Category: Blockchain

Why We Need Fiat Backed Stablecoins

Posted on by Jean Chalopin

Cryptocurrency carries this cryptic veil around it. Its coins allure investors new and veteran, far and wide, hoping to strike digital gold by gambling with its infamous volatility. Stablecoins, however, suffer from a keen lack of volatility.

Likely you know about Bitcoin, Ether, and the sporadic rollercoaster affecting their prices. Less likely you know about the intrinsic details and uses of fiat-backed stablecoins, and why regulators of the traditional banking world appear to like them.

This article walks you through stablecoins, from their basic mechanics to their incredible uses as digital coins pegged to respective fiat currencies.

What Are Stablecoins?

Stablecoin is an umbrella term referring to any cryptocurrency (crypto) whose value is pegged to the value of an external asset, often a fiat currency.

Popular crypto, such as Bitcoin, provide the essential benefit of removing all intermediaries in your daily use of cash. This opens up “banking” to any one person living on the globe. Yet a key weakness is the volatility inherent to most crypto coins as our world adjusts to this new asset class.

Enter stablecoins, whose aim is to remain, well, stable. How a stablecoin achieves this depends on the coin.

We have four common types: fiat-backed, commodity-backed, crypto-backed, and algorithmic. Each type maintains a reserve of an external asset “backing up” the stablecoin’s value. Algorithmic refers to an unbacked or partially-backed coin primarily using algorithms to manipulate supply and demand to maintain the often 1:1 peg against the external asset.

Understanding Fiat-Backed Stablecoins

The base mechanic of a fiat-backed stablecoin feels almost too simple. When a user wishes to exchange their tokens, they simply return them as they receive the fiat equivalent from the coin’s reserve. The exact dollar-to-coin count is maintained, and the peg, unaffected.

Yet fiat-backed stablecoins possess certain nuances which must be addressed.

First, any fiat-backed stablecoin derives its value from the value of its reserves. Whether these are in euros or in US dollars, both the regulators and investors must feel confident in the coin’s ability to maintain its (likely) 1:1 peg.

Second, fiat-backed stablecoins must remain free of theft- or hacking-related events, in addition to providing regular reserve audits. A recognized accounting firm needs to audit their reserves. Further, the coin operator itself would benefit from a complete audit.

For example, popular USD-pegged stablecoin Tether, with a current market capitalization of 66 billion USD, intends to undergo a full audit of its reserves. Amazingly, this transparent and forthright attitude seems to have caught regulators off guard, with Tether’s CTO Paolo Ardoino calling for immediate regulation. 

Third, its transaction fees must stay minimal, with 24/7/365 capability. This feels obvious to many, but remains after all a prominent reason as to why Satoshi Nakamoto truly unleashed the cryptocurrency phenomenon in 2009.

Uses of Fiat-Backed Stablecoins

There are four common uses for incorporating stablecoins into your portfolio.

Saving

Volatility makes fortunes, but it also kills. Every investor’s goal is to use it intelligently and avoid destroying their savings.

When not investing in traditional equities, funds, or cryptocurrencies, stablecoins represent an ideal safe haven void of intermediaries and high fees. Utilizing a secure, offline, “cold” digital wallet helps here if you would like to keep the bulk of your savings in a digital, Swiss-like vault.

Transfering

Wire transfers continue to earn notoriety for their high transfer costs, often approaching 100 USD equivalent depending upon the bank, the country, and the destination. Further, the concept of waiting two or more days for receiving money already belonging to you, such as any receivable, seems inconceivable thanks to the advent of cryptocurrency.

Stablecoins and their creators remain aware that stablecoins represent the “cash” portion of any digital portfolio. Thus transferability continues to be a priority alongside liquidity. For both Tether and USD Coin stablecoins are going to have zero transaction costs in the near future–in addition to instant transferability.

Staking

Unique to cryptocurrencies, “staking” refers to the process of locking your stablecoins into a “deposit” onto the blockchain. Effectively, you’re leasing your stablecoins over to the host blockchain in order for said blockchain to operate.

This is how Proof-of-Stake competes against Bitcoin’s Proof-of-Work. With the former, those users, or “validators,” who have staked their coins with the blockchain earn rewards as the chain uses their coins to validate new transactions onto the block. Users are chosen at random, though with larger deposits favored over smaller ones.

Proof-of-Work operates as it sounds. Many “miners” compete to solve the hash puzzle necessary for adding the next block of transaction data to the blockchain. The work itself, replicated by many competing miners across the globe, proves the transaction’s authenticity.

Staking applies to stablecoins as certain blockchains prefer stablecoins, such as Tether or USD Coin, over more volatile counterparts (i.e., Bitcoin, Ether, Algorand). Alternatively, the recipient blockchain may use the staked stablecoin as a guarantee for another coin or more volatile asset.

Source: Whiteboard Crypto

Establishing Liquidity

A rapidly rising vanguard of stablecoins, liquidity pools represent a new area in which holders earn attractive yields well above traditional interest rates.

Bundles of stablecoins are pooled together from many different lenders, similar to staking, and facilitate various Decentralized Finance (DeFI) activities operating under software protocols called “smart contracts.” Think of these pools as smart programs using the digital currency lent to them in useful or novel ways.

For example, a liquidity pool could support the Ether-Tether currency trading pair. In exchange for lending your Tether coins to this pool, you might earn a yield up to 18% by taking a cut from the overall transfer fee revenue.

However, stablecoin holders take on the key risk of losing their principal (Tether) value. The asset pair in that pool must maintain a total constant value. Since Tether shall always equal one US dollar, you sacrifice value stability in exchange for a possibly incredible yield. In other words, if the value of the Ethereum coin falls, your Tether is sold off in a bid to increase Ether demand inside your specific liquidity pool.

The Bottom Line

Stablecoins tackle the two key issues affecting fiat currencies: fees and intermediaries. They offer zero or limited fees and the complete removal of all institutional intermediaries.

The core strength of blockchain technology is its public immutability. The global community contributes to the operation and honesty of blockchains, and thereby, stablecoins. They are community-managed, always-active mediums of exchange.

Yet the vast majority of global trade continues to use one fiat currency or another. One glaring reason for this: a lack of regulator guidance. For the time being, this also means a bind to fiat, but one without centralization, volatility, fees, delays, and wire transfer horror stories.

Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The co-author of this text, Conor Scott, CFA, has been active in the wealth management industry since 2012, continuously researching the latest developments affecting portfolio management and cryptocurrency. Mr. Scott is a Freelance Writer for Deltec International Group, www.deltecbank.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service, or offering. It is not a recommendation to trade.

TerraUSD and The Next Era of Stablecoins

Posted on by Jean Chalopin

On May 9, 2022, the TerraUSD (UST) algorithmic stablecoin crashed, losing nearly all of its value. What does this mean for stablecoins? 

Hardly the end. If anything, it reflects the continuously increasing interest in crypto that has been growing since 2009. In order for any asset to fall, it first has to rise. 

While this seems incredibly obvious, the longer context helps investors understand the “sticky” trend that is crypto. Crypto is a new asset class that investors globally are considering as part of their investment portfolios as well as for payment means. Collateralized stablecoins are primarily used for transactional purposes and in lending products.

Bitcoin’s price movement since 2009 felt haphazard and lackadaisical until 2020. In other words, naysayers appeared smart until the price reached over 61,000 USD during the height of the post-covid recovery. We also say institutional investors entered into the space strongly. Yet the pursuant correction reintroduced general skittishness into the hearts of experts and novices alike. 

