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From solving Mt. Gox to tracing crypto used by child abuse syndicates in Korea, Chainalysis has a long but sometimes controversial history.

Its been more than a decade since 850,000 BTC went missing from Mt. Gox, yet the collapse of the former exchange remains one of the most infamous black swan events of the cryptocurrency ecosystem.

While creditors of the defunct exchange are edging closer to some form of restitution, Mt. Goxs demise ended up playing an important role in the development of tools to identify, track and tackle the illicit movements of funds through the wider cryptocurrency industry.

The search for answers and funds played a key role in the birth of cryptos best-known blockchain analytics and tracing firm, Chainalysis, explains co-founder Michael Gronager.

Close to a decade later, Chainalysis analytics tools are being used by myriad private and public enterprises and institutions. From data analytics to pure law enforcement use cases, the firms services continue to prove influential and sometimes controversial across the industry.

Kraken the Mt Gox case

Gronager is a crypto OG, having previously co-founded cryptocurrency exchange Kraken. He got involved in blockchain analysis after Kraken went looking for a steady banking partner and met a wall of wariness over the lack of visibility in the cryptocurrency ecosystem along with KYC and money laundering concerns.

These conversations with the banks, they all end in the same way. How do you do transaction monitoring? How do you track the funds you receive from someone that you are onboarding online? Gronager tells Magazine.

The collapse of Mt. Gox around the same time presented another unique challenge for Gronager, who was tasked with figuring out what happened to the funds that Kraken and some of its clients had in the defunct exchange.

As explored in the book Tracers in the Dark, Gronager developed the tools that would lay the foundation for Chainalysis, with the nascent firm eventually appointed as the investigative team by Mt. Goxs bankruptcy trustee in 2014. From there, Gronager and his team wasted no time putting the proverbial bits together to trace the missing funds.

Jonathan Levin, the second of three Chainalysis co-founders, also spoke with Magazine at the companys Links conference in the Netherlands earlier this year. The Oxford economics masters graduate highlights the investigation as the starting point of Chainalysis wider service.

We were given the Mt. Gox investigation, which was the largest bankruptcy case in crypto history, and that really was about following the money. If its all on the blockchain, how is it that no one can find it? And so, you know, we worked it out and cracked that case.

Two Russian nationals would eventually be indicted in June 2023 by the United States Justice Department for allegedly hacking and laundering some 647,000 BTC from Mt. Gox. The Internal Revenue Service Criminal Investigations unit, which makes use of Chainalysis tools, is assisting in ongoing investigations.

Helping trace the movements of Bitcoin held by Mt. Gox proved that Chainalyis had the tools to solve complex cryptocurrency movements. Gronager also realized this was a service the worlds top crime-fighting institutions were crying out for.

I realized in conversation with other people from the industry that worked with law enforcement that they had no clue. They didnt know how to solve these things.

The customer base grew rapidly after onboarding both private and public sector users, including exchanges and law enforcement agencies. As of September 2023, Chainalysis has 1,200 customers from the private sector and over 250 from public sector institutions.

The go-to service for law enforcement 

Chainalysis has become the go-to tracing solution for some of the best-known law enforcement organizations worldwide and has helped the IRS seize an estimated $10 billion worth of cryptocurrency related to criminal investigations. IRS Criminal Investigations (IRS-CI) Chief Jim Lee says the tools it offers are invaluable to trace cryptocurrency and interrogate data in myriad settings, from blockchains to darknet marketplaces.

Think about all the data that I have working for the IRS. It may not be the most, but its the richest. Now I can take all this other data we have and then match it up against the records that I have. I mean, its just incredibly powerful, but it takes time, energy and money. 

Lee was also at the Links conference, participating in open and closed-door conversations with various governmental agencies and businesses in Amsterdam.

Gronager was reluctant to single out a stand-out investigation made possible with Chainalysis blockchain analytics, considering that its services have helped solve a litany of high-profile cases from tracing cryptocurrencies that help bust child abuse material syndicates in South Korea to using its tools to help solve headline-grabbing Twitter hacks in 2020 that led to close to $1 million being stolen.

