Crypto Market Commentary 

24 November 2019

Doc's Daily Commentary

 

The 11/20 ReadySetLive session with Doc and Mav is listed below.

Checkmate's Corner

Cost Of Creation

Gold, due to it’s atomic properties is of extremely low abundance relative to other commodities. It’s existence and supply is a product of the laws of physics and thus may only be acquired via physical exploration and extraction or by purchasing it off the market. This manifests as a natural constraint on supply inflation given demands of production and as a result, global civilisations have converged on gold as the monetary base throughout history.

 

Industrial uses represent a small fraction of global demand and it is a reasonable conclusion that gold’s scarcity and monetary premium underlies demand for jewelry, rather than the other way around.

 

Scarce digital assets like cryptocurrencies differ to gold in that they are man-made and thus have a discrete, designed genesis event and the incentive model to secure these protocols relies on demand for the scarce native units. Thus the initial distribution mechanism must be carefully designed to incentivise protection of the protocol during early life whilst not compromising the market perception of scarcity and fairness.

 

In this article, I will be exploring the launches of Bitcoin and Decred and the mechanics of the initial distribution. This is part of a study investigating the relative merits of pre-mines, ICOs and pure PoW launches. Much critique comes of any launch that is not Bitcoin however I believe it to be disingenuous and unfair to ignore the reality that projects need funding and bootstrapping.

 

In a future article will explore Grin, Dash and Ethereum as comparison projects.

 

Appreciation for the initial distribution is important for man-made scarce assets as it carries risk of unfair leverage granted to the creators. Establishing user trust in a money protocol requires great finesse and skill in design, and thus the cost of creation must be the subject of user critique.

 

What really got me thinking about initial distributions is comments made by Dave Collins (lead developer in Decred) regarding the Satoshi coins. In reality, there are a few outcomes for what ends up happening to those coins in the long term.

 

* Bitcoin encryption by SHA-256 is never broken by quantum computers which is an unlikely situation as everything has a lifespan.

* Bitcoin encryption is eventually broken and Satoshi has lost the keys. Thus the coins will eventually be stolen.

* The existing cryptographic security is upgraded requiring Satoshi to move the coins to a new UTXO.

* The consensus rules are changed making the coins unspendable, violating the immutability promise.

 

Quite the conundrum but one which has me curious as to how many coins Satoshi really has and what this means for the initial distribution of other projects.

Bitcoin Genesis

For Bitcoin, Satoshi Nakamoto’s design decision was to transparently release the Bitcoin whitepaper on 31 Oct 2018 and the v0.1 Bitcoin and mining code on 9 Jan 2009 to the cypherpunks public email list. This group of people were those most likely to engage with and nurture the protocol through its formative and most vulnerable years.

 

Numerous studies into early hashrate indicate Satoshi was the dominant miner through the first year with estimates on the number of bitcoins mined ranging from 740k to 980k BTC (of which all are believed to have never been spent). Given there is no way to tell if these coins will ever move, public consensus appears to have accepted this uncertainty as a fair and reasonable thanks for Satoshi’s skill and time.

 

The evidence strongly suggests Satoshi deliberately reduced his share of network hashrate as new miners entered and the Bitcoin network gained strength. Thus Bitcoin’s genesis is considered by many to be as fair as a decentralised scarce asset network launch could be.

 

Key ingredients in Bitcoin’s initial distribution may be reasonably summarised as follows:

 

* Complete transparency months in advance of releasing the code.

* Permissionless access with appropriate mining tools made available on launch.

* Awareness raised of those people most likely to nurture the protocol through its most vulnerable early years.

* Appropriately gradual reduction in the role of the founder.

* A now formed public consensus that the founder owning around 4% of BTC supply is fair remuneration for their work (value of time and skill).

Figure: Satoshis Hashrate share after Sergio Demian Lerner (https://organofcorti.blogspot.com/2014/08/167-satoshis-hashrate.html)

 

Decreds Origin Story

The whitepaper for Decred’s primitive called Memcoin2 was originally announced in in April 2013 on the BitcoinTalk forums by an anonymous developer named tacotime. Paired with another anonymous individual _ingsoc, tacotime secretly developed the bones of what would ultimately become the Decred project whilst simultaneously working on the Monero project. _ingsoc recruited Company 0 in early 2014, being attracted by the quality of the code written for btcsuite, a process which culminated in the formal announcement of Decred on 15 Dec 2015.

 

Decred’s main-net launched on 8 Feb 2016 at which time the cryptocurrency market had by then reached an elevated state of maturity. Bitcoin had attained a market valuation over $6 billion and the market had significantly more participants and eyes (of friends and foes) than at the time of Bitcoin’s launch. On one hand, these market conditions can benefit coin price appreciation and attract miners and investors, whilst on the other; pose challenges for bootstrapping security without compromising a ‘fair initial distribution’. This was compounded by the established GPU mining industry which could have reasonably attacked Decred in it’s early and vulnerable state.

The Pre-mine

An important feature of Decred is it’s Hybrid PoW/PoS security and consensus mechanism. In order to secure the chain at launch, it was necessary that a majority of honest actors, with an appreciation of the project’s philosophy, participate in the Proof-of-Stake ticket system.