Collateralized stablecoins exist to address that problem through more guaranteed stability than an algorithmic stablecoin like UST can. For transactional purposes, this means peer-to-peer payments can occur without third-party intermediaries. Unlike with payments using Bitcoin, a collateralized stablecoin does not face volatile swings and are seen more as digital fiat by many. 

We believe regulators appreciate guarantees, particularly when they come with financial backing. And in the case of collateralized stablecoins, it’s a matter of “telling, not asking.” 

Despite TerraUSD’s unfortunate crash, regulators in both the USA and the EU continue to work towards a framework that will support fiat-backed stablecoins. Why? What is fiat-backed? 

This article delves into the actually-not-so-complicated world of stablecoins. More importantly, it shows their future virtually etched into the proverbial and historical stone. 

Goodbye, TerraUSD

Maybe see you later. But likely, no. 

TerraUSD represented a keen entrepreneurial vision and the hope to stay away from all things fiat. Much of the crypto community may have seen this as admirable, and something worth supporting. 

After all, if you didn’t know what the word “inflation” meant before this year, you do now. 

Inflation shows the paralyzing dark side of fiat (traditional) currencies–that central banks control their respective supplies and demands on (educated) whims. 

Algorithmic stablecoins seek to do the same, using algorithms controlling supply and demand. Too expensive? Create some additional supply (“mint” coins). Too cheap? Retract some coins or give holders an incentive to convert other crypto into the cheaper stablecoins. Natural arbitrage helps as well. 

However, there’s a glaring weakness. You can’t dictate demand–it’s not a dictator-coin. 

For this reason, TerraUSD’s Luna Foundation Guard (LFG), or the body responsible for maintaining the stablecoin’s 1:1 peg to USD, lost the war. It held a chest once containing up to 70,736 bitcoins. 

When Bitcoin’s price did what it does (fall), this collapse in reserve value translated into UST’s collapse as well. 

While investors appreciate the idea of abandoning the “machine” of fiat currency, they evidently did not fully believe in UST’s capacity to stabilize its peg without recourse to another cryptocurrency–Bitcoin. 

Thus, TerraUSD crashed back to Earth. Fiat-biased regulators noticed. 

The Regulators’ Concerns

Even though they could have kicked stablecoins while they were down, we, surprisingly enough, observed the opposite response. 

On June 30, 2022, the EU Council released a press release effectively approving the use of fiat-backed stablecoins. 

Their point remains simple and honest: Crypto has experienced something of a “wild west,” which has no place in the future of finance. They give a slight dig by loosely tying this wild west to algorithmic or other coins having no relation to fiat whatsoever. 

Yet they also rubber stamp fiat-backed stablecoins holding reserves at least approaching 100% of the value of stablecoins in circulation. If the point is to keep a 1:1 fiat peg in the quest of guaranteeing safety in a dog-eat-dog crypto world, then keep some fiat in reserves. 

After TerraUSD, it’s clear: don’t gamble your reserve value. Even gold is down by more than five percent year-to-date, as of this writing. 

Therefore, the European Banking Authority (EBA) will require stablecoin issuers “to build up a sufficiently liquid reserve, with a 1/1 ratio and partly in the form of deposits.” 

Stablecoin issuers, crypto-assets, and crypto-asset service providers shall fall under a common regulatory framework for the first time. While this may spell doom for algorithmic stablecoins and possibly other altcoins (unbacked, alternative coins), it does bring stablecoins into the realm of permanency. 

America’s Joining the Party

On the other side of the Atlantic, the United States also signaled its implicit approval of fiat-backed stablecoins. 

Nellie Liang, undersecretary for domestic finance, remarked that a holistic approach to including stablecoin issuers into the greater banking fold remains vital. The focus seems squarely upon the quality and consistency of their reserves.

In the words of Ms. Liang, stablecoins have the “potential to really fundamentally reform payments.”

The Next Era

Stablecoins are here to stay. Stablecoins are here for tomorrow. 

As a global society, we’re evidently not yet ready for abandoning fiat currency. The term value still implies some relation to either the euro, the swiss franc, the British pound, the US dollar, and so on. We’re not at a point of saying eight terras or three bitcoins. 

However, stablecoins bring alongside them far smaller transaction fees as they eliminate the intermediaries known to bog down everyday wire transfers. Traditional banks, and their regulators, will have to adapt. 

Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The co-author of this text, Conor Scott, CFA, has been active in the wealth management industry since 2012, continuously researching the latest developments affecting portfolio management and cryptocurrency. Mr. Scott is a Freelance Writer for Deltec International Group, www.deltecbank.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service, or offering. It is not a recommendation to trade.

What Are Crypto Bridges? 

Posted on by Jean Chalopin

Crypto bridges are also referred to as blockchain bridges or cross-chain bridges. They connect two blockchains, enabling users to send cryptocurrency from one chain to the next. 

If you have some Bitcoin and want to spend it like it was Ethereum, you can do so by utilizing a bridge. Since most blockchain assets are incompatible with one another, crypto bridges create synthetic derivatives representing assets from secondary chains. 

We will discuss how bridges work, the two major types of bridges, and a few current bridge options for use. Let’s get right to it.  

Crypto Bridges Explained

One of the most pressing issues facing the blockchain space is the inability of different blockchain networks to work together. Blockchain projects are generally fluid and efficient at what they do; however, each blockchain becomes limited by the walls that it has built around its domain. 

The resulting problem is a lack of liquidity translating into higher transaction costs and limited systems. Ultimately, we have real-world-like congestion. 

Crypto bridges solve this problem by allowing two blockchains to communicate with one another and alleviate congestion through teamwork. This communicate can be in the form of: 

  • Token transfers
  • Smart contracts
  • Data exchange
  • Feedback and instructions 

Different blockchains mint their respective native tokens, with each operating under a different set of rules. 

The crypto bridge is a neutral arbiter between the two, allowing users to (in theory) seamlessly switch between them.  By having access to multiple blockchains but only requiring the use of a single network, bridges allow for an enhanced crypto space experience.  

The crypto bridge concept is like a Layer 2 solution, which is built on top of the Layer 1 base network but is designed to address the lack of network interoperability. It works independently from the Level 1 networks it bridges.   

How Do Crypto Bridges Work?

While they can convert smart contracts and send various kinds of data, their most common function remains to transfer tokens between chains. 

For example, there was no interoperable bridge between Bitcoin and Ethereum. These two massive crypto networks have different rules and protocols. However, through a crypto bridge, Bitcoin users can transfer their BTC coins to the Ethereum network and now receive added functionality that they would otherwise not have. These Bitcoin-Ethereum bridge users can purchase ETH tokens and make low fee payments. 

A user who has Bitcoin and wants to transfer some of their holdings to Ethereum utilizes the crypto bridge, holding their Bitcoins and creating an equivalent amount of ETH for the user to conduct transactions. No crypto actually moves between the chains. 

The amount of BTC that is being exchanged for ETH is locked in a smart contract allowing the user to gain access to an equal quantity of ETH on the other side of the bridge. This functions similarly to a traditional swap. 

If they desire to convert their usable ETH back into BTC, then the ETH that remains available for use will be burned, and the equivalent amount of BTC will be returned to the user’s Bitcoin wallet.

If there was no bridge and a user wanted to do the same process, they would have to convert their Bitcoin to ETH on a trading platform, withdraw the purchased ETH to their wallet, and then make a second deposit into another exchange. However, this process is time-consuming, and the amount of fees needed to complete this process could remain significant. 

Two Types of Blockchain Bridges

There is an implicit downside resulting from certain blockchain bridges, and this is centralization.

