A Case for Security Tokens as On-Chain Crypto Derivatives

Investment psychology is made up of a few different camps, each with their own merit. There are Bulls and there are Bears. Those in the bullish camp tend to buy and hold, those in the bear camp tend to stay away or short sell. During typical market cycles, both the bulls and the bears tend to make money at seperate times, and generally the people who are in the game for the long haul tend to make the most profit. These are the financial institutions.

The crypto-world seemed to yield a third type of person. The HODLer emerged amidst some of the most insane market bubbles in recent history.

Holding on for dear life

Why do we HODL?

For the uninitiated, HODL stands for Holding On for Dear Life. While bullish and bearish investors seem to act on principal, the HODLer was simply in it for the ride. We all knew that Cryptocurrency was in a bubble, and when the wheels fell off the amount of respect we had for the investor that was HODLing was immense.

HODL comes around because of the centralised risk surrounding cryptocurrency. Holding Ethereum is great for a time,

Why do we love the HODLer?

For the uninitiated, HODL stands for Holding On for Dear Life. While bullish and bearish investors seem to act on principal, the HODLer was simply in it for the ride. We all knew that Cryptocurrency was in a bubble, and when the wheels fell off the amount of respect we had for the investor that was HODLing was immense.

People wore and continue to wear the term HODL with a badge of honour.

The truth is HODL is not a badge of honour. HODL is the crypto version of the buddhist philosophy “pain is an illusion”. Cryptocurrency losses are very real, and HODL is terrifying, so why do we do it?

We love HODL because it’s all we have

That’s the saddest part about the Cryptocurrency world. There isn’t an alternative for HODL.

HODL is not healthy

The often repeated joke on Reddit is that whenever there is a large scale crypto-crash is to post the U.S. Suicide hotline. Holding on for dear life doesn’t do anything for your mental health, so why do we think it’s necessary.

Stablecoins suck

For a while during 2018, it seemed like Stablecoins were going to be the solution to HODL. Stablecoins presented their users with what seemed to be a valid solution; Tether the value of cryptocurrency to a fiat currency, or some other commodity.

We all know what the most famous example of this type of product is. Tether’s controversies continue, and many other Stablecoins haven’t fared much better in the ICO crash. Many of their value generation mechanisms rely on scarcity, or some other theoretical mechanism to generate some form of stability. I’m just going to come out and say it, Stablecoins don’t work. Relying on Stablecoins for stability is like relying on stimulants to get you off depressants.

Fundamentally Stablecoins don’t work, because they rely heavily on deriving their value from a liquid asset. These liquid assets themselves fluctuate heavily, resulting in not only a lack of stability, but a lack of a use case for their existence. What good is a Stablecoin that doesn’t provide any stability to a violently fluctuating cryptocurrency.

We need a cure For HODL

Cryptocurrency investors are still people. They have livelihoods that run with the markets. When pandemonium takes over and the price of cryptocurrency begins to exceed its underlying value, HODL seems like fun. It’s this excitement that drives us to pursue ever increasing highs. It might be fun, but HODL is a hell of a drug.

Stablecoins don’t prevent HODL. In fact it is their inherent failure as a system that only adds instability fuel to the fire of crypto-markets.

How can we prevent HODL? How can we become so hooked to the movements of crypto-markets that our very livelihoods are affected by this?

In order to cure HODL, and the types of behaviour that permeates through the cryptocurrency community, we need to look at HODL a bit differently. The main reason people HODL, is because they don’t have any alternative. For the main cryptocurrencies, such as Bitcoin and Ethereum, there is nothing to hedge against. If the crypto-markets go down, the only option most investors have is to sell out of their holdings into cash.

Call me crazy, but I think I this is the answer. It’s a long shot, but it could be the answer. Hear me out.

A case for on-chain Crypto Derivatives

A[1] derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset (like a security) or set of assets (like an index). Common underlying instruments include bonds, commodities, currencies, interest rates, market indexes and stocks.

