Cryptonite November 2023
de/centralized.
It’s time for Cryptonite - our monthly roundup of all things crypto - with Dr. Tejaswi Nadahalli.
You can follow Tejaswi on twitter @nadahalli and he blogs at tejaswin.com
AI summary (via summarize.tech):
00:00:00 We discuss the changing nature of crypto and its potential future implications. Despite its resilience in the face of skepticism, they feel the loss of its "cyberpunk charm" as it becomes more mainstream and institutionalized. Institutions and governments entering the crypto space may bring normal users but also the risk of regulation and control, potentially limiting the anonymous and decentralized transactions that define crypto. The hosts express hope that organic grassroots movements will persist, preserving an "escape valve" for those seeking freedom. They also caution against the potential for US jurisdiction over crypto, highlighting the Binance issue as a warning, and the possibility of the US claiming jurisdiction over global transactions.1
00:05:00 We discuss the role of Ethereum Builders and their compliance with Office of Foreign Assets Control (OFAC) sanctions. OFAC already maintains lists of transactions and addresses that are not allowed, and Ethereum Builders, similar to Bitcoin mining pools, construct transaction bundles which are then mined by multiple contributors. Three of the big Ethereum Builders are OFAC compliant, while only one is non-compliant. In contrast, only one Bitcoin mining pool is OFAC compliant and is based in the US. The speaker expresses hope that Ethereum will continue to value the principles of freedom, despite regulatory pressures.2 The conversation then shifts to Solana, the third-largest L1 blockchain ecosystem, which is currently experiencing a lot of attention.
00:10:00 We discuss Solana's resilience despite its close affiliation with FTX and the subsequent crypto market downturn. The Solana community held together, with members building apps and decentralized applications (DApps) cohesively. The strategy paid off when Solana initiated an airdrop season, starting with the liquid staking protocol JITO, resulting in a surge in demand and price increase for the tokens. Another example given was Solana's phone launch with an attached airdrop, BONK, which was initially perceived as insignificant but later saw exponential price growth, creating a lucrative carry trade opportunity and selling out phones in minutes3. The speaker expresses amazement at the hype and speculation surrounding crypto tokens, comparing it to penny stock market behavior.
00:15:00 We discuss the excitement and risk associated with speculating in cryptocurrency. In the mid-90s, speculators were active in trading various assets, and some compared this behavior to gambling with small amounts of money to see how far they could grow it. This phenomenon is evident in crypto, with many individuals entering the space for entertainment and taking on larger risks than they would in traditional finance. The speaker points out that action in the crypto space can be addictive, and even when individuals lose significant amounts of money, they often continue trading. One example given is the Ordinal NFT project on the Bitcoin blockchain, where individuals speculated on NFTs despite high transaction costs because of the potential rewards.4 However, the lack of true smart contracts on Bitcoin led users to move to other chains, there's an ongoing trend of side market activities driven by low transaction costs. Additionally, the speaker discusses the frequent hacks in the crypto space, with millions of dollars often stolen in these incidents. A significant vulnerability was discovered and exploited in November 2023, resulting in the theft of around a million dollars, although the speaker notes that it could have been much worse. The attack targeted web2 fronted decentralized finance (DeFi) projects and allowed the attacker to steal funds by exploiting a weakness in the website interface instead of the smart contract itself.
00:20:00 We discuss two major hacks that occurred in the crypto world in 2023. The first hack involved the compromised CDN access of the popular hardware wallet, Ledger, leading to the insertion of a malicious JavaScript library that took users' funds and sent them to the hacker's contract.5 While the hardware wallet itself was secure, the web2 front end was the weak link, putting the entire web3 ecosystem at risk. The second hack targeted a crypto lending protocol called Kyber, which lost around 50 million dollars when the hacker took advantage of an overflow error in a math library and created a large pool to lend and borrow twice. 6 Both hacks highlighted the dependency on web2 platforms and the convenience factor, which often overlooks security measures.
