Blockchain Investing Isn’t Foolproof

There has been a lot of buzz about Bitcoin and blockchain investing in the past several months.  However, the process involves more than just putting money into a ‘stock’ and getting a bigger return.  Especially because there are many new blockchains popping up almost every day.  People that are interested in getting involved in blockchain investing need to do their research and really understand the ins and outs of cryptocurrency.  The article below elaborates more on this topic.

Investing in the Next ‘It’ Blockchain Isn’t So Easy

Bailey Reutzel
Jan 31, 2018 at 08:30 UTC

Turns out too much money can be a bad thing.

Speaking at the Blockchain Connect conference in San Francisco last week, investors struck a surprisingly nervous note on the recent wave of initial coin offerings (ICOs) and the eye-popping funding rounds they’ve secured.

In fact, while ICOs and token-based blockchains have been touted as a way to circumvent the often tricky venture capital process, speakers like Linda Xie, managing director of crypto hedge fund Scalar Capital, went so far as to advocate for the industry and its decades-old approach to best practices.

Xie told the audience:

“It’s great that these ICOs allow thousands of people to invest in the project … but thousands of people aren’t going to give you the best advice on how to run this protocol or company.”

Speaking to more than 1,000 crypto enthusiasts and entrepreneurs, Xie argued traditional VCs aren’t interested in just giving startups money to build their platforms. Rather, she argued they’re just as focused on helping the entrepreneurs build a successful business from start to finish.

And with that, Xie and others worry about the entrepreneurs that raise exorbitant amounts of money in token sales – more money than they may ever need.

Echoing that skepticism was Rodolfo Gonzalez, a partner at Foundation Capital, who said, “It’s pretty obvious why folks are skeptical – 140 lines of code for $140 million raised; that wouldn’t happen in the traditional venture world.”

There’s no doubt that kind of raise will lead to failures, failures that Gonzalez said would make investors, both institutional and retail, demand better management of the crypto projects they put money towards.

And while that hasn’t shaken out just yet, the investors on the panel had some ideas of what that transparency in management might look like in the future.

Is this legit?

Others chimed in with words of warning as well. Take Huobi Capital, which thought everything was on the up with one of the startups it invested in through a token sale not long ago.

The venture arm of the cryptocurrency exchange Huobi is focused on a buy-and-hold strategy for projects that it thinks might become the next “it” blockchain, and the team believed this startup had potential.

Yet, shortly after closing the ICO, the founders of the company resigned, taking a good chunk of change with them and leaving the project in limbo.

“We had to liquidate,” Li Huo, head of Huobi Capital, said.

And that’s why the company now looks to invest primarily in token projects that instate some sort of lockup process for the tokens they raise.

“We get a better deal because [the token] doesn’t go onto the secondary market for speculators … and it shows that [the founders] are interested in working on the project longer term,” Huo said.

Xie agreed, explaining that Scalar also looks for longer-term lockups because the company is interested in investing in companies over three to five years.

She said:

“Even if there’s a liquidity event, we’ll hold.”

Continuing, Xie said she is interested in seeing more token projects develop a method for raising money in installments, like the traditional venture rounds, instead of raising a ton of money all at once. Plus, vesting periods for making tokens available to employees of the startup would also make institutional investors feel more secure.

A ‘beautiful’ business model

Having discussed all that, though, Huo admitted that liquidating the company’s position in the failed token it backed had its advantages.

In the traditional venture capital space it’s much harder because the positions aren’t that liquid, he said, but in crypto, investors can easily sell tokens on the secondary market.

Gonzalez echoed that, calling the current business model for VCs investing in token sales “beautiful.”

“You get in with discounts, then when it goes on the secondary market you’ve already made money,” he said. “If you can get into the presale of many of these things, you will get rewarded well.”

And while Gonzalez seemed very much the capitalist on the panel in this regard, he wondered what another crypto “winter,” where the hype dies down and the industry stagnates, will bring in terms of exit strategies for both the token issuers themselves and the hedge funds investing in them.

Overall, Gonzalez said, the real strategy was getting in at the earliest position possible and going along for the ride.

Changing agreements

But Gonzalez admitted investors could get mixed up in crooked deals with this approach.

And from that, Kavita Gupta, founding managing partner at ConsenSys Capital, said she believes token issuers shouldn’t be offering discounted periods with only very small lockups.

