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Jun 12 2021

Is there a right way to regulate crypto? Yes, and this is how

Cryptocurrency is becoming increasingly mainstream. Between the entrance en masse of traditional financial institutions — from investment funds, to banks, to insurance companies — to the multitrillion-dollar market capitalization, crypto is truly unignorable.

As such, it is also increasingly on the radar of regulators around the world, particularly in the United States. How can this industry balance stability and investor protection on the one hand with the promotion and support of innovation on the other?

There are three paths to regulating crypto. The first is to not regulate it as much, but given the incredible growth and increasing overlap with traditional financial markets, it is unlikely that regulators will find that path tenable.

Another option is to regulate the industry from on high, without deep engagement or consultation from good-faith companies in the crypto space. This way could be perilous and could sacrifice the powerful financial innovation of blockchain that could be harnessed for good.

The third — and we believe the only truly viable option — is regulation that involves an ongoing partnership with the industry itself. Many in the crypto industry already see this sort of proactive, innovation-oriented regulation as something that will greatly advance the industry.

Bitcoin regulation in historical context

Bitcoin (BTC) was born over a decade ago as a peaceful protest against the expansive monetary policy of the great financial crisis of 2008. What started as a niche industry for cyberpunks, libertarians and, quite frankly, people wanting to buy weed more conveniently and anonymously has morphed into a concentration of mind power, with 46 million Americans owning Bitcoin. The sheer scale of crypto as an asset class, with a market capitalization peaking north of $2 trillion, puts it on the radar of every lawmaker and regulatory agency in the world. To expect crypto to march onward in the unsupervised manner of its early years is simply unrealistic. Mainstream asset classes cannot go unnoticed, and the influx of new investors needs protecting.

As entrepreneurs, our concern about regulation does nt stem from a desire to run amok. If history is any guide, too often the regulation on innovative businesses is imposed by legislators who are, quite understandably, not into the intricate details of industry-native processes and have little or no practical experience. This gap between innovators and regulators opened up decades ago with the massive expansion of internet-based companies, and has resulted time and again in unnecessarily burdensome rules that do little to serve their purported purpose. The alternative is of no benefit to advanced jurisdictions because nimble companies will usually seek offshore tax havens with little regulatory friction and lax rules, which ultimately hits state coffers, especially in post-COVID-19 remote-work-adjusted societies. The reality is: Legislation lags behind innovation, which occurs at a significant pace.

The matter gets even more complicated when one considers the decentralized finance (DeFi) space. These solutions, colloquially referred to as “noncustodial” or “unhosted” — meaning there is not a centralized third-party intermediary, but the intermediary is the software itself — present challenges when it comes to putting them into existing rules, especially in financial intermediation and securities laws.

CeFi as bridge between DeFi and regulation

Our hypothesis is that the most productive legislation will come from regulators working with good-faith actors in the crypto space who wish to actively engage with them. What does that engagement look like? One part of it is taking proactive steps to work within the existing regulatory frameworks in order to better identify where gaps and friction remain.

To take the example of DeFi above, while it presents new regulatory challenges, there are ways to ease this burden initially. Centralized finance (CeFi) companies can be the interim solution, serving as a bridge between the traditional financial sector and the regulatory framework that encapsulates them on one hand and the decentralized finance space on the other. These companies very well understand the sector from both the infrastructure point of view and the needs of their users.

Until we reach the conclusion that the current regulatory framework does not apply for blockchain companies or the sector gets specific legislation, CeFi businesses have been on a license acquisition crusade, culminating in a significant number of licenses from regulators across the globe, with more pending authorizations in the pipeline. This means that they are perfectly placed to allow DeFi projects to piggyback on our infrastructure, as they are just starting to consider allocating funds to legal expenses and lobbyism.

Also, they can rely on established Know Your Customer (KYC)/Anti-Money Laundering (AML) procedures prescribed by the Financial Action Task Force (FATF), as well as fiat on- and off-ramps to broaden their offering and bring it to their users in a manner that is compliant with the incumbent rules.

Key concerns of regulators and how the industry can help

If one part of being an engaged partner to regulators is seeking to work within existing frameworks first, another part is having a perspective on key areas of legitimate concern for regulators, so they can work with industry rather than against it to develop solutions.

