Disclaimer: Everything we write in "The Crypto Insider Report" is an x-ray of the industry as we see it, through the lens of publicly available information. We are not financial advisors.
One of the most common confusions is related to the way we interpret the pricing of a crypto asset. Most people look at performance versus USD/USDT/USDC, but that's not native thinking for many reasons. First of all, because little money invested in crypto goes back to FIAT. Secondly, because the benchmark should not be an asset massively impacted by inflation like the dollar.
Specifically, we all know that the S&P 500 index has risen ridiculously much in recent years, right? But, you can see in the image below, which is extracted from Pompliano's newsletter, how it really performed versus a scarce asset like Bitcoin.
I had in Capital the first episode of a series in which I want to describe the features that make bitcoin the standard for what we already know as hard money, and the feedback from those who haven’t been in crypto so far has been very good. It is important to speak the language of those who haven’t had contact with our world before, not only because it helps with adoption but also because more clarity is needed in communicating with our community.
The comparison to the S&P 500 is something that everyone can easily understand, and I would like the free newsletter to include, in the future, more and more such analogies that you can use in discussions with friends, family, etc.
Every person who gets into crypto knowingly does not impoverish others, but it is a win-win that, cumulatively, leads to the growth of the industry.
Whether you want it or not, if you’re reading this, you're already an apostle of crypto.
Vlad
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The first steps in crypto: Understanding Byzantine Agreement
To understand the Federated Byzantine Agreement (FBA), we must first take a look at Byzantine Fault Tolerance (BFT). Fault Tolerance is the feature that allows a system to continue to function correctly in the event of one or more failures occurring within some of its components.
The quality of the way the system operates may not decrease at all, or the decrease may be proportional to the severity of the failure. In comparison, in a system designed without this feature, even a minor failure can cause a total collapse.
When it comes to Blockchain, this refers to a network’s ability to protect itself from failures that derive from the Byzantine General’s problem and make it more challenging to achieve a consensus. For example, such failures could be network congestion or disconnection, malicious attacks, or incorrect request processing.
A Byzantine Fault Tolerant system is able to continue operating even if some of the nodes fail to communicate or engage in malicious behavior.
There are several ways to build a Byzantine-tolerant blockchain, and they are related to the different types of consensus algorithms, that is, the mechanisms through which a blockchain reaches consensus. For example, Bitcoin’s solution for Byzantine fault tolerance includes atomic broadcasting and public-key cryptography.
Many blockchains have implemented some sort of BFT. The traditional Byzantine agreement is a good example. In this case, the agreement is reached when a certain minimum number of nodes, known as a quorum, agree on the solution to a given problem. While such a consensus is fast and efficient, it sacrifices decentralization to achieve these characteristics as membership in Byzantine agreement systems is set by a central authority.
Here is where the Federated Byzantine Agreement (FBA) comes in, which is a decentralized alternative to BFT. So let’s dive deeper into what FBA entails.
What Is FBA and How Does It Work?
In a BFT system, there must be a list of recommended validators, which is defined by a central authority, typically the company behind the protocol. Even if anyone can spin up a validator, only those the authority adds to that list can participate in consensus. So, such a system features a centralized, closed membership.
In FBA, there is no such list chosen by a central authority. Instead, the nodes (validators) choose the other validators they trust, and their list of trusted nodes is known as their quorum slice. In a system of this type, several quorum slices will overlap and thus form a quorum, which is the number of nodes required to reach an agreement within the system. The system-wide agreement is reached when overlapping quorum slices communicate the transactions.
Without a central authority to decide on the recommended validator list, FBA creates an open membership network. This means anyone can run a validator and participate in the network’s consensus as long as any other participating validator adds them to their quorum slice. This further allows for decentralization as more and more nodes can be added to the network, promoting organic network growth.
The Ripple blockchain pioneered the FBA consensus mechanism, but the Stellar blockchain refined it and successfully implemented the first safe and secure FBA.
Pros and Cons of FBA
Some of the advantages of FBA include the following:
FBA ensures an open membership.
Since there is no central authority, individual nodes choose the validators they trust, and they can have several quorum slices.
Anyone can join and leave at any time, so there is a low barrier to entry.
Robustness in the face of failure - even if a node goes down, the rest of the system will keep operating and will stay intact.
Low latency as transactions can be closed in just a few seconds, which leads to high throughput and network scalability.
