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Bouncing ideas around tokenomic design – Cointelegraph Magazine

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Jack Lu, 23, was struck by the idea for his new DeFi platform Bounce while working on his thesis on game theory and cryptocurrency at Reed College in California.

“It took me quite a long time to think of it,” Lu explains about his game theory influenced auction platform. “Everyone was talking about lending and borrowing, and doing Uniswap and providing liquidity. When I looked at this financial channel I think there’s one missing piece, which is auctions.”

Lu — who counts Andre Cronje from Yearn.Finance, Kain Warwick from Synthetix and Calvin Liu from Compound as peers — describes Bounce as a decentralized version of eBay, Sotheby’s or Christies. Users can set up pools to auction off tokens, and play around with parameters like the number to be swapped, the time limit and different ways of accepting bids.

He co-founded it with Ankr CEO Chandler Song and the bare bones, black and white platform went live on August 4.  “I partnered with some friends and we made it,” Lu says. “The platform has been live for two months and it’s ranked nine on ETH gas station.”

So far more than 2,700 pools have been created, and more than 500,000 Ether ($179M) has changed hands on the Ethereum version of the platform. Bounce was also one of the first five projects announced for the interoperable Binance Smart Chain — which is essentially an Ethereum clone with lower gas fees and avoid congestion — and 700,000 BNB ($18.5M)has been swapped on that version since early September too. 

The site launched with two types of auctions. Fixed swap, where everyone has the same price (like an ICO from 2017) and sealed bid auctions.

“You can put in a floor price and a timer and anyone can come and bid above the floor price. And when the pool closes, the smart contract will fill the orders from the highest price down to the bottom. So people do get different prices.”

Lu recently added in some variations on Dutch style auctions — which start from a high price and sell off the tokens gradually as the price comes down — as well as English auctions, which start from a reserve price and head up.

World tour before San Francisco

Originally from Guangdong Province in China, Lu attended high school in Britain where he took intro courses for college economics that enabled him to finish his degree at Reed College early. “That was where Steve Jobs went,” says Lu. It was there he discovered crypto in 2016.

“Quite a lot of teenagers got into crypto at the time and my college roommate taught me about Ethereum and then I started to read medium articles and Reddit,” he says. Lu began joining crypto groups and became friendly with NEO founder Hongfei Da which led to a six month internship with NGC Ventures in Shanghai in 2018.

It turned into a full-time gig after he graduated in 2019 and he’s now the US Investment Manager for the fund, based in San Francisco.

“I help our portfolio projects to design their tokenomics,” he says. “During my due diligence on many projects, I have a broader view on what’s going on in the crypto market and what the progress is on tokenomics in the crypto world.”

Learning to play games

He may be the youngest employee at the firm, but he’s also the only one to have written his thesis on blockchain and game theory — one of just a handful on the subject in the world at the time.

Game theory is a branch of mathematics that examines the strategies employed in competitive situations where the outcomes for players depend critically on the actions of the other players. It has been applied to everything from war, to business and biology, but Lu’s thesis explores why it’s a perfect fit for cryptocurrencies. The ‘players’ in the decentralized world of blockchain, from miners to traders and hackers, are independent and make decisions after evaluating the benefits and costs associated with their moves. 

Unlike in the real world (as the New Yorker points out), game theory actually works better when applied to blockchain and smart contracts, because the rules are fixed, the blockchain is transparent and the information can be made available to all the players. Research has shown that the more informed party in a deal typically captures up to 18% more economic benefits than the less informed party. Lu explains:

I always say it’s a successful experiment in game theory since we use smart contracts to avoid a lot of human elements for a game, and we can see how pool creators and participants act.

His thesis examined concepts like the Nash Equilibrium, which is used to analyze the outcome of games where there is a strategic interaction between several decision makers and where the outcome for each depends on the decisions others make, as well as their own.

Snitches get four years

The famous example of the Prisoner’s Dilemma helps illustrate the concept:

Two suspects are interrogated separately for a crime. If both confess, they get four years in jail. If neither does, each will be sentenced to two years in jail. If only one confesses he will be released and the other sentenced to six years.

