beyond The Merge; on-chain ceremonies; regulatory moves
1. In focus: Proof of stake blockchains; beyond The Merge to Ethereum roadmap & hot topics
with Tim Beiko; Sonal Chokshi, Valeria Nikolaenko, Tim Roughgarden, Ali Yahya
In these two most recent episodes of our podcast ‘web3 with a16z’ — be sure to subscribe in your podcast player if you’re not already subscribed! — we cover all things proof-of-stake blockchains and much more:
In episode 12 (with Ethereum Foundation’s Tim Beiko), we deep dive on all things Ethereum… which this week (!) finally makes the move to proof-of-stake in The Merge. But our conversation — which certainly goes into The Merge and shares lots of in-depth and behind-scene details — also goes well beyond the Merge, also going into top of mind tech trends, and what comes next. How has Ethereum’s protocol evolved with the community, and vice versa? This is really a conversation about how innovation happens, in a decentralized way.
In episode 11 (with a16z crypto research partner Valeria Nikolaenko), we share an overview of proof-of-stake (PoS) blockchains — including how blockchains work; differences between PoS & PoW blockchains, plus approaches to improving both; an overview of consensus approaches, Sybil resistance, long-range attacks… and much more on the designs (& debates) around PoS blockchains overall.
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2. Code drop: Trusted setup ceremonies, now on-chain
by Valeria Nikolaenko, Sam Ragsdale
Blockchain projects conduct trusted setup ceremonies to generate cryptographic parameters that originate the root of trust for their systems. But all such ceremonies to date rely on centralized coordinators. So we open-sourced a tool that enables people to run these ceremonies — known as a Kate-Zaverucha-Goldberg (KZG) or “powers-of-tau” ceremony — completely permissionlessly, in perpetuity, and in a decentralized way.
While the approach has limitations in data size due to gas costs, the parameters it generates can still be useful for generating KZG commitments, small-circuit SNARKs, Verkle trees, and data-availability sampling. Check out the details below (but note that this is being shared for experimental purposes for now, until the math and code are formally audited):
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3. Top of mind: Navigating downturns
by Jeff Amico, Maggie Hsu, Ed Lynch, Emily Westerhold
From decentralized autonomous organizations (DAOs) to traditional startups, teams are reckoning with a market environment featuring high inflation, low yields, and a tightening of financing options across both public and private markets. And while treasury management is a core function of any organization, it is particularly relevant today. Especially for decentralized organizations, how can teams place greater emphasis on conservative cash management principles to help weather storms and emerge stronger on the other side? Based on our experiences and observations from DAO governance, go-to-market for web3, and more, we share a basic framework with some principles to help decentralized teams steer the waters now… as well as prepare for and prevent any issues long-term.
4. Regulatory moves & news
U.S. House of Representative Tom Emmer (R-MN) sent a letter to Treasury Secretary Janet Yellen asking her to explain why the department sanctioned Tornado Cash, writing, among other things, that “[t]he sanctioning of neutral, open-source, decentralized technology presents a series of new questions, which impact not only our national security, but the right to privacy of every American citizen.” He also stated in an interview that OFAC was wrong to sanction Tornado Cash, sharing that “My problem is that this software is controlled by code, not by any person or entity… an unprecedented shift in the Office of Foreign Asset Control in their sanctioning policy.”
Members of the House Committee on Energy and Commerce sent individual letters to four publicly traded crypto miners seeking to learn more about the impact of their mining operations on the environment.
🏦 Federal Reserve
Board governor stated at a recent fintech conference that their staff is working to articulate “supervisory expectations for banks on a variety of digital asset-related activities”, including: 1) custody of crypto assets, 2) facilitation of customer purchases and sales of crypto assets, 3) loans collateralized by crypto assets, and 4) issuance and distribution of stablecoins by banking organizations.
The board announced final guidelines that establish a set of factors for Reserve Banks to use in reviewing requests to access Federal Reserve accounts and payment services, which may help crypto companies gain access to “master accounts” without the use of intermediaries.
💵 Federal Deposit Insurance Corporation
In letters issued to five companies and their officers, directors, and employees, the FDIC demanded that they cease and desist from making false and misleading statements about FDIC deposit insurance — clarifying that it only insures deposits held in insured banks and savings associations, not in brokerage accounts or stocks and cryptocurrencies.
🌽 Commodity Futures Trading Commission
In an example of the CFTC asserting its anti-fraud and anti-manipulation jurisdiction in the spot (aka cash) market for digital assets — and in contrast to its more traditional jurisdiction over derivatives, e.g., futures, options, and swaps — the CFTC filed a civil enforcement action against Rathnakishore Giri and his Ohio-based companies.
⚖️ Department of Justice
The DOJ announced that four individuals were arrested for participating in a scheme to steal four million dollars’ worth of cryptocurrency and trick U.S. banks into refunding them for the millions used to purchase that cryptocurrency. The DOJ has charged the defendants with a number of violations, including conspiracy to commit wire fraud and bank fraud, wire fraud, and aggravated identity theft.
A federal court in the Central District of California entered an order authorizing the IRS to serve a John Doe summons on a cryptocurrency prime brokerage, seeking information about U.S. taxpayers who conducted at least the equivalent of $20,000 in transactions in cryptocurrency between 2016 and 2021 with or through SFOX. The government uses such John Doe summonses to obtain information about possible violations of law by individuals whose identities are unknown, and this particular summons is the fourth of its kind issued to digital asset platforms that seeks to identify taxpayers who fail to report the tax effects of cryptocurrency transactions.
👮 Federal Bureau of Investigation
The FBI issued a public service announcement warning investors that cyber criminals are increasingly exploiting vulnerabilities in DeFi platforms to steal cryptocurrencies, and encouraged investors to contact them if they believe that cyber criminals have stolen their DeFi investments.
The California State Assembly passed the Digital Financial Assets Law, which requires digital asset exchanges and crypto companies to acquire an operating license from the California Department of Financial Protection and Innovation. If California Governor Gavin Newsom signs the bill, it will go into effect in January 2025. [see also a16z crypto’s Miles Jennings on this move, here]
The Korea Financial Intelligence Unit (KoFIU) announced that it had reported the business activities of 16 Virtual Asset Service Providers (VASPs) to the Korean investigative authority for failure to register with the proper financial authority.
The South African Reserve Bank released guidelines for local banks to do business with cryptocurrencies and cryptocurrency companies. The guidelines advise banks to employ anti-money laundering and counterterrorism financing for all crypto transactions.
The Afghanistan Police Force reportedly shut down 16 crypto exchanges in the country’s western Herat province. Afghanistan’s central bank banned crypto trading practices, following reports that suggested an increased demand for cryptocurrencies on the part of Afghani residents.
The Mendoza Tax Administration, the tax authority for the province (the fifth-largest territory in Argentina) announced that taxpayers may pay provincial taxes and fees with cryptocurrencies. Mendoza will purportedly only accept stablecoins, including DAI and USDT, as payment.
--Robert Hackett, Sonal Chokshi, Stephanie Zinn, and a16z crypto team
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