In that high-profile case, Chainalysis tools helped investigators link a Bitcoin scam being promulgated by various hacked Twitter accounts to three perpetrators accused of orchestrating the scheme. The mastermind of the scheme is a juvenile whose identity has not yet been revealed.

12 days after, the case was solved, and thats again showing that you can actually do things really, really fast by following the funds in crypto.

Another highlight was assisting in the recovery of $30 million of the $650-million Axie Infinity hack in 2022, which Gronager believes made a statement to North Korean-linked hackers that crypto-related thefts might not be the cash cow they once were.

Controversy over Bitcoin Fog case

The ability to tie cryptocurrency wallets or funds to a specific person is hugely valuable in criminal investigations.

But the firm is not without its detractors, with critics suggesting that reliance on heuristics or assumptions about unidentifiable wallets can lead to inaccurate tracing and unlawful arrests.

A sizable contingent of Bitcoiners online has argued that this is the case in a legal battle involving the U.S. government and Roman Sterlingov, 35, who stands accused of operating Bitcoin mixer Bitcoin Fog. 

Chainalysis tools were used to identify Sterlingov as the alleged orchestrator of the infamous and now defunct cryptocurrency mixer that the Justice Department claims moved over 1.2 million BTC worth $335 million over a decade.

Detractors argue that the DOJs case made certain assumptions about wallets and credentials allegedly linked to the early Bitcoin adopter and the eventual registration of the Bitcoin Fog domain that was tied to Sterlingov.

Sterlingov attorney Tor Ekeland claims the firms Reactor software is unscientific and unreliable, and flawed assumptions have falsely implicated Sterlingov. He argues that Chainalysis cant identify its error rate. This is junk science that doesnt belong in a federal court, Ekeland told a Sept. 7 court hearing.

Elizabeth Bisbee, head of investigations at Chainalysis Government Solutions, reportedly told the court she was unaware of any peer reviewed scientific papers attesting to the accuracy of Chainalysis Reactor.

The courts will ultimately decide whether there is enough reasonable doubt about Chainalysis methods in the case to convict. Chainalysis would not be drawn in our interviews to comment on any ongoing investigations or cases.

Investigations 90% focused on public blockchains

Despite the controversy, Chainalysis has a lot of happy customers and has played a big role in the recovery of hacked funds. Erin Plante, VP of investigations at Chainalysis, manages a growing team of more than 120 investigators across 11 countries.

Plante, who has a wealth of experience working in cybercrime and financial investigation as a U.S. government contractor, says that 90% of their investigators are tasked with probes into incidents involving public blockchains like Bitcoin and Ethereum. 

The Ronin Bridge investigation was a primary driver for the creation of her team, highlighting the importance of allocating human capital to trace funds in the immediate aftermath of a major hack.

Getting in early and tracing funds early is so important and getting law enforcement involved early is how youre most able to have successful recoveries.

There has also been an evolution in the theme of investigations, with Plante recalling a plethora of darknet investigations around 2019 demanding a lot of their attention. Investigative efforts are now more focused on cybercrimes involving ransomware, national security threats from entities associated with North Korea and sanctions screening of entities involved in Russias invasion of Ukraine.

A key talking point in the conversations in Amsterdam was the inherent traceability of blockchain-based cryptocurrencies despite the advent of token mixing protocols, such as sanctioned Tornado Cash.

Plante notes that it is fairly straightforward to trace stolen funds through cross-chain bridges, with criminals typically converting tokens to ETH and then BTC, which is sent to mixers in an effort to obfuscate funds.

She says that mixers require significant amounts of liquidity to properly obfuscate funds, which has predominantly left Bitcoin mixers as the main option for criminals to launder money.

Chainalysis has a dedicated data intelligence team using specific tools to identify mixers using an algorithm that clusters wallets that are associated with the mixer service. An example of the algorithm at work was helping cluster some 50,000 addresses that were linked to the now sanctioned Sinbad mixer.

Between December 2022 and January 2023, North Korea-linked hackers sent 1,429 BTC worth $24.2 million to the mixer.

