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RelayNode NYC #30 - December 2

David Gogel

Welcome to RelayNode NYC Area edition! The NYC blockchain ecosystem is growing rapidly. Our goal is to harness its energy and innovation for the benefit of New Yorkers and provide a weekly curated list of interesting content, upcoming events, and local jobs.

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RelayNode NYC is curated by:

David Gogel Advisor & Finance Lead @ Paperchain fmr Associate @ Techstars' Blockchain Accelerator, Co-president @ Wharton FinTech, Corp dev @LinkedIn @AIG

Hsin-Ju Chuang Founder @Dystopia Labs. Former-Head of Growth @Stellar/Lightyear, Solana. Ex-Director at Tezos (TQ)

1 Big Thing: Crypto M&A & Prime Brokerages…

Coinbase has generated significant revenue (estimated at ~$2B+ from transactions fees) from its core businesses (Consumer, Pro) and has used surplus capital to build or invest in teams working on mass market interfaces or tools for institutions to accelerate its vision for an open financial system. Last week, CoinDesk spread a rumor that Coinbase acquired Tagomi Systems, a crypto prime brokerage platform, for $150M. Tagomi has raised a total of $28M to date. The acquisition would have been Coinbase’s largest acquisition to date (bigger than the $120M acquisition of Earn). The acquisition was denied by both companies and the CoinDesk article was later corrected. What was the rationale behind the rumored acquisition?

Why M&A: If you look at the most successful technology companies reaching $1B+ in revenue, success is defined by creating a new business that captures a dominant share of a large addressable market. Most of the growth is driven by a core business. Companies invest in growth organically through investments in sales & marketing, research & development, capital expenditures or inorganically through acquisitions. During phases of rapid industry growth, firms need to speed up time to market through M&A or partnership with existing firms vs. building organically. Many successful acquisitions are the result of defensive moves to acquire products or technology that gain more traction than proactive organic efforts.

The big picture: Coinbase is valued at $8B after raising a $300M series E in October 2018 led by Tiger Global Management. Coinbase’s main business include a retail brokerage, pro exchange, and custody / asset management services. Core revenue drivers include transaction fees, gains & losses on crypto assets, and AUM fees on custody / asset management. Coinbase Prime uses a maker-taker fee model for determining its trading fees. Orders that provide liquidity (maker orders) are charged different fees than orders that take liquidity (taker orders). Fees on Coinbase are high compared to those on other crypto exchanges. Further, crypto exchange fees are much higher than those on non-crypto exchanges. Meanwhile, zero-fee trading for retail is emerging (and prevalent in the non-crypto space… Robinhood, Schwab / TD merger anyone?) In the long run, current fee rates appear unsustainable and margin compression unavoidable, forcing Coinbase to evaluate new growth opportunities.

Why a prime broker: Fragmentation in the crypto markets has resulted in pockets of liquidity and data overload for clients who are buying in size and attempting to assess execution quality and implicit cost slippage. Tagomi is an electronic agency brokerage service that launched in December 2018, with a focus on serving institutions (hedge funds, RIAs, broker dealers, HNWs) with large cryptocurrency transactions. Using Tagomi, customers get access to 15 exchanges and venues with integrated custody products and treasury management. Tagomi does not provide liquidity using its own balance sheet - it is an agency broker that acts as a middleman to the exchanges and places trades on behalf of clients. Tagomi offers smart order routing technology which allows the brokerage to monitor market data, pool liquidity, and shop around for the best price across exchanges to provide trade execution services. Tagomi also provides lending, shorting, margin, and settlement services.

Strategic Rationale: The acquisition of Tagomi would allow Coinbase to bolster its core business by increasing its Pro / Prime market share with institutional traders. I view it as both an offensive move to gain market share and lower revenue concentration, as well as a defensive move to protect its high fees through increased liquidity, potentially through prioritized order flows. Coinbase would derive new revenue from spreads on financing and trading commissions, and generate revenue whether customers trade on Coinbase or on another exchange. The acquihire would expand Coinbase’s footprint outside of San Francisco and bring in top Wall Street talent with extensive experience across top shops including Citadel, Two Sigma, Virtu, KCG, and Goldman Sachs. Further, after several high-profile executive departures from Coinbase’s institutional business and an open CTO seat, Greg Tusar, Co-founder & CTO of Tagomi, has over a decade of experience as Global Head of Electronic Trading at Goldman Sachs and could help bolster credibility with traditional funds. Further, the acquisition would create new capabilities for Coinbase to provide lending, shorting, margin, and settlement services, rather than build all those services in house. Finally, an acquisition would potentially accelerate Tagomi’s ability to add security tokens to its portfolio of supported assets and trade them by leveraging Coinbase’s broker-dealer license.

