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Consensus Week and The Protocol Trilemma

After an eventful Consensus week, where the midtown Hilton was taken over by crypto-faithful flocking from around the world, where companies were competing to give away Lamborghinis, and various luminaries ranging from a Fields medal winner to Snoop Dogg took centre stage. These are our takeaways.

Institutional acceptance – Everyone was there, from the big banks to the Big Four to the big IT consultants. Circle announced a fund-raise and its newly-minted Unicorn statusBloomberg along with Galaxy digital launched an index, Goldman ( which owns Circle) folks from its newly created crypto-desk were there, as were a number of the other usual suspects. Basically, every institution worth its crypto-salt and aspirations, pitched tent and polished pitch at-the-ready.

Decentralized exchanges might be super exciting but a number of folks are focusing on traditional exchanges and OTC businesses, betting on the fact that the institutional opportunity is far more lucrative near-term.

Narrative funding is done! People want to see real protocols and real development. A ‘yet another ethereum’ project will find it difficult to raise funding if the only marketing strategy is a pie-in-the sky whitepaper, even if it has a bevy of MIT/Stanford PhDs and a Fields medal winner advising it.

The profusion of ‘boutique ICO advisors’ /shill-meisters’, that has worked on ‘40 ICOs’. Steer clear of such entities. More often than not, hiring such entity will be negative virtue/credential signalling to the increasingly sophisticated, increasingly jaded token/ICO investor.

There is a certain seediness to this mid/late stage of the bubble, a certain sense of ‘deja vu’. Some of the parties had all the essential cocktails that gave a number of the other cycles (the junk-bond predator’s ball in the 80s, dotcom in the late 90s, the structured finance boom in the last decade) a certain bad name, especially around the time they were about to pop. Plus ca change and all that.

Corridor Track – as always the most useful. A number of folks we met did not even bother to buy tickets to the conference properly, instead choosing to just stay on the sidelines making conversation and building out their network.

The Anti-Consensus – All the ‘cool kids’, the early pioneers and the whales and the cypherpunks are increasingly staying away. Someone threw an ‘anti-consensus’, a one-day event with some decent speakers, $100 entry fees and a great after party. For a limited number of participants. Great idea and we expect this to be the norm, especially as the Consensus machine now starts juggernauting around other parts of the world.

Love them or hate them but security tokens are here to stay. Lowest hanging fruit, but there is a lot of roadmap uncertainty, very much an evolving field. Likely one reason why Wall Street is getting in in a big way.

OTC trades are the new ‘private tech secondaries’. Over the last few weeks, we have had around 20 entities reach out to buy ‘blocks’ of BTC, and another 20 willing to ‘sell’. Highly attractive prima facie, but the vast majority of these trades will fail because of the degree difficulty in establishing trust across a daisy chain of brokers. A small cluster of execution-focused entities will capture a lot of value from this froth.

A necessary dose of skepticism from some smart folks around the whole idea that the Blockchain will cure everything that is wrong today!

Special shout out to XSQ (HongZhuang Lim), Dhruv Bhansal (Unchained Capital), and Market Protocol (Seth and Phil), just what the crypto world is missing right now; focused, under-the-radar execution, with the emphasis on building a great product or a service rather than a self-aggrandizing narrative with little underlying substance.

It was also a pleasure catching up with Daniel Wang of Loopring. This could be a real, viable ZRX competitor in the decentralized exchange space.

And now, onto this week’s main course.

This is the third time this year we are visiting the highly debated topic of smart contracting platforms and potential winners. Such is the pace at which we are seeing innovation in this space. In our previous posts, we talked at length about the scale of disruption that smart contracts are bringing to bear and the key differentiators between some of the early big boys in the space – Ethereum and NEO.

Almost every crypto-related construct can be viewed from the optic of the Scalability Trilemma. To provide a quick recap, what this essentially means is that for any blockchain project, it is practically infeasible to hit the trifecta of Scalability, Consensus and Decentralization, with trade-offs across these three axes being the norm. Trying to reach a perfect solution on any one of the three fronts will inevitably lead to trade-offs on the other fronts. For example, Bitcoin found it almost impossible to achieve maximum decentralization and high scalability at the same time. So, the core team decided to make decentralization their primary goal and everything else got relegated to secondary solutions such as Lightning Network, SegWit, etc. You can read more about it in an earlier post.

Coming back to our discussion about smart contracting platforms, there is a growing disagreement among the blockchain community as to what degree of decentralization and what level of security the base platform should provide. One camp of investors and experts believe that censorship resistance is uncompromisable, even though it leads to throughput deficiencies, while others posit that achieving high scalability is imperative to build customer-grade applications, albeit at the expense of security. Censorship resistance is important to withstand full-frontal attacks by malicious actors and higher throughput reduces waiting times and latency. The major platforms catering to these two extreme poles of decentralization and scalability are Ethereum and EOS, respectively. For folks who value on-chain governance over everything else, there are projects like Dfinity and Tezos. We will save a discussion on the ongoing tussle between on-chain and off-chain governance for a future post. Governance enables project stakeholders to arrive at optimal decisions around the development and upgradation of the protocol to achieve higher utility.

Ethereum’s challenges are well documented, as are the various efforts aimed at addressing them. At a current throughput maximum of around 20 transactions per second, it is economically unviable to run DApps on top of Ethereum. We saw this happen with Cryptokitties last year. While a variety of scaling solutions is being worked out by the Ethereum team, the fact that a fee has to be paid for every activity (tweeting, retweeting, posting, etc.) results in sub-optimal experience for users running decentralized applications, especially for consumer-facing applications such as social networks, for instance. EOS aims to resolve this issue by completely doing away with transaction fees and requires users to buy or rent tokens to get a share of the bandwidth that is directly proportional to the percentage of outstanding tokens held by the user. Unlike Ethereum and Bitcoin, where miners are rewarded through both transaction fees and mining reward, EOS miners are rewarded exclusively through inflation. Miner rewards are important in a Distributed Ledger System to drive incentivization for performing the critical task of updating the ledger. Another notable differentiating feature of EOS is that it uses a DPoS consensus protocol with 21 block producers to achieve greater throughput and faster finality (~two seconds). Tokenholders reserve the right to replace an inactive or rogue block producer with a new one. EOS estimates the throughput to be as high as 1000-6000 transactions per second right from the outset, making it a preferred choice for consumer-focused applications (Note: Promises made by blockchain projects should be taken with copious ladlefuls of salt. There is often a big difference between performance and promise, especially in these early days). However, the fact that there will only be 21 block producers makes investors question the decentralization aspect of the EOS platform. Ethereum, on the other hand, when it moves to PoS, will have a minimum staking requirement of 1500 ETH for block producers, which could again play out in many interesting ways.

In summary, given the wide-ranging requirements for developers building decentralized applications, we believe that both EOS and ETH can co-exist, with each catering to their own set of application developers who find one facet (scalability/decentralization) more valuable than the other. However, the jury is still out on which of these features will be favoured by a larger number of developers, and this is definitely not a two-horse race, as other strong competitor protocols are emerging – Dfinity, Cardano, Tezos etc being some of the notable ones.

Meanwhile, among the very few things that managed to stay apace with Bitcoin over the past few years was the growth in attendance numbers at Consensus, and, perhaps, our rich pipeline of disruptive ideas! 

Hope you enjoyed this little expedition down the rabbit hole. Until next week.


Satoshi&Co Daily Crypto Newsletter

By Ramani Ramachandran and Rohit Alluri

ZPX - Daily Crypto Update