Plante reveals that Chainalysis had its clustering algorithm independently confirmed by a separate, covert FBI investigation that had been making use of dusting to trace how funds were being obfuscated by Chipmixer, another service that is widely believed to be the direct predecessor of Sinbad and its funds. Chipmixer was shut down in March 2023 over allegations that it had facilitated $3 billion in money laundering.

We didnt know the FBI was doing that, but it was picked up in our clustering, which verified the cluster. That verification, thats very cool. That one will probably go to court, which is why we dont talk about it.

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If you’re not transforming your business to take advantage of AI now, you’ll be left behind, says Easy Translate boss Frederik Pedersen.

The launch of generative AI products over the past nine months has the world talking about how it will change the future. Many are frightened. Others are excited about the opportunity.

A report last month from Next Move Strategy Consulting predicts the AI industry will grow 20x in the next seven years, creating a $2 trillion business, up from its current value of $100 billion. It might sound like wild hype, but other analysts from McKinsey, Morgan Stanley and BlackRock all map out a similar trajectory. AI is here to stay, and a lot of human lives will be upended. But its also the chance of a lifetime.

Frederik Pedersen, the co-founder of Danish AI company EasyTranslate and son of one of Denmarks most famous men, is approaching the future head-on.

I have been saying for a long time that translation is dead and AI has killed the industry as we know it, but that hasnt gone down particularly well with my competitors. Now, however, those same people are listening and are realising that they may be too late if they want to transform their business.

Son of Danish politician Klaus Riskr Pedersen

Its not easy to be the child of a powerful person, as has been recently and brilliantly illustrated by the TV series Succession. If theres a Logan Roy in the family, its difficult for the child to be their own person.

Some crash and burn; some, such as singers Justin Bieber and Miley Cyrus, try to shock their parents by being outlandish and independent. Its rarely a good look.

Others, however, do it in smarter ways and emerge from that parental shadow by adopting different mechanisms to build their own reputation. 

In the case of Pederson, now 35, it was technology that enabled him to do so. First, with translation software, and now, generative AI has overtaken it.

His dad, Klaus Riskr Pedersen, is a controversial Danish political party leader, entrepreneur, businessman and author. Everybody in Denmark knows his name.

His chequered career includes being a member of the European Parliament for the Liberal Party, writing books, developing, building and selling around 15 companies over three decades. He set up his own political party in 2018.

But there have been controversies. He has several convictions for fraud and has spent different spells in jail, as well as splitting Danish public opinion and having the social life that goes with such apparent conviviality. 

At first, (Frederik) Pedersen suffered. In and out of schools, he tried to find a way of acceptance and struggled. He didnt make it to university, but he did know about technology and became interested in its power and consequently found a way to plow his own furrow.

It took me some time to find a direction, but slowly I realized that the world was all about communication. I knew I was from a privileged family, but educators always seemed to have a lack of empathy and communication when I was a child. I was made to feel different, and it was a difficult place to be.

But I came through it, and those life lessons set me up for all the changes that life throws at you. So I set up a translation company, and now Im pivoting the company into generative AI because of the huge opportunity it offers humanity, not least the same elements of communication, says Pedersen.

Early access to OpenAIs ChatGPT

The AI light started to dawn on him back in 2020.

That year, Pedersen applied to the Danish Innovation Fund for a 65,000 euro grant to create a content generator engine that would enable him to create a new form of translation:

I realized that the biggest issue in e-commerce when it came to languages was not translation in itself, but creating localized content for retailers different products that customers could relate to, he explains, adding the company spent the money to train neural networks to create these product descriptions.

Also read: AI Eye Real uses for AI in crypto, Googles GPT-4 rival, AI edge for bad employees

A neural network is a type of machine learning process called deep learning that uses interconnected nodes or neurons in a layered structure that resembles the human brain.

We branded it content-as-a-service and couldnt believe we were one of the first companies to do it, he says, though it ended up proving the old adage that being early is the same as being wrong.

Ultimately we were ahead of the technology and while our technology could build sentences, it just wasnt good enough for our customers.

