Daily Trade Ideas & Trends

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17 May 2020

Doc's Daily Commentary

4/29 ReadySetLive with Doc and Mav

Checkmate's Corner

Path To Privacy Part 1

Privacy of money is one of the most important features for the long term success of any cryptocurrency. I certainly have to think quite carefully about all my actions on-chain to avoid leaking personal accounts and information to the public that is permanently imprinted on an immutable public ledger. A few examples just to demonstrate what I mean:

Purchased BTC on KYC exchange – If I send a transaction which combines two UTXOs, one from KYC and one I have mixed via a CoinJoin, it effectively deanonymizes both because only the same private key can combine two UTXOs in a single transaction.

Sending an Ethereum address for a tip – Someone asks to tip me for my work, I give them a fresh ETH address and they send a tip in USDC. Somehow I need to get ETH into that address to pay the fee to do anything with it. If I send ETH from a KYC exchange, I reveal my tip to the exchange and link it to the rest of my addresses. If I send ETH from another address I own, the tipper can now see my entire account balance and activity including my past transactions.

Shill posting when a Decred ticket votes – In the tweet below, I deliberately blurred out the ticket purchase price and the number of days it took to vote. If I did not do this, someone could take the specific DCR purchase price, day of voting (the halving day) and the time it was in the pool, and find a ticket purchase that matched exactly those criteria. That ticket is then linked to my identity and can be tracked forevermore.

You can quickly see that privacy is a non-trivial problem and is a consistent challenge across most blockchains. There are a number of pathways and options available for privacy solutions but as with everything, there are trade-offs. Today I want to run through a handful of these options and discuss the benefits and risks associated with each one to help you control your desired level of privacy.

Note that many of these tools are still experimental so should be researched and discussed further before you use them. I’m not an expert but will certainly do my best to help you navigate so jusat give me a shout on discord. The fact that you need a PhD in blockchain privacy shows that we are a long way from mainstream.

We will cover:

** Bitcoin CoinJoins via Wasabi or Samourai

** Decred CoinJoins

** Bitcoin Confidential Transactions via Liquid Sidechain

** Privacy Coins like Monero

** Tornado Cash for Ethereum

Why Privacy is important

It is actually quite simple, I don’t want you or anyone else to know how much money I have, what I spend it on and I wish for freedom to move my money around without broadcasting it to the world.

If we assumed that Bitcoin was classified as money in its current form by governments around the world, it would be the ultimate surveillance tool. Even worse, if nation states became the dominant miners, they could refuse to mine CoinJoin transactions and then refuse to mine particular users transactions, halting their ability to spend. Privacy is so important and if it is not a feature, it erodes the value proposition immensely.

Option 1 – CoinJoins for Bitcoin

CoinJoins are a specially coordinated transaction that take many different peoples UTXOs and combine them into a large multi-signature transaction via a coordinating server. Lots of coins of different size go in, lots of coins of the same denomination come out.

Imagine Alice, Bob and Carol sent in 0.10 BTC, 0.25 BTC and 1.5BTC making a total of 1.85BTC to a single transaction (3x inputs).

Now imagine that 37x 0.05BTC outputs came out (a total of 1.85 but split into equal pieces. Which ones do Bob own? You can’t tell immediately and this is called the anonymity set. Three people but you don’t know who owns what. So long as each UTXO is spent separately, no issue. But what happens if you need to spend more than 0.05BTC?

If Bob sends 0.2BTC and combines 4x of his UTXOs, an observer can now conclude that those 4 are NOT Alice’s (as she only had 0.1 to start) and therefore those 0.2 BTC belong to either Bob or Carol. If that 0.2 is combined with another 0.1BTC, we know they all belong to Carol as Bob only had 0.25 to start. Alternatively, Bob might combine one of his 0.05BTC with a KYC exchange coin thus linking the coin and reducing the anonymity set for Alice and Carol by accident.

If this sounds complicated and a bit ridiculous….that is because it is. It is a horrible system and to make things worse, you need to pay very high fees to a centralised mixing server for the privilege of doing so.

The honest truth, Bitcoin privacy stinks and it is the single biggest risk to the protocol in my opinion. We are a long way from a solution but there is not question, this one is untennable.

