Zcash (ZEC) Report

Zcash (ZEC) Report (PDF)

Zcash (ZEC) Model (XLSX)

Zcash is a privacy preserving digital currency and the first to use Zero Knowledge Proofs to obfuscate the identities of parties to a transaction. Zcash uses zk-SNARKs, a variant of Zero Knowledge Proofs, to prove that the conditions for a valid transaction have been met without revealing any crucial information about the addresses or values involved. Even though Zcash transactions require additional computation to be processed, the architecture of its blockchain guarantees a level of privacy that cannot be matched by other privacy-preserving technologies, including Monero’s Ring Signatures. The protocol known today as Zcash was initially developed under the name Zerocoin, a collaboration between researchers at Johns Hopkins University, a group of cryptographers at the Massachusetts Institute of Technology, students at the Israel Institute of Technology, and Tel Aviv University. The genesis block of Zcash was mined in October 2016.

Laws and Regulations

SEC Fund Innovation Report (PDF)

Senate Banking Committee Hearing on Virtual Currencies (PDF)

How OFAC's Guidance May Negatively Impact Token Fungibility (PDF)

Origin Stories: The Term "Utility Token" (PDF)

CFTC Issues Advisory for Virtual Currency Products (PDF)

SEC Director's Remarks on Token Sales (PDF)

The Uncertain Tax Implications of Cryptocurrency Forks (PDF)

SEC Registration Trends for ICOs (PDF)

Rescission Rights for ICO Purchasers (PDF)

 

Bitcoin, at its heart, is a technology and the U.S. government generally does not regulate technologies themselves, but rather, how technologies are used. For example, PayPal is regulated as a money service business because it enables the sending of money over the Internet, but the Internet itself is not regulated as such. Not surprisingly, the U.S. Congress and many U.S. federal and state agencies, including the SEC and the CFTC, have begun examining the operations of digital asset issuers, their Users and the market for digital assets, and have claimed authority to govern various aspects of the digital assets ecosystem. 

It is not always easy to determine which agency has governing authority. For example, a CFTC commissioner recently said that digital assets “may actually transform at some point from something that starts off as a security and transforms into a commodity.” The CFTC determined in 2015 that bitcoin is a commodity and that fraud and manipulation involving bitcoin is within the purview of the agency. However, financial products linked to the value of digital assets, including bitcoin, may be structured as securities and subject to U.S. securities laws. In addition to complying with federal laws, bitcoin-related companies must also comply with state regulations, some of which are tailored specifically to digital asset activity, such as the “BitLicense”, which was created by the New York State Department of Financial Institutions in 2015. Still, because Bitcoin is a global network, the laws and regulations from jurisdictions around the world are applicable and how countries approach digital assets range from clear regulatory guidance and approval to outright bans on digital asset ownership.

Cardano (ADA) Report

Cardano (ADA) Report (PDF) 

Cardano (ADA) Model (XLSX)

Cardano is a high-profile smart contract platform and one of our favorite projects that we have analyzed. The platform is under development by IOHK, a blockchain consulting company led by Charles Hoskinson, the former CEO and Co-Founder of Ethereum. The team behind the project is technically competent and we have been impressed with their current and proposed technology. We caution investors that Cardano is still in a very early stage. There is a native token, ADA, and a standalone network, but all validating nodes are controlled by the project’s creators and the current iteration of the platform does not feature smart contract execution. Furthermore, many technical and economic decisions have not been definitively decided.

