I am not someone who generally dallies with decision making and this rapid-fire approach extends to investing. I tend to make snap decisions on things that just make sense, be it a standout idea or the market overreacting as is its wont.
As an example, one of my favourite trades was buying Glencore in January 2016 right at the bottom on the back of a hysterical FT article declaring its end; lo and behold the price would more than double in the next two or three months. Buying Ethereum or Golem would also fit into this category — I was sold on the world’s supercomputer immediately.
Why do I bring this up? Well Rootstock fits the same billing as these and a small cadre of other projects.
It’s smart contracts. On Bitcoin.
It just made so much sense that when I first heard of it I’d mentally allocated my BTC/ETH to it before even reading the whitepaper. The only problem? You couldn’t actually invest in it. The project went quiet, the space moved on, and hundreds of other shiny new projects flooded the scene.
When deals for Rootstock recently started emerging I resisted at first due to the extortionate valuations. However, I ultimately ended up making it a small holding when more palatable prices appeared, really based off nothing more than my prior knowledge (which itself only amounted to my prior reading of the whitepaper two years before and some cursory browsing).
Some would label this impulsive or irresponsible (maybe, but it’s my money) or view me as everything wrong with the crypto market, but I tend to trust my intuition and will happily exit a position if I later change my mind. Reading and absorbing huge amounts of information daily about various industries and companies, being risk averse in other ways (i.e. bankroll management) as well as being a closet degenerate gambler also helps.
So consider this the anti-shill, where I focus on all the things I don’t like over the things that made me invest. It’s the sort of exercise you should really be doing before buying, but better late than never \_(ツ)_/¯
In contrast to some of my other project spotlights, I’m going to focus more on the questions dominating my thinking and less on a technical breakdown. I’m led to believe Rootstock (henceforth RSK) will be imminently publishing a new whitepaper and so to avoid wasting my time I will update this upon publication. Please be aware some details may be incorrect owing to the lack of this whitepaper — much of this has been pieced together from scattered discussions on Telegram and other channels.
However, to summarise:
Although I’m using RSK as shorthand, it is not the token ticker. So what are people buying? RSK stated they weren’t doing an ICO for RSK and I see this as slightly duplicitous. Although technically they are correct, as they are doing a raise for RIF (RSK Infrastructure Framework), it amounts to the same thing.
RIF will be a utility token which will be used to pay for DApps, development interfaces and RSK infrastructure protocols and services such as storage, payments and computing. I may be corrected upon whitepaper publication, but RIF seems to me like the equivalent to gas. Although gas for Ethereum smart contracts is just normal ETH, projects such as NEO split the two out separately (e.g. NEO and GAS) and I assume this is the model RSK is following. It will not be used to exchange BTC for SBTC.
The mainnet platform is now live with only a select group of users currently allowed access. Current participants building on RSK include the Inter-American Development Bank (through a Bitcoin focused NGO) and the BitGive Foundation.
This promise for smart contracts, scalability and security are the three core features at the heart of RSK.
Smart contracts: Smart contract functionality is what has led to the rise of Ethereum, generating hundreds (thousands) of new projects. This has undoubtedly had an impact on Ethereum’s price. The idea is a simple one; developers could simply port these DApps over and run them on Bitcoin instead. This would lead to increased demand for BTC while those mining BTC would find the activity more profitable owing to the increase in transactions on the network and the merged mining of both BTC and RSK.
Adding to the promise — Bitcoin is already the de facto reserve currency of the crypto world, even if that has been shaken in the past 12 months with the amount of ETH first traded cryptoassets. If BTC was to fulfil the visions of adherents as a global store of value, then what better cryptoasset would there be to make the basis of smart contracts?
Scalability: While Bitcoin has a rather tortured history of scaling issues, so too does Ethereum. Bitcoin has solutions such as Lightning Network already running, but the RSK team describe their solution as operating in a different manner. The Lightning Network revolves around off-chain scaling i.e. a load of transactions are made off the main Bitcoin chain and then bundled into one transaction at the end — this means that multiple transactions can be validated even if the miners only have to process one transaction in their block.
By contrast, RSK aims to scale on-chain through what they have called the Lumino Transaction Compression Protocol. They state this would allow RSK to reach 2,000 tps and, if implemented as a soft fork upgrade to Bitcoin itself, would allow the main network to scale to 100 tps. I’ll do a separate post on LTCP and other blockchain scaling efforts later on as they all have drawbacks to them.
Security: By using merged mining, so the theory goes, Rootstock will be able to take advantage of the biggest and best protected network in BTC.
I’ll preface this by saying that I don’t think RSK necessarily is a bad idea, just that it might not be as good as it first appears.
1. Decentralisation, governance and Bitcoin
Let’s start with the links to Bitcoin, as this is one of the more obvious concerns.
