CoinDesk Crypto

Ethereum Classic has suffered its second 51% attack in a week after more than 4,000 blocks were reorganized Thursday morning.

Mining pool Ethermine’s parent entity Bitfly and crypto exchange Binance reported the reorganization, announcing all Ethereum Classic payouts, withdrawals and deposits had been suspended due to the attack. It’s unclear how much the attacker has made.

The reorganized transaction history is currently the longest chain on the network. However, the majority of Ethereum Classic miners – such as mining pool Ethermine – are continuing to mine on the shorter version of the network.

Related: Ethereum Classic Suffers Reorganization That Resembles 51% Attack Amid Miner Complications

Developers behind Ethereum Classic said in a tweet minutes before Bitfly’s report that exchanges and mining pools are advised to “significantly raise confirmation times on all deposits and incoming transactions” in light of “recent network attacks.”

A chain reorg occurs when a party gains more hashing power than the rest of the network miners. The adversary can then rewrite the chain’s history and “double-spend” the blockchain’s native currency (in this case, ETC). Hashing power on Ethereum Classic looks to have decreased considerably since Monday, August 3 dropping nearly 20% from 1.6 TH/s to 1.3 TH/s as of press time. 

Read more: Ethereum Classic Suffers Reorganization That Resembles 51% Attack Amid Miner Complications

This fresh attack to Ethereum Classic’s network follows on from a recent attack that occurred between July 29 and August 1, according to blockchain analytics firm Bitquery.

Related: Market Wrap: Bitcoin’s Price and Ether’s Dominance Sit at 2020 Highs

While Ethereum Classic developers initially said the network did not suffer from a reorganization or a 51% attack in that previous attack, Bitquery said Wednesday that an attacker double-spent a little over 800,000 ETC (about $5.6 million), and paid about 17.5 BTC ($204,000) to acquire the hash power for the attack.

The monetary value of Thursday’s 51% attack in terms of the double spends is not yet known. However, at $23.44 per block reward on Ethereum Classic, the attacker has most likely earned $93,760 from block rewards alone.

The attack follows the deprecation of the OpenEthereum client on July 16. Nearly half of the network’s nodes – including important mining and exchange connections – operated on OpenEtheruem software which became immediately outdated following the first chain reorg July 31.

Ethereum Classic developers have urged node operators to switch to Besu or Multi-geth implementations as soon as possible.

Ethereum Classic’s price was $7.03 as of press time, down less than 1% over 24 hours.

Not the first

The network has suffered major reorg attacks at least twice in the last two years.

In the more recent attack, the perpetrator moved more than 807,000 ETC from an unspecified crypto exchange to several wallets between July 29-31, according to Bitquery.

The attacker then started mining blocks after purchasing the hash power from a user on cryptocurrency mining platform Nicehash.

On July 31, the attacker sent money to their own wallet address via private transactions and then implemented the transactions into the blocks they were mining.

The attacker then sent back money to a crypto exchange, which Bitquery alleges belongs to Malta-based OKEx.

By August 1 the attacker published their blocks and initiated the chain reorg.

As of press time, none of the funds compromised in the 51% attack have moved from the OKEx exchange, according to Bitquery.

Nikhilesh De, Wolfie Zhao, William Foxley and Christine Kim contributed reporting.

Related Stories

• Market Wrap: Bitcoin Blasts Past $10,000; Ethereum Fees Up 550% in 2020
• OpenEthereum Supported 50% of Ethereum Classic Nodes. Now It’s Leaving the Project

A Brazilian crypto businessman who allegedly arranged his former lawyer’s murder rather than pay the man a R$2.5 million ($471,965) bitcoin debt remains jailed after Brazil’s Supreme Court rejected his request for freedom.

• The First Panel of Brazil’s Federal Supreme Court on Tuesday declined to hear defendant Danilo Afonso Pechin’s request for Habeas Corpus in connection to the execution-style murder of his lawyer Francisco Assis Henrique Neto Rocha.
• Pechin, a partner of the defunct crypto investments manager Valour Invest, which Brazilian media have described as a pyramid scheme, was arrested in August 2019 on suspicion that he paid hitmen R$500,000 to kill Rocha. Gunmen ambushed and murdered Rocha at a São Paulo gas station in June 2019.  
• In a press statement, the Court said that prosecutors allege Pechin owed Rocha R$2.5 million “due to the sale of bitcoins” at the time of Rocha’s death. They cited that debt as the motive for Rocha’s murder. 
• A lower court had previously rejected Pechin’s request for freedom after finding “strong evidence” that he participated in the Rocha murder. Though initially complicated by a preliminary injunction, that denial of Habeas Corpus now stands.
• The investigation into Rocha’s death is ongoing.

Related Stories

• Nasdaq-Listed MicroStrategy, Wary of Looming Dollar Inflation, Turns to Bitcoin and Gold
• 17-Year-Old Pleads Not Guilty to Twitter Hack as Defense Tries to Lower Bail From $725K
• Ex-Wife’s Testimony Suggests Craig Wright ‘Defrauded’ Court, Kleiman Lawyers Claim
• BnkToTheFuture Steps Away From Banks Citing Mounting Risk to Clients’ Assets

Bitcoin gained Wednesday while DeFi interest rate volatility is causing concern over its long-term viability.

• Bitcoin (BTC) trading around $11,670 as of 20:00 UTC (4 p.m. ET). Gaining 4% over the previous 24 hours.
• Bitcoin’s 24-hour range: $11,072-$11,735
• BTC above 10-day and 50-day moving averages, a bullish signal for market technicians.

Traders are mostly buying bitcoin Wednesday, with the world’s oldest cryptocurrency going as high as $11,735 on spot exchanges such as Coinbase. 

Read More: Bitcoin Price Rises 3% as Gold Trades Above $2K for First Time

Related: DeFi Traders Are Gaming Ethereum for Higher Profits, Researchers Say

“I think we’ll hit $12,000 by Friday. There’s a lot of momentum in the market just now,” said Chris Thomas, head of digital assets for broker Swissquote. “Tuesday was a pause for breath, but we didn’t react negatively.” 

Thomas noted bitcoin spot volumes have been rising this past week after a month of relative feebleness. 

“Flows are definitely picking up and more people are feeling the excitement, which naturally helps the markets move higher still,” added Thomas. 

Read More: Ethereum Transition to Staking Could Push More Traders to Use Derivatives

Related: Two Reasons Crypto’s Bull Market Is Coming

While bitcoin’s pace is picking up,  gold, the original hedge against economic uncertainty, has been on an absolute tear. The yellow metal was up 1.1% and at $2,041 as of press time, hitting a fresh intraday high at $2,056. However, while gold has rallied 14% over the past month, bitcoin has done twice as well, up 28% during that same period. 

Bitcoin bugs continue to believe its price can keep making outsized gains in unsettled economic times. “I’m bullish on bitcoin,” said George Clayton, managing partner of Cryptanalysis Capital. “I do not have a strong view on timing, but I’m expecting a move higher.” 

Volatile DeFi lending rates

The second-largest cryptocurrency by market capitalization, ether (ETH), was up Wednesday, trading around $399 after climbing 3% in 24 hours as of 20:00 UTC (4:00 p.m. ET). 