Not only that, but she and her team at ConsenSys are “completely against SAFT” now, a comment that refers to the Simple Agreement for Future Tokens framework.

Created by startup Protocol Labs and U.S. law firm Cooley, the living document was an effort to keep token issuers and their tokens away from the purview of the securities regulators, who are increasingly taking an interest in how these products resemble securities.

But instead, Gupta believes the Brooklyn Project, an initiative led by blockchain startup ConsenSys, will create a new framework for token issuers that is based on set deliverables, yet keeps with the ethos of ICOs that anyone and everyone can invest.

ConsenSys Capital has invested in three token projects.

And while Gupta said those investments were made based on stringent due diligence of the core concept and the founding team, she said there’s no standard to making the correct crypto token investment currently.

“I don’t have a very optimistic answer,” she said.

Hot topics

Yet, many of the investors on the panel did give some insight into what kinds of things they’re looking for before investing in a token project and what are concepts they’re researching heavily.

Xie said she asks three questions before moving forward with an investment – “Is this something that anyone would want to use? Does this actually need to be decentralized? Does this token actually make sense or can you replace the token with a more liquid coin like bitcoin or ether?”

She continued, saying that all the more traditional mechanismsare vetted too, such as the supply of tokens, the inflation rate, the community interested in the project, what percentage of tokens is being held by the founders and the governance structure. Plus, Xie’s co-founder is a developer who analyzes the codebases.

And in doing their research on the nascent crypto token space, what several investors have found most intriguing are protocol tokens, privacy tokens and decentralized exchange projects.

Both Xie and Huo mentioned decentralized exchange projects, which many in the industry believe are the way forward in stopping large repositories of customer information from catching the eye of hackers.

Aligning with this interest in securing people using crypto, Xie also mentioned privacy-oriented cryptocurrencies (projects like zcash and monero), which are getting quite a bit of attention of late as the technology used in those projects attracts developers from the top two cryptocurrency projects – bitcoin and ethereum.

In a separate fireside chat, Todd Chaffee, a general partner at IVP, which just recently invested in Coinbase, said the venture fund is looking for the core protocols that all other crypto applications will ride on in the future – similar to the underlying infrastructure of the internet itself.

All in all, though, Xie said she expects there to be some amount of “ICO burnout” in 2018.

The rampant pace of ICOs “is going to continue, but these projects are going to have to differentiate. They’re going to maybe have a platform or product already,” she said, adding:

“Many of these [entrepreneurs] this year will realize they don’t need a token and go the more traditional equity route.”

Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in Coinbase and Protocol Labs. 



What To Expect This Year With Bitcoin

Bitcoin and cryptocurrency had a big year in 2017, and 2018 will be a year of more advancement and investing.  A lot of people across the country just learned about cryptocurrency for the first time in 2017, so this year you can expect that they will take the new-found information and run with it.  More blockchains will be created and more money will flow in and out of exchanges among other things.  Read more predictions in the article below.


Keep an Eye Out for These Bitcoin Tech Trends in 2018

Aaron van Wirdum

1:49 PM  JANUARY, 02 2018

In many ways, 2017 was Bitcoin’s best year yet. Most obviously, increased adoption made the pioneering cryptocurrency’s exchange rate skyrocket from under $1000 to well over 10 times that value.

But from a tech perspective, things seem to be just getting started: 2018 promises to be the year that a number of highly anticipated projects are either launched or adopted.

Here’s a brief overview of some of the most promising upcoming technological developments to keep an eye on in the new year.

Cheaper Transactions with Segregated Witness and a New Address Format

Segregated Witness (SegWit) was one of Bitcoin’s biggest — if not the biggest — protocol upgrade to date. Activated in August 2017, it fixed the long-standing malleability bug, in turn better enabling second-layer protocols. Additionally, SegWit replaced Bitcoin’s block size limit with a block weight limit, allowing for increased transactions throughout the network, thereby lowering fees per transaction.

However, adoption of the upgrade has been off to a relatively slow start. While some wallets and services are utilizing the added block space offered by SegWit, many others are not yet doing so. This means that, while Bitcoin is technically capable of supporting between two and four megabytes worth of transactions per ten minutes, it barely exceeds 1.1 megabytes.

This is set to change in 2018.

