The abridged version |

Insights, news and analysis for the professional investor

Was this newsletter forwarded to you? Sign up here.

Bitcoin (BTC) - $24,197.81

Ether (ETH) - $1,925.74

Prices as of 8/12/22 @ 7:59 p.m. UTC

Welcome to Crypto Long & Short!

This week’s topic hardly needs an introduction, but here’s one anyway.

If you know anything about crypto and also read the news, I’m sure you’ve read about crypto mining. And if you’ve read about crypto mining, you’ve read about how Bitcoin depends on proof-of-work (which is so so so terrible for the environment) and about how Ethereum is moving from proof-of-work to proof-of-stake soon (which is so so so much better for the environment).

Which is better? In answering that, most proof-of-work versus proof-of-stake pieces either get too technical or are too obviously biased. From an investor perspective, you just want the facts and the trade-offs so that you can make an investment decision.

So herein lies the “Investor’s Definitive Guide to Proof-of-Work and Proof-of-Stake (Abridged).” An actual book could be written about this, so a lot of the technical nuances will be papered over to avoid word-count creep.

But first, a quick detour that I promise is relevant ...

– George Kaloudis, back from a cabin in the woods somewhere

Trade 200+ markets with deep liquidity on the world's fastest and most secure crypto exchange. Built for traders and institutions. Register now.

This might surprise you, dear reader, but investing and software engineering aren’t too different. Fundamentally, investing is about trade-offs. So is software engineering.

In investing, you have a certain amount of capital and you allocate that certain amount of capital in a certain way. When you choose to invest in Thing 1, you can’t also invest that same capital into Thing 2. And in choosing to allocate to Thing 1 over Thing 2, the allocator takes several things into account like expected return, risk profile or if investing in Thing 2 would be cause for termination because the boss’s boss doesn’t like Thing 2 for whatever reason.

Read more: BlackRock Has Entered the Chat

In software engineering, you have a product that has a particular behavior and structure. An engineer will design something that behaves a certain way and will make structural decisions for the code. These structural decisions determine how easy it will be to make adjustments down the road.

Cryptocurrencies aim to operate their networks without the (extensive) use of third parties. To do that, network participants need a way to decide on what’s what and come to a consensus. Enter the consensus mechanisms. There are many consensus mechanisms, but the two most important ones are proof-of-work (PoW) and proof-of-stake (PoS).

Between the two, there are trade-offs. But the most critical thing to know about consensus mechanisms is that they need resilience to ward off attackers of the network (be they competitors, governments or a cabal of wealthy individuals). So let's take a piecemeal approach for the Investor’s Guide by first defending PoW (in the context of Bitcoin); second, defending PoS (in the context of Ethereum); and third, outlining (some of) the trade-offs.

Read the full article here.

Crypto-mixing service Tornado Cash was blacklisted by the U.S. Treasury

TAKEAWAY: The Treasury Department has banned all U.S. persons from using decentralized crypto-mixing service Tornado Cash, citing its role in helping Lazarus Group, a North Korean hacking group, launder money connected to the $625 million hack of Axie Infinity’s Ronin Network. All U.S. persons and entities are prohibited from interacting with Tornado Cash or any of the Ethereum wallet addresses tied to the protocol. Those who do may face criminal penalties. Read more here.

The Netherlands has arrested a developer of Tornado Cash.

TAKEAWAY: According to a release from the Netherland’s Fiscal Information and Investigation Service (FIOD), a 29-year-old unnamed developer, who is suspected of being involved in the sanctioned Tornado Cash protocol, was arrested in Amsterdam Aug. 12. The release said, “He is suspected of involvement in concealing criminal financial flows and facilitating money laundering through the mixing of cryptocurrencies through the decentralized Ethereum mixing service Tornado Cash.” FIOD has not ruled out making multiple arrests in the case. Read more here.

Polkadot has a decentralized version of “wrapped” bitcoin.

TAKEAWAY: Interlay, a decentralized stablecoin network, launched InterBTC (iBTC), a wrapped bitcoin token, on Polkadot. One iBTC can be redeemed directly on the Bitcoin blockchain for one BTC, which allows bitcoin to be used for decentralized finance applications on Polkadot. Interlay claims iBTC is built on a trustless model that borrows its security from the token’s target blockchain and uses decentralized vaults that hold collateral, instead of relying on third-party merchants and custodians like wBTC. Read more here.

Buenos Aires plans to deploy Ethereum validation nodes in 2023.

TAKEAWAY: Diego Fernández, the city’s secretary of innovation and digital transformation, said the effort “has exploratory and regulatory purposes” and will help the capital of Argentina, which has 3 million residents, “develop adaptable regulation” for crypto. Buenos Aires would be one of the first cities in the world where a government deploys Ethereum nodes. Read more here.

The S&P Global said that the outlook for Coinbase is “negative.”

TAKEAWAY: S&P Global dropped Coinbase’s long-term issuer credit rating and senior unsecured debt ratings to BB from BB+. “Competitive risk has intensified in the crypto exchange sector, with the company’s market share decreasing this year,” S&P Global wrote. “We believe that as a result of market share erosion and a higher risk of margin compression, cyclical variations (peak-to-trough changes in revenue, EBITDA, and EBITDA margin) for Coinbase have exceeded our previous expectations, leading us to revise our assessment of financial risk.” Read more here.

Introducing Market Wrap, our daily newsletter that explains what happened today in the crypto markets — and why. Sign up to get it in your inbox each weekday.