Reflecting on Time Well-Spent at LedgerX

By Bryan Bishop

I will soon be leaving LedgerX. I wanted to take a moment and reflect on my experiences and lessons learned from working at LedgerX, the first CFTC-regulated digital currency clearinghouse and options exchange.

I joined LedgerX four years ago in 2014 to help build out the technology stack and its interaction with the Bitcoin system. Since that time, Bitcoin has grown in leaps and bounds from a fledgling cryptocurrency into a global, somewhat regulated asset class of its own kind. Although I had expertise in Bitcoin back then, the landscape was very different and my previous work was focused on backend application development, mobile apps, reverse engineering, typical full stack development. Everything has changed.

What’s next for the Bitcoin ecosystem, and what’s next for myself? Well, to find the answer for the industry, it may be helpful to reflect on the broader technological trends in society today. In particular, I want to highlight something that has been gnawing at the back of my head for quite a while now. It’s the contrast of a highly regulated venture like LedgerX operating in the world of Bitcoin, a world which is widely seen as outside the reach of regulation. LedgerX at its core has a contrarian thesis that stands in contrast to the various startups that pray at the altar of the likes of Uber or Airbnb: a thesis that up-front regulation can coexist with innovation.

Before I go into my interpretation of the core thesis, though, I want to point out that technology and its development fundamentally cannot be regulated, in the same way that the laws of physics cannot be (aren’t) regulated. Hobbyists, enthusiasts, hackers, garage biohackers, cypherpunks– call these individuals whatever you want; they are technology tool users, and individuals are the ultimate form of decentralization. Many of the tools of technology development have become so cheap, and the communications cost so low, that even cryptography once restricted by export control laws was trivially disseminated by a few lines of source code printed on t-shirts. For fun. Often this story is told starting with the original hackers of the personal computing revolution, followed by the Internet and its decentralization, and later an emphasis on file sharing protocols, and the now-famous observation that software is eating the world, which by now has long been updated to the observation that Bitcoin is eating the world as well. A good perspective on this was provided by Balaji Srinivasan in his 2013 talk, “Voice and Exit” where (and this summary won’t do his argument any justice) he painted a picture of East and West Coast philosophies at war with each other.

In the talk (which I recommend watching), one of the ideas he proposes is that maybe regulators are really no longer capable of enforcing regulations, particularly against certain venture-backed technology companies that can simply treat penalties as a cost of doing business if they grow fast enough. By invoking the narrative of software eating the world, have startups found an invisibility cloak giving them stealth from the eyes of regulation or even lawfulness? Maybe, or maybe these startups are taking advantage of the natural shape and structure of the underlying technological landscape. Maybe there’s truly meaningful signal to be found in Bitcoin’s meteoric 60 million percent market price climb, or in Bitcoin’s equally outstanding hashrate growth and difficulty target growth, or in the many efficiencies and cryptography innovations that the Bitcoin software system has been accumulating.

In the long-term, I wonder how society will deal with these kinds of regulatory problems. I think that the regulatory sandbox concept is fascinating. It’s the idea of letting people opt-in to an experimental sandbox where they can access products and services that are, basically, unregulated and unapproved. How society will resolve these different pressures and forces at play, I really don’t know yet. Obviously, the resolution to this issue chosen by LedgerX was engaging with regulators to the maximal extent possible.

So that’s the theme of our times that has been bouncing around in my head for a while now. LedgerX has made it clear that there is room for working closely with regulators to operate a U.S. clearinghouse, in an industry that doesn’t always embrace regulation with open arms. Boiling down four years of effort (and even more years for a few of my colleagues here) into a short sound bite: we launched and have found traction, which is cool. But upfront regulation also took us three years to get licensed, which was uncool. Everyone knew from the beginning that things would take a while, of course.

However, instead of seeing the regulatory environment as inherently hostile, I saw it as encouragement to maintain a high quality of work and a certain level of discipline. Sometimes the regulatory requirements are basic, everyday sane things that have made me wonder: what exactly is it about those less regulated companies that they can’t meet these standards?

Beyond regulation, LedgerX has also shown it’s possible to use modern software development practices and tech to build a U.S. clearinghouse. All of this software can run on a single laptop during development. An entire test clearinghouse can be spun up or down, and migrated from one cloud computing platform to another. In the world of clearinghouses, this is a marvel.

I wish I had time to do a deep dive into technical details here. I’ll share some very quick highlights, and then wrap this up. In a previous blog post, I described some of the aspects of the LedgerX signing ritual and security around bitcoin custody. Separately, one odd problem I ran into was that docker’s build cache doesn’t actually do graph search over the set of available layers (reported here). I’d also like to point out that bitcoind RPC for the Bitcoin Core wallet acts basically like a database but the wallet RPC layer doesn’t have any transactional or atomicity guarantees. The takeaway is that one might find it more productive to build applications against the p2p layer instead of the RPC layer.

I think all of the efforts from the LedgerX team over the years- across finance, technology, and regulation- are starting to pay off. I am proud of the work I have done here, and I am happy to have been part of the team. I wish nothing but the best for the team going forward, and I expect to see great products from them in the future based on the solid foundation we have built.

