Know & go
- A closer look: Last week, Microsoft unveiled a decentralized identity project it’s been working on in collaboration with W3C and members of the Digital Identity Foundation. We provide a closer look into this project named ION in our recap this week.
- Three things to know: (1) Bitfinex launched its IEO platform, called Tokinex, and announced the first token offering (2) CME Group recorded a new high for bitcoin futures contracts purchased, with May shaping up to be its “strongest month ever” (3) Grayscale received approval from FINRA to offer shares in its Ethereum Trust to individual investors.
- Market snapshot: Total crypto market capitalization is around $240.4 billion at press time (up 33% w/w). BTC is trading at $8153 (up 12% w/w), ETH is at $254 (up 6.9% w/w). BVOL (the rolling 30-day annualized Bitcoin volatility as calculated by BitMEX) is 79.2%, up slightly from last week. (5/24 12:15PM ET)
Weekly market snapshot
A closer look: Shield your ID with DID
“Each of us needs a digital identity we own, one which securely and privately stores all elements of our digital identity. This self-owned identity must be easy to use and give us complete control over how our identity data is accessed and used.” — Ankur Patel, Principal PM, Microsoft Identity Division
Last week, Microsoft unveiled a Sidetree-based DID network called ION (Identity Overlay Network) to kick off NY Blockchain Week. ION is based on open standards created in collaboration with members of the Decentralized Identity Foundation (DIF) and W3C. DIF was created in May 2017 to address the fragmented efforts in decentralized identity. Members of DIF include Microsoft (also a founding member), IBM, Hyperledger, IDEO, R3 and many others. Later in 2017, the organization started more actively discussing how to scale decentralized identifier (DID) systems globally.
Personal identification information is becoming increasingly more, if not fully, digital, public, and out of our control. Unfortunately, there are limited options for securing or protecting this information as it’s needed to access and engage with most devices, applications and digital services. As a result, we have become more and more susceptible and subject to breaches of this sensitive information. Simultaneously, the onus on developers and their companies of handling this sensitive information has transitioned from being not only an asset, but also a liability due to an increasingly stringent regulatory environment, as Vitalik Buterin highlights in his recent post titled Control as Liability. “What this trend in regulation does, however, is that it gives a big nudge in favor of those applications that are willing to take the centralization-minimizing, user-sovereignty-maximizing “can’t be evil” route.” And one potential solution that could limit the risk of liability and facilitate the transition to greater sovereignty is the adoption of decentralized digital identity.
Decentralized identity systems can be built directly on a public blockchain or on layer two protocols such as sidechains or state channels built atop the base layer. The advantage of building an identity system above the base layer is that layer two allows for significantly higher throughput, and operating at scale is a critical component for a network that may be handling billions of identities. Advancements in and acceptance of layer two solutions led DIF to reveal a layer two, blockchain agnostic solution called Sidetree protocol in February 2019.
Sidetree is not a DID network in itself, but it can be deployed to public blockchains like Bitcoin and Ethereum to create one. Microsoft is initially deploying Sidetree on Bitcoin, but as Sidetree is chain agnostic, there could be support for other chains in the future. For example, Transmute Industries and members of ConsenSys are deploying the protocol to create a layer two DID network on Ethereum.
The key components of Sidetree protocol include the Sidetree core module that monitors the underlying blockchain for relevant transactions, a content addressable storage (CAS) protocol like IPFS that stores data off-chain to limit the on-chain burden and allows for transaction propagation across nodes, and the chain-specific adapter – code that allows for the reading and writing of DID operations to the underlying blockchain.
What is the Identity Overlay Network (ION)?
ION is an open-source network based on the Sidetree protocol that can be used to cement and maintain ownership rights over DIDs by writing the operations to a secure and immutable blockchain like Bitcoin. Microsoft is designing ION to be globally scalable “while inheriting and preserving the attributes of decentralization present in the Bitcoin blockchain.” As a second layer, ION is not limited by the throughput constraints native to most layer one blockchains like Bitcoin (~7 transactions per second) and Ethereum (~15 transactions per second). Microsoft claims that ION is able to process transactions at scale “with zero to minimal consensus requirements beyond the points of interaction” with the base layer, as the network does not have a secondary form of consensus. This could create a viable environment for decentralized identity systems without having to trade off throughput and data validity.
