VYSYN VENTURES Weekly Insights #1

Bitcoin Fourth Epoch, Ethereum 2.0 & Central Bank Blockchain Progress

We are excited to deliver the first edition of the VYSYN Capital newsletter. 

We are launching this newsletter to bring greater clarity, analysis, and coverage on developments in the cryptocurrency industry.

There has been an onslaught of content related to cryptocurrencies and blockchain in recent years but high-quality sources are still rare.

Our newsletter content will initially be a mixture of a deeper exploration of three key topics with a summary of other events.

Subscribers can intimately familiarise themselves with three important developments in cryptocurrency while also getting a birds-eye view of other news.

In our inaugural release, we investigate how conditions have changed since the Bitcoin halving, the state of Ethereum 2.0, and the recent blockchain progress made by central banks. 

For those new to Vysyn Capital, we are a venture capital firm solely focused on investing in blockchain and digital currency projects.

Our investment activities are underpinned by the belief that digital currencies and blockchain technologies will mature into assets that function at the core of our global economy.

You can keep up to date with our daily curation of developments in the VYSYN community Telegram channel.

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Bitcoin Enters Fourth Mining Epoch

A new mining epoch has dawned for the Bitcoin network as the block subsidy declined from 12.5 BTC to 6.25 BTC on the 12th of May.

With far more eyeballs on the Bitcoin network than the first two halvings, this event was preceded by a greater scale of speculation, discussion, and preparation.

Research by Delphi Digital highlighted that online Bitcoin discussion relating to the halving exceeded both Bitcoin discussion relating to Coronavirus and gold since mid-April.

With the block subsidy generally representing over 98% of miner revenue over recent years, how miners will be incentivized to keep providing security as the subsidy diminishes has been one of the greatest puzzles facing industry leaders.

The large portion of revenue attributable to the subsidy also means that Bitcoin miner revenue effectively halves after the halving.

Miners raced to upgrade to the most efficient and powerful hardware in the lead-up to the halving as old-gen hardware which was already operating at thin margins was bound to struggle. 

The expectation that old-gen hardware would lose their profitability turned out to be accurate.

At the current price and difficulty levels, the breakeven electricity rate for the latest gen Antminer S19 is $0.10 per kWh while the electricity requirement to breakeven with Antminer S9 rigs is $0.025. 

Very few miners can access rates as low as $0.025 and even if they did, this is just the breakeven level!

One exception would be Chinese miners in the Sichuan province who can avail of sub-$0.03 per kWh electricity rates during the rainy season (~April to October each year).

Nonetheless, there remains a huge opportunity cost to running S9 rigs if they’re taking the potential places of latest generation equipment.

Many miners have expectedly been pushed below their breakeven levels since the halving and the estimated hash rate level has naturally been impacted.

The seven-day moving average of hash rate estimated by Bitinfocharts has dropped from a recent high of 123 EH/s to 111EH/s.

While many analysts were enthusiastic to observe higher transaction fees post-halving, the reduced hash rate makes block times longer which serves to make block space more valuable.

We ultimately will not see whether transaction fees as a percentage of total block reward has significantly changed until two difficulty adjustments occur. 

The next difficulty adjustment is set to occur in roughly two days and is currently estimated to decrease by 0.6%.

However, this adjustment will not fully account for the changes in network activity post halving as it will also be adjusting based on the mining activity from the last difficulty adjustment to the halving (i.e. blocks 628,993 to 629,999).

Nonetheless, we can explore how transaction fees and block times have changed at the current difficulty level before and after the halving.

We analysed the following two segments of blocks:

  • Blocks from 628,993 to 629,999 where the block subsidy is 12.5 BTC

  • Blocks from 630,000 to 630,588 where the block subsidy is 6.25 BTC

All of the above blocks were appended at the current difficulty level of 16.1 trillion.

Here are the results...

Both block times and transaction fees have increased since the halving.

The average and median block time before the halving were 9 minutes 29 seconds and 6 minutes 39 seconds respectively whereas this increased to 11 minutes 25 seconds and 8 minutes 11 seconds after the halving.

