Coin Metrics, The Block
Once USDC, PAX, and GUSD came to market, TUSD’s market share quickly shrank to
roughly 30% by late December — settling at around 18% at the time of this report.
USDC, meanwhile, saw its market share grow from 6%, when it first launched, to
54%. Paxos Standard (PAX) currently has a 28% market share, with Gemini Dollar
(GUSD) rounding out the group with roughly 0.5%.
USDC’s early success can be attributed to the adoption of the stablecoin by many
projects in the ecosystem and the support of Coinbase. We listed major events of
USDC in the timeline below.

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Source: The Block
As shown above, despite being the creator of USDC, Circle has taken a backseat to
Coinbase, with Coinbase taking the role as the main driver in its adoption. The San
Francisco-based exchange has pushed for USDC adoption in the global market,
added support for its popular merchant service, and contributed to the growth of
USDC's ecosystem through a $2M DeFi fund.
Along with Coinbase, many services in the ecosystem have since added support for
USDC, as shown in the map below.
Source: The Block

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USDC’s market share of trading volume on centralized exchanges has also seen
substantial growth. In the charts below, we plotted the trading volume market share
of USDC, both with and without the inclusion of Tether (USDT).
Source: CryptoCompare, Paradigm API, The Block
Without counting USDT, USDC has a roughly 70% share of total trading volume across
The Block 22 exchanges. If we include USDT, this number drops to ~5% — showing
while USDC has broken itself from its pack of 2018 stablecoin project, it still has a
long way to go to overtake USDT’s hold over trading volume.

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Source: CryptoCompare, Paradigm API, The Block
In the DeFi space, USDC has shown similar market standing. Below, we plotted out
the decentralized exchange trading volumes of the six ERC-20 stablecoins: DAI+SAI,
USDT, USDC, PAX, TUSD, and GUSD.
Source: Dune Analytics, The Block

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If we include Dai/Sai and USDT, USDC makes up roughly 3% ($19.7M) of total

stablecoin trading volume on decentralized exchanges. If we exclude the former two,
USDC makes up over 87% of stablecoin trading volume.

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Non-custodial volume
dwindles as Uniswap, Kyber
Network take lead in market
share
January 6, 2020
Quick Take
● Reflecting volume on centralized exchanges, total volume on non-custodial
exchanges dropped to a 9-month low in December
● In January 2019, the share of non-custodial vs. centralized volume was a mere
0.30%. But by the end of 2019, it rose to more than 0.50%
● Uniswap is currently neck-and-neck with Kyber Network for the most
non-custodial volume
● Non-custodial exchanges won’t capture a significant portion of the centralized
exchanges’ volume for the foreseeable future
The total volume on non-custodial crypto and digital asset exchanges fell to a
9-month low in December.
However, while still relatively negligible, the share of volume traded on non-custodial
exchanges increased in comparison to the amount traded on the centralized
exchanges.
Despite eradicating the risk of losing funds in theft, the non-custodial exchanges
have, so far, failed to gain traction, especially in comparison to their centralized
counterparts. The total volume on non-custodial exchanges reached $179.6 million in
December, which is only 0.53% of the volume recorded by the centralized exchanges
vetted by Bitwise.

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The lack of liquidity, simplicity, as well as blockchain constraints, are among the
reasons non-custodial exchanges haven’t caught on yet.
Source: Bloxy, Dune Analytics, CryptoCompare, The Block
There is still a reason to be optimistic, though.
The share of volume traded on non-custodial exchanges has gradually increased in
comparison to that traded on the centralized exchanges. In January 2019, the share
was a mere 0.30% while the share was above 0.50% by the end of the year. Still
negligible, to be sure, but at least going in the right direction.

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For the most part of 2017, the non-custodial volume was dominated by EtherDelta.
IDEX and Bancor Network also attracted a significant portion of the market share in
2018.
However, in 2019, the volume started to become much more equally distributed to
new exchanges entering the market. EtherDelta, IDEX, and Bancor combined don’t
even have 10% of the market share.
Uniswap is currently neck-and-neck with Kyber Network for the most volume.
Binance DEX captured a lot of market share immediately after launching (likely
because of hype surrounding the launch as well as trading competitions) but has
since fallen significantly. 0x and Oasis trail after these three.

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I fully expect the share of non-custodial volume to continue rising, but these
exchanges won’t capture a significant portion of the centralized exchanges’ volume
for the foreseeable future.
Trusting a third-party with funds in exchange for more convenience is simply a

trade-off that the majority of people will continue to make.

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Company

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Crypto-friendly Signature Bank

grows non-interest bearing
deposits by $1 billion in 4Q19
January 22, 2020
Quick Take
● On Tuesday, Signature Bank reported a $1 billion sequential increase in
non-interest bearing deposits
● Although not specifically disclosed, I suspect a large portion of that came from
their Digital Asset Banking team
Competition between crypto-friendly banks, Signature and Silvergate, continues to

heat up.
On Tuesday, Signature Bank reported a $1 billion sequential increase in non-interest

bearing deposits for 4Q19.
Typically, securing low-cost deposits are hard to come by. For crypto-friendly banks,
however, that’s a different story as struggles to find banking partners have led
cryptocurrency-related businesses to accept lower interest rates on their deposits.
The vast majority of Silvergate Bank’s $1.3 billion digital asset-related deposits are
non-interest bearing. Signature Bank doesn’t provide breakouts of its deposits, but I
suspect a significant portion of its 4Q19 non-interest bearing deposit growth came
from its Digital Asset Banking team.
With that being said, I find the large Signature’s large boost in deposits rather
surprising given the less-than-stellar performance of the cryptocurrency industry in
4Q19. Exchange trade volumes continued on its downward trend. Bitcoin prices
pulled-back over 10%. Investments in blockchain-related companies were much less
than what was experienced in 2018.

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Source: CryptoCompare, CoinGecko, LMAX, The Block
Perhaps Signature Bank was able to capture parts of the cryptocurrency markets
that Silvergate hadn't deeply explored. Signature recently noted that it's been looking
into the energy industry as a possible area of growth for their blockchain-based
payments platform, Signet.
“…Once April comes along, we’ll have an energy company using Signet with clients
that they service and they provide energy to,” management noted on the 4Q19
earnings call. Would it be that much of a stretch to think that these "energy"-related
companies are cryptocurrency mining operations?
Of course, this is all speculation. Despite Signature being one of the top banking
providers to the cryptocurrency space, their cryptocurrency-related deposits only
make up a fraction of their entire portfolio. As a result, specific details are rather
sparse within the company filings.

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Given Silvergate Bank focuses primarily on the cryptocurrency space, its earnings call
should provide some much-needed color. Their 4Q19 earnings release is scheduled
for next Wednesday, January 29th.