Crypto is volatile. Despite being in a downward trend, volatility is here to stay. As a disciple of Benoit Mandelbrot and a student of capital markets, let me tell you: Volatility tends to cluster — i.e., volatility begets more volatility. This is what attracts many people to the space — the promise of multiple X on their initial capital. Of course, volatility works both ways. Yes, Bitcoin can go up 15x in 12 months, but it can also undergo corrections of 30% in a matter of hours. Such rapid, severe corrections occur in every bull cycle. However, it just so happens that those corrections usually precede larger legs up, as the March 2020 crash showed.

The more recent correction of May, while not as severe, was important because it showed the remarkable resilience of the DeFi space. There were cascades of liquidations, yet the protocols stood their ground (for the most part) and performed as designed even as Bitcoin slumped 35% and Ether (ETH) close to 40%, futures traded in severe backwardation, and implied volatility in the options market surpassed 250%. In my former life, I was a trader in equities futures, and I have vivid memories of the S&P 500 flash crash of May 6, 2010, where the indexes lost 10% within minutes, only to retrace those losses a short period after. It was anything but orderly as the most advanced, sophisticated, regulated and monitored markets experienced total mayhem. It took five months for the Securities and Exchange Commission and CFTC to gain a preliminary understanding of what actually happened.

It is also worth noting that despite the May correction, Bitcoin is up 27.26% in 2021 and has surged 284.58% over the past 12 months. Meanwhile, the S&P 500 has added 11.95% year to date and 34.63% over the past year. Gold is flat for the year and has gained 11% in the past 12 months. In short, much of the volatility concerns around Bitcoin have to do with one’s time scale — and moreover, the investment strategies one is using.

Within this overall framework of volatility, there is one aspect worth discussing further: leverage.

As the best-performing asset of the past decade, Bitcoin is unique in many aspects, and investing requires a certain mindset and the right time horizon. Day trading any asset — but even more so, cryptocurrencies — is a one-way ticket to obliterating your trading account. 100x, 135x and 500x leverage means you get liquidated when the underlying asset moves less than 1%, which in crypto might mean seconds. Here’s a great thread on volatility and cascades of liquidations. Spoiler alert: Although objective and informative, it comes from someone who profits enormously from excessive leverage.

Bitcoin and other crypto assets are a great addition to any well-diversified portfolio and should be bought and holded for extensive periods of time during which, history has shown, Bitcoin has outperformed every other asset, except perhaps the U.S. dollar against the Zimbabwe dollar. Should you put your kid’’ college funds in crypto after it has 15x-ed in 12 months? Probably not. And definitely not with any sort of leverage, as even 2x leverage can get you liquidated in a March 2020 sort of correction, which saw intraday prices dip more than 50%.

At our company, we have little tolerance for leverage and have been advising our extensive customer base to be cautious since at least January. A client depositing $100,000 worth of Bitcoin gets an instant crypto credit line of $50,000 with us. Compare that to a trading platform that allows traders to enter trades with 100x leverage. That means, in order to buy a position of $100,000 in BTC, the margin required is $1,000. The rest of the $99,000 is borrowed at rates that are lucrative for the lender. Additionally, exchanges and prop shops profile their clients — they are quick to identify those high-rollers engaging in 100x levered trades, then they gladly take the other side of the trade, as everything these clients deposit can instantly be booked as profit.

In our opinion, leverage in the crypto space would be a reasonable place for regulators to look when analyzing who is focused on investor protection. The legitimate purpose of protecting investors in nascent industries is a difficult balancing act, as it sometimes borders on the stifling of innovation. But the reverse is true as well: “Innovation” cannot be used as an excuse for rapacious behavior because 100x leverage is not innovation. Forex got it pre-Satoshi, and no, it does not contribute to the betterment of society.

Companies need to work with their respective national bodies to ensure the right type of investor protection legislation is implemented. This approach is far more constructive than the alternative: stubbornly insisting that the current regulatory framework is obsolete and doesn’t capture the cutting edge of crypto and fintech.

Crypto and money laundering

On money laundering, most crypto industry participants have the same feeling: On one hand, we are happy to play by the rules. On the other, crypto has been unfairly maligned when the massively preferred currency of money laundering has been and remains the U.S. dollar.

Any widely accepted currency is prone to money laundering, and the fact remains that the incumbent financial system and the U.S. dollar are the preferred means for illicit purposes. It is not just about the medium of exchange itself. Do the rewards of aiding the finance of illicit activities outweigh the repercussions? Just type in your search engine the name of a major bank plus money laundering and you will see how large the problem is. Then try to find out how many of the complaints were civil vs. criminal, and what percentage ended up with settlements with “no admission of guilt.” As long as a slap on the wrist and a few percentage points of the gains from abetting illicit activities remains the punishment, there is little to no hope that money laundering will suffer any significant blow.