Consider the value of an on-chain cryptoderivative, which operates at a completely independent value compared to Ethereum. If a trader believed that the price of Ethereum was about to drop, that trader would purchase derivates in a given asset, and then wait for the price of Ethereum to drop. If Ethereum did in fact drop, they would sell their squares and then buy back in to Ethereum, thus earning more Ethereum for the same relative value for squares. If Ethereum was then to rise, the derivative holder could then convert their Ethereum to fiat currency, thus realising a profit.

Let’s use the example that Ethereum is trading at $200 USD. A trader buys squares from the example above, with 1 Ethereum ($200, or 0.1% of the total asset value).. Ethereum drops in price to $150AUD. The trader can then buy more Ethereum for the same amount of money. They now own 1.25 Ethereum.

Ethereum rises up to $200AUD. The trader now has 1.25 Ethereum at $200AUD, earning a total profit of $50.

Why the need for on-chain? On-chain removes the need to have a custodian, which is the single biggest issue with creating financial instruments such as derivatives. By leaving the transactions on-chain, these derivatives can be viewed publicly i.e. in full view of regulators. I’d argue that being on chain would make it much harder to manipulate the market, and being harder to manipulate, it would stifle the presence of the large financial institutions.

Ok, so you’re probably wondering by now, if Crypto Derivatives are going to be the answer, what do we use to secure them.

Ladies and Gentlemen, the answer is:

Security tokens are the solution to the On-chain Crypto derivative we need

Imagine this., imagine that I own Ethereum. I’m scared of my Ethereum losing value, so I use part of my Ethereum to buy a Crypto derivative. The derivative itself represents something neither inherently stable, nor something that violently fluctuates. The derivative is backed by something that is undervalued. That’s how I know my portfolio value is safe.

The Crypto game isn’t about winning. It’s about not losing. 

This is how we don’t lose.

It appears that cryptocurrency is at the exact same point in time as when the stock market was booming in the 1920s. During this time, stocks would trade purely on sentiment. At this time, companies with little to no earnings would be able to raise millions of dollars, and in turn the market boomed. In economic context, many parallels can be drawn between this time and the time that we are currently living. The exact same behaviours that occurred during the 1920s and the lead up to the great depression can be seen to be acting out in the cryptocurrency space right now.

Who said history never repeats?

But first, let’s set the scene.

During the 1920s, people seemed to completely ignore the fundamentals that kept stock prices honest. For speculators on the market, a company did not need anything more than news, and a bit of hype to be worth investment.

Following the great crash of 1929, Ben Graham wrote a book called, ‘Security Analysis’. This book made the distinction between speculation and investment, and then taught readers what to look for to make an investment portfolio. Of course, Ben Graham fully acknowledged how long it would take to make an investment portfolio. It also became clear that Ben Graham was not interested in speculation at all. In fact, he loathed the investment communities’ obsession with news.

Graham saw investing as: An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are therefore speculative.

Graham proposed that investors look at three key metrics:

  1. Price to earnings ratio
  2. Dividend yield

Graham himself clearly stated that a stock was a partial ownership in a business, and by extension a business model, management team and underlying technology.

These seemingly small, but fundamentally important parts of investing have formed the basis of many investment portfolios. And it is with this understanding that we can build a platform for trading Ethereum.

A brief history on the crypto-bubble

I believe that hindsight will prove that cryptocurrency investment at this current period would provide some of the best investment returns. Though Bitcoin in itself has grown substantially, and held its value over a long period of time, it is in fact highly unlikely that Bitcoin will grow to a market cap beyond $1T USD in the next two decades (still a substantial amount of money by anybody’s measure). Ethereum on the other hand would be likely to hit $1T over this time.

In late 2017 and early 2018, prices of cryptocurrencies skyrocketed. Not only did they skyrocket, but their prices were not based on anything other than pure speculation and hype. Coupled with this, the Ethereum standard ERC-20 gave way for many, many initial coin offerings to be launched. Under the ICO model, companies could raise money under the proviso that they would build the project that they were proposing. ERC-20 allowed for proposals to be created, and funds to be raised for utility tokens.

Utility tokens frankly offered no value. They added friction. In fact, as Fred Scherbesta of Finder.com stated, ERC-20 was the tulip that caused the bubble.