The best outcome is that neither of them confess. However, the model predicts both will confess, because they don’t have any information about what the other prisoner is doing and thus hedge their bets and both converge at the middle outcome.

 

 

Game theory gets fantastically complicated very quickly with games within games, and various amounts of knowledge and information about what other players are up to, expressed using algebraic formulas.

Lu enjoys watching the auctions on Bounce to observe how things play out in the context of game theory. “I think all types of auctions are game theory events,” he says pointing out that a sealed bid auction is reminiscent of the Prisoner’s Dilemma.

“If you raise (the price), everyone needs to pay more than the sealed bid creator’s floor price. But if everyone bids near the floor price, everyone would be better off. So I think this kind of on-chain behavior is quite interesting to see.”

Price discovery

Lu says that auctions provide a better route towards price discovery for Initial DEX offerings than exchanges, or automated market makers like Uniswap. where the mechanics of competition encourages a lot of quick and reactive price action.

“For Bounce if you’re doing an auction, people have time to think. And the projects also have time to think and analyze people’s demand for each pool,” he says. “There’s only a floor price or a price ceiling, so everything else is purely based on market demand.”  

“Some projects are doing consecutive sealed bid auctions and the final price for each round is different. Like in the first round the final executed price is high and in the second round, the price is lower, and then in the third round the price gets higher again. So I think this is very interesting for analyzing players.”

He compares it to a guessing game, where players in the second round assume that because there’s more supply after the first round, they can enter at a lower price, but in the third round they assume everyone else will bid lower again, so en masse they bid higher in order to ensure they get tokens. As he puts it:

If you think that way others will also think that way, so this is the pattern of a consecutive game in game theory.

Synthetix founder Kain Warwick says Bounce offers some intriguing possibilities.

“On-chain price discovery mechanisms are still fairly rudimentary for early stage projects with low liquidity,” he says. “Bounce is looking to create several new token distribution mechanisms which will significantly improve price discovery and reduce volatility. Synthetix is exploring using this mechanism as part of our [stablecoin] sUSD peg stabilisation efforts.”

Synthetix is expected to make a proper announcement about that soon.

Another use case for Bounce is for decentralized over the counter (OTC) trades. Users with large piles of tokens can set up a pool, either privately or publicly, to arrange an OTC deal and avoid the price slippage that would occur on a centralized exchange.

Around 50 IDOs and OTC trades have already made use of the platform. Bounce hit a milestone when Lu added support for non-fungible tokens. NFTs are unique tokens that first appeared in the form of CryptoKitties, but now represent ownership of digital art, fashion, unique in-game items like F1 cars in racing games, and sporting memorabilia collectibles.

“I think an English auction is a perfect solution for NFTs that are art or tools in a game. But there are more functionalities, like using NFTs as collateral or NFTs as a loan, so for that dutch and sealed bid auctions have some special use cases.”

Competition for auctions

Bounce isn’t the only token auction platform and has competition in the form of Mesa, which is currently in beta, and CoinList. But Lu argues that Bounce is more decentralized than either.

“The difference is the philosophy, I want everything to be on chain, I want zero (off chain) computation, which means the smart contract will do everything,” he says. “It requires the smart contracts to be lightweight and requires your data type to be very efficient because you can only do a limited amount of computation on chain.”

Game theory was also influential when Lu designed the tokenomics for the project. While he has studied lots of complicated token systems in the course of his work, he decided to start small.

“It’s impossible to create a perfect game at the beginning because every single game you cannot reach equilibrium immediately,” he explains — which in this case means an optimal outcome. “A lot of projects think they can which is why they build a very, very complex token economy.” He explains that:

For game theory you move to your equilibrium gradually and that’s how I designed the Bounce tokenomics

Lu started with daily rewards based on the number transactions, then added staking and Uniswap liquidity pool rewards and more.

“For me the philosophy is we will build more token economic pieces along the road, not at the very beginning, because even if you build a very complex system, if there are no people participating and you don’t see what people want, then you are far away from equilibrium.”