00:25:00 In this section, the speaker discusses an incident where hackers target blockchain protocols, specifically the Kyber Swap attack. Hackers often leave a message on the blockchain acknowledging their actions and requesting a reward, which is a known practice. In this case, the hacker made an unusual demand, asking for the entire protocol instead of just the reward. It's unclear how he intended to take over the protocol, which had real offices, employees, and bank accounts. The hacker went dark after his demand and has not been heard from since. Law enforcement was informed, and it remains to be seen what will happen next. The speaker also mentions another hack from Silk Road in 2013, where a student was eventually caught and sentenced for stealing thousands of Bitcoins. The US government, through the Justice Department, is said to be the biggest cryptocurrency holder due to seized assets that were auctioned off to the public.7
00:30:00 We discuss the appeal of Bitcoin as a deflating asset, opposed to traditional currencies that experience built-in inflation. Bitcoin's scarcity is its selling point, making it a desirable asset to hold. However, as a deflating asset, it faces challenges as a medium of exchange because people are incentivized to hold onto it rather than spending it. The speaker also mentions the upcoming air drop season for various Solana projects like Jupiter, Kino, and Margin Five, where participants need to be active in the community to be eligible for air drops. The conversation then shifts to the potential for using the blockchain to bypass regulations, creating a parallel universe for trading. The speaker shares an example of the Singapore Stock Exchange and its plans to introduce futures on the Nifty 50, which led to panicking from NSE and government intervention to prevent erosion of fees.8
00:35:00 The discussion revolves around the National Stock Exchange (NSE) of India cutting off access to its end-of-day prices for Singapore-based financial services firm, SGX. NSE insisted that the data was only licensed for personal use and not for commercial distribution. If SGX was unable to access this information, they risked losing revenue on Indian instruments. In response, the finance ministry supported NSE's decision and suggested that trading these instruments should only occur on Indian soil. Additionally, there was an attempted gift of the Nifty Market to GIFT City in Gujarat, with SGX potentially setting up a subsidiary there for trading. The conversation then transitioned to the reduction in value of NFT Marketplaces, specifically OpenSea, and the rise of Blur as a preferred alternative, possibly due to execution issues and an insider trading scandal.9
00:40:00 We discuss the current state of cryptocurrency in India. Despite cryptocurrency legislation being completely silent, the Reserve Bank of India (RBI) has effectively made it difficult to transfer funds to crypto exchanges. Taxation issues and a lack of regulatory clarity have resulted in most developers and traders looking for remote jobs in the crypto industry rather than for philosophical or financial gains. The Ethereum hackathon in Bangalore, India, is a testament to the talent pool in the country. However, the lack of clarity around taxation, GST, and cost basis present challenges for individuals in the industry. The RBI's stance on crypto may not have completely banned it, but the lack of regulatory clarity could lead to unexpected tax liabilities and fines in the future. Overall, the crypto industry in India continues to offer opportunities for jobs, especially for developers and hackers, due to the remote nature of the work and the lack of clarity around taxation and regulation.
00:45:00 We discuss the attraction of cryptocurrency and related technologies to developers due to the new paradigm and programming language they offer. He mentions the Web3 paradigm, which includes notions of composability and networks, as differing from Web2 in terms of coding. Additionally, the speaker introduces the Open Network for Digital Commerce (ONDC), a government-sponsored platform in India aimed at connecting businesses to consumers for physical goods transactions, including food and grocery delivery. The ultimate goal is to resolve demand-supply problems and create a marketplace where consumers prioritize price over provider, although the government control raises concerns about potential restrictions and limitations to user autonomy.
00:50:00 We discuss the Unified Payments Interface (UPI) system in India, which records financial transactions between accounts but lacks innovation due to control issues. The speaker then moves on to talk about the challenge of regulating Autos in Bangalore, resulting in companies like Uber renting autos to drivers instead of bringing them onto their platform effectively. As a solution, a free app called Namma Yatri10 was developed, which allows users to directly pay auto drivers through UPI and functions on a blockchain. Despite some challenges, the app is gaining traction and inspires curiosity.
Markets this Week
More here: country ETFs, fixed income, currencies and commodities.
Links
Research
Beyond Scarcity: A Social Value-Based Lens for NFT Pricing
We argue and find that social value can outweigh intrinsic value as a determinant of willingness-to-pay. As a result, when scarcity threatens access to high levels of social value, its effect on price can be negative rather than positive.
