 | Trust bomb Coinbase is responsible for a great many crypto investors' funds. It should do more to safeguard their trust, writes Michael J. Casey.
Read more in THE TAKEAWAY below. | | |
 TOP TRENDS ON COINDESK | | |
Smartphones galoreThis may just be the year of the blockchain smartphone.
There will soon be five different blockchain phones available for purchase, with four of the five targeting the typical consumer smartphone market: HTC’s EXODUS 1, Samsung’s Galaxy S10, PundiX’s XPhone and Sirin Labs’ Finney. Electroneum also announced its M1 smartphone, though unlike the others, this will be targeted at developing regions, with a launch planned in South Africa later this year.
Each of these phones interacts with the cryptocurrency space in different ways. The EXODUS 1, S10 and Finney all include crypto wallet functions, allowing customers to securely store their digital assets. The XPhone boasts a blockchain-based peer-to-peer calling system. The M1 will even mine its producer’s ETN token for users.
And while three of these devices – the Finney, XPhone and M1 – are not likely to see widespread mainstream distribution for a variety of reasons (ranging from a limited production run to only targeting a small market), the fact is that Samsung, the world’s largest producer of smartphones, and HTC, itself a giant in the space, are targeting a wide audience with their devices.
HTC announced this week that it would begin selling its phone for fiat currencies (while it was in the early access phase, customers could only purchase the device using bitcoin or ether). To support dapps, the EXODUS 1 will also feature a number of integrations, which will allow for micropayments directly from its wallet.
Specifically, users can send funds to the dapps loaded onto the device, or on websites using a native integration with the Opera browser.
The S10 will be partnering with crypto startups to support dapps as well. While specifics are scarce, it appears that Samsung is partnering with Cosmochain (a startup focused on content review and rewards) and Enjin (a crypto gaming platform) at launch.
Right now only the Finney is available for immediate purchase online, with the EXODUS 1, S10, M1 and XPhone all set to release in the coming months.
It remains to be seen just how popular they may be. |
Twin upgrades
The world’s second largest cryptocurrency by market value successfully activated two long-anticipated system-wide upgrades, Constantinople and St. Petersburg, this past Thursday, concluding months-long push to activate four new ethereum improvement proposals (EIPs) to the network.
In fact, St. Petersburg was a last-minute creation by core developers as a result of a security bug found back in January compromising smart contract security.
In order for developers to safely activate a fix to Constantinople on both the ethereum mainnet and all of its test networks, St. Petersburg was coded to specifically disable part of the Constantinople code.
The code in question was originally designed to reduce gas costs on the network and introduce a more equitable pricing method for data storage on the ethereum blockchain.
However, as discovered by smart contract auditing firm ChainSecurity at almost the last minute, the code also created a loophole for malicious actors to "re-enter" a contract multiple times without updating the users or system administrators about the current state of affairs.
This essentially allows for an attacker to be “withdrawing funds forever," as explained by Joanes Espanol, CTO of blockchain analytics firm Amberdata in a previous interview with CoinDesk.
Now, with only part of the Constantinople code activated on ethereum, ethereum core developers are already discussing the next system-wide upgrade to occur on the blockchain platform – and who will be the main coordinators for it.
Following the recent departure of ethereum core developer Afri Schoedon from the community, Ethereum Foundation community relations manager Hudson Jameson highlighted in a developer call that one, if not multiple individuals, would need to step up to take on the role of “hard fork coordinator."
Delegating the task of figuring out who these individuals will be and what specific tasks will be assigned to a relatively new group of ethereum volunteers called the Ethereum Cat Herders, developers also tabled discussions on a proposed mining algorithm change called ProgPoW until an audit of the code by the Cat Herders is officially finished. |
 QUOTE OF THE WEEK | |  | "People vote with their feet. Look at what happened to Facebook. A lot of users left Facebook because they didn’t like what was happening. The best jury is what people are looking to use.”
– Meltem Demirors, chief strategy officer at CoinShares, on Coinbase's acquisition of the Neutrino team. | | |
The Takeaway |  | | |
Michael J. Casey is the chairman of CoinDesk's advisory board and a senior advisor for blockchain research at MIT's Digital Currency Initiative.
If you want to test a cryptocurrency newcomer’s grasp of the design principles of permissionless record-keeping networks, tell them it wouldn’t matter to bitcoin if ISIS were running a node.
The statement can provoke a look of alarm. But it helps to make the point that the security model behind bitcoin and other decentralized cryptocurrencies – the way they resolve the Byzantine General’s Problem – is independent of the question of who is participating in the network. ISIS’s intent, evil as it would no doubt be, is irrelevant if it has less than 50 percent control of the network.
It’s also a good way to draw a distinction between the ostensibly “trustless” nature of the underlying ledger and the fact that so many of the businesses that provide services for cryptocurrencies – exchanges, custodians, price feeds and so forth – actually function as trusted third parties.
The point is that once you have to trust someone or some entity, then the question of who they are really does matter. That’s the lesson everyone should take from the PR disaster that Coinbase brought upon itself with its recent acquisition of the rather dodgy blockchain analytics firm Neutrino.
Precisely because it acts as a steward and custodian of a very large amount of people’s funds and assets, Coinbase’s business model depends on it building up and maintaining trust with its customers.
And as it learned last week, that can be a complicated exercise, one that goes far beyond what the entity does, to include how its messaging and its dealings with others are perceived.
The Neutrino-Hacking Team Connection
After BreakerMag’s David Z. Morris pointed out that the founders of Neutrino were the same folks who headed up Hacking Team, a notorious Italian IT firm whose software has helped authoritarian governments spy on their citizens, a #DeleteCoinbase movement arose on Twitter and elsewhere.