The peg I described at the start, where one BTC is exchanged for a SBTC (with either or locked up at any given time) is not quite as seamless as it sounds. What actually happens in this process is described in the whitepaper on sidechains, where the team outline that their chosen solution is a _“_hybrid drivechain + federation in the Bitcoin side combining miners and federation votes.”
They go on to note a few other things relating to this design choice:
RSK Labs also aim to provide a smooth upgrade path to a fully decentralized solution, so Rootstock plans to start with a federation composed by renowned Bitcoin parties having secoin bonds [secoin refers to SBTCs i.e. Bitcoins stored on the secondary chain], and plans to add miner’s votes (a drivechain) when available.
Fully decentralised is good…federation not so good…renowned the alarm bells are ringing.
No-one has ever said Federation and decentralised in the same breath
The criteria to be a member (or notary) of this federation is helpfully also outlined:
To achieve true decentralization, the notaries should be carefully selected to have at least the following properties:
· The number of notaries should not be low (e.g. at least 10).
· The number of notaries should not be too high, so that users can verify the authenticity and honesty of the notaries (e.g. below 30).
· Notaries should be distributed across different legal jurisdictions and nations, to prevent state attacks, coercion and censorship.
· Notaries should be geographical distributed to prevent failure of the infrastructure on natural disasters.
· Notaries should be renown [sic]
· Notaries should not be controlled (or dependant on) a lower number of entities. For example, notaries cannot be different branches of the same bank.
· Notaries should be able to achieve and maintain a specified level of security through physical and logical protections, together with required security procedures.
I dislike any solution which relies on a small number of parties or uses reputation as a means to choose them. Furthermore, ‘at least 10’ is too low a benchmark. RSK has at least 25 members in its federation but that’s not ‘true’ decentralisation. You can read more about why I dislike DPoS here as the factors are applicable to RSK too. If you’re relying on reputation and, more specifically, trusting that a small number of parties are going to do right by you then that’s not decentralised in any way.
Going off the original whitepaper, this federation will be composed of “leading Bitcoin companies” and will “play the fundamental role of securing the transfer of funds between the Bitcoin and RSK blockchains. In exchange for that they will profit from the fees generated by the settlement between the inflow and outflow of funds.”
We can assume the Federation will comprise many of these firms
Once the merge-mining gets almost full miner acceptance (such as 95%), the federation role in voting can be disabled, and only the drivechain remains.
I am sceptical of any project that starts off with centralisation and promises to become fully decentralised at an unspecified time in the future (just look at IOTA and the Coordinator). Full miner acceptance is not impossible, but could be difficult.
This difficulty may increase given the mining contingent of the federation would probably like to retain the fees coming settling incoming and outgoing BTC/SBTC. But it is not just them — the full cadre of firms are going to be getting fees from RSK usage, giving them the incentive to want to retain this privileged position in perpetuity. Why would they give this up? Who forces them? Let’s look at the governance model:
RSK governance model aims to represent all actors of the community, by providing a board of governance consisting in 5 seats. Miners will be able to vote with hashing power (1 vote), Bitcoin and RSK users will vote with proof-of-stake (1 vote), Exchanges and web-wallets will vote though the Federation (1 vote), RSK and Bitcoin Core developers will have a special threshold voting system (1 vote), and the last vote will be offered to a non-profit established Bitcoin institution, such as the Bitcoin Foundation, that can represent the broader ecosystem.
So the miners could collude to keep mining power under 95% (albeit at least 90% have already committed to merge mining in the future), profit driven exchanges get a vote (I don’t trust the exchanges enough to leave my assets on there, let alone trust them to secure a network) and an institution like the Bitcoin Foundation gets a vote. The board at the Bitcoin Foundation includes Chairman Brock Pierce (I’m not going to go into Pierce, just google him) and Vice Chairman Bobby Lee (CEO/Co-founder of BTCC, a Bitcoin exchange). So 60% of the total votes could be controlled by miners, exchanges and the Bitcoin Foundation — three sectors which have a high crossover of individuals between them.
Meanwhile all of the combined users of Bitcoin and RSK only amounts to one vote. That’s not the basis for good governance.
One final point: other commentators have noted the correlation between federation members and former backers of the Segwit2x fork. I’ve purposefully ignored discussing the debate around Bitcoin forks (it’s excruciatingly dull and there are others better placed to do so) but it doesn’t take a genius to draw the parallel between the failed attempt to centralise Bitcoin and RSK’s centralised federation of intermediaries.