People who invested in cryptocurrency now find themself in the precarious position where they don’t know what they need to do to make money, and lack the basic information to make an informed decision as to what they can do with their money. Most ICO projects will never make it to fruition, leaving the market decimated, bare and with seemingly little to no hope of recovery.

What is therefore desirable, with all historical considerations in place, is a system that allows users to actively purchase cryptocurrency, and if the price falls, allows them to freely move their money to a safe haven. In essence, this system would allow you to bet for and against cryptocurrency depending on your position in the market (whether you owned the crypto-asset or the cryptocurrency).

The Metrics behind Ethereum

When people buy cryptocurrency, they must firstly understand that they are not buying a currency in the strict sense, but they are buying a share in a network.

Cryptourrency, therefore by definition may be considered to be a fractional ownership in a network, with the network size itself attributable to the amount of data nodes (read: merchants) in the network. This simple idea seems to be virtually unbeknownst amongst cryptocurrency enthusiasts.

Though the following principles may be applied to all cryptocurrency, we have chosen to focus almost exclusively on Ethereum. The reasoning behind this is due to the presence of decentralised applications, known as d-apps, giving a clear use case for Ethereum above other cryptocurrencies.

The Ethereum network allows users to construct applications for smart contract execution, using a programming language called Solidity. Solidity is a programming language specifically designed for the Ethereum Virtual Machine (EVM). When a contract is verified on the Ethereum blockchain, a small amount of Ethereum (known as gas) is paid out. Unlike Bitcoin, Litecoin, and other cryptocurrencies, Ethereum allows users to deploy smart contracts that can be verified on the EVM (read: blockchain).

The Opportunity in Ethereum

Ethereum presents a rare opportunity for cryptocurrency investing. Not only is Ethereum widely utilised, but given the current price ($204 USD as at 19/10/18), it may be considered undervalued given thorough ratio analysis.

If we really look at the price performance of Ethereum over the last year, at its peak Ethereum represented an exceedingly high gas price with very little actual transactions. During the ICO bubble, ERC-20 compliant contracts flooded the market. As ERC-20 utility tokens does not represent any actual value, Ethereum could have been considered overvalued at this time.

Now, with the ICO market having wiped out most of the overpricing from Ethereum, Ethereum may be considered undervalued. Ethereum is a very powerful tool, that is going virtually unnoticed due to the prevalence of ICOs.

The question remains as to how ethereum may be considered may be considered undervalued. Traditionally, for a particular company to be considered undervalued, it must be thoroughly analysed with a view to discern its value from the available metrics.

How to value Ethereum

Though these metrics have been around since the beginning of 2018, since the crash of all cryptocurrencies, they have not been widely published.

These metrics are as follows:

NVT — Network Value to Transaction ratio

PMR — Price to Metcalfe Ratio

GSR — Google Search Ratio

They will be touched on further on in this, but it is important to understand that there is an inherent opportunity in aggregating and broadcasting the key metrics in Ethereum, which has not been done before.

The Network Value to Transactions Ratio:

Chris Burniske, the author of the book Crypto-Assets (one of the definitive books on cryptocurrency) gave the suggestion of using the term “Network Value to Transaction ratio” as a similar concept to a P/E ratio for valuing companies. In October 2017, Willy Woo (himself a significant powerhouse in the cryptocurrency space) gave the concept some significant modifications to produce a more accurate reflection of the network value.

The concept is simple enough. If a cryptocurrency can be viewed as a “share in a network”, the networks value can be directly valued as the total market capitalisation of the cryptocurrency itself, similar to the share price of a company. Added to this, the amount of transactions that are being made using the cryptocurrency can be considered it’s “earnings”. In a way, this ratio is no different to P/E ratio, which is simply market capitalisation divided by total EBITDA.

Transactions and value are both measured in $USD.