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Examining the landscape of

digital asset custody
January 23, 2020
Quick Take
● Custody of digital assets has seen approximately $1.3 billion in investment,
with approximately $419 million allocated to pure crypto custody firms
● Pure custody companies saw capital injections during bear market conditions
following large swings in the price of Bitcoin. In 2014 and 2018, investment saw
an increase of 7,404% and 1,300% YoY, respectively
● With more custody suppliers than institutional demand, the market seems ripe
for M&A transactions this year akin to Coinbase’s acquisition of Xapo’s
Institutional service in 2019
Digital assets like Bitcoin present novel challenges that legacy financial firms aren't
equipped to handle. Digital assets are, essentially, digital bearer bonds, and the
ownership of these assets is intrinsically linked to the possession of private keys.
Due to these unique needs, the ability to properly safeguard private keys is
particularly critical – indeed, paramount – to the success of a digital asset custodian.
Outside of safeguarding these assets, many of these tokens can, and arguably
should, be actively participating in their respective networks for consensus (staking)
or voting purposes. Investment funds have been compelled to make the difficult
decisions on whether they should assume the risk of actively staking their tokens or
opting-out of participation while accepting that their position will be diluted by some
percentage.
For the purpose of this research piece, we have broken down the custody space into
two segments – Institutions and Consumer – which includes a total of 42 custody
service providers.

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The majority of early adopters operate on the mantra “Not your keys, not your coins”,
or the notion that the users should be in possession of their own private keys rather
than trusting a third party to do so.
The problem: this position is not ideal for all users nor is it possible, at least in the
U.S., for institutions managing more than $150 million that are required by law to
have their assets safeguarded by a registered custodian.
For this reason, custody is a critical link for the institutional adoption of digital
assets. 2018 and 2019 saw a surge of custody firms and services entering the market
aimed primarily at institutional investors. Since early 2018, “institutional” custody
vendors have been formed, many backed by the most prominent traditional firms

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which include the likes of the New York Stock Exchange, Fidelity, and Goldman
Sachs.
The Block examines the custody space dating back to 2012, how it has evolved, and
what it’s like in its current form.
Vendors Founded
Eleven of the 15 or about 73% of consumer vendors were formed by 2016. Whereas,
for institutionally focused vendors, 18 of the 27 or approximately 67% were formed
after 2016. This hints at a shifting dynamic where newly founded companies are
seeing a greater market opportunity in serving an institutional clientele.
The most popular hardware wallet producers, including Trezor, Ledger, and Coinkite
were formed in either 2013 or 2014. A lack of newer participants suggests that these
brands have built a stronghold in the market and potential new players don’t see
many unexplored market segments to develop their own niche in.

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Total Investment in Digital Asset Custody Services
Our sample includes a total of 72 investment deals dating back to 2012. Custody of
digital assets has seen approximately $1.3 billion in investment, with approximately
$419 million allocated to pure digital asset custody firms.
Coinbase for example, whose custody service may have the highest AUM of any
provider with over $7 billion, is classified as “Not Pure Custody." Coinbase, which has
amassed at least $525 million in investment, represents approximately 41% of the
$1.3 billion total investment.
The $415 million allocated to Not Pure Custody in 2018 ($547.5 million) is attributed
to three specific deals: Coinbase ($300m), Bakkt ($182.5m), and Paxos ($65m).
A trend identified in the custody space is that capital has been injected into pure
custody companies during bear market conditions, often after large increases in the
price of Bitcoin. In 2014, pure custody companies saw about $54 million in

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investment, a 7,404% increase from the year prior, when it saw only $720k in
investment. 2018 saw a similar increase when investment jumped from $14 million in
2017 to approximately $196 million in 2018, an increase of approximately 1,300%.
Investment by Deal Type
As mentioned previously, the formation of custody companies often coincided with

Bitcoin price increases, which could explain why early-stage venture capital
dominated in 2013 and 2014.
In 2014, BitGo raised a $1 million seed funding round and a $12 million early-stage
venture capital deal. Xapo received a $20 million early-stage VC investment. After
2015, investment in new custody ventures dried up and instead late-stage venture
capital investments dominated from 2015 to 2017.
During this time, Coinbase was scaling, raising capital and was largely responsible for
late-stage investment dominance. In 2015, its $75 million later stage VC deal

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represented 72% of the approximate $102 million in investment. In 2016, its $10.5m
raise was the only investment, and in 2017 its $108.1 million raise was one of two
investments that made up the majority of dollars invested. Blockchain’s $40 million
investment was the other.
2018 and 2019 saw investments in early-stage and seed round custody ventures
increase. Some of these particular ventures in no specific order include Ledger, Knox
Custody, Unchained Capital, BitGo, FireBlocks, ZenGo, Argent, Vo1t, Hex Trust,
MyCrypto, Casa, Onchain Custodian, Aegis Custody, Curv, and Anchorage.
2019 was the first year that saw a major custody acquisition deal. Coinbase acquired
Xapo’s institutional business for an estimated $55 million. This could be the
beginning of a larger M&A trend in the broader industry.
Today, there are more custody providers than there is of institutional demand, and
some firms are beginning to position themselves to take advantage of acquisition
opportunities. Most recently, Anchorage, the institutional custody provider backed by
the likes of Visa, Andreessen Horowitz, and Khosla Ventures, expanded its services by
acquiring Merkle Data, which helps clients detect manipulative behaviors and other
risks in the digital asset market.

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Prominent Investors with exposure to Digital Asset Custody Solutions
We have sorted through the 72 investments in custody companies and created this
visualization to show where investors, who have at least one investment in the
space, are focused.
Two technology giants, Microsoft (M12) and Google (GV) have each made an
investment through their ventures arms, with Microsoft betting on Bakkt, a futures
exchange and custody provider and Google betting on the wallet and exchange
provider Blockchain. Samsung, the electronics conglomerate, invested in Ledger,
producer of the most popular hardware wallet and a provider of institutional custody

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services through its Ledger Vault service. Samsung also opted to invest in ZenGo, a
non-custodial wallet for digital assets.
There are two state-owned entities that have invested in digital asset custody
companies. Government of Singapore Investment Corporation or GIC is Singapore’s
wealth fund responsible for allocating over $100 billion, made an investment in
Coinbase. Swiss Post, the national postal service of Switzerland, made an investment
in METACO, a digital asset management provider.
Most Venture in Digital Asset Custody Solutions
The chart above shows the ten most-active investors in the digital asset custody
space. The median number of investments among the most active is 3 deals. Digital
Currency Group is the most active investor in the custody space with 8 investments.

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It's interesting to see which of the investors also use their portfolio company's
services for their own assets.
For example, Blockchain Capital and Andreessen Horowitz are both investors in
Anchorage and use the firm's custodial services. Galaxy Digital has invested in BitGo,
Xapo (now part of Coinbase Custody), and Bakkt and has opted to use Bakkt and
Fidelity Digital Assets as its custodians.
Digital Currency Group has signed with Coinbase to custody its reported $2.7 billion
AUM for the next three years but is an investor in BitGo, Ledger, Paxos, Curv, all of
which offer institutional custody services.
Recap
Over the years, digital asset custody solutions have received $1.3 billion in
investment, with $419 million of it representing pure custody companies. The focus
of custodial services has shifted from consumer to institutional as shown by the
percent of custody companies founded with a focus on the latter.
With a wide assortment of institutionally-focused custodians established in 2018 and

2019, and not an overwhelming demand for their services, consolidation in the space
is not out of the question with activity similar to Coinbase’s acquisition of Xapo’s
Institutional Custody service.