Read More: BnkToTheFuture Steps Away From Banks Citing Mounting Risk

Interest rates in Ethereum-powered decentralized finance, or DeFi, have see-sawed wildly over the past few months. Composite Lend Rate, a metric calculated by DeFi Pulse, determines how much profit an investor would return lending out crypto. It has fluctuated mostly due to the volatility of lender Compound’s rates, which have been as low as 0.122% on June 17 and as high as 18.6% on June 26. Compound dominates the DeFi lending market and had 3% rates for lenders as of Wednesday.

“A number of new applications are adjusting their protocol and token incentives, which can trigger extreme volatility,” said Jean-Marc Bonnefous, managing partner for Tellurian Capital, which has been investing in crypto projects since 2014. “There is also a lot of shuffling of short-term liquidity among the DeFI protocols, which is not very conducive to longer-term sustainability and adoption,” he added. 

Other markets

Digital assets on the CoinDesk 20 are mostly flashing green Wednesday. Notable winners as of 20:00 UTC (4:00 p.m. ET): 

• zcash (ZEC) + 14%
• dash (DASH) + 6%
• bitcoin gold (BTG) 5.5%

Read More: Square Crypto, Human Rights Foundation Ramp Up Bitcoin Grants

Notable losers as of 20:00 UTC (4:00 p.m. ET):

• tezos (XTZ) – 0.66%
• qtum (QTUM) – 0.56%
• stellar (XLM) – 0.53%

Read More: US Lawmakers Don’t Want Proof-of-Stake Networks to Get Overtaxed

Equities:

• In Asia, the Nikkei 225 ended the day in the red 0.26% as poor corporate earnings for Softbank and Yamaha led stocks lower.
• In Europe, the FTSE 100 closed higher, gaining 1.1% as better-than-expected earnings reports boosted stocks like Commerzbank, up 5% on the day.
• In the United States, the S&P 500 gained 0.60% on shares of Disney jumping 8.8% on positive earnings and optimism for a coronavirus vaccine.

Read More: Square Reports 600% Increase in Quarterly Bitcoin Revenue

Commodities:

• Oil is up 1.6%. Price per barrel of West Texas Intermediate crude: $42.14

Read More: Social Engineering: A Plague on Crypto and Twitter, Unlikely to Stop

Treasurys:

• U.S. Treasury bonds were mixed Wednesday. Yields, which move in the opposite direction as price, were up most on the 10-year, in the green 7.5%.

Read More: Pharmacist Charged With Trafficking Drugs Worth $270M in Bitcoin

Related Stories

• ETH Lite: Reflexer Labs Raises $1.7M to Build a Somewhat-Stable Coin for DeFi
• Bitcoin Price Rises 3% as Gold Trades Above $2K for First Time

Decentralized finance (DeFi) has been clogging the Ethereum network, but not in the way most analysts would have guessed. 

An architectural quirk in the most-used software version of Ethereum, Geth, has led to an uptick in the practice of spamming the network to secure trade profits over the last six months, according to Certus One co-founder Hendrik Hofstadt.

Transaction spamming is one of many reasons the average Ethereum user fee has increased some 800% since May, according to Coin Metrics. Ponzi schemes like MMM or DeFi’s general growth in 2020 are also to blame.

Related: Market Wrap: Bitcoin Trudges Past $11.7K as DeFi Lending Rates Gyrate

Read more: Weed Out the Soviet-Era Ponzi Scheme Eating Ethereum

Hofstadt told CoinDesk that algorithmic trading firms have created bot swarms to watch the Ethereum transaction queue (called the mempool). These bots wait for large trades on DeFi platforms such as Uniswap. After they go through, the bots quickly place orders to take advantage of price movements in what is called “backordering.”

Too many firms knew about this practice, though. So some firms switched up their tactics over the spring months by sending a wall of executions to crowd out others and secure a backorder. 

Higher rewards for miners, higher profits for traders

Rough modeling shows some $5.99 million in gas fees have been used to execute this trading strategy since April 2018, according to developer Philippe Castonguay. That’s about a week’s worth of typical Ethereum fees for useless transactions.

Related: Two Reasons Crypto’s Bull Market Is Coming

Moreover, the majority of these trades occurred since March 12’s “Black Thursday,” when DeFi platforms saw record volumes.

Read more: Thursday’s Market Madness Strained Ethereum’s Killer App: DeFi

For trading firms, this translates into more fees overall but arbitrage profits into the hundreds of thousands, according to addresses provided by Hofstadt.

For the network, spamming crowds out other transactions. It also increases the average fee for everyone.

On July 29, the Geth team approved swapping the execution model to a first come, first served basis. Yet, it remains to be seen if mining firms will update to the new Geth version.

Hofstadt said miners could keep doing business as usual if they value the extra pocket change from DeFi traders more than helping out the network in general.

Indeed, total network fees per day on Ethereum has increased 1,077% since May 5 from $162,200 to $1,909,000 on a seven-day rolling basis, according to Coin Metrics. 

Related Stories

• ETH Lite: Reflexer Labs Raises $1.7M to Build a Somewhat-Stable Coin for DeFi
• First Mover: Ethereum’s Transition to Staking Could Push More Traders to Use Derivatives

Publicly traded business intelligence company MicroStrategy said it will invest $250 million of its excess cash in bitcoin, gold and other “alternative assets” over the next 12 months as a hedge against U.S. dollar (USD) inflation. 

• CEO Michael Saylor, who unveiled MicroStrategy’s new capital allocation strategy on a July 28 earnings call, said the weakening USD is no longer a tenable place to park MicroStrategy’s sizable cash reserves. (The firm is sitting on $500 million).
• Near-zero interest rates, infinite helicopter money and the specter of coming inflation are all forces Saylor said are chipping away at the dollar. “It wouldn’t be prudent to continue to hold a large portion of USD” in the current environment, he said. 
• While USD yield has effectively gone negative, bitcoin, gold and silver have been gaining strength, even if they may prove more volatile havens, Saylor said. He said bitcoin’s 21 million hard cap bolsters the cryptocurrency’s appeal as an inflation hedge.
• “It makes sense to shift our treasury assets into some investments that can’t be inflated away,” Saylor said.
• Saylor indicated his bitcoin revelation came after his firm sold the domain “Voice.com” to crypto project Block.One for $30 million in July 2019. 

Related Stories

• 17-Year-Old Pleads Not Guilty to Twitter Hack as Defense Tries to Lower Bail From $725K
• Ex-Wife’s Testimony Suggests Craig Wright ‘Defrauded’ Court, Kleiman Lawyers Claim
• BnkToTheFuture Steps Away From Banks Citing Mounting Risk to Clients’ Assets
• Square Reports 600% Increase in Quarterly Bitcoin Revenue

Call it a “gentlecoin,” perhaps?

A new decentralized finance (DeFi) project aimed at softening volatility has closed a $1.68 million seed round led by Paradigm, with participation from Standard Crypto, Compound founder Robert Leshner and Variant Fund, from a16z alum Jesse Walden.

Reflexer Labs is building a new asset called rai (RAI) that’s meant to follow the price movements of ether (ETH) but more gradually. 

Related: Market Wrap: Bitcoin Trudges Past $11.7K as DeFi Lending Rates Gyrate

“I think RAI will be extremely useful for protocols. A form of collateral that will help users not get liquidated that much,” Stefan Ionescu, the project’s CEO, told CoinDesk in a phone call.

Or, as Paradigm partner Charlie Noyes, put it:

“Self-correcting mechanisms are an elegant method of efficiently managing protocols. Reflexer is taking this approach to build the first trustless stable asset administered by algorithms rather than manual governance.”

RAI is generated much like its namesake, dai (DAI): Users stake an asset, ETH, to the system to borrow a new crypto asset.