There is no data to support that Bitcoin plays a meaningful role in the transnational money laundering scene. Crypto is also far from being as anonymous as people may think. The fact that a system can be misused does not mean the system should be outlawed; otherwise, we would have long parted ways with banking, cash, fiat currencies, the internet and just about any manifestation of human ingenuity. Yet, we hear the concerns, and we are making sure that in the history books, they will be nothing more than temporary FUD — fear, uncertainty and doubt.

There is another important point on money laundering concerns. We use plenty of tools — such as the sophisticated algorithms of Chainalysis, CypherTrace and Coinfirm — to trace the origins of cryptocurrencies and show a detailed flow of funds. This allows us to draw definitive conclusions on the status of a particular crypto deposit and apply the risk-based AML approach of the FATF. Sure, there are obfuscation tools and cross-chain techniques that make tracking more difficult, but nothing more than what already exists in the banking sector — cross border transfer, offshore jurisdictions, etc.

As someone who has a significant portion of their net worth derived from cryptocurrencies, let me say: Getting fiat currencies from the sale of crypto into the banking system is a Herculean task, so it is the furthest thing from a “money launderer’s dream.” Top tier-one banks require extensive proof of funds from early Bitcoin investors, including, but not limited to, the cryptographically signed messages of the earliest wallets. So, I am not sure how a darknet drug dealer would transfer crypto wealth into the U.S. dollar or euro in any meaningful amounts. Their best hope is to stay within crypto and pay for goods and services with crypto. Sounds similar to the method that the drug cartels have been using since before Pablo Escobar’s days.

Why protect crypto? It’s the only truly free market

In the crypto markets, regulators have something truly unique. The cryptomarket is the only free market, where there is no central bank to engage in interventionist policies, to control interest rates and the money supply. There is no lender of last resort, which in traditional markets has created some moral hazard and has encouraged aggressive long positions. There is no Fed put, no Plunge Protection Team, no bailouts.

In crypto, the market forces of supply and demand and of leveraging and deleveraging get to play out without an arbiter. While this can be dramatic at times, it adds to the antifragility of the space and makes it quick to adapt to new circumstances. While painful for novice investors who come in late to the party and usually with leverage, none of the corrections in crypto cost any government taxpayer money.

This means that crypto cannot be a systemic risk and no company within it can ever be “too big to fail,” which is a net positive for the advancement of innovation. Unlike traditional finance, in crypto, it’s those that develop good products and services that survive.

If crypto has been in a bubble in the past years — and it might very well be — equities have been in a bubbly state for the better part of the last decade. Tesla’s normalized price-to-earnings ratio is 676.35, and as Lyn Alden put it:

“The S&P 500 is arguably the second most expensive it has ever been in absolute terms, which doesn’t bode well for long-term returns.”

But the bubble in crypto should be viewed as a byproduct of the aggressive monetary policy by the world’s central banks and fears of 1970s type inflation, so eloquently said by Paul Tudor Jones, the guy who put “hedge” in the term “hedge funds.”

The future of regulation

There is no doubt that the next Google, Amazon, Facebook or Apple will come out of the crypto space. But for the crypto market to sustain and surpass its current market capitalization of $2 trillion, it needs to continue its path to maturity.

This is why as innovators, but also as licensed institutions, we welcome a constructive dialogue with all key stakeholders of the regulatory process that will ideally translate into clear rules around the way business ought to be structured. It is for the benefit of all involved — regulatory bodies, businesses and retail clients — to have clear guidance and regulatory certainty. This will lead to sustainability, innovation, security of funds, consumer protection, sound AML procedures, and ultimately, more revenue for the jurisdictions that decide to embrace crypto, echoing the United States’ embrace of the internet in the early 2000s.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Antoni Trenchev is the co-founder and managing partner of Nexo, a provider of instant crypto credit lines. He studied finance law at King’s College London and Humboldt University of Berlin. As a member of Bulgaria’s parliament, Trenchev advocated for progressive legislation to enable blockchain solutions for a variety of e-government services, most notably e-voting and the storage of databases on a distributed ledger.