How to calculate Network Value to Transactions Ratio:

The simple method of calculating the network value to transactions ratio is to take the total network value and divide total coin market cap by the 24h transaction volume. As at 25/10/18, this would yield an NVTR of 17.75 for Ethereum. Compare this to the other major Cryptocurrencies:

BTC = 31.30

XRP = 61.85

BCH = 30.13

EOS = 14.97

(source: https://coinmarketcap.com/)

Dmitri Kalichkin (4) advocates using a 90 day moving average for NVTR, to determine a trendline. As Ethereum does not have enough data to provide a true lead indicator, time will tell whether this will be an accurate measure. It is important however to put this data front and centre.


Price to Metcalfe Ratio (PMR)

The price to Metcalfe Ratio is a bit different. Though it is a much more complex ratio, it appears to be strongly correlative to indicate whether to buy or sell Ethereum.

The ratio is a logarithmic function of the daily price of the currency in USD, divided by the 30 day moving average of M2:

M2 is defined as follows:

100 X N¹.5 / S

N is representative of the total number of users on the network (which is then given the power of 1.5). The monthly active users for Ethereum cannot be truly determined, so we use the number of transactions processed on the network as a proxy. Therefore, N is the number of daily transactions, and S is the current supply of tokens (coins) in circulation.

So, for simplicity’s sake we will determine the simple PMR as being:

Ln (201/100*(537236¹.5/102803398))

= -0.64

The PMR as at 25/10/18 of -0.64, indicates a strong buy signal.

The way PMR works is that if it is positive, the network is overvalued for the number of users that are interacting with it, but if the PMR is negative, the network is being used but undervalued.

In the research (6), it is strongly implied that PMR was able to predict the major price corrections of Ethereum, as a PMR of 1 indicated a correction was looming, but a PMR of -0.25 indicated a strong buying signal as the network was undervalued and proceeded to rally.

At -0.64, the PMR of Ethereum makes it look promising.

Update: As it turns out, this was not meant to be N¹.5, but instead meant to be N². But frankly, I like N¹.5 as opposed to N² as it adds less sensitivity while maintaining the same variables, though it was a typo. Anyway, we can experiment with it and find the results.

Google Search Ratio

This is one ratio that I would never have thought of, but apparently works.

The idea that Google trends can be used as a lead indicator of Ethereum is quite novel,but makes sense when considering the number of times people use Google to search the price to USD of Ethereum, relative to the number of people who search for ways to buy Ethereum. Due to the nature of HODL, it is unlikely that people who are searching for how to buy Ethereum are existing cryptocurrency investors, but in fact new investors.

As this search ratio becomes an indicator for new buyers of cryptocurrency, or existing holders of ethereum that are intending to sell, the Google Search ratio becomes an interesting indicator for the new money that is flowing through Ethereum. This has been demonstrated to be an effective method of indicating “bubbles” (7).

The only problem with it is, Google only publishes the information for Google Search ratio with a 24 hour to 48 hour lead time.

In Willy Woo’s research (7), he indicated that Bitcoin’s bubbles could be detected by measuring the ratio between the term “Buy BTC” with “BTC USD”. The ratio seems to be a solid indicator for Bitcoin, however Ethereum may benefit more from this ratio analysis than Bitcoin.

If you look at the graph (15), over the past year, where the search term “Eth USD” was overlapped by “Buy Ethereum” (specifically on December 10th to December 17th), Ethereum seemed to start a massive run. When the term “Eth USD” then overlapped (Jan 7th), the price of Ethereum dropped massively. This might not be comprehensive, but this ratio is one of the most powerful ways to indicate if Ethereum is going down or going up. Currently, the GSR is at 25%, indicating that Ethereum is not going to move up any time soon.

Therefore, the ratio itself can be expressed as as a percentage. If Eth USD is more popular, the indicator will be expressed as less than 1. If Buy Ethereum is more popular, the ratio will be greater than 1. Usually the ratio will (hopefully) never exceed 2, so we will never see Ethereum gain too much momentum.

Though this doesn’t help our situation for trading in real time, it does give a very strong indicator for what Ethereum is doing at any point in time.

(source: https://etherscan.io/chart/tx)


These 3 indicators can be considered the most important markers for Ethereum trading. If NVT is Ethereum’s P/E ratio, PMR can be considered it’s P/B ratio and GSR a lead indicator.