One attractive virtue that has brought so many to the blockchain space is its decentralized nature. No central entity makes decisions about a cryptocurrency the way central banks control a fiat currency.   

However, with a crypto bridge, the user must release their control of the coins that they wish to use on the other side of the bridge, and this release is in the hands of the bridge owners. This process is like a wrapped token. wBTC is a quantity of Bitcoin that is “wrapped” in an ERC-20 contract. It has the same functionality as an Ethereum token. 

These are called “Trust-Based Bridges” (custodial), and while they are centralized, they are economical and efficient options for transferring a large amount of crypto. 

Yet the number of reliable bridges is limited. All wrapped bitcoin (wBTC) is held in the custody of BitGo.  Users who choose less well-known trust-based bridges are increasing their risk, and therefore it’s an unattractive transfer method for smaller traders.  

There are also “Trustless Bridges” (noncustodial), or decentralized crypto bridges, that are intended to make users feel safer when they are transferring their coins to other networks. A trustless bridges is a solution that operates like a decentralized blockchain network that validates the bridge’s transactions.  

If a user is concerned about their coins being turned over to others, then the use of a trustless bridge provides more peace of mind. Bridged assets using “Wormhole” are held only by the protocol, making it more decentralized. Hardline decentralization advocates may argue that trust-based bridges like wBTC make them less secure than the decentralized alternatives.

Bridges open new markets and support a multichain future, but there are security challenges. February 2022 saw a $326 million exploit of the nascent Wormhole bridge, showing that decentralized bridge assets might not be safer.

Choosing a Crypto Bridge

Crypto bridges have become easier to use. DeFi protocols are integrating them into platforms to make token swapping much more manageable.  

Porting assets to another blockchain provides several benefits. The new blockchain may be faster and cheaper than the native blockchain. Ethereum has high transaction fees, and while it is still a proof-of-work system, it’s also slow. 

However, if users bridge to a Layer 2 network like Polygon or Arbitrum, they can trade ERC-20 tokens at a fraction of the cost and not sacrifice their Ethereum token exposure.

Investors could also use bridges to benefit from markets that only exist on other blockchains. For example, the DeFi protocol Orca is only available on Solana, but it supports wrapped ETH.  

Major Crypto Bridges

The following list includes some prominent crypto bridges in operation that can be used to transfer your crypto assets and more.

Multichain (Formerly AnySwap)

This bridge system is famous for providing features beyond just transferring crypto. Once Multichain is connected to a wallet, the user can see all of their balances and the different types of coins. These balances can easily be transferred from one currency to another. 

Multichain operates its own node network based on Secure Multi-Party Computation (SMPC). Multichain does have some limitations, and there are specific blockchains where transfers can only be made to particular destinations, but a double hop can be made if necessary to reach the desired network.  

Images Courtesy of Multichain

Binance Bridge 2.0

This is a decentralized bridge that offers a large selection of tradable cryptos. It supports several popular blockchainssuch as Ethereum, TRON, and Solana (35 in total). The bridge is easy to access for those trading on Binance (both the US and international versions) right from their app. The bridge wraps listed and unlisted tokens as “BTokens,” and these wrapped tokens can be used with the BNB Chain’s ecosystem for DeFi, decentralized games, the metaverse, and more.   

Celer cBridge

cBridge is accessed from Binance and is a good alternative if you don’t want to use the Binance Bridge 2.0.  

Image Courtesy of cBridge

cBridge is like other trustless bridges. There are a variety of blockchains and other cryptos that it allows users to interact with.  If you are not a Binance user, then you will have to connect a wallet to cBridge before you can conduct any transactions. 

No matter which bridge you choose to use, you should check what are the limitations and fees before conducting any transactions. Smaller transfers vary a lot between the different bridges, so be aware beforehand and make sure you check the bridge’s reputation and update status.

Final Thoughts

The blockchain space has always been defined by its decentralization. This factor’s prominence supersedes the importance of making other operative improvements, including scalability and interoperability. A network’s developers are naturally resistant to making significant network changes, especially if it deviates from the philosophy of decentralization. 

Outsiders creating blockchain bridges have realized this need and are have signaled that developers are seeing its importance. These crypto bridges and the interoperability they bring are moving the world toward a broader crypto economy. They should be embraced and become part of the layer one network’s protocol, ensuring the dedication they deserve.  

Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltec.io.

The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business.  Mr. Trehan is a Senior VP at Deltec International Group, www.deltec.io. 

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees.

EU Council Agrees to Regulate Crypto-Assets

Posted on by Jean Chalopin

In the late hours of June 30th, 2022, the EU Council issued a seemingly succinct and ordinary press release aside from sporadic bits of bold text. However, it marked the official start of a new financial era for crypto-assets worldwide, with Europe leading the charge. 

What is “MiCA,” the Markets in Crypto-Assets proposal? 

The proposal brings crypto-assets, its issuers, and its service providers into a common regulatory framework for the first time. The proposal treats crypto like fiat currency and weighs it against the fiat currencies of Europe. This includes popular cryptocurrencies and stablecoins. 

It strives to “protect investors and preserve financial stability, while allowing innovating and fostering the attractiveness of the crypto-asset sector.” 

In other words—it marks the location of the white start line before the marathon. 

Prior to 2022’s bear market, the price of Ether on December 31, 2021, for example, was 3,683 USD, an extraordinary run from its launch at around 1 USD in September 2015. Similarly, the market capitalization of Tether—the unofficial premier stablecoin—stood at approximately 78 billion USD.

What does MiCA mean for the future? What kind of growth should we as investors expect?

MiCA, Unwrapped

We found six key points requiring further analysis and discussion.

Consumer Protection

“With the new rules, crypto-asset service providers will have to respect strong requirements to protect consumer wallets and become liable in case they lose investors’ crypto-assets.” 

In crypto’s wild beginning, filled with hacking stories and hackers galore, no meaningful consumer protections existed. Hence, the hackers.

Now, crypto-asset service providers remain liable for lost crypto and failing to protect consumer wallets. Likely, most providers will take out insurance—as is done by many popular exchanges currently—protecting against theft, hacking, and similar calamities. 

Carbon Footprint Tracking

“Actors in the crypto-assets markets will be required to declare information on their environmental and climate footprint.”

Within two years from the formal adoption of this proposal, the European Commission must provide a report detailing the environmental impact of crypto-assets and what minimum sustainability standards may be necessary. 

Proof-of-stake (randomly selected “stakers” validate blockchain nodes) improves upon proof-of-work (all “miners” compete to validate first) by eliminating the energy consumption of the latter. However, it also eliminates some of the top-notch security inherent in hundreds of thousands of Bitcoin miners. 

This clause introduces potential insecurity into the fate of proof mechanisms, which we’ll touch upon later in this article. 

Anti-Money Laundering

“MiCA requires that the European Banking Authority (EBA) will be tasked with maintaining a public register of non-compliant crypto-asset service providers.”

Providers who maintain a parent company in countries listed on the EU list of nations considered at high risk for money laundering or on the EU list of non-cooperative jurisdictions for tax purposes must implement “enhanced checks” in line with the EU AML framework. 

This carries the no-nonsense and no-tolerance approach to money laundering from fiat currencies to crypto counterparts. 

Stablecoins in the Spotlight

“MiCA will protect consumers by requesting stablecoins issuers to build up a sufficiently liquid reserve, with a 1/1 ratio and partly in the form of deposits….every so-called ‘stablecoin’ holder will be offered a claim at any time and free of charge by the issuer.” 