The risks: Strategically, the acquisition did not make a lot of sense for me from the perspective of Tagomi’s management team. Sure, a $150M valuation on $28M in capital raised for a 1-year old business would have been a very lucrative exit for management and investors, but I believe that Tagomi will become more valuable if it remains independent from a crypto exchange. After all, the crypto market structure will remain complex / fragmented and significant value can be captured by providing an aggregated order book and best-in-class execution across venues, without being viewed as biased and potentially prioritizing flow to an equity owner. Partnerships with multiple exchanges, including Coinbase, is likely a better outcome for Tagomi management and customers. Tagomi maintains the customer relationship and has negotiating leverage with exchanges to provide liquidity. It was not surprising to see Tagomi’s partnership with Binance.US to bring extra liquidity. Binance.US is the 15th exchange to join Tagomi, along with a number OTC desks both in the U.S. and abroad.

The bottom line: Industry consolidation is likely required to clean up the market fragmentation and bring in larger pools of institutional capital (especially for later-stage rounds and exits). A more robust crypto M&A market is likely to materialize, fueling both substantiated and unsubstantiated rumors. Coinbase will continue to position itself as an indispensable part of the crypto ecosystem and bolster its core businesses through strategic partnerships and M&A. Beyond the core, Coinbase will invest in strategic and venture bets to enter adjacent markets and position itself for future disruption.

Things to Read

🌐 Macro / why Bitcoin?

  • Howard Marks, Co-Chairman of Oaktree Capital, released a great memo on negative interest rates. He suggests “move out the risk curve to strive for returns above those offered by safe instrument in this low-return (or negative-return) world… but do so with caution.”

  • Open Interest on BitMEX declined rapidly last week from ~110K BTC to the 80-90K BTC range. According to data from skew, BitMEX's perpetual swap traded at a discount to the spot price for a full week (backwardation) resulting in shorts paying longs. Put another way, traders believe that Bitcoin will depreciate in the future vs. the USD. Implied volatility remains on a downtrend. Short-term bearish sentiment prevails with major downside risks if capitulation occurs.

  • Chris Burniske, GP at Placeholder VC, tweets about how “tribalism is the biggest drain on crypto's human resources that I see today. Tribal toxicity drives newcomers away, has caused valuable talent to leave the industry, and clouds the thinking of the committed.” One day we'll remember we're all human and have more similarities than differences.

💰 Funding & Exits

  • TRXMarket, a decentralized exchange built on the TRON blockchain, was acquired by Poloniex. TRXMarket, one of the 127 TRON Super Representatives, boasts a 7-day transaction volume reaching 30M and is a top ten DApp by transaction volume according to DApp Review. Financial terms were not disclosed.

  • MoneyGram, a global provider of money transfer services, announced that Ripple, a provider of enterprise blockchain solutions for global payments, made the final $20M investment in MoneyGram equity pursuant to Ripple's original $50M equity investment commitment made earlier this year. Ripple purchased newly-issued equity at $4.10 per share, which represents a significant premium to MoneyGram's current market price of ~$3.10. Funding will support MoneyGram's operations as the company continues to increase the volume and use of On-Demand Liquidity, Ripple's product that leverages XRP to send money globally, instantly.

  • Wasabi Wallet, a privacy-centric bitcoin wallet launched by zkSNACKs Ltd., raised $337,500 (for a 4.5% equity stake) from Cypherpunk Holdings, a publicly-traded Canadian firm focused on operating as a merchant bank that intends to own digital privacy coins and equity investments related to blockchain tech.

  • Securitize, a provider of services for managing and issuing digital securities, raised a “seven-figure sum” from SBI Investment, the asset management subsidiary of Tokyo-listed SBI Holdings. The investment follows Securitize’s recent announcement that it had raised $14M from Santander Bank and MUFG.

  • Openfinance, a secondary trading market and ATS for digital securities, announced it raised $8.6M from 19 different investors to continue building out its trading platform.

  • CoinShares, a crypto asset manager, obtained a broker-dealer license from FINRA through an acquisition of Group Capital. This move will likely enable the asset manager to offer security tokens or crypto investment products to U.S. investors. Financial terms were not disclosed.

  • Arbol Inc., a weather derivatives software platform, announced it raised $2.2M in a seed round led by Finch Finance, with participation from Space Capital. The platform aims to reshape the weather risk market by combining the power of big data and machine learning with smart contracts to allow users to get paid automatically when adverse weather leads to financial loss.

  • TokenData released a fantastic report on M&A in the crypto / blockchain industry. 350 acquisitions involving cryptocurrency and blockchain companies have taken place since 2013. M&A activity peaked in 2018 with more than 160 deals. Total deal value at $4B since 2013, with $2.8B of M&A activity in 2018 and $700M in 2019.