This first effort was not wasted time and money, however, as it meant the company was able to hit the ground running when large language models were released publicly. EasyTranslate obtained early access to ChatGPT because it already had an account with OpenAI and was able to adopt and execute the technology instantly.

From that point, EasyTranslate pivoted to a generative AI content future based on Pedersens thesis that traditional translation was indeed dead.

Translation meets technology

It was not the first change in direction for Pedersens company. Formed in 2010 without venture capital, the translation service grew quickly.

In 2016, it went after bigger fish and started offering interpretation services to the Danish government after realizing there was an opportunity with the launch of Apples FaceTime. According to Pedersen, interpreters were super-expensive, inefficient and slow, and travel for in-person events wasnt exactly climate change-friendly. 

Pedersen created a video interpretation app that streamlined costs and increased efficiency by offering a marketplace and matching service for interpreters as well as remote interpreter services. 

Danish municipalities signed up for the service, including the Danish Ministry of Justice, recognizing that bringing an interpreter to a court was a very expensive business, especially due to the often last-minute nature of such needs.

Danish operation a success, but the patient died

At its height, the company was running 1,000 interpretation meetings a day, and between 2017 and 2019, it was responsible for more than 70% of the Danish governments interpretation business.

However, Pedersen says the Danish government had never outsourced such business, and the relationship turned sour.

It was a very mutual and fruitful relationship for a long time, but we realized that working with governments was more difficult than we imagined. It was like the cliche of a heavy tanker not being able to turn around.

Again, it was the first learning curve for me. Yes, our data processing wasnt as good as it could have been and working with antiquated systems and reasoning was very difficult.

Eventually, the Danish government decided they didnt want to carry on with our relationship. It was hard at the time, but I still believe we succeeded, and we learned a lot, he says. 

Lets just say, the operation was a success, but the patient died. There was also a lot of opposition from the strong Danish trade unions who thought we were putting people out of jobs.

But it was not about putting people out of jobs, it was working with technology in the same way we work with AI now. Our interpreters who decided to join our community were extremely happy with our software. They said it was like having a PA that coordinated their calendar and ensured them productive days with the highest possible earnings they managed to increase those earnings.

Impact of AI on jobs

The impact of AI technology on employment is a source of great anxiety for many, with some predicting entire industries will be wiped out, while others suggest jobs will change and evolve rather than disappear.

A recent study by the International Labour Organization found that women will be disproportionately affected by automation, with around 7.8% of jobs held by women in high-income countries (or 21 million) likely to be automated, but only 2.9% of jobs held by men (9 million).

Translation is a highly gendered industry too, with women accounting for around 67% of translators.

Pedersens thinking about the essential human element in technology be that content generation or generative AI is now central to EasyTranslates business.

Also read: AI Eye Get better results being nice to ChatGPT, AI fake child porn debate, Amazons AI reviews

He believes that the combination of humans and AI is more powerful than just letting the AI do everything, using the example of a hard-working high school student who was angry at classmates for using AI to cheat.

Instead of cheating herself, she asked ChapGPT to mark her already-written essay. It sorted out the grammar and typos, and it gave her extra resources and links to improve her work beyond that of the cheater.

In business, everybody is looking for the magic of balance in the marketplace, that sweet spot where pricing, innovation and technology are aligned. We are also doing that when it comes to AI and humans; we want that magic balance there as well, he says.

Humans still required in the loop

He cites humans in the loop as the way forward for humans and machines. Generative AI can do the heavy lifting, and humans can finish and finesse the job. It creates content in any language generated by AI but enhanced by humans.

There are others in business, such as Reuters, who also profess the humans in the loop phrase. Again, Ive been saying for a long time that this is the way forward to make both technology and humans better.

By harnessing the power of both and increasing machine learning in the process, I believe that the current dominance of LLMs will be replaced by small language models that can be tailored exactly for the customer open source generative AI that will be the future.

Thats what were planning for and how the whole AI sector will play out. Those companies that are prepared for that will prosper; those who arent will fail, he says.