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A deep dive into the Paxos

stablecoin ecosystem
January 28, 2020

Quick Take
● Paxos launched the Paxos Standard (PAX) stablecoin in 2018
● PAX has become a fast follower to the market leader of 2018 stablecoin
cohort, USDC
● One interesting strategy Paxos has deployed is white-labeling its stablecoin
solutions to launch stablecoins with exchanges like Binance and Huobi
● These partnerships have significantly boosted trading volumes and issuance in
Paxos’ stablecoin ecosystem.
The Block has previously covered the growth of the four fiat-backed stablecoins
launched in 2018 and the rise of USDC as a leading contender.
Gunning for that position, as a fast follower, is Paxos, the New York-based crypto
finance startup.
Tied with Gemini USD as the last of the 2018 stablecoin cohort to announce their
projects, Paxos’ stablecoin, Paxos Standard (PAX), has seen a significantly higher rate
of adoption than the former, as shown in the cumulative transaction valued settled
on chain in the chart below.

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Coin Metrics, The Block
What’s more interesting than the adoption of PAX, however, is the launch and growth
of two stablecoins in late 2019 using Paxos’ white-labeled stablecoin solutions: the
Huobi Dollar (HUSD) and Binance USD (BUSD).
These two significant events are noted below, in the timeline of major Paxos events:

The Block
Both HUSD and BUSD were launched via partnerships with Paxos. Under these
partnerships, Paxos, through the Paxos Trust Company, became the regulated and
qualified custodian of these exchange-branded stablecoins, managing the

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attestations of their reserves and issuance of the stablecoins from its platform.
Paxos was also able to obtain NYDFS approval for PAX and BUSD.
If we include HUSD and BUSD under the Paxos stablecoin umbrella, we see that the
firm has issued roughly $346M in stablecoins.

The Block
If we consider these stablecoins as part of Paxos' stablecoin ecosystem, the firm

significantly closes the issuance gap between its stablecoins and USDC, growing from
having only issued 47% of USDC’s total supply to having issued 72% as we see below.

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The Block
A benefit of this increase in stablecoin supply is the boost of liquidity into the Paxos
stablecoin ecosystem.
Because these stablecoins are branded under each exchange’s name, they are
immediately supported for trading on their corresponding exchanges, i.e. BUSD is
supported on Binance and Binance U.S. and HUSD is supported on Huobi Global and
Huobi Korea.
We show the growth of additional liquidity into Paxos’ ecosystem in the chart below.¹

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CryptoCompare, Paradigm API, The Block
The two charts below show how dominant these white-label stablecoins have
become since their issuance, in terms of trading volume, with HUSD and BUSD
making up nearly 70% of the total trading volume of Paxos stablecoins.


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Looking at the dominant exchanges of the Paxos Stablecoins, it is no surprise that

Huobi takes a large portion of the share of the trading volume, given the share of
trading volume of HUSD.
Huobi’s market share of Paxos Stablecoins peaked at over 99% in August 2019 before
settling at around 34% at the time of this writing.


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A look at organizations that

accept bitcoin donations
January 6, 2020

Quick Take
● 12% of America’s top 100 charities of 2019 accept bitcoin donations
● A majority of these charities use BitPay as their main payment processor.
A sliver of major charities in the United States accept bitcoin, and much of that
charitable giving is taking place through a long-running industry payment processor,
according to new research.
As exemplified by the Pineapple Fund, the unique properties of bitcoin enabled a

completely anonymous donor to give away roughly $55M in bitcoins during the
cryptocurrency bubble of 2017.
While the benefactors of Pineapple Fund’s donation were non-controversial, the

apolitical and uncensorable nature of Bitcoin enables users to support any cause,
even those deemed by the current zeitgeist and local governments as facilitating
activities that are against their wishes, like WikiLeaks.
For this piece, The Block analyzed charities, non-profits, and open-sourced projects
accepting bitcoin donations. We used Forbes’ top American charities list of 2019 and
Bitcoin Wiki for our data set.
Our major finding: 12% of America’s top 100 charities of 2019 accept bitcoin
donations. Of those that accept bitcoin donations, the most popular payment
processor was BitPay, at ~58%.
The remaining payment processors used are evenly distributed through

CoinPayments, The Giving Block, Investment Fund, or directly by way of the Bitcoin
network itself. Over 90% of these charities accept bitcoins through third-party

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payment processors.
From The Block’s list of 55 organizations and open-source projects that accept
bitcoin, 67.9% accept bitcoins directly.

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The large disparity may be due to the nature of these projects.
A large percentage of these projects offer open-sourced and technological services,

such as WikiLeaks and TOR Project, which may point to their management team as
being more comfortable with directly accepting BTC.
We also note that because the Bitcoin Wiki list is compiled by members of the
Bitcoin community, there will be an inherent bias of selecting organizations that are
more knowledgeable of how bitcoin works. However, in addition to the original list,
The Block has also added other popular non-profits and charities in an attempt to
lessen this bias.
The Block also analyzed the address type of non-profits and organizations accepting
bitcoin donations, which we show below.

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The P2PKH format is the non-SegWit format for bitcoin. The addresses under these
formats start with 1. As we see in the chart above, a majority of organizations still
use their original address format and have not upgraded their usage to
SegWit-enabled address formats like P2SH and Bech32.
Interestingly, only 3.64% of organizations use new addresses each time they accept
bitcoins — that is, generating a new address each time a visitor refreshes the
organization’s website. The remaining organizations practice address reuse, which
can be detrimental to their financial privacy.
We categorized the organizations in our data set into four categories: Technology
(Tor Project), Information & Media (WikiLeaks), Human (Human Rights Foundation),
and Environment (Amazon Watch) to show the distribution of address type across
categories.
Technology and information & media organizations have the highest usage of SegWit
address formats, while human and environment organizations primarily use the old

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Bitcoin address formats.

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Concerns loom for one of

Canada's biggest bitcoin
miners
January 7, 2020

Quick Take
● Bitfarms, one of Canada’s largest bitcoin mining companies, currently operates
5 facilities with 813 PH/s of installed computing power (~0.8% of the network
hash rate)
● By utilizing a $20 million secured loan, the company purchased over 13,000
new generation miners
● Due to strict covenants and a high interest rate on the loan, Bitfarms will need
higher levels of operating cash flow in order to pay the outstanding balance at
maturity (scheduled for 2021)
● Coupled with several recent departures from its management team and noise
complaints from locals, Bitfarms has much to worry about as the bitcoin
reward halving approaches.
As we approach the halving – the term used to describe the drop in the bitcoin
per-block subsidy from 12.5 BTC to 6.25 BTC, scheduled to take place this spring – it
becomes increasingly important to monitor the financial strength of the mining
industry.
With the majority of the bitcoin hash rate existing in China, bitcoin mining operations
are somewhat of a mystery to us in the West.
Thankfully, we can gather insights from the many industry-scale mining companies
that are publicly traded within North America, such as Bitfarms.