While ION transactions are free to the end user, ION nodes anchoring transactions to the Bitcoin blockchain will be required to pay transaction fees. Nodes could pass these fees on to the end user, but as ION nodes will anchor transactions in batches of operations, the cost per transaction will be minimized. For example, if 30,000 operations are batched into a single transaction, even at a $10 transaction fee, users would only be charged $0.0003 per operation – which is miniscule relative to the value provided by DIDs. However, Daniel Buchner, Senior PM leading decentralized identity efforts at Microsoft, added that the company may process and anchor batches from its own node at no cost to the user since the entire procedure is nothing more than a “rounding error” to a company like Microsoft. Other companies that are interested in running ION nodes include Casa, Equinix, Learning Machine, Civic, and Cloudflare.
What is a DID?
DID stands for decentralized identifier. DIDs are expected to be unalterable and outside of the influence of anyone other than the owner. An owner can have multiple DIDs for different purposes.
A DID is two things: a unique identifier and an associated DID Document. The unique identifier can be considered as the unique ID for looking up a DID document. A DID Document is an object stored off-chain so that it can be easily looked up. DID Documents must include a DID for reference so the user can locate and validate ownership. It is important to note DID Documents do not contain any personally identifiable information, or PII, (e.g. name, address, phone number). Rather, they contain pieces of information like what the DID can authenticate or services where the DID can be used. Personal user information is exchanged through the process of “verifiable claims” — a cryptographically-secure procedure.
Verifiable claims have three components – the subject or the user, the issuer of the claim and the claim being made. The user may leverage the verifiable claims process to prove to a verifier that they are, for example, over 21 years old without having to share their birthday.
How are DIDs created and maintained on ION?
In order to create an ID on ION, a user signs a “DID creation document” with their private key and sends it to a node on the ION network that “then archives the metadata (without accessing the data itself) as a DID document for other nodes to reference.” The originating node finalizes the creation and ownership of the ID by anchoring a batch of DID operations to the Bitcoin blockchain via an on-chain transaction. When users want to make changes to the state of their DID, the node updates the corresponding DID document. ION nodes monitor the blockchain to identify transactions linked to the network, fetch relevant transactions, reference the DID documents in the originating nodes and sync with the latest state of the IDs.
ION is currently live on the Bitcoin testnet. It must undergo more testing and the implementation of additional features prior to mainnet release — anticipated for later this year. In the meantime, savvy developers can stand up a node and help Microsoft and collaborators debug the network. Microsoft also intends to transition ION from its technical state to a more simple and intuitive interface such as an app-based model, where users can more easily create and manage their DIDs and select what information to share.
The decision of a large tech incumbent to build on a public, permissionless blockchain like Bitcoin over private and permissioned networks reinforces the power and superiority of public blockchain technology. However, ION and the whole decentralized identity movement are still in the early stages and have to overcome their fair share of challenges to achieve adoption. Major challenges include:
- Pushback from tech incumbents: Companies (like Facebook or Google) whose business models are reliant on owning and controlling user identity and data may be averse to open source technology that challenges their current business model and moat. Notably, while Facebook has been invited to join the efforts to create an interoperable DID network, it has declined to engage. Lack of buy-in from major tech companies could impede users from seeing the value in creating and managing a decentralized ID.
- Fragmentation and lack of interoperability between DID systems: This is a problem today, but one that Microsoft recognized when it chose to develop open standards with W3C and members of DIF and is trying to address. Further, while there may be multiple DID efforts, the fact that ION has the backing of Microsoft and other (for lack of a better word) trusted incumbents increases its chances of widespread adoption and network effects.
- UX hurdles: DID systems face similar user experience hurdles as other cryptocurrency counterparts — namely wallet management and key recovery mechanisms. Storing and managing digital assets and wallet keys is a complex task, and lost keys may render any associated assets, or in this case DIDs, irrecoverable. Microsoft will need to develop the necessary tooling to support a friendly user wallet and DID management experience. However, as ION is open-source, other companies and developers can help expand on the available ION tools beyond Microsoft’s efforts, possibly accelerating DID management to a better user experience. ION supporters could also build off of previous efforts — i.e. Blockstream’s GreenWallet and Casa’s Keymaster — to improve digital wallet functionality.
- Lack of interest from end users who, frankly, don’t care about self-sovereign identity and privacy: When it comes to user adoption, the challenge will be creating an experience that drives people to want to change their behavior when habit is so deeply entrenched and convenience is more coveted that privacy.