Is there a right way to regulate crypto? Yes, and this is how

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Jun 05 2021

A new decade rising: 2021 has brought crypto to unparalleled heights

Challenges stimulate progress. Technology, pretty much like life itself, cannot be static. Only dynamics stimulate positive changes. Amid the collapse of the cryptocurrency market in mid-May, many retail and institutional investors began to lose faith in the bright future of cryptocurrencies in general and Bitcoin (BTC) in particular. Corporations and institutions, whales, and early adopters converged in a single impulse — the internet was overwhelmed by a wave of mistrust towards “cryptocurrency number one” as the best defensive asset, superior to gold and everything else that had been invented prior.

One needs to see the full picture here to realize what’s happening. The last time the market suffered more or less comparable and significant losses was a year ago, in March 2020. This year, the panic sell-offs caused by a series of negative events — Elon Musk’s Twitter crusade against BTC, the rumoured court case against Binance and the latest crackdown on crypto from the Chinese government — bring to mind the tremendous collapse of digital assets at the peak of many asset rates in December 2017 and the succeeding “crypto winter”.

However, many people who have little understanding of how the cryptocurrency market functions do not realize the depth of changes that the space has been through in recent years. Emotions are the worst enemy of an investor or trader in a rapidly growing digital asset ecosystem. It is worthwhile to look dispassionately at the facts and analyze the changes to understand the true value of ecosystems growing on the fertile soil of the blockchain.

The wind of change

The investment mindset has changed in recent years. Even though it continues to be dominated by a highly speculative component, there is also a practical application for the settlement. Investors switched from short-term speculations to the long game. The number of Bitcoin ATMs has doubled since 2020. This dramatic rise clearly demonstrates a growing demand for the world’s largest crypto assets. From a niche, the cryptocurrency industry has evolved into a multi-billion dollar industry.

Stablecoins — tokens pegged to their corresponding fiat asset such as the U.S. dollar, euro, etc. — have gained significant weight in 2020-2021. With the emergence of new platforms known as decentralized finance, or DeFi, protocols, opportunities appeared to offer profit without risks of the principal asset, for example. Such platforms are nothing more than distributed programs that provide clearing, custody and settlement services. Every year they take a larger piece of the pie from traditional financial institutions. The surge in activity in the environment of decentralized trading platforms also occurred because they do not have the same common vulnerabilities as centralized trading platforms in their infrastructure.

Decentralized exchanges outperform centralized exchanges in terms of trading volume, demonstrating a thousandfold growth in trading volumes in the last year alone. Interfaces for interacting with DeFi can be created by any programmer anywhere globally, and the essence of this interaction is the development of a financial ecosystem running on the global blockchain. By now, DeFi’s market capitalization has reached over $100 billion, and this trend will undoubtedly continue soon.

Speaking of examples, we can outline that even large companies like Deutsche Telekom have abandoned private blockchains and are studying public infrastructure, supporting nodes in networks such as Ethereum, Solana, Algorand, Celo, etc. This fact suggests that the world of decentralized finance is gaining ground in the global market for clearing, custody and settlement services — just as Bitcoin had previously secured the status of a shielding asset, removing gold from its throne.

We observe that corporate demand accelerated when real rates on dollar deposits turned negative (central bank rate minus inflation). Inflationary expectations have intensified over the past year, fueling demand for long-term capital preservation. Today, Bitcoin is successfully winning the hearts and minds of not only speculators and hedge funds who, realizing the inevitability of the devaluation of dollar balances, vote with their money and transfer some of the treasury liquidity into digital assets.

There are still challenges

Meanwhile, divergence in the regulatory approach continues. Some jurisdictions have created bills, but they have no practical application. At the same time, other countries are just at the beginning of the road to create regulations, and some banally prohibit the use of cryptocurrencies — the recent example of China being a case in point.

In the United States, for example, banks were allowed to provide custody services for cryptocurrency assets. The emerging markets of such countries as China, Russia and India stand apart, rushing from fire to fire, remaining uncertain and trying to propagandize something at the state level, offering potential investors the so-called “technological candy.” Unfortunately, in practice, all projects that reach the world level often move to other jurisdictions — which is very sad.