🔓 DeFi / OpFi

  • Martin Lundfall, Formal Verification Researcher at Dapphub, MakerDAO and CirclesUBI, introduced ‘chai.sol’, an ERC20 wrapper over the Dai Savings Rate, a gas-less token transfer enabling users to accrue interest on Dai without requiring it to be locked in the Dai Savings Rate.

  • Stake Capital, which provides digital asset management through a decentralised cooperative (DAO), announced StakeDAO, a revenue-sharing DAO for DeFi services, enabling DAO token holders to continuously receive staking rewards. Binance Research released a great overview of DAOs for those getting up to speed.

  • The NYSE filed paperwork with the U.S. SEC to allow companies to raise capital as part of a direct listing.

💸 STOs / Stablecoins / Tokens

  • Eric Wall, writer at the Human Rights Foundation, has a great article on stablecoin privacy. His tweet on smart contracts shows which stablecoins are freezable / open-source / attested / KYCd, and links to every stablecoin blacklist function call.

  • Ian Allison, a reporter at CoinDesk, has a great article on the challenges in real estate tokenization and profiles a failed high-profile venture between Fluidity and Propellr. A $20M tokenized real estate deal derailed due to the issuer, trading giant DRW Holdings, not seeking permission from the senior debtholder to transfer ownership.

  • Arianna Simpson, Founder & managing partner at ASP, has a great thread on in-game assets. “Tokenized assets enable individual asset ownership (no trust assumptions or centralized honeypots), increased transparency (verifiable scarcity), and better cost/UX of trading, among other things.”

  • Jason Choi, Head of Research at Spartan Capital and RelayNode Curator for HK / Singapore, tweets about value accrual in cryptoassets, making the distinction between intrinsic value (the "inherent" value of an asset), fair value (the "justified" value of an asset), and market value (what the market is willing to pay).

🌉 Infrastructure

  • Upbit, a South Korean crypto exchange, suffered a theft worth ~$49M (342,000 ETH). Upbit announced that it had temporarily suspended withdrawals and deposits “due to server maintenance.” The exchange announced it will will cover with its own assets. The risks of centralized exchanges and hacks remain.

  • Kraken announced that has joined the Silvergate Exchange Network (SEN). SEN is a proprietary internal payments platform developed by Silvergate Bank that enables fast transfers between account holders. Kraken users can leverage SEN to fund their account within minutes and with no fees, 24/7.

🏦 Institutionalization

  • Binance Research released a survey of 76 institutional investors, managing crypto holdings of between $100K and $25M. Many interesting findings, including the largest risks are platform-specific issues and tether’s ongoing legal issues, more than 50% of funds had less than $1M allocated to crypto while 4% had more than $25M, and only 25% indicated they were engaged in lending or borrowing while 56% staked.

🍰 Layer 1

  • The Ethereum network will be undergoing a scheduled upgrade, called Istanbul, at block number 9,069,000, which is predicted to occur on Saturday, December 7, 2019. The exact date is subject to change due to variable block times and timezones.

  • The Algorand Foundation released "Algorand 2.0", a massive upgrade to the protocol. The upgrade adds smart contracts and DeFi capabilities like atomic swaps and the Algorand Standard Asset (ASA), which enables the tokenization and issuance of any type of asset on the Algorand blockchain.

⚖️ Legal

  • The U.S. Attorney for the Southern District of NY and the FBI arrested and charged Virgil Griffith for violating U.S. sanctions by delivering a presentation and technical advice on using crypto and blockchain technology to North Korea to evade sanctions.

  • The “Managed Stablecoins are Securities Act of 2019” draft bill was introduced by a group of senators to the House Financial Services Committee to regulate stablecoins as securities under the Securities Act of 1933. Implications for MakerDAO, USDC, Libra?

  • CipherTrace released its Q3 3019 Cryptocurrency Anti-Money Laundering Report covering important trends and issues around the status of anti-money laundering (AML) and counter terrorism funding (CTF) regulation and compliance.

Highlighted Industry Jobs (non-exhaustive list for NYC / remote):

If you would like to highlight jobs or internships in future editions, please email links here.

Check out Indeed’s report on crypto / blockchain jobs and trends for 2019.