Moving forward, I am in the midst of entertaining a bunch of very exciting opportunities and I hope to announce soon where I will land. Follow me on twitter.com/kanzure to keep in touch.

 

Bryan Bishop

July 2018

The post Reflecting on Time Well-Spent at LedgerX appeared first on LedgerX.

source https://ledgerx.com/reflecting-time-well-spent-ledgerx/

Auditing an Auditing Technology

I apologize for not blogging recently (I didn’t realize until recently that people even read these things). In short, we were in the middle of going through an audit — more on this later.

It’s interesting to recursively think about being audited in a business where the blockchain itself is an auditing technology. The blockchain for Bitcoin is essentially a custodian of 100 billion US dollars of value that allows irrefutable proof of control for a huge number of balances. If the Bitcoin blockchain were a bank, it would be roughly one of the top 10 banks in terms of assets under management.

But with one critical difference — the balances are open for all to see. Bitcoin is an example of a technology that provides an unusually good balance between unprecedented transparency with an appropriate level of privacy.

In the 4 years that LedgerX has been around, we have seen or heard of crypto transactions that institutions have been negotiating and completing. Most of them are above board, but inevitably, we’ve seen situations that turn out to be outright scams. Luckily, the blockchain infrastructure allows an easy way to prove control over balances, and these potential thefts are almost always stopped very quickly in their tracks, saving institutions millions of dollars in fraudulent transactions. This is auditing at its best.

That said, it’s important that companies which custody both fiat and cryptocurrencies are audited independently by reputable firms. There are close to zero US based exchanges who have done a comprehensive audit by a top 10 firm.

So we’re pleased to announce that Grant Thornton LLP expressed an unqualified opinion that our financial statements were presented fairly, in all material respects, in accordance with accounting principles generally accepted in the US. An unqualified opinion represents a clean bill of health with respect to LedgerX operations, internal controls, regulatory compliance, and transaction integrity. This is a long process to go through but an essential one regardless.

Similar to our regulator, the Commodity Futures Trading Commission, the LedgerX team was floored by how sophisticated and detailed the understanding of our auditors is with regards to our Bitcoin infrastructure and balance management. We have Grant Thornton to thank for that, and it was a pleasure to work with these professionals.

Special thanks to Jennifer Liu, our Chief Financial Officer who ran point on this process to work with our partners at GT. Despite our strong belief in the decentralized transparency of Bitcoin and its blockchain, we recognize that prudence requires that an auditor still audits the auditing technology.

The post Auditing an Auditing Technology appeared first on LedgerX.

source https://ledgerx.com/auditing-auditing-technology/

CryptoClearing

This article details a particularly contentious brawl between several panelists about the future of crypto:

https://www.bloomberg.com/news/articles/2018-05-02/a-verbal-cryptobrawl-breaks-out-at-milken-over-bitcoin-s-future

The following two quotes struck me as interesting, and worth some comment given my perspective on this area:

“Mashinsky said crypto assets will let people bypass banks.

 

‘You’re just making stuff up,’ Roubini replied.”

In fact, he’s not — Mashinsky is right, and LedgerX is seeing it all the time.

One of the most amazing use cases of crypto that we’ve seen play out is as a form of collateral, pledged in order to do trading in BTC derivatives. We have a ton of customers who pledge only BTC, use our day ahead swaps to convert a portion into USD, trade all manners of derivatives, and when they are done, they convert all the holdings into BTC and have us send it back to them on the blockchain.

It’s extraordinary that people can send us millions worth of BTC on a Saturday night, have it available within hours to support complex trading strategies, and when they are done have it sent back as BTC. They haven’t touched the banking system once throughout the entire process, something which I think is unique in the history of US federally regulated derivatives exchanges and clearing houses.

So go ahead — bypass the banks. It’s a real thing.

The post CryptoClearing appeared first on LedgerX.

source https://ledgerx.com/cryptoclearing/

Zero Sum, an Announcement, and a Correction

When I was a trader at Goldman, it constantly bothered me that the trading mentality was too oriented around the zero sum idea — for one person to win, another has to lose. That’s a horrible way to go about things and also happens to be entirely inaccurate.

Zero sum is a matter of scope. If you scope the game to an individual trade, there is no question that it’s zero sum. One person gains money, the other loses it. But that’s an entirely unrealistic economic scoping of what is actually happening.

If Bill Gates sells some Microsoft shares to a retiree, and the shares go up, the cynic will say that Gates lost and the retiree investor won. But of course that is nothing close to the richness of what is happening in an interaction like that — what is each person doing with the trade, after? If Gates took the proceeds of that trade to invest in another even higher yielding project, such as a new company, or to invest in projects to control Malaria, he could very well be earning a higher return on his proceeds than he would have had with holding his stock. Also, the retiree wins as well. Positive sum.

Bitcoin is a new ecosystem, and derivatives on Bitcoin can be considered some of the most zero sum transactions in the world. But we certainly don’t see it that way — for example, miners who work with us, selling call options and investing the proceeds in projects to advance the state of the art in hardware, mean that both buyer and seller can benefit.

