SWRM Labs Blog

Black Swans and Other Common-Rare Phenomena

Oct 19, 2017 3:41:50 PM / by Robert Binning posted in Token Sale, ICO, Ethereum, Cryptocurrency, Uncategorized, Blockchain

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In 2007, Nassim Taleb wrote a ground-breaking book about a common investing fallacy: Banks and trading firms are vulnerable to hazardous and infrequent events and are exposed to loss risk far greater than their usual probability models would predict. Because rare events are very difficult to predict and quantify, most models simply assume that catastrophic losses will never happen. This philosophy works well most of the time, and as a result, many financial planning models work well using traditional risk-return valuations based on standard deviations from expected mean levels.

Unfortunately for the financial market (but luckily for Taleb’s reputation and book sales), the banking crisis and stock market collapse one year after he published the book showed the importance of scenario planning to include rare catastrophes. Taleb’s thesis is not that people should try to predict such rare events — after all, market collapses of that magnitude not due to war have only happened a few times. Rather, strategists should build robustness against potential catastrophic events and prepare to exploit the advantages that might come from an unexpected windfall event.

The recent hurricanes that hit Texas, Florida, and the island territories of Puerto Rico and Virgin Islands got me thinking again about Black Swans. Hurricane Harvey dumped more than 40 inches of rain on Houston, Beaumont, and other Texas Gulf communities, making this storm the most extreme single rain event in the United States. Over 80,000 homes were flooded beyond 18 inches, and almost 800,000 households applied for assistance from FEMA. Shortly after this catastrophe, Puerto Rico and the US and British Virgin Islands all suffered double hurricane damage from Irma and Maria, both Category 5 hurricanes, over a 2 week period. Thankfully, none of the major hurricanes this year resulted in heavy death levels, but the islands will probably be struggling to rebuild their infrastructure and recover their economies for the next several years.

The blockchain world may have just seen its first Black Swan event — ICOs have been banned in two countries where most blockchain innovation has been happening (China and South Korea) and the United States Securities and Exchange Commission has recently been publishing guidelines that suggest a much more restrictive regulatory environment. Several other countries have also announced plans for tighter regulations.

Blockchain innovators are not the first industry segment to receive extraordinary attention from regulators; the US SEC published similar warnings about marijuana “microcap” stocks in 2014, and the recreational alcohol and drug industries remain highly restricted by national and local regulations around the globe. Technologies like radio and nuclear medicine faced similar birthing pains due to safety concerns. However, this is possibly the first time that a new technology has faced such strong financial regulation in so many country markets at once.

How to deal with this challenge? As Taleb suggests, it is not worthwhile to try to predict any specific crisis — they are too rare and too varied. Rather, the best thing for an organization to do is to build up resilience to accommodate the impact from the rare negative event and to seize the opportunity from a rare positive event. Over the past year, hundreds of projects have raised over $2 billion through ICOs. A common current accounting treatment, recognizing the proceeds from ICOs as prepaid revenues against future service deployment, is clearly not a good representation of reality, as it signals that the project could be a Ponzi scheme, especially if there are promises made about the return levels that investors might expect. Another solution would be to craft a new funding mechanism that did not rely on speculation on value for private tokens; there are at least two blockchain tokens that feature fixed value tokens intended to facilitate blockchain transactions without the potential of extraordinary investment returns.

A greater challenge facing the blockchain industry today is the lack of skilled developers. The number of blockchain projects has exploded by about a factor of ten in the past year. While we continue to recruit experienced programmers as best we can, we are also committed to training young programmers to become skilled blockchain coders. That means that we face a modest ramp before the new staff become highly productive, but that makes more sense than waiting for months for rare experienced talent to walk in our doors.