As with almost all projects in the crypto space at the moment, there are many hurdles to overcome. But it’s exciting to see incumbents embrace the power of collaboration over competition and walled gardens, empower and act in the interest of end users as well as adopt new business models that can be enabled by open-source technology. The choice of Microsoft and its partners to build and devote resources to a permissionless, interoperable, decentralized project is a testament to open source, and the choice to build on Bitcoin reinforces the narrative that Bitcoin is an immutable, tamper resistant settlement layer that cannot be controlled or taken over by any entity or group of entities. Further, it legitimizes Bitcoin in the minds of many as an important technology that bears a unique feature set built for a future based on digital privacy.
Further reading: Microsoft ION Messari board
Thanks to Rocco for his feedback.
In other news
- Bitfinex launched its initial exchange offering (IEO) platform, called Tokinex, and announced the first token (Amples) to be supported by the service. Bitfinex is the latest crypto exchange to pursue an IEO platform, joining Binance, Kucoin, OKEx, and Bittrex, among others, which have led to a recent resurgence in token sale investor interest. The launch comes shortly after the firm released its exchange token, LEO — the token distributed in Bitfinex’s $1 billion token sale that concluded last week. Source.
- Craig Wright, the self-proclaimed individual behind the pseudonym Satoshi Nakamoto, filed a copyright registration for the Bitcoin whitepaper and the original 2009 Bitcoin code. Registering a copyright itself does not imply ownership, and as Coin Center Executive Director Jerry Brito points out, the “Copyright Office does not investigate the validity of the claim.” He carries on to say that there is no official way to challenge the registration. Anyone can register anything and often do in an attempt to prepare for lawsuits pertaining to item or idea ownership. Source.
- Block.one, the cryptocurrency startup behind the EOS blockchain, issued a share buyback that will return as much as 6,500% to early investors — a list that includes Peter Thiel, Alan Howard, and Louis Bacon. The company stands out because it raised $4.1 billion after its year long EOS token sale that concluded last June. According to a recent shareholder update, Block.one assets now total ~$3 billion with $2.2 million in U.S. government bonds and $500 million in cryptocurrency (which has reportedly halved in value since a year ago). Source.
- The CME Group has recorded a new high for bitcoin futures contracts purchased, with May shaping up to be its “strongest month ever” in terms of daily trading volume. As reported by The Block, average daily trading volume reached nearly 14,000 contracts in May so far, marking an over 1,200% growth since CME launched bitcoin futures in December 2017. The number of accounts trading bitcoin futures also increased over the last month to a new record of 2,500. Source.
- Crypto lending startup BlockFi is cutting interest rates on ETH deposits from 6.2% to 3.25% citing a stagnant ETH lending market. By comparison, BTC deposits will see a slight increase from their current 6.2% interest rates. According to BlockFi, the BTC lending marking has continued to develop into a “vibrant and growing field.” Source.
- Grayscale Investments has received approval from the Financial Industry Regulatory Authority (FINRA) to offer shares in its Ethereum Trust to individual investors. Each share is “equivalent to about one-tenth of an ether.” The Grayscale Ethereum Trust — which will trade as ETHE — initially launched in December 2017 and was only available to accredited investors. Source.
- AT&T announced it will now be able to accept payments through cryptocurrency payments processor BitPay, enabling customers to pay their mobile service bills in crypto. According to AT&T VP Keven McDorman, the mobile carrier has customers who use cryptocurrency and is “always looking for ways to improve and expand [its] services.” Source.
- According to Reuters, some of the world’s largest banks — including UBS, Santander, Credit Suisse, and Barclays — are planning to invest ~$50 million in Fnality. The newly funded entity will manage the development of a blockchain-based digital cash system featuring a utility settlement coin that banks could use to settle transactions. The coin would be an equivalent to central bank issued currencies like the dollar or euro. Although a deal has yet to be finalized, the project could launch sometime in 2020. Source.
- Crypto exchange Kraken has partnered with investment platform Bnk to the Future to offer preferred shares to a wider audience of accredited investors. The company recently sent out an email to registered users announcing shares are available for purchase at a minimum investment of $1,000 until June 20. The move comes after Kraken offered select investors the opportunity to buy company shares (minimum investment of $100k) at a $4 billion valuation late last year. Source.
