Cornell Blockchain. Sixth Meeting Education Series V: Exchanges, Wallets, and ICO

Transcription

1 Cornell Blockchain Sixth Meeting Education Series V: Exchanges, Wallets, and ICO

2 This Week and Blockchain SegWit2X Cancelled Bitcoin Gold s Problems 1. Equihash instead of SHA-256 (similar to Zcash) - tries to remove ASIC 2. Launched after DDOS 3. Lack of replay attack protection, scam URLs associated with BTG, fork wasn t publicized initially DASH is updating - Thank you Segwit2X? 1. Segwit2X community decided to cancel update 2. Post cancellation - Bitcoin Cash hash power exceeded BTC 3. Bitcoin down 15% post cancellation - Chinese influencers shift to Bitcoin cash Blockchain Project Success Rate 1. DASH developers looking at Segwit2X update 1. 26,000 projects developed last year - Not ICOs, but projects 2. DASH increase block size to 2mb - reduce transaction fee factor of % Success Rate 3. Startups, governments, to banks, and more are investing heavily in blockchain - Trial and Error to see what works 3. Updates

3 Markets: An Introduction

4 Exchanges and Brokers

5 Derivative Exchanges Approved by the Commodity Futures Trading Commission (CFTC) for swaps and options, as a Swap Execution Facility and Derivatives Clearing Organization Investors like leverage and shorting Holders hold larger balances because it s safer, and use some for collateral Due to collateral, large amounts taken out of circulation, dampening volatility and pushing up prices Renters avoid transaction fees by holding More demand by reduced volatility, attractive returns, and larger suite of products First federally regulated exchange and clearing house to list fully collateralized bitcoin swaps and options Derivatives allow more liquidity, higher prices, and lower volatility Last week, the world s largest options and futures exchange announced bitcoin futures based on their own CME Bitcoin Reference Rate and Index

6 CME Rates CME Bitcoin Reference Rate (BRR) CME CF Bitcoin Real Time Index (BRTI) Aggregates trade flow of major bitcoin exchanges during a specific window into a once a day reference rate of USD- BTC Aggregates global demand to buy and sell BTC in a consolidated order book and reflects the instantaneous US dollar price Futures based on the BRR Price data from Gemini, Gdax, Kraken, BItstamp, and more CME Bitcoin Futures Will Be Based On: 1. Cash based ( payment in BTC or USD) 2. Each contract = 5 BTC, 1000 contract limit 3. Each min. fluctuation = 5$ per bitcoin (25$ per contract) 4. Futures have a price limit + / - 20% of the settlement price based on the BRR

7 New York State Residents: Bitlicense Companies with Bitlicense New York State s Bitlicense - in Effect August Issued by the Department of Financial Services 2. Deal with exchanges and activities/businesses dealing with virtual currencies 3. Includes: storing, holding, buying/selling, controlling, administering, and issuing 4. Does not include a. Development of Software b. Merchants that use virtual currency for sale of goods or for investment Notable Exceptions

8 Insurance on Funds Do exchanges protect my money? U.S Dollars FDIC Insurance (Up to $250,000). No Insurance of digital currency. Provide significant security measures. Heavily capitalized to protect data. U.S Dollars FDIC Insurance (Up to $250,000). ALL digital currency held in coinbase online is fully insured. Any breach and loss of currency Coinbase will pay out to customers. Physical, Cyber, or Internal Attacks are protected.

9 Creating an Account Step-by-Step Explanation Identity Verification Needed for regulation and compliance Useful for preventing illegal activity, money laundering, and tax evasion Usually a photo of government-issued ID Account Security Setup Often require two-factor authentication through texts or mobile app confirmation for new devices and IP s

10 Paying for Cryptocurrencies Step-by-Step Explanation Payment Methods Traditional currencies require trust and verification through banks Tradeoffs between limits and speed Liquidity Restrictions Reduces impact of hacks and identity theft Reduces price volatility in currencies with low volume of transactions

11 Transactions through Broker Step-by-Step Explanation Buying Cryptocurrencies Market price is constantly changing Delay between payment and access to cryptocurrency Purchased currency is temporarily stored in an online exchange wallet Exchange interface can be used to send coins to other wallets, including the non-exchange wallet of your choice

12 Buying Altcoins There are multiple kinds of exchanges Larger Ones deal with more Secure assets (Litecoin, Ripple, Zcash, Eth/BTC) Others deal with less secure assets - where you can often buy a wide variety of ALTCOINS Coins can be listed in one, or many exchanges - and it takes a significant process to be listed in some of the more major exchanges To buy some coins, you have to do it via their own exchange or via ICO/other means

13 Order Types A market order will execute immediately at the current market price. A limit order locks in a price, buy buying if price drops, or selling if price rises. A stop order prevents losses by setting the price in which some action should trigger. A stop limit automatically posts a limit order at the limit price when stop price is triggered Good 'Til Canceled (GTC) - This order will be placed on the order book and remain valid until you cancel it. Immediate or Cancel (IOC) - This order will be placed and if it is not immediately filled, it will automatically be cancelled and removed from the order book. Fill or Kill (FOC) - This order will only complete if the entire amount can be matched. Partial matches are not filled with this order type and will not execute. Post Only - You can also check the 'Post only' option. This will ensure the order executes only as a maker (no fee) order. If part of the order results in taking liquidity rather than providing, it will be rejected and no part of the order will execute.

14 How to Deposit Money The Most Secure and Common Way to Exchange funds is from Wallets

15 Exchanges and Fees 1. Maker Taker Model 2. 0% Fee for Maker 3. Small Fee for Taker These are independent from the transaction fees that are needed to go from wallet to wallet 1. Acts more of as a broker % fee for every transaction at market 1. Flat.25% fee on all exchanges (# * $ *.0025) 1. Multi-fee structure for different purchase types 2. Maker-Taker and Rebates

16 Maker-Taker Model Taker = Place an order at market that gets filled immediately Maker = Place an order not immediately matched by an existing order (get a rebate) Ex. 100 BTC traded in 30 days, you account fo 1.1, (more than 1%), you receive a rebate of 0.01% and pay a taker fee of.24% GDAX Maker-Taker Model Maker When you place kan order, placed in an order book - if someone matches, you are considered a maker and 0% When order partially matched immediately, taker for that portion and maker for the other portion

17 Gemini Maker-Taker Model Dynamic Maker Taker Fee and Rebate (.10% rebate, and only.15% fee Fees based on Gross Trading Volume and Liquidity Making Buy/Sell Window

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21 Wallets The most important question : Where and How do I store my [cryptocurrency]? Wallets Online Vs. Offline

22 What is a Wallet? 1. Generates and stores private keys. 2. Creates transactions. 3. Signs transactions using the private keys. 4. Broadcasts transactions to the network.

23 Hot vs Cold Wallets Hot Wallets - combines all four functions above (private keys, transactions, sign transactions, and broadcast) into a single system on a single computer Most Hot Wallets Encrypt Private Keys, but lacks much security, in exchange for much more convenience Cold Wallet - quarantines, have offline environments that host operations to create or use the private keys, and private keys secure from the network

24 Type of Wallets Desktop Exchange Hardware Online Paper

25 Online Wallets/Exchange Hot Wallets Ultimate Rule: No private key, then no ownership. But plenty of convenience. Online Wallet Private key is stored online usually in a centralized database Hosted by third-party Exchanges You don t own your cryptocurrency Only password protected (personal and one-time generated) Prone to identity theft

26 Offline Wallet Paper Wallet Generating private key and storing it in on paper. Pros: highly secure. Cons: Easily lost, one time use. Hardware Wallet Examples: Trezor, Ledger Pros: easy to transact often. Cons: connect to internet, lose it, break it and lose seed key.

27 Cold Storage vs. Deep Cold Storage Cold Storage Storing BTC offline Transactions sent online Prevents network attacks Prone to malware attacks Deep Cold Storage BTC stored offline, and wallet used was never connected online. Private Keys stored offline. Transactions signed offline. Gemini + other exchanges store reserve coins this way. Glacier Protocol

28 Cold Storage in Practice Manual Keystore Software Keystore Use an offline device to generate an address and private key pair Transfer a copy of that to your offline medium (paper, plastic, USB) Transfer funds into the cold storage address To spend, transfer the appropriate key into the hot wallet to sign transaction Electrum and Armory does this for you (handles the maintenance of private keys) Employ online computer and offline computer that share the same addresses and remain synchronized Online prepares an unsigned transaction, and signed by the offline computer via USB or QR

29 Multi-Signature Wallets A set of private keys. Some required. Why? Avoid theft Backup if keys are lost Enables signatories Signatories can collude Signatories can see your balance More cumbersome process Risks Require multiple signatures, and allow much more security Note that some exchanges and cryptocurrencies break when multi-sig is used (dash and bittrex)

30 Glacier Protocol Protocol for High Security Bitcoin Storage Set of best practices for deep cold storage of BTC. Intended for large amounts of BTC that do not move often. Recommends Eternally Quarantined Hardware. Multisignature withdrawal policy. Outputs a set of paper information packets, one for each private key needed for the withdrawal.

31 How do Exchanges Store my Money? Gemini Digital Asset Security Assets stored in offline (airgapped) vaulted storage system - Cold Storage and only a small portion in Hot Wallet (online) Hot Wallet Amazon Web Services, and rooted in HSMs (hardware security modules) with level 2 security ratings (FIPS) Cold Storage - Cold and Cryo HSMs with FIPS Level 3 All air-gapped storage, and private keys generated, stored, managed on HSMs Use multi-sig technology for security All HSMs guarded, monitored and geographically distributed Coinbase/GDAX ] 98% of customer funds are stored offline 2-step verification on all accounts Comprehensive Insurance Policy

32 Initial Coin Offering (ICO) What/Why/How ICO? What? ICOs are fundraising tools that trade future cryptocoins in exchange for current coins (generally bitcoin or ethereum). The Economist says ICO coins are essentially digital coupons, tokens issued on...blockchain...they can easily be traded, although unlike shares they do not confer ownership rights. Some coins can be pegged to (built on top of) other coins. ex. Golem coin transactions occur through Ethereum smart contracts. Why? Seller: to fund development and operation of blockchain projects Buyer: hope that successful projects will cause tokens value to rise - The Economist How? Most ICOs are marketed as crowdsales or donations, in order to prevent regulation ICOs have now raised 4x as much as bitcoin companies raised in VC capital so far this year Fortune ICO: $1.3bn vs VC: $358mm

33 Initial Coin Offering (ICO) Famous ICO s Ethereum $18M raised over 42 days - Number one most funded ICO Golem $8.6M raised in minutes. Focused on creating a decentralized global market for computer power. Lisk $5.8M raised - Own a total of 101,000 BTC. Waves $16M raised - controversial ICO. Company was accused of scamming investors. Iconomi $10M raised - provides a connection to the distributed economy by allowing individuals to create their own Digital Asset Arrays.

34 Initial Coin Offering (ICO) What makes ICO s unappealing? 1. Regulatory uncertainty Many companies will incorporate outside the US Most don t understand whether or not this counts as a security subject to SEC s registration requirements 2. High valuations / over-capitalization VC firms and other savvy investors undergo thorough due diligence prior to investing unlike the target market 3. Lack of controls Promoters of tokens have no fiduciary obligation to benefit token holders Rarely promote plans on how to utilize capital Such schemes have raised over $1.8bn this year alone Fortune article describing potential of capital punishment in China for illegal fundraising

35 Initial Coin Offering (ICO) Utility vs. Security Offerings 1. Utility Tokens Units of service that can be purchased Similar to purchasing and using API keys. Popular way to fund projects - tokens can be pre-mined or sold through Crowdsales Represent shares of a business. Tokens are considered a security until passing the Howey Test. Howey Test : Investment of money or assets? Is the investment in a common enterprise? Expectations of profit from the investment? 2. Tokenized Securities Utility tokens that a startup would issue to finance future customer s purchases should not be securities, since their purpose is to facilitate the purchase

36 Simple Agreement for Future Tokens (SAFT) What/Why/How SAFT? Why? U.S. Securities Law & Howey Test determine if something is a security, which are heavily regulated in the U.S. If a company develops a token and can distribute them at time of ICO, it is unlikely to be a security and can crowdfund normally. Promising tokens at a future date is considered a Pre-Sale which entails a whole set of regulations. What? Streamline the U.S. security regulations to simplify the process for companies to legally accept token pre-sales. Modeled after Y-Combinators: Simple Agreement for Future Equity (SAFE). Which is a standard seed round investment practice. How? Companies Interested can register through CoinList Once SAFT is released, companies can simply download and utilize it just as Y-Combinators : SAFE agreement.

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38 Fair And Compliant Token Sales New Model for Compliant ICO s Challenges Offering is a utility token opposed to a security. (i.e - SEC rules do no apply) Utility Tokens assume : that product is launched and currently usable & tokens are purchased by users FACTs Approach Public ICO is restricted to verified accredited investors with 12 month lock up period- only transferrable to other verified accredited investors. Utility tokens distributed as a property dividend to ICO investors. Total utility token value = Amount Invested a. Utility Tokens ARE NOT a security. b. Through FACTs, investors receive two tokens for the price of one. c. Distribution as a dividend allows for a clean transaction that fits within the existing legal framework. Could use guidance from SEC to understand applications and implications in other countries.