Cryptocurrency derivatives

Could we See Cryptocurrency derivatives?

We already have well established cryptocurrency exchanges. These are essentially places like Coinbase and Bitstamp where people can go and exchange their Fiat money for cryptocurrencies. It works much like a traditional Fiat currency exchange but has no connection.

It is agreed that one of the major steps that can be implemented to drive cryptocurrencies towards mass adoption is to eliminate a lot of the friction that people will encounter when they attempt to enter the crypto markets. There is no simple exchange where they can enter coin positions on the traditional markets.

Enter Crypto Derivatives

This could eventually change thanks to an initiative by Nasdaq. Nasdaq is an exchange operator that has several of exchanges over the world for fiat money to buy assets. For example, they oversee the Copenhagen Stock exchange, the Helsinki stock exchange, the Stockholm stock exchange and the Nasdaq Vilnius OMX exchange.

Nasdaq Cryptocurrency Derivatives

Nasdaq is also particularly powerful in the Nordic countries where they list hundreds of companies on the Stockholm exchange. It is at this location that the company is trying to launch cryptocurrency linked derivatives.

Other Exchanges

On the Nasdaq Stockholm exchange, you have Bitcoin linked exchange traded notes (ETNs). These are issued by XBT Provider which is owned by Coinshares. These have been able to track the price of Bitcoin over the past two years quite effectively.

Prior to the purchase of XBT provider by coinshares, they offered a range of Euro linked cryptocurrency ETNs called Bitcoin Tracker One and Bitcoin Tracker Euro. They are derivatives which means that they derive their value from the price of the underlying assets. As the price of Bitcoin moves so should the value of these ETNs.

Bitcoin Exchange Traded Notes

This is about to change as CoinShares is about to use their expertise to launch an Ethereum linked ETN. This will also be on the Nasdaq Stockholm and will go by the name Ether Tracker one and Ether Tracker Euro.

Why The Long Wait

Many people are interested in hearing why it took over 2 years for CoinShares to take the step from a Bitcion ETN to that of an Ethereum based one. According to the co-founder of CoinShares, Ryan Radloff, this was because there had not been enough of the Ethereum core team going out and making the case to the traditional players in finance.

He did acknowledge the Ethereum developers and the Ethereum blockchain is one of the most sophisticated and strongest cryptocurrency initiative. However, there had not being enough of these smart people going out and making the case for Ethereum being listed on an exchange.

Hence, CoinShares decided that they wanted to pick up this task and make the Ethereum investment case. Obviously, listing the ETNs on the Nasdaq Stockholm will be a major game changer. It will allow investors who have exposure to Nasdaq to add Etheruem to that exposure.

Although the company does not solicit clients directly from the US, there are a number of businesses in the US, there are a number of Investment providers in the US who can use particular platforms in order to buy the ETNs.

Radloff also claimed that although he was long term bullish on adoption of Ethereum based investment instruments, he acknowledged the great deal of steps still to be taken before any sort of mass adoption can occur. He claimed that there had to be a great deal of work that was done with the clearing authorities and exchanges.

Ethereum Volatility

He also took the long term view that the Ethereum protocol itself may threaten the established exchanges. Smart contracts and decentralised applications are what could eventually be used with online share trading and other blockchain based exchanges.

There is also general concerns about how an exchange traded note can handle something that is generally outside of traditional finance. That is the hardforks or splits in the chains. There is currently an Ethereum hardfork that is taking place although many people think that it will be uneventful.

A New Asset Class

There is also great optimism in what a established crytpocurrency derivative market can do for the physical trade of these coins. They will be able to enhance liquidity, hedging options and allow for more diverse risk management strategies. This is something that many large institutions and investment houses will no doubt look favourably upon.

One of the major requirements in order for these derivatives to proliferate is how widely used cryptocurrencies are and whether they are able to maintain value throughout various market reactions.

Ethereum HardFork

People Believe Ethereum Won’t Split

There is indeed a lot of confidence in the view that the Ethereum blockchain is unlikely to split in the next hardfork on Monday.