- The Ethereum Foundation issued an update stating it plans to spend $30 million on critical projects in the Ethereum ecosystem. Almost two-thirds of this spending budget will be dedicated to Ethereum 2.0 specific projects — specifically client development, state channels and plasma, formal verification, and EWASM. At least $3 million will be put towards developer education, community event organization, and additional non-infrastructural improvements. Source.
- San Francisco-based Unstoppable Domains raised a $4 million Series A led by Draper Associates and Boost VC (founded and managed by Adam Draper). Additional funding came in the form of grants from the Ethereum and Zilliqa Foundations. The startup is looking to leverage blockchains to register web domains, making it so websites and associated content cannot be censored or taken down. The company also says registering a blockchain domain will make it easier to send and receive crypto payments as alphanumeric addresses could be replaced by wallet domains. Source.
Global regulatory roundup
- The SEC has postponed making a decision on the VanEck/SolidX (in collaboration with Cboe) Bitcoin exchange traded fund (ETF). The government agency is seeking more public comments prior to seeking further decisions. As a result, the SEC has now turned down at least ten proposed Bitcoin ETFs, including the Winklevoss proposal last year and the Bitwise proposal a few months ago. Source.
- The U.S. Internal Revenue Service (IRS) announced it is working on new tax guidance for cryptocurrency. This would be the first such effort made by the government agency since 2014. According to the letter, the guidance will focus on “acceptable methods for calculating cost basis, acceptable methods of cost basis assignment, and the tax treatment of forks.” Source.
- Binance CEO Changpeng Zhao (CZ) is suing Sequoia Capital’s China unit claiming the VC investor’s previous lawsuit against Binance hurt CZ’s reputation and prevented Binance from raising money at “favorable valuations.” Sequoia previously obtained an injunction order against CZ in December 2017, claiming he breached an exclusivity agreement. The move prevented Binance from raising outside funds for three months at a time when cryptocurrency and crypto-related company valuations were notably high. The original charges were dismissed in December. Source.
What we’re reading
- The Past & Future of Blockchain: Where we’re going and why by Spencer Bogart
- ELI5 Explanation of the Ethereum 2.0 Testnet by Mohamed Fouda
- The Unbundling of Ethereum by Kyle Samani
- The Case for Better Data in Crypto (Slides from CBUS 2019 Conference) by Nic Carter
- Bitcoin: an Accounting Revolution by Murad Mahmudov and @ImacallyouJawdy
- Lightning Network Consensus is a Marketplace and That’s Okay! By John Carvalho
- Decentralized Lending: An Overview by Antonio Juliano
- MetaMask Metrics: a first look by Bobby Dresser
What we’re listening to
- What Bitcoin Did: A Bitcoin Reality Check in Venezuela with Jill Carlson, Alejandro Machado & Jamaal Montasser
- Click Here to Apply with Tony Sheng: Kyle Samani teaches me about starting and operating a crypto hedge fund
- Unchained: How to Trade on Crypto Exchanges Without Fear of Hacks
- Staked Podcast: Investing in Governance with Jake Brukhman
- The Blockcrunch: Can Crypto Change How We Run Organizations? – Luis Cuende (Aragon)
- Zero Knowledge: Diving into Cosmos with Sunny
- Off the Chain: The Bitcoin Sign Guy: The Legend of the Sign
- Blockchain Insider: Do the crime, do the time
- Base Layer: Alexander Skidanov (NEAR)
- Citizen Bitcoin: Gigi: 21 Lessons from Down the Bitcoin Rabbit Hole
Circle in the news
- Circle CEO Jeremy Allaire and the Circle team released a pair of blog posts detailing the shortcomings of current U.S. crypto policies and advocating for a new clear, forward looking regulatory framework regarding crypto assets.
- As stated in the latest Diar report, USDC trading volumes have increased by 435% since the start of 2019, including a 130% m/m jump in May (as of 5/20).
- USDC is now supported by the Dharma, dy/dx and Compound open finance lending platforms.
- Last Friday, Circle released the latest attestation report on the USD reserves backing USDC issued by an independent accounting firm.
Where we’ll be in June
- Money 20/20 Europe, Amsterdam, 6/3-5
- CB Insights: Future of Fintech, New York, 6/11-13
- Fortune Brainstorm Conference, Montauk, NY, 6/19
- MIT Professional Ed – Applied Blockchain Course, Cambridge, MA, 6/24-28