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Company history
Bitfarms manages one of the largest mining operations within Canada.
Since its inception in late 2017, Bitfarms has grown its footprint to 5 facilities spread
across the province of Quebec. Utilizing the region's cold climates and ample
hydroelectricity, the company secured preferable rates on energy costs with the
local public utility companies. According to the company, they pay an average rate of
$0.04 per kWh for electricity, which is around the global industry average, according
to research by CoinShares.
At the end of 2018, Bitfarms' mining equipment mostly consisted of the aging
Antminer S9s, with total computing power of approximately 208 PH/s. Throughout
2019, however, the company purchased 13,300 next-generation miners: a mix of
Antminer S17 Pros, Innosilicon T3s, Avalon A10s, and Whatsminer M20S’s.
As of today, Bitfarm’s has installed computing power of approximately 813 PH/s

(~391% increase in hash power year-over-year), powered by 55 MW of electricity.
Liquidity concerns
The purchase of the next generation mining equipment was financed through a $20
million secured loan with New York-based Dominion Capital LLC.
The loan is split up between four separate tranches of $5 million, each with
24-month maturities and 10% interest per annum. Bitfarms is required to give
Dominion 10% of mining revenue each month, a payment that goes towards paying
off both the interest and principal payments of the loan along with a balloon
payment for any remaining outstanding balance at the end of the term of the loan
tranche.
According to company filings, Bitfarms estimates that its financial obligations (both
principal and interest) on long-term debt are:
● 2020: $4,613,000
● 2021: $17,137,000

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Within its 3Q19 MD&A documents, the company notes that it views its cash & cash
equivalents as well as its future operating cash flows to be sufficient to fund its
ongoing business requirements and debt payments over the next 12 months.
Nonetheless, the true test will come during 2021 when the outstanding debt balance
is due.
Covenants on Bitfarm's loan include restrictions on issuing additional debt or selling

property, plant, and equipment (PP&E) without reinvesting the proceeds into PP&E.
Source: Bitfarms

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On top of that, the company had working capital of only $632,000 as of 3Q19.
As a result, the $21.8 million in aggregate debt obligations over the next two years
would need to be paid off either through equity financing (which would dilute
existing common shareholders) or operating cash flow.
For 3Q19, operating cash flows were $1.5 million. If we were to assume a steady state
of incoming operating cash flow moving forward, the company would be able to
accumulate only $13.5 million in cash flows by year-end 2021 ($1.5M * 9 quarters), a
$8.3 million deficit to the $21.8 million in debt obligations for 2020 and 2021.
To be fair, Bitfarms has since increased its installed computing power from 548 PH/s
at the end of 3Q19 to 813 PH/s (a 33% increase vs. a ~13% increase in the network
hash rate) following the completed installation of all its new generation miners, likely
improving the company’s projected revenues.
However, noise complaints from residents near one of Bitfarm’s mining facilities will
probably lead to increased costs in the short term as the company spends resources
in order to dampen the sound emission. According to an article by The Canadian
Press from Nov. 20, the company has promised to construct a 23-meter wall outside
its Sherbrooke facility in order to restore peace with the locals.
Also noteworthy: the halving is scheduled to take place this May. Depending on the
movements of bitcoin prices and the network hash rate, it could have a drastic
impact – good or bad – on future earnings.
Departures from management

Within the last few months, Bitfarms has experienced a fair amount of turnover.
Bitfarms issued a press release on October 3 announcing the resignation of its
president and co-founder, Pierre-Luc Quimper. A month later, The Canadian Press
reported that 3 managers (VP of Operations Anthony Levesque, VP of Infrastructure
Louis Valois, and head of public relations Bahador Zabihiyan) as well as other
lower-level staff members had also left.

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According to the article, an anonymous source noted of tensions that arose between
the operations and corporate sides of the business. Bitfarms CEO, Wes Fulford
downplayed the allegations of any conflict to just “business gossip.”
However, comments from both Fulford and Quimper to The Canadian Press
suggested that the two didn’t see eye-to-eye.
“He’s never had a boss. He’s never had a board of directors. We are now a much
larger, professionally traded organization, and you can read into that what you like,”
Fulford said in regard to Quimper.
Since Pierre’s resignation, the company put co-founder and director of software
engineering, Mathieu Vachon, in charge of oversight of the Bitfarms’ operations.
With that being said, it still remains unclear as to the reasoning behind the other
departures on the management team. When asked to comment on the situation, the
company told The Block:
“Except when disclosure is required pursuant to securities laws, we wish to maintain

the privacy and confidentiality of our employees and would like to avoid commenting
on the employment status of our team members.”
Conclusion
Despite Bitfarms' operations exhibiting a sizable increase in hash rate over the year,
its expansion was financed through debt with high interest rates and strict
covenants. The payment of sizable financial obligations over the next two years will
require either increased operational cash flow or equity funding.
Decreased block rewards when the halving occurs and possible one-time expenses
associated with noise suppression to appease angry locals are notable headwinds.
Several departures from the company's management team should also cause reasons
for concern.

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Simply put: 2020 could be a make-or-break year for one of Canada's biggest bitcoin
miners.
Update: Year-over-year growth rate percentage in Bitfarm's installed computed hash

rate has been corrected.

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Trends

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The halving of Bitcoin's

Security Ratio
January 9, 2020

Quick Take
● Discussion around Bitcoin’s imminent issuance halving has predominantly been
framed as an innately bullish event, ignoring network security implications
● Regardless of any dollar value appreciation, Bitcoin’s Security Ratio, calculated
as miner revenue over network value, is set to halve, opening up the
potentially debilitating for speculative attacks
● For Bitcoin’s Security Ratio to stay at pre-halving levels post-halving, fee
revenue must increase roughly 4300%
Bitcoin’s ‘halving’, set to take place in May, has inspired active discussion around the
application of the Efficient Market Hypothesis. Commonly alluded to as an innately
bullish event, debate predominantly focuses on the extent to which the halving of
block reward issuance has been priced in.
While some analysts find merit in these discussions, these predictions are ultimately
mere speculation and, moreso, difficult to prove or disprove: without a fundamental
valuation framework for Bitcoin it is impossible to ascertain as to whether it is
trading above or below fair market value and price appreciation or depreciation post
halving may well be a function of entirely orthogonal factors.
Consequently, we believe halving-related discussion is best focused on the

deterministic facts: bar the outright destruction of the network, at block time
630,000 Bitcoin block rewards will fall from 12.5 BTC to 6.25 BTC. Excluding a
miraculous rally in the Bitcoin fee market, Bitcoin’s Security Ratio (SR) is set to halve.
Contrary to pervasive halving narratives, this represents a fundamentally bearish
development for the Bitcoin network and its existing stakeholders.

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Security Ratio
Before delving into the Security Ratio itself, it is first worth briefly discussing the
relevance of security itself. In theory, the very value proposition of blockchain
networks derives from their credibly neutral properties, largely manifested in
immutable transaction history and censorship resistant transaction processing. This
departs from ledgers hosted by single organizations and enterprises, where
transaction history and access to services is unilaterally controlled at the discretion
of limited parties. In order for blockchain networks to live up to their value
proposition the cost to acquiring majority control must be insurmountable.
There are several different approaches to quantifying security. The first, and most
rudimentary, technique is to calculate a network’s Security Budget. Under the
assumption that existing miners are honest and miner cost trends to miner revenue,
we can state that the cost to acquire majority hashpower is equal to existing miner
revenue. The Security Budget gives us a nominal security value: for Bitcoin, this
equals roughly $13m per day or $5.2bn per year.
An alternative way of calculating network security is through the relationship

between miner revenue and ‘miner extractable value’ (MEV). MEV refers to arbitrage
and front running opportunities that emerge from blockchain-hosted applications:
front running a MakerDAO CDP liquidation or Uniswap trade are two examples among
many. If earnings from MEV opportunities exceeds miner revenue from block rewards
and fees, rational miners should be incentivized to continuously fork blocks to
capture these opportunities themselves. The end result is instability at the
consensus layer and disruption to both ledger history and transaction processing.
MEV opportunities are currently largely limited in Bitcoin but, as argued by Professor
Narayanan, may perhaps become increasingly prevalent as fee revenue makes up a
majority portion of miner revenue.
Finally, we have the Security Ratio, which is calculated by finding the ratio between
miner revenue and network value. Put differently, the Security Ratio illustrates value
of wealth secured by value of security. As we will discuss, the diminishment of this
ratio leads to increasingly more value secured by increasingly less security value,
thereby opening up potential for debilitating attacks.