For those who may not know, Ethereum is about to update its protocol with a range of changes that could improve the secure, cheaper and faster. These updates are part of the Byzantium hardfork that will happen at block 4,370,000.

Usually, when there is a hardfork, there is usually some concern as this could lead to a chain split. People are generally worried with this as these two competing chains then have different coins which creates confusion.

Nothing to Worry About

Given that the price of Ether seems to be rising and rising, people appear to be unfazed by the upcoming fork. Indeed, it seems as if they don’t think that the fork will lead to a chain split. This seems to also be reiterated by some of the Ethereum developers themselves.

Alex Van, who is one of the Ethereum developers said that he expects nothing to happen. He also brought up all of the previous hardforks where nothing appeared to happen either.

The only time that there was ever a contention in the hardfork occurred because of an emergency fork in the code last year. This was done when the DAO was hacked and a considerable amount of Ether was stolen.

Some of the miners continued mining on the original chain. This created a competing cryptocurrency called Ethereum classic. This still exists today although is worth much less than Ethereum proper.

Why the Optimism?

Some of the many reasons that people are optimistic about this update is because it has been in the works for quite some time and has been planned long in advance. It forms part of the Ethereum Metropolis roadmap that was laid out in 2015 as a means to scale the network.

The fork was also tested effectively on the Ethereum Rosten test network. There were no problems as everything moved forward as planned. Although there were some spam attacks that forced some developers onto their private networks. It largely worked effectively.

One of the Ethereum Improvement protocols that many people are interested to see implemented was the use of Zk-snarks. This would allow for Ethereum holders to send coins using technology that is in use with Z Cash.

Explanation ZK-snarks

Zk-snarks are zero knowledge proofs and can hide information about the transaction from the rest of the public blockchain. There is no doubt that this could be of benefit to some of Ethereum holders.

Another initiative was a decrease in the difficulty that is required to mine Ethereum as well as a drop in the reward for mining the blocks. This would have the benefit of increasing the transaction speed as well as reducing the cost.

Also, this is seen as the first move towards the implementation of Ethereum proof of stake mining. Officially called the Casper POS protocol, this will help make mining less centralised.

Some Opposition

This is not to say that there are no dissenting voices. There are some participants such as miners who are not in favour for reducing the block reward. One can of course understand why they would have taken this position.

The protest against this move is from a movement called “Etherite”. They want to implement all of the proposed changes from the Byzantium hardfork but keep the mining rewards the same. They believe this change could turn the miners off of the new Ethereum chain.

One of the proponents of this, Dylan Young, is of the view that this reduction is not known by most of the miners and they merely take what is being given to them by the Ethereum developers.

This is indeed the sentiments that were echoed by a representative of a mining pool called Nanopool. He stated that the Block reward was now a secondary issue and that most of the control was in the hands of the Ethereum foundation.

Resistance from Some Miners

If anyone was worried about the prospect that Etherite may gain momentum and threaten the Byzantium hardfork, they should rest easy. As is currently, there is only one forum post on Reddit and one Github contributor.

It seems though, that many miners have realised that although there is reduction in the block reward from 5 ETH to 2 ETH, the overall number of blocks that will be propagated will increase substantially with the difficulty reduction. Hence, the miners that continue to mine both chains may discover that they can make the same amount of money on both of the chains.

There is also the point that was raised about the difficulty bomb that is built into the Ethereum protocol. With this, the Ethereum developers can slow down the rate of Ethereum blocks that are created on its blockchain. This will convince users to move over to a new chain.

Conclusion

Unlike the contentious debate that there was over the Bitcoin hardfork, the Ethereum Byzantium hardfork was so far pretty orderly and well planned. Developers, users and even miners appear to be in agreement and are falling well in line.

This hardfork was a result of lots of planning and cohesion in the community. It is no doubt a great vote of confidence in the Etheruem project. We are therefore likely to see the price of Ether reaching new highs next week.