The future of the cryptocurrency sector is undoubtedly optimistic. Any period of “cleansing” and dumping of price ballasts, correction and decline, should be perceived as another round of evolution. In the near future, we should expect that investors will switch their attention from meticulous market monitoring, hype regarding coins (which does not carry any value to the community) and the expectation of new price records to the construction of products in developing areas. The cryptocurrency sphere is expecting the emergence of more convenient, reliable and accessible interfaces for mainstream investors interacting with the digital asset market, as well as 3.0 generation blockchains — for which fierce competition will erupt in the next few years.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Gregory Klumov is a stablecoin expert whose insights and opinions appear regularly in numerous international publications. He is the founder and CEO of Stasis — a technology provider that issues the most widely used euro-backed stablecoins with a high transparency standard in the digital-asset industry.

A new decade rising: 2021 has brought crypto to unparalleled heights

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Jun 01 2021

Fraudio, a Cloud Native, AI enabled Payment Fraud Detection Solution, Secures $3.3M via Seed Round

Fraudio, a startup founded by experts from the Dutch payment ecosystem, has reportedly secured $3.3 million in capital via a seed round.

The Fraudio team claims that they’ve spent two years developing a Cloud native, centralized AI and machine learning payment fraud detection solution for the payments ecosystem. The solution can be used by payment-service-providers (PSPs), acquirers, issuers, processors, card schemes and large merchants that operate their own checkout or gateway.

The Fraudio team writes in a blog post that their aim is to provide a modern replacement to the first-generation “rules-based” systems or second-generation integration-heavy fraud prediction models that are currently the market standard.

Company CEO and Co-Founder João Moura stated:

“We worked in the payment industry for many years and became so frustrated with the options available for fraud detection that we decided to build our own solution. In a blind test by the risk department at the PSP and acquirer we were at our solution effectively controlled fraud while causing 40% fewer false positives than one of the top vendors in the world. This was a vendor that charged six figures just for a proof of concept and then took half a year to implement it. We thought, hang on, why should companies make that kind of commitment before knowing if it’s any good? There must be a better way.”

Fraudio says that it aims to offer the latest fraud detection tools by leveraging proprietary and patented AI tech with a robust network effect (supported by its vast dataset of transactions and real-time signals).

Fraudio will provide products that can be accessed from a single platform. They include payment fraud detection solutions; merchant-initiated fraud detection capabilities (for PSPs and acquirers); and money laundering detection tools.

COO and Co-Founder Nathan Trousdell remarked:

“The long project timelines and the prohibitive costs of testing solutions was identified by Gartner as a major frustration in the industry. We don’t charge customers before they see value from our solution. We do this by offering what we call a proof-of-results free of charge. This allows companies to see the real results of our product in a week or less. Between that and our simple API integration we believe we are offering something really unique and compelling. Our current customers are very happy with the quick integration time and product performance. Current customers include Viva Wallet, Borgun, Novalnet, PagueloFacil and other undisclosed customers in Europe, North America, Latin America and Asia.”

A Viva Wallet representative noted that Fraudio enables them “to detect fraudulent merchants and money laundering, ensuring the safety of [their] clients against Fraud in Payments.”

Fraudio’s investment round has been announced at a time when there’s rising demand for fraud detection tools, as more merchants and consumers move online following the COVID outbreak.

Nathan added:

“More than 70% of fraud is caused by organised crime groups. These are sophisticated organisations with their own data scientists developing cutting edge AI solutions that are constantly evolving. Their industry is booming, with some reports indicating payment fraud was up over 600% year-on-year during Covid-19. The old way of doing things is just not working anymore.”

Investors in Fraudio’s round are reportedly the founders of Fintechs Stone and SaltPay, VCs BiG Start Ventures and BYND Venture Capital, as well as the founders of Viva Wallet, ComplyAdvantage and VOLT, and experts from the payments and cybersecurity sectors.

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May 23 2021

Green blockchain should work smarter, not harder

As the spotlight returns to Bitcoin (BTC), helped by some tweets by a certain mercurial celebrity, the raging debate over its energy use has once again reignited. It centers around one, seemingly clear-cut question: Does Bitcoin use too much energy?

The basic contours of the issue are clear. Bitcoin secures its network from a hostile takeover using proof-of-work (PoW), a process that expends significant quantities of electricity due to the computing power required. Every time we have this discussion, the all-too-familiar battle lines are redrawn.

Critics argue that Bitcoin’s energy use simply cannot be justified. At various stages in recent years, reports have estimated that the network uses as much electricity as entire states such as Denmark or Ireland, for instance.