Acknowledgements:

Photo by Gehlert Michael on Unsplash

References:

  1. Taleb, Nassim. The Black Swan: The Impact of the Highly Improbable, 2007. https://en.wikipedia.org/wiki/The_Black_Swan:_The_Impact_of_the_Highly_Improbable . Accessed Oct 5, 2017.
  2. Samenow, Jason, Washington Post. https://www.washingtonpost.com/news/capital-weather-gang/wp/2017/08/29/harvey-marks-the-most-extreme-rain-event-in-u-s-history/?utm_term=.7476e850094e . Accessed Oct 5, 2017.
  3. US Securities and Exchange Commission. https://investor.gov/news-alerts/investor-alerts/investor-alert-marijuana-related-investments . Accessed Oct 5, 2017.
  4. Coindesk ICO Tracker. https://www.coindesk.com/ico-tracker/ . Accessed Oct 5, 2017.
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The Binary Chain

Oct 4, 2017 4:02:15 PM / by Robert Binning posted in Token Sale, ICO, Ethereum, Bitcoin, Uncategorized, Blockchain

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StreamSpace is developing a novel Streaming Video on Demand platform that uses a blockchain-enabled storage and distribution network. The storage network aspect of the StreamSpace solution resembles Protocol Labs’ Interplanetary File System (IPFS) and Storj’s cloud storage platform, with a couple of proprietary differences that make StreamSpace’s platform ideal for the SVOD application. Like Storj and similar blockchain-enabled storage network cloud services, StreamSpace uses tokens, called SpaceCredits, to track the actual data storage across the cloud and to compensate “Curators,” who provide storage fragments, through a Proof of Work Time fragment (PoWTf) algorithm.

There is also a transaction management aspect to the StreamSpace platform, a marketplace for filmmakers and film aficionados to discover each other, to find exciting content, and to engage in commerce. The filmmaker sets a price for someone to view the content, along with the terms for the viewing rights — one time, limited views in a day, unlimited views over a multi-day period, etc. The film viewer agrees to the terms, paying for the transaction from their account, via credit card, Paypal, or bank transfer, or by deducting the amount to be transferred from their StreamShares wallet. The amount of the transaction, in local fiat currency, is converted to some equivalent amount of StreamShares, based on an average price across the exchanges that will support StreamShares. The filmmakers can hold StreamShares in their wallets or convert to fiat currency.

StreamSpace will support an internal exchange between StreamShares, for which an ICO has been planned for Fall of 2017, and SpaceCredits, for which there will be no public token offering.

Why implement a complex two-token policy? Ironically, the two-token method is actually simpler and more efficient than trying to support one token with either a Proof of Stake or Proof of Work reward algorithm and mis-applying the reward to participants who do not deserve it. Initially, we contemplated using a simpler Proof of Stake Time fragment (PoSTf) policy to reward participants. The people that provided storage would be compensated via an algorithm that accounted for the amount of storage, the time that storage was in use, and the popularity of each file fragment, a surrogate for the transaction velocity occurring across the network. However, there was no way to account for different pricing structures that filmmakers might want to support — one filmmaker getting started might want to set a very low price for a modest documentary film, while a more established filmmaker might set a high price tag to reflect higher costs, great special effects, and high name recognition for the cast and crew.

There is one previous case of a successful binary coin implementation for a blockchain network service offering, Vericoin and Verium. StreamSpace’s CTO, Steve Woods, was one of the co-inventors of Vericoin and helped to architect their innovative service, which involves a “gold standard” cryptocurrency that processes transactions much more quickly than bitcoin while supporting a much higher system capacity.

One of the interesting dilemmas of all tokens is the conflict that exists between miners and customers. Miners want to hoard the tokens they are creating, restricting the supply of the tokens in the marketplace and thereby ensuring increasing prices for the scarce assets. In an ideal state for the miners, the network would have slow transactions and high fees, increasing their power on the blockchain. Customers want the opposite — ample supply of tokens so transactions flow smoothly. Customers are not looking at the token market as an investment, just a medium for network transactions. In their ideal state, network transactions happen very quickly and with minimal overhead and fees. The dual token strategy is a way of resolving this challenge, satisfying both the miners providing the underlying cloud storage network and the film communities that use the network to enable commerce. The SpaceCredits side of the StreamSpace platform rewards the miners for enabling the storage network, with rewards based on allocated storage volume and time; the StreamShares side of the StreamSpace platform rewards rapid transaction behavior with its Proof of Stake Time algorithm.


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