The funding comes at a time when DeFi has seen an explosion in growth.
Terra is joining forces with Cosmos, Web3 Foundation and Solana to roll out a DeFi product meant for a wider consumer audience. Meet Anchor.
The blockchain and smart contracts you interact with may be decentralized, but the cloud services often used to access them aren’t. Dfinity’s Internet Computer is stepping up to set that straight.
Proponents of blockchain technology herald decentralization as a key facet of its revolutionary nature.
But the majority of users are still accessing decentralized exchanges, or DEXs, decentralized finance, or DeFi, and decentralized applications, or DApps, through web browsers served by centralized cloud services.
Cointelegraph spoke to Dfinity founder and Chief Scientist, Dominic Williams, about its Internet Computer platform, which allows direct interaction with code held on the blockchain, and completely eliminates third party intermediaries from the equation.
One (decentralized, autonomous) computer to rule them all
Williams got involved in blockchain full-time in 2013. He hooked into the buzz around Ethereum and interacted with its early developers.
“I saw the potential for an Internet Computer which could eventually host everything, from search engines to email and everything in between.”
After all, if all of the world’s internet services were on one single blockchain computer, the networking benefits alone would be enormous. The idea went through several scaled-down iterations, before an oversubscribed fundraiser in 2016 convinced Williams to revert to his original vision.
No easy task ahead
Such an undertaking would not be easy. The science is several giant leaps ahead of that required for a standard blockchain. The first stage was to build the necessary structure for the organisation, which was helped by substantial backing from Andreessen Horowitz.
“Hands down we have the strongest blockchain team in the world, bar none. We have a huge capacity for research and development. You won’t get the top cryptographers for free on GitHub.”
The next issue was scalability. The complexity of standard software is immense, and a large proportion of the $3.9 trillion spent globally on IT annually goes on securing systems. The Internet Computer needed a secure protocol which was tamper-proof and unstoppable.
“Bitcoin rewards electricity burning, and proof of stake blockchains reward staking on a server, but this doesn’t work for scaling on the Internet Computer.”
Instead, the Internet Computer rewards data centres based on the number of computer nodes they run, providing a platform on which to scale. The result is a giant blockchain computer running on the public internet, which provides performance and capacity, but also enhanced security.
Hey, you, get off of my cloud
Code on the Internet Computer is held in canisters which essentially run forever, and can be served directly from the blockchain into a browser as a user experience. This means that the users can be sure that they are interacting directly with the underlying blockchain.
In contrast, smart contracts and DApps which are accessed through websites hosted on proprietary closed cloud services provide no such guarantee. Use of cloud services creates an external point of failure, whether through hacking or other vectors.
There is also the risk that a cloud provider could block the service based on the whims of its management or the authorities. Furthermore, a web services account can only be held by a legal entity, so cannot be autonomous by definition.
“Some of the key requirements of blockchain are to be uncensorable, unstoppable and tamper proof. This is the basis of the Internet Computer.”
Dfinity recently opened up the Internet Computer to third party developers with its “Tungsten” release. The final public release is scheduled for later in the year.
Examining COMP’s ability to pass the Howey test for being qualified as investment contracts and to be considered a security.
Innovation springs eternal in the digital asset ecosystem, and with Compound’s launch of its governance token, COMP, last month, the burgeoning world of decentralized finance continues to pick up steam. The broader cryptocurrency community has embraced COMP, which now trades on OKEx, Binance and Coinbase Pro, among other digital asset exchanges, while other investors were dumping Compound tokens after listing on major exchanges, according to the report by Flipside Crypto. By democratizing access to liquidity and yield, DeFi is in many ways the next logical step in cryptocurrency’s seemingly unstoppable march toward disrupting the traditional financial services markets.
However, innovative blockchain and cryptocurrency applications do not occur in a regulatory vacuum. Issuances of digital tokens must always take into consideration United States federal securities laws, lest they fall victim to the cold, hard grip of the U.S. Securities and Exchange Commission, with Telegram as a case in point. Therefore, it is imperative to ask the question: “Is Compound’s token, COMP, a security?”