Related: DeFi Traders Are Gaming Ethereum for Higher Profits, Researchers Say

But where DAI attempts to match the price of a U.S. dollar, RAI does not. 

RAI targets a “redemption rate” relative to its underlying asset but stripping out much of the volatility (the precise proportion hasn’t been specified). So, if over a three-month period, ETH generally trended up but with some stomach-churning drops along the way, RAI would just generally trend up, with maybe only some slight stumbles (this also means that RAI holders would miss hard upward spikes, too, as it calms all movements).

Read more: Five Years In, DeFi Now Defines Ethereum

“The idea is the system has kind of an index inside it,” explained Reflexer’s Ionescu. “It’s a number called the redemption price. It’s the ideal price for RAI at any time.”

Think of it this way: DeFi on Ethereum is a whitewater river with sections of Class 5 rapids for those who want them; Reflexer is the Army Corps of Engineers smoothing out a nice stretch that never breaks Class 3.

Steady now

The long view here is to give DeFi an asset for collateral that has both the qualities of price stability (if not full rigidity) and decentralization. 

ETH has fared very well this year but it had one wild swing in March. While it took the ETH price six weeks to recover, the most acute pain was felt by those who had staked ETH to borrow DAI on MakerDAO. Over $8 million was lost in manipulated collateral liquidations. If RAI had been in the mix on Black Thursday (March 12), its backers say, it could have eased some of the pain.

Read more: Mempool Manipulation Enabled Theft of $8M in MakerDAO Collateral on Black Thursday: Report

RAI actually aims to bring a well-established technology from electrical and mechanical engineering into crypto. A proportional–integral–derivative controller is a well-worn, proven technology based on control theory that helps different systems maintain consistency.

“One of the things that’s exciting to us as investors in the project is this is the first time elements from control theory in engineering will be embedded in smart contracts,” Alok Vasudev of Standard Crypto told CoinDesk in a phone call.

The specifics remain to be determined but Reflexer’s product will use oracles to monitor the price of RAI and the price of ETH. If RAI doesn’t match the target price, the system can fine-tune the amount of RAI it takes to pay back debt. This can expand and contract the supply as needed to return to the target.

Since this is a delayed reaction there will still be shifts in price but they should be more gradual, giving users time to adjust, whether they are using RAI in a loan or as collateral on a DeFi platform. 

Building

The new seed round will enable Reflexer to begin modeling its ideas and determine the optimal mechanics before deploying a live system. While not committing to a launch date, Ionescu hopes that if all goes well it should appear in 2021.

SpankChain founder Ameen Soleimani is a co-founder of Reflexer Labs, Ionescu told CoinDesk, assisting with growth efforts on a part-time basis. In February, Soleimani released a concept called MetaCoin, for a governance-minimized stablecoin. He wrote at the time:

“In light of MakerDAO’s recent upgrade to Multi-Collateral DAI (MCD) and decision to abandon ETH as the sole form of collateral (thereby introducing counter-party risk for offchain assets), it’s worth considering what a governance minimized, ETH-only system might look like.”

RAI has evolved from the initial idea of MetaCoin, but it meets some of the objectives detailed therein. In particular, that of eschewing the use of centralized cryptocurrencies like USDC as a collateral and limiting the powers of human governors.

Read more: MakerDAO Adds USDC as DeFi Collateral Following ‘Black Thursday’ Chaos

Ultimately Reflexer will need to deploy some kind of token, similar to MakerDAO’s MKR, with limited control powers in order to fully decentralize, Ionescu said.

“Ninety-plus percent of the system will be completely closed off and humans won’t be able to change anything,” he said.

Related Stories

• Two Reasons Crypto’s Bull Market Is Coming
• Market Wrap: Bitcoin Flat at $11.2K; DeFi Has Highest Volume Month Ever

The 17-year-old claimed to be the mastermind behind July’s Twitter hack pleaded not guilty to all charges brought against him by U.S. authorities.

• Graham Ivan Clark has pleaded not guilty to all 30 counts against him by U.S. authorities at an appearance at Hillsborough County Courthouse, Florida, on Tuesday, the Tampa Bay Times reported.
• State authorities have described Clark as the ringleader for a coordinated attack on 30 high-profile accounts, including CoinDesk’s, that promised to double the money of users who sent cryptocurrency.
• In a bail hearing Wednesday, Clark’s attorney said the $725,000 bail posted Saturday was “grossly inappropriate” with the $117,000 believed to have been gained in July’s hack.
• The defense argued Florida law only requires monetary conditions for bail for those accused of dangerous crimes.
• Clark was investigated last year by California authorities who confiscated 400 bitcoin and subsequently returned 300. The defense claims the return of the bitcoin legitimizes them but prosecutors allege the cryptocurrency was illegally acquired.
• State prosecutors contested the defense’s argument, claiming Clark poses a danger if he has access to an electronic device.
• The defense said the court could “fashion” a bail in which Clark hands over $117,000, forfeited if convicted, and returned if not, as well as restrict his access to the internet and electronic devices.
• Conducted over Zoom, public access to the call was abruptly restricted after a series of loud interruptions or “zoom bombs.”
• The ultimate outcome of the hearing is not yet known.

See also: Social Engineering: A Plague on Crypto and Twitter, Unlikely to Stop

Related Stories

• Nasdaq-Listed MicroStrategy, Wary of Looming Dollar Inflation, Turns to Bitcoin and Gold
• Ex-Wife’s Testimony Suggests Craig Wright ‘Defrauded’ Court, Kleiman Lawyers Claim
• BnkToTheFuture Steps Away From Banks Citing Mounting Risk to Clients’ Assets
• Square Reports 600% Increase in Quarterly Bitcoin Revenue

Square’s bitcoin business is booming, lawmakers are batting for crypto staking protocols and a blockchain-based voting system in Russia may have been hacked.

You’re reading Blockchain Bites, the daily roundup of the most pivotal stories in blockchain and crypto news, and why they’re significant. You can subscribe to this and all of CoinDesk’s newsletters here. 

Top shelf

Bitcoin Revenues
Square’s bitcoin business is booming. Announcing Tuesday, the San Francisco payments company said revenue made from selling bitcoin to Cash App customers during the second quarter came to a total of $875 million – up 600% year on year. Square stresses it only takes a “small margin” selling bitcoin to customers, but Q2’s results show it made $17 million profit – an increase of 711% year-on-year. While bitcoin made up only 5% of Square’s revenue at $34 million in Q1 2018 (its first full quarter), it came to $65.5 million in the same quarter in 2019. Square Crypto, a subsidiary, has also sponsored Lightning developer Lloyd Fournier.

Related: First Mover: Ethereum’s Transition to Staking Could Push More Traders to Use Derivatives

Taxing Staking
Four congressional lawmakers wrote a letter to the Internal Revenue Service Wednesday, asking the U.S. tax agency to ensure holders of staked crypto don’t face tax liabilities for receiving block rewards before they sell their new tokens. “It is possible the taxation of ‘staking’ rewards as income may overstate taxpayers’ actual gains from participating in this new technology,” the letter said. “It could also result in a reporting and compliance nightmare, for taxpayers and the Service alike.” Each block could be treated as a taxable event, creating headaches for filers and the IRS alike. The lawmakers, chairmen of the Congressional Blockchain Caucus, said staking rewards resemble both rental income and interest payments. 