Since Pedersens pivot to AI at the end of 2022, there has been increased investor interest in EasyTranslate, and the company raised 2.75 million euros earlier this year

We think that weve been ahead of our time, and that thinking has led us to embrace AI and take us to the next level. AI itself is just the mirror of what humanity has already created; AI is really the technological history of human knowledge.

I think its obvious that the two are perfectly compatible, that magic balance, so as generative AI evolves, so will those humans in the loop. Nobody with a good and adaptive brain will lose their job; their jobs and roles will be better and more creative, he concludes.

His father should be proud.

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How Maker, The Sandbox and Near are using AI in crypto, plus terrible workers benefit most from AI and Google’s GPT-4 rival nears release.

AI and crypto isnt just a buzz phrase

AI Eye has been out and about at Korean Blockchain Week and Token2049 in Singapore over the past fortnight, trying to find out how crypto project leaders plan to use AI.

Probably the most well-known is Maker founder Rune Christensen, who essentially plans to relaunch his decade-old project as a bunch of sub-DAOs employing AI governance.

“People misunderstand what we mean with AI governance, right? We’re not talking about AI running a DAO,” he says, adding the AI wont be enforcing any rules. The AI cannot do that because it’s unreliable.” Instead the project is working on using AI for coordination and communication as an Atlas to the entire project, as theyre calling it.

“Having that sort of central repository of data just makes it actually realistic to have hundreds of thousands of people from different backgrounds and different levels of understanding  meaningfully collaborate and interact because they’ve got this shared language.”

Near founder Illia Polosukhin may be better known in AI circles as his project began life as an AI startup before pivoting to blockchain. Polosukhin was one of the authors of the seminal 2017 Transformer paper (“Attention Is All You Need”) that laid the groundwork for the explosion of generative AI like ChatGPT over the past year.

Polosukhin has too many ideas about legitimate AI use cases in crypto to detail here, but one hes very keen on is using blockchain to prove the provenance of content so that users can distinguish between genuine content and AI-generated bullshit. Such a system would encompass provenance and reputation using cryptography.

“So cryptography becomes like an instrument to ensure consistency and traceability. And then you need reputation around this cryptography, which is on-chain accounts and record keeping to actually ensure that [X] posted this and [X] is working for Cointelegraph right now.”

Sebastien Borget from The Sandbox says the platform has been using AI for content moderation over the past year. “In-game conversation in any language is actually being filtered, so there is no more toxicity,” he explains. The project is also examining its use for music and avatar generation, as well as for more general user-generated content for world-building.

Meanwhile, Framework Ventures founder Vance Spencer outlined four main use cases for AI, with the most interesting by far training up AI models and then selling them as tokens on-chain. As luck would have it, Frameworks has invested in a game called AI Arena, in which players train AI models to compete in the game.

Keep an eye out for in-depth Magazine features outlining their thoughts in more detail.

AI is for communists?

Speaking of AI and crypto, are they pulling in opposite directions? Dynamo Daos Patrick Scott dug up PayPal founder Peter Thiels thoughts on AI and crypto in his forward to the re-release of the 1997 non-fiction book The Sovereign Individual, which predicted cryptocurrency, among other things. In it, Thiel argues AI is a technology of control, while crypto is one of liberation.

“AI could theoretically make it possible to centrally control an entire economy. It is no coincidence that AI is the favorite technology of the Communist Party of China. Strong cryptography, at the other pole, holds out the prospect of a decentralized and individualized world. If AI is communist, crypto is libertarian.”

From Peter Thiel’s new 2020 preface to The Sovereign Individual. pic.twitter.com/cWzfgyUqfY

Patrick Scott | Dynamo DeFi (@Dynamo_Patrick) September 17, 2023

Roblox lets users build with AI

Roblox has unveiled a new feature called Assistant, which will let users build virtual assets and write code using generative AI. In the demo, users write something like “make a game set in ancient ruins” and “add some trees,” and the AI does the rest. It’s still being developed and will be released at the end of this year or early next year. The plan is for Assistant to one day generate sophisticated gameplay or make 3D models from scratch.