On the other side of the fence, Bitcoin’s proponents contend that the network might spur the greater use of renewables. Furthermore, they point out that we are not accounting for the energy use of the alternative. We cannot gauge the relative efficiency of Bitcoin as a means to secure and exchange value unless we compare it with the total energy use of the traditional banking system. Just as we should move beyond the narrow metric of tailpipe emissions to measure the environmental impact of vehicles, Bitcoin advocates assert that we need a comprehensive audit of the environmental impact of traditional finance, including all the infrastructure, brick-and-mortar buildings, travel and hardware that support it. In addition, lurking in the background, are the other alternatives — what about consensus mechanisms such as proof-of-stake (PoS), the approach that Ethereum is transitioning to?

The standard battle lines

It is a fact, and noncontroversial, that mining technology for blockchain consumes vast amounts of energy. This is particularly stark when comparing the cost of producing and circulating currency.

Bitcoin, for instance, is estimated to consume 123.77 billion kilowatt-hours of energy annually, compared with 2.64 million kWh for cash. According to Digiconomist founder Alex de Vries, if Bitcoin became the world’s reserve currency, global energy production would need to double.

Others claim that miners will eventually gravitate to wherever energy costs are lowest, or become the green energy buyers of last resort. Whether the argument stands up over the long haul remains to be seen, given the degree of regulation in energy markets, the physical costs of relocation and the potential security implications of concentrating miners.

Framing the opportunity costs

Of all these arguments, comparing the energy use of cryptocurrencies with the traditional banking sector — or fiat, in particular — is relatively new. Comparisons with legacy payment systems, however, overlook the difference in transaction volume: While the Visa network completed over 185 billion transactions in 2019 alone, Bitcoin has facilitated 643 million since its inception. Furthermore, commercial entities like Visa are well integrated with energy markets, which are highly regulated in many countries. In the mental models where miners move en masse into new energy markets, it is highly likely that transition costs (as well as the resistance of incumbents) are being discounted. Again, these tendencies are not surprising, as cryptocurrency advocates tend to look optimistically to the future, imagining that markets work more efficiently than they actually do.

Setting aside the non-trivial, highly complicated implications of energy use for the security of blockchains, the idea that miners will follow cheaper electricity prices does not necessarily mean cleaner energy, as cheaper is often dirtier. But even more importantly, the idea that miners will eventually just switch to renewables ignores the opportunity cost of energy. According to the United States Energy Information Administration, global energy usage will grow 50% by 2050. The emergence of unforeseen computational requirements posed by smart cities or integrated supply chains, for instance, will require blockchain to be more energy efficient — all while humanity needs to keep an eye on climate goals.

So, while Bitcoin maximalists are undeterred in their belief that Bitcoin is the first best use for energy, and while proponents of Ethereum — which is moving to a different model, in part apparently due to energy use concerns — may think they have a long-term solution, the general public may not be convinced that cryptocurrency (and nonfungible tokens built on technologies like that of Ethereum) have a sustainable answer to the question: What will be best for society?

Blockchain is now receiving mainstream attention, which gives those of us in the industry a chance to restate the problem in a way that speaks to all of us. Do we think the benefits of blockchain will be worth the opportunity cost? When it comes to memecoins built on mining chains — which are fads, peaking and waning in price with popular sentiment (and new memes) — and the many scams and imitations that have popped up (to the continual embarrassment of serious projects in this space), blockchain technologists are rightfully afraid the public will decide it is not.

However, if we are discussing the benefits of new blockchain technologies that take resource use seriously and open new markets as the internet did, that is an entirely different matter. In that case, the correct comparison is not merely with the opportunity cost of staying with the status quo in finance but with the intermediated economy as a whole.

More to the issue than just mining

While the debate about the efficiency of cryptocurrency tends to be dominated by the discussion of mining, less attention is given to the alternatives. PoS protocols sidestep the need for mining by changing what bad actors stand to lose if they try to falsify transactions. While with PoW such actors could potentially lose the energy they invested, on a PoS network they would forfeit cryptocurrency staked in advance. But this solution also comes with energy considerations.