Aion (AION)

Aion (AION) Token Profile

Aion is a project focused on blockchain interoperability, or the ability to seamlessly exchange of tokens from one blockchain to the other, through its own intermediary network. Prior to founding the project, Aion’s co-founder, Matthew Spoke, was an accountant at Deloitte. While there, he wrote a paper describing the ways Bitcoin could eliminate the need for professional accountants. Deloitte’s CEO was particularly interested in the paper and decided to start a research lab that focused on blockchains. Spoke was a part of this research lab until June 2016, when he left Deloitte to join the Muskoka Group, a blockchain discussion group. Many Ethereum co-founders were members of this group and being in Toronto allowed Spoke to be involved in the early stages of the Ethereum project. Spoke is also on the Board of Directors of the Ethereum Enterprise Alliance and Nuco, the company developing Aion. The project’s technical implementation is based on the Ethereum Virtual Machine,  and it uses Zcash’s Equihash in its consensus algorithm. Aion launched a mainnet in April 2018, but its initial version does enable any degree of interoperability.

FOAM (FOAM) ICO Report

FOAM Token Sale Report (PDF)

  • FOAM is an intriguing project attempting to cryptographically prove the locations of entities through its “Proof of Location” protocol.
  • The cryptographic assurance of location is an important element for many smart contract use cases and existing infrastructure is inadequate for many proofs of location.
  • However, we are concerned that the FOAM token initially does not have enough use cases to create a robust two-sided market.
  • At launch and during the initial Static Proof of Location phase, the use cases for FOAM tokens will be limited to staking tokens on a Token Curated Registry or to “signal” the need for beacons.
  • The Dynamic Proof of Location phase is expected to introduce more opportunities for token use cases, but there is no guarantee that the project ever advances to this stage.
  • If FOAM is able to successfully create Dynamic Proof of Location, we believe there is an opportunity for some short to mid-term token appreciation.
  • Additionally, if Zones decide to exclusively accept FOAM as payment for Presence Claims, we believe there is opportunity for a healthier long-term market, but there is again no guarantee that this will occur.

Ontology (ONT)

Ontology (ONT) Token Profile

Ontology is a public blockchain project that aims to build a decentralized trust system where individuals and businesses can construct varying enterprise applications that leverage the blockchain data structure. It attempts to achieve that by repurposing many technologies originally developed by the NEO project, such as NEO’s virtual machine and Go-lang client. In essence, Ontology’s architecture mimics NEO’s smart contract platform, but with a focus on identity management and enterprise applications. There are many connections between the founders of the NEO project and Ontology. Notably, Ontology’s development company, OnChain, is also the main entity behind NEO and the both projects share team members. The Ontology blockchain utilizes a Verifiable Random Function (VRF) in addition to Delegated BFT in its consensus algorithm. This combination of Proof of Stake with VRF, and Byzantine Fault Tolerance consensus allows validators to create new blocks every 10 seconds. Like NEO, Ontology uses a dual token mechanism in its network; ONT is used as medium of exchange and in Proof of Stake, while ONG is used for transactions fees (gas).

Ontology (ONT) Report

ONT In-Depth Report (PDF)

Ontology is building a platform to make it easy for any type of business to develop and deploy their own blockchains and decentralized applications. Ontology calls itself a “peer to peer trust network” that allows all entities in the ecosystem to seamlessly trust each other and work together. The project was conceived by the Chinese blockchain development company, Onchain, which also created NEO. Onchain, NEO, and Ontology are separate entities, but Ontology is based on NEO’s architecture. Most of Ontology’s technology is forked directly from NEO, including NEO’s dBFT consensus algorithm, compiler, and virtual machine. It also largely repurposes NEO’s Go-lang client and adds a set of core protocols focused around identity management and data storage to provide a foundational layer to build trusted applications.

VECHAIN (VEN) Report

VEN In-Depth Report (PDF)

VeChain proposes to use the immutability of blockchains to store non-financial data through a tokenized system. Specifically, its Thor Core client was designed to store supply chain data and execute relevant applications based on smart contracts. This client is largely based on Geth, the Go implementation of the Ethereum protocol, but with changes to support an alternative consensus algorithm called “Proof-of-Authority,” which relies on a validator’s public identity and reputation. If a validator misbehaves, it is excluded from the network and its public reputation is tarnished. However, there is no collateral forfeiture or “punishment” other than loss of reputation, which we view as a key risk of the project. Like Ethereum, it uses the Ethereum Virtual Machine for the computation of smart contracts. While this design choice makes it easier to bootstrap the network, we note that, like Ethereum, Thor Core is unable to perform API calls, which may limit some of its advertised use cases.

TRON (TRX) Token Report

TRX In-Depth Report (PDF)

TRON is a platform for content creation and social media for the entertainment industry. The network was founded by Justin Sun, the founder of Peiwo, a platform that emulates the features of Snapchat. Peiwo, which has ten million registered users, is registered in the TRON network. The TRON roadmap is divided into five stages. The first, Exudus, proposes the creation of a mechanism to upload, store and distribute content that is powered by IPFS. The second, Odyssey, will introduce economic incentives through a blockchain to the platform introduced by Exudus. The third, Great Voyage, will enable users to start their own ICOs using the native TRX token. The fourth, Apollo, proposes the creation of a decentralized exchange that enables users to swap tokens. The fifth, Star Trek, proposes the creation of a decentralized gaming system and prediction markets. Finally, Eternity, the final stage of platform, will enable “traffic monetization” for video games and game development platforms. Combined, these proposed stages in TRON’s roadmap are extremely ambitious. The technical feasibility of all these features is a potential concern, and implementation details were not revealed in the project’s white paper. Additionally, in late 2017, Juan Benet, Founder of Protocol Labs accused the project of plagiarizing the IPFS and Filecoin white paper in the Tron white paper.

Ripple (XRP) Token Report

XRP In-Depth Report (PDF)

XRP Model (XLSX)

XRP is one of the most contentious projects in the digital asset industry. It is one of the oldest projects and largest in terms of network value, trailing only Bitcoin and Ethereum. This contentiousness is a result of differing philosophical beliefs about decentralization and the value of censorship-resistance. The debate can be summed up by the fact that the XRP digital asset was created and continues to be largely maintained by a central organization, Ripple Labs. This structure is in direct opposition to the open source ethos espoused by the cryptocurrency community at large. So, while XRP is technically a cryptocurrency, it is not decentralized like most. We think it is helpful to think of Ripple Labs as an enterprise software company that has developed interfaces and APIs for financial institutions that in some, but not all cases, use the XRP digital asset. Its current product offerings include xCurrent, a financial institution messaging system like SWIFT, xRapid, a real-time payment platform that uses the XRP digital asset, and xVia, an upcoming payments interface that targets emerging markets.  Financial institutions that use these assets make up RippleNet, the interconnected network of market participants.

Raiden (RDN)

RDN Token Profile (PDF)

Polymath is a project that aims to create platform for the exchange of security tokens while being legally compliant. POLY, the platform’s native token, is based on Ethereum as an ERC20 token and serves as a gateway to the services offered by the Polymath exchange. The token attempts to enable individuals and institutions to authenticate their identity and provides a bidding mechanism for the issuances hosted on the platform. Issuers can also use POLY to hire smart-contract developers through the platform to work on key aspects of their tokens’ smart contracts. According to the project’s website, the Polymath team is working on a securities token standard called ST20; which seems to be specifically designed for ERC20 tokens. POLY will also be used to pay for fees, including for KYC accreditation, which will be required in order for an investor to get whitelisted for future offerings. The platform also aims to employ governance features through a staking mechanism also based on POLY, and implemented through a number of smart contracts. Most of the development of these smart contracts has been outsourced to SecureBlocks; a Dehli-based Solidity development shop. Partnerships with the Barbados Stock Exchange (BSE) and tZero have been announced to enable the trading of security tokens. It appears that the partnership with the BSE will relate to at least one security token, the Polymath Capital Fund, but it is unclear to us whether all security tokens associated with Polymath will go through the BSE, tZero, or another regulated securities exchange or ATS platform. It is also possible that these regulatory responsibilities could be passed on to the Legal Delegates described in the whitepaper.

Polymath (POLY)

Poly Token Profile (PDF)

Polymath is a project that aims to create platform for the exchange of security tokens while being legally compliant. POLY, the platform’s native token, is based on Ethereum as an ERC20 token and serves as a gateway to the services offered by the Polymath exchange. The token attempts to enable individuals and institutions to authenticate their identity and provides a bidding mechanism for the issuances hosted on the platform. Issuers can also use POLY to hire smart-contract developers through the platform to work on key aspects of their tokens’ smart contracts. According to the project’s website, the Polymath team is working on a securities token standard called ST20; which seems to be specifically designed for ERC20 tokens. POLY will also be used to pay for fees, including for KYC accreditation, which will be required in order for an investor to get whitelisted for future offerings. The platform also aims to employ governance features through a staking mechanism also based on POLY, and implemented through a number of smart contracts. Most of the development of these smart contracts has been outsourced to SecureBlocks; a Dehli-based Solidity development shop. Partnerships with the Barbados Stock Exchange (BSE) and tZero have been announced to enable the trading of security tokens. It appears that the partnership with the BSE will relate to at least one security token, the Polymath Capital Fund, but it is unclear to us whether all security tokens associated with Polymath will go through the BSE, tZero, or another regulated securities exchange or ATS platform. It is also possible that these regulatory responsibilities could be passed on to the Legal Delegates described in the whitepaper.

Kin (KIN)

Kin Token Profile (PDF)

Kik Interactive Inc. (Kik) is one of the first mainstream companies to launch a token sale. It hopes to leverage its existing 15M monthly active users to create an ecosystem that aligns the interests of Kik, its developer community, and its mobile app users, using the Kin token. The company claims that developers will be incentivized to create new and unique services and consumers can earn and spend Kin in the Kik app.  Kik and the Kin Foundation received 90% of the total supply of tokens, so they too are incentivized to grow the Kin ecosystem. The ICO lacked key disclosure in important areas (e.g. technical details) and the project made statements about the token’s valuation that did not take into account key details. Since the ICO, KIN announced that it would launch on the Ethereum blockchain but then announced it would launch on the Stellar blockchain. It is unclear at this point whether KIN will launch on both or only Stellar.

Verge (XVG)

Verge Token Profile (PDF)

Verge is a privacy preserving cryptocurrency based on the Bitcoin protocol that attempts to obfuscate not only the transactions within its blockchain, but also the communication between the many nodes in the network. The Verge protocol is integrated with a Tor onion routing system to encrypt the data exchanged across a network of nodes. Verge nodes are organized to facilitate integration with I2P, yet another network obfuscation mechanism that creates a shielded intranet of nodes. Combined, these two features are intended to provide a strong combination of both packet-based and circuit-based routing. Like Dash, Verge employs multi-algorithmic mining and five different Proof-of-Work hashing algorithms can be used to mine a Verge block. Like Bitcoin, Verge did not have an ICO and it was initially launched through mining. The project now seems to be working on several layer-two features to enhance the value of its platform, such as smart contract integration through Rootstock and atomic swaps. Shortly after Verge was accused of paying John McAfee to make it his Coin of the Day, the project announced that it would release the Wraith Protocol before the end of the month. This was outlined in a critical article about the project that was published by CryptoSlate on April 15, 2018. It also included evidence that 18.6M XVG had been moved from the project’s fundraising wallet.

DAR Educational Resources

To access our in-depth educational guide, please click here.

 

INTRODUCTION

Many people do not understand what cryptocurrencies are, but after reading this overview, we hope that you will understand one cryptocurrency, Bitcoin. Before we begin, we need to make a distinction between “Bitcoin” (upper-case B) and “bitcoin” (lower-case b). “Bitcoin” (upper-case B) is the software that runs the Bitcoin network. “bitcoin” (lower-case b) is the native token or “cryptocurrency” that is used to transact in the network. We have broken up this overview into five sections: (1) the participants in the Bitcoin network, (2) the underlying technology, (3) how users transact, (4) network security, and (5) regulatory environment.

 

BITCOIN NETWORK PARTICIPANTS

  • Users: Users are the parties who transact with one another on the Bitcoin network. Users do not hold bitcoin physically; rather, they control the right to move specific amounts of bitcoin across the network.  Users safeguard this control in “wallets”, which can be stored on a personal computer, a piece of paper, a specially designed piece of hardware, or through a third-party service provider, such as Exchanges.
  • Exchanges: Most people purchase bitcoin from Exchanges. Exchanges can either sell bitcoin directly to Users, or create a marketplace where Users can transact amongst themselves. They can also store bitcoin for Users or help initiate transactions to other parties on the Bitcoin network. A parallel might be an online bank account where one can purchase financial products, in addition to wiring money.
  • Miners: Mining is the process by which transactions are verified and confirmed on the Bitcoin network. Miners, which are specialized computers, race to solve a computationally intensive mathematical problem. Solving this math problem verifies and confirms that the proposed Bitcoin transactions are legitimate and that no one is sending bitcoin that they do not own. The first Miner to win the race is awarded with newly created bitcoin, as well as transaction fees from senders who want their transactions processed more quickly. Around the year 2140, new bitcoin will cease to be created and Miners will only be rewarded with transaction fees.

 

TECHNOLOGY

Bitcoin solved a problem in computer science originating in 1982, called “The Byzantine General’s Problem”. The question was how to establish trust and reach agreement among parties who do not necessarily know or trust one another. To solve this problem, Bitcoin employed a combination of cryptography and economic incentives. The cryptography ensures, among other things, that people only spend bitcoin that they own, and the economic incentives make it more profitable for Miners to act honestly rather than nefariously.

The blockchain is a continually growing database of all past transactions. Each “block” is a collection of transactions that are validated at the same time, and the “chain” is the chronological sequence of blocks containing all past transactions. A new block is created approximately every ten minutes by Miners, who are awarded with new bitcoin, currently 12.5 BTC, as well as any transaction fees.

Bitcoin uses several cryptographic functions, but for purposes of this overview, it is only important that you understand Private Keys, Public Keys, Addresses, and Wallets.

  • Private Keys are strings of random numbers and letters, chosen at random by the Bitcoin software that can be used to spend the bitcoin associated with a specific Address. A parallel might be the PIN number of a checking account; and thus, Private Keys should not be shared.
  • Public Keys are derived from their associated Private Key, but can be publicly shared. Addresses are derived from Public Keys.
  • Addresses often represent Users’ public identities, like a bank account number. This is where you send or receive bitcoin and both the sender’s and receiver’s Address are included in the transaction data stored on the Bitcoin blockchain.
  • Wallets are a collection of Users’ Private Keys and Public Keys that give Users the right to move the associated bitcoin. Wallets do not physically contain any bitcoin.

 

BITCOIN TRANSACTIONS

Transactions are like the double entry accounting system that dates back hundreds of years. Each transaction contains inputs, or debits against a sender’s account, and outputs, or credits to a receiver’s account. Balances are the sum of all debits associated with their private keys, minus all credits.

To initiate a transaction, you only need to know the Address of the person to whom you want to send bitcoin. You, or the Exchange on your behalf, will “sign” the transaction with your Private Key, thereby authorizing the transfer of bitcoin. Once the transaction is initiated, the Bitcoin software will look at all previous unspent outputs (debits) related to your Public Key to make sure you hold at least as much bitcoin as you want to send. Because a new block is only created every ten minutes, the transaction is not completed immediately, but is instead added to a list of unprocessed and unverified transactions called the Memory Pool or “Mempool”.

Miners participate in a competition to create new blocks that contain transactions from the Mempool. Because blocks have a fixed size, all pending transactions in the Mempool do not necessarily fit in one block, and Miners prioritize transactions with higher fees. Transaction fees are specified by the sender of bitcoin, so if timeliness is important, the sender may consider paying higher fees.