Attack of the scammers

Being philosophically inclined towards maximum decentralization, Lu was faced with a tricky situation when scams started appearing on the platform. This is an issue that plagues DeFi protocols with a host of scam tokens listed on Uniswap every week.

“People are saying ‘Oh you should ban scammers’, but I was like, ‘Oh this is a dilemma, because if I ban the scammers that means this platform is no longer decentralized,” he says.

“How can you define if it is real or if it’s fake?” he says. “So the only way is to build a social trust system.”

In the just released system, users stake BOT tokens, and can then propose a project to the social trust board. The community of stakers vote on which tokens are legit and which aren’t. So far around ten proposals have been put to a vote.

“The proposer (of a pool) will stake their token to make sure they have their monetary interest in it. And they can lay out all of the project’s information and all the Bounce holders can go to this social trust board and open all the proposals and if they like it, they can upvote, if they don’t like they can downvote.”

Interestingly enough, it’s not based on the similar sounding Kleros curated token registry for Uniswap, which takes advantage of a game theory concept called a Schelling Point to reward jurors with tokens for voting for the judgement they think most other jurors are likely to give and punish them for voting any other way.

“Right now there’s not a mechanism, but later there will be punishments, Lu says of the social trust system. “When you propose a pool you’ll stake tokens in an insurance fund and the mechanism will punish malicious behaviour. If everything is clear, you get the insurance back, otherwise you compensate people through the insurance fund.”

“I think this is going to be a very nice experiment. When people talk about DeFi governance everyone just focuses on parameters like changing the transaction fee from this percentage to that percentage and adding a new pair. But this is not all that governance is about, there should be a large, large social element and people should be able to use tokens to do some interesting stuff. If on Bounce, social trust is worked out, I hope other people can also try to use it.”

Attack of the clones

The other big issue DeFi projects face is that as soon as a successful protocol is created, someone else clones it and offers its users bigger incentives to jump ship. Lu says he’s just happy if “there are more people starting to think of different types of auctions and start to start to see this is also a DeFi piece that people can work on” and isn’t worried about clones.

“Being the creator of this idea, I know exactly what I’m doing,” he says. “They might be able to copy the auction types I built but I have a roadmap in mind to follow so I think we can gradually compete them out.

“You can copy one piece of the framework but when the framework has a solid foundation and a community to back it, I don’t think a copycat will function. “

Governance for Bounce is handled by an all-star line up including Liu (Compound), Warwick (Syntherix) Stani Kulechov (Aave), George Lambeth (Balancer), Nikita Ovchinnik (1inch) and Michael Gu (Boxmining). Lu says that he hopes to collaborate more with these projects and believes that interoperability and collaboration is the key to DeFi’s future.

“The next step will be to find cooperation with other DeFi projects because I strongly think we only need one financial channel and everyone needs to cooperate with each other – not to have the ambition to fork other people,” he says.

If you look at financial structures in history everything worked out because of collaboration.


 



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BTC crash, DOT crushes XRP, man risks losing $262M: Hodler’s Digest, Jan. 10–16

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Coming every Saturday, Hodler’s Digest will help you track every single important news story that happened this week. The best (and worst) quotes, adoption and regulation highlights, leading coins, predictions and much more — a week on Cointelegraph in one link.

Top Stories This Week

Bulls buy Bitcoin’s $35,000 support retest as altcoins push higher

Scream if you want to go faster. The crypto markets have been a rollercoaster ride this week — with Bitcoin’s price falling by more than $10,000 to lows of $30,549.60 on Monday.

Analysts maintained that the correction was “healthy and necessary,” with the sharp sell-offs prompting the total crypto market cap to fall by more than $200 billion

ExoAlpha CIO David Lifchitz said the crash “would purge the excessive growth of the past 10 days, allowing Bitcoin to build a new base toward $50,000 and above.”

And indeed, Bitcoin refused to die. Just three days after the sudden downturn, BTC reached $40,000 on Coinbase once again, amid fresh evidence of new large buys on exchanges. Tyler Winklevoss had a clear message: “Don’t listen to the noise, stay focused.”

Alas, it seems like $40,000 is now shaping up to be a tough nut to crack. Despite Joe Biden unveiling an eye-watering stimulus package worth $1.9 trillion, there was not a surge to be seen in Bitcoin’s price. Indeed, BTC actually fell under $35,000 at one point.

 

eToro warns users it is running out of crypto to trade due to unprecedented demand

An email sent out by eToro suggests that the exchange is struggling to keep up with users who are clamoring to snap up Bitcoin.

In a message to customers, it warned that “unprecedented demand for crypto coupled with limited liquidity” meant limits on crypto buy orders may need to be enforced over the weekend.

It seems the company has been a victim of its own success. The email came a day after eToro marketing manager Brad Michelson revealed that 380,000 users had opened accounts in the first 11 days of January — with crypto trading volumes running 25 times higher than they were last year.

Quantum Economics founder Mati Greenspan — formerly a market analyst for eToro — told Cointelegraph that the warning notice was “a symptom of a potential upcoming liquidity crunch” and advised users against trying to move funds off the platform.

An eToro spokesperson told Cointelegraph: “Our experience of the 2017 crypto rally means that we understand the possible consequences of extreme volatility in crypto markets. We want to ensure that our clients fully understand the possible risks.”

DOT flip: Polkadot overtakes XRP to become the fourth-largest cryptocurrency

There have been some big movers as the crypto market rally resumes and Polkadot’s DOT token is among them.

DOT has flipped Ripple’s XRP in terms of market capitalization following a massive gain of 29% over the past 24 hours. This makes it the new fourth-largest cryptocurrency, with a market cap of $15.6 billion at the time of writing. Over the past week, DOT has surged by an impressive 83.26%.

Polkadot is a fully interoperable platform that allows other blockchains to connect to the network, and it has been described as an “Ethereum killer” because of how it can process thousands of transactions per second.

The most recent update, which may be driving momentum, was the launch of its Rococo parachain testnet, which went live in late December.

Other factors driving momentum include the issues with DeFi on Ethereum as demand for scaling intensifies.

 

Programmer has two password guesses left to avoid losing $262 million in Bitcoin

Two gut-wrenching stories emerged this week — both with a similar theme.

One man told The New York Times that he has forgotten the password to a hard drive holding 7,002 BTC — a crypto haul that’s worth a jaw-dropping $262 million at the time of writing.

Stefan Thomas has just 10 guesses before the hard drive is encrypted forever… and so far, he has used eight of these attempts to no avail.

Meanwhile, on the other side of the Atlantic, a Welshman is offering the city of Newport a staggering $72 million for help in tracking down a hard drive storing 7,500 BTC. There’s just one problem: It was thrown away several years ago and is languishing in a landfill. Unfortunately for James Howells, the council has said it isn’t prepared to help over concerns that the search would be damaging for the environment. That means he’s going to miss out on a $280-million fortune.

Thankfully, it isn’t all bad news. A student has claimed that they have found private keys that they accidentally Hodled as early as 2011, unlocking $4 million in the process.

 

ECB president Lagarde renews calls for global regulation of Bitcoin

The president of the European Central Bank has doubled down on calls for Bitcoin to be regulated globally.

Speaking at the Reuters Next conference, Christine Lagarde said: “[Bitcoin] is a highly speculative asset, which has conducted some funny business and some interesting and totally reprehensible money laundering activity.”

During the interview, Lagarde did not reportedly refer to any specific instances of money laundering involving Bitcoin but alluded to her awareness of criminal investigations into illegal activities connected with its use. 

She told reporters: “There has to be regulation. This has to be applied and agreed upon […] at a global level because if there is an escape that escape will be used.”

 

Winners and Losers

 

At the end of the week, Bitcoin is at $37,271.25, Ether at $1,255.16 and XRP at $0.28. The total market cap is at $1,038,320,969,138.