Terrible workers benefit most from AI

The worst workers at your place of employment are likely to benefit the most from using AI tools, according to a new study by Boston Consulting Group. The output of below-average workers improved by 43% when using AI, while the output of above-average workers improved by just 17%.

Interestingly, workers who used AI for things beyond its current abilities performed 20% worse because the AI would present them with plausible but wrong responses.

Google Gemini gears up for release

Googles GPT-4 competitor is nearing release, with The Information reporting that a small group of companies has been given early access to Gemini. For those who came in late, Google was seen leading the AI race right up until OpenAI dumped ChatGPT on the market in November last year (arguably before it was ready) and leaped ahead.

Google hopes Gemini can best GPT-4 by offering not just text generation capabilities but also image generation, enabling the creation of contextual images (rumors suggest its being trained on YouTube content, among other data). There are plans in future for features like using it to control software with your voice or to analyze charts. Highlighting how important Gemini is, Google co-founder Sergey Brin is said to be playing an instrumental role in the evaluation and training of the models.

AI expert Brian Roemmele says hes been testing a version of Gemini and finds it “equivalent to ChatGPT-4 but with newly up to the second knowledge base. This saves it from some hallucinations.”

Google CEO Sundar Pichai told Wired this week he has no regrets about not launching its chatbot early to beat ChatGPT because the tech “needed to mature a bit more before we put it in our products.”

“It’s not fully clear to me that it might have worked out as well,” Pichai said. “The fact is, we could do more after people had seen how it works. It really won’t matter in the next five to 10 years.”

AI meets 15-minute cities

Researchers at Tsinghua University in China have built an AI system that plans out cities in line with current thinking about walkable 15-minute cities that have lots of green space (please direct conspiracy theories about the topic to X).

The researchers found the AI was better at tedious computation and repetitive tasks and was able to complete in seconds what human planners required 50 to 100 minutes to work through. Overall, they determined it was able to improve on human designs by 50% when assessed on access to services, green spaces and traffic levels.

The headline figure is a bit misleading, though, as the finished plans only increased access to basic services by 12% and to parks by 5%. In a blind judging process, 100 urban planners preferred some of the AI designs by a clear margin but expressed no preference for other designs. The researchers envisage their AI working as an assistant doing the boring stuff while humans focus on more challenging and creative aspects.

Stephen Fry is cloned

Blackadder and QI star and much-loved British comedy institution Stephen Fry says he has become a victim of AI voice cloning.

On September 14, Fry played a clip from a historical documentary he apparently narrated at the CogX Festival in London last week but revealed the voice wasnt him at all. I said not one word of that it was a machine, he said. They used my reading of the seven volumes of the Harry Potter books, and from that dataset an AI of my voice was created, and it made that new narration.

Training AI to rip off the work of actors and repurpose them elsewhere without payment is one of the key issues in the current actors and writers strike in Hollywood. Fry said the incident was just the tip of the iceberg, and AI will advance at a faster rate than any technology we have ever seen. One thing we can all agree on: its a fucking weird time to be alive.

How not to cheat using ChatGPT

The sort of academics drawn to cheating using ChatGPT appear to be the sort of people who make dumb mistakes giving that fact away. A paper published in the journal Physica Scripta was retracted after computer scientist Guillaume Cabanac noticed the regenerate response in the text, indicating it had been copied directly from ChatGPT.

Cabanac has helped uncover hundreds of AI-generated academic manuscripts since 2015, including a paper in the August edition of Resources Policy, which contained the tell-tale line: Please note that as an AI language model, I am unable to

All Killer No Filler AI News

Meta is also working on a new model to compete with GPT-4 that it aims to launch in 2024, according to The Wall Street Journal. It is intended to be many times more powerful than its existing Llama 2.

Microsoft has open-sourced a novel protein-generating AI called EvoDiff. It works like Stable Diffusion and Dall-E2, but instead of generating images, it designs proteins that can be used for specific medical purposes. This is expected to lead to new classes of drugs and therapies.

Defense contractor Palantir, along with Cohere, IBM, Nvidia, Salesforce, Scale AI and Stability, have signed up to the White Houses somewhat vague plans for responsible AI development. The administration is also developing an executive order on AI and plans to introduce bipartisan legislation.