If these three ratios are bundled together into a trading program, or even a news site, Investors can use this information to understand when to buy and sell Ethereum (and eventually other cryptocurrencies).

Above all else, as of this moment, Ethereum could be considered undervalued.

Oscar Loudon runs the startup AssetSquared. Cryptocurrency was made for crowdfunding. We make it possible. Buy, sell and trade digital assets using the AssetSquared platform. Find out more at AssetSquared.io


Dave Kleiman

Dave Kleiman

Craig Steven Wright

Craig Steven Wright


Hal Finney

Hal Finney

Much has been written about Satoshi Nakamoto. So much in fact that it is clear that we cannot see the forest for the trees. For the longest time the debate has raged on between crypto-fanboys, government agencies and authors alike (sometimes with all 3 of those titles in one) as to the legitimacy of cryptocurrency creators identity.

Though it need not be said that the true identity is known, it must be said that the identity can be intelligently speculated over. It is highly unlikely that the identity will ever be truly known, and Satoshi Nakamoto will never reveal himself.

So who is Satoshi Nakamoto? Why haven’t we found him yet? Surely he would have revealed himself by now?

The answer, as will be described to you in this article, is that it’s not that simple. If it is as I beleive it to be, Satoshi Nakamoto is in fact an online persona comprised of three real persons. The key assumption here is that everybody involved is telling the truth. Specifically, Hal Finney knew who Satoshi Nakamoto was, Dave Kleiman knew who Satoshi was, and finally that Craig Steven Wright was in fact Satoshi Nakamoto (albeit for the shortest amount of time).

In a tribute to Game Of Thrones plotline around the Azor Ahai prophecy, I’m going to attempt to build a true picture of how I believe the identity of Satoshi Nakamoto came to pass, and how the tragic deaths of Dave Kleiman and Hal Finney inevitably sealed the fate of bitcoin, and gave it value far beyond what we would have considered it to be.

The need for a name

When Hal Finney was looking into building a digital store of value, he needed help. Of course, being the early days of the internet, the cypher-punks (as they were known) used forums as their primary method of communication.

We don’t need to go into who Hal Finney is. Put simply, he is the inventor of bitcoin. In the same way that we attribute the invention of the iPhone to Steve Jobs, Hal Finney invented Bitcoin. By extension of this metaphor, Nick Szabo invented the BlackBerry. Wai Dei invented the Palm Pilot. They all worked, but there is only one still going in the market.

It was through these forums that Finney met David Kleiman. Kleiman, a cryptography expert came up with the concept of “mining”, whereby a computational puzzle is solved by a network of computers to generate a new collection of transactions, known as a “block”. Of course, in this sense you could say that David Kleiman could be considered the inventor of bitcoin as a protocol, and the idea of a distributed ledger based on a consensus algorithm could also be considered the fundamental distinguishing feature of bitcoin. But we digress.

As Kleiman and Finney began to create the bitcoin protocol, it was Finney’s idea to build an identity for Bitcoin’s creator. He reasoned that by using an identity, he could continue to build out the Bitcoin platform unburdened by the infamy that would come with building such a platform. This was Tim Berners-Lee in the age of the internet, or Bill Gates and Steve Jobs at the dawn of the personal computer age. This time, the stakes were much higher. Personal computers had nothing to replace, nor did the internet. Bitcoin could replace all currency as we knew it. Therefore, the creator needed a name.

Satoshi Nakamoto had parents

Satoshi Nakomoto was born from the parents of David Kleiman and Hal Finney. As the two collaborated over the specifics of the Bitcoin protocol, they realised they needed to conduct tests, get guidance from other conspirators and of course, send bitcoin.

The following is intended to be purely speculative, but here is what I believe happened:

Hal Finney had Amyotrophic lateral sclerosis (ALS), also known as motor neurone disease (MND), or Lou Gehrig’s disease. That much is obvious.

Hal Finney came up with the name Satoshi Nakomoto. That much is obvious too.

Hal Finney lacked the mobility to collaborate with all of the contributors of bitcoin. He enlisted the help of Dave Kleiman to be the voice behind Bitcoin. He was the ideas man, but Dave Kleiman would distill his ideas into a finer art.