In addition, all stablecoins intending to operate within Europe and with European residents shall be supervised by the European Banking Authority (EBA), with a physical presence in the EU mandatory. 

The bottom line: stablecoins wishing to operate in the EU must remain infallible and open themselves to liability should they fail their mandate of stability. 

Immediate Regulation

“Under the provisional agreement reached today, crypto-asset service providers (CASPs) will need an authorisation in order to operate within the EU.”

Further, national authorities will be required to regularly transmit relevant data concerning the largest CASPs to the European Securities and Markets Authority. 

This immediately acts upon nefarious or less-than-holy actors in the European crypto space. It supplies the groundwork for the great push forward supporting legitimate crypto-asset and stablecoin providers. 

NFTs Saved for Later

“Within 18 months the European Commission will be tasked to prepare a comprehensive assessment and, if deemed necessary, a specific, proportionate and horizontal legislative proposal….” 

Non-fungible tokens (NFTS) are digital assets representing real, non-fungible assets like art or collectibles. At this time, the EU Council is not treating NFTs like cryptocurrencies, defined as crypto-assets in this context. 

Instead, we have the wait-and-see approach. Regulation down the road remains entirely possible. 

The Deltec View

We saw five separate, clear themes behind the EU Council’s proposal driving the future growth of crypto-assets worldwide. 

A Vote of Confidence

Despite 2022 marking a fantastic Bitcoin crash (Ethereum too), this proposal by the EU Council delivers an incredible vote of confidence for experienced, new, and prospective crypto-asset buyers. It paves the way for mass adoption and strives to give crypto a badge of legitimacy. 

Bad Actors, Digital or Otherwise, Are Unwelcome

Hacking coupled with money laundering paired with market manipulation creates an unhappy love triangle. The EU Council treats the darker side plaguing crypto-assets seriously. We expect little mercy, swift action, and possibly the demise of altcoins that fail to meet their standards. 

Yet each instance of justice also promotes greater crypto adoption. If the public bodies of the EU can demonstrate solid control over crypto-assets, then they have indirectly cemented them as part of the modern portfolio. 

Proof-of-What?

While the original proof-of-work designed by Bitcoin’s Satoshi Nakamoto remains the most secure blockchain consensus mechanism, it comes with a hefty environmental price tag. Perhaps, this tag is too much. 

With carbon footprint tracking and standardized reporting becoming necessary, could proof-of-stake supersede proof-of-work? Could another proof mechanism take over instead?

Consumers, Protected

The “Wild West” philosophy fails to apply in Europe, because, there is no American frontier in Europe. Geography aside, the EU wants to use a harsh, take-no-prisoners approach to criminal actors in the financial and digitally financial realms. 

A major, if not primary, deterrent slowing the adoption of crypto-assets was the lack of any bank balance protection. The USA touts the Federal Deposit Insurance Corporation (FDIC), protecting up to $250,000, while the EU maintains deposit guarantee schemes (DGS), reimbursing up to €100,000.

In the current proposal, crypto-asset service providers become liable for damages as a way to recoup consumer losses. This also opens the road for later public protection of certain crypto-assets, such as Bitcoin or Ethereum, in the event of a service provider’s demise. 

Keep Stablecoins Stable

Regulators seem to view stablecoins (i.e., Tether, USD Coin) more favorably than traditional cryptocurrencies owing to their limited volatility and ethos of remaining pegged to a fiat currency such as the US dollar. 

However, the language inside this proposal quietly condemns the recent insecurity surrounding stablecoins. The recent demise of Terra Luna, possibly due to a personal attack on one of its co-founders, likely caught the attention of the EU Council. 

Here, the same council provides a road to redemption. Stablecoins can exist in Europe, but only through vetted, deposit-backed methods proven to maintain liquidity and free currency exchange. 

Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service, or offering. It is not a recommendation to trade. 

The Multi Asset Bitcoin Protocol, Taro

Posted on by Jean Chalopin

When Bitcoin (BTC) was created, the anonymous inventor Satoshi Nakamoto had a vision of displacing the current monetary structure. That vision now leads us to “Taro.”

Bitcoin was a novel idea. The blockchain provides a way to transfer value securely and transparently between users using a distributed public ledger. Value remains in the form of BTC. Early investors who saw the potential have done incredibly well. 

However, Bitcoin lacked the ability to transfer anything besides itself (digital currency). Since Bitcoin’s introduction, other projects, most notably Ethereum, have built additional functionality into their network’s “Layer One,” or its base network. In other words, a crypto’s underlying and primary infrastructure. 

This functionality includes smart contracts, which allow for the transfer of more than just the native token of the network. Further, Bitcoin suffers from a bottleneck limiting the number of possible transactions per second. 

To address Bitcoin’s transactions per second deficiency, the Layer Two Lightning Network was created.  Lightning works together with Bitcoin’s Layer One by removing transactions from the bottleneck’s queue. It bundles a set of transactions into a single transaction, and then sends this bundle onto Bitcoin’s network. 

Security and transparency remain while transaction throughput increases alongside a decreasing cost per transaction. 

In addition, Bitcoin recently upgraded its Layer One through Taproot. This upgrade adds further security and speed through an enhanced coding language used in writing Bitcoin’s transaction parameters. Combining Lightning with Taproot yields a new protocol available to Bitcoin called Taro.

The Introduction of Taro

In April 2022, a new Bitcoin network protocol was announced by Lightning Labs that intends to compete with the multi-asset capabilities of Ethereum and similar blockchains. This Taproot-powered protocol can issue assets on Bitcoin’s blockchain, which then benefit from Lightning’s bundling service.   

This protocol represents a significant shift for the Bitcoin network. Taro allows the network to not just transfer BTC but makes it capable of processing multiple asset types through Lightning. Any currency applies here. 

Taro accomplishes this by utilizing the stability and security of the Bitcoin network and its Taproot upgrade, while incorporating the speed, efficiency, and scale possible with the Lightning Network.  

How Lightning Will Expand

Taro allows Bitcoin to become a value protocol, enabling app developers to integrate their assets beside BTC in Dapps that remain on-chain and facilitated with the Lightning Network. 

Taro expands the Lightning Network’s reach, enabling more users to utilize the network while driving more volume and liquidity for Bitcoin. Taro allows people to easily transfer fiat currencies for bitcoin using apps. Enhanced volume provides the necessary economies of scale while giving node operators more in routing fees. 

Dollar “Bitcoinization”

Lightning Labs considers Taro a step towards what it refers to as the “Bitcoinization” of the dollar. It allows for the issuing of stablecoins using the secure and decentralized blockchain Bitcoin. And it allows users to avail themselves of Lightning’s fast and low-fee global payments network.  

Taro’s Specifics

Taproot remains the heart of Taro. This upgrade creates a new tree-style structure enabling developers to embed into transactions arbitrary asset metadata. Taproot and Taro use what are called Schnorr signatures to improve Bitcoin’s scalability. Schnorr signatures work with multi-hop transactions on the Lightning network.  

With their launch of Taro, Lightning Labs also released a set of Bitcoin Improvement Proposals (BIPs) that they hope to later adopt, and which would further enhance the capability of the network.

Still, Lightning Needs More

2021 was a big year for the Lightning Network. It saw significant growth. Users from Latin America and West Africa came on board quickly and en masse. 

Developing nations benefit significantly from the Lightning Network’s peer-to-peer transactions featuring low fees and instantaneous settlements by removing financial intermediaries. 

There are several emerging market startups and users who want to add stablecoin assets to the Lightning Network. For example, we have “Bitcoin Beach” from El Salvador. This desire is the reason for Taro.  

