The Continued Existence of Altcoins, Appcoins and Commodity

coins

A market of many flavors

This is not an endorsement of or investment advice for the purchase of any token, coin or service. This is strictly for educational purposes.

Consult with a financial professional and conduct thorough due diligence before participating in this market. IANAL.

Disclosure

Altcoin: anything that is not Bitcoin (i.e., in practice most altcoins are near duplicates – in both features and code base – as Bitcoin. A minority of others include new attributes, hash functions and extensibility characteristics providing room for additional metadata, changes in block timing, asset issuance and enhanced privacy)

Definitions

Commodity coins: linking blockchains / reflecting ownership with specific assets in the real world (i.e., pegged commodities that generate value through future appreciation)

Definitions cont’d

App coins: tokens that generate value through the ‘network effects’ of the underlying system (i.e., give users access to decentralized applications similar to how gift cards, loyalty programs, frequent flier miles, or subway tokens give users access to specific facets and elements of goods and services)

Definitions cont’d

Scarce labor and lack of compensation for working on Bitcoin core (e.g., public goods problem, see Lighthouse)

New ways to raise funds, pay for development and connect a public/transparent accounting system with property

Market signals to other competitors Depreciating capital goods (ASICs)

incentivize pointing towards other profitable chains after 3-6 month window due to increase in difficulty

Why are coins still being created?

Core devs rightly concerned about damaging / introducing new bugs into protocol, becoming more conservative

Altcoins serve as the outsourcing of experimentation

Open source turn key solutions make it easy to tinker with the protocol and create new customized coins

Markets like choices and freedom to try out alternative attributes

Other factors

Building, breaking, learning and reiterating are the zeitgeist of digerati and altcoins allow this recursive derivation to take place quickly

Continues today: see Dave Hudson’s proposal on 2 minute block times at 20mission

The tweaking of code began in earnest in the summer of 2011◦ “The Guns of Altcoin August”

What does this lever do?

Namecoin (originally BitDNS) – April 18, 2011 Ixcoin – faster reward schedule, premined – August 10, 2011 I0coin – “fork” without the premine - launched August 11, 2011 Solidcoin – 3 minute blocks, premined, launched August 20 GeistGeld – 15 second blocks, premined, launched Sept. 9 Tenebrix – 5 minute block, uses Scrypt, premined, launched September

26, 2011

Litecoin – 2.5 minute blocks, uses Scrypt, no premine, launched October 11, 2011

See Charlie Lee’s Miami presentation as well as ArtForz and RealSolid

Brief history of altcoins prior to LTC

Blackcoin – proof-of-stake, 1% inflation Darkcoin – mixing via “DarkSend” and

hybrid POW (x11) and POS (Gold) Digital Tangible – CP asset

linked via Bitcoin to custodian (represents an actual 1/10 troy ounce of gold)

Let’s Talk Bitcoin (LTBcoin) – CP asset, official advertising token of LTB Content network (e.g., rewarded for proof of content/activity)

Current assets listed at Melotic

StorJ – CP asset used to pay/reward nodes on decentralized cloud

Stellar – fork of Ripple, uses a consensus ledger rather than POW, 1% inflation

Uro – pegged to 1 metric ton of urea (uses x11 POW) [Delisting impending]

Counterparty – sits on top of Bitcoin, used POB to create limited batch

Monero – uses CryptoNote protocol (not Bitcoin) notable feature is ring signatures

Current assets cont’d

Consumer behavior on the blockchain

Over the past 9 months, liquidity has remained roughly 10% of all mined bitcoins

This can mean several things but in general:◦ Roughly $2-$4 million in daily retail commerce (based on self-reporting)◦ UTXO holders like to permastore in cold wallets◦ The remaining liquidity can be further divided into

Mining rewards Gambling, mixing (sending to burner wallets) and illicit activities Trading on exchanges

(Note: percentages are difficult to estimate without full traffic analysis)

Important for Bitcoin startups: watch out for ‘The Platform Trap’ could impede return-on-investment

Consumer behavior cont’d

Bitcoin: 38-48 TPM Litecoin: 2-3 TPM Dogecoin: 37-40 TPM

Source: www.chain.so

Not all TPM is equal (see previous slide, is FOREX commerce?) Why has Litecoin stagnated?

