Crypto Market Commentary
4 June 2019
Doc's Daily Commentary
Doc’s latest “Trade School” video from Friday 5/17 was about Options and is posted in the Trade School archive. Due to travels Doc will not be doing any trade schools until Mid-June.
Our most recent “ReadySetLive” session from 5/16 is listed below.
The Mind of Mav
I want to summarize one of the most interesting papers I’ve read during my trip.
Intelligent Assets by Daniel Mark Harrison (which you can read here) makes a lot of excellent points about the state of the blockchain market:
“The explosion in the number of digital currencies as a result of Ethereum’s global network propagation has resulted in an innovation irony. That irony is that while Bitcoin and Ethereum are both decentralised networks, the exchanges that digital currencies trade on are for the most part not.
Therefore, while each network confirms to the principle of preventing double-spending problems and ensuring fair and transparent market behaviour, nefarious actors have with the rise of the number of cryptocurrencies been able to simply bypass the barriers the networks themselves put up against unethical behaviour by running crypto exchanges off centralised servers which are entirely hidden from public sight.
As a result, market manipulation is rampant in the digital currency universe, with many Blockchain projects listing tokens for a minimum of $30,000 upwards only to find that there is no liquidity for their currency. In the event their currency does do well, most of the time the central server they are on (i.e. the exchange operators) quickly crashes the price at the point they are financially incentivised to put profitability over their customers’ user experience.
Part of the problem with bad actors becoming an increasing influence on digital currency markets has to do with the highly-centralised mining processes that dominate the new currency protocol. In the case of proof-of-work Blockchains, coin age usually serves as a function of mining priority.
This rule was implemented to incentivise miners to hold larger shares of coins for longer so that the price of the digital currency remains stronger as demand outpaces supply. The problem is that holding periods are by themselves not a suitable weight for determination of preference. As a result of this feature of the Bitcoin Blockchain, market makers and other liquidity providers are not incentivised to create meaningful liquidity.
In this way, they are directly incentivised to purely prioritise the liquidity of one currency only — that which is easiest for them to cash out in; Bitcoin.
POS chains have yet to offer a viable alternative to the dilemma with wallet mining favouring incumbent premine coins purchasers disproportionately, sometimes negating many advantages of the decentralised cryptographic data mining process.
In the case of many POS chains, buyers simply hoard extensive numbers of Masternodes — software mining devices — ultimately churning out coins at what are initially extremely high coin production rates so the coins can be quickly sold in exchange for bitcoins.”
So what’s the potential solution to the increasing amount of bad actors in the space? Clearly the bear market and other external forces (such as the SEC) are a passable sieve, but is there another option affronted to us?
Daniel spends the rest of his paper talking about an AI Blockchain solution:
“In the period since Bitcoin was launched, there have been large-scale improvements in the overall usability and application of Artificially Intelligent (AI) software programs, especially in the area of financial technology. Many so-called “robotraders” employ self-learning trading systems that have been proven to profitably engineer consistent trading returns based on real-time assessments of market behaviour and pricing.
An artificially-intelligent Blockchain that was simultaneously integrated into its own exchange platform and which traded against a whole variety of non-securitised and ultimately too, securitised assets, as a digital cash product would end a lot of the problems that today’s Blockchain innovation drain suffers from, with the simultaneous and ongoing continual copy-and-paste of traditional Blockchains by new teams, and subsequent garage-sale, followed by the exchange pump-and-dump of the new chain’s currency, which after that is most often simply abandoned altogether.
Specifically, an AI Blockchain would achieve the following:
- It is market price-efficient. By constantly scanning the exchange for price updated and volume order updates, the AI Blockchain can easily synchronise its mining algorithm with whatever price increase or decrease is likely to occur in its own currency over the short- and medium-term. This will over time make it a stronger source of purchasing power and act as a more robust store of value than any digital asset today, where there is no correlation between currency inflation and market pricing, leading to sudden one-time spikes and erratic volatility versus steady, scalable value growth
- It rewards superior market behaviour. One of the best features of the AI Blockchain is that it could assess how wallet holders and market makers were behaving, and ascribe accounts (and by association strongly connected accounts) with individual weights which would determine how much of the newly mined coins a wallet holder received. In doing this, it would look at factors such as how much liquidity that account brought to the network, how aggressive the account was about trying to quickly profit in the event of market price increases in the currency, to which accounts the account holder was connected with etc.”