There is a great website that helps track the actual privacy of your transactions in a CoinJoin, link here to a CoinJoin transaction I participated in. https://www.kycp.org/#/74ca0599f2fbf3ca9440a1da7c65da58bfe9987c9a037f7ce78bac18f138416a

Far left are all the input UTXOs, far right are the Outputs. On the right, you can see that many streams  converge into a smaller set of boxes on the far right. That shows all the people who combined their UTXOs following the mix and literally defeated the whole point, deanonymizing all their coins. All those people, reduced the privacy of my coins in the mix because it is one less set of anonymous UTXOs.

And I still paid a hefty fee for the ‘convenience’. Bitcoin CoinJoins suck, but they are the best we have at the moment. For reference, a single CoinJoin via Wasabi wallet will cost you around $3 to $4 per person. If 100 people contribute, the total fee for a single mix could be $300 paid to the centralised server provider.

Decred CoinJoins

As a comparison, Decred CoinJoins have pretty much the same concept at play as Bitcoin. The big difference here is that Decred mixing is integrated with the ticket purchase system. Since tickets are a constant denomination of DCR, there are lots of DCR coins incoming all the time from different people. The server is planned to be integrated with everyone’s node meaning there is no centralised server and no fees paid to maintain it (devs are funded by the Treasury).

The transaction below is an example of a Decred Mix with 104 Inputs, 20 Outputs costing a total of 2.3 cents. The ticket system mixes people naturally due to the pseudorandom vote time meaning every time you buy a ticket, you can mix with a new set of people. You also don’t need to buy a ticket to participate, nor do you need the full ticket price. As more people use it, smaller denominations like 5, 10, 20, 50, 100 and ticket price in DCR will all be available.

It still suffers from the same post-mix UTXO management as Bitcoin, but the wallet is being designed to handle best practice spend habits without you ever needing to know about it.

As with everything Decred, the devil is in the details. Decred consistently nails the details.

https://explorer.dcrdata.org/tx/09256e105e3145e11fcc39910c5696c56965ed32ba12437efa7559fab7c471ac

We’ll finish up with part 2 tomorrow! 

The ReadySetCrypto "Three Token Pillars" Community Portfolio (V3)

 

Add your vote to the V3 Portfolio (Phase 3) by clicking here.

View V3 Portfolio (Phase 2) by clicking here.

View V3 Portfolio (Phase 1) by clicking here.

Read the V3 Portfolio guide by clicking here.

What is the goal of this portfolio?

The “Three Token Pillars” portfolio is democratically proportioned between the Three Pillars of the Token Economy & Interchain:

CryptoCurreny – Security Tokens (STO) – Decentralized Finance (DeFi)

With this portfolio, we will identify and take advantage of the opportunities within the Three
Pillars of ReadySetCrypto. We aim to Capitalise on the collective knowledge and experience of the RSC
community & build model portfolios containing the premier companies and projects
in the industry and manage risk allocation suitable for as many people as
possible.

The Second Phase of the RSC Community Portfolio V3 was to give us a general idea of the weightings people desire in each of the three pillars and also member’s risk tolerance. The Third Phase of the RSC Community Portfolio V3 has us closing in on a finalized portfolio allocation before we consolidated onto the highest quality projects.

Our Current Allocation As Of Phase Three:

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The ReadySetCrypto "Top Ten Crypto" Community Portfolio (V4)

 

Add your vote to the V4 Portfolio by clicking here.

Read about building Crypto Portfolio Diversity by clicking here.

What is the goal of this portfolio? 

The “Top Ten Crypto” portfolio is a democratically proportioned portfolio balanced based on votes from members of the RSC community as to what they believe are the top 10 projects by potential.
 
This portfolio should be much more useful given the ever-changing market dynamics. In short, you rank the projects you believe deserve a spot in the top 10. It should represent a portfolio and rank that you believe will stand the test of time. Once we have a good cross-section, we can study and make an assessment as to where we see value and perhaps where some diamonds in the rough opportunities exist. In a perfect world, we will end up with a Pareto-style distribution that describes the largest value capture in the market.
 
To give an update on the position, each one listed in low to high relative risk:
 
SoV/money == BTC, DCR
Platforms == ETH, XTZ
Private Money == XMR / ZEC / ZEN
DeFi == MKR / SNX and stablecoins
 
It is the most realistic way for us to distill the entirety of what we have learned (and that includes the RSC community opinion). We have an array of articles that have gradually picked off one by one different projects, some of which end up being many thousands of words to come to this conclusion. It is not capitulation because we all remain in the market. It is simply a consolidation of quality. We seek the cream of the crop as the milk turns sour on aggregate.

Current Top 10 Rankings:

 

 

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