Different community dynamics than Dogecoin / and uphill institutional inertia of Bitcoin

Why has Dogecoin succeeded at getting this far? If cryptocurrencies are a startup, traction channels are key. Dogecoin utilized new

traction channels to market (e.g., guerilla) whereas Bitcoin community has largely saturated its traction segments (e.g. handful of social media channels)

Current transactions per minute (TPM)

Proof of burn with Dogeparty (fork of Counterparty on top of Dogecoin)

1.85 billion dogecoin burned in 28 days (August 14 – September 11)

Roughly equivalent to 2.01% of Dogecoin monetary base

Compare with Counterparty – 2,130 BTC “burned” in month of January, or 0.01% of monetary base

9/17/2014: Transaction, XCP: 2,499 and BTC: 79,784. CP accounted for 3% of Bitcoin tx volume.

Dogecoin and Dogeparty transactions

Merged mining (AuxPOW) has proven fairly successful for the ‘scrypt alliance’ (Jackson Palmer’s name for the conglomerate of coins mining with DOGE/LTC)

May not be sustainable (still contingent on block rewards) “Litecoin has essentially become the profitability layer that

drives the security of Dogecoin's network” (and other scrypt-based coins piggy backing)

If value of litecoin falls, then the overall hashrate will decline once again and/or when LTC block reward halves in Q3 of 2015

“Scrypt alliance”

Dogeparty (like CP) could have disproportional rewards issues long-term

Cannot multiply TX volume by USD/EUR on any chain Very few pay TX fees on any chain

Most, if not all, tipping is done off-chain

Other observations from DOGE/LTC

NXT (problems found by Garzik?) Stellar/Ripple Mastercoin Counterparty Bitshares (Invictus) Open Transactions (not fully released) Koinify (CP) Coloredcoins (Coinprism, Chromaway)

Current 2.0 platforms

Ethereum (tries to be an appcoin but...) Tezos (POS) Tendermint (POS) Pebble (POP) Nimblecoin (MM) Dogethereum (Eros) Factom, formerly Notarychains (POE/MSC) SKUChain (DPOS) Hyperledger (PBFT) Filecoin (~Bitcoin, see also Permacoin) Treechains/Sidechains/PeerNova Several “stealth” projects (Vpal)

Future protocols and/or coins

Beyond scams and pump & dump what are other hurdles? Dev team may lack the skills to make robust code that can

achieve its promises The economics of appcoins may not be well-thought out:

◦ The only way to reflect changes in demand for an inelastic money supply (limited app tokens) are changes in the price. This could result in price appreciation incentivizing holding and not spending, diminishing the value of a network and lowering overall liquidity for market participants.

Challenges

List of deployed POW hash functions: ◦ SHA256d, Scrypt, Scrypt-N, Scrypt Jane, Groestel (Grøestl), Keccak,

Quark, X11, X13, X14, (n+1…) List of coins hit with 51% attack:

◦ Coiledcoin, Auroracoin, Feathercoin (several times), Worldcoin, Powercoin, Terracoin, numerous others

Legal uncertainty of cryptosecurities, digital currency crowd sales (e.g., Howey test, indemnification, UPL, money transmitter license)

Challenges cont’d

The transition of alternate consensus algorithms from highly speculative in 2011 - 2013 to increasingly accepted (see annual Dijkstra Prize)

This has opened a new space where consensus algorithms are chosen based on use-case rather one size fits all

This also drives greater fragmentation in the code bases and increases the requirements on developer skill

Need to incentivize mining otherwise becomes self-terminating (or as Nicolas Courtois calls, “self-destructive”); perhaps sidechains/treechains will ameliorate that

Sea of change

Or during bull-runs (e.g., price appreciation) does inelastic supply incentivize movement into other liquid chains? Substitute goods?