Transaction fees effectively doubled with the average transaction per block going from 0.53 BTC before the halving to 1.02 afterwards.

As a result, the percentage which transaction fees represent of the total block reward recently increased to a local high of over 20%.

However, as noted, these factors are interdependent as slower blocks will increase demand for block space. 

The second difficulty adjustment from now will give a clearer idea of what we can expect in terms of what percentage transaction fees will represent of each block reward.

The mining pool rankings also changed pre and post halving with the pools that purchase large amounts of hash rate from miners with old-generation rigs getting hit the hardest.

Poolin slipped in the rankings from second position to fourth position.

A new Chinese mining pool has also sprouted up with the name Lubian.com inserted into the block header.

It is estimated that the emerging entrant currently holds the fifth largest share of hash rate.

Ethereum 2.0 Expected in July

In an interview with CoinDesk, Vitalik Buterin showed confidence in the progress Ethereum developers are making towards the transition to Ethereum 2.0.

The long-awaited transition is expected in Q3 with many considering the five-year Ethereum launch anniversary on July 30th to be the date when 2.0 launches.

However, analysis by BitMEX Research highlights that the launch will just be the first step in what will likely be a “multi year transition to a new network.”

The Ethereum network in its current state will initially exist in parallel to Ethereum 2.0 with the intention that both networks merge in the future.

Ethereum 2.0 will use proof-of-stake as the underlying consensus mechanism and will incorporate sharding.

The transition to proof-of-stake and sharding are intended to address scalability issues facing Ethereum.

Upon launch, a one-way peg will be incorporated where tokens can be transferred from the current Ethereum network to Ethereum 2.0 (Eth1 to Eth2) but transferring in the opposite direction is not possible.

Network congestion, growth in smart contract data, and general scalability issues have been identified as headwinds preventing the Ethereum network from fulfilling its vision of becoming the world’s computer.

The transition to a network utilizing sharding with proof-of-stake acting as the underlying consensus is an attempt to address such concerns but there is much debate over how effective proof-of-stake will be.

The jury is still out on whether the proof-of-stake can provide the same security assurances as proof-of-work.

Nonetheless, the first phase of what will be a multi-step transition to Ethereum 2.0 is on track to take place in July. 

The analysis by BitMEX Research concluded that “Ethereum 2.0 is exceptionally complicated” but “the potential rewards are considerable if it does succeed”. 

Central Banks Push Forward With Blockchain Technology

During the week, Cambodia launched a pilot blockchain network aimed at reducing the usage of the US Dollar and encouraging transactions within the local fiat currency.

According to the assistant governor of the National Bank, Serey Chea, 90% of payments within Cambodia are transacted in USD.

Recent devaluations of Asian, South American, and CIS domestic currencies against the USD may be spurring more citizens within these countries to transact in the stronger dollar.

Twelve banks are currently connected to the network but Chea foresees all financial services providers in the country adopting the network.

The network can also be used for cross-border transactions with Malaysia where over 30 thousand Cambodians are reported to be working. 

Cambodians working in Malaysia sending funds back home are currently subject to high fees up to 30% of the transaction.

Cambodia is not the only country pushing forward with distributed ledger technology (DLT).

Recent months have demonstrated that Chinese authorities are serious about implementing blockchain technology both domestically and on a global scale.

China recently launched its Blockchain Service Network (BSN) with over 100 nodes procuring the infrastructure including China UnionPay, China Mobile, and Beijing Red Date Technology Company.

Any entity can apply to run a node but the approval process essentially means that the network will be run by Chinese State entities.

Seven nodes are currently based outside of China in cities including Paris, Sydney, and Singapore.

The motivation behind launching BSN is to lower the costs of deploying blockchain applications and to establish China as a leader in emerging technology.

The BSN intends to be an infrastructure that can integrate with other protocols and allow entities globally to build decentralized applications. 

A recent report has revealed that major Chinese entities have already been experimenting with building blockchain applications.