Sixty U.S. senators attended a private briefing recently about the risks of AI from 20 Silicon Valley CEOs and wonks, including Sam Altman, Mark Zuckerberg and Bill Gates. Elon Musk told reporters afterward that the meeting “may go down in history as very important to the future of civilization.”

ChatGPT traffic has fallen for three months in a row, by roughly 10% in both June and July and a further 3.2% drop in August. The amount of time users spend on the site fell from 8.7 minutes on average in March to seven minutes last month.

Finnish prisoners are being paid $1.67 to help train AI models for a startup called Metroc. The AI is learning how to determine when construction projects are hiring. 

The U.S. is way out in front of the AI race, with 4,643 startups and $249 billion of investment since 2013, which is 1.9 times more startups than China and Europe combined.

Video of the week

Writer and storyteller Jon Finger tried out the HeyGen video app, which is able to not only translate his words but also clone his voice AND sync up his lip movements to the translated text.

Testing out @HeyGen_Official translation on French and German. I dont speak either language so let me know if it sounds natural if you do.
I hope if you pay you can turn off the color correction.
It didnt work on my phone so I had to upload on my pc.https://t.co/FMJp9sJEBI pic.twitter.com/iF5eONAQ3c

Jon Finger (@mrjonfinger) September 11, 2023

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Many contend that DAOs have failed to deliver on their promises, but developers are coming up with novel solutions.

Ask 10 different people to define a decentralized autonomous organization (DAO), and youll likely get 10 different definitions. But there is at least one thing most agree on: DAO governance is a mess. At best, its an experiment in the works.

According to DeepDAO, DAOs today handle a whopping $17.2 billion in value. Yet many DAOs managing millions of dollars have proven hopeless at heeding even the most basic of lessons in business management 101. One does not have to look too far in the annals of crypto history to recall major DAO catastrophes.

Recall Wonderland DAO, an Olympus fork that birthed arguably one of the most notorious scandals in DAO history. At its peak, Wonderland enjoyed a near $2 billion in total value locked, which came to a skidding halt in January 2022 when its treasury manager who went by the pseudonym 0xSifu turned out to be none other than Michael Patryn, co-founder of the failed crypto exchange QuadrigaCX and a convicted criminal for financial fraud.

Or consider a more recent exploit with the Solana-based trading protocol Mango Markets. In October, attackers exploited the DAOs loosely governed parameters to acquire a disproportionate chunk of the DAOs MNGO tokens. In an absurd turn of events, the attacker proceeded to propose on governance forums an offer to return half their heist in exchange for the DAO not to prosecute him, then voted Yes on it with the stolen tokens. The vote eventually failed, but Mango still ended up paying off $47 million to the attacker.

Case studies of DAO failures are not exclusive to outrageous one-off spectacles like the ones above. Despite the Libertarian rhetoric of self-sovereignty and self-custody, dozens of DAOs that kept their monies on centralized exchanges also saw their treasuries implode during the carnage of 2022s blow-ups like FTX.

The truth is, DAO governance isnt easy. Founders have to balance a multitude of priorities, like solving voter apathy, committing to decentralization and product market fit. A best practices manual doesnt exist, and where there is one, its not widely shared. 

The good news? Die-hard DAOists are hard at work to rid these problems, one experiment at a time. 

The problem of voter apathy

Take voter apathy, for instance, arguably DAO governances most widespread problem. As a decentralized community, tokenholders must vote if they desire resilient protocols. But token holders dont vote because it takes time. When voters do turn up at the voting booth, or Snapshot, they lack the expertise or context to make an informed decision. Worse still, voters who care may not even be aware of a vote until its over.

To combat voter apathy, a burgeoning landscape of DAO infrastructure tools has been developing tools to streamline DAO voting into one-stop platforms. Products such as Senate and Goverland are trying to aggregate governance proposals across dozens of DAOs with direct integration on popular voting platforms, such as Snapshot and Tally.