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Attack types
Blockchain networks must contend with three separate forms of attack.
The first, and most commonly feared, is the double-spend attack. ‘Double-spend’ is
perhaps a misleading term as it suggests that funds can only be spent twice: in
reality, funds requisitioned can be re-spent an arbitrary number of times. Double
spends require an attacker to control a majority of hashpower. Once this hashpower
has been marshalled, the attacker can ‘spend’ their coins in exchange for some
tangible item, whether fiat or a non-monetary asset like a car. Once this exchange
has taken place and the item has been received, the attacker proceeds to fork the
network, building a longer chain that excludes their previous transaction. By
excluding their initial transaction, the ledger suggests that the attacker maintains
custody of the coins used to purchase the item: meanwhile, they simultaneously
retain custody of the exchanged item. This process can be repeated indefinitely
assuming there are enough willing counterparties. The payoff is a function of the
‘double spend’ size and, implicitly, block rewards over that period, while the cost is
derived from the value spent acquiring a majority of hashpower. However, double
spend attacks seem increasingly less likely due to both the proliferation of
blockchain analytic firms and the threat of account suspension on fiat-supporting
exchanges.
Unlike double-spends, sabotage attacks are not necessarily motivated by explicit

profit. Forms of sabotage include arbitrary censorship of accounts, publication of
empty blocks, and liveness disruption through continuous forks. Like double-spends,
sabotage attacks require a majority of hashpower to execute. However, sabotage
attacks are easier to execute than double-spends in that they do not require the
presence of willing counterparties to be successful: the ultimate goal is simply to
disrupt a blockchain network’s utility. Nation states concerned about the potential
for cryptocurrencies to disrupt fiat hegemony or blockchain-enabled activity —
money laundering, unregulated financial services — are the most likely actors. Here,
the payoff cannot be calculated in explicit dollar earnings: rather, the payoff is a
function of limiting expected future harm derived from active networks.
Speculative attacks involve shorting a cryptocurrency, either through spot or

derivatives, and proceeding to sabotage a network along the lines described above. In

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theory, market participants should react negatively to a sabotage attack as it reveals

a network’s inability to serve as a credibly neutral platform for economic activity.
Although not directly analogous, there exist numerous historical precedents for
sabotage attacks, including George Soros’ ‘Black Wednesday’ attack in 1992 and,
more recently, hedge fund credit default swap manipulation. Here, the payoff is a
function of profit derived from short positions minus the cost of marshalling majority
hashpower. Activist hedge funds are likely participants.
As with any investment, the key decision making factor is risk-reward. Put
differently, what is the relationship between the probability of success and the
potential payout. If there is, say, a 10% chance of success then the payoff has to be a
minimum of 10x invested capital for the opportunity to return positive expected
value. Another way of framing risk reward is that any investment opportunity with a
positive skewed expected value should be pursued. This is where the Security Ratio
comes into play: as the ratio between attack cost and network value diminishes, the
attack becomes proportionately more profitable. Conversely, as a network’s SR
increases, a speculative attack becomes proportionately less attractive.
Cross Network Security Ratios

Looking at Bitcoin’s Security Ratio over time we see distinct jumps every four years
lining up with halving events. This halving of the SR comes despite an overall
upwards trend in miner revenue, or the Security Budget. There is a widespread
misunderstanding within the industry that a dollar-denominated appreciation in
Bitcoin price is enough to make up for the regular halving of block rewards. Security
Ratio, however, is not tethered to Bitcoin’s dollar value: a doubling of miner revenue
every four years, which brings the Security Budget up to pre-halving levels, still leads
to a halving of the SR as the ratio between miner revenue and network value remains
constant.

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Source: The Block, Coinmetrics
Ethereum’s Security Ratio takes a different shape due to its non-deterministic

issuance schedule. As with Bitcoin, however, we see a general trend of SR
deterioration over time due to the decrease in block rewards. The bump from the
beginning of 2020 was the result of the Miur network upgrade, which returned block
times to a 12-13 second average. However, the Security Ratio is ultimately far less
relevant for Ethereum than it is Bitcoin due to the former’s impending transition to a
Proof of Stake consensus algorithm, which entails a transformation of the network’s
security model.

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The chart below illustrates comparative Security Ratios:

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Under the assumption that Bitcoin’s existing Security Ratio is sufficiently high to
dissuade speculative attacks, we can benchmark alternative networks versus Bitcoin
to get a sense as to which platforms are over or underpaying for security.

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As of January 6th, we see that Ethereum (7.83%) and Litecoin (7.89%) are marginally
overpaying versus Bitcoin on a seven day simple moving average basis. Meanwhile,
Ethereum Classic (113.85%) and Tezos (38.90%) are consistently overpaying, while
Bitcoin Cash is underpaying (-9.98%). Tezos’ overpayment may possibly be explained
by its use of issuance as a form of development funding.
What are the practical implications?

Is Bitcoin’s imminent Security Ratio halving cause for immediate concern? In all
likelihood, the answer is no. While the SR will almost certainly halve come block
630,000, would-be speculators are still constrained. For one, there is not sufficient
liquidity in the lending, futures, and options markets to profit from an attack:
Bitmex’s BTC perpetual swap currently has just $729m in open interest while Deribit
open interest sits at just $390m. Although some of the most liquid cryptocurrency
markets at present, these markets are still not sufficiently large to realize outsized
gains from a sabotage attack.
Speculators are also constrained as far as marshalling necessary hashpower, with

low-cost energy rates geographically constrained and secondary markets for mining

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hardware largely illiquid. There are three counterpoints here: the possibility of
renting versus buying through bribery attacks, as suggested by Joseph Bonneau;
selfish-mining suggests that controlling 51% of hashpower is not necessary to
execute malicious behaviour, and bringing large amounts of latent hashpower online
will drive out low-margin operations, meaning that the attack cost is likely less than
existing miner revenue. Nevertheless, considering we have yet to see selfish mining
and bribery attacks in the wild, it is reasonable to conclude that, at present, they are
largely impractical or unattractive.
Finally, would-be speculative attackers must note that cryptocurrency markets often
ignore fundamentals-driven events: Ethereum Classic traded down just 2% after last
January’s double-spend attack. The uncertainty surrounding the market’s delay in
taking this information into account directly impacts payoff as attack cost scales
linearly with time.
Bitcoin’s declining SR is, however, cause for concern over the coming decade. As
Bryan Ford writes, “systems are temporarily more secure only until they become fat
enough targets to be eaten by their own success.” If Bitcoin ‘succeeds’ — the
definition of succeed ranges widely but can likely be measured by continued growth
in network value and/or, at minimum, continued liveness — we should naturally
expect derivative liquidity growth to blossom, opening up potential for such an
attack. Rising ‘decentralized exchange’ liquidity may catalyze such an attack as their
pseudonymous properties permit unlimited contract caps, which have limited
potential for similar attacks in legacy capital markets.
Miner concentration is itself a double-edged sword. In the short term, the

concentration of hashpower may help prevent speculative attacks as miners can
collude to execute counter-bribery strategies described by Bonneau. However, this
concentration also makes it possible for miners to collude as attackers themselves.
Of course, as owners of capital assets themselves, their payoff structure must
account for write downs in mining hardware.
The only natural solution to Bitcoin’s deteriorating Security Ratio is the rapid
emergence of a healthy fee market. If we assume that the existing Security Ratio is
the equilibrium — any higher would be overpaying, any lower would be insecure —

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fee revenue has to move up to 6.25 BTC per block after the halving event. At existing
fee revenue levels, this would require a 4300% increase in fees per block.

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IEOs are finally dead

January 27, 2020

Quick Take
● Only 23% of IEOs have a positive return in terms of USD; down from 43% in Q4
and 64% in Q3
● Nearly 95% have lost more than half of value since their all-time high
● As the number of days since IEO increases, the average return of IEOs
decreases
Initial Exchange Offerings (IEOs), token fundraising events administered by an

exchange, became a theme of 2019 — just as ICOs became a theme of 2017. Data
now shows that IEOs are as shortlived as ICOs.
The Block has analyzed all projects that had an IEO on the more legitimate
exchanges with a proven track record — Binance, Bitfinex, Bittrex, Huobi, KuCoin,
and OKEx.
Only 23% currently have a positive return in terms of USD, which is down from 43%
in Q4 and 64% in Q3, which demonstrates how the value can’t be sustained over the
long term.
The median USD return is currently -50%. The best performing project, to date, has
been Binance’s Matic (522% return) while he worst-performing project is currently
Veriblock that was launched by Bittrex (-95% return).

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Source: CoinGecko, CoinMarketCap, The Block
Perhaps a more indicative metric is a return in terms of bitcoin, which shows the
projects that have outperformed or underperformed bitcoin since having an IEO. 9
projects, about a quarter, have outperformed bitcoin. Binance’s Matic has the highest
return in terms of BTC (283%) while Veriblock scores last again with -97% return.

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Most of the investors buy the IEO tokens just to sell them for a higher price a few
months later, which means that the price is never sustained. Nearly 95% of IEOs have
lost more than half of value since their all-time high. 71% of projects lost more than
75% of value since the ATH.

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There also appears to be a clear relationship between the return and the number of
days since the IEO. The average return is more than 250% on day 1 and descends to
0% in about 210 days.

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The data shows that Binance is the only exchange with a positive average USD and
BTC return on IEOs across the examined exchanges. Bittrex, on the other hand, has
by far the lowest USD return.


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A comprehensive look at

Bitcoin ETFs
January 30, 2020

Quick Take
● The SEC’s approval of an ETF launch is contingent on three main
requirements: derivatives with sufficient volume, access to regulated
third-party custodians and measures against manipulation
● The remaining concern seems to be the potential price manipulation on
unregulated exchanges where most of the price discovery happens
● The current market structure is unlikely to change anytime soon, which makes
the prospects of a Bitcoin ETF quite slim
● There have been a total of 26 Bitcoin ETFs so far with 12 of them denied and
the rest withdrawn by the issuers themselves
A Bitcoin ETF has long been the Holy Grail for a lot of market participants. But after
more than 6 years since the first application, and the market significantly maturing,
the SEC has still not approved a single application.
Ever since Winklevoss twins filed their first ETF application in July 2013, which was,
notably, also the first application to be rejected by the SEC, Bitcoin ETF has been a
central point of discussion in the market.
The SEC rejected a second attempt for a Winklevoss ETF in July of 2018 and released
a 92-page order detailing its decision. The decision was supported by three
commissioners with a dissent coming from Hester Peirce who said that the decision
undermines investor protection by precluding greater institutionalization of the
bitcoin market and demonstrates a skeptical view of innovation. She argued that
there could not be any commodity ETFs if they were held to the same standard.

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The lengthy rejection can be summarized with these three key points:
● Bitcoin derivatives markets do not have significant volume to support an ETF

● Lack of qualified custodial offerings (regulated third-party custodians)
● Means of compliance to prevent fraudulent and manipulative acts are not
sufficient
Since then, the regulated derivatives markets have matured; constantly recording
volume of about $4 billion a month on CME. While Cboe announced in March that it
is putting its bitcoin futures market on hold, Bakkt launched its offering in
September and recorded $450 million in volume in December.
On the unregulated side, the derivatives markets grew even more significantly in
2019. The monthly volume of BitMEX’s flagship Bitcoin perpetual swap reached an
all-time high in 2019. In both June and July, monthly volume surpassed $140 billion,
which is about 33% higher than the previous high of $105.8 billion recorded in March
2018.

Source: CoinAPI, The Block

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The same trend can be observed with the options volume on Deribit. The volume of
BTC and ETH combined reached $18.1 billion in June.

Source: Deribit, The Block
Custodial offerings have also matured recently. Custody providers have seen
approximately $1.3 billion in investment, with approximately $419 million allocated to
pure cryptocurrency custody firms. There are now several companies focusing
primarily on serving institutional clientele.

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Source: The Block
In October 2019, the SEC rejected Bitwise’s proposal for a Bitcoin ETF citing
insufficient resistance to fraud and manipulation on the underlying market.
The majority of Bitcoin’s price discovery happens on exchanges that have virtually no
regulatory oversight — BitMEX, Bitfinex, and Binance. It ultimately doesn’t matter
how the particular ETF determines price if the price on the underlying markets is
determined on other unregulated exchanges, which the SEC has no insight into.
While most of the commodities with an ETF have underlying spot markets that are
arguably inferior to bitcoin (larger spreads and lower liquidity), the price discovery
itself happens on the much more liquid regulated derivatives markets.

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So while the regulated Bitcoin derivatives markets now have decent volumes and the
current custody solutions appear to be sufficient, not much has changed about the
SEC’s main issue, which is fraud and manipulation on the markets where price
discovery happens. And the current market structure is unlikely to change anytime
soon, which makes the prospects of a Bitcoin ETF quite slim.
One could perhaps argue that if a Bitcoin ETF was approved, it could lead to Bitcoin’s
institutionalization and price discovery could shift from unregulated exchanges to
regulated derivatives markets. But the SEC will likely not step back from their main
argument anytime soon.
ETF Applications
There are currently two active ETF applications up for consideration — Wilshire
Phoenix and Kryptoin. VanEck SolidX and Bitwise have both withdrawn their
proposals for now.
There have been a total of 26 Bitcoin ETFs so far, according to The Block’s research.
12 of them have been denied by the SEC while the rest was withdrawn by the issuers
themselves.

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The full table can be seen below:

Source: The Block, SEC

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An analysis of cryptocurrency
bug bounties on HackerOne
January 13, 2020
Quick Take
● HackerOne is a bug bounty platform
● The Block analyzed the publicly disclosed 2019 bug bounties on HackerOne
from cryptocurrency and blockchain firms
● Block.one paid out at least $285,000 in bug bounties in 2019 to white hat
hackers, based on public data.
Due to their open-sourced nature and links to money, cryptocurrency networks are
prime for hackers to profit off of vulnerabilities found in their code.
To avoid bugs being exploited, many of the companies and developer teams behind
cryptocurrency projects leverage services such as code audits and bug bounty
programs.
One of these service providers is HackerOne, a San Francisco-based platform that

allows technology firms to hire white hat hackers. While HackerOne has been
relatively well-known in the traditional technology company, they more recently
started experiencing traction amongst cryptocurrency and blockchain businesses.
In its 2019 year in review report that HackerOne shared with The Block, it cites the
year-to-year growth of the cryptocurrency and blockchain industry on its platform at
64%. Some notable instances of cryptocurrency-related HackerOne reports include
the bug found in MakerDAO’s Multi-Collateral Dai code prior to the launch of the
system, which could have allowed an attacker to steal all the collateral locked in the
Multi-Collateral Dai system during the liquidation process.

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Another was a potential DOS attack on Tron, which would have allowed an attacker
to stall the blockchain by consuming all of its CPU resources.
Due to the rising popularity of HackerOne, The Block has analyzed all the publicly
disclosed bounty reports on the platform. We note that, while HackerOne has over
80 firms on its platform, a spokesperson told The Block that a majority of companies
on its platform offer private programs where bounty information and reports are not
publicly disclosed on the platform. Therefore, the data The Block has collected
should be seen as estimates in the lower bound.
Below is a chart of the 26 cryptocurrency and blockchain companies on HackerOne

with their public bounty disclosures. The three firms that paid out the most bug
bounty rewards in 2019 are:
1. Block.one, the development firm behind EOS, at ~$285K across 60 disclosures

2. Maker Foundation, the non-profit behind MakerDAO, at ~$90k across 6
disclosures
3. Coinbase, the cryptocurrency exchange, at $82k across 47 disclosures

The Block also charted out the average bounty payout of these firms below.

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On a per report basis, Maker Foundation, by far, paid out the largest bounties at $15k
per report. This amount is nearly equal to the sum of the average payout for the five
firms that follow.

This piece has been updated with figures from Monero

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Are bitcoin miners pricing in

the effects of the block reward
halving?
January 21, 2020

Quick Take
● On the secondary market, prices of Antminer S9’s have gone down
considerably since July, according to data from mining equipment broker
Kaboomracks
● Pricing trends have typically followed that of the daily mining revenue per Th/s
(a profitability metric that combines total bitcoin mining revenue and the
network hashrate)
● However, the pattern has diverged over the past few months as S9 prices
continue to fall despite daily mining revenue per Th/s holding relatively steady
● This could possibly be suggesting that miners are pricing in lower expected
profitability come the halving.
Are bitcoin miners pricing in the effects of the block reward halving?
Declining prices of the Antminer S9's may suggest that miners expect profitability to
take a hit with the bitcoin per-block subsidy falling from 12.5 BTC to 6.25 BTC come
May.
We gathered the listing prices from Kaboomracks – one of a handful of mining

equipment brokers that cater to a mostly North American customer base.
Although the secondary market in the West may not be as robust as it is in China
(where the majority of bitcoin mining takes place), we can still determine the general

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trends by monitoring the prices of one of the industry's most popular miner,
Bitmain's Antminer S9.
S9 prices plummet
For many years, the Antminer S9 has been a staple within the bitcoin mining
ecosystem.
Back in 2016, retail prices ran around $2,100 apiece. Since then, Bitmain – as well as
other manufacturers – have produced much more efficient equipment. Despite this,
the S9's have remained somewhat popular due to their reduced pricing on the
secondary market.

Source: Kaboomracks, The Block
*Asking prices consist of a mix of different models of the Antminer S9’s at varying
condition levels

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As we can see from the chart above, however, asking prices have been tumbling.
Kaboomracks had listing prices of S9’s up to $450 apiece back in August, and now
they are only selling between $60 to $90 apiece.
It’s important to note that mining equipment prices change dynamically roughly
based on their perceived payback periods. Those payback periods are heavily
influenced by many variables. Ignoring any changes that would impact the costs of
mining, the most noteworthy variables include:
● Miner revenue ($USD/day)

● Network hash rate (TH/s)
Daily mining revenue is mostly determined by bitcoin prices. Higher bitcoin prices
equate to higher miner revenue as they convert to fiat.
Network hash rate influences the mining difficulty. Rising network hash rates leads
to an increase in the mining difficulty.
The below chart compares bitcoin’s price in the shaded red-area vs. the mining
difficulty on the solid-red line. Since July, bitcoin prices have decreased while the
mining difficulty has increased.

Source: CoinMetrics

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Combining these two variables gives us the daily mining revenue per TH/s. As shown
below, bitcoin mining profitability has declined since July.

Source: Blockchain.com, bitinfocharts, Cryptosheets, The Block

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Comparing bitcoin mining profitability against S9 prices

Source: Kaboomracks, Blockchain.com, bitinfocharts, Cryptosheets, The Block
By comparing the bitcoin mining profitability, we can see the impact it has had on
the prices of equipment. Based on Kaboomrack’s listings, the asking prices of
Antminer S9’s seem to follow the trend of the daily mining revenue per TH/s with an
approximate two-week delay.
With that being said, there seems to have been a divergence from the pattern around
October. Despite mining profitability remaining fairly steady over the past three
months, the prices of S9’s continue to fall. Currently, Kaboomrack’s has asking prices
of S9’s around $60 to $90 apiece.
For comparison, the asking prices of S9’s were around $150 to $170 in
late-March/early-April despite mining profitability being at similar levels (~$0.15 per
TH/s) to where they are today.

DISCLAIMER

127

Why is this happening?
The lower prices could be a reflection of reduced profitability expectations as the
reward halving approaches. As mentioned previously, prices of equipment change
dynamically roughly based on payback periods. With trading fees being somewhat
negligible at the moment, a reduction of the block subsidy would effectively cut the
industry revenue nearly in half (assuming bitcoin prices remained constant).
Another factor negatively affecting the prices: an influx in supply from mining
operations replacing their old equipment with more efficient miners. Over the past
few months, large shipments of next-generation ASICs have been delivered to the
West.
Some of those on the receiving end of these deliveries include:
● Argo Blockchain received 3,616 Antminer T17’s recently with 6,384 additional
Antminer T17’s expected to be delivered this month
● MGT Capital received 320 Antminer S17 Pro’s in November and is expected to
have received an additional 1,100 Antminer S17s in December
● Riot Blockchain received 3,000 Antminer S17 Pro’s in December and anticipates
an additional 1,000 S17 Pro’s to come this month
● Bitfarms received 2,125 Whatsminer M20S’s in November and is expected to
have received an additional 125 M20S’s around the same time
To wit: the secondary market could be flooded by larger-scale operations attempting

to sell their used Antminer S9's simultaneously.
Lastly, buyers could be accounting for depreciation. Although used mining equipment
doesn't generally suffer from noticeable performance degradation over several years
of usage (measured in J/Th), overclocking machines will almost certainly shorten a
miner's life span. When purchasing off the secondary market, overclocked miners can
be a significant concern, thus leading to reduced prices as the equipment ages.