Some have asked which Bitcoin
2. Ethereum and other smart contract platforms
The idea that developers will simply flock to port DApps onto Bitcoin (especially when most seem an arduous task just to get running on Ethereum) seems fanciful to me, even if it is a shared coding language. Furthermore, these developers have a vested interest in the ecosystem (large ETH holdings) and are mostly Ethereum first (many were attracted to the space by Ethereum’s vision, not that of Bitcoin). Ethereum certainly has its problems with scaling, but Bitcoin too suffers from this. Is RSK’s scaling solution good enough to differentiate itself from the solutions coming into existence for Ethereum?
Unlike 2015, when the project was launched, RSK is also competing against the plethora of other smart contract platforms, many of which have learnt from Ethereum’s flaws. RSK, meanwhile, will always be hamstrung by the design choices of Bitcoin, a network designed to be a payment solution first — not a smart contract one. One example of this is the need to buy both BTC (and then convert to SBTC) and RIF rather than solely ETH or EOS or ADA (although, again, we’ll have to wait for the new whitepaper to see full details on how this will work and its entirely possible the team have solved this). It isn’t a dealbreaker, but it does add to the challenge.
3. The changing nature of Bitcoin
This challenge is rather augmented by how the narrative surrounding Bitcoin has changed. As the aptly timed article by and notes, “as sidechains proved complicated to implement, non-money uses of Bitcoin fell out of favour”. Since RSK’s launch, BTC has become less of an all things to all people and become more widely accepted as a store of value or uncorrelated asset.
Why does this matter? Well, if we see BTC in such a manner, then why do we even need smart contracts on Bitcoin? What is the point? Why not leave BTC as a store of value and let one of the other cryptoassets be the unit of exchange for smart contract fulfilment?
This could have gone under the previous section because RSK are pitching this high. There will be 1 billion RIF generated, around 40% of which will be sold in the private sale. These were sold at 14,000 RIF per BTC initially, with a 30% bonus for those willing to lock up for 3 months.
The resale of RIF has been brisk, with pools first seeing deals at 5–6k per BTC with the three month lock. That has subsequently come in, with recent offerings moving to 10–11k with no locks. The last couple days have seen deals sweeten further, with 11.5–12.5k now on offer. The decrease in appetite can likely be ascribed to the current market, investors becoming increasingly aware that they are getting screwed over by VCs and partially because of the large raise the team are attempting. It is quite possible that we will see a return to the original 14k price before long.
400,000,000 tokens at 14,000 per BTC = 28,500 BTC or roughly a $230m raise at current prices. This gives RSK an implied opening day market cap (assuming the entire supply is circulating from day 1) of around $570m, meaning it needs to debut around the 22–25 range just for original investors to break even. Those who invested at lower tiers need it to debut higher, above the likes of OmiseGo and ZCash for the 10k buyers and above BinanceCoin, Tezos, VeChain and NEM for the 5–6k pools.
As a side note, it amounts to a nice payday for early investors like Coinsilium who invested $100k in Rootstock at a valuation of $5m. I don’t know Coinsilium’s arrangement, but assuming a 2% stake in the company equals an allocation of 2% of all RIF on offer then that would mean a profit of c. $4.5m or a 45x increase in two and a half years (although it should be noted that the price of BTC has risen around c. 20x since the investment was made — plenty of altcoins outperformed BTC by 2x since January 2016).
Curiously, Coinsilium Group Ltd only has a market cap today of $12.37m (it is a publicly listed company) and listed that at the end of 2017 they had only $5.34m in held digital assets. They list in their 2017 Annual Report that “at 31 December 2017, the Group and Company owns unlisted shares in RSK” and in the line above that the company had “ converted loans into shares in both RSK and Factom”. If their RSK holdings are hidden from the reports or factored in at a much lower valuation (because RSK only started their sales this year) then Coinsilium could be extremely undervalued — more research to be done on that one.
Am I overly worried about my investment in RSK? Not hugely, but I think leaving it in BTC may have been the smarter move as there’s no doubting prices are only going one way right now. I think the lack of liquidity in the market from retail investors unwilling to sell current holdings at a loss is starting to take its toll on a number of projects.
However. I think it will do pretty well and I suspect that the same reaction that led to me investing will see others follow suit, and it has the backing of enough of crypto royalty (Coinsilium, Bitmain, Digital Currency Group, Antpool, Xapo, Bitpay, BTC.com, Jaxx, etc) that if they want it to be a success it likely will be, at least for a spell. It will see a lot of exposure owing to its links with Bitcoin and aforementioned partners and I expect the team, armed with a large budget, to begin marketing in earnest following the conclusion of their private sale.
Although I’ve been purposefully negative throughout RSK remains an interesting project with a team that have been in the space for a long time and who are trying to succeed where others have failed. I’m keenly looking forward to the release of the new whitepaper and to start seeing the first projects go live — smart contracts on Bitcoin will be a fascinating experiment to watch unfold if nothing else. Maybe the new whitepaper will even explain how they’ve managed to remove the need for the Federation.