China has also been pushing forward with innovation on the digital currency front.

The Chinese central bank has been working on a digital currency known as DCEP (digital currency electronic payment).

While there is no official document detailing DCEP, analysis of public statements relating to its implementation suggest that DCEP is intended to replace the Chinese M0 money supply. 

The digital currency will be backed 1:1 with the Renminbi deposits and has recently rolled into its test phase where it will be used by workers in Suzhou.

The test phase is expected to last roughly 6-12 months.

Information related to theDCEP technology has set high expectations with the network reported to facilitate double-offline payments where a transaction can be processed even in the case that both the payer and recipient are offline.

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Birds Eye Crypto View;

  • J.K. Rowling, Harry Potter author, askedTwitter to explain bitcoin to her. All the big whales on Crypto Twitter jumped into the thread to offer various explanations and summaries to the legendary fantasy writer.

  • Jared Tate, the Founder of DigiByte, announced that he will be stepping aside from day-to-day operations due to the “Greed and rampant pillaging” of the cryptocurrency industry.

  • Crypto ransomware group doubles ransomto $42 million threatening to expose Trump.

  • Bitso, a Mexican crypto exchange, has joined forces with the crowdfunding platform Donadorato launch a crypto-based donation system to help fight the ongoing pandemic.

  • John McAfee´s Ghost cryptocurrency whitepaper debutson Twitter. Ghost focuses on individuals privacy.

  • Sydney police have arrested an Australian woman for allegedly running a crime syndicate using Bitcoin to launder more than $3.23 million in three years.

  • Facebook´s Libra Association has addedthree new members to the consortium, including one of Singapore’s two government-owned investment vehicles, Temasek. Besides Temasek, they added two crypto investment firms Paradigm and Slow Ventures

  • Reddit unveils Ethereum-based cryptocurrency "Loot Token" to encourage valuable contributors.

  • Bitwala, a German crypto bank, is now offeringinterest rates up to 4.3% with its new Bitcoin Interest Account product. Users can hold and earn interest on Bitcoin in their bank accounts.

  • Deribit has fully integratedClearLoop, the newly launched digital currency custodian platform with off-exchange settlement by London-based Cooper. The platform can settle transactions in 100 milliseconds.

  • Celo, a Silicon Valley blockchain startup, just raised$10 million for the through a token sale to investors on the CoinList platform.

  • Bitfinex partners withKoine to launch institutional-grade crypto custody service. The crypto exchange is aggressively expanding its offerings.

  • Telegram has shut downits TON cryptocurrency project. Founder Pavel Durov explains that a US court has stopped his TON project and prevented the gram cryptocurrency from being distributed to investors, not just in the US but globally.

  • Binance is cementingits presence in Indonesia, announcing an investment in a major domestic regulated exchange Tokocrypto on May 12.

  • RAKBank, based in the United Arab Emirates, is expanding its quick cross-border payment routes to the Bangladesh corridor using Ripple's blockchain technology.

  • BitcoinHD, a Singaporean blockchain project claims to have submitted the first SEC-approved security token offeringfor prospective listing on major U.S. exchange Coinbase.

  • Gibraltar, a pioneer of blockchain-friendly regulations, will introduce a new regulatory principle for the DLT sector addressing market manipulation risks in the coming months.

  • DBS Bank, a Singapore-based multinational banking firm has become the first bank to join the blockchain trade-finance network Contour.

  • Vietnam´s Authorities are lookingto establish a crypto research groupto better govern developments on digital currencies and related assets in the country.

  • Coinme has garnered more than $5 million in funding through a new round led by Pantera Capital. Funds will be used to increase its cryptocurrency ATM and kiosk network across the US.

  • The South Korean blockchain space is seeing a steady streamof platforms specialized in trading for unlisted stocks, following on from a major offering from state-backed financial IT firm Koscom last year.

  • Lazarus Group, the infamous hacking organization, is stepping up its effortsto steal cryptocurrencies. The group is using the current global economic difficulties prompted by the COVID-19 pandemic to increase its profits from cybercrime activities.

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