For one, the Bitcoin Core wallet interface will allow users to accept and send SegWit transactions. Bitcoin Core 0.16, scheduled for May 2018 (though this may be moved forward), will most likely realize this through a new address format known as “bech32,” which also has some technical advantages that limit risks and mistakes (for example, those caused by typos).

“To spend coins from the P2SH format currently used for SegWit, users need to reveal a redeem script in the transaction,” Bitcoin Core and Blockstream developer Dr. Pieter Wuille, who also co-designed the bech32 address format, told Bitcoin Magazine.

“With native SegWit outputs this is no longer necessary, which means transactions take up less data. Recipients of SegWit transactions will be able to spend these coins at a lower cost.”

Perhaps even more importantly, several major Bitcoin services — like Coinbase — plan to upgrade to SegWit in 2018 as well. Since such services account for a large chunk of all transactions on the Bitcoin network, this could significantly decrease network congestion, thereby decreasing average transaction fees and confirmation times, even for those who do not use these services.

The Lightning Network Rolling Out on Bitcoin’s Mainnet

While further SegWit adoption should provide immediate relief of fee pressure and confirmation times, truly meaningful long-term scalability will likely be achieved with second-layer solutions built on top of Bitcoin’s blockchain.

One of the most highly anticipated solutions in this regard — especially for lower value transactions — is the lightning network. This overlay network, first proposed by Joseph Poon and Tadge Dryja in 2015, promises to enable near-free transactions and instant confirmations, all while leveraging Bitcoin’s security.

The solution has been under active development for about two years now, with major efforts by ACINQ, Blockstream and Lightning Labs. Progress on the scaling layer has been significant all throughout 2017, with early software releases of different but compatible software implementations, useable wallets interfaces and test transactions happening both on Bitcoin’stestnet and even on Bitcoin’s mainnet on a regular basis now.

“I’d say we have solved the main technical problems and have a relatively good idea on how to improve on the current system,” Christian Decker, lightning developer at Blockstream, told Bitcoin Magazine. “One last hurdle that’s worth mentioning is the network topology: We’d like to steer the network formation to be as decentralized as possible.”

Given the current state of development, adoption of the lightning network should only increase throughout 2018 — not just among developers, but increasingly among end users as well.

“Integration and testing will be the next major step forward,” Lightning Labs CEO Elizabeth Stark agreed, noting: “Some exchanges and wallets are already working on it.”

Increased Privacy Through TumbleBit and ZeroLink

While it is sometimes misrepresented as such, Bitcoin is not really private right now. All transactions are included in the public blockchain for anyone to see, and transaction data analysis can reveal a lot about who owns what, who transacts with whom and more. While there are solutions available to increase privacy right now — like straightforward bitcoin mixers — these usually have significant drawbacks: They often require trusted parties or have privacy leaks.

This situation could be improved significantly in 2018. Two of the most promising projects in this domain — TumbleBit and ZeroLink — are both getting close to mainnet deployment.

TumbleBit was first proposed in 2016 by a group of researchers led by Ethan Heilman. It is essentially a coin-mixing protocol that uses a tumbler to create payment channels from all participants to all participants in a single mixing session. Everyone effectively receives different bitcoins than what they started with, breaking the trail of ownership for all. And importantly, TumbleBit utilizes clever cryptographic tricks to ensure that the tumbler can’t establish a link between users either.

An initial implementation of the TumbleBit protocol was coded by NBitcoin developer Nicolas Dorier in early 2017. His work was picked up by Ádám Ficsór as well as other developers, and blockchain platform Stratis announced it would implement the technology in its upcoming Breeze wallet, which also supports Bitcoin, by March 2018. Recently, in mid- December of 2017, Stratisreleased TumbleBit integration in this wallet in beta.

The other promising solution, ZeroLink, is an older concept: it was first proposed (not under the same name) by Bitcoin Core contributor and Blockstream CTO Gregory Maxwell, back in 2013. Not unlike TumbleBit, ZeroLink utilizes a central server to connect all users but without being able to link their transactions. As opposed to TumbleBit, however, it creates a single (CoinJoin) transaction between all participants, which makes the solution significantly cheaper.

This idea seemed to have been forgotten for some years until Ficsór (indeed, the same Ficsór that worked on TumbleBit) rediscovered it earlier this year. He switched his efforts from TumbleBit to a new ZeroLink project and has since finished an initial ZeroLink implementation.

Ficsór recently ran some tests with his ZeroLink implementation, and while results showed that his implementation needs improvement, Ficsór considers it likely that it will be properly usable within months.

“I could throw it out in the open right now and let people mix,” he told Bitcoin Magazine. “There is no risk of money loss at any point during the mix, and many mixing rounds were executing correctly. It is just some users would encounter some bugs I am not comfortable with fixing on the fly.”

More Sidechains, More Adoption

Sidechains are alternative blockchains but with coins pegged one-to-one to specific bitcoins. This allows users to effectively “move” bitcoins to chains that operate under entirely different rules and means that Bitcoin and all its sidechains only use the “original” 21 million coins embedded in the Bitcoin protocol. A sidechain could then, for example, allow for faster confirmations, or more privacy, or extended smart contract capabilities, or just about anything else that altcoins are used for today.

The concept was first proposed by Blockstream CEO Dr. Adam Back and others back in 2014; it formed the basis around which Blockstream was first founded. Blockstream itself also launched the Liquid sidechain, which allows for instant transactions between — in particular — Bitcoin exchanges. Liquid is currently still in beta but could see its 1.0 release in 2018.

Another highly anticipated sidechain that has been in development for some time is RSK. RSK is set to enable support of Turing-complete smart contracts, hence bringing the flexibility of Ethereum to Bitcoin. RSK is currently in closed beta, with RSK Labs cofounder Sergio Demian Lernersuggesting a public release could follow soon.

Further, Bloq scientist Paul Sztorc recently finished a rough implementation of his drivechainproject. Where both Liquid and RSK for now apply a “federated” model, where the sidechain is secured by a group of semi-trusted “gatekeepers,” drivechains would be secured by bitcoin miners.

If drivechains are deployed in 2018, the first iteration of such a sidechain could well be “Bitcoin Extended:” essentially a “big block” version of Bitcoin to allow for more transaction throughput. That said, reception of the proposal on the Bitcoin development mailing list and within Bitcoin’s development community has been mixed so far. Since drivechains do need a soft-fork protocol upgrade, the contention does make the future of drivechains a bit more uncertain.

“Miners could activate drivechains tomorrow, but they often outsource their understanding of ‘what software is good’,” Sztorc told Bitcoin Magazine. “So they’ll either have to decide for themselves that it is good, or it would have to make it into a Bitcoin release.”

A Schnorr Signatures Proposal

Schnorr signatures, named after its inventor Claus-Peter Schnorr, are considered by many cryptographers to be the best type cryptographic signatures in the field. They offer a strong level of correctness, do not suffer from malleability, are relatively fast to verify and enable useful features, thanks to their mathematical properties. Now, with the activation of Segregated Witness, it could be relatively easy to implement Schnorr signatures on the Bitcoin protocol.

Perhaps the biggest advantage of the Schnorr signature algorithm is that multiple signatures can be aggregated into a single signature. In the context of Bitcoin, this means that one signature can prove ownership of multiple Bitcoin addresses (really, “inputs”). Since many transactions send coins from multiple inputs, having to include only one signature per transaction should significantly benefit Bitcoin’s scalability. Analysis based on historical transactions suggest it would save an average of 25 percent per transaction, which would increase Bitcoin’s maximum transaction capacity by about 33 percent.

Further on, Schnorr signatures could enable even more. For example, with Schnorr, it should also be possible to aggregate different signatures from a multi-signature transaction, which require multiple signatures to spend the same input. This could, in turn, make CoinJoin a cheaper alternative to regular transactions for participants, thereby incentivizing a more private-use Bitcoin. Eventually the mathematical properties of Schnorr signatures could even enable more advanced applications, such as smart contracts utilizing “Scriptless Scripts.”

Speaking to Bitcoin Magazine, Wuille confirmed that there will probably be a concrete Bitcoin Improvement Proposal for Schnorr signatures in 2018.

“We might, as a first step, propose an upgrade to support Schnorr signatures without aggregation,” he said. “This would be a bit more straightforward to implement and already offers benefits. Then a proposal to add aggregation would follow later.”

Whether Schnorr signatures will already be adopted and used on Bitcoin’s mainnet is harder to predict. It will require a soft fork protocol upgrade, and much depends on the peer review and testing process.