The backlash isn’t surprising. In a report that identified Hacking Team as one of five “corporate enemies of the Internet,” Reporters Without Borders documented the outfit’s cooperation with a wide range of governments around the world, including Sudan and Morocco, enabling them to “commit violations of human rights and freedom of information.” The Washington Post reported that Hacking Team once worked with the Saudi enforcement unit that was later involved in the murder of the newspaper’s correspondent, Jamal Khashoggi. A Toronto human rights group found that the firm had helped the repressive Ethiopian regime monitor expatriate dissidents’ activities.
It’s not clear how many users have actually deleted their Coinbase accounts in response to these revelations. Some reported difficulty in withdrawing their bitcoin balances to zero, a pre-requirement for closing an account; the amounts left were too small to easily transfer on-chain.
That prompted developer Udi Wertheimer to create #DeleteCoinbaseTrustChain – a play on the Lightning Network Trust Chain – to create a chain of Coinbase users transferring residual bitcoin to each other on the company’s books so they could drain and delete their accounts.
Either way, it’s impossible to put a positive spin on the branding impact of the Neutrino decision – which is why it’s also really important to look at Coinbase’s response to it.
Misplaced messaging
As of the time of writing there had been no update on the Coinbase blog beyond the upbeat announcement of the acquisition from engineering director Varun Srinivasan.
In a statement to The Block, however, Coinbase said it was “aware that Neutrino’s co-founders previously worked at Hacking Team, which we reviewed as part of our security, technical and hiring diligence,” adding that “Coinbase does not condone nor will it defend the actions of Hacking Team,” but “it was important for Coinbase to bring this function in-house to fully control and protect our customers’ data and Neutrino’s technology was the best we encountered in the space to achieve this goal.”
This is disingenuous.
The company’s argument – that this is best-of-class tech and that by bringing it “in-house” the company can be sure that it will “fully control and protect our customer’s data” – depends entirely on the presumption that users can trust Coinbase to act in their interests. And trust isn’t as easily maintained as Coinbase seems to think it is. Hiring people who worked on such unsavory projects as the Hacking Team is a good way to lose it.
I’m not suggesting that Coinbase intends to surveil or otherwise abuse the rights of its customers. It has been a mostly faithful and trustworthy steward of its more than 20 million users’ assets. There’s nothing to indicate that it won’t continue to work hard to protect them.
But Coinbase is a trusted third party. To succeed it must develop, nurture and maintain the public’s trust. And as the saying goes, it’s very difficult to engender trust and easy to lose it.
This requires more than just living up to legal and de facto fiduciary duties. It’s about how the entire company behaves, with everything from its blog posts to its corporate decisions under scrutiny.
An alternative that can be trusted
Banks and other financial institutions have been well aware of this challenge for years. It’s why they work hard on their branding – using words like “trust” and “fidelity” in their names and product offerings, and associating their logos and other corporate iconography with images of strength and dependability.
Even so, because of their poor behavior in recent years, public trust in banks is near all-time lows. Not that this has caused them to lose much business; most people feel they have no choice but to deal with banks if they are to transact in the real world. (Even among competing banks, switching costs, such as the hassle of changing direct deposit for paychecks, have historically made consumers “sticky,” or disinclined to switch providers.) It’s a captive audience, but a miserable one.
Perhaps Coinbase is relying on similar inertia, and maybe it can even afford to, given its massive user base and relative ease of use compared to most crypto exchanges. But if it wants to be a real alternative to the complacent, too-big-to-fail banks, Coinbase and others like it must hold themselves to a higher standard. They have to win the public’s trust.
Even if the Lightning Network and other decentralized technologies start to allow cryptocurrency users to more easily “be their own bank” and manage their assets without relying on exchanges or custodians, trusted entities will continue to play vital roles in the crypto ecosystem. In any case, we’re long way from having those new technologies operate at scale.
Can Coinbase survive the Neutrino controversy and the #DeleteCoinbase movement? Possibly.
Yet the fallout from its decision and response affect confidence in the entire field of cryptocurrencies.
If the company and other such intermediaries want to help the industry grow and, in so doing, succeed in building their own respected brands, they need to work a lot harder at winning the trust of the people they serve. — Michael J. Casey |
 BEYOND COINDESK... | | |
THE NEW YORK TIMES: The daily inflation rate for Venezuela's bolívars hovers around 3.5 percent. The annual inflation in 2018 was nearly 1.7 million percent. These factors make using the currency to purchase goods difficult, writes Carlos Hernández. The Venezuelan economist explains how actively using bitcoin for day-to-day expenses is helping him – and his family – survive the economic disaster ongoing in the South American nation.
CHRIS BURNISKE: This year may be the best time to purchase or develop a crypto token, says Chris Burniske. Even as startups shift from raising funds by selling tokens to raising funds by selling equity, in the long run, protocols are likely to emerge as the base for "thousands of equity-capitalized businesses," making them potentially far more valuable than simply equity alone.
CASEY CARUSO: While bitcoin may have started as an ideal for transacting value directly between two parties, the space a decade on has evolved drastically, writes Casey Caruso. Today, the primary groups seem to be the sound money camp trying to build a global store of value; the payments camp trying to improve payment systems; the open finance camp trying to build an open financial system; the Web 3 camp trying to build a decentralized internet; and the DLT camp trying to use blockchain technology for other purposes.
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 WHAT WE'VE BEEN UP TO | | |
Last month we launched a new series of monthly webinars focusing on the institutional crypto market.
On Feb. 21, CoinDesk’s Noelle Acheson spoke to Lucas Nuzzi, Director of Technology Research at Digital Asset Research, on the role of cryptoasset analysis in the shaping of the market.
Missed the discussion? You can watch it here.
Thanks for reading! |
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