Is it possible for Crypto Currency exchanges to create coins and trading volume from nothing?
Crypto currency exchanges are starting to trade enormous daily volumes on their crypto currency exchanges.
All the transactions occur ‘off chain’, so they are not recorded on any blockchain or publicly accountable database.
Exchanges take deposits in crypto currency coins and then ‘credit’ your account with that amount ready for trading. For your deposit there is a verifiable blockchain transaction to the exchange but the crediting of your account appears to be just an entry on their database. Likewise, each trade on the exchange is just a ledger change on their own private database.
Exchanges do publish all the reported volume on their platform but how do we know if this volume is real and backed up by real crypto currency deposits? Quite frankly, we don’t know for certain so there is every chance that some of the volume or orders could be fakery. This means the crypto currency exchanges could have the power to act as market manipulators with ‘coins’ on the exchange created from nothing. We are calling this #CoinCreate .
Sound familiar? Yes, it is exactly like fractional reserve banking or a ponzi scheme. As long as they have enough coins to pay each account holder when customers go to ‘withdraw’ then we are all good. Until of course the tide goes out and we have a ‘run’ on the exchange when everyone withdraws at once. Then we can see who is swimming without any trunks on.
Audit & Accountability
Do the exchanges have auditors or any accountability? All exchanges should be registered businesses, with some even being regulated, so they certainly should have an accountant or even an external auditor. However, as we have seen time and time again, any auditor being paid by the company to check the books often overlooks or doesn’t question crucial information. It takes quite some effort for an auditor to go that extra mile to ensure every check and balance is performed, especially in something like crypto which can be difficult to understand.
It seems like exchanges could certainly do #CoinCreate but are they actually doing it? It would certainly be tempting. History tells us that if someone can cheat they usually will. Cheating often starts small at first and then it becomes addictive and profitable so the temptation to profit further kicks in. Also the more people that become aware of whats going, the more people you have to ‘pay off’.
Incentive to be honest
There is certainly some incentive to be honest and not do this. Crypto is an early stage phenomenon and any bad actors now will potentially compromise themselves becoming an extremely large company in the the future, thus disincentivising gaming the market. Crypto is a passionate and honest space with some of the best minds on the planet ready to campaign and call out any bad actors in this space. Money and their savings is the driver and motivation, as with most things. The more people get ripped off the more angry people you will create. Therefore any short term and dishonest profiteering now risks forgoing long term success for any exchange that could become a very big player in this space.
Of course, the other major incentive is the threat of criminal prosecution from operating a ponzi scheme.
There are already ‘on chain’ type solutions but the speed, expense and low liquidity means they are underused. It just shows how people are willing to forgoe security for convenience up until the point they lose money. One solution is of course BitSquare but this has next to zero volume on most available markets. Therefore what is really needed for now is an exchange to open up their business ‘Bitcoin Style’ and put all their transactions on a publicly available immutable ledger ready for inspection at any time. Sounds fanciful yes, but this would give trust and assurance that they are not cheating their customers by creating volume and moving markets with proprietary trading from free credits #CoinCreate.
BlockChain Capital completes 10 million USD ICO.
A more traditional style Venture Capital fund has been launched by Blockchain Capital and has raised over the 10 million USD maximum in its first day and will invest all of this in anything but traditional ventures.
In what BlockChain Capital itself dubs a world first they have launched the First Digital Liquid Venture Fund which they say “will disrupt the traditional VC market and create the first of its kind “Digital LP” investment vehicle”.
The difference with this fund, and why it can disrupt, is that it will not only invest in companies associated with Blockchain technologies, such as Bitcoin, Ripple and Ethereum but it will issue a liquid tradeable token, representing value in the fund, that can be bought and sold on an exchange. This means that investors can essentially cash in their investment at any time as opposed to waiting many years like in a more established Venture Capital fund.
This Blockchain Capital token will be issued on the Ethereum Blockchain, and joins an increasing number of ICOs using Ethereum’s easy and straightforward deployment of secure tokens on its network.
Time will tell
We shall certainly see over time whether this fund is able to return value to its investors but with some big names backing it, and a massive treasure trove to pick the best investments from, it certainly has a great chance of retuning investors multiple times their original investment in 5-10 years.
The fund has essentially underwritten the value of the token at 1USD and thus creating a floor at its original par value. This is achieved trough their intent to buy up any tokens in the event that it falls below this base value.
With the ICO raising finishing so quickly, it would have meant many would-be investors potential missing out on the initial offering. This will create a pent up demand and when the tokens are finally issued on Ethereum and listed for exchange you could see an initial explosion in price built around the hype and opportunity of a more regulated type token, of sorts, amidst a largely speculative and unregulated space.
Of course now they have created a honey Pot for new and more established Blockchain type companies to request funding from. This makes Blockchain Capital the current ‘Belle of the Bitcoin Ball’ and thus creating an opportunity to pick and choose from the most alluring suitors. This should at least mean the Fund managers being able to decide on more quality investments and not just any old Blockchain company with a great idea. With this space developing so fast, and there starting to be a number of well established players likley looking to expand their offerings, there will certainly be no shortage of suitors.
Open Blockchain not Permissioned database
If they use the mantra that the word ‘Blockchain’ cannot be replaced by the word ‘Database’ when looking at company pitches then it is likely to be a better type business investment. Many new startups and advisors are creating new closed access, permissioned style databases and calling it ‘Blockchain’ or ‘Distributed Ledger Technology’ and are really suggesting nothing better than an open SharePoint. Unless a company is building technology that resembles all of the main characteristics of Bitcoin such as having an open and permission-less innovation & security model then it will inevitably find it hard to differentiate itself. Any Blockchain investment needs to be disruptive and not just offering small efficiency gains here and there.
It will be fascinating to see how the token trades when it is listed on exchanges and how they will restrict Non-Accredited US investors from buying the tokens. I suspect it will be listed only on a limited number of exchanges who conduct thorough KYC before allowing investors to buy. One such exchange could be the fairly new NYCEX, which looks fairly quiet but well designed and part of the Argon Group that helped launch the ICO on Tokenhub .
Watch this space…
5 apps that are running on Ethereum that you may not know… yet! Here we present a list of apps developed on Ethereum that you need to check out! 1. Trek Miles : This Android app helps you to raise money while doing physical activities, as walking, running, etc., creating tokens based in your effort. These […]