 

For Decred’s launch, the design decision was to launch the protocol with a pre-mine totaling 1.68M DCR, equivalent to 8% of the total 21M supply. Half of the pre-mine (4%, 840k DCR) was airdropped free to community members to enhance coin distribution and bootstrap the security and governance system. The other half was purchased by the founding team at a rate of $0.49/DCR either in exchange for their own money or their future development time.

 

Community registration to participate in the airdrop was transparently publicised one month prior to the window close and over 8,793 submissions were received and filtered to remove duplicates and false entries. Ultimately, 282.63795424 DCR was awarded to a total of 2,972 participants who showed a desire for supporting the young protocol. Community and founder participants in the airdrop committed to 12 and 24 month periods respectively where airdropped DCR were not to be exchanged and instead used to bootstrap the Proof-of-Stake ticket system.

 

Airdrop participants were required to provide a Decred address, as well as a link to a social media identity that showed some interest in cryptocurrency. For miners, v0.0.4 of cgminer was available at the time of Decred’s launch and ccminer v1.7.2 released 3 days later to ensure permission-less access to Proof-of-Work mining.

 

Details of the Decred pre-mine are made available in full as part of the project documentation and the block 1 transaction. Some notes regarding the Decred pre-mine as of the time of writing are:

 

* 54% of the pre-mined UTXO set has been spent of which 61% of this represents the community share of airdropped DCR. Thus 4.3% of the total 21M supply created at genesis is spent and considered circulating.

 

* The unspent portion of the community airdrop is generally assumed to be lost coins representing 1.386% of the total 21M DCR supply

* Of the total founder’s reward, 63% remains unspent representing 2.3% of the total 21M DCR supply.

Early Distribution

The Decred block reward structure allocates 30% of the block-reward to Proof-of-Stake and thus results in a persistent dilution of governance rights for all participants. The chart below models the most conservative case (most advantageous for founders) where:

 

All spent DCR from the pre-mine was perfectly staked by community and founders (no consideration of ticket price which in reality results in a portion of an individual’s DCR not being included in the stake)

 

No DCR mined via Proof-of-Work or the Treasury enters the stake pool (meaning the pre-mined coins are the only ones that have ever participated in staking)

 

From this chart, it can be seen that the role of the pre-mined coins (dashed lines) has been consistently reduced and diluted over time even under these most conservative conditions. The founder’s coins have remained the minority position in the staking pool. During the early years, Company 0 remained self-funded and did not bill any additional work against the Decred treasury until the project had reached maturity and all spent treasury funds were paid to community contractors.

 

It is also immediately obvious that the ticket pool (blue) has strong correlation to the Proof-of-Work issuance curve (red). This indicates that a combination of miners and people buying coins sold by miners have historically been the dominant participants in the Decred ticket system. Blockchain analytics undertaken by Dave Collins (2017) suggest that early GPU miners predominantly merged mined Decred with Ethereum and almost invariably distributed DCR to exchanges for sale. This insight adds further evidence of heavy distribution of voting rights away from the founders and into the community as well as a strong desire for participation.

 

In a very similar manner to Satoshi, the Decred founders have taken appropriate and reasonable steps to ensure their stake in the system is diluted, both by design and choice, as the protocol gained strength.

 

Decred’s initial distribution thus iterated on Bitcoin’s ideals to account for the new market dynamics in 2016 and the need for bootstrapping a Hybrid PoW/PoS consensus and security mechanism.

 

Key ingredients of Decred’s initial distribution may be reasonably summarised as follows:

 

* Complete transparency of both the project genesis (as Memcoin2 and Decred) the conditions of pre-mine participation months in advance of releasing the code.

 

* An open application process for community members to participate with appropriate screening for false entries given heightened market awareness. Appropriate staking and mining tools made available at the time of launch across almost all operating systems.

 

* Awareness and coin distribution for people most likely to nurture the protocol through the most vulnerable early years.

 

* Appropriately gradual reduction in the role of the founding team including a deliberate dilution of voting right. This is exacerbated by the clear distribution of coins by PoW miners into the hands of investing community participants.

 

* An end of day founder’s reward of 4% of the DCR supply which is consistent with that which public opinion deems fair remuneration for Satoshi’s work on Bitcoin (value of time and skill).

Closing Thoughts

It really is a fascinating process to study the cypher-punk origins of Bitcoin and Decred this week and Monero the other week. One can gain immense insight into the fairness of the launch and the design decisions that ultimately set the tone for all participants that join the social contract.

 

From this study, I would argue that Decred has as fair of a launch as could possibly be managed in a 2016 market. It was structured to massively distribute coins to the community and bootstrap security. Nothing can ever repeat Bitcoins immaculate conception however does that preclude other projects from building something valuable? Ethereum will be another interesting case study with the first ICO and Dash with the “accidental” 2M coin instamine by the developers at genesis.

 

We unfortunately have an enormous body of evidence that pre-mines, ICOs and pretty much all other initial coin distributions are heavily in favour of the creators and are indeed unfair. It sets the tone for the rest of the protocol’s life. However there are diamonds in the rough and starting your research from ground zero appears to be a great place to start.

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