Dispatch #26 – 2021
August 13th, 2021
The crypto language inserted into the Infrastructure Bill takes top billing this week. This political bungle might become a big deal for US-based developers, but investors won’t notice any difference. A bipartisan group of Senators tried to strip out the potentially harmful language, but failed because of pork barrel politics. The political noise has drowned out the London upgrade to the Ethereum blockchain.
Finally, the buoyant digital asset prices action of late coincided with the $1.2 trillion Infrastructure Bill and the additional $3.5tn spending plan. The Fed will have to print money for the government to fund these programs, and this liquidity will seek out scarce/valuable assets. The macro backdrop for digital assets remains helpful. Full discussion line up follows:
- Senate Infrastructure Bill includes idiotic crypto language
- Pork barrel politics sink bipartisan amendment
- Ethereum network makes a notable upgrade – London upgrade
- $600m crypto hack…and the hackers returned the funds!
- Delta variant – San Diego data shows relative vaccine efficacy
- Gary Gensler’s reply to Elizabeth Warren’s – More regulation is coming
- BITCOIN SCHOOL is becoming COIN school – Ethereum London upgrade
Infrastructure Bill and crypto language
The US currently dominates decentralized blockchain innovation and, just as Silicon Valley has added billions to the US economy, so can blockchain innovation. This Bill, in a worst-case scenario, could drive innovators offshore as developers and validators, who have NO access to consumer details, are required to report consumer tax data to the IRS. Given the bipartisan effort to change the language, the Dispatch remains hopeful that future amendments/bills will correct the wrongs in the Infra Bill. Here’s a bullish take on the week’s events by Coin Telegraph.
The bill projects $28bn of the $550bn incremental spending to come from higher crypto taxes on increased disclosure rules. There’s widespread agreement among all parties that better reporting by exchanges will help tax collection. Actually crypto exchanges are NOT pushing back on the proposal. However, the language in the bill was too broad and would ensnare a wide swath of participants who don’t have access to consumer data. The Dispatch, for example, would love to see investors/clients receive 1099s from crypto exchanges to vastly improve cost basis reporting.
Rising influence of the crypto industry on display
Furthermore, the bill highlighted the rising power of the digital asset community as the crypto language held up the Infra Bill for several days. This Politico article (headline shown below) provides a lengthy take. This Washington Post article goes into how the industry galvanized grassroots activity. There are an estimated 46m US crypto users according to this NASDAQ article, which is a powerful cohort alongside a leaders in the Senate and Congress who understand decentralized blockchains.
Pork barrel politics sinks the bipartisan amendment
The bipartisan amendment failed because Richard Shelby of Alabama tried to add $50bn for defense spending to the amendment to change the crypto language. It was fascinating to see pork barrel politics in actions, as the Dispatch watched the floor proceedings live. This Blockworks article provides a rundown of the action. The tweet below sums up things better! If you’ve never watched Senate floor proceedings, this 22 minute C-span clip of the crypto amendment discussion is both insightful and entertaining. The explicit pork barrel politics start at 16.25 minute of the video.
Furthermore, defense contractors probably couldn’t care less about digital assets. However, Senator Shelby’s largest donors, financial service firms, have much to gain from a less vibrant decentralized finance ecosystem, which blockchains enable. This is another sad reminder of the money in US politics!
Ethereum London software upgrade
The Ethereum blockchain implemented Ethereum Improvement Proposal (EIP) 1559, which has been dubbed the “London upgrade”. The two most important changes ushered in by EIP-1559 are:
- Make transactions fees more stable and predictable
- Lower the net issuance of ETH, making the token less inflationary.
This upgrade took place smoothly on August 5th without requiring user adjustments. The bullet points from this Coinbase article highlights of the key changes.
Additionally, this Coinmetric article looks at ETH issuance since the London upgrade. More charts and discussion on ETH issuance in the Coin School section at the end.