Dave Kleiman had all the login details for Satoshi Nakamoto’s email accounts. He had all the forum logins and passwords for collaborating. He was an expert at covering his tracks, and knew how to disappear without a trace. But he was ultimately acting at Hal Finney’s bidding.

Once the protocol was constructed, Hal Finney directed Dave Kleiman to make the first transaction to his wallet. It was thus only Hal Finney and Dave Kleiman who had access to the private key for the intial supply of Bitcoin.

Hal Finney soon realised that the system was gaining traction. He knew that Satoshi needed to disappear. He instructed Dave Kleiman to destroy all the evidence of their collaboration (which wasn’t hard considering it was all heavily encrypted). In deleting all the evidence, Dave Kleiman sealed Satoshi’s fate for years to come. We refer to this event as the erasure.

Craig Steven Wright

So, this now begs the question. What about the man that came out as saying that he was Satoshi Nakamoto? Surely he can’t have been involved?

He is not lying. For the a brief moment in history, Craig Steven Wright had a login for Satoshi Nakamoto.

Dave Kleiman needed help. We all need help. Craig Steven Wright claimed to have access to that information. He was great at winging his way through things, and he had all the cunning to convince Kleiman to let him have a piece of the action.

Kleiman sent him bitcoin using the original private key, allowing Wright to be able to showcase the earliest known bitcoin transaction (apart from the original). Wright then posted under the pseudonym Satoshi Nakamoto.

Following the erasure (and subsequent deaths of the collaborators), Craig was distraught. He gathered what evidence he could, and bunkered down to watch the bitcoin seed grow. Craig isn’t lying when he said he was Satoshi Nakamoto. He was the third head. He collaborated with Dave Kleiman, who was acting on behalf of Hal Finney. He is the third, less impressive head of the dragon. The incidental member of the three musketeers. He might have some merit, but nobody wants to be Ringo.

Inevitably, there will be some questions here.

Why did Hal Finney invent Bitcoin?

If this is all true, why did Hal Finney invent Bitcoin?

Hal was a masterful inventor. A bona fide genius. But he was flawed. He knew he was on borrowed time, living with ALS. He needed a way out.

Bitcoin was that way out. ALS is a terrible disease, and is near incurable. Hal Finney realised that his only way out was to raise enough money for treatment and eventually find a cure. He invented a new type of money specifically for this.

Bitcoin was his swan song. It’s amazing what a genius mind will do when their life is on the line. Bitcoin was Hal Finney’s brain in overdrive, the brain of a bona fide genius, trying to save itself. Hal Finney died so we could have Bitcoin. In a tragic twist of fate, so did Dave Kleiman.

Why did Dave Kleiman and Hal Finney collaborate so well together?

Apart from the obvious shared understanding of cryptography, software development and so on, the two had something else in common. They were both wheelchair bound.

It’s rare enough to find someone with the same appreciation for cryptography and cyber security, let alone someone with the same shared suffering. That is as true a bond if ever I saw one.

Why have we never found out who Satoshi Nakamoto is?

The tragedy and the triumph of the story is that both collaborators are dead. When Dave Kleiman tragically passed away from MRS in 2013, Hal Finney finally understood the significance of his life. He had reinvented money. He was going to die, and nobody would ever understand the significance of what had taken place.

At the end of the day, we don’t need to know who Satoshi Nakamoto is. We just need to know that he existed as an online identity.

Above all else, just think about how amazingly unlikely this story is. Hal Finney and Dave Kleiman meeting. Their understanding of each other, and ego-less work ethic. Craig Wright as the Ringo Starr of the group. Their untimely deaths leading to the bitcoin behemoth we know today. All this seems impossible.

But it just might be true.

If anybody ever asks you if you know who Satoshi Nakamoto is, simply reply…

The dragon has three heads.

Oscar Loudon runs the startup AssetSquared. Cryptocurrency was made for crowdfunding. We make it possible. Buy, sell and trade digital assets using the AssetSquared platform. Find out more at AssetSquared.io

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