Sophisticated Engineering
The teenager arrested for allegedly masterminding the recent Twitter hack gained access to the platform by “socially engineering” a Twitter employee, according to a government affidavit and the company’s internal investigation. Social engineering is a broad term that encompasses many methods of exploitation including bribery, coercion, phishing and SIM swaps. Haseeb Awan, CEO of Efani, which protects against SIM swap attacks, estimated around 1,000 people fall victim every day, and the exploits are getting more sophisticated. In many cases, perpetrators go uncaught, and victims frequently do not come forward, making the arrests in the Twitter hack the exception to the rule.

Blockchain Breached?
Hackers are reportedly selling the personal data of more than a million Russians who voted electronically, using blockchain technology, during the recent constitutional amendment process. Over 1.1 million data points were stolen and put on sale for $1.50 each on the online forums, though authorities deny the hack. The online voting system, based on Bitfury’s open-source Exonum blockchain and built with the help of Kaspersky Lab, was previously reported to have poor data protection. Journalists were able to decrypt people’s votes as well as pull passport numbers out of a weakly-protected file posted online by the authorities, a Russian media outlet Meduza wrote.

DeFi Development
The Chicago DeFi Alliance (CDA) is launching one of the first accelerator programs for decentralized finance (DeFi) startups beginning in August. The program is modeled on Silicon Valley’s Y Combinator program and will invest $120,000 in each participating team in exchange for future token purchases. Volt Capital co-founder Imran Khan and CDA partner Qiao Wang will lead the eight-week program for early-stage startups, plus a fast-track program to introduce more established startups to relevant experts. “DeFi has all the fundamental qualities to become a real, trusted alternative to the legacy financial system,” Wang said.

Quick bites

• Dark web vendor and pharmacist charged with trafficking drugs worth $270 million in bitcoin.
• SEC seeking “smart contract” tracing tool that can spot security vulnerabilities.
• Genesis’ crypto lending rebounded in Q2.
• Missouri man pleaded guilty to trying to buy chemical weapons with bitcoin.

At stake

Related: Blockchain Bites: XRP Sales, INX IPO and Bitcoin Mining Woes

In the mainstream financial press there is a lot of attention given to the inflationary risks of the Federal Reserve’s bout of money printing. As Pantera Capital CEO Dan Morehead said, the United States has printed more money in June than in its two centuries of existence. Putting this in context, over the course of the pandemic the Fed has nearly doubled its balance sheet to about $7 trillion. 

Some pundits, such as professor of economics Antony Mueller, believe the reverse case – that the economy is deflating – is more likely in the short term. Deflation is when the rate of growth of demand is lower than the growth rate of production. An under-utilized workforce reduces not only productivity, but also demand: because there’s less money to spend. 

It’s this same depressed workforce that is likely keeping inflation, or hyperinflation, in check, according to Goldman Sachs economist Jan Hatzius. 

“The modern monetary policy suffers from a deep fear of deflation and tries to avoid it at any cost,” Mueller said. “There are various effects at work that promote an automatic recovery from a deflationary shock.” He cited ZIRP and NIRP (zero interest rate policy and negative interest rate policies) and quantitative easing as two tools in the Fed’s toolbox. 

These same tools often can often prevent a natural business correction and lead the economy to inflate. If that’s the case, and the workforce remains under lockdown, the states may be heading to a period of stagflation instead, where inflation rises without growth.

Ending on a pragmatic note, Mueller said reliable economic prognosis is difficult and expectations are volatile. There is a degree of trust in economists and government actors to make forward-directed decisions, and “while trust can easily be destroyed, it is hard to re-establish.”

Good thing there’s a trustless hedge.

Market intel

Sustained Cycle
After wild Sunday action that saw the price of the world’s oldest cryptocurrency fall as low as $10,050 on spot exchanges like Coinbase, bitcoin is trading relatively flat, at around $11,200 Tuesday. “The asset is trading in a narrow range of $11,080 to $11,220,” said Constantine Kogan, a partner at crypto fund of funds BitBull Capital. “To continue last week’s rally, bitcoin needs to overcome the resistance level, which is in the $11,300- $11,400 region,” he added. 

Ethereum 2.0: How It Work and Why It Matters
CoinDesk Research’s 22-page report covers the long-awaited Ethereum 2.0, from its technology and development road map to potential market impact as the foundational upgrade to the world’s largest smart contract platform. Ethereum developers present commentary about the benefits and risks this new technology may bring. Download the free report.

Tech pod

…See, Lightning!
Blockstream released its latest version of c-lightning, an implementation of the Lightning Network. Dubbed “Rat Poison Squared on Steroids,” referencing Warren Buffett’s denouncement of Bitcoin, the update has added multi-part payments, an easier way to plug in crime-sleuthing watchtowers and also laid the groundwork for a tracking tool that could make filing taxes easier.

Final, Official Test
Ethereum 2.0’s final and official public testnet, Medalla, went live, according to the Ethereum Foundation. Medalla is the final testnet before the launch of the Eth 2.0 network, which is tentatively expected by year’s end. Over 20,000 validators had joined the network within a few hours of launch, staking some 650,000 ether (ETH), according to the Beaconcha.in block explorer.

Podcast corner

No Hope?
Bobby Goodlatte, founder of seed investment firm Form Capital and early Facebook employee, joins NLW to discuss the perils of social media and whether these platforms can be redeemed.

Who won #CryptoTwitter? Related Stories

• First Mover: As Fed Nears Inflation Rubicon, Analysts See $50K Bitcoin in Play
• Blockchain Bites: Hedge Fund Down, Banana Bets and the Twitter Hack Fallout

Under a pair of U.S. Securities and Exchange Commission (SEC) regulations, crowd-equity platform Republic has raised $16 million through the sale of its Republic Note security token.

Announced Wednesday, the firm secured commitments of $11 million through a Regulation D offering. An additional $5 million from non-accredited investors was committed through a Regulation A+ offering that has yet to be approved.

“What we did was a Reg D and a ‘testing the waters’ under Reg A+,” Republic CEO Kendrick Nguyen explained in a phone call. “We will hold [the non-accredited investors’] space until we can qualify the Reg A+ and close that step.” 

Related: CoinList Launches ‘Pro’ Exchange for Token Sale Buyers

The Republic Note token is secured on the Algorand blockchain and allows holders to receive dividends from Republic Core, a Republic subsidiary. Dividends will be earned through exits of companies that did their initial fundraising on Republic. According to the project’s white paper, 800,000,000 Republic Notes have been minted.

Nguyen said that, of the chains that have features needed for security tokens such as anti-money laundering checks and white-listing investors, Algrorand “is truly faster, cheaper.”

Part of the crowd-equity sector that grew out of the JOBS Act of 2012, Republic has facilitated over $100 million in investments since 2019, allowing individual investors to join rounds alongside major venture capital firms.

Overall, more than 10,000 people sought to participate in Republic’s latest token offering, the company said in a press release. Roughly 700,000 people have used the site to invest in projects.

Multiple offerings

Related: tZERO Slashes Jobs, Salaries as It Gears Up for Another Funding Round

Republic had announced a $12 million pre-sale of security tokens in 2018 with support from Binance and NEO. Ultimately, Republic broke these sales into four phases, as described in the Republic Note white paper. 

In phases one and two, the company raised roughly $12.5 million. This current sale represents phases three and four. 