What is COMP?
Compound is a decentralized protocol that establishes money markets with algorithmically set interest rates based upon supply and demand, allowing users to lend and borrow various digital assets. COMP, on the other hand, is the native Compound ERC-20 token that allows for decentralized governance of the Compound protocol. Those who hold COMP may debate, propose and vote on all changes to the Compound protocol.
COMP is distributed on a daily basis to users of the Compound protocol. Each time a user interacts with the Compound protocol — e.g., by supplying, borrowing or repaying assets — COMP is automatically distributed to the user.
The Howey test
A “security” under U.S. federal securities laws includes the exceptionally broad concept of an “investment contract.” Whether any asset (including a digital asset) constitutes an investment contract and, thus a security, is determined by applying the Howey test.
An asset is deemed a security when all four criteria of the Howey test are met:
- An investment of money.
- In a common enterprise.
- With a reasonable expectation of profits.
- To be derived from the efforts of others.
Investment of money
While seemingly straightforward, the first prong of the Howey test does not specifically require a traditional investment of cash. As the SEC stated in the DAO Report, a digital asset can satisfy this prong if exchanged for cash or “other contributions of value.” Perhaps more importantly, as stated in the cease-and-desist proceedings of Tomahawk, the SEC has highlighted that “free” distributions of tokens or “airdrops” in exchange for economic gain can satisfy this prong of the Howey test.
While COMP is issued for “free” to users, it is offered in exchange for their participation in the Compound market. Once users hold COMP, they will be able to vote on updates to the Compound protocol, as well as the underlying lending and borrowing mechanics.
In one of the SEC’s rare pieces of public guidance on the topic of digital assets and the application of the U.S. securities laws, it explicitly stated that a common enterprise typically exists in the digital asset context. With respect to COMP, the token’s purpose is to actively promote the distributed governance of the Compound protocol — making it very likely to qualify.
Expectation of profits
The third element of the Howey test requires an expected return from profits. COMP is now available on multiple secondary trading markets. According to the SEC, the existence of a secondary trading market is typically an indication that people wishing to buy the digital asset may be expecting profits. It is worth noting that COMP has been trading at a 100% premium since its initial launch on June 16, 2020. Whether or not there is an “expectation of profits” typically depends on the intent of the purchasers of COMP.
Furthermore, the expectation of ancillary benefits does not diminish or serve to undermine this analysis. Therefore, if individuals purchase COMP to earn profits but also obtain some ancillary benefits, such as governance rights with respect to the Compound protocol, then the investment can nonetheless still be deemed to be made with an expectation of profits.
From the efforts of others
The fourth and final element of the Howey test requires that a return on an investment originate from the efforts of others. It would seem clear that the value of COMP is derived intrinsically from the value, operability and success of the underlying Compound protocol and its effective implementation of DeFi.
There is also no doubt that individual holders of COMP, by participating in the governance of Compound through their COMP ownership, may contribute to such returns. Unfortunately, it would appear that Compound, albeit indirectly, may likely continue to play a leading role in the development and success of its protocol. While the company will be distributing approximately 2,880 COMP to its users over the next four years, shareholders and founders of Compound will retain almost 50% of the total supply of COMP, and Compound will continue to create and focus on services that run on its protocol. While this state of affairs by no means indicates that the return on investment with respect to COMP will originate solely from Compound itself, in order to satisfy this prong of the Howey test, profits need not come exclusively from others, but rather “primarily” or “substantially.”
The final verdict
Where does this leave us? COMP’s recent listing on Coinbase is of particular significance, given that the market views the platform as an informal arbiter in these matters — only listing tokens that it believes are not securities. Unfortunately, the SEC has the final say, and the Howey test is as expansive as it is nebulous.