Among the biggest 100 cryptocurrencies, the top three altcoin gainers of the week are HedgeTrade, Voyager Token and IOST. The top three altcoin losers of the week are Bitcoin SV, EOS and Verge.

For more info on crypto prices, make sure to read Cointelegraph’s market analysis

 

Most Memorable Quotations

“They said #Bitcoin died on Monday, but now it’s above 37k. Don’t listen to the noise, stay focused.”

Tyler Winklevoss, Gemini co-founder

 

“Did nocoiners really think #Bitcoin wouldn’t bounce back? This is the year of the Metal Bull. $100k is inevitable.”

Samson Mow, Blockstream CSO

 

“This whole idea of being your own bank — let me put it this way: Do you make your own shoes? The reason we have banks is that we don’t want to deal with all those things that banks do.”

Stefan Thomas, locked out of 7,002 BTC 

 

“The unprecedented demand for crypto, coupled with limited liquidity, presents challenges to our ability to support BUY orders over the weekend.”

eToro

 

“[Bitcoin] is a highly speculative asset, which has conducted some funny business and some interesting and totally reprehensible money laundering activity.”

Christine Lagarde, European Central Bank president

 

“I look at the asset value of Bitcoin versus the asset value of all things traded and Bitcoin is still a nothing burger — a giant nothing burger.”

Kevin O’Leary, businessman

 

 

Prediction of the Week

Pantera Capital CEO doubles down on $115,000 Bitcoin prediction for 2021

Dan Morehead has maintained his bullish prediction for 2021, with the Pantera Capital CEO claiming that Bitcoin is on track to have surged 800% by August and hit $115,000.

The exec initially made this prediction in August 2020, when Bitcoin was trading at about $11,600. At the time of writing, it is now worth $37,000.

Setting out why Bitcoin has plenty of room for growth, he added: “Is Bitcoin overvalued? I would say no. […] Bitcoin has spent three years well below its long-term compound annual growth trend line, it’s still below it, and although Bitcoin has rallied a great deal over the last six months, I think it is fairly valued.”

 

FUD of the Week 

 

British financial adviser calls on the government to ban crypto transactions

A veteran financial advisor has called on the British government to ban crypto transactions.

Neil Liversidge started a petition urging local financial authorities to stop Bitcoin payments in the United Kingdom.

He argued that digital assets have no intrinsic value, adding they can have a “destabilizing influence on society, and are often used for criminal activity.”

In an interview with Professional Adviser, Liversidge urged retail investors to cash out immediately, adding: “If the UK government takes a lead by banning transactions on cryptos as my petition requests, that will set off a chain reaction, crashing cryptos overnight.”

Liversidge needs 10,000 signatures for a response from the government. At the time of writing, he’s got just 112.

Ledger owners report chilling threats after 20,000 more records leaked

Ledger users are receiving threatening emails in the wake of the hardware wallet manufacturer reporting that 20,000 more of its customers have been affected by another massive data breach.

One Reddit user said his father, who owns a Ledger wallet, received a message including his name, home address and phone number. The extortionist demanded 0.3 BTC or 10 ETH, worth roughly $12,000, or he would face physical violence.

The Redditor wrote: “I know that those scammers sending emails by hundreds are just trying their luck by creating fear, but when it comes to the safety of your family it’s another story.”

In another email, the scammer wrote: “Are you able to imagine all the possible consequences that can occur to you and your loved ones? I hope you do not ruin every little thing for yourself by making the wrong choice.”

Bitcoin payments are the “second stupidest idea I’ve heard,” says Stephen Colbert

Stephen Colbert, the charismatic host of CBS’ The Late Show, isn’t holding back his punches or his jokes when it comes to Bitcoin.

He referenced a recent Vice report that revealed how hackers had taken control of internet-connected chastity cages — devices worn by men to prevent them from engaging in any sort of sexual activity — and demanded Bitcoin to unlock them.

With a wry smile, he said: “Getting paid in Bitcoin? That’s the second stupidest idea I’ve heard.”