Read more: Binance, NEO Lead $12 Million Investment In AngelList Crypto Spin-Off Republic

Algorand was a strategic investor in the prior phases of Republic’s fundraising, along with Binance. Nguyen said that once Binance Chain is able to support security tokens, a wrapped version of the Republic Note for the Binance Chain will be created. It is meant to work much like wrapped bitcoin (WBTC) does on Ethereum, a one-for-one pairing. 

When the Republic Note offering closes at the end of the presumed Reg A+ approval, the company will have raised roughly $28 million in token sales, Nguyen said. With additional sales of company equity, the firm will have raised approximately $40 million since inception.

Related Stories

• SEC Registered Broker-Dealer Is Launching a Security Token-Friendly Platform
• Cannabis and Lending Firm Seeks SEC Permission to Raise $50M in Crypto Sale

Recent testimony from Craig Wright’s ex-wife suggests he misled the court on the nature of the Tulip Trust, an entity key to the ongoing Kleiman dispute, lawyers for the plaintiff claim.

• In a motion last month, Lynn Wright, the ex-wife of Craig Wright, claimed she had previously owned one-third of her former husband’s firm, W&K Info Defense Research.
• Ms. Wright claims her transferable interest in W&K moved into one of Wright’s other companies in 2012, Craig Wright R&D, which ultimately changed its name to “Tulip Trust,” and that she only regained ownership interest again in July 2020.
• The Tulip Trust is an entity claimed to hold the million bitcoin (around $12.6 billion at press time) at the heart of the dispute.
• Disputing the filing’s validity Tuesday, lawyers for the estate of David Kleiman, Craig Wright’s late business partner, said Ms. Wright’s testimony means Craig Wright’s previous assertions that the Tulip Trust was a blind trust – an entity run independently of its beneficiaries – was not true.
• “[T]he infamous “Tulip Trust” is now apparently just a name change of a company affiliated with Dr. Wright, it is not a “blind trust” as previously alleged,” Kleiman’s lawyers said.

See also: 4 Experts Agree: Craig Wright’s Latest Cryptography Claims Are ‘Nonsense’

• Kleiman’s legal team asserts the inconsistencies in Ms. Wright’s submission come from it apparently being intended to “defraud” both them and the court.
• They also claim there is no proof Ms. Wright owned, relinquished or regained interest again in W&K.
• Ms. Wright’s motion asserted Ira Kleiman was not authorized to take his dead brother’s position at W&K, thereby, she claims, invalidating the entire case.
• Although Ms. Wright split from her husband in 2010, part of the divorce settlement, according to the motion, gave her half of the company; she also asserts the “W” in W&K refers to her, not her husband.
• Tuesday’s filing is part of an opposition to Craig Wright’s push for a motion of summary judgment – a judgment without a full trial.
• The Kleiman estate is suing Wright for half of the bitcoin in the trust, as well as intellectual property.

See also: Kleiman Bitcoin Case Heads to Trial as Motion for Sanctions Against Craig Wright Is Denied

Related: BnkToTheFuture Steps Away From Banks Citing Mounting Risk to Clients’ Assets

See the full motion below:

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Bitcoin is again acting like a macro asset, drawing bids amid a record rally in gold and a broad-based sell-off in the U.S. dollar.

• At the time of writing, the cryptocurrency is trading at $11,624.63, representing a 3% gain on the day, according to CoinDesk’s Bitcoin Price Index. 
• Gold is trading at a record high of $2,040 per ounce, having surpassed the $2,000 mark on Tuesday.
• Investors are flocking to gold on sinking inflation-adjusted bond yields and a weaker U.S. dollar, as noted by macro analyst Holger Zschaepitz.
• The U.S. 10-year bond, when adjusted for inflation, currently offers a yield of -1%.
• The dollar index, which tracks the value of the greenback against majors, recently reached a 26-month low of 92.55, according to data source TradingView.
• Gold and bitcoin exchange-traded funds have seen strong inflows over the past five months on the growing demand for an “alternative” currency, according to JPMorgan Chase & Co.

• Bitcoin and gold have recently rallied in tandem with the dollar losing ground across the board.
• As gold rose from $1,800 to $1,980 in the 11 days to July 28, bitcoin jumped from $9,100 to $12,100 and the U.S. dollar took a beating against other fiat currencies.
• As such, some analysts are convinced that bitcoin is now more of a macro asset, meaning it responds to large-scale events in the world’s economies.
• Gold and bitcoin could continue to rise as governments and central banks are unlikely to slow or halt liquidity-boosting programs launched this year to counter the coronavirus-induced recession.
• Bitcoin may see stronger gains in the future, as it looks relatively cheap with prices still down 43% from the record high of $20,000 reached in December 2017.
• The cryptocurrency has gained nearly 60% so far this year, while gold has risen by 34%.

Also read: First Mover: The Dollar Drop May Have Helped Push Bitcoin Past $11K

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• Dark-Web Vendor and Pharmacist Charged With Trafficking Drugs Worth $270M in Bitcoin
• Missouri Man Pleads Guilty to Trying to Buy Chemical Weapons With Bitcoin
• Market Wrap: Bitcoin Flat at $11.2K; DeFi Has Highest Volume Month Ever

Ethereum’s biggest-ever upgrade is supposed to make the blockchain network faster and more efficient. But the new “staking” system could lock up so many of the network’s native ether tokens that investors who want to trade them may have to rely on derivatives markets. 

The blockchain, the world’s second-biggest, currently uses a validating mechanism similar to larger Bitcoin’s known as “proof-of-work,” where new data blocks and transactions are confirmed via power-hungry computers solving complex cryptographic puzzles.

Under Ethereum’s multi-year upgrade now underway, the network would shift to a “proof-of-stake” model, where investors validate transactions by staking ether on the blockchain in exchange for token rewards. It’s a bit like depositing dollars into a bank account for interest, paid out in dollars. 

Related: Bitcoin Price Rises 3% as Gold Trades Above $2K for First Time

A possible consequence, though, is the new staking system could soak up as much as 30% of the ether tokens in circulation, based on estimates from Adam Cochran, a partner at MetaCartel Ventures, a decentralized investment firm. An address needs to stake at least 32 ether tokens, worth about $12,400 at the current price, to become a validator in the proof-of-stake model. 

“It’s possible to see a future scenario where the incentive to keep assets locked up on-chain is so great as to remove some liquidity from the market,” says Diogo Monica, co-founder and president of the digital-asset custodian Anchorage, told CoinDesk in an email. 

Lost liquidity

In May, a survey by the Ethereum developer Consensys found that 65% of ether investors were planning to stake the cryptocurrency under the new system, known as Ethereum 2.0, and half of those wanted to run validator nodes. 

Most staking mechanisms have a lock-up period. Rocket Pool Staking, an Ethereum 2.0 staking service, offers staking terms ranging from three months to a year. 

Related: US Lawmakers Don’t Want Proof-of-Stake Networks to Get Overtaxed

Some ether tokens might get locked in staking as the network upgrade proceeds. Ethereum 2.0 is being rolled out in three phases of what could end up being a multiyear process, with the original proof-of-work blockchain running in parallel until the two networks are merged at “Phase 1.5.” 

Wilson Withiam, a research analyst at the cryptocurrency data firm Messari, told CoinDesk that “ethers sent to the deposit contract will likely remain locked up” until Phase 1.5, and “that could cause a decline in the amount of ether readily available.”

Staking derivatives market?

Cryptocurrency analysts say ether-staking yields of 3% to 5% would be so tantalizing – at a time when government bonds carry near-zero or even negative yields – that few investors would opt to leave their tokens in Uniswap or other decentralized trading systems where they could be accessed by traders. 