DISCLAIMER

128
With those things in mind, there are a few noteworthy caveats about the listing data
used in this study:
● The trends displayed could be influenced by factors specific to Kaboomracks

(ie reputation, customer relations, distribution)
● These are merely asking prices. Kaboomracks does not publicly disclose which
items have been sold. Actual sales prices may vary from their listing prices
● Kaboomracks deals with customers primarily in the U.S. and Canada. The
secondary markets in other regions such as China could look completely
different based on factors such as varying costs of electricity, delivery
schedules of new equipment from manufacturers, geopolitical risks, etc.
Conclusion
According to data gathered from Kaboomracks, the prices of the Antminer S9’s have
been plummeting since July. A lot of this is could be attributable to lower bitcoin
prices and high network hash rates.
However, asking prices of S9’s have continued to fall despite mining profitability
stabilizing over the past three months.
With prices this low, one could imagine that miners might be pricing in lower
expected profitability come the halving as block subsidies are reduced. Prices on the
secondary market may also be negatively influenced by an oversupply of S9’s as
mining operations in the West replace their older equipment with large batches of
next-generation equipment.

DISCLAIMER

129
What's going on with Bitmain's

Texas facility?
January 8, 2020
Quick Take
● In October, it was announced that Bitmain would partner with DMG Blockchain
Solutions to manage its 33,000-acre mining facility in Texas
● Last Monday, DMG Solutions announced that the partnership had been
terminated as “cost and operational efficiencies have not materialized as
planned.”
● The facility currently has 15,000 installed mining units, but what happens at
this point is unclear.
So what, exactly, is happening with Bitmain’s Texas facility?
The status of what is supposed to be Bitmain’s largest mining project to date is
rather unclear. If you recall, Bitmain had taken over an old aluminum-smelting plant
in mid-2018, promising to build the world’s largest mining facility, which would in
turn create hundreds of jobs for the local community.
The project was shelved in early 2019 as Bitcoin prices dropped. Then, as prices
recovered later that year, Bitmain announced that they would resume development
with the help of DMG Blockchain Solutions. Bitmain would provide the capital and
equipment while DMG would manage the operations.
On Monday, however, DMG announced that agreement had been called off.
In a press release, DMG stated:
“As part of an exploratory agreement announced in October 2019, DMG has been
managing Bitmain’s Texas facility and installed approximately 15,000 next generation
miners. DMG and Bitmain have mutually terminated the existing management

DISCLAIMER

130
agreement as cost and operational efficiencies have not materialized as planned.

DMG and Bitmain continue to explore opportunities for collaboration including DMG’s
Christina Lake facility, and new sites that are of joint interest.”
As noted previously by The Block, many industry experts had warned of the
difficulties of building a mining farm in Texas. As Iterative Capital research lead Leo
Zhang said: “A lot of places [in Texas] are advertising [an electricity rate] of 2.3 cents
or 3 cents, but a lot of them don’t have much of the right infrastructure. Once you
consider hiring staff, putting up warehouses and networking infrastructure, the cost
is much higher.”
With that being said, it's not particularly clear what Bitmain plans to do from here.
Will they choose someone else to manage the facility? Will they shut down the
operation entirely? My guess is that Bitmain will just manage the project themselves.
Assuming that's the case, I wouldn’t be surprised if the company starts cutting
corners in order to reduce costs. Since Jihan's return as Bitmain's CEO in late 2019,
it's been apparent that lowering expenses has been one of his top priorities with the
recent announcement that the company will cut its staff by 50%.
Based on a job ad posted on a local Texas newspaper's website, it appears that the
cost-cutting mentality has bled over to Bitmain's U.S. operations.
Dated November 21st, the ad suggests that Bitmain and Whinstone (a company
building a separate mining facility in Rockdale, Texas) have been targeting high school
students for employment. “Both Bitmain and Whinstone will soon hire for various
networking and ant miner maintenance positions,” the post reads. “In fact, both have
agreed to interview high school students at each of the five high schools [in Milam
County] in the very near future for these positions.”
Based on the date the ad was posted, it's not certain whether it was DMG or Bitmain
behind the idea. Either way, the employment strategy should constitute some reason
for concern.

DISCLAIMER

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Latest Research &

Ecosystem Maps ​14​5

Meet the Research Team

Market Outlook Insights

As for market share, Binance continues to dominate.

In January, Binance captured 53% of the legitimate traded volume. Coinbase

2019: a year in blockchain

Blockchain Investment Deals over Time

50 Largest Blockchain Deals in 2019

Largest 50 Deals in 2019 to Scale

Largest Deals of 2019 by Region

If permissionless finance wants to progress, there is a dire need for on-chain

In order to measure the correlation between the cryptocurrencies, the Pearson

correlation. A correlation of 0 shows no relationship between the movement of the

2019 cross-asset correlation

2018 cross-asset correlation

Mean cross-asset correlation

Bitcoin is the only cryptocurrency whose correlation to other cryptocurrencies

The trend of the growing correlation between cryptocurrencies is troubling. It shows

An analysis of angel investors

The blockchain/cryptocurrency sector saw approximately $3.7 billion in investments

1. Naval Ravikant​: CEO and co-founder of AngelList. Advisor at Republic,

8. Balaji Srinivasan​: Technical advisor at 1Confirmation. Board member & general

A rough estimate of portfolio in blockchain

The makeup of each of the investor’s portfolios is widely varied, where

PoolTogether: No-loss Lottery

Officially launched in September 2019, ​PoolTogether​ is an Ethereum-based no-loss

Source: The Block, PoolTogether

Source: The Block, DuneAnalytics

Source: The Block, PoolTogether

Source: The Block, PoolTogether

Source: The Block, PoolTogether

Source: The Block, PoolTogether

Source: The Block, PoolTogether, LoanScan

PoolTogether’s position as a hybrid-speculative application gives it the potential to

● Leveraging fixed-rate yielding products, whether through Yield Protocol’s

● Using bonding curves to reward early liquidity providers. At present, a rational

I2P: The Invisible Internet

create a more private internet access protocol by using a technique called g

The I2P Protocol

The I2P Network. Source: ​I2P Data Communication System​.

Weaknesses and responses

MakerDAO: System healthy

MakerDAO is an Ethereum-based credit facility and synthetic issuance platform. First

Source: The Block, Dune Analytics

Source: The Block, Dune Analytics

Source: The Block, Dune Analytics

Source: The Block, Dune Analytics

DefiSaver​, ​Atomica​, and ​CDPSaver​ become increasingly prevalent and increased

Source: The Block, Dune Analytics

A look into the growth of USDC

Source: Coin Metrics, The Block

Source: The Block

Source: The Block

Source: CryptoCompare, Paradigm API, The Block

Source: CryptoCompare, Paradigm API, The Block

Source: Dune Analytics, The Block

If we include Dai/Sai and USDT, USDC makes up roughly 3% ($19.7M) of total

Source: Bloxy, Dune Analytics, CryptoCompare, The Block

There is still a reason to be optimistic, though.

Source: Bloxy, Dune Analytics, CryptoCompare, The Block

Source: Bloxy, Dune Analytics, CryptoCompare, The Block

Source: Bloxy, Dune Analytics, CryptoCompare, The Block

Ecosystem Maps 145

1. Naval Ravikant: CEO and co-founder of AngelList. Advisor at Republic,

8. Balaji Srinivasan: Technical advisor at 1Confirmation. Board member & general

Officially launched in September 2019, PoolTogether is an Ethereum-based no-loss

The I2P Network. Source: I2P Data Communication System.

DefiSaver, Atomica, and CDPSaver become increasingly prevalent and increased

On Tuesday, Signature Bank reported a $1 billion sequential increase in non-interest

As exemplified by the Pineapple Fund, the unique properties of bitcoin enabled a

We gathered the listing prices from Kaboomracks – one of a handful of mining

In a press release, DMG stated: