News from the market and our learnings around Casper v 0.1

2. CRYPTO MARKET UPDATE
MAY 14th

3. Overview
Confidence wavers in crypto market with some profit-taking last week. South
Korea prosecutors raid UPbit exchange resulting in double-digit losses in one day.
 No big updates from US regulators yet
 Legal framework for cryptocurrencies comes into force in Thailand
 Ethereum releases Casper v0.1: our learning points
 PolySwarm releases v1.0 Alpha
 NYSE plans to open bitcoin trading platform
 Galaxy Digital partners with Bloomberg to launch Crypto Index
 Facebook considering creating its own cryptocurrency

4. Market Momentum
 Weakness continued in the cryptocurrency market last week with losses
amounting to: 10% for Bitcoin, 4% for Ether, 12% for Ripple, and 21% for EOS.
 The top weekly performers among the top-40 crypto assets by market
capitalisation were Bytecoin (+75%) and Zilliqa (+31%)
Smaller token winners included KIN (+94%) and SONM (+46%) among others.
 The top losers among the top-40 assets were Ethereum Classic (-25%), Bitcoin
Gold (-23%), and Nano (-23%).
Market Momentum

10. Events Affecting the Market
Events that affected the market performance last week:
 The market last week was shaken by the South Korea Prosecutors’ Office’s
investigation into the country’s largest crypto exchange, UPbit.
 Sentiment was also dampened by the ongoing series of negative statements on
cryptocurrencies with Bill Gates last week stating that he would short bitcoin,
 His low confidence is shared with Warren Buffett and a number of other
business tycoons.
 The lack of any updates from the US SEC following last week’s meetings and
conference is probably an indication that there is still no clarity on the status of
major crypto assets.

11. Regulatory News
South Korea prosecutors raid country’s largest crypto exchange UPbit
 According to Coindesk, the South Korea Prosecutors’ Office searched the
head office of the country’s largest cryptocurrency exchange, UPbit.
 The exchange is suspended of fraud, selling the crypto assets to customers,
which it does not hold.
 According to a release from UPbit, all of its services are operating normally.
 UPbit is run by a subsidiary of South Korean internet giant Kakao.
 Markets fell by 15% after the announcement.

12. Legal framework for cryptocurrencies comes into force in Thailand
 A regulatory framework for cryptocurrencies was signed into law in Thailand
last week by royal decree.
 The decree defines cryptocurrencies as “digital assets and digital tokens” to be
regulated by the Thai Securities Exchange Commission (SEC).
 According to the decree, sellers of digital assets or tokens must register with
the SEC within 90 days or they will be penalised and may even face
imprisonment for up to two years.
 The penalty may be as high as twice the value of the unauthorised digital
transaction or at least 500,000 baht ($15,700).
 The SEC will now require all crypto exchanges in the country to
register with their local regulator. The country is supportive of
ICOs as long as they are regulated.
Regulatory News

13. Regulatory News
China plans to release blockchain standards by end 2019
 Li Ming, Chinese government official and director of the Blockchain Research
Office, stated that China plans to release national blockchain standards by
the end of 2019.
 The new legislation will unlikely “quickly advance the development of the
blockchain industry” in China.
 Currently, China restricts ICOs and crypto trading; however according to
numerous media sources, projects and research on the blockchain are
receiving full support domestically.

14. Crypto Market News
Ethereum releases Casper v0.1
 The following is a summary of key tips released by Casper team for
validators.

15. Casper v0.1
Casper the Friendly Finality Gadget (FFG) version 0.1, released by the Ethereum team
last week, is an improvement to the Ethereum network.
 The Hybrid Casper FFG combines proof of work (PoW) with proof of stake (PoS)
consensus.
 It is “a separate process that runs in parallel with proof of work and finalises
blocks, giving them additional security.”
 Ethereum plans to eventually transition to PoS from PoW to improve the
economic values for users by reducing the cost per transaction and increasing the
number of transactions per second.

16. Casper v0.1
 The new version does not provide scaling but is an essential step towards a
lighter network.
 According to the Ethereum Improvement Proposal (EIP) #1011, the aim of the
new version of the protocol is to reduce the block reward for miners to
0.6ETH from 3ETH now.

17. Casper v0.1
 Validation of the Casper protocol is performed by validators.
 Validators apply to join the validator set by sending a transaction
containing the ETH stake they want to deposit, the “validation code”, which
is a generalised public key that specifies a computer program to be used to
verify their signatures, and the return address where their deposit will be
sent to when they withdraw

18. Casper v0.1
 The validation code is a piece of EVM code and input that shall pass as a 32-
byte message hash plus a signature. The gas limit is 200k.
 There is freedom in terms how to use a validation code, with some having
elliptic curve verification (ECRECOVER), quantum-resistant hash ladder sigs,
and additionally multisig, threshold signature and keys that can authorise
other keys.

19. Casper v0.1
 Validators usually do not choose the validation key in practice, depositing
money and running the validation code that the client generates by
default, setting a withdrawal address and publishing the transaction
automatically.
 The validator can choose his withdrawal address that can be a cold wallet.
 As a result, the money cannot be stolen from the validator, causing just
the appearance of misbehaviour and penalty in the worst case.

20.  The deposit transaction for a validator is set at a minimum of 1,500ETH.
If validators have fewer funds available, they can join a stake pool.
 Casper FFG splits into a series of epochs.
Every fiftieth block in the chain is called a checkpoint, and the period between
two checkpoints is called an epoch.
 At every epoch, Casper FFG gives the validator the ability to send a “vote”
transaction; this transaction will vote for some particular checkpoint.
Casper v0.1

21.  In a hybrid version Casper is not a full consensus algorithm; it processes
over proof of work blockchain, already created on Ethereum blockchain.
 The purpose of Casper is to finalise blocks, and give them security.
 If two thirds of validators vote for a checkpoint, the checkpoint is justified.
If two check points in the row are justified, the block is finalised.
 The new validator gets inducted as a validator in approximately two
dynasties or 45 minutes on average.
Casper v0.1

22. Casper v0.1
 Once validators sign and send a deposit transaction, after 45 minutes, they
are staking.
 Every epoch, when the validator node signs and deposits transaction, sending
a “vote” message, the validator will participate in the consensus and needs to
stay turned on and connected.

23. Casper v0.1
 Rewards and penalties have not been finalised by the Ethereum team
yet.
 An initial suggestion is that, assuming 10m ETH are deposited: the
reward for staying online and voting would be 0%-5% per year;
 the penalty for going offline would be 5-10% per year or more in extreme
circumstances; and the penalty for making conflicting votes would range
from from 1% to 100% and getting logged out.

24. Casper v0.1
 Validator returns are proportional to the inverse square root of total deposits.
 That means that if total deposits go up 2%, an individual validator’s interest rate
falls 1% and total issuance rises 1%.
 If there are only 2.5m ETH participating, a validator can make an annual return
of 10%.
 If 40m ETH are participating, a validator can make an annual return of 2.5%.

25. Casper v0.1
 Collective rewards and penalties are implied within the Casper protocol,
incentivising validators to vote.
 Validators’ rewards depend not just on whether they vote, but also on
whether or not other validators vote.
 If a validator does not vote, the penalty becomes even bigger if other
validators do not vote.
 If everyone else behaves perfectly, a validator only needs to be online half
of the time to be profitable

26. Casper v0.1
 Casper introduces a “quadratic leak”, whereby validators may lose an amount
from their deposits which is quadratic in time during when no one votes:
 after 1 week, some 5% of deposits will be lost;
 two weeks, 20%; and three weeks, 50%.
 If more than one third of validators stop voting correctly and blocks stop
finalising, non-voting validators’ deposits start to leak more quickly until
blocks start finalising again.
 Voting validators get zero rewards (but not penalties) during this phase.

27. Casper v0.1
 A validator gets slashed for submitting two votes that contradict each other.
 The Casper protocol has two conditions under which a validator may be
slashed: a validator cannot make two different votes in the same epoch, and
a validator cannot make a later vote which references an earlier source than
an earlier vote.
 If a validator gets slashed, they get logged out, must pay “collective penalties”
as a non-voting validator for the next four months or a minimum of 2% of
their deposits, and suffer a penalty of 3p* of their deposit where p is the
portion of other validators that also get slashed within four
months of the validator.

28. Casper v0.1
 The slashing mechanism incentivises validators to set up their security to
have failure modes that are maximally miscorrelated from everyone else’s
failure modes.
 According to the game theory, if a validator gets hacked during an attack
while others get slashed, they may lose a great deal; It is better to fail alone.
 The slashing mechanism disincentives validators from participating in the
same staking pool, using the same VPS, the same operating system and
sample implementation as everyone else.

29. Casper v0.1
 The logout procedure with the withdraw function happens when a validator
enters either an online key or a withdrawal address that initiates a logout
procedure and withdrawal.
 Log out procedure happens every 700 dynasties (if each dynasty is
approximately 20 minutes, this translates to roughly one per week).
 Once logged out, the validator will be able to recover their funds in four
months. If the chain is under attack, the logout may take more than a week.

30. Casper v0.1
 If a validator does not have the necessary 1,500ETH stake, they can join a staking
pool. There is a minimal size of stake because in the current non-scalable version
of Casper, there is a limit for supporting validators.
 In a sharding network, the minimum stake will be lower. The main differences
between staking pools will include: reliability, size, deposit or withdrawal
conditions, and centralised or decentralised (using threshold signatures between
participants).

31. Casper v0.1
 Validators will be able to participate in the experimental sharding
system with a minimum deposit of 32ETH.
 It will take some time for the network to understand the risks and
benefits of the new protocol.
 The transition from 14-15tx/sec Ethereum to a faster network is
required for further network development.

32. Crypto Market News
 PolySwarm, the cyber-security market place on the blockchain, released version
1.0 Alpha on 30 April in line with its roadmap.
 The first version includes submission and response and artifact download, an
exemplar micro-engine featuring ClamAV, and a bounty management software.
 The main goal of the Alpha version is to allow Ambassadors and Experts to test
transactions on a PolySwarm test network to report bugs and provide feedback.
Our token description is here.

33. Crypto Market News
NYSE plans to open Bitcoin trading platform
 Intercontinental Exchange (ICE), the parent company of NYSE, is building a
trading platform to allow institutional investors buy and hold Bitcoin via swap
contracts
 In contrast with CME and CBOE, which opened a bitcoin futures market at the
end of 2017, ICE will provide more direct access to Bitcoin
 No more detail has been disclosed yet, and according to one report, the whole
undertaking could still “fall apart”.

34.  The report further explains that
 “The swap contract is more complicated than an immediate trade of dollars for
Bitcoin, even if the end result is still ownership of a certain amount of Bitcoin.
But a swap contract allows the trading to come under the regulation of the
Commodity Futures Trading Commission and to operate clearly under existing
laws — something today’s Bitcoin exchanges have struggled to do.”
Crypto Market News

35. Crypto Market News
Bill Gates’ negative attitude towards Bitcoin
 After Warren Buffett and Charlie Munger’s ultra-bearish
statements regarding the cryptocurrency market,
 Bill Gates stated that he “would short Bitcoin if there was an easy
way to do so.” This has drawn a huge response from the crypto
community.

36. Crypto Market News
Fundstrat’s new metric sees Bitcoin at $36,000 at end 2019
 Fundstrat has presented its thesis for why mining will take Bitcoin to
$36,000 by the end of 2019. Its analysis focused on the calculation of a
Bitcoin pricing to mining breakeven metric known as P/BE.
 According to the report, Fundstart “expects the mining economy to grow
over the next several years, and projects a BTC price of ~$36,000 by year-
end 2019 based on the historical average 1.8x P/BE multiple”.

37. Crypto Market News
Galaxy Digital partners with Bloomberg to launch Crypto Index
 Bitcoin bull and founder of “all-in one” Galaxy Digital cryptocurrency bank
Mike Novogratz has announced a partnership with Bloomberg LP to launch
the Bloomberg Galaxy Crypto Index (BGCI).
 The index aims to track the performance of a basket of top cryptocurrencies
in terms of market cap. Alain Campbell, global product manager for
Bloomberg, stated that “today’s launch of the Bloomberg Galaxy Crypto Index
reflects our clients’ growing interests in cryptocurrencies.”

38. Crypto Market News
Australian government makes cash payments over $10,000 AUD illegal
 Australian Treasurer Scott Morrison has announced a crackdown on the
cryptocurrency “black economy”.
From 1 of July 2019, all transactions over $10,000 will have to be made via
electronic payment systems.
 The purpose of the plan is to shut down tax avoiders, drug dealers and the
rest of the underground economy.

39. Crypto Market News
 Many people involved in cryptocurrencies predicted this kind of move
would happen. Many governments are interested in a “no-cash society” not
just to secure tax revenue from citizens but also to mitigate the financing of
terrorists and anti-money laundering and even to reduce interest rates.
 Governments are yet to be convinced that Bitcoin and other
cryptocurrencies could ever substitute for cash due to their anonymity.
 However, this perception is not correct, as thanks to blockchain technology,
all payments are transparent. The only problem would be if your plumber
asked you to send him Monero or another private
coins.

40. Crypto Market News
Facebook may considering creating its own cryptocurrency
 Despite the negative approach towards blockchain-related ads since the
beginning of this year,
 Facebook may seriously be considering launching its own cryptocurrency in
order to afford its billions of active users the option of making online,
electronic payments.

41. Crypto Market News
 Facebook hinted at a blockchain initiative, by stating that :
“Like many other companies, Facebook is exploring ways to leverage the
power of blockchain technology. We don’t have anything further to share.”
 The same source also claimed that Facebook will most likely acquire existing
crypto assets to expedite the whole process.

42. Cryptoassets’ Performance
 Over the past week, the Bitcoin price has corrected further to $8,400
staying around this level for a few days in a side trend.
 The market may remain quiet during this week as many investors and
companies will be away from their desks attending NY blockchain week.
 Litecoin has stayed within a side trend supported at 0.016 BTC/LTC, likely
awaiting further clarity on Bitcoin movements.

45. Cryptoassets’ Performance
 Ripple recovered relative to Bitcoin after losses over 10-11 May.
It may go a little higher to 0.00009BTC where it remained in April.
 Ripple has a few weak cards in its hand, including a lack of regulatory
clarity, which may squeeze the asset price.
 Ether fell down 4% last week, to stay around $700-710/ETH.
 We believe that Ethereum has its own agenda now given that it has
launched Casper FFG and may now be moving from PoW to PoS. However,
it still depends on Bitcoin trends.

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