Suppose that some of these stakers are centralized exchanges: Their first incentive will be profitable trading, not monitoring the energy efficiency of the underlying blockchain. In this respect, we need to consider how information is disseminated among nodes. Mainstream blockchains typically use peer-to-peer gossip networks to communicate. Put simply, such networks pass transaction data from node to node until it is known by all participants. As a result, however, the same message may be repeatedly sent to peers who have already received it from others, wasting resources. And the protocols that assume that security and transaction volume will be able to attract a sufficiently large number of nodes to maintain accuracy in some fashion — whether they are new delegated PoS protocols, directed acyclic graphs, layer-two solutions or cross-chain bridges — are similar to PoW in their assumption that the correct transactions will be confirmed and propagated wherever the network needs that information to be.

Beyond gossip

However, if we manage to overcome the limitations of gossip networks, a whole new world opens up. For instance, nodes on Geeq blockchains use a hub-and-spoke structure to communicate, in order to transmit a minimal set of messages without defaulting to a centralized power structure. Any honest (and potentially anonymous) node may serve as a hub for one block and communicate with the nodes on that blockchain’s active node list (the nodes that happen to be on active spokes).

Unlike a gossip network, where each node sends messages (gossips) to every node around it, meaning that a particular node could receive the same message redundantly from all of its gossiping buddies, this structure results in messaging that is parsimonious, predictable and verifiable. As a result, the use of resources is lower by magnitudes compared with PoW or PoS based protocols, bringing computation, bandwidth and storage costs per transaction as low as a hundredth of a cent, making micropayments feasible.

Furthermore, future blockchain architecture will need to be multichain and flexible, providing a set of parameters that can be adjusted according to the specific requirements — such as speed, transaction throughput or security — of a given use case. A more lightweight, “smarter” blockchain would certainly have a smaller environmental footprint, but it would also be easier to adopt, and could even provide the underlying infrastructure for more sustainable societies.

Small is beautiful

One promising application in this regard is P2P energy trading. Currently, large utility companies supply entire cities with electricity through centralized networks. However, smart cities in the future could rely on a more flexible web of microgrids instead. To satisfy local consumption, these localized, autonomous electricity networks would use mainly local sources like power generators or photovoltaic panels.

Blockchain technology has always been a promising way to execute, validate and record P2P energy transactions, letting anyone on a local microgrid become either a producer or a buyer of electricity. However, up until now, the technology has not been up to the challenge. In order for the market to work well, units of energy as low as a few kilowatts would need to be traded, which would equate to a monetary value of just a few cents. Such transactions are infeasible given current blockchain transaction fees. When transaction costs are fractions of a cent, however, this hurdle would be eliminated. In turn, this would allow blockchain to serve as the technological bedrock of smart cities, allowing millions of Internet of Things devices like smart meters or solar panels to seamlessly interact and interface with digital wallets, often without human intervention.

For example, before going to work in the morning, you could charge your electric vehicle from the energy gathered from photovoltaic panels installed on your roof. Later you may decide to sell unused electricity to your neighbors before going on a vacation. It would also be possible to set up networkwide demand response rules, written in smart contracts. According to the Natural Resources Defense Council, for instance, the cost of “vampire electricity” consumed by plugged-in but unused devices is circa $165 per household, amounting to 4.6% of the total residential electricity production in the United States. Hence, an electric toothbrush left on the charger would be turned off during certain time periods automatically. To override network rules, you would need to pay a small compensatory fee, incentivizing producers to offset extra demand while discouraging users from wasting energy.

In addition, blockchain-based applications — decentralized applications, or DApps — may be built to ensure the traceability of clean energy. Thus, when purchasing electricity, you could check via an app whether it came from a sustainable source. Empowering the consumer to make these decisions is only possible with decentralized technology; otherwise, intermediaries will be able to distort markets to their own tastes. With the rise of global environmental consciousness, traceability may become a key tool to incentivize the production of renewable energy.

New horizons ahead

With such a drastic growth in global energy consumption predicted, it is easy to see why blockchain’s environmental footprint is coming under scrutiny. However, it is also important not to throw out the baby with the bathwater.

As well as taking a holistic view of the relative energy consumption of blockchain compared with traditional finance, we should begin a wider discussion about the net positives and negatives of the technology for society more broadly. In order for blockchain to fulfill its transformative potential, underpin smart cities and support low-carbon economies, we need to focus on developing smarter, more affordable blockchain architecture.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Stephanie So is an economist, policy analyst and co-founder of Geeq, a blockchain security company. Throughout her career, she has applied technology within her specialist disciplines. In 2001, she was the first to use machine learning on social science data at the National Center for Supercomputing Applications. More recently, she researched the use of distributed networking processes in healthcare and patient safety in her role as a senior lecturer at Vanderbilt University. Stephanie is a graduate of Princeton University and the University of Rochester.

