Another week, another clusterfuck.

This time it was Enigma's turn and it was embarrassing. The story goes that the CEO used the exact same email and password for Enigma' Slack channel and website back-end as the credentials that were once compromised in a previous hack (the Ashley Madison hack no less!). Hackers logged in, messaged the Slack community and altered the front page of the site asking for contributions. $500k was stolen from the Enigma's community that way. This unfolded as the pre-sale was taking place, but apparently it didn't compromise it and they still managed to close $20 million. The CEO has eventually issued an apology and promised to refund the amount stolen to the scammed.

Ok, this was highly irresponsible and a very poor show from the Enigma's CEO, and could have easily been avoided with the most basic online security measures; but it once again shows how inadequate the existing tools are to address the needs of crypto communities.

Every Slack group we're part of is infested by phishing attempts of all sorts. It's untenable. Metacert have grown their business trying to ease this pain point, but despite being a great solution it still feels like putting lipstick on a pig. Just this past week its CEO Paul Walsh was on the ICO Alert Podcast to talk about what they do. And beyond the bad actors, Slack just isn't fit for communities of a certain size, let alone Telegram. We need something else, and it needs to be re-thought from the ground up to address some of the needs of growing communities.

Luckily the crypto community is stepping up. Luis from Aragon has taken the initiative and gathered a group of projects (Decentraland, 0x, Cofound) around the table to collaborative work on an alternative.

We very much look forward to seeing where this and other attempts go and will support in any way we can.

Secure and scalable community tools are paramount to the growth of this industry.

There has been been a thought provoking debate about token liquidity this week, between a finance professor and a tech lawyer.
 
Stephen McKeon original post on traditional asset tokenization (covered in previous issue) argued that
a) tokenizaition improves liquidity by eliminating frictions from trade and enabling deeper secondary markets and
b) liquidity increases the expected value from a trade (eliminating the so called “illiquidity discount”).

Preston then picked up on Stephen's post arguing it ignored the regulatory angle: 'tokenizing' is nothing short of 'securitising', citing how projects like the DAO have cut corners for the sake of liquidity, causing more harm than good down the line.

Stephen ultimately responded reiterating how, unlike traditional securitized assets, blockchain tokens (within a regulatory compliant context) will in his view lead to incremental market depth, thanks to the reduction in frictions to trade emanating from the “divisibility, low cost global transfers of ownership, and an immutable record of the ownership claim”.

Ultimately the two views are complementary rather than divergent. Stephen's perspective is very much theoretical as we are still years away from mass adoption of tokenized traditional assets (though it is encouraging to see the first examples in Real for real estate and Digix for gold), while Preston's views are very much relevant to today's regulatory uncertainty and increased scrutiny from the likes of the SEC.

More generally, liquidity is touted as the single most game changing feature of this asset class and the reason why so much Wall street type capital is starting to dip their toes in it, with a lot more waiting on the sidelines.

But how much 'liquidity' is really out there?

Liquidity is not just a function of the availability of buyers and sellers, but also of the depth of both sides of the book, which affects the spread between bid and ask and thus the price one can liquidate a position at. Outside of the top 5 cryptos, the markets are actually very dry. It's rare to find tokens that trade more than 5% of their network value on a 24hr period and, crucially, that's spread across multiple fiat or crypto pairs and different exchanges, rather than in a single pool. Playing around with the order book depth charts for various pairs, one can immediately notice how thin the books are.

On top of that, there is the looming regulatory risk, as Ari Paul highlights in a recent tweetstorm: what happens to liquidity when the regulator starts naming tokens as securities? Immediate de-listings form exchanges, zero liquidity. We noted last week how Shapeshift has acted pre-emptively by delisting certain tokens, we bet their liquidity dropped as a result.

The liquidity conundrum matters not so much to the amateur investors, nor to the hodlers who never sell, but to the institutional capital that builds significant positions in these assets and perhaps gets too comfortable with paying a liquidity premium. Getting out of these positions will be long and costly, meaning that current trading price as meaningless for those who hold large positions. We do wonder how crypto funds are accounting for that in the quarterly NAVs...

We believe current valuations may be mis-pricing liquidity risk.

Estonia has always been a pretty forward looking country in terms of digital innovation.
They kinda have to, but not any less impressive.

I'm picking up my e-residency card finally next week, and must say it's an amazing experiment.

This week, on the E-residency blog, there was what I would call a "provocation" post about a so-called Estcoin currency.

People went wild on Twitter with all sorts of "mind blown" "this is amazing" "this is super important' comments.

And I was left absolutely dumbstruck.

I've re-read the post now probably 10 times, and I still have no idea what they are talking about.
It's full of "could" "maybe" "potentially" language, and seems more like a question to the community rather than an announcement of any sorts.

But I think this is a great example of people just going out on mind trips with little substance.

Most people that hear about the space for the first time through usually old-school media are drawn to only one single thing: ICOs. Companies / people / raising stupid amounts of money for projects they don't understand.

And guess what the first thing that comes to mind is: "dude, idea, we could do an ICO for X".

I've gotten countless of these comments, and every time I look for the closest bottle.

The attraction to large sums of capital is certainly understandable, but the lack of interest into what the instrument is and why some things are raising money is frankly appalling.

In this post, there are talks of people "investing" in Estonia and only gaining financially if Estonia gains from the scheme

"it is important that Estcoin investors gain only when all of Estonia gains."  🤔

So, unless Estonia is going to start developing decentralized applications, or it is going to be changing its revenue model from a tax based system to something else, it seems to me that the only two avenues for this mutually beneficial arrangement are:
1) people invest in the government and the government pays out a share of tax revenue
2) Estonia develops some sort of decentralized product that has a need for a cryptographic token, whose use would benefit Estonia and whose consequent appreciation would benefit the investors.

For 2) this could very well be the e-residency product. But I've had to submit my passport and I'm going to go to an embassy to pick up my card, so I'd say we're a far cry from a decentralized system at the moment.

And in fact it seems like the thinking of the author is more on the 1) case. There are for example ill-advised talks of DAO-like VC funds to invest in Estonian companies.

"As an investment opportunity, estcoins could benefit Estonia and be attractive to investors from the day it is launched." 🤷‍♂️

In any case, I guess I'm pretty mad just for one reason.

In my view, the wrong question is being asked.

The question being asked is basically:
"so ICOs are around. We could raise a bunch of money, but then what the fuck do we do with it?"

While the real question should be:
"We have finally figured out how to run decentralized censorship-resistant consensus systems. What amazing things can we do with this technology to fix all the fucked-up things that happen in our country?"
"Could we maybe incentivize people to pay their full share of taxes?"
"Could we maybe make it clear, public and cryptographically verifiable that we spend money on what we say we do?"
"Could we maybe build automated tax-collection systems?"
"Could we build a currency that only rewards this type of actor, whom we need more in our country?"

But instead the question is always: what can we raise money for and what can we give back in return. It's just a bit boring and I think we could use our mental cycles for much more interesting questions. Proof.

I'm one of the few fans of purpose-specific alternative (crypto and non) currencies, and I would just LOVE if a country would start experimenting with incentive systems through the tool of a cryptocurrency.

But I don't think we should continue to continue instigating the raising of insane amounts of money to sell dangerous semi-securities which are absolutely not trustable, or are as trustable as a country's bonds.

"If there is support for this proposal, then the next stage before the ICO would be to provide a white paper that outlines the value of estcoins and how the investment will be used to develop our digital nation." 🤦‍♂️

Some Saturday 2am ideas for Estonia:

- implement e-residency as a decentralized protocol that can be used by other countries and where users retain their data
- give the ability to tie ETH addresses to e-residency accounts
- give full legal recognition to any Aragon organization managed by e-resident ETH accounts and provide its court system as an optional centralized dispute resolution system
- provide a district0x district for the selling of government assets.
- implement a decentralized automated exchange to enable anyone to pay taxes in whatever cryptocurrency they want, without having to go back to EUR
- don't raise money without an aim.

Watch this space, because the question of Nation-states trying to fight with crypto is one of my favorite :) 

We'd love some help on a couple of data projects.
If you are (or know anyone who's) good at handling data, interested in cryptos and willing to help out in some spare time, please get in touch!

Token Economy is written and curated by Stefano Bernardi and Yannick Roux.

If you're building a new fundamental piece of technology for the future, please reach out 🤙