Premium Daily Crypto NewsletterFebruary 17, 2019
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Crypto Market Commentary
Mav's Daily Commentary
Chainlink is a middleware project which aim is to make blockchains and smart contracts useful for application in the real world. Smart contract platforms today (e.g. Ethereum), can be thought of as an internal database in a business where it is limited to interactions only within a designated set of parameters and users. Data must be manually input by users after which a smart contract executes. Note that whilst I will refer to Ethereum as the base blockchain from here on, Chainlink is being designed to operate on multiple blockchains.
What Chainlink is developing is effectively the bridge between externally sourced input data, such as payments networks (SWIFT, Paypal, Bank networks), IoT (Sensor data, QR readers, RFiD etc), events data (prediction markets, securities data, news) as well as software APIs and smart contracts.
An example would be for a car insurance smart contract where the sensors on a modern vehicle provide the degree of damage, conditions of impact and location data to a Chainlink node. The node then processes the data and provides it as input to the smart contract. The Smart contract can then execute and determine whether or not to pay out the insurance claim.
This bridge protocol is called an Oracle and it itself requires a trust mechanism such that the smart contract will execute with a degree of certainty, reliability and confidence in the quality of the input data. According to Sergey Nazarov (CEO of Chainlink) this real world application accounts for 80% of the potential market for smart contracts with the remaining 20% associated with financial transactions such as trades, token offerings and payment networks.
Figure 1 – Chainlink bridges the gap between external, real world data on payments, IoT, APIs etc and execution/processing via smart contracts running on decentralised ledgers
What is an oracle
The structure of a smart contract is simply Input > Code Procedure > Output occurring in a trustless and decentralised environment. The simplest model was seen for the ICO where an incoming transaction of ETH was converted to an outgoing transaction of tokens. This code can obviously become far more valuable as the number and complexity of inputs, operations within the smart contract and outputs increase. This problem however is the “interoperability” between on-chain functions and external data networks. Right now, Ethereum has no way to obtaining input data on its own nor outputting smart contract results to external users.
Oracles are not a new concept and have existed in central servers or small closed source teams for many years given the immense value they bring to automation. The problem with this model in a decentralised economy is the degree of trust in the input data which feeds these smart contracts. It is impossible to validate the closed source data of these oracles and thus what is the point of running a trusted smart contract off unverifiable data?
In the car insurance example above, would you feel safe knowing that the IoT data from your vehicle was routed through the car manufacturer or insurance companies database before being processed by the smart contract? You may have confidence the contract was executed in a trustless manner but are unable to trust the input data was not tampered with beforehand in favor of either party?
The chainlink solution
This is where Chainlink aims to create a decentralised, third party and trustless oracle service. Nodes on Ethereum provide consensus and security to complete the transaction and run the smart contract. Nodes on the Chainlink network acts to mine the input data from verified sources, structure it into a format readable by the blockchain and the provide these inputs to the Ethereum smart contract.
In order to make this system viable, Chainlink must be able to provide security commensurate with the security of the smart contract. Feeding low quality data into a business critical, for reliance smart contract is a meaningless exercise. Furthermore, the variable quality of input data sources must also be verified. Would a hedge fund manager trust the results of price and volume returned from CMC or the Nasdaq to make live trading decisions?
In order to maintain this trusted and secure environment, Chainlink utilises a three phase system:
- Distribution of data sources = Diversity in input data
- Distribution of Oracles = Diversity of input data fetch, process and send to blockchain
- Utilisation of trusted hardware = remove uncertainty in hardware to minimize potential attack vectors (Intel SGX is current leading hardware for those tech savvy folks)
Figure 2 – Example layout of Chainlink Oracle contract obtaining feeds from distributed sources and distributed oracle nodes to improve confidence in the result
Chainlink nodes must stake collateral to prove their reliability and their performance is written to a reputation contract on chain. Users of the network can opt to pay higher fees for enhanced data security and higher reputation nodes to process their data. Requests for data are sent to an order matching engine which locates nodes suitable to fulfil the request. An aggregating contract takes the results from oracles and calculates a weighted answer for return to the requesting contract.
As an example, a financial institution interacting with an API to get price data feeds would prefer a higher security and higher confidence data feed (at higher cost) than say an IoT contract checking the weather from sensor arrays.