So with that in mind, LedgerPrime (our affiliated market maker) is open sourcing their basic codebase for quoting options algorithmically. I have a lot of friends who are curious as to how these algos work, and I can say with certainty that it’s a ton of fun algorithmically trading options. But it’s also nontrivial to build from scratch. It’s easily an order of magnitude more complex than trading spot, and we want to make it as accessible as possible to those interested, because we think at this stage in the market, there is room for a lot of participants who can all do well.

You can find the initial repo here: https://github.com/LedgerPrime/ledgerx and there will be more installments coming. Of course, there are no promisees of quality and effectiveness, it’s just a good starting point for those who might be interested. We hope you find it helpful.

Correction

One of my obnoxiously smart friends from college rightfully pointed out an error in this post: https://ledgerx.com/is-btc-real/

BTC does not have to use the real number system to achieve the aspects I was describing. It only has to be a quotient of two integers, so real numbers are overkill. Instead, BTC needs only to be in the rational number subset of the reals.

So it turns out Bitcoin doesn’t need to be real, it just needs to be rational.

(Thanks Boris A. for the feedback)

— Paul

The post Zero Sum, an Announcement, and a Correction appeared first on LedgerX.

source https://ledgerx.com/zero-sum-announcement-correction/

LedgerX files updated fee schedule with the CFTC

On February 13, 2018, LedgerX filed the following updated fee schedule to the CFTC.

VIA COMMISSION PORTAL

Christopher J. Kirkpatrick
Secretary, Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, N.W.
Washington, D.C. 20581

Re: Commission Regulation 40.6(a) – Rule Certification
LedgerX LLC Submission No. 18-05

Dear Mr. Kirkpatrick:

LedgerX LLC (“LedgerX”) hereby submits to the Commodity Futures Trading Commission (the “Commission”), pursuant to Section 5c(c) of the Commodity Exchange Act (the “CEA”) and Commission Regulation 40.6(a), an updated Fee Schedule (“Amendment”). The attached Amendment will become effective on February 28, 2018.

Various fees have been revised for early 2018. The changes being made are marked on a copy of the Amendment, which is attached hereto as Appendix A. This Amendment also includes revised fee amounts for the recently self-certified USDBTC day-ahead options contract.

LedgerX believes that the Amendment is consistent with the SEF Core Principles, because the Amendment (i) sets forth fees that are equitable, are very reasonable given bitcoin’s price history, and do not unfairly discriminate and (ii) sets forth the manner in which LedgerX will assess its fees in a clear and transparent way.

LedgerX certifies that the changes amendments comply with the CEA and Commission Regulations thereunder. LedgerX additionally certifies that it has concurrently posted a copy of this submission letter and the attachments hereto on LedgerX’s website at https://ledgerx.com/. LedgerX is not aware of any substantive opposing views to the Amendment.

Please contact the undersigned at (917) 935-6727 or alex@ledgerx.com if you have any questions or you would otherwise like to discuss this further.
Sincerely,

Alex C. Levine
Chief Compliance Officer
LedgerX LLC

* * * *

LedgerX Fee Schedule
(as submitted February 13, 2018)

Fees for Weekly and Monthly Options

1. For each transaction executed on LedgerX, each Participant to the transaction will be charged an execution fee that is equal to $12.50 per contract.

2. For each contract that results in settlement and delivery, the Participant exercising the option will be charged $0.25 per contract that is exercised.

Fees for Day-Ahead Swaps

1. For each transaction executed on LedgerX, each Participant to the transaction will be charged an execution fee that is equal to $3.00 per contract.

Fees for Day-Ahead Options

1. For each transaction executed on LedgerX, each Participant to the transaction will be charged an execution fee that is equal to $5.00 per contract.

General Fees

1. A USD withdrawal fee of $10 will be charged to the Participant per USD withdrawal.

2. A BTC withdrawal fee of 0.005 BTC will be charged to the Participant per BTC withdrawal.

3. Per-transaction fees charged by swap data repositories will be charged to the Participant. Liquidity Providers approved by LedgerX to participate in
LedgerX liquidity programs may be offered fee reductions as part of the program. No such programs are currently in place.

PLEASE NOTE: For the current fee schedule, please reference https://docs.ledgerx.com/docs/fee-schedule

The post LedgerX files updated fee schedule with the CFTC appeared first on LedgerX.

source https://ledgerx.com/updated-fee-schedule/

A brief overview of custody for bitcoin and other digital assets

As some of you may already know, my name is Bryan Bishop. Some of you know me from the community of Bitcoin Core contributors, but I am also the digital assets bitcoin expert at LedgerX. I would like to offer some current perspective on methods for the storage and custody of bitcoin and other digital assets. The perspective from LedgerX tends to be somewhat unique.

source https://ledgerx.com/digital-assets-overview/

Bubble, Rubble, Same old Trouble

It surprises my friends when I tell them that my wife (also co-founder / president) and I do not own any bitcoin. Zero. We did this years ago to ensure that we were objective and committed to running LedgerX, and not like, sitting on an island somewhere and leaving our investors out to dry. Because […]

source https://ledgerx.com/bubble-rubble-same-old-trouble/