How to define success? Does it have to be immediate or does it get a 5.5 year runway/grace period like Bitcoin has had?

What about double-standard: anonymity of Satoshi is “okay” but not for other alts? (or for anonymous miners?)

Ray Dillinger’s Deathcoin list (Necronomicon)

What are attributes of longevity? See failure vectors too.

Rising tide lifts all boats?

1.  The dev is not anonymous.  If a coin has an anonymous dev, it’s about three times more likely to be a scam than not. Further, if the dev is not anonymous, there are things you can legally do if it does turn out to be a scam and if the dev is anonymous there aren’t.

Dillinger’s observations on altcoin survival:

2.  It doesn’t halve its remaining coin supply more often than it can double its value.  That’s kind of hard to predict, but at this point I think the double-value time for cryptocurrency is up to about a year, maybe two.  It’ll get longer until it catches up to double-value period for the rest of the economy, which is 7 to 15 years depending on the industry.    This is important because whenever the block reward goes down, the hash rate goes down in the same proportion; and when the hash rate gets too low, the blockchain becomes vulnerable to an attack which can destroy its value completely.  Expect any coin that mines out its coin supply too fast, to collapse.  I think even Bitcoin is going to be too fast in the long run; there’ll come a point when its double-value time is slower than its block-reward halving time and alts will start sucking up the hashing power making bitcoin vulnerable to attacks.

Dillinger cont’d:

3.  It isn’t an IPO where you’re supposed to “buy” coins for some other form of money.   A few of those are honest, but most turn out to be scams.

4.  The dev actually knows how to fix problems in the software.  This is hard to judge straight out of the gate.

5.  There’s a point.  To put it gently, in order for it to be reasonable for someone who’s not scamming to release an altcoin, there has to be something wrong with Bitcoin and they have to believe that they can do better.  In order to believe any altcoin has a long-term future, there has to be something wrong with Bitcoin and that altcoin has to be able to survive where Bitcoin cannot.  Anytime there’s an alt, ask what it does that bitcoin cannot do.  Then ask, does that enable it to survive where bitcoin cannot?

Dillinger’s observations cont’d

6.  Don’t be taken in by talk of philanthropy.  Money, when functioning as money, has no morals whatsoever, good or bad.  It flows in the reverse direction of the profitable allocation of resources.  Any money that attempts to do anything else will cause market distortions that cripple the economy it’s working in and ultimately cause it to function less well than its competition.

7.  If there’s a premine, be sure that the devs are absolutely honest about the premine.  If they claim that it’ll be used for the good of the community, then the community is entitled to know how every last dime of it gets spent.

8.  If there is any difference at all between the block reward structure they advertise and the one they implement, stay away.

Dillinger’s observations cont’d

It would not make much sense if the NYSE or NASDAQ only listed one asset, such as MSFT, which was the only asset traded by brokers.

And looking at the Cambrian Explosion of altcoins and appcoins created over the past year, it's increasingly clear that consumers and developers are interested in testing out and experimenting with new functions, features and extensibility.

In short, they want to poke, probe and most importantly: have choices.

A market of choices

According to Venture Scanner, there are 22 funded exchanges that have raised $113m

Daily volume on public (non-OTC) exchanges for bitcoin is $40m - $100m (on certain days litecoin is 1st, usually 2nd)

Two general types of exchanges - bitcoin/fiat exchanges, or everything-under-the-sun altcoin exchanges

At Melotic, we focus more on due diligence and working on providing liquidity and price discovery / value discovery for unique assets that run on different chains, platforms and protocols

Exchanges

tim@melotic.com @ofnumbers Melotic.com / OfNumbers.com

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