Challenges and Risks
- The demand for the LINK token aligns with the common “pay nodes with token” incentive model seen throughout decentralised networks. However, I am still to be convinced this model will pass the magic internet money phase. This will heavily depend on regulatory acceptance of the ICO token as a legitimate asset. At the moment LINK tokens function to provide useful incentives IF they grow to have true value in the free market:
- Compensation of Input data nodes for providing accurate and reliable data sources
- Compensation of oracle nodes for mining the input data and running oracle contracts
- Staking by oracle nodes to ensure honesty and reputation. Indications of malpractice distributes the staked LINK to accurate and honest nodes and increases reputation
- The biggest challenge with accessing data of many forms is the extreme variability in data quality and format. There will be many challenges ahead with the development of automation and filtering scripts as well as management of upgrades and changes to data sources and Chainlink contracts.
- Chainlink issued 35% of tokens via an ICO and it the risk of being an unregistered security must be acknowledged.
- Oracles of the future are likely to providing business critical information to smart contracts with irreversible results. It is possible that teething problems or a bad outcome during production phase could severely impact the reputation of Chainlink depending on the degree of the fault.
- Chainlink is building out what I would consider critical decentralised infrastructure. The ability for blockchains to interact with outside data is essential and a trustless oracle is an essential part of this solution. Chainlink is well placed to lay this foundation.
- Chainlink has been designed as a modular system where each component can be upgraded and altered as necessary which provides a strong futureproofing system. This will allow for adaptation as the data networks and blockchains evolve over time improving survivability.
- Chainlink can benefit from Network effects whereby users and companies gradually shift across to decentralised solutions. If your client in a supply chain is providing data from a decentralised network, at some stage you are going to have to interact with this network. These companies will eventually push each other to realise the benefits and savings afforded by the automation potential of smart contracts.
- Technically speaking (from a non-developer review standpoint) the team appears to be experienced and very knowledgeable. The proposed approach in the whitepaper is well thought out and detailed in the short to long term methodologies for delivery of the Chainlink project.
- One potential opportunity for Chainlink is in connecting payment networks on the scale of SWIFT to public ledgers like Ethereum or Bitcoin. This would provide the enhanced security of decentralisation whilst providing an interface with legacy systems to make the transition of infrastructure more palatable for institutions. This potentially acts disruptor to projects offering proprietary systems for banking payments however cannot offer the security of a fully decentralised solution. This assumes the base blockchain layer reaches production level scalability which I believe to be a very likely scenario.
Chainlink is a project which is solving a crucial technological limitation of smart contracts today; interoperability with the real world. Oracles are necessary to provide trusted and validated inputs and outputs for data feeds to enable the full capabilities of smart contracts and provide useful solutions and efficiencies to real world procedures.
Smart contracts are only as smart as the data they process and only as useful as the external applications they facilitate. Chainlink is well positioned to provide this layer in the stack and appears to have a very dedicated team of talented developers fit to deliver the project.
The biggest risks and challenges I have identified are the token metrics (will it really be an incentive?) and the potential legal implications of the ICO. Both of these are widespread industry problems which will hopefully gain clarity in time.
Off the Chain Podcast – Jan 16 https://open.spotify.com/episode/6ZQydjnH6iVIE2FplBjvuM?si=VWjhzAnzTimFOI4ZJcNHuA
Subscriber Update: There will be no premium newsletter produced tomorrow due to the US Presidents’ Day holiday on Monday, February 18. See you on Tuesday!
A new episode of the ReadySetCrypto Podcast has been published; all of our episodes are posted on our blog (and on iTunes) and Episode Twenty-One is now available. Episode Twenty-One is Doc’s interview with Lior Gantz of Wealth Research Group about the state of the markets and methods on how to protect your wealth. Look for more episodes shortly as we comb the crypto space for valuable interviews, and create valuable content to keep you in the loop! See you tomorrow!
Doc's Daily Commentary
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Offense – Adding Trades
Offensive Actions for the next trading day:
- We’re still waiting for the Bear to play out, in the meantime there are some short-term swings setting up nearly every day on certain alt-coins.
Defense – Managing Risk
Defensive Actions for the next trading day:
RSC Managed Crypto Fund
How to read this portfolio: Please read through the FAQ tab
- ETH/USD 2% added 8/10/2018 @ $363.14
- ETH/USD 2% added 9/9/2018 @ $200.50 (10% more to add)
- LTC/USD 2% added 8/10/2018 @ $62.56. (5% more to add)
- XMR/BTC 2% added 9/21/2018 @ .018BTC
- BTC/USD 2% added 11/7/2018 @ $6501
- XLM/BTC 2% added 11/19/2018 @.00004389BTC
- XEM/BTC 2% added 11/27/2018 @.00001901BTC
What is the RSC Managed Cryptocurrency Fund?: We have one goal: To beat the market. To do this, we aim to balance risk vs. reward. Additionally, we aim to enter positions advantageously and in small increments, not all at once. As such, the pie chart you see above is representative of our “expected” portfolio, but will likely not match our “actual” portfolio. Why don’t you just buy into every position at once?: We aim to not only beat the market, but do so in a way that allows us greater leverage than simply buying in all at once. To do this, we will DCA into our positions to lower the average buy-in, and allow us greater yield from our initial capital seed. This also allows you the flexibility to follow our documented moves or immediately buy in when you want. We expect this will help you follow along easier as our moves are more deliberate. By setting targets for allocation, you know exactly how we intend to diversify our portfolio. Why are you only targeting large caps? Where is ____ coin?: We are targeting large market capitalization coins regardless of our belief in their viability as this enables us to diversify our risk and improve our chances of staying positive. We can hedge our bets by creating a fund that incorporates all of the major assets yet distinguishes between them based on the allocation. For example, we allocated more to Ethereum over its competitors as we feel it has more built-in longevity given its status as the default ICO platform. Of course, that can change, and as such we will be periodically rebalancing this fund as we redetermine viability and yield. Can I invest in this fund / can you manage my funds?: Not at this time. We are looking for ways to legally tokenize a fund such as this, but at this time no avenue exists for US citizens. Will we be adding small caps / ICOs?: It is likely we will be starting a separate fund dedicated solely to small caps / ICOs. We feel that the market simply isn’t showing favorable risk / reward signs for us to be trading them right now, but that will likely change soon. Why was the previous portfolio discontinued?: We felt it wasn’t correctly connecting with our customers as we started it in late 2017 and even during the 2018 bear market we were still very profitable. The same could not be said for customers who joined us during the bear market and tried to replicate our portfolio. Simply put: we wanted a portfolio that was easier to follow along with and less risky for our customers while still aiming for profitability.
RSC Altcoin-Exclusive Crypto Fund
Technical Analysis Research
Any rally that we try to take long will be counter-trend in most of the top-ten, although some are starting to break that trend impressively. TRX has been strong lately!
My beta for the Digitex Futures platform will be live soon; expect to hear more as I know it.
Doc will be attending The TradersExpo in NYC March 10-12 – see you there!
In August we introduced a new “fund” project that we’ll be creating over the next few months, in piecemeal form. I will be slowly and methodically creating a “fund” with (currently) 23 assets that we will do “live” or at least very plainly indicate where we intend to enter portions of assets. As long as the market continues grinding down in a bear, we will use sentiment-based entries to hopefully secure a better entry. All that I saw were bear flags tonight; we are close to some good entries on coins showing positive divergence on the RSI. Going forward into the end of this year my plan is to do a LOT more swing trading; what would really help is a decent derivatives exchange. I am looking for big things from Digitex in this regard, which will be a commission-free futures platform however all trades must be made in DGTX as the base currency. Put yourself on the waitlist for this platform by clicking here. I have started to acquire DGTX tokens at Mercatox in anticipation of them turning up their platform, and this looks to be a good candidate for a pump prior to the production event. Here are the recent swings that we’re tracking in the portfolio below; :
- DGB/BTC – long @ .00000608 (7/23). My target exit is .000008BTC.
- WTC/BTC – Long @ .00155980BTC (4/23). My target exit is at .002BTC.
- ADA/BTC – Long @ .00003931BTC (5/1) My target exit is at .00005BTC.
- ONT/BTC – long @ .0008905 (5/20) My target is .0013BTC.
- ETP/BTC – long @ .000522BTC (9/21) My target is .00072BTC
- ZIL/BTC – long @ 641satoshis (1/16) My target is 750 sats.
Please keep in mind that if you want to follow these trades, I am using FIXED RISK POSITION SIZING. This means that I am using a fixed amount of risk capital that is based on my account size, like 2%. I am assuming that the trade will burn to the ground and that I will lose that entire capital position! Only in this manner can one effectively manage a position the way that you have to. If you’ve every checked your blockfolio nervously every 5 minutes when you’re underwater, this will prevent that. I will track these positions in this area and not in the main portfolio section. I will use a public portfolio tool to do so, which you can access by clicking below:
If you go to buy any of our courses at our online “store” you can receive $10 off the street price with your member’s “coupon code” of member18crypto..