“In that case, people will have an incentive to create ways to buy and sell ether shares that abstract whether the underlying asset is currently being staked,” Monica said.

Derivatives might be a solution.  

Fixed income from staking could even be packaged as a distinct product. Holders who stake their coins could create voucher tokens representing a claim on the stake. Then they could trade the tokens for ether or other cryptocurrencies. So buyers could capture the yield without having to own the underlying asset. 

As an alternative to selling voucher tokens, holders could deposit ether as collateral on decentralized lending and borrowing platforms. 

Messari’s Withiam says he thinks staking derivatives are inevitable.

“It will give traders access to tradable assets so that they can continue to do what they do best,” Withiam said. “Exchanges will be able to offer new markets around these assets and potentially lock customers within their product suite if the synthetic assets aren’t transferable outside of the exchange.” 

For now, all this really just amounts to speculation over how speculators will want to speculate on ether. 

But there’s no lack of motivation: Plenty of cryptocurrency analysts say it’s possible ether’s price could jump as demand increases for tokens to stake. Ether’s price has tripled this year to about $390. Such returns far exceed bitcoin’s 56% gain on the year.  

“Financial incentive to buy and hold both increases the security of the network, and could lead to dramatic price appreciation,” said Connor Abendschien, an analyst at the research firm Digital Assets Data.

Tweet of the day Bitcoin watch

BTC: Price: $11,509 (BPI) | 24-Hr High: $11,521 | 24-Hr Low: $11,045

Trend: Bitcoin is showing signs of life with a near 3% rise to over $11,500 on Wednesday after a lackluster day yesterday.

The bulls will be hoping to maintain a foothold above $11,400, having failed to keep gains above that level in the previous two trading days. If successful, stronger buying interest may emerge, pushing prices to the psychological hurdle of $12,000 – last put to test on July 27.

However, if the market fails to absorb selling pressure above $10,400, a re-test of the daily chart support at around $10,900 may be seen.

A continued bullish scenario looks likely with gold, an inflation-hedge, rallying to record highs above $2,000 and the U.S. dollar losing ground across the board. Both bitcoin and gold have recently moved in tandem, with Goldman Sachs warning that the greenback could lose its global reserve status.

The overall bias will stay bullish as long as prices are held above the former hurdle-turned-support at $10,500 (February high).

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Online fintech and blockchain investment platform BnkToTheFuture is moving client assets to a Hong Kong-based trust company citing a “systemic risk” with traditional banking.

• Announced Wednesday, custody provider First Digital Trust (FDT) will be responsible for storing BnkToTheFuture’s client crypto and fiat currency assets.
• BnkToTheFuture CEO Simon Dixon told CoinDesk the most important difference will be that client money is “legally segregated” under a trust structure, but there is no guarantee of segregation at a bank.
• This means a bank can further invest client’s funds at will, while assets held in a trust cannot be used for other purposes without first obtaining permission from the client.
• Shifting assets to a trust would help protect them against a potential “systemic risk event” in the banking sector resulting from expected economic disruption, Dixon said.
• This, he told CoinDesk, would help develop trust among investors and help create an industry standard for crypto custodians.
• The move came as Cayman Islands-based BnkToTheFuture was developing new crypto retirement plan products expected to go live later in 2020.
• Using FDT’s trust structure will help enable clients to store assets in perpetuity for inheritance planning, according to the announcement. 
• First Digital CEO Vincent Chok echoed Dixon’s comments, saying that, with a recession approaching, investors need a way to protect their assets from “exposure to fractional reserve banking.”
• FDT is the crypto custody arm of financial services company Legacy Trust.

See also: Legacy Trust’s Crypto Spin-Off Receives $3M to Roll Out Asian Settlement Platform

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Square’s bitcoin business is continuing its rapid growth, with Q2 revenue 600% up year-on-year.

• Announcing Tuesday, the San Francisco payments company said revenue made from selling bitcoin to its Cash App customers in Q2 came to a total of $875 million – six times the amount in the same period in 2019.
• Square stresses it only takes a “small margin” selling bitcoin to customers, but Q2’s results still mean it made $17 million profit – 711% year-on-year.
• Square released its results ahead of schedule after someone gained “early external access” – it hasn’t provided any further details on what happened.
• Since Square first enabled bitcoin buying through its Cash App in November 2017, it’s grown to become a dominant part of the business.
• While bitcoin made up only 5% of its revenue at $34 million in Q1 2018, it came to $65.5 million in the same quarter in 2019.
• By Q4 2019, Square's bitcoin revenue reached $178 million and $306 million in Q1 2020: $100 million more than the revenue generated from its fiat services.
• But Tuesday's results represent one of the biggest increases in quarter-to-quarter revenue to date: the company attributes the rise to a surge in customer demand and volumes, as well as an increase in bitcoin’s circulating supply.
• Square excludes bitcoin revenue from its total figures, saying that incorporating something so unpredictable and volatile into its results would make it hard to gauge the company’s overall performance.

See also: Grayscale Says Institutions Invested Record $900M in Crypto Products in Q2

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A dark-web vendor and his supplier, who allegedly used the murky recesses of the internet to sell drugs and launder money, have been formally charged in the U.S.

• David Pate and pharmacist Jose Hou were both indicted by a federal grand jury in the District of Columbia on Tuesday for the illegal sale of opioids over the dark web.
• The seven charges laid out against the pair include conspiring to distribute controlled substances, distribution of controlled substances, conspiring to import controlled substances, conspiring to launder money and laundering of monetary instruments.
• According to the Department of Justice statement, Pate allegedly purchased OxyContin and morphine pills from pharmacist Hou, who was based in Costa Rica.
• It is alleged that Pate, who would launder the payments using bitcoin and wire transfers, sold the narcotics on various dark-web markets including The Silk Road and AlphaBay.
• The claims include that Pate was paid more than 23,903 bitcoin (worth $269,838,576 at press time) overall by customers.
• Using the online handle “buyersclub,” Pate is said to have advertised the sale of an “old formula” of OxyContin which can be crushed and then inhaled or injected – newer versions are designed to be tamper-resistant to prevent this from happening.
• Bulk shipments of the drugs were sent in pill form from Costa Rica to U.S.-based co-conspirators, who would then reship orders to a list of customers, the DoJ said.
• The drugs were often hidden inside tourist souvenirs such as maracas on the journey from Costa Rica to the U.S.
• After a customer had received their shipment, the dark-web markets would allegedly release the customer’s bitcoin funds held in escrow to Pate.
• Both men are Costa Rican citizens, while Pate is also a U.S. citizen.
• “We are firmly committed to combatting the problem of opioid abuse and breaking through sophisticated cyber-enabled barriers employed by criminals to hide their activities,” said Acting U.S. Attorney Michael Sherwin. 

See also: French Judge Orders Trial of Alleged BTC-e Operator Alexander Vinnik

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The Human Rights Foundation’s Bitcoin Development Fund, launched in June 2020, announced three new grant recipients this week on the heels of a similar announcement by fellow grant distributor Square Crypto. 

• Lloyd Fournier became the latest out of nearly a dozen Bitcon contributors sponsored by Square Crypto in some form when the payments firm announced he would receive a grant on August 3. Fournier’s grant proposal said he plans to experiment with payment channels and the Lightning Network, exploring options comparable to the oracles popularized by decentralised finance (DeFi) systems.
• Yet another Lightning developer, Evan Kaloudis, earned a HRF grant for his work on Zeus, an iOS and Android app for using a Lightning node on a phone with privacy tools like a VPN or Tor on August 4.
• With regards to CoinJoins, HRF funded a developer who goes by Openoms, the creator of JoinInbox, that makes it easier for bitcoiners to transact in a relatively private and decentralized way using a Raspberry Pi microcomputer to access JoinMarket, a grassroots CoinJoin option.
• The creator of Fully Noded, who goes by Fontaine, received an HRF grant to continue work on his Tor-friendly iOS app for using a bitcoin node on a regular mobile phone.  
• The HRF grants are 1 bitcoin each, or just over $11,000 as of press time.

Read more: OKCoin, BitMEX Sponsor Bitcoin Core Developer Amiti Uttarwar

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A 45-year-old Missouri man pleaded guilty on Tuesday to charges related to his trying to buy chemical weapons on the dark web using $150 in bitcoin.

• Jason William Siesser admitted in U.S. District Court for the Western District of Missouri that he attempted to pay $52 in bitcoin per vial of an unnamed chemical weapon on two occasions in the summer of 2018.
• Prosecutors said the “highly toxic chemical” was potent enough to “kill approximately 300 persons” at the levels Siesser sought, and that he had told the seller he planned to use them imminently.
• Siesser, whom FBI agents detained within minutes of the package’s arrival in late August 2018, also admitted on Tuesday to identity theft. He had had the package sent to a juvenile living at his address “because [Siesser] did not want to get in trouble if the purchase was traced to him,” the plea deal stated.
• The package that Siesser ultimately received contained an inert substance, not a chemical weapon. Even so, agents found a potentially deadly trio – cadmium arsenide, cadmium metal and hydrochloric acid – at Siesser’s Missouri residence.
• Siesser faces a minimum five year sentence, according to a press release from the Department of Justice.

Read the plea deal below:

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Bitcoin trading is weak Tuesday while volumes on DeFi are as high as they have ever been.

• Bitcoin (BTC) trading around $11,2587 as of 20:00 UTC (4 p.m. ET). Slipping 1.6% over the previous 24 hours.
• Bitcoin’s 24-hour range: $11,005-$11,419
• BTC above 10-day and 50-day moving averages, a bullish signal for market technicians.

After wild Sunday action that saw the price of the world’s oldest cryptocurrency fall as low as $10,050 on spot exchanges like Coinbase, bitcoin is trading relatively flat, at around $11,200 Tuesday. “The asset is trading in a narrow range of $11,080 to $11,220,” said Constantine Kogan, a partner at crypto fund of funds BitBull Capital. “To continue last week’s rally, bitcoin needs to overcome the resistance level, which is in the $11,300- $11,400 region,” he added. 

Katie Stockton, analyst for Fairlead Strategies, says the bitcoin market is weaker after traders scurried in late July to buy, leading to an “overbought” situation for the world’s oldest cryptocurrency. “We view sideways price action as constructive,” she said. “Bitcoin has gained approximately 29% since July’s low, and is now due for consolidation.”

Related: Decentralized Exchange dYdX Debuts Ether Perpetual Swaps

Read More: Bitcoin Futures Interest Soars as Bond Yields Fall to Record Lows

Money printing from the Federal Reserve is one reason why the case for buying bitcoin sustains, says BitBull’s Kogan. “The sharp rise in bitcoin is associated with the weakening of several world currencies – the dollar and the Chinese yuan,” he said. According to the Fed, the M1 money supply, which constitutes cash and cash equivalents, has increased from $4 trillion at the start of February to $5.3 trillion at the end of July, a 33% increase. 

Andrew Tu, an executive at quantitative trading firm Efficient Frontier, is bullish on a higher bitcoin price. “We are now at higher lows and now have a genuinely tested support line at $11,000,” Tu said. “Bitcoin seems to be trending upwards now.” 

Read More: As Fed Nears Inflation Rubicon, Analysts See $50K Bitcoin in Play

Record DEX volumes

Related: There’s Now an Accelerator Exclusively for DeFi Startups

Ether (ETH), the second-largest cryptocurrency by market capitalization,  was down Tuesday, trading around $387 after slipping 1.8% in 24 hours as of 20:00 UTC (4:00 p.m. ET). 

Read More: Ethereum 2.0 Testnet Medalla Goes Live With 20,000 Validators

July was the best trading volume month ever for Ethereum-powered decentralized exchanges, or DEXs. According to data aggregator Dune Analytics, DEX volumes approached $4.3 billion this past month, four times the volume than in June and a twelvefold increase since July 2019. Leading the way was Uniswap’s DEX, followed by stablecoin swapping platform Curve.

“Uniswap has really grown tremendously over the course of the last year,” said Efficient Frontier’s Tu. He also noted technological improvements and incentives that increase liquidity have helped the growth of DEXs. “This is due to the automated market making, or AMM, innovations seen in the space, as well as due to liquidity mining.”

Other markets

Digital assets on the CoinDesk 20 are mixed Tuesday. Notable winners as of 20:00 UTC (4:00 p.m. ET): 

• chainlink (LINK) + 10%
• tezos (XTY) + 6.6%
• qtum (QTUM) + 6.4%

Read More: Charlie Lee, Adam Back Lead $3.1M Token Raise for Blockchain Game 

Notable losers as of 20:00 UTC (4:00 p.m. ET):

• xrp (XRP) – 6.3%
• bitcoin sv (BSV) – 4.7%
• bitcoin cash (BCH) – 4.5%

Read More: Ripple Snaps XRP Sales Slump With $33M of the Crypto Sold in Q2

Equities:

• Asia’s Nikkei 225 closed higher, up 1.7% as strong manufacturing numbers globally boosted Asahi and Mitsubishi Chemical stocks in Tokyo.
• Europe’s FTSE 100 ended the day flat, in the red 0.05%, as U.S.-China tensions left traders unsure about economic prospects.
• The United States’ S&P 500 was flat, up only 0.36% as U.S. lawmakers indicated a fresh coronavirus relief package wouldn't materialize this week.

Read More: INX Scales Down US IPO Target to $127M – Still Set to Be Crypto’s Largest

Commodities:

• Gold is up 2%, topping $2,000 for the first time at $2,016 as of press time.
• Oil is up 1.9%. Price per barrel of West Texas Intermediate crude: $39.66

Read More: Genesis’ Lending Rebounds in 2Q; Firm Acknowledges Unsecured Loans

Treasurys:

• U.S. Treasury bonds all slipped Tuesday. Yields, which move in the opposite direction as price, were down most on the 10-year, in the red 8.6%.

Read More: DeFi-Focused Derivatives Platform Hedget Raises $500K in Seed Funding

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All eyes are on bitcoin‘s bullish price at the moment. Behind the scenes, however, developers are tinkering to build the infrastructure that many hope could make the Bitcoin system more accessible to more people.

Last week, Bitcoin tech startup Blockstream released its latest major version of c-lightning, its implementation of the Lightning Network. The release is dubbed “Rat Poison Squared on Steroids,” facetiously referencing Warren Buffet’s comment that Bitcoin is “rat poison squared” and, in his opinion, investors will get burned if they put their money into it.

Of course, c-lightning’s developers probably don’t believe Bitcoin is “rat poison,” seeing as they’re working full time to scale bitcoin payments. The Lightning Network is pitched as the future of Bitcoin because it ushers in faster and cheaper payments and scales the network so it can support many, many more users than it currently can support without slowing it down.