$600m crypto hack and hacker returns all the funds
Poly Network, a cross-chain decentralized finance (Defi) protocol, was hacked and $612m stolen. The hacker exploited cryptography/computer code flaws in Poly Network and made off with funds in multiple crypto currencies. Poly Network does NOT have its own token. This Block Crypto article provides a succinct update. For a deeper dive, read this Chainalysis blog post, which includes messages from the hacker on the motivations. Poly Network is popular in China according to this Unchained podcast and less well know or used outside.
How it started…
As soon as the hack occurred, the entire crypto community started monitoring the wallets where the stolen coins were moved. Some of the best analysis came from Chinese blockchain security firm Polymist’s Medium posts on the hack. The focus of much of the crypto community would have made it next to impossible for the hackers to cash out into fiat currency without detection. Centralized tokens like Tether even suspended the stolen Tether.
This is the beauty of blockchains, the world is now discovering. Maybe the hacker could have cashed out in North Korea, but nowhere else. The hacker has since returned most of the stolen funds, as this CNBC article explains (headline below). The Dispatch does not buy the benevolent spin from the hackers.
…How it’s going!!
However, this event is a good example of the inherent risks of digital assets. They are all based on software code, which on rare occasion can include exploitable flaws. Larger blockchains like Bitcoin and Ethereum that have 100s of developers will naturally have less risk than smaller blockchains. Fewer upgrades vs. more frequent protocol upgrades also leads to lower risk. The Dispatch veers to the larger more established protocols, for this reason.
Gary Gensler’s response to Elizabeth Warren – SEC needs more laws to tackle crypto
This is Gensler’s response to Senator Warren’s letter (see Dispatch 23). The response makes it clear that investor protection is inadequate today and that SEC would like more authority to enhance protection. The paragraphs from the letter shown below illustrate the tone of the 2.5-page letter. Highlights by the Dispatch.
There are more regulations coming down the pike for the crypto industry. Some of the new rules will benefit investors. For example, The Dispatch would love to see enhanced reserve reporting by stablecoin issuers. However, The Dispatch would not be happy to see excess regulation to sharply curtail yield available in lending your crypto assets. In a world where bank deposits provide savers nothing, digital asset offers returns above inflation. Yes, there are risks associated with the higher yield and there’s no FDIC insurance, but the market should decide if the risk adjusted returns are attractive. Government should NOT be supressing rates and deciding for consumers that crypto yield is too risky!!
JP Morgan launches inhouse bitcoin fund for wealth management clients
Another large global investment bank with a large wealth management practise offers access to the wealthy. JP Morgan is partnering with NYDIG to offer this fund according to this Coindesk article.
Covid infection rate 10x higher among not fully vaxxed vs. vaccinated in San Diego county
This is just one county, but it’s worth noting the large infection divergence. Furthermore, the divergence is even wider in the gray part of the chart, which is NOT considered in the numbers provided below. It’s good to see the data directly from a large county, rather than a quote in a media source with a political leaning.
We probably should move our focus away from infection rates as more people are vaccinated. However, as a first principal, it’s good to not become infected.
COIN SCHOOL – Ethereum London upgrade in charts
ETH issuance post London upgrade
The first chart from this Wisdomtree post show ETH issuance history leading up to the upgrade. The article is an excellent source of how EIP 1559 will impact ETH inflation rate, which was ~ 4% a year before the upgrade.
These charts below from Coin Metrics illustrate the ETH inflation trend from the start of the upgrade August 5th until August 9th evening. During this period ~ 32% of the ETH issued were burned.
When transaction fees (aka gas price) spikes, more ETH will be burned, which in turn can turn net issuance for that block negative. 2 ETH are issued to PoW miners for securing each block (roughly every 13 seconds). However, more ETH can be burned when transaction fees spike.
Stay safe, enjoy the summer and do reach out if you have any questions or comments about the material in this Dispatch.
|This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of RockDen Advisors LLC and are subject to change at any time based on market and other conditions. Past performance may not be indicative of future results.|