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Thousands of people have checked out our new blockchain regulation proposal, Born in the USA, which you can read online here. Generally the feedback has been extremely positive. At the risk of sounding like a Zagat restaurant review, people called it “fun to read,” with “thoughtful ideas” and “colorful graphics.” We also scored a 29 on food quality, with a highlight being our pan-seared scallops. The biggest area of contention was our proposed metrics for measuring whether a blockchain project is centralized or decentralized. This may seem like a trivial legal distinction, but it’s really the heart of the matter. If the government allows blockchain projects a 3-year “safe period” to become decentralized, as the SEC has proposed, then how do we measure decentralization? We proposed three metrics, which have been battle-tested through decades of academic research. These three metrics are commonly used to measure decentralization in government; we simply adapted them for blockchain. | |
While some folks argued that we want to add more tests, I feel strongly that our goal should be to keep it simple. If our goal is to educate investors, then let’s make it easy for investors to understand. If our goal is to change regulation, then let’s make it easy for regulators to enforce. These three metrics, like the SEC proposal, have the virtue of simplicity. This week I’ll show you how they play out in real life, using a few popular digital assets. Real-Life Examples: Bitcoin, Bitcoin Cash, and Litecoin These are our three trusty examples because they are the most transparent: you can see everything happening on these blockchains. They are models for how we hope the SEC will require all U.S. companies to be completely transparent in the future. In our Excel worksheet, which you can download here, we first looked at fiscal distribution, orwho holds the wealth. You may be surprised to know that the top digital assets are highly centralized in this respect: the top 10% hold 99% of the bitcoin wealth. | |
This gives bitcoin a fiscal decentralization score of 0.03. Remember that this is a number between zero and one, with zero being completely centralized (one person owns the entire supply), and one being completely decentralized (everyone owns the same amount). Our target is anything above .5. Bitcoin fails miserably in this regard. I’ll say it again: the top 10% own 99% of the wealth. That’s why there are two other metrics to consider: administrative decentralization (how easy it is to spin up a new node) and political decentralization (how easy it is to “vote” on new changes). On both these metrics, all three digital assets get a perfect score of 1. This is because they are truly decentralized: anyone can start up a new node, as opposed to “permissioned” blockchains where you need to be invited to join. And anyone can “vote,” simply by keeping the node current with the latest software updates, as opposed to voting managed by a central body (like a board of directors). By averaging these three numbers, our three test subjects come out with these decentralization scores: Bitcoin: 0.68 Litecoin: 0.69 Bitcoin Cash: 0.67 Remember, the critical threshold is .50, putting all three well into the decentralized “green zone”: | |
TL;DR In plain language, this would mean a new blockchain project, under the SEC’s new Safe Harbor proposal, would have three years to achieve this level of fiscal, administrative, and political decentralization. It would report on these metrics regularly to investors, providing transparent blockchains that let them audit the results for themselves. After three years, if the blockchain project fell below the .50 threshold, their blockchain investment (i.e., the tokens held in the project) would not be considered a security, and thus not fall under SEC laws. It would be like holding Ethereum. After three years, if the blockchain project fell below the .50 threshold, they could simply register it as a security, and it would fall under SEC laws. It would be like holding a stock. As always, we are asking the common-sense test: does this seem right? Well, if these three digital assets aren’t decentralized, then I don’t know what is: they’re the models for how decentralized networks work. At the same time, there are gross inequities in the way the wealth is distributed: in that regard, they’re extremely centralized. To me, it seems they should land somewhere between “barely decentralized” and “completely decentralized,” which they do. The challenge with this test (and with any test of blockchain decentralization) is that we’re going to need a lot more transparency. We need to see what’s happening on the blockchain, who’s holding the tokens, and how people are voting. Ultimately, transparency is what the SEC wants – and, I think, what blockchain investors want, too. That much is clear. Health, wealth, and happiness, | |
John Hargrave Publisher Bitcoin Market Journal | |
"The only thing we have to fear is fear itself." -FDR (March 4th, 1933) In his landmark speech, almost exactly 87 years ago to the day, Franklin Delano Roosevelt called for "an end to speculation with other people's money" and the "provisions for an adequate but sound currency." Watching the speech today, one can only marvel at the timelessness of his words and how much applies to our present situation. With the total number of Coronavirus cases surpassing 100,000 people as I write to you it's difficult for me to see why people are freaking out of this. I mean, we're talking about 0.001% of the world's population. Yet, the entire world economy has ground to a virtual halt. Global travel, theater, sports, education, commerce, shipping lines, financial markets, and virtually every industry on the planet have been massively disrupted. For me, this is far more concerning than the virus itself. The potential affects of a supply shock being met with a demand shock on an economy that has been excessively stimulated for over a decade seems potentially more perilous to me than even the most dire of corona predictions. | |
Jobs Day The first Friday of every month has been a day of celebration for the last few years, when investors get together to talk about how great the economy is and analyze exactly how the numbers coming from the Beuru of Labor Statistics can be interpreted in the most bullish way possible. That won't be the case today. In the past, good news was always seen as bullish because it meant the economy is doing well wheras bad news was always met with buying because it meant the Fed is more likely to rain stimulus down upon us. If the data comes out good, it can be easily dismissed as pre-corona statistics. If they're bad, it still won't give us any indication of just how bad things might get should the virus continue to grow. In any case, the Fed is already in full panic mode so there doesn't seem to be much more they can do. | |
OPEC Minus Crude Oils is down 4% as of this writing but according to some analysts it has the potential to drop another $6 a barrel between now and the opening on Monday. The issue here is that Saudi Arabia has promised the market a huge production cut of approximately 1.5% of total global production. The issue is that they really can't accomplish this without Russia's help and Putin is yet to sign off on the emergency measures. Should Russia end up agreeing to the cuts, it's estimated that crude could see a nice pop of $2 or $3 a barrel. However, for the first time in years, crude's problem at the moment is more on the demand side than supply. As we can see, Texas Tea is now coming up on a historically important support level of $42 per barrel. Let's see if she holds. | |
Viral Affect In lieu of the comments above, I hope that you understand that my expertise lies in the markets and economics and I am in no way qualified to weigh in on the potential spread or decline of the Coronavirus. Given the current numbers, the level of fear we're seeing does seem disproportionate to me but I also understand we're dealing with a new kind of sickness and still many unanswered questions about how it spreads and how to treat it. Uncertainty is certainly a valid driver of fear. Certainly we've seen times in the past when something seemed trivial before producing hockey-stick graphs. Like bitcoin for example, going from $1,000 to $20,000 in 2017 before reverting to the mean. As Howard Marks points out in his latest note, because we don't know how things will progress, we don't really know how to trade it. Perhaps the best strategies might include buying a bit now and a bit later. Understand how much capital you want to deploy in total once the market reaches the bottom and that will give you a good indication of how much to spend at the moment. | |
For me, of course, this is more about short term volatility, which is a day trader's dream. If there are any long term investment opportunities, I don't think they're apparent just yet. In any case, I would like to make apparent my very warm appreciation for every one of you. If you're reading down this far I can only assume that you're enjoying the content and finding it useful. As well, all of your replies both in the mail and on social media have been fantastic really. Your questions and feedbacks are my main source of motivation. So please, if you are enjoying these updates, let me know. But more importantly, let your friends know because that's how we make our little network grow. Have a wonderful weekend & don't forget to wash your hands!! Best regards, | |
Mati Greenspan Analysis, Advisory Money Management | | |
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