The competition is a race among the Miners to find the solution to a mathematical puzzle that confirms the validity of a Bitcoin transaction. This competition requires Miners to contribute significant amounts of computer processing power to the network, making the puzzle difficult to solve. Although difficult to solve, it is very easy to verify that the solution is legitimate. After solving the puzzle, the winning Miner notifies the other Miners in the network of its solution, and the other Miners then verify that the solution is indeed legitimate. Once verified, the new block is cryptographically linked to the chain of previous blocks. Miners then begin solving the puzzle for new transactions that have accumulated in the Mempool.

 

NETWORK SECURITY

If you have heard about Bitcoin, you have also probably heard about hacks, thefts, and lost hard drives containing access to large amounts of bitcoin. The software running the Bitcoin network is extremely secure, built on decades of cryptographic research, and has an economic incentive structure making it is more profitable to protect the integrity of the blockchain than to attack it. However, Bitcoin is still in its infancy and should be considered an experimental technology. Although rare, other cryptocurrencies have had critical errors in their codebases.

Most cryptocurrency-related security incidents resulting in theft or loss of funds have been due to user-error or issues with third party service providers. Because Bitcoin is an open source, decentralized network, there is no central authority to reset passwords or recover lost funds if something goes wrong. The security of private keys, and therefore access to funds, is the sole responsibility of Users. Private keys can be stored locally on a computer, paper wallet, or hardware security module, such as a Ledger Nano S. They can also be entrusted to third parties, such as Exchanges and online wallet providers. When using any online service, we encourage best practices with regards to internet security, such as the use of strong, unique passwords and two factor authentication services, such as Google Authenticator. Exchanges and online wallet providers have been hacked in the past, which exposed Users to loss of funds, even when they followed best security practices. Therefore, we encourage the use of only vetted, reputable third party service providers to mitigate counterparty risk.

 

REGULATORY ENVIRONMENT

Bitcoin, at its heart, is a technology and the U.S. government generally does not regulate technologies themselves, but rather, how technologies are used. For example, PayPal is regulated as a money service business because it enables the sending of money over the Internet, but the Internet itself is not regulated as such. Not surprisingly, the U.S. Congress and many U.S. federal and state agencies, including the SEC and the CFTC, have begun examining the operations of digital asset issuers, their Users and the market for digital assets, and have claimed authority to govern various aspects of the digital assets ecosystem. 

It is not always easy to determine which agency has governing authority. For example, a CFTC commissioner recently said that digital assets “may actually transform at some point from something that starts off as a security and transforms into a commodity.” The CFTC determined in 2015 that bitcoin is a commodity and that fraud and manipulation involving bitcoin is within the purview of the agency. However, financial products linked to the value of digital assets, including bitcoin, may be structured as securities and subject to U.S. securities laws. In addition to complying with federal laws, bitcoin-related companies must also comply with state regulations, some of which are tailored specifically to digital asset activity, such as the “BitLicense”, which was created by the New York State Department of Financial Institutions in 2015. Still, because Bitcoin is a global network, the laws and regulations from jurisdictions around the world are applicable and how countries approach digital assets range from clear regulatory guidance and approval to outright bans on digital asset ownership.

Stellar (XLM) Token Report

XLM In-Depth Report (PDF)

XLM Model (XLS)

Stellar Lumens is a payments rail that is specifically designed for remittances, micropayments, and low cost financial services. The protocol employs a novel consensus mechanism called the Stellar Consensus Protocol (SCP), which provides low latency for transactions regardless of the amount being transacted. SCP also allows trust ratings to be assigned to the nodes that validate transactions, thereby making validation power proportionate to a quantitative metric representing trust. This protocol design also allows for low network fees, thereby enabling low cost microtransactions. Many partnerships have been created to build services on the Stellar network. For example, Deloitte, in June 2016, announced a partnership with Stellar to build a cross-border micropayments app. In November 2017, a partnership with IBM was announced to move money across borders throughout the South Pacific.