However, a disadvantage is that trust among participants is required. Then, some experts consider that quorum slices can actually lead to centralization, which is the opposite of what an FBA system tries to achieve.
Conclusions
To sum up, the Federated Byzantine Agreement is a decentralized alternative to the traditional Byzantine agreement. An FBA ledger can be accurate as well as up-to-date even if not all nodes agree.
The quorum formed from the choices of each node is the one that convinces the entire system of agreement. Given that there is no central authority, anyone is free to join the network. Examples of well-known cryptocurrencies that use the FBA include Stellar and Ripple.
Animation of the day: What Is Cloud Mining?
For more animations: Cryptomatics
Tania
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The Altcoin Pulse
1. Metaverse Group, an entity focused on real estate in the metaverse, acquired a patch of digital land in Decentraland for a record amount of $2.4m (equivalent to 618,000 $MANA). The virtual area, which is roughly equivalent to 6,090 square feet of land, is located in the Fashion Street district and will host events dedicated to the fashion sector.
2. ENS is about to be used as a collateral asset in Aave.
3. Imagination roaming freely: a tease of lines about an adiVerse (adidas metaverse) built in The Sandbox.
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Interesting Headlines
1. The last week stood out by net flows of $154m in the digital asset funds tracked by CoinShares, the 14th consecutive week of positive net flows. Most volumes went into Bitcoin funds ($114m). Ethereum continues the series of positive net flows ($13m), while Solana ($9m) and Polkadot ($5m) attract significant amounts. There is also an orientation of investments towards diversified / multi-asset funds ($14m).
MTD=month-to-date (November), YTD=year-to-date, AUM=total assets
2. It seems that Binance will find the home for its global HQ in Ireland. At the same time, it is in talks with sovereign wealth funds to conduct a funding round. These discussions are being held in parallel with those held for a funding round for Binance US before its listing on the stock market.
https://blockworks.co/binance-looks-to-settle-on-ireland-as-global-headquarters/
3. 31% of hedge funds managers, 24% of investors in alternative assets, and 13% of private equity funds plan to add crypto to their portfolios in the next 1-2 years, according to an EY study.
https://decrypt.co/86494/hedge-fund-invest-crypto-bitcoin-ernst-young
4. Pantera Capital raises the fourth fund dedicated to the crypto space. The closing target is estimated at $1bn. The fund will invest in equity, crypto tokens that have been launched or are in development.
https://www.coindesk.com/business/2021/11/23/pantera-capital-raises-600m-for-new-crypto-fund-report/
5. Citigroup opens a special division dedicated to institutional investors in the crypto space and plans up to 100 new hires.
https://www.theblockcrypto.com/linked/125051/citigroup-hires
6. We have had a reset of the funding rates lately, leaving the market less exposed to cascading liquidations due to a level of excessive leverage.
7. Transactions with BTC units purchased more than a month ago decreased to a level of 2.5% of the daily volume. Thus, for now, long-term holders show conviction and don’t sell exaggeratedly at these levels (but are likely to add to their positions). Glassnode's chart divides BTC coins into different ranges depending on when they were last traded. Considering only the intervals of more than one month, which it associates with long-term conviction, the chart analyzes their volume from the daily traded BTC total. It is not used to identify market tops or bottoms but to locate the processes of profit markings or accumulation.
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Tweetstorm of the week:
How Yield Farming came about on a large scale in crypto:
Business book of the week: The fourth turning: An American Prophecy. It's a book that I first heard about from Raoul Pal, and later, pressured by Emil, I started reading it. I haven’t finished it, but I liked it so much that I recommend it. Crypto plays a decisive role in the fourth cycle described by the author.
Youtube clip of the week: Benjamin Cowen talking about the change of the bull market structure:
That's a fair point. Using native financial instruments to express the value of token such as $STANDARD does make a lot more sense. Nevertheless, as behavioural economists have shown, humans are not much of a rational being, are they? It's one of these things we're humans prefer comfort, even if it means getting a skewed/biased piece of information. Fiat currencies are still the means of exchange that we use in our day-to-day. We trade our time for it - at least most of us still do - only to have the flexibility to trade back for whatever makes us happy and fits our needs further down the line.
It would be slightly unproductive if not confusing to use other points of reference than fiat currencies, at least for the time being... until better solution gain traction relative to fiat currencies anyway.