We’ve started to do some swing trades on alts, tracked in the previous section. I am mostly focusing on the top 10-20 coins for now until we confirm that we’re back into an overall bull market.
I am doing the majority of my Technical Analysis work on TradingView, and I have a BitFinex app on both my iPad and Android smartphone. All of these charting platforms call a TradingView API. TradingView is the 800 lb. gorilla in the Crypto charting space until the “established” players want to make a go at Crypto, like Ninjatrader, Tradestation, eSignal, Sierra charts, etc. My sense is that TradingView has such a head start that it will be very difficult for the big boys to make a dent in this space for a while. Until that point, TradingView has almost a monopoly in this space. If you have a particular tool that you think is superior, please let me know. You can access the BitFinex and TradingView platforms for free, however there are some paid features that you might want to consider depending on your needs, such as expanded watchlists, different study sets, account alerts, etc.
Coinigy is a great tool for determining prices on each exchange, however I may not have access to the full suite of tools on TradingView charts. I am currently not using it as a front-end GUI for my exchanges, which it supports.I also use Blockfolio and/or Delta to give me a quick snapshot of my holdings, and find that it does an excellent job to aggregate all of my holdings into one easy-to-read snapshot of my cryptocurrencies, which are typically located in many different places.
I am also trialing the Profit Trailer and CryptoHopper trading apps which are working well in this choppy market.
Fundamental Currency Research
We’ll focus in-depth on a coin you should consider, and talk about the fundamentals of what makes it interesting. This is not a “ this is the next big crypto” article or “reasons why you should buy”. We’re simply laying it down with hype, speculation, and other nonsense.
Today’s RSC Coin Spotlight is the 0x Protocol (ZRX):
No doubt you’ve heard about ZRX in the past several weeks since its listing on Coinbase on October 11, 2018. But you may be asking yourself: What is ZRX? And What gives it value?
ZRX is the governance token of the 0x Protocol, a standard for trustlessly trading ERC20 and ERC721 tokens. 0x Protocol allows users to trade tokens right from their wallets in either OTC trades or through a decentralized exchange otherwise known as a relayer.
0x protocol uses an approach they refer to as off-chain order relay with on-chain settlement. In this approach, cryptographically signed orders are broadcast off of the blockchain through any arbitrary communication channel an interested counterparty may fill the order by submitting one or more of these signed orders into 0x protocol’s Exchange contract to execute and settle trades directly to the blockchain.
The project ICO’d in August 2017 for $24,000,000. On August 2, 2017, iFinex Inc. (BVI), the company that owns Bitfinex, announced it would launch Ethfinex, an Ethereum-based trading and discussion platform that would utilize the 0x Protocol. Several other prominent relayers rose in the 0x ecosystem such as DDEX, Radar Relay, and Paradex.
On May 23rd, Coinbase announced it had acquired Paradex, a decentralized exchange that uses 0x. At the time of the Paradex acquisition, Cointelegraph reported,
“Coinbase will integrate the Paradex relay platform into Coinbase Pro which, according their blog post, will let customers trade ‘hundreds of tokens directly from their wallets.’ This would markedly expand the types of cryptocurrencies to which customers will have access through Coinbase. The blog post states that the new service will be made available to customers outside the US before eventually being offered to American clients.”
This acquisition led many in the crypto community to speculate that Coinbase would list ZRX and sure enough it was listed on Coinbase on October 11, 2018. The ZRX community eagerly awaits Coinbase Pro “Trustless” which could see the listing of many ERC20 tokens. Coinbase’s recent announcement of USDC, an ERC20 backed by USD, may be used in trading pairs on Coinbase’s new trustless service.
0x protocol relayers have a lot of flexibility on how they collect and relay the orders they interact with. Relayers can choose whether to have open or closed liquidity pools. Relayers can be private or open.
They can even be dark relayers which allows big players to transact outside of the eyes of the public by obfuscating their orderbooks and provide just-in-time quotes for crypto assets to emulate the experience of using a dark liquidity pool.
But 0x goes far beyond decentralized exchanges. The liquidity pools that relayers create can be beneficial to any number of projects in the Ethereum ecosystem. 0x allows developers a flexible approach to offering their users liquidity for their tokens.
Any DApp looking to accept multiple tokens as payment methods could tap into 0x’s orderbooks for the liquidity to convert the payment into the token of their choice.
For example, Since 0x can handle ERC721 tokens, two players of the ERC721-based card game Gods Unchained can trade cards with one another. Gods Unchained is going to utilize 0x to create an in-app exchange where players can trustlessly trade ERC721 cards with one another. https://godsunchained.com/
Developers see the value in a protocol like 0x and several major projects in the Ethereum ecosystem are integrating the 0x protocol as a vital function of their code.
District0x (DNT) is one of these projects. According to their website, District0x is a network of decentralized markets and communities known as districts that solves a number of coordination issues and inefficiencies commonly found within distributed community marketplaces.
This is accomplished by providing tools that can better align incentives and decision making among the market participants themselves.
The end goal is to create a self sustaining ecosystem that can flourish without the need for a central authority. Districts exist on top of a modular framework of Ethereum smart contracts and frontend libraries referred to as d0xINFRA.
District0x embedded their 0xprotocol into their districts on the district0x Network, giving users the ability to pay and receive payment in the ERC20 or ERC721 token of their choice.
Simlar to the ZRX token, DNT is used to govern District0x. As their FAQ puts it:
“The district0x token holders themselves decide whether a district is good or bad for the network through the District Registry, an incentivized voting game that dictates access to the network. Whether a district is good or bad not only applies in terms of the quality of the marketplace, but also prevents against districts that are deemed immoral or threatening to the entire network by DNT holders. This will be entirely up to the DNT token holders to decide.”
Like many people you may be asking yourself: “Where is the value in governing these protocols? Where is my money?” These are valid questions that honestly no one has the answer to yet. Like many aspects of crypto, these investments are speculatory.
One concern many have raised in the ZRX community is: What stops someone from forking the 0xprotocol in the case of a dispute? While it is true that a relayer who wanted to could fork away from the rest of the 0xprotocol but they would also suffer the consequences of disconnecting from everyone else in that pool of liquidity.
Similar arguments have been made for open-source software in the past and it usually boils down to the same concept that gives these open-source projects value: network effect. It’s hard to copy and paste Ethereum because it is the Ethereum network that has value not strictly the technology.
0xprotocol can be viewed in a similar light. Yes, you could fork the protocol but the value in ZRX is the network of users and application built on top of the protocol itself. District0x and relayers are a prime example of this. Any project that tried to duplicate ZRX would need to attract all of the protocol network’s users as well.
As the cryptocurrency space keeps evolving, we’re going to see users and developers take the path of least resistance. Why make my own operating system when I can use one someone else wrote? Why make my own network protocol for computers when I can use TCP/IP to connect to the internet?
Why make my own cryptocurrency network when I can build on Ethereum or Stellar? This line thinking logically progresses into: Why make my own liquidity when I can tap into a network like ZRX? Why make my own marketplace when I can use District0x?
This interweaving of utility protocols is going to create a strong fabric for ecommerce in the age of Web 3.0. Just like ZRX, District0x benefits from developers building off of their framework. These developers must place a refundable deposit of DNT to become a district creating a symbiotic relationship.
District0x provides a standard framework for any marketplace system with a reputation like Ebay or even Amazon.
One example of the districts on the District0x network is the RedLightDistrict created in partnership with Spankchain. They sell, as you might have guessed, adult content from performers on Spankchain’s network. District0x’s framework provides the RedLightDistrict with the ability to have buyer and seller reputations, an issue interface for performers to sell digital content, and seamless payments via the ZRX protocol.
The decentralized finance ecosystem grows with each new strand woven into its fabric; We are seeing more and more Dapps in the Ethereum space being built on top of or interwoven with other Dapps or protocols. District0x is just one of the threads interwoven with ZRX.
dYdX protocol is building another important product that integrates with ZRX relayers. dYdX is a protocol for short selling and derivatives built on the Ethereum blockchain. dYdX provides decentralized peer-to-peer shorting, lending, and options trading of any Ethereum based token. dYdX allows decentralized exchanges to offer sophisicated financial tools similar to centralized exchanges but in a completely trustless way. https://medium.com/dydxderivatives/introducing-dydx-2d0f0f326fd
Dharma protocol is another great example. Dharma is a protocol for issuing, underwriting, and administering debt agreements as tradeable cryptographic tokens built on top of, you guessed it, the 0x protocol. https://dharma.io/
Overall, 0x is certainly a project doing big things, and will certainly be one of the more successful projects you should keep your eye on heading into next year.
More resources on 0x:
2017- 2018Q2 Portfolio (Discontinued)
How to read this portfolio: Please click on the Chart Key tab above for definitions and color codes. The colors correspond to our 7 categories in the graphic below.