This is an interesting take.
Daniel suggests a few ways to implement such an AI system in a platform or exchange.
The reasons for this, as he points out, is that decentralization needs a certain “push” to operate successfully in the context of a platform:
“One of the problems with the impact that Ethereum’s network has had on digital asset markets is the sheer quantity of “junk asset creation” that has been undertaken due to the relatively quick and easy method the Blockchain offers users for creating digital assets. Digital assets are first and foremost, a form of capital asset.
If you allow anyone and everyone on a network (environment) to create capital assets of their choosing and allow the situation to run to its natural extent then you are bound to have a degradation of value on the network over time as the quality average of capital is reduced substantially by the proliferation of these junk assets.
Value is a very tenuous concept, and erosion of even very high-quality value assets can happen at times in markets where there is substantial low-grade capital constantly filling up the same context.
For this reason stock exchanges, retail chains, and even high-quality serviced apartment operators tend to bias customers and products that contribute somehow to the perception of quality that their brands are trying to attain or maintain.”
A quick parallel I thought of while reading that is the ELO system used in chess and many esport games. An ELO score is based on a few factors, most notably wins and loses, and weight is determined also by who exactly those wins and losses occurred against.
This weighting could easily be decentralized in the sense that everyone playing the game agrees to the terms of ELO, and so all players are judged under the same mechanical system of evaluation.
Of course, ELO isn’t truly decentralized. It’s maintained by officials, judges, game developers, and whoever else needs to ensure that the system is working to judge and weigh players fairly.
But, that’s where AI could easily come in.
In the same way, Daniel is suggesting that an AI weighting in addition to the tenants of decentralization and decentralized assets would create a potent mixture and alleviate us from many of the bad actor issues we faced in 2017.
As he points out:
“By utilising the weighting criteria, the AI Blockchain can assess whether a market-maker is “asset creation worthy”. In this particular case it may not look at the total weighted criteria in the balance but may put preferential consideration on the amount of liquidity the market maker provides to the platform, the consistency of the liquidity, the number of counter-parties in OTS status the Market Maker deals with etc. as well as the regularity of profitable trading that is undertaken by the market maker without either causing or participating in extreme price volatility in the process of taking profits.
Once the asset is issued, the AI examines very closely how liquid the issued asset is, the number of holders over the length of time the asset is distributed, the amount the holders trade the asset or move it between “known” separate user accounts with similarly favourable weightings and so forth.
In this way a high-quality digital capital asset market is allowed to develop on a smart Blockchain protocol in a decentralised manner consistently for the first ever time.”
So it’s clear: this is introduce more fairness to a system and economy that is founded on the principles of leveling the playing field as much as possible.
It is not a final, all-encompassing solution, nor does it possibly have a hope of solving the bad actor issue.
“The economic beneficiary weighting process and constant value ascription to such processes is long overdue in the trading of digital assets and a successful prototype would likely attract major institutional investors over time, forming the central point of exchange for such assets over time for much larger volume players. Meanwhile, smaller retail players will find fairer and more cohesive pricing on the Platform that does not penalise them for their smaller investment holdings.”
I think there’s a lot of truth to that.
The initial appeal of the crypto market was the insane volatility, but that was short-lived and attracted those actors who prey or are preyed on by such conditions.
In a sense, it was a self-fulfilling short term phenomenon.
Introducing aspects such as an AI driven fairness mechanism would appeal to a longer term market with longer term objectives. I think that’s where crypto is heading, in conjunction with other emerging technologies.
After all, how curious is the notion of “intelligent assets”?
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