Related: Charlie Lee, Adam Back Lead $3.1M Private Token Raise for Blockchain Game Infinite Fleet

Read more: What Is Bitcoin’s Lightning Network?

With this release, Bitcoin’s Lightning Network gradually continues to make headway. Here’s a dive into the major pieces of the latest release.

MPP-sending for more reliable payments

Multi-part payments (MPP) are one feature that will improve the Lightning Network’s user experience (UX). Sometimes payments fail when the software can’t find a path to the user. This is especially likely to occur when payments are bigger; large payments require an adequate amount of liquidity in all the channels between the sender’s node and the receiver’s. If there isn’t enough liquidity to support passing the payment along, the payment will fail. 

MPP effectively splits payments into smaller pieces so they’re easier to send across the network, making payments more reliable.

Related: To Beat Online Censorship, We Need Anonymous Payments

Read more: ‘Multi-Part’ Payments Could Bring Bigger Bitcoin Sums to Lightning Network

“The most obvious feature is that we now can pay with multi-part payments,” Blockstream Lightning engineer Rusty Russell told CoinDesk.

C-lightning has been able to receive MPP payments since last year, “but Christian [Decker, Blockstream engineer] finally got around to implementing the sending side,” Russell said.

This is a piece of a much broader effort to update Lightning’s UX to hopefully attract more users. MPP was discussed by developers back at a Lightning developer summit back in 2018 in Adelaide, Australia. 

Watchtowers fight fraud

Watchtowers is a fraud-fighting component of the Lightning Network that is early on in its creation. A watchtower “watches” a user’s bitcoin in the Lightning Network to make sure it’s safe. If someone tries to cheat, the watchtower detects the infraction and responds by penalizing the offending user.

Read more: Bitcoin Lightning Fraud? Laolu Is Building a ‘Watchtower’ to Fight It

C-lightning has made changes to make it easier for watchtowers to hitch up to c-lightning. Blockstream engineer Christian Decker “added enough information that a plugin can easily support a watchtower,” Russell told CoinDesk. “We tell it exactly what transaction it would need to publish if the previous (cheating) transaction were to appear.”

Like plug-ins in other software, such as the Google Chrome browser or a music-making program, a plug-in in c-lightning adds extra functionality to the c-lightning node.

Russell noted the Lightning watchtower Eye of Satoshi is already using this new feature.

Coin tracking for taxes

C-lightning has laid the groundwork for a tool to track “all” of a user’s coin movements, Russell told CoinDesk.

This could come in handy for anyone worried about tracking their Lightning coins come tax season, so they can figure out what they owe the IRS.

Read more: Crypto Taxes: Still Confused After All These Years

This underlying tracking work has been added to this release. The next step is to make this functionality available for users. Neigut is “putting the final touches” on a plug-in that “records everything your accountant will want to know about where your money came from and went,” Russell said.

“Seems she is actually looking forward to next tax year so she can use this in anger :),” he added.

Other changes

While these are a few of the most significant changes, there are plenty more. 

C-lightning now supports sending keysend transactions, which offers a new way to tip others with Lightning payments. And Russell mentioned that the developer team has been “re-engineering everything” to support a new bitcoin transaction format called PSBT (partially signed bitcoin transactions), which facilitates transactions with hardware wallets, a secure method of storing bitcoin since the device remains disconnected from the internet.

Peruse the release notes for more details. 

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Crypto holders earning new tokens by staking their coins might be at risk of being overtaxed, believe several members of Congress.

Four lawmakers wrote a letter to the Internal Revenue Service Wednesday, asking the U.S. tax agency to ensure stakers don’t face tax liabilities for receiving block rewards before they sell their new tokens.

The letter, dated July 29, was sent to IRS Commissioner Charles Rettig, Chief Counsel Michael Desmond and Assistant Secretary for Tax Policy David Kautter and was signed by the Congressional Blockchain Caucus’ co-chairs Reps. David Schweikert (R-Ariz.), Bill Foster (D-Ill.), Tom Emmer (R-Minn.) and Darren Soto (D-Fla.).

Related: Bison Trails Hires Ex-Goldman Sachs VP as Legal Head

“It is possible the taxation of ‘staking’ rewards as income may overstate taxpayers’ actual gains from participating in this new technology,” the letter said. “It could also result in a reporting and compliance nightmare, for taxpayers and the Service alike.”

Read more: Even the IRS Admits Some Crypto Tax Regulations Are ‘Not Ideal’

The caucus clarified staking rewards should be taxed appropriately. “We believe that taxpayers’ true gains from these tokens should indeed be taxed,” the letter said.

Abraham Sutherland, a lecturer at the University of Virginia, told CoinDesk these concerns include the fact that staking protocols could create new blocks – and therefore, release new tokens – every few minutes, hours or days. 

Related: Proof-of-Stake Chains Team Up to Prove DeFi Is Bigger Than Ethereum

Each of these blocks could be treated as an independent taxable event, meaning taxpayers could potentially have hundreds of taxable events every year, which would be a headache for both the taxpayer and the IRS to assess, he said.

Metaphors

Treating staking as a source of income might cause issues for participants in the U.S., said Sutherland, who assisted in writing the letter.

The metaphors individuals use to explain staking might be misleading in a harmful way, he said, although the implications might not be immediately obvious.

 “The example here is it’s misleading to say that validators get paid to create blocks and to maintain the network,” he said. “And it might seem harmless but this metaphor can lead to the idea that block rewards are income, and of course income gets taxed.”

These implications are starting to be felt by the industry.

If a network’s value grows 5% over a year, but an individual staker has seen the number of tokens they hold grow 6%, this does not mean the staker has a 6% gain, he said. 

Read more: Industry Group Led by Polychain, Coinbase Seeks to Get Ahead on Staking Regulations

The IRS has yet to say how or when staking rewards should be taxed, said Shehan Chandrasekera, Cointracker head of tax strategy. In an email, he said there are a few different positions as to how staking rewards can be taxed.

“Technically speaking, staking income is similar to rental income. This is because cryptocurrencies are treated as property. Income you get after lending property is rental income by default,” he said. 

However, staking income can also be treated as interest because rewards might look like interest payments (though he said it would have to be fiat money to comply with case law).

Property

Sutherland said the appropriate approach to taxing staking rewards could be to treat it like new property. 

New property isn’t taxed as income right away, he said, but taxed when it’s sold. 

The congressmen agreed in their letter.

“Those who help validate transactions create new blocks in the cryptocurrency blockchain and also create these new tokens. Similar to all other forms of taxpayer-created (or taxpayer-discovered) property – such as crops, mineral, livestock, artworks and even widgets off the assembly line – these tokens could be taxed when they are sold,” the letter said.

Read more: IRS Violated ‘Taxpayer Bill of Rights’ With 2019 Crypto Letters: Watchdog

Chandrasekhara said there is an argument to be made in support of this method, though in his view the “most conservative approach” would be to tax rewards as income at the time they’re received, which is similar to how the IRS approaches mining rewards. 

Sutherland said he believes the issue is less important for mining than it is for staking because it’s more likely token rewards are more diluted in a proof-of-stake network. Still, Wednesday’s letter is mainly a first step in getting clarification on how tokens are treated by the nation’s Tax Man..

As part of that, Sutherland hopes the crypto industry gets better at using metaphors in explaining how new consensus mechanisms or token reward systems work. 

“Block rewards are not a money machine,” he said. What they are is one part of an amazing system to incentive the maintenance of a decentralized network where nobody is in charge.”

Read the full letter below:

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