Despite COMP’s utility and decentralized governance mechanics, if history is any indication, there is a strong likelihood that the SEC would view COMP as satisfying each of the Howey test prongs and, therefore, constitute it a security regardless of the fact that it has yet to make such a definitive statement concerning any of the most widely distributed tokens on major U.S. exchanges.
It is worth noting that this determination says nothing of the regulatory implications of the underlying DeFi mechanics. Participants in traditional retail lending can attest to the myriad state lending laws, licensing obligations and money transmission implications. As DeFi continues to challenge traditional lending mechanics, we cannot help but contemplate the challenges that such a structure may also pose to traditional lending regulation. However, we leave that discussion for another time.
The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
This article was co-authored by Ethan Silver and William Brannan.
Ethan Silver and William Brannan are attorneys with Lowenstein Sandler. They advise cryptocurrency, blockchain and digital asset businesses navigating federal and state regulatory frameworks. They also counsel cryptocurrency trading platforms, exchanges, custodians and related businesses with respect to federal securities laws and work with technology-focused broker-dealers and robo-advisors on formation, structuring and regulatory matters. Ethan is the chair of the firm’s fintech practice, in which Will is counsel.
Scott Melker, the “Wolf of All Streets,” spoke on the danger of relying on centralized platforms after being locked out of Twitter.
The “Wolf of All Streets” Scott Melker has been unable to do anything more on Twitter than read or retweet more than 24 hours after the massive hack on verified accounts.
In a livestreamed interview with Cointelegraph on July 15, the crypto trader said in the midst of the attack he had been unable to verify his account using two-factor authentication. Melker then briefly had full access to read, retweet and post for roughly an hour before having his account restricted following the interview.
Twitter Support reported that the platform had “locked accounts that were compromised” and would restore access as needed. As of press time, major verified accounts including those of Joe Biden and crypto exchange Binance were back online, but Melker’s and others are still restricted from posting.
Dangers of centralization
The recent Twitter hack which resulted in the platform restricting all verified accounts from posting for hours highlights the dangers of becoming dependent on one platform. Melker said anyone who relies on a centralized service is at risk of having it taken away in an instant.
“We cannot depend on centralized platforms, no matter how good their intentions are,” Melker said in his newsletter. “These are single points of failure that you do not control.”
The crypto trader said the same circumstances apply to “being your own bank,” i.e. storing private keys in a different safe, and not holding all of one’s assets on a centralized exchange.
As if the universe wanted his point to sink in, YouTube — a centralized platform if ever there was one — pulled the plug on the Cointelegraph livestream shortly after he spoke, saying the content violated its terms of service.
“Weakest hack attempt ever”
The hacked Twitter accounts posted messages attempting to scam millions of followers into sending Bitcoin (BTC) or cash, promising a 2:1 return. Melker said this was a rather weak attempt given the serious nature of the breach.
“They could have literally started a world war, and they’re trying an old scam that’s probably failed every time it’s been tried in history,” he said.
What happens to Bitcoin
The crypto trader considers the hack a “Twitter problem” and not a “Bitcoin problem,” saying the market would have already seen a “super knee-jerk reaction” to the BTC price fairly quickly. Bitcoin did drop 1.4% several hours after the initial hack from $9,191 to $9,058, but had no noticeable surge or downturn as the attack was underway.
One possible fallout, according to Melker, would be a greater chance of the general public associating Bitcoin with scams.
“It’s just another hurdle to overcome when you’re trying to explain to someone why Bitcoin should be taken seriously,” the crypto trader said.
Twitter going down?
Twitter stock fell from $35.60 to $34.70, a decrease of 2.5% in just 15 minutes during after-hours trading.
“Imagine having the most powerful people and companies in the world all angry at you at once,” Melker said in one of his last tweets on July 15 before access to his account was restricted.
He told Cointelegraph the company would likely be “sued into oblivion” by those affected, but most users would “forget about this in a week.”
Ankr has already entered the world of decentralized finance by integrating and partnering with some notable players in the space such as…