Art in an Age of Non-Fungible Tokens
A comprehensive exploration of Non-Fungible Tokens (NFTs) within the art world, dissecting their implications on authenticity, value, and counterfeit.
Why do individuals keep trading and losing?
First, we show that the decision to quit day trading is strongly determined by whether individuals gain or lose on a given day and, surprisingly, is not affected by the size of gains or losses. Second, we show that day traders win more often than they lose despite losing on average -- mean losses are larger than mean gains. Combining both leads to a reason why individuals keep trading and losing: they infer their own skill using an upward-biased measure, the proportion of profitable days.
DeFi: A Critical Review of Related Risks and Regulation
This article provides a systematic, critical review of the literature about the risks of DeFi and offers a framework for further discussion on the policy and regulatory instruments.
The Law Applicable to (Digital) Transfer of Digital Assets
This chapter utilises an analogy to electronic funds transfers (EFTs) and funds transfer systems in order to offer an alternative way of thinking to find solutions to the problems concerning cryptocurrency transfers via blockchains.
Rising Income Tax Complexity
We find that taxpayers perceive that tax complexity and filing costs have been increasing and that the majority would be willing to pay for simplifying the tax system and adopting pre-populated tax returns. Second, we use word counts of the tax codes in several countries dating as far back as the early 1980’s as a proxy for tax compliance costs. This measure shows that compliance costs have been steadily increasing.
Economy & Investing
India
India’s economy follows China to reach rapid take off (reuters)
The Karnataka government has asked top beer makers to stop third shift operations at their breweries to shore up sales of hard liquor, such as rum and whisky, which brings in more revenue compared with beer. (deccanherald)
India's informal sector may be adding more value to its economy than we know (livemint)
Nobody wants this GIFT (reuters)
RoW
A quant winter’s tale — Across the multifactorquantiverse with AQR (ft)
The dots the powered the markets: 3 cuts in 2024
Does the US Tax Code Encourage Market Concentration? (rooseveltinstitute)
Might makes right:
Pakistani officials, who were focused on securing the best possible price, didn’t insist on strict penalties for failing to deliver gas; at the time, cancellations were rare. Gunvor and Eni offered the lowest prices on the five- and 15-year contracts, respectively. In November 2021, both companies canceled their deliveries. Gunvor sent the cargoes to countries including the UK and Italy, where buyers paid the “spot,” or market, price. If the gas had been delivered to Pakistan as originally planned, the value of the sales would have been about $200 million. Gunvor’s traders unloaded it for more than $600 million. Some would receive seven-figure bonuses for the year, the highest of their careers.
Carbon Capture: The network needed to handle CO2 captured from power plants or sucked directly from the atmosphere in the US would be staggering in scope, requiring as many as 96,000 miles of new pipelines. That's enough to encircle the Earth four times. (bloomberg)
Bipartisan lawmakers called for severing more of America’s economic and financial ties with China, including revoking the low tariff rates that the United States granted Beijing after it joined the World Trade Organization more than two decades ago. (nytimes)
China to kill the messengers bearing bad news about its economy. (scmp)
China’s Xi goes full Stalin with purge (politico)
In China, every five people of employable age need to provide care for just over one old-aged person. (yicaiglobal)
A.I.
A financial news site uses AI to copy competitors — wholesale (semafor)
AI-pocalypse Now (medium)
Digi, the future of AI Romantic Companionship
Meme of the Week
Ledger breach possibly affecting whole EVM ecosystem (cointelegraph)
Ledger attack details and new findings (fxstreet)
KyberSwap hack explained (hacken)
KyberSwap hacker demands complete control over Kyber company (cointelegraph)
$3.36 Billion in Bitcoin Seized from Silk Road Hacker (chainalysis)
Decoding the battle between NSE and SGX (livemint)
SGX Nifty will cease to exist (thehindubusinessline)
A $7.5 billion derivative trade shifts to India as SGX feud ends (economictimes)
How NSE versus SGX ended up in Gujarat (livemint)