Colbert first covered Bitcoin on his show in April 2014 when Bitcoin was fluctuating between $50 and $300. Since then, BTC has risen by more than 40,000%.

 

Best Cointelegraph Features

Bitcoin has become nothing but the new Che Guevara T-shirt

Cassio Gusson argues Bitcoin promised to create a new normal in finance, but it turned out to be nothing but the old normal with a new face.

Here’s how institutional investors ignited Bitcoin’s rally to $40,000

In this article by Benjamin Pirus, experts weigh in on the main events from 2020 that impacted Bitcoin’s price the most.

Strap in: New institutions wait for Bitcoin price rollercoaster to end

Bitcoin market volatility is scaring off new institutional investors, but meanwhile, old ones continue to buy up the BTC dips. Here’s Shiraz Jagati.



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Four cryptocurrency block reward halvings to look out for in 2021

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Block reward halvings cut the rate at which new coins are generated on a given blockchain by 50%. Such events, known jokingly as “halvenings,” have long been anticipated by cryptocurrency traders as catalysts for pushing up the price of their cryptocurrency holdings.

Past attempts to predict when Bitcoin’s (BTC) price would increase in relation to halvings have proved inconsistent at best. However, few would be willing to quickly discount the mechanisms described in the law of supply and demand. All things being equal, as the number of coins available on the market decreases, the demand for those coins — and thus the price of each — increases.

With that in mind, here are four cryptocurrency projects that are due to undergo block reward halvings in the coming year, when their issuance rate will be cut in half.

Verge (XGV)

Verge is set to undergo a halving on Jan. 25 when its chain reaches a block height of 4,700,000. At this point, the current reward of 200 XVG which is issued to miners every 30 seconds will be cut to 100 XVG.

With just over 11 days to go before the halving, it may be assumed that the opportunity to get ahead of the reduction in Verge’s supply has already passed. However, capitalizing on block reward halvings has never been an exact science, and often times a coin fails to react to the event until after the fact.

The XVG price hit an all-time high of $0.30 back in December 2017, before suffering a near three-year slide down to the $0.001 mark by 2020. Since the winter surge, which sent Bitcoin to a new all-time high, however, Verge’s fortunes have reversed. The coin recorded growth of 219% between November and the time of writing.

Tomochain (TOMO)

Tomochain’s halving will occur on Feb. 7, when the number of TOMO coins issued yearly will be reduced from 2 million to 1 million.

The Tomochain blockchain features block times of two seconds, and every 900 blocks make up an epoch. For each epoch, a total of 250 coins are issued to miners at the current time. This figure will be halved to 125 coins in February.

Launched in 2017, Tomochain uses a Proof-of-Stake consensus mechanism and is compatible with the Ethereum Virtual Machine. The upcoming halving will be only the second in the coin’s history, and also its last. From here on, the TOMO issuance rate will remain the same until the coin’s total supply of 100,000,000 has been reached.

Vertcoin (VTC)

Vertcoin’s block reward halving is scheduled for Dec. 8, at which point the number of VTC issued to miners will be reduced from 25 to 12.5 per block.

Vertcoin was forked from Litecoin (itself a Bitcoin fork) in 2014, as a response to the application-specific integrated circuit (ASIC) machines that were invented for Litecoin mining the same year. Vertcoin aims to remain ASIC resistant and can be mined with a GPU.

Once a feature of the top hundred coins by market capitalization, Vertcoin now finds itself ranked in the mid-500s after a 98% decline from its all-time high in December 2017.

Ravencoin (RVN)

Although not technically scheduled to take place until January 2022, Ravencoin’s first block reward halving is just 12 calendar months away and will see the issuance rate cut from 5,000 to 2,500 RVN per block.

Launched in 2018, Ravencoin is geared towards the registration and trade of real-world assets on the blockchain. In 2018 the then little-known project received a surprise investment of “millions of dollars” from online American retail giant, Overstock.

Ravencoin reached an all-time high in the $0.08 range in June, 2019. Today the coin trades at a price of $0.016 — a 48% increase since recent lows in November 2020.