Taro enables wallet developers to give access to users with a USD-dominated balance, a BTC-dominated balance, or any other asset in the same wallet. They can send any currency across the Lightning Network. 

The more users that are brought onto the network and transfer fiat currency, the easier it will be for them to also obtain Bitcoin. This is how Lightning Labs believes Taro can bring Bitcoin to billions of users.  

How Does a Taro Over-Lightning Transfer Work?

Let’s assume Amanda and Brad have a Lightning-USD channel with $100 of capacity (both have a balanced $50 worth of inbound liquidity). Connie and Dan have a similar L-USD channel with $50 each in inbound liquidity available.  

If Brad only has a channel with Connie, Amanda can still send $20 of Lightning-USD to Brad, who will charge a small routing fee in BTC, and then sends the $20 worth of BTC to Connie, who then forwards the L-USD to Dan and also charges a small routing fee. 

Taro can interoperate with the BTC-only Lightning Network without changing anything. It only requires the first and last hops to have sufficient Lightning-USD liquidity. 

This functionality avoids creating a bootstrapped, new network to transfer new assets. It ensures that Bitcoin remains the foundational medium for all currency transactions conducted on the network. This structure also incentivizes growth promoting Lightning Network’s BTC liquidity, allowing it to serve multiple asset transactions. 

What is the Origin of Taro?

Taro relies on the new scripting behavior of Taproot, which was added to the Bitcoin Network as a soft fork in November 2021. Taproot allows developers to embed additional arbitrary asset metadata.

Graphic courtesy of Lightning Engineering

This means that more data can be sent with a single transaction. 

  • There is no additional burden on the full nodes
  • No burning of Bitcoin is needed via the OP_Return opcode
  • Taro assets inherit all of the same double-spend protections of normal Bitcoin transfers
  • Additional functionality of transferability over the Lightning Network is also given

The Lightning Network was created as a payment channel network and therefore has faster settlements and lower transaction fees than other blockchains. It retains these properties even as the network grows. When Stablecoins are brought to the Bitcoin network via Lightning, we receive:   

  • Users who want to access financial services
  • App developers who desire new tools in their arsenal 
  • Node operators who can earn more in fees
  • Issuers who want to provide a better experience to their users

The Major Benefits of Taro’s Taproot-Native Design

The full list of benefits can be found in the Taro protocol BIPs. The major benefits of this modern Taproot-native design are as follows:

Scalability

An essentially unlimited amount of Taro assets can now be contained within a single Taproot output.

Programmability

Developers are able to program transfer conditions into Taro assets with an unlocking script. This script is like normal unspent transaction outputs (UTXO) of Bitcoin.  

Usability

Wallets are smart enough to prevent their users from sending the wrong asset by mistake through asset-specific addresses.

Auditability

Taro’s tree structure allows for efficient supply audits to be conducted within a wallet (locally) as well as within the chain of an issued asset (globally).

Taro’s Pathway Forward

While the announcement of Taro is exciting, much needs to be done. The initial step of launching Taro came with it a series of BIPs, as discussed above.

The next goal is to receive feedback from Bitcoin’s community and the users of its Lightning Network.  From there, Lightning Labs must build the necessary tooling that will enable developers to issue and transfer desired assets on the chain. The final required step is to build functionality into Lightning that will enable developers to open Taro asset channels, which can then be used with the Lightning Network. 

Presently, Lightning Labs is working on all these goals in tandem.

Taro Is Exciting 

The companies building tools on the Lightning Network will be able to integrate the Taro protocol using app integration or through similar methods. Taro can also issue assets on Lightning, which lets users globally harness the decentralization and security Bitcoin provides while working with other currencies or coins. 

The protocol is focused on enabling fiat-stablecoin transfers using the Lightning Network, but Taro, as is proposed, is a more general asset issuance and transfer protocol. 

Summary

The Taro Proposal is revolutionary for Bitcoin. It adds the functionality that other chains have but to a network with the widest use. 

Further, the Lightning Network and Taro interact seamlessly. This is because Taro has accounted for possible pushback from the major parties involved. If the Lightning Network can fulfill its goals for the Taro protocol, we will very likely see new assets transferred on the Bitcoin Network soon. 

Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service, or offering. It is not a recommendation to trade. 

What Is Ethereum?

Posted on by admin

This is usually the next question asked after: “what is Bitcoin?” or “what is Blockchain?” Ethereum (ETH) represents an ambitious blockchain project moving cryptocurrency into uncharted territory by decentralizing a wide range of products and services. 

If we think of Bitcoin as digital gold, storing value, then Ethereum clearly takes a different approach. It creates wrappers in which users place custom assets and add rules governing their operations and transfers.

Investors consider Bitcoin a precise tool for a specific job, while Ethereum is more like a Swiss army knife. It enables users to interact with it in novel ways and create new products. In this article, we will go further into the specifics of Ethereum and how it has become the second-largest crypto according to current market capitalization.   

Ethereum Basics

Ethereum performs two tasks. It:

  1. Tracks changes on its blockchain (confirming transactions like Bitcoin)
  2. Tracks potential changes called “State” (Bitcoin does not do this)

Ethereum contains multi-step functions called “smart contracts.” For example, “A” must do X first, and then “B” will automatically happen, like any basic logic function. State tracks if “A” has completed the relevant task.

Smart contracts are often linked together and stacked into larger structures which are called decentralized applications or Dapps.

Current Dapps are primitive, but Ethereum proponents believe that Dapps will eventually facilitate the creation of software replicating the services offered by the world’s largest tech companies and financial institutions, such as Amazon.

Let’s think of the Amazon Marketplace as a “state” service connecting buyers with sellers through an easy-to-use graphical interface providing a massive selection of constantly updated inventory. Amazon is just a middleman, a steward of the technology. It takes a (hefty) portion of the sale price for this role.   Ethereum is an early attempt of using blockchain to create a marketplace, circumventing these monopolistic services. 

To execute these ever-complex Dapps, the Ethereum team created a scripting language native to its own virtual machine, itself funded through the sale of “Ether” coin.

Ethereum’s Origin Story

The idea for Ethereum came from a 20-year-old Russian-Canadian named Vitalik Buterin. Buterin realized that it’s possible to more broadly apply Bitcoin’s design, to, according to Buterin, mitigate the “horrors centralized services can bring.”

Buterin’s famous example refers to the life-changing slight he suffered from a centralized service while playing the online game World of Warcraft. He discovered that the game’s developers could make arbitrary changes at any time, drastically affecting gameplay.

A Theil Fellowship was awarded to Buterin, allowing him to work on Ethereum full time and create a non-profit entity, The Ethereum Foundation. Its sole goal: launch the Ethereum project. In 2014, this project generated $18 million through an online crowd sale of 72 million ETH (roughly worth $255 billion USD in October, 2021).

Ethereum expanded to attract a passionate community of developers and users, who continue to forge its development today. Some of the most notable are:

  • Jeff Wilke: creator of Ethereum’s first software implementation
  • Gavin Wood: author of Ethereum’s yellow paper defining its virtual machine
  • Joseph Lubin: Consensys Founder and Ethereum investment incubator

The Inner Workings of Ethereum

Two Ethereum networks always exist in tandem: the network being used at present and the new network which its developers are building.

Its team maintains an ongoing roadmap since Ethereum’s launch in 2015. Its mandate is to continue growing. This partly explain Ethereum’s many accomplishments since 2015, though several proposed features are still pending.

The Current Ethereum

The Ethereum blockchain from 2015 until today uses a proof-of-work (PoW) consensus mechanism in which “miners” (computers) verify orders and add them to the ongoing blockchain. Through PoW, miners use energy to compete in solving puzzles (find the correct string of numbers called a has) and earn the role of a creator of a new block.

The winning miners receive modest amounts of ETH as their prize. This process repeats every twelve seconds.

Smart contract developers use one of two programming languages: Solidity or Vyper. Being proprietary to Ethereum, they deploy code onto its blockchain. All nodes (the miners running Ethereum software) maintain respective copies of Ethereum’s Virtual Machine (EVM). The EVM is a compiler translating smart contracts written in Solidity or Vyper, and executes them upon the blockchain.

A group of miners who had rejected a proposed Ethereum code update chose to continue running the older code, and this resulted in a new cryptocurrency in 2016 called Ethereum Classic. The two should not be confused. 

ETH 2.0, Proof of Stake, and Shards

The original PoW structure of Ethereum is similar to Bitcoin’s blockchain. However, Ethereum is shifting its core operating system with Ethereum 2.0.

The consensus mechanism will change to “Proof-of-Stake” (PoS), swapping traditional miners for “stakers.” Users who have 32 ETH or more can lock their “stakes” and earn rewards for maintaining the blockchain, using less intensive software and hardware than the increasingly power-hungry miners of PoW.

The single (active) Ethereum blockchain will be divided into a group of separate sections called shards, ultimately linked by an overarching “beacon chain” dedicated to improving the entire system’s throughput.

ETH 2.0 upgrades will improve electricity usage and throughput speed, making the chain safer, and should be completed by mid-2022.

Why Does Ethereum Have Value?

The cryptocurrency behind Ethereum is called Ether. New coins of it are minted with every new block miners create. Ether has no supply limit.

Currently, two Ether are created every twelve seconds, though some coins do get burned, thereby limiting the supply.

Developers propose monetary policy changes, which must be agreed upon by nodes. Miners (or after ETH 2.0, stakers) receive fees for their processing work. These are referred to as “gas.” The more complex the smart contact, the more gas used. One of Ethereum’s goals is to constantly increase the utility of Ether and its platform, attracting more stakers despite the implicit ceiling on gas rates.

Why Choose Ethereum?

Ethereum aims to be more than a cryptocurrency, unlike many of the altcoins available, and has created several pillars for increasing demand.   

Private Blockchains

Major banks embraced Ethereum by taking advantage of its opensource code, creating proof of concept/R&D initiatives in 2015-16. These projects contained either copies of Ethereum’s code or were Ethereum-inspired, like R3’s Corda and Linux Foundation’s Hyperledger. They used the architecture but did not create a new cryptocurrency.

In 2017, these banking projects led to the Enterprise Ethereum Alliance, a non-profit backing Ethereum and bridging the gap between it and private blockchains.

The ICO Craze

Also in 2017, several entrepreneurial projects used Ethereum as a platform for fundraising. They created new cryptocurrencies and sold them to investors through initial coin offerings (ICOs). Through its ERC20 token standard, Ethereum holds the ability to facilitate new crypto assets without requiring additional, coin-specific blockchains. Chainlink, LiquidiFy, and VeChain are all Ethereum ERC20-based projects.

Decentralized Finance (DeFi)

Ethereum’s most recent innovations are in decentralized finance (DeFi), where Ethereum replicates legacy financial services. For example, MakerDao decentralized USD-pegged cryptocurrency management. Other DeFi projects automate lending and borrowing and represent the most recent use cases for Ethereum’s blockchain.

Security Tokens

The most exciting development for Ethereum is in the security token space, where financial assets are converted into digital equivalents. These security tokens are to be traded on decentralized markets, all on the Ethereum network and without expensive middlemen.

The essential requirement of security tokens is legal compliance. Are they complying to all relevant laws and regulations applying to where they are traded? Fortunately, several projects are building compliant tokens.

NFTs

A Bitcoin, a dollar, or an Ether, is “fungible.” One dollar is like any other and has the same value. Art, however, is nonfungible. There may be several copies of the Mona Lisa, but only one is the original. 

Nonfungible tokens or NFTs are one-of-a-kind digital assets. These new forms of digital value have become popular over the past year as we see headlines of people buying them for millions of dollars. 

Ethereum is well-suited to creating NFTs. The tokens and their respective proofs of ownership can be transferred with ease, while the transfer itself follows pre-defined rules with Ethereum’s smart contracts.

Always Upgrading

Ethereum’s rapid rise in market capitalization proves it to be the ideal choice for blockchain development. It has shifted over the years, though each update adds more functionality to its smart contract abilities. These increases give developers more tools to further expand Ethereum’s capabilities.

Summary

In a handful of years, Ethereum has changed the world of cryptocurrency. It continues to change this world each day. Smart contract functionality, coupled with decentralized management, represents a genius invention carrying ramifications yet to be felt. The future for Ethereum is nothing but bright.   

Disclaimer:  The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service, or offering. It is not a recommendation to trade.

Bitcoin’s Taproot Upgrade

Posted on by Jean Chalopin

Taproot is groundbreaking because it’s the first upgrade to Bitcoin in four years.

It was approved by the cohort of Bitcoin miners in early June of 2021 and went into effect the following November. The upgrade means greater transaction privacy and efficiency, and most importantly, the potential for smart contracts. With this article, we’ll discuss what Taproot is and what its implications are for Bitcoin, its users, and investors. 

What Does Taproot Do for Bitcoin?

Finally, with Taproot, Bitcoin is compatible with basic smart contract functionality. This is due to two overarching back-end code changes. Specifically, a change in the network’s cryptography method and new support for Merkelized Alternative Syntax Tree (MAST) script execution (we will go deeper into this below).

Because of the complexity of these improvements, and with many investors lacking in-depth knowledge of blockchain, Bitcoin’s price will not readily take into account these upgrades. For all investors, it’s still vital to understand Taproot.

The Upgrades in Detail

Bitcoin’s blockchain network carries as its main function a direct peer-to-peer payments system for transferring value. Our cryptocurrency layering article discussed Layer 2 capabilities, like those offered with the Lightning Network.

However, due to a lack of functionality and scalability issues, Dapps and smart contracts cannot be built on the Bitcoin Layer 1 network. Taproot provides a workaround and eliminates Bitcoin’s code limits to increase real-world uses on the network.

Taproot gives app building, combined with increased scale, privacy, transparency, and fungibility. These changes should increase Bitcoin’s adoption worldwide and, with it, its price.   

Schnorr Signatures

The most fundamental change Taproot brings to Bitocin is a rehaul of its cryptography method. It previously used an Elliptic Curve Digital Signature Algorithm (ECDSA). Bitcoin’s creator, Satoshi Nakamoto, used ECDSA to produce a public key (i.e., a public ID) from a private key. Supposedly, he chose this method due to its lack of popularity.

ECDSA signatures are, however, vulnerable to exploits such as lattice attacks. Worse still, they cannot be compressed, slowing transaction processing speed and throughput. With Taproot, Bitcoin is shifting to Schnorr signatures.

These can be compressed. They will also improve the privacy of more complex smart contract transactions, while enabling simultaneous signature processing (batched validations).

Image courtesy of bitcoin.com

Merkelized Alternative Script Trees (MASTs)

The second change Taproot brings: MAST. These scripts feature a similar function to Schnorr signatures. They minimize on-chain data transfers.

MAST scripts compress transactional conditions into their simplest forms, called Merkle roots. Merkle trees are data structures used in computer science apps. In the case of Bitcoin, Merkle trees encode blockchain data efficiency and securely.

The MAST idea in a nutshell is that you have alternative scripts or script fragments stored as leaves in a single Merkle tree. Those leaves not used can be pruned away, saving space.

Merkle Tree Diagram

Image courtesy of Investopedia

Compare MAST to P2SH (Pay to Script Hash), where the entirescript must be hashed and then revealed on the blockchain when spent. This brings block space efficiency (and lower transfer costs) and numerous privacy benefits. 

With MAST, Bitcoin transactions of greater complexity, such as Bitcoin DeFi apps, are compressed into only one hash each. This minimizes memory usage and increases scalability. MAST enables Bitcoin developers to write more complex scripts requiring less gas (less usage for processing) .

Image courtesy of Stephen Tuttle

The Valuable Combination

Combing Schnorr signatures with MASTs is significant. Taproot means that Bitcoin now has a value beyond a simple Store-of-Value (SoV), like with gold. Bitcoin’s network now has the capability to develop an ecosystem of applications like Ethereum.

As Ethereum continues to grow and accommodate more complex apps, Bitcoins and its players understand the need to compete.

Bitcoin’s Possibilities

For an investor to feel secure with Bitcoin as a portfolio constituent, it’s crucial to understand the possibilities for development that will result from Taproot’s code changes. This understanding requires some technical knowledge, but this relatively simple understanding will still surpass that of the typical investor. 

Lightning Network’s Improvements

Our Bitcoin layers article introduced the Bitcoin Lightning Network, a Layer 2 solution that takes Layer 1 bundles and deals with them off-chain, providing Bitcoin with enhanced functionality. This is how Bitcoin has been able to have smart contract functionality in the past.

With Taproot, Lightning Network nodes which minimize memory usage and gas fees of Bitcoin payments by computing the transactions off-chain, shall gain scalability and privacy improvements. The two technical reasons for these improvements are due to Schnorr signatures:

  1. Switching to point-locked contracts
  2. Batched validation

These improvements should make Lightning Networks more intuitive and cost-effective for their users.

Lightning Network Applications

With Taproot’s upgrade increasing the efficiency of the Lightning Network, it will also provide for additional development of applications on the Lightning Network. This is an ecosystem of dApps intend to expand the uses for Bitcoin. 

Besides Blockchain developers, few people are aware of Bitcoin’s improved functionality. The primary source network of smart contracts and DApps has been Ethereum.

With “Layers,” we learned that Bitcoin’s Base Layer uses its Proof-of-Work consensus mechanism, Lightning is the Layer 2 of Bitcoin, and to it, we can add Layer 3 DeFi (Decentralized Finance) and dApps.

Taproot Risks

There are risks involved when a blockchain of any kind upgrades. Bitcoin, being the world’s most valuable decentralized network, certainly has many eyes on them. Yet this attention is a double-edged sword. It brings both expert hackers wanted to exploit protocol vulnerabilities, as well as brilliant computer scientists working against them.

Though Taproot should make Bitcoin more secure, there are always potential unforeseen errors, whether during or after Taproot’s implementation. The amount one chooses to invest should mirror their confidence in the upgrade.

Bitcoin’s New Core Function

Before Taproot was released, there was a September 13th Bitcoin Core 22 release hat helped prepare the Bitcoin Core for Taproot. A Bitcoin Core decides which blockchain contains the valid transactions. One of the key upgrades to the Core was Multisig, or coins that require signatures from multiple private keys in order to be spent.

Multisig is used for several purposes. For example, it’s used to secure funds from several devices. Even if one device becomes compromised or lost, the coins remain safe and accessible.

Multisig can also share control over funds between several users but requires cooperation (multiple signatures) to spend the coins.

Summary

The list of technical improvements coming to Bitcoin with Taproot is too long for a single article. Beyond Schnorr signatures and MAST scripts, there are discrete log contracts, script-less scripts, ring signature functionality, and other privacy increases.

The important takeaway, however, is that continued development is coming to Bitcoin. Taproot expands on its single use as a SOV and becomes a platform for dApps and DeFi. This change alone completely reimagines Bitcoin by linking it to Layer 2 and 3 solutions, and the future itself.

Disclaimer:  The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees.

The Token Classification Framework

Posted on by Jean Chalopin

If you wish to either evaluate a token or develop one of your own, you should understand the differences between the types of tokens. New users join the blockchain world daily, including politicians, regulators, and other decision-makers who can significantly influence the future of this technology. 

They will need clear and relevant knowledge of blockchain’s innerworkings so to make informed decisions. The best tool we have found for evaluating and separating tokens into different categories was created by Untitled INC.

Image courtesy of Untitled INC

This framework has multiple uses. It incorporates all the current token types and enables readers to draw distinct lines between them. 

Its development is ongoing but free for all. It was released for free use under a Creative Commons BY-NC-SA license allowing anyone to share, copy, redistribute it in any format, and to remix, transform, and build upon the material.

It’s a living document. As the field expands, extra dimensions may be added to the framework.

Five Dimensions

Tokens can be divided into five dimensions. 

Image courtesy of Untitled INC

These five dimensions are: 

  1. Purpose. What is the token designed to do?  Misunderstanding the token’s purpose leads to incorrectly calling it a cryptocurrency. It can be used as a cryptocurrency, or it can aid a network’s growth (network token) or simply act as an avenue of investment (investment token). 
  2. Utility. There are four general categories: 
    1. Usage – provides network access or features
    2. Work – provides work to the host system or blockchain
    3. Hybrid – offers both a and b
    4. Useless – no utility
  3. Legal status. As more regulation occurs, this category will evolve, and the presiding jurisdiction may alter a token’s classification. If a token provides no network nor service features, or is not a pure cryptocurrency, then it’s usually classified by regulators as a security token. But some tokens will hover between the two. Current legal frameworks were developed before tokens, and they may have to be adapted. 
  4. Underlying value. Most tokens are created with underlying monetary values, but the sources of these values differ significantly. They can be IOUs for real assets or rather like stocks with commercial or equity links, values which fluctuate. We do find that the network’s value may determine the token’s value, making valuation more interesting relative to traditional investing. However, value is extremely difficult to determine.
  5. Technical layer. Implementation of tokens occurs on different layers of a blockchain-based network. Generally, there are three technical layers:
    1. Blockchain-native tokens – the chain’s native token
    2. Non-native protocol tokens – part of a crypto-economic protocol that sits on the blockchain
    3. DApp tokens – a token on the application level

These five dimensions are complementary, and tokens are not exclusive to only one. Most are assessed through all dimensions. We will see that when we look at the archetypes of tokens, there are strong correlations between them. 

Token Archetypes

Generally, there are four token archetypes:

Cryptocurrencies.These have a use as a store of value (SOV) for wealth, are not controlled by a central authority, and can either be mined or pre-mined. There is no counterparty risk.

Tokenized assets. These provide access to assets such as gold, but also enable microtransactions. The issuing authority has control of the underlying asset, leading to counterparty risk since ownership is tied to one entity. 

Tokenized platform. A platform-like network that is not owned or operated by a central entity. Users start with limited roles, but now roles are available to all network participants. The token’s value, either financially or in terms of utility, moves with the network. 

Shared tokens. This is a tokenized financial instrument for investing in a company, with characteristics of a stock. The tokens improve on the traditional share model by being flexible, and having smart contract programmability. As regulatory frameworks develop, this is the most targeted and vulnerable of the token types.

Tokens As Part of a System for Valuation

Crypto tokens are only one component of a blockchain or distributed network. They are integral but should be evaluated in conjunction with the other two layers of a network: governance and technology.

Evaluating Matrices

It helps to look at some examples to see how the use of a framework aids in valuing any token.

Steem is an incentivized blockchain social media platform that uses three currencies: STEEM, Steam Power, and Steem$. STEEM is used as the currency of the publishing platform, measuring reputations and providing rewards to creators.

STEEM is its own blockchain. Therefore, it’s the native token. It’s used for keeping the network running and is therefore also a network token. Since its use is providing network features, it’s also a usage token, and because it provides a service (network), the legal status is deemed as a utility token.

Kin is both a token and an app inside an app ecosystem. Kin is used to pay for digital services inside several apps available on its network. In Germany, the Kin token could be regarded as a security and regulated as such.  

Kin is not just a cryptocurrency but has functionality and programmability contributing to the user experience. It’s a non-native token, and similar to STEEM, a network token doubling as a cryptocurrency as well. 

It’s also a network token and a usage token, but it differs from STEEM in that it can act as a cryptocurrency outside its system. Therefore, it can be regarded as a security token. 

The classification of tokens feels confusing to many, since they are relatively new and without a well-defined classification system. A good rule of thumb is this: any “crypto” can also be one or more types of “tokens.” 

Augur is a no-limit betting platform enabling gamblers to bet on sports, economics, world events, and more. Augur tokens are used to incentivize “Oracles” on the network who are essential to its function (Oracles bring off-chain data to the chain) as a decentralized prediction market. Oracles report events and receive a share of all network fees for their work. 

Since it was built on the Ethereum network, Augur is a non-native protocol token. Its primary use is to provide a reward for a needed function and is therefore a network token. And since the token is awarded as a result of work for the system, it’s a work token. An Augur token is not used outside the system, however, and so must be exchanged for external use. Thus, it’s also a utility token. 

Summary

The Token Classification Framework is a great system for defining cryptocurrencies or tokens. It requires users to think critically about their uses and identify their potential forms of regulation. 

As public sectors across the world dive into tokens, they should invest the time to define them according to their uses and subtypes rather than as part of the larger “crypto” buzzword. Yes, the presiding understanding of token classification remains limited, but the space is growing alongside the potential of blockchain. 

The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service, or offering. It is not a recommendation to trade.

Applications of NFTs in Commerce and Reality

Posted on by Jean Chalopin

However, the presiding thought is that these digital representations will only have limited shelf lives. In a few years, the same “Apes” which collectors are paying hundreds of thousands for will wane in popularity and eventually be worth nothing. Billions of dollars may indeed be earned or lost.  

Yet many have asked if NFTs have practical applications beyond these two worlds. Are they helpful in real life? 

While it’s difficult to think of NFTs beyond their 2D or 3D images, they do have several practical applications. At their core, NFTs represent either digital or physical content or even intangible property. Let’s review some of these applications. 

Art

During World War II, much of Europe’s most prized masterpieces were taken by force. In other words, their chain of custody was lost. “Fakes” replaced some of these works, while some remained lost for decades or forever. 

With NFTs, the original artworks are tagged to their masters; they are tracked. Originality is ensured. One of the most traditional of settings, an auction house, has the most to gain from this new technology. 

Also, physical artworks can be converted into NFTs (such as with Banksy), and vice versa. Ownership of art is thus being fractionalized (if desired by the seller), so now you can own 1/10,000 of a Banksy as well.  

Gaming

Gaming uses NFTs with in-game items available for purchase, trade, and reward. NFTs can be used across platforms, allowing for longer shelf lives even if interest in a particular game decrease. This facilitates consistent revenue streams for brands or game developers. 

In-game trading becomes easier between players, increasing demand, and the values of NFTs themselves. With ownership and transaction tracking, players need no longer worry on the possibility of a scam, since the trading itself is near-instantaneous.

Real Estate

Real estate and NFTs function perfectly together. NFTs can be the digital representations of deeds that prove ownership. Title searches become obsolete since the NFT owners are the landowners, potentially cutting expenses for land transfers. Further, NFT’s timestamping capability tracks the changes in any property’s value, providing for simplified taxation. 

NFTs accelerate property transfers, through the option of selling without intermediaries who often charge excessive fees.  

The use of smart contracts could even facilitate decentralized rental services for various properties, automating payments and other administrative processes. 

Supply Chains

Many products throughout the world have issues identifying their origins, particularly in the food and beverage industry. Improper tracking facilitates the risk of E. coli.

Any product in theory could have an attached NFT indicating a specific identifier and accompanying information, which would be immutable and public. Supply chains are already making us of several applications. 

Medical Records

NFTs are capable of storing medical records, but they don’t have to compromise patient confidentiality or risk malicious manipulation by unqualified sources because, as they are blockchain-based, they are validated by multiple nodes first. 

Hospitals, insurance companies, and other medical organizations are exploring narrowly defined NFT use cases for improving operations, including patient verification and medical procedure recording. Confidentiality is ensured. 

For example, NFT Birth Certificates are issued to newborns at delivery so to provide a lifelong and effective way of identifying the child and their linked adults. This is the evolution of the paper birth certificate. 

Event, Travel, and Other Tickets

Tickets will be in NFT form, including entry and parking passes programmed to have uniquely assigned IDs and driving rights. This reduces the risks of counterfeiting, fraud, and identity theft. 

An owner will require only one token rather than multiple tickets or cards, or even cash. Transportation will be facilitated through longer journeys having multiple checkpoints. 

Academic Credentials

NFTs can indicate attendance records, degrees earned, and other important information, all of which must remain immutable. 

If utilized, NFTs streamline multiple administrative processes within academic institutions while championing the original essence of blockchain—permanent, verified, and immutable. Paper certificates would become only ceremonial. 

Voting

Since the rampant claims of voter fraud in the USA’s 2020 election, there have been multiple calls for required IDs to be shown before voting. However, mandating IDs risks disenfranchising those who lack copies of their identification or voter registration. 

Voting issues such as these can be solved by integrating NFTs. NFTs can provide identity and residence verification without physical documentation. They drastically reduce voter fraud as well. 

Product Authenticity

Buyers can now be confident that their purchases are authentic.  Because a blockchain permanently stores product information, confirming rarity and authenticity is always possible.

NFTs store information about harvesting, manufacturing, and fair trade. Yet this does not stop at the commercial level: several companies are using NFTs at the design and prototyping levels.  

Fake drugs and medicines can be prevented with NFT tracking. For example, you scan a bottle of a drug or supplement purchased online and verify its entire journey and use-by date. Sellers who claim legitimate products but are selling counterfeits will be exposed through NFT’s inherent transparency. 

Intellectual Property (IP)

Patents are well suited for NFTs because they allow users to provide proof of ownership of nearly anything, which is not possible with traditional IP tools such as trademarks and copyrights.  

The chain of history from the time of creation through every generation of ownership can be distinguished with timestamps. The immutable nature of a blockchain forever defines the original creator of an IP and makes infringement claims impossible. Any blockchain is a public ledger.  

Metaverse 

Nearly everything in the Metaverse will be in NFT form, including the virtual representation of individuals, or “avatars.” Products will be paid for with fungible tokens, but products or items themselves will be in NFT form. 

NFTs will effectively be tied to your avatar, as will its reputation. You could potentially sell or rent your avatar out. 

Summary

Blockchain is still young at 13 years old, and NFTs are younger still. They not only represent new explorations of art but all collectibles or things, not currency. 

Likely, we will see NFTs become integral parts of our lives given their incredible security, transparency, and utility. Their potential use cases include almost anything, from intellectual property to medicine to real estate. As the Metaverse expands, this will become more and more apparent. 

The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees.

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