Green blockchain should work smarter, not harder

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May 20 2021

Bosch, Ocean Protocol represented by BigchainDB, Fetch.ai Join Catena-X to Bring Expertise in Market, Mechanism, Token-based Incentive Design

Bosch, Ocean Protocol represented by BigchainDB, and Fetch.ai have all joined Catena-X, in order to bring their “collective expertise” in market, mechanism, and token-based incentive design

Catena-X is described as an “agile” ecosystem with automotive industry stakeholders. All firms taking part in Catena-X are working cooperatively on concepts for creating an open, scalable network for secure, cross-company, and standardized information and data exchange in the automotive sector.

As mentioned in a release shared with CI:

“The aim is to create uniform data and information flows throughout the automotive value chain. The Cloud-based network is to be open to all companies in the European vehicle industry as well as their global partners, users, and equipment suppliers.”

Bosch, BigchainDB, and Fetch.ai contribute “complementary” areas of expertise to token-based ecosystems into Catena-X. They’ll be supporting the ongoing development of decentralized technology and business models, along with incentive systems within Catena-X.

Dr. Nik Scharmann, Project Director, explained that “Economy of Things” at Bosch Research will aim to advance these causes (as an elected member of the Catena-X advisory board).

Dr. Scharmann remarked:

“I’m convinced that by establishing suitably organized marketplaces, along with payment and incentive systems, Europe’s diversity and individuality can be leveraged as strengths to provide an efficient and globally competitive basis for a value-based digital economy. With so many strong partners implementing Catena-X, we will quickly create a competitive data ecosystem for the European automotive industry.”

Bosch is reportedly a founding member of Catena-X, which has been running as an association in the founding stage since May 7 (Catena-X Automotive Network e.V.i.G.).

As an established IoT firm, Bosch is focused on researching an Economy of Things (EoT). As noted in the release, in the EoT, the economic aspect of interactions is “added to the IoT.”

The announcement also mentioned:

“The EoT project addresses the question of how networked devices can do business with each other for the benefit of citizens and businesses. With decades of experience in the automotive sector, Bosch also brings extensive industry expertise, which will be improved by applying EoT principles and mechanisms.”

BigchainDB GmbH will reportedly be joining Catena-X “on behalf” of Ocean Protocol, a “decentralized” data exchange protocol for data monetization. It will “bring its expertise in Web 3.0 and implementing token-based ecosystems to the multi-stakeholder consortium-led project, along with its experience in building open-source communities,” the announcement revealed.

As noted in the update:

“Ocean’s main focus will be contributing to the working group tasked with developing sustainable decentralized business models and incentive mechanisms for the Catena-X network.”

BigchainDB founder Trent McConaghy remarked:

“The automotive industry is shifting to a digital future. The digital economy is the data economy. At BigchainDB, we aim to empower organizations to create sustainable business models within this new data economy. We’re proud to contribute to Catena-X in this capacity, drawing on our years of experience in developing token-based ecosystems and decentralized business models. With the leading companies in the automotive space collaborating, we’re hopeful that Catena-X will drive impactful and lasting change in the European landscape.”

BigchainDB has been a Day 1 Member of the GAIA-X Association, which is developing a European Cloud-enabled data infrastructure. Ocean contributes to creating a data infrastructure standard for Europe that “prioritizes efficiency, security, and trustworthiness.”

Fetch.ai offers a framework for creating decentralized, autonomous AI networks to “carry out complex coordination tasks.” Its goal is to connect digital and real-life economies to “allow automation to change the way we use data.”

As noted in the release:

“Fetch.ai brings expertise in multi-agent systems, artificial intelligence, advanced cryptography, and decentralized machine learning to the Catena-X network. Its main focus will be to provide technologies for agent-based “smart” clients, secure and private sharing of information, and base-layer blockchain infrastructure.”

Fetchi.ai will be supporting advanced data analytics via its CoLearn network, a decentralized information-sharing system that is “deployed on blockchains and aggregates learning from multiple stakeholders.”

Maria Minaricova of Fetch.ai added:

“Catena-X represents the evolution of the automotive industry as it works to prioritize the digital exchange of information in order to enable new data-driven business models. Fetch.ai is excited to be a part of a consortium that understands the fundamental changes happening within the industry and looks forward to helping the ecosystem evolve and thrive.”

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