Events this week

Gitcoin Virtual Hackathon : Online Only (Free)

When: Monday, December 2, 2019, 7:00 PM to Sunday, December 15, 2019, 9:00 PM

Where: Online

This is a virtual hackathon hosted by Gitcoin. Developers from around the world will come together to build the infrastructure for a new, decentralized Internet, competing to earn cryptocurrency prizes along the way. This event is for coders and noncoders alike to form teams, pitch ideas and formulate plans for their projects. Sign Up Here >>>

https://share.hsforms.com/1bf0FjMk-QTaby_Mf9a79LQ2urwb

Privacy in Enterprise Blockchain – An Introduction to Corda (Free)

When: Monday, December 2, 2019, 6:30 PM to 8:30 PM

Where: R3, 11 West 42nd Street 8th floor · New York, ny

Blockchain Technology has been evolving and maturing over the years, and enterprises are looking into it and slowly adopting it. R3 has been a champion of the enterprise level of blockchain and using its open source platform Corda, has had multiple partnerships and success in bringing the blockchain to the enterprise. Join us for an event hosted At R3 offices and Austin Moothart, as we go through an overview of the architecture of a permissioned, private blockchain. This session will be a high level technical walk through of Corda and what privacy means in Enterprise Blockchains.

DAOfest NYC: State of the DAOs (Free)

When: Monday, December 2, 2019, 6:30 PM to 9:00 PM

Where: The Ainsworth, 64 3rd Ave · New York, NY

DAOfest NYC #1 will feature a diverse panel of experts speaking about the current state of DAOs and putting it in historical and legal context.

• Are DAOs the future of work?

• How do DAOs relate to cooperatives, holocracy, and other modern forms of decentralized governance?

• Are DAOs even legal?

• What are the next steps for the space?

BitDevs: Socratic Seminar 99 (Free)

When: Tuesday, December 3, 2019, 7:00 PM to 9:00 PM
Where: NYU Stern, 44 West 4th Street · New York, NY

A final list of discussion topics will be posted the day before the event. Please see our link aggregator below for a list of potential discussion topics. Feel free to make topic suggestions in the comment section below. https://www.zotero.org/groups/691739/devsny/items/collectionKey/Y3TUNS7T

[Whitepaper Wednesday] Compound (Free)

When: Wednesday, December 4th, 2019 at 12:00 PM – 1:00 PM EST

Where: Rent24 ( 25W 39th Street, 14 Fl, New York, NY 10018)

This week, we're reading about Compound, a smart-contract-based lending protocol on Ethereum.

WWCode CONNECT NYC 2019 ($74.5 - $99.5)

When: Thu, December 5, 2019, 8:00 AM – 5:00 PM EST

Where: Microsoft REACTOR, 11 Times Square, New York, NY 10036

Women Who Code’s signature developer conference is coming to New York City! CONNECT NYC brings together influential technology leaders to share their expertise centered around the latest trends, technical tools, platforms, languages, and industry applications. 300+ innovators and developers will explore a cross-section of technologies, including tracks for deeper dives into Blockchain, AI/ML, and Mobile. Join us for innovative talks, in-depth panels, and technical workshops designed to help you advance your skills, connect with your community and inspire women to excel in technology.

Google Cloud for Startups: Blockchain Forum (Free)
When: Friday, December 6th from 1:00 to 5:30pm

Where: Google NYC - 111 8th Ave, New York, NY 10011

Google Cloud for Startups is hosting their second annual Blockchain Forum on Friday, December 6th from 1:00 to 5:30pm at Google NYC. Please RSVP in the link above if you’d like to attend. This half-day event will give attendees the opportunity to hear from leaders within the industry and to learn how blockchain companies are building on Google Cloud Platform. We'll finish off the day (and week!) with a closing reception.

Upcoming events

⚡GOTHAM DLT Hackathon @ Microsoft HQ ⚡

When: Saturday, December 7, 2019, 8:30 AM to Sunday, December 8, 2019, 8:00 PM

Where: Microsoft, 11 Time Square · New York, NY

The Gotham DLT Hackathon at Microsoft HQ is bringing together developers to use the industry's leading tools! As a cross blockchain event, we are creating a great space for developers to learn, use and collaborate on best decentralized ledger tech around!

TRUST-LESS 2020: Proof of Stake (PoS) Validator Summit

When: Sunday, January 12th 2020

Where: Virtual

This is one of those pivotal moments in blockchain history. With ETH 2.0 & multiple PoS layer-1 blockchain protocols slated to launch early 2020, it's an opportunity for developers & students to enter the blockchain space & learn how to build one of the few viable business models that can earn money: staking-as-a-service. Attendees Will Learn:

  • What The ETH 2.0 Roadmap Looks Like + How Staking Will Work

  • How To Stake On Different Layer-1 Blockchain Networks

  • How To Participate (As A Validator) Via Incentivized Testnets

  • How To Build Your Own Staking-As-A-Service Startup

  • Staking-As-A-Service Models: Economics, Custody, & Security

  • Frameworks For Treasury Management

  • How To Think Through Crypto-Taxes

  • and more!

Notable Conferences

Nothing written in RelayNode NYC is legal or investment advice and should not be taken as such. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence.