Decentralization

The crypto industry must do more to promote encryption, says Meltem Demirors

Meltem Demirors sat down with Cointelegraph to express why the industry needs to focus on privacy and freedom when it comes to regulations.

“I like to call myself a future, or aspiring, cult leader,” Meltem Demirors, chief strategy officer of CoinShares — a publicly listed investment firm managing around $5 billion in assets — told Cointelegraph.

Demirors, who first entered the Bitcoin (BTC) space in late 2012, further mentioned that it has been “fun to see how big the crypto sector has become,” noting that people from all walks of life are now interested in the cryptocurrency space. As such, Demirors explained that “crypto cults” are bringing people together in a positive manner, especially since it gives people a sense of purpose and belonging.

When it comes to regulations — one of the most important topics facing the crypto industry today — Demirors expressed skepticism. “Having been in this industry professionally for eight years, I’m tired of talking about regulations, particularly in the United States,” she said. While U.S. regulators continue to pass frameworks around the treatment of digital assets, Demirors pointed out that there has been “too much talk and not enough cogent action.” Moreover, Demirors remarked that a number of crypto bills are attempting to minimize consumer use of encryption, which she believes to be the backbone of the internet.

*Meltem Demirors (left) of CoinShares speaks to Cointelegraph at Consensus 2022. Source: Cointelegraph*

Demirors elaborated on this topic, along with the development of decentralized autonomous organizations (DAOs) during an interview with Cointelegraph at Consensus 2022.

Cointelegraph: What are your thoughts on recent regulatory frameworks in the United States?

Meltem Demirors: I do think that the Lummis-Gillibrand bill and the Token Taxonomy Act of 2021 have been good attempts at categorizing and classifying digital assets. But, the challenge I have with so many of the crypto bills and regulations is that all are all focused on financial services and taxation. They are focused on where and how we govern, tax and extract value for the government. Therefore, the biggest issues I’m excited about are those centered around consumer privacy, self-sovereignty and freedom of speech, which are not being addressed in these bills.

Unlike so many bills that focus purely on the side of the financial services, the industry needs to focus on crypto infrastructures like data centers, connectivity, computations, semiconductors and the actual plumbing that makes any technology function. We also need to make sure that the U.S. is a friendly jurisdiction for people to develop not only software but also hardware that can be deployed at scale. Today, we have seen no cohesive action on this. The industry has seen a piecemeal approach with the State of New York taking a very draconian approach, while states like Texas and Wyoming want to become homes for crypto mining.

Moreover, the right to consumer and financial privacy are also not being addressed. In fact, most of these bills want more financial surveillance. As an industry, it’s important for us to continue to push back on this, particularly in a world where central bank digital currencies (CBDCs) are being explored.

CT: Any suggestions on what the crypto industry can do to preserve privacy and financial freedom?

MD: I think the biggest movement we’ve seen has been the crypto wars — and I’m talking about cryptography. In the early 90s, there was a massive debate around encryptions and the use of encryption for a variety of consumer-focused applications. Encryption is truly the backbone of the internet and we are seeing a number of bills now attempting to minimize consumer use of encryption and to create back doors.

Yet, once backdoors to encryption are created, they won’t just be used to surveillance consumers but rather will be used against our government. This is now a matter of national security. Therefore, I think the war of encryption is still alive and well. I also think there is more that we can do as an industry to preserve and promote encryption instead of using taxpayer dollars to run challenges that try to crack encryption algorithms, like SHA-256, which is the backbone of Bitcoin.

I also think that preserving code and speech is important. For example, open-source code is a big part of the crypto community, along with anonymous developers. Unfortunately, there are a number of efforts underway to hold open-source developers criminally liable for how their software is leveraged, which is antithetical to the entire open-source movement.

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In addition, we need to consider the treatment of virtual asset service providers, or VASPs. For example, if someone is running a node or if two people are transacting peer-to-peer on an open blockchain protocol, classifying them as VASPs and forcing them to comply with regulation is concerning. There is a bill now that makes people report their social security numbers to anyone sending crypto over an amount of $10,000. This is preposterous and we don’t have that same rule for cash. These are all factors around privacy that make it easier for the government to target individuals that are in the crypto space, so it’s important that the industry pushes back.

CT: You mentioned DAOs during your talk at Consensus. Can you share your thoughts on this area, please?

MD: Yes, DAOs have been interesting because a lot of what I do at CoinShares is focused on strategy, which means investing, but also looking at what’s happening in the crypto industry and how it’s relevant to the world of investing. So, I experiment with things happening in crypto. For example, I joined a few DAOs recently. I joined Friends With Benefits last year, which was my first DAO experience. I also started two DAOs with friends. One is Hashes DAO, which is an art collecting-focused DAO. The second is a DAO called DAO Jones, which is a funny play, but it’s an investment DAO that uses Syndicate, a platform that allows users to create investment clubs as DAOs that fit into a legal framework.

I’ve learned a lot about DAO tooling, infrastructure and the exciting opportunities around DAOs, along with the inherent limitations. The biggest thing I’ve learned though, is that all communities need leadership. In particular, communities need strong principled leadership to uphold and reinforce community values but to also push the community forward. We have seen so many communities in crypto begin with strong leaders, but then those leaders leave and challenges are created that splinter the community. We saw this with Bitcoin — we saw a struggle for power five years after Satoshi left the Bitcoin community.

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Overall, I think DAOs are an exciting area of experimentation, but from an investing perspective, I think DAOs are still very early. There are many people building DAO tooling right now without understanding what emergent behaviors we need to focus on. Governance is not a technology or crypto problem but rather a very human problem that has existed since the early days of civilization. While I’m excited about the future of DAOs, I think there is still a lot of work to do before DAOs get to scale and become implemented in ways that allow for good governance.

CT: What are you most excited about in terms of the crypto space moving forward?

MD: I’m really excited about community-owned infrastructure, or physical infrastructure. Today, crypto is so dependent on centralized service providers like AWS being used for utilities. But, there are a number of efforts underway to build peer-to-peer networks that will enable us to perform computations, have better telecommunications, better broadband connectivity and decentralize and make the energy grid more resilient. I’m excited about taking crypto and combining it with energy computations and connectivity in new ways. This will also make our global systems more resilient, which typically comes with decentralization.

I’m also excited about more developer tools and infrastructure. Right now, the surface area of crypto is so large, so it’s been difficult for people to enter the space to build. Standardization, modulation and convergence around core consensus algorithms are really important. Experimentation has been fun, but we are now learning what does and doesn’t work. Also, thinking about decentralized identifiers and verifiable credentials, along with using Bitcoin as a communication protocol excites me.

Scientists claim to have designed a fully decentralized stablecoin pegged to electricity

The E-Stablecoin would require several scientific advancements that are already in the works, and would allegedly make it possible to transmit electricity almost for free.

Researchers at the federally funded Lawrence Livermore National Laboratory in California have combined statistical mechanics and information theory to design a class of stablecoin dubbed the Electricity Stablecoin (E-Stablecoin) that would transmit energy as a form of information. Livermore’s Maxwell Murialdo and Jonathan L. Belof say their innovation would make it possible to transmit electricity without physical wires or a grid and create a fully collateralized stablecoin pegged to a physical asset – electricity – that is dependent on its utility for is value.

According to the scientists, the E-Stablecoin would be minted through the input of one kilowatt-hour of electricity, plus a fee. The stablecoin could then be used for transactions the same way as any stablecoin, or the energy could be extracted by burning it, also for a fee. The entire process would be controlled by smart contracts with a decentralized data storage cloud. No trusted centralized authority would be needed to maintain or disburse the asset.

This would be a first for a hard-pegged stablecoin, being directly exchangeable for a specified quantity of a physical asset, the scientists said. They suggested that electricity has a highly stable price and demand, and the electricity used in minting E-Stablecoins would be easily sustainable. Investors would be able to mint E-Stablecoins in regions where electricity prices are low and burn the tokens where electricity is more expensive.

Murialdo and Belof described their work as a proof of concept and made extensive use of advanced mathematics for their reasoning. To make a working E-Stablecoin, “further advances that increase the speed, transfer entropy, and scalability of information engines will likely be required,” according to the scientists.

Improved cloud storage, or an alternative to it, would also be needed. In the meantime, their research has theoretical implications for the way in which cryptos derive their value, the authors said. Their work was published in the peer-reviewed journal Cryptoeconomic Systems on Monday.

Centralized vs. decentralized digital networks: Key differences

Find out what differentiates centralized and decentralized digital networks—and which structure is right for your organization.

Disadvantages of centralized and decentralized networks

Censorship, limited scalability and security issues are some of the downsides of centralized networks. Meanwhile, lack of clarity, high setup and maintenance costs, and volatility are the weak points of decentralized networks.

In a centralized system, there is often a single point of failure. If the central authority is compromised, it can bring down the entire system — a major disadvantage, especially in systems where security is critical.

As for scalability, a centralized system can often only grow as fast as the central authority allows it. Restrictive development could be disheartening when users are clamoring for more features and functionality.

Censorship is another disadvantage. In a centralized system, the central authority has the power to restrict content. This is a major con for those looking to share information freely.

However, in a decentralized system, lack of clarity can often be an issue. Since decentralized network governance doesn’t rely on key authorities, such a structure could be its undoing in times of crisis when decisions need to be made quickly.

Decentralized systems are also more expensive to set up and manage since they need systems with automated communication capabilities.

And lastly, the prices of decentralized digital currency are known to be volatile, making them a risky endeavor for more conservative investors.

Advantages of centralized and decentralized networks

The merits of a centralized network are a clear chain of command, inexpensive setup and easier task delegation. Decentralized networks, on the other hand, are immutable, censorship-resistant and provide users with complete control and security.

There is a clear chain of command in a centralized network, and everyone knows who is in charge. This can be helpful in times of crisis when decisions need to be made quickly and efficiently.

Centralized networks also tend to be less expensive to set up and maintain as only one server or mainframe needs to be managed. In addition, it is easier to delegate tasks with clear-cut lines of authority. This ensures that tasks are completed timely and efficiently.

Meanwhile, in decentralized networks, users exercise complete control over their data and information. They are also immutable, i.e., once data is entered into the system, it cannot be changed or altered. This ensures data integrity and fraud prevention.

Another pro is that decentralized networks employ cryptography to guarantee the safety of data ledgers. Because the current block’s data must be validated using cryptography, it relies on data from the adjacent block, thus making the data incredibly secure.

Lastly, in a decentralized network, no central authority exists to censor or restrict content. This is appealing to those wanting to share information without fear of reprisal.

The basic difference between centralized and decentralized networks

Aside from the locus of control, the key differences between centralized and decentralized networks inextricably lie in what they stand for.

Simply put, a centralized network is used to maintain control and stability. In contrast, a decentralized network is geared toward user freedom and collaboration.

If you’re in the mood to get into the philosophical and theoretical underpinnings of centralization vs. decentralization, we have a great thought piece on that here.

In the meantime, let’s dive into the basic differences between the two:

Third-party involvement: In a centralized network, a third party or middleman is required to facilitate communication between different nodes. There is no need for a third party in a decentralized network. Each node can communicate directly with every other node on the network.
Transparency: Centralized networks are less transparent because all data and information are stored in one central location. Decentralization, however, increases transparency through distributed ledger technology (DLT).
Security: Centralized networks are more vulnerable to attacks as hackers only need to target one central point to gain access to the entire system. Decentralized networks are more secure because even if one node is compromised, the others are not affected.
Scalability: Centralized networks are easier to scale just by adding more servers to the system. This is more difficult to pull off with decentralized networks since each of their nodes needs to be capable of handling more traffic.
Exchange fees: Centralized networks tend to have higher fees (think of banks and financial services) as more middlemen are involved in the process. Such actors are not present in decentralized networks, resulting in lower fees.

How does a decentralized network work?

Rather than rely on a single central server, a decentralized network distributes information-processing tasks across multiple devices.

In a decentralized network, even if one of the master nodes fails or is attacked, the remaining servers may continue to grant data access to users. Consequently, the overall network will continue to work without disruption.

Recent technological advancements have endowed computers and other devices with large amounts of processing power, which can be synced and used for decentralized computing. This is what makes decentralized networks possible.

It’s essential to remember that while decentralized networks are distinct from centralized networks, they are still reliant on main servers, although in more than one per network.

What are decentralized networks?

A decentralized digital network is not controlled by a central authority.

Instead, control is distributed among its users. There is no single server or point of command. Rather, the network is run on a peer-to-peer basis, with each user wielding equal power and responsibility.

A great example of a decentralized network is the internet, itself, which is not controlled by one authority. Rather, it is distributed among its users. However, some argue that the internet is moving toward centralization due to the monopoly of big names within the space—Google, Facebook, WordPress and the like.

How so? Data is concentrated within these big players’ servers. As such, everything one needs to access online goes through any one of them. So to answer the question, “Is the internet centralized or decentralized?”

Technically, it’s decentralized, but the argument that it is slowly but surely becoming more centralized cannot be downplayed or understated.

Another example is Bitcoin (BTC), the first cryptocurrency. Bitcoin’s network architecture was born after the Great Financial Crisis of 2007–2008. Briefly put, Bitcoin was launched as a decentralized network precisely because centralized institutions (banks, financial firms) “had failed the people.”

The creator(s) of Bitcoin realized that if a single point of control or failure exists, the entire financial system is at risk. Therefore, they designed Bitcoin to be decentralized and distributed. No single entity or group controls it. Instead, it is managed by its users.

How does a centralized network work?

In a centralized network, a central server handles major data processing and network management functions.

This server is responsible for storing all the data and running all the processes on the network. It may be situated in a single location or spread out over multiple locations.

Workstations within the network, which have less processing power, connect to the central server. Instead of directly performing specific functions (data storage, applications, utilities), these workstations submit their requests to the main server for processing.

The central server typically features a robust computing power and a huge storage capacity. It also has a high-speed connection to the internet. These allow for handling a large number of users and a lot of data traffic.

What are centralized networks?

A centralized digital network is one in which a central authority controls the network.

The authority may be an individual, a group of individuals or a corporation. Usually, the centralized authority is responsible for maintaining the network, managing users, and setting rules and regulations.

A centralized network’s architecture is built around a single server where all significant processes are run. If the server fails, the network goes down. Many digital platforms that we interact with daily, like Facebook and YouTube, are centralized. In these examples, a single entity (the company) is in charge of all the data and processes on the network.

Self-regulatory orgs for crypto keep ecosystem afloat pending clear regulations

In places where crypto has no solid legal framework, self-regulatory organizations act as a ladder for crypto companies to evolve.

The crypto market is growing at a rapid pace, with governments and various regulatory bodies actively trying to study and keep up with the growth.

While many policymakers around the globe have come to realize that banning the crypto market is not an option, many are yet to come up with a formidable framework to regulate the nascent market in their respective countries.

Even some of the most crypto-friendly countries have only managed to regulate parts of the crypto market such as crypto trading while a significant chunk of crypto-related activities still remains a gray area.

Thus, for a rapidly growing industry like crypto, which often remains under heavy government scrutiny, surviving becomes a complex task. This is where self-regulatory organizations (SRO) come into play.

Self-regulatory organizations have complete authority in developing policies, maintaining guidelines, enforcing policies and resolving conflicts. Although self-regulatory groups are private, they are subject to government scrutiny; if there is a discrepancy between the regulations of the two bodies, the government agency takes precedence.

Bradley, founder of crypto trading platform Y-5 Finance, told Cointelegraph:

“SROs are becoming more commonplace within countries lacking any official cryptocurrency regulation. Technology such as blockchain does not fit easily into traditional regulation and proponents of SRO state that they can help integrate a new complex industry into existing traditional agencies. SRO’s are self-funded and self-governed, and some have received criticism for taking the side of their members rather than the public.”

An SRO is a non-governmental organization formed by participants of a particular industry or sector to assist in the regulation of enterprises in that area. These SROs facilitate collaboration between industry experts and government policymakers and try to fill the regulatory vacuum until a widely recognized framework comes into play.

Financial Industry Regulatory Authority (FINRA), is a prime example of an SRO that works in accordance with the United States Securities and Exchange Commission (SEC) to enforce the regulatory bodies’ broader objective. Similarly, several crypto-based SROs have cropped up in various jurisdictions that have helped the crypto industry thrive.

Tony Dhanjal, head of tax at crypto taxation platform Koinly, told Cointelegraph:

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“In the absence of official or government-backed regulation, self-regulation and governance have been witnessed before in other industries. it demonstrates a degree of intent and responsibility toward ‘protecting investors.’ This further fuels confidence in the industry and accelerates innovation. SROs aim to ‘foster consumer protection and market integrity’ — they certainly seem to be making the right sounds.”

How SROs have helped across the globe

Over the past year, the crypto industry has managed to create the highest number of unicorns, or startup firms worth over $1 billion, as a significant chunk of investment from the traditional market has flowed into the crypto industry. The growing confidence of traditional markets in the crypto industry has been possible in part because of the self-regulatory measures that the industry has incorporated in the absence of government regulation.

Justin Newton, CEO of leading compliance digital identity verification technology firm Netki, told Cointelegraph:

“Eight years ago, I forecasted that regulations were coming to the cryptocurrency space, it was just a matter of when and under what conditions. It was clear even then that the industry would be best served by getting out ahead of regulators in terms of reducing risks and providing appropriate Anti-Money Laundering controls. We are more likely to get good frameworks if we design them rather than if we wait for regulators to force the issue.”

He went on to add that the crypto industry needs to be more proactive in offering solutions to the issues regulations attempt to address rather than fighting the inevitable interference from policymakers. He said that “self-regulatory bodies are a specific kind of organization that is created and empowered by legislation and regulation, which may not be the right fit for our industry, particularly due to the inevitable cross-border nature of the businesses participating in the ecosystem.”

There has been a global push for crypto exchanges to self-regulate. Japan and South Korea are considered pioneers of the self-regulatory industry and were among the first nations to establish SROs for crypto.

The Japan Blockchain Association (JBA) boasts 127 members and 35 crypto exchanges among them. It sets standards and promotes the development of a sound business environment and user protection system of virtual currency and blockchain technology. Over the years, the JBA has worked toward bringing awareness around the crypto market and holds regular meetings and discussions around the advent of new use cases with its latest focus being on nonfungible tokens (NFTs).

CryptoUK, a trade association with its own self-regulatory code of conduct, was founded by the United Kingdom’s seven largest crypto firms. The motto of the association is to help people in times of crisis, especially in case of a hack. Similarly, seven top crypto exchanges in India partnered with the Internet and Mobile Association of India to form a self-regulatory body.

South Korea’s blockchain association has 25 members and propagates the use of nascent blockchain tech among the masses. The SRO has been responsible for issuing crypto exchange guidelines and has also been a part of making crypto tax policies. The Korean blockchain association lobby has formally advised against the 20% crypto tax proposed in the country.

In the United States, the Gemini crypto exchange was the first to propose an SRO in the form of the Virtual Commodity Association. Later in 2018, a group of 10 financial and tech firms created the Association for Digital Asset Markets (ADAM). According to its website, ADAM now has 31 members and five partnering law firms.

Gabriella Kusz, CEO of the Global Digital Asset and Cryptocurrency Association — a global self-regulatory association for the digital asset and cryptocurrency industry — explained how the self-regulatory organization functions and works toward building policies to promote growth. She told Cointelegraph:

“Around the world, the Global DCA maintains a number of Memorandums of Understanding with other emerging self-regulatory movements so we can speak intelligently to the other global movements we are seeing develop credibly in this regard. In particular, we see excellent progress through leadership and stewardship in Nigeria through the Stakeholders in Blockchain Technology Association of Nigeria as well as with the Internet and Mobile Technology Association of India. Both of these are emerging self-regulatory movements, but they have sought to bring around a diverse and inclusive group of firms to advance standards, education and gentle advocacy to support public and private sector dialogue.”

Europe is currently lagging behind in terms of accommodating self-regulatory bodies, with Switzerland being the only stand-out nation.

Why should regulators pay attention to SROs?

The nature of a particular industry, the level of competition in the sector and its need for regulation usually will determine if an SRO is necessary. Either the member firms of the industry agree and create the organization themselves or the government could mandate the creation of an SRO. In many cases, SROs also serve as forums for producing educational materials or managing certifications within their industry.

Justin Hutzman, CEO of Canadian crypto exchange Coinsmart, explained the importance of how government regulations and SROs can go hand in hand. He told Cointelegraph:

“Along with country-specific regulations, the industry needs to take specific measures to self-regulation to meet certain global standards. Recently, CoinSmart and other exchanges from Canada, the U.S. and Singapore joined the Travel Rule Universal Solution Technology (TRUST) to boost its AML efforts. TRUST takes measures to reduce money laundering by ensuring that members are compliant with the travel rule while protecting user data.”

Self-regulatory organizations are adopting self-imposed standards for participants in the digital asset ecosystem that reflect compliance practices in traditional financial institutions. Regulators and legislative bodies around the world are beginning to address how digital assets will be regulated, but it could take years before standards are adopted. U.S. President Joseph Biden’s recent executive order on digital assets underscores the need for companies to address ethical practices and internal controls within their organizations.

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The growing prominence of self-regulatory organizations will contribute to the development of standardized compliance practices, allow for constructive engagement with regulators and accelerate institutional adoption of this emerging asset class. Organizations like the Association for Digital Asset Markets are building a foundation for this to happen.

Felipe Vallejo, the chief regulatory officer at Bitso, told Cointelegraph:

“We believe that the emergence of SROs and continued self-regulation set an excellent example for governments looking to assess risks and appropriate policy responses for crypto without stifling innovation.”

Self-regulation combats one of the drawbacks of every country potentially having different regulations, which makes it increasingly difficult for companies to operate on a global scale. Self-regulatory bodies have more opportunities to collaborate with each other and introduce global regulations that are consistent and meet the needs of investors and cryptocurrency companies.

Struggle for Web3’s soul: The future of blockchain-based identity

What’s behind Buterin’s embrace of “soulbound tokens”? Ensuring Ethereum’s dominance? A backlash against NFTs? Creating a better world?

There is no shortage of visionary scenarios about how Web3 might unfold, but one of the latest, “Decentralized Society: Finding Web3’s Soul” — a paper published in mid-May by E. Glen Weyl, Puja Ohlhaver and Vitalik Buterin — is close to becoming one of the top 50 most downloaded papers on the SSRN scholarly research platform.

The attention, one might suspect, has much to do with the participation of Buterin, blockchain’s wunderkind and the legendary co-founder of the Ethereum network. But it could also be a function of the paper’s ambition and scope, which includes asking questions like: What sort of society do we really want to live in? One that is finance-based or trust-based?

The authors illustrate how “non-transferable ‘soulbound’ tokens (SBTs) representing the commitments, credentials and affiliations of ‘Souls’ can encode the trust networks of the real economy to establish provenance and reputation.” These SBTs appear to be something like blockchain-based curricula vitae, or CVs, while “Souls” are basically people — or strictly speaking, individuals’ crypto wallets. However, Souls can also be institutions, like Columbia University or the Ethereum Foundation. The authors wrote:

“Imagine a world where most participants have Souls that store SBTs corresponding to a series of affiliations, memberships, and credentials. For example, a person might have a Soul that stores SBTs representing educational credentials, employment history, or hashes of their writings or works of art.”

“In their simplest form, these SBTs can be ‘self-certified,’” continue the authors, “similar to how we share information about ourselves in our CVs.” But this is just scratching the surface of possibilities:

“The true power of this mechanism emerges when SBTs held by one Soul can be issued — or attested — by other Souls, who are counterparties to these relationships. These counterparty Souls could be individuals, companies, or institutions. For example, the Ethereum Foundation could be a Soul that issues SBTs to Souls who attended a developer conference. A university could be a Soul that issues SBTs to graduates. A stadium could be a Soul that issues SBTs to longtime Dodgers fans.”

There’s a lot to digest in the 36-page paper, which sometimes seems a hodgepodge of disparate ideas and solutions ranging from recovering private keys to anarcho-capitalism. But it has received praise, even from critics, for describing a decentralized society that isn’t mainly focused on hyperfinancializaton but rather “encoding social relationships of trust.”

Fraser Edwards, co-founder and CEO of Cheqd — a network that supports self-sovereign identity (SSI) projects — criticized the paper on Twitter. Nonetheless, he told Cointelegraph:

“Vitalik standing up and saying NFTs [nonfungible tokens] are a bad idea for identity is a great thing. Also, the publicity for use cases like university degrees and certifications is fantastic, as SSI has been terrible at marketing itself.”

Similarly, the paper’s attention to issues like loans being overcollateralized due to lack of usable credit ratings “is excellent,” he added.

Overall, the reaction from the crypto community, in particular, has been quite positive, co-author Weyl told Cointelegraph. Weyl, an economist with RadicalxChange, provided the core ideas for the paper, Ohlhaver did most of the writing, and Buterin edited the text and also wrote the cryptography section, he explained.

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According to Weyl, the only real sustained pushback against the paper came from the DID/VC (decentralized identifiers and verifiable credentials) community, a subset of the self-sovereign identity movement that has been working on blockchain-based, decentralized credentials for some years now, including ideas like peer-to-peer credentials.

A “lack of understanding”?

Still, the visionary work garnered some criticism from media outlets such as the Financial Times, which called it a “whimsical paper.” Some also worried that SBTs, given their potentially public, non-transferable qualities, could give rise to a Chinese-government-style “social credit system.” Others took shots at co-author Buterin personally, criticizing his “lack of understanding of the real world.”

Crypto skeptic and author David Gerard went even further, declaring, “Even if any of this could actually work, it’d be the worst idea ever. What Buterin wants to implement here is a binding permanent record on all people, on the blockchain.”

Others noted that many of the projected SBT use cases — such as establishing provenance, unlocking lending markets through reputation, measuring decentralization or enabling decentralized key management — are already being done in different areas today. SBTs are “potentially useful,” said Edwards, “but I have yet to see a use case where they beat existing technologies.”

Cointelegraph asked Kim Hamilton Duffy, who was interviewed two years ago for a story on decentralized digital credentials, about some of the use cases proposed in the “Soul” paper. How do they compare, if at all, with the work she has been doing around digital credentials?

“It is similar to my thinking and approach when I first started exploring blockchain-anchored identity claims with Blockcerts,” Duffy, now director of identity and standards at the Centre Consortium, told Cointelegraph. “The risks and, correspondingly, initial use cases I carved out — restricting to identity claims you’re comfortable being publicly available forever — were therefore similar.”

While the Soul paper touches on potential approaches to risks and challenges — such as how to handle sensitive data, how to address challenges with key and account recovery, etc. — “These solutions are harder than they may initially appear. What I found was that these problems required better primitives: VCs and DIDs.”

Weyl, for his part, said there was no intent to claim priority with regard to the proposed use cases; rather, it was merely to show the power of such technologies. That is, the paper is less a manifesto and more a research agenda. He and his colleagues are happy to pass credit around where credit is due. “The VC community has an important role to play,” as do other technologies, he told Cointelegraph.

A question of trustworthiness

But implementation may not be so simple. Asked to comment on the practicality of an enterprise like “soulbound tokens,” Joshua Ellul, associate professor and director of the Centre for Distributed Ledger Technologies at the University of Malta, told Cointelegraph: “The main issues are not technological but, like many aspects in this domain, issues of trust.”

As soon as any input is required from the outside world — e.g., an academic degree, affiliation or attestation — a question arises as to the trustworthiness of that input. “We can raise the levels of trustworthiness of data through decentralized oracles, yet we should acknowledge that that data is still dependent on the collective trustworthiness of those oracles,” Ellul said.

Assume a university is a “Soul” that issues students blockchain-based certificates. “People may trust the attestation because they trust the centralized university that makes its public key public,” Ellul said. But then others might ask, “What is the point of storing SBTs on a DLT when the university keeps such control?”

Or looking at the idea of peer-to-peer work credentials, “In the real world, would a company honor a peer-to-peer credential issued by an individual or institution unknown to the company? Or would they rather just rely on traditional credentials?”

It’s a matter of “shifting the mentality of trust” from centralized institutional trust to trusting networks, Ellul told Cointelegraph — and that could take some time to achieve.

What if you lose your private key?

The paper presents several use cases in areas where very little work has been done until now, Weyl told Cointelegraph. One is community recovery of private keys. The paper asks the question of what happens if one loses their Soul — i.e., if they lose their private key. The authors present a recovery method that relies on a person’s trusted relationships — that is, a community recovery model.

With such a model, “recovering a Soul’s private keys would require a member from a qualified majority of a (random subset of) Soul’s communities to consent.” These consenting communities could be issuers of certificates (e.g., universities), recently attended offline events, the last 20 people you took a picture with, or DAOs you participate in, among others, according to the paper.

Community recovery model for Soul recovery. Source: “Decentralized Society: Finding Web3’s Soul”

The paper also discusses new ways to think about property. According to the authors, “The future of property innovation is unlikely to build on wholly transferable private property.” Instead, they discuss decomposing property rights, like permissioning access to privately or publicly controlled resources such as homes, cars, museums or parks.

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SBTs could grant access rights to a park or even a private backyard that are conditional and nontransferable. For example, I may trust you to enter my backyard and use it recreationally, but “that does not imply that I trust you to sub-license that permission to someone else,” notes the paper. Such a condition can be easily coded into an SBT but not an NFT, which is transferable by its very nature.

Backlash against NFTs?

Inevitably, speculation is settling on Buterin’s motivation for attaching his name and prestige to such a paper. Some media outlets suggested the Ethereum founder was overreaching or looking for the next big thing to spur a market rally, but “This doesn’t fit Vitalik’s typical approach,” noted Edwards.

Buterin’s motivation may be as simple as looking for another way to maintain and build Ethereum’s platform dominance. Or, perhaps more likely, the impetus “could be a backlash against the speculation and fraud with NFTs and looking to repurpose them into a technology that changes the world in a positive way,” Edwards told Cointelegraph.

In any event, the Soul paper shedding light on decentralized society, or DeSoc, performs a positive service in the view of Edwards and others, even if SBTs themselves eventually prove to be nonstarters. In the real world, one often doesn’t need an all-encompassing, perfect solution, just an improvement over what already exists, which today is centralized control of one’s data and online identity. Or, as the paper’s authors write:

“DeSoc does not need to be perfect to pass the test of being acceptably non-dystopian; to be a paradigm worth exploring it merely needs to be better than the available alternatives.”

Corporate evolution: How adoption is changing crypto company structures

Could the growing adoption of cryptocurrencies also mean a move away from its decentralized principles?

Crypto-focused companies have come a long way since their beginnings in terms of corporate structure, employee motivation, decision-making systems, compliance and other aspects of their operations. While the early 2010s saw startups founded by small groups of crypto enthusiasts, the space has since grown to become home to large institutional businesses.

Still, crypto companies are engaged in business, and business is alien to anarchy. The rapid growth of the cryptocurrency industry in the 2010s transformed small, independent businesses into huge conglomerates with thousands of employees and offices worldwide. Investment funds and professional investors own shares of them, many have functioning boards of directors, and their corporate structures have dozens of departments and divisions. But does all this bureaucracy destroy the very philosophy of cryptocurrency?

Like any other company, most cryptocurrency businesses got their start when their founders came up with the idea to launch a business. The difference, however, is that crypto is not only a new form of finance but also has an ideological foundation that combines the spirit of decentralization, freedom and anonymity. Over the last decade, cryptocurrencies have challenged traditional fiat currencies and rejected many of the rules of the financial world, causing confusion in the measured life of the global investment industry.

From the very beginning

The cryptocurrency exchange Huobi was founded by two co-founders, Du Jun and Leon Li, in September 2013. By November 2013, Huobi had already reached a Bitcoin (BTC) transaction volume of 1 billion yuan (around $6 billion at the time) and began receiving funding from prominent investors. In its first year of existence, Huobi’s headcount grew to exceed 100 people, and the exchange now counts more than 2,000 employees in its corporate structure. It has rapidly transformed from a cryptocurrency startup to a large company with a multibillion-dollar turnover. Institutional investors such as Chinese venture fund Zhen Fund and Sequoia Capital bought stakes in Huobi back in 2013 and 2014, respectively.

1inch Network, another exchange, was founded at the ETHNewYork hackathon in May 2019 by Sergej Kunz and Anton Bukov, engineers with many years of software development experience. Today, 1inch is a decentralized network of over 100 contributors distributed all over the world. From what can be gathered, the company does not have an office, and employees can work from anywhere in the world. Nevertheless, it has a corporate structure, as well as funding from Binance Labs that it received in August 2020.

Corporate colors

In 2014, Frederic Laloux’s book Reinventing Organizations was published. It was the result of a three-year study of 12 companies (including Patagonia, Zappos and Sounds True) that promoted unconventional management practices and principles. In the book, Laloux identifies five types of companies, which he categorizes according to their form of corporate governance: red, orange, yellow, green and teal. According to the author, teal companies represent the highest form of organization. They are characterized by the absence of a hierarchical structure, maximum transparency and employees’ great freedom to make decisions and express their opinions.

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Unfortunately, Laloux did not study financial organizations, much less financial startups, so there is no information in his book about which color cryptocurrency companies could be classified as. Nevertheless, an executive at Huobi and a founder of 1inch told Cointelegraph that they consider their companies to be teal.

Describing Laloux’s theory of the evolution of organizations, Jeff Mei, director of global strategy at Huobi Global, told Cointelegraph that teal represents the final stage, characterized by “complex adaptive systems with distributed authority, often structured as decentralized, self-managed teams or networks.” In this stage, “static pyramidal hierarchies give way to fluid natural hierarchies, where power shifts to the people with the most experience, passion or interest.”

Mei said that this description “coincides with Huobi’s core beliefs as well as the underlying values of blockchain itself.”

1inch co-founder Bukov told Cointelegraph he believes that his company’s efforts “to create a ‘teal organization’ are not only successful but also quite sustainable in the long term. While a corporate hierarchy may work for some companies, it is not very suitable for decentralized finance projects. In fact, the less hierarchical the project structure, the better.” He added:

“But consistency between different teams is vital to make sure they are on the same page. Adherence to rules is absolutely normal for DeFi projects, and freedom should by no means mean breaking laws. Freedom and decentralization remain core values of 1inch Network, no matter the size of the project. Our teams enjoy a high degree of independence, and if, for example, a team doesn’t think an idea is promising and worth pursuing, it will be debated until a consensus is reached.”

Freedom or compliance?

The ideology of blockchain and cryptocurrencies — expressed in decentralization, freedom and anonymity — has recently been tested and even questioned by some cryptocurrency companies.

Mei said that “Thanks to numerous regulations by governments around the world, as well as security breaches and even coin crashes, we have concluded in 2022 that cryptocurrency as an asset needs some form of regulation to serve as an anchor and bottom line for protection.”

He added that “A degree of compliance and regulation is necessary for cryptocurrency as an asset class to become generally accepted, but the nature of blockchain technology should always allow for a degree of autonomy and decentralization. These two contrasting ideologies must coexist to some degree.”

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According to Mei, exchanges like Huobi operate on a spectrum where decentralization and compliance already coexist: “Transparency and accountability must remain in certain aspects of traditional corporate structures, but we can learn from the spirit of pooled contribution and collaboration. A system with a more secure, efficient distribution of work and information is beneficial in both the blockchain world and the corporate structure.”

Teal or red future

The cryptocurrency industry has developed rapidly in recent years, and this will only continue. Many companies operating in the cryptocurrency market declare a commitment to the values characteristic of “teal” organizations. Of course, as cryptocurrency companies proliferate and become institutionalized investment businesses, corporate governance practices will change as well. Striving for openness, self-governance and consensus may face tough regulatory requirements, competitive pressures and other external challenges.

Will cryptocurrency companies be able to stay true to the original values of the industry, or will they be forced to become more centralized and “red”? Time will tell. For now, however, Huobi’s and 1inch’s representatives are optimistic. A curious fact: During Huobi’s recent brand refresh, its official colors took on a new teal and green hue. One can only hope that moving forward, the company will be able to keep these colors as an element of their governance, not only their logo.

Anonymous culture in crypto may be losing its relevance

Although anonymous teams have built some of the leading infrastructure in crypto, many new participants in the ecosystem are using their real identities.

Crypto has inherited many values that were popularized in the early days of the internet.

Many participants in the crypto space have been anonymous since the beginning of Bitcoin (BTC), since using this digital money offers a certain degree of anonymity so long as nobody knows the public address of the user. The true identity of its creator, Satoshi Nakamoto, remains unknown to this day.

The most recent wave of innovation spearheaded by decentralized finance (DeFi) and nonfungible token (NFT) projects have anonymous teams that maintain their general right to remain unknown.

The founder of DeFi analytics dashboard Defi Llama, 0xngmi, released a bug bounty on his identity. Rather than giving out this quest to find vulnerabilities in the Defi Llama code, he offered 1 Ether (ETH) to whoever could reveal his identity with a detailed explanation of how they found out. No one has managed to reveal his identity at the time of writing.

0xngmi has also been educating people that would like to become anonymous with a guide on “How to stay anon,” which is a collaborative document that allows contributors to add and edit to improve it.

Navigating through Crypto Twitter, there are plenty of pseudonymous “celebrities” that, based solely on the reputations they have built, have a digital persona with a substantial amount of followers.

Another account that remains anonymous on Twitter, The DeFi Edge, tweeted the reasons why he has decided for the account to remain anonymous. The founder of the eponymous DeFi analysis site has no intention to reveal their identity for the time being, but has dropped some minor details:

Why I've chosen to remain anonymous for now, and why I might semi-doxxed myself later: pic.twitter.com/OGZLmU9Nte

— The DeFi Edge ️ (@thedefiedge) March 11, 2022

As the industry rebrands to Web3 and a wide array of talent is being lured into the ecosystem, a greater number of participants in the space have decided to take a different approach. They are in the position to later reveal different characteristics of their physical persona to become pseudonymous or reveal their true identity altogether.

After the recent Terra collapse, the BBC reported that a man presented himself at Do Kwon’s home in Seoul only to find his wife answering the door. The 30-year-old founder of Terra has been active on Crypto Twitter, using his real identity to promote his protocol and communicate with the community in these times of crisis. Having his identity open to the public might have helped him convey trust to investors and the community, but it also exposed him to threats in real life. Situations like these are some of the reasons why many entrepreneurs in the space remain anonymous.

In a constant struggle between the open flow of information and retaining the privacy of the individual, protecting anonymity and avoiding getting doxxed has become an important issue of the new cultural and technological revolution taking place in online society.

One of the biggest controversial identity reveals was when journalist Kate Notopoulos authored an article titled “We found the real names of Bored Ape Yacht Club’s pseudonymous founders,” in which she uncovered the identities through publicly available records associated with Yuga Labs.

*Protestors in Guy Fawkes masks. In the internet age the mask has become a symbol associated with anonymity and privacy.*

Revealing an identity ≠ doxxing

Usually referenced as a hostile action via the internet, doxxing is meant to insinuate the ability to find a person and reveal private information about an individual or organization. Although the term was coined by extreme groups as a way to threaten and intimidate marginalized persons online, the word doxxing currently blends into the meaning of revealing an identity without exclusive extremist connotations.

Recently, 0xngmi gathered some findings that linked Charlotte Fang as the person behind the anonymous account Miya. The founder of the NFT art project Milady Maker allegedly used this pseudonymous online profile to spread hate speech toward minorities through social media.

After being recognized as the person behind the pseudonymous account allegedly linked to an online cult, Charlotte had to step down from the project as Milady Maker’s floor price plummeted.

Anonymous teams handling fortunes

Decentralized autonomous organizations (DAOs) have opened the door for many participants to be able to contribute to the governance of a project while remaining anonymous. Either for safety reasons or to avoid regulation, the majority of these projects have anonymous founders and contributors. This has been the norm in recent years.

Grug, a pseudonymous account on Twitter, told Cointelegraph his reasons for remaining anonymous as CapitalGrug and the value of being judged solely on performance and ideas:

“I think the main reason that I chose to be anonymous is so that I can participate in and help maintain the same type of irreverent culture that I found so cool about crypto from the start.”

Plenty of good actors in the space have remained anonymous, bringing value to projects and communities by not having other defining characteristics influence people’s perceptions of that persona.

Being anonymous can also be the path for people that need a fresh start, but this can also have the effect of allowing malicious actors to infiltrate the space.

Back in January, the true identity of 0xSifu, founder of Defi protocol Wonderland, was unveiled as Michael Patryn, the co-founder of now-defunct crypto exchange QuadrigaCX.

The co-founder of the scandal-ridden exchange had previously been sentenced to 18 months in a United States federal prison for identity theft related to credit card fraud. Patryn is not even his real name; following the prison term and previous to founding QuadrigaCX, he reportedly changed his name from Omar Dhanani.

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The Wonderland protocol collapsed with this news and the debate of whether anonymous teams should be allowed to handle large sums of money took the center stage. Even Danielle Sesta, co-founder of Wonderland, said that he expects anonymous teams to lose relevance in favor of teams that have their full identity revealed.

Redefining anonymous identity

Although with the transition toward transparency in crypto in recent years, anonymous culture is still very strong. One doesn’t have to remain completely anonymous in the space, as Grug shared:

“Our fund is all anon for instance, although we have all doxxed to one another. When I go to events and people whip out their phone to follow me on Twitter they are usually anonymous.”

Identity, whether it’s public or anonymous, is a very delicate subject that we all struggle with. Finding the balance between fully anonymous and a public identity will be the key to a more rich and diverse crypto community.

Up to this point, anonymous culture in crypto has proved to bring some positive value, as it minimizes biases and allows individuals to fully express themselves. Bad actors can take advantage of this to pursue a fresh start, which can be dangerous if they keep acting maliciously. But, if they become healthy contributors to an ecosystem and provide value to the community, it could prove people deserve a second chance.