Senate founder Paulo Fonseca tells Magazine, At present, its cumbersome for most DAOs to see off-chain and on-chain voting separately on different platforms. One of our products key value-adds is simply for users to consume all the information on one page.

Because governance proposals typically open to vote for a limited duration, Goverland, in turn, is putting a strong emphasis on mobile integration so voters are notified in time. It all starts with an in-time notification. With mobile, its far more convenient to help boost voter participation, Goverland founder Andrey Scherbovich tells Magazine.

Others believe that for DAO governance to improve, it needs to go beyond pure token-based voting based on duty. JokeRace, a voting protocol that aims to make governance fun, was designed with this goal in mind.

Instead of expecting thousands of tokenholders to vote, JokeRace is exploring the use of incentivized contests that allow governors to gate voting proposals in any way possible via a highly customizable allowlist, from a fully public forum to select DAO participants. Co-founder Sean McCaffery tells Magazine:

Many DAO projects want to give non-financial utility to their token. What we are doing is opening a horizon on top of simple token voting and incentivizing people to hold tokens for more than just speculative reasons.

For a highly technical proposal that wants to draw on the wisdom of experts or loyal fans, a creator can gate the vote around criteria, such as minimum liquidity provision for three months or holders who have held the token for at least a year. It enables everything from low-commit fun GM contests to serious proposals where only active contributing DAO participants can vote, he adds. 

In short, JokeRace strives to reimagine governance right down to the bottom social layer. 

Delegate voting

To thwart low voter turnouts, DAOs are also turning to the real world of public governance for wisdom. One such tried-and-true method that has caught on in the past year is delegation, where tokenholders entrust voting rights to delegated politicians or stewards who would vote on their behalf.

From a PR perspective, delegation is nice in that DAOs get to have their cake and eat it, too. It allows the DAO to scale faster without having to pass all decisions through months of debate. DAOs also get to deflect the criticism of insufficient decentralization since tokenholders are technically expressing a demonstrated preference to vote, albeit indirectly.

Most major DAOs today have embraced delegation voting, and while its helped voter apathy to some extent, its hardly a silver bullet. Delegation voting in itself has surfaced with problems. For instance, delegation can descend into a popularity contest where voters simply assign tokens to popular Twitter influencers or familiar company names.

An experiment that could be worth trying is to have delegates vote specifically on their domain expertise rather than making them responsible for voting on every single DAO decision which range from complex technology to finance too wide of a range for robust decision making, Kate Beecroft, governance lead at Centrifuge, tells Magazine.

Moreover, delegate voting suffers from apathy in itself. Delegates themselves dont turn up on election day. According to Karmas research, at least 53% of delegates in major DAOs have failed to even cast a single vote. Or it could lead to situations where voting decisions are the result of collusion made behind closed doors for mutual political gain.

For instance, a16z famously delegates voting powers to blockchain university clubs. While the venture fund claims that student clubs are free to participate in governance however they see fit, its not immediately clear what the relationship between these entities is.

Gitcoin founder Kevin Owocki insists that delegating voting is a step forward for DAO governance but also acknowledges its shortcomings. Gitcoin launched a fairly egalitarian airdrop to around 25,500 holders in 2021, but its decision to incorporate delegate voting saw a concentration of voting power back into the hands of only about 100 delegates. On top of that, delegates cycle in and out of activity over time, and even getting tokenholders to reallocate their delegation from inactive delegates every half a year was difficult.

The problem that confronted us was keeping delegates engaged, accountable and slowly changing the DAO into a liquid democracy of dedicated Gitcoin community members that cared about our core vision of decentralized public funding, Owocki states.

These problems are being recognized by builders in the DAO tooling, trying to improve delegate accountability. For example, tools like Karma have emerged to create transparency around delegation voting by aggregating all the information about delegates, including their voting weight, forum activity and voting history, on one page. 

The DAOmeter dashboard, a DAO maturity rating index by StableLab, also serves as a useful DAO public good for assessing the decentralization journey of DAOs.

StableLab founder Gustav Arentoft tells Magazine, During the bull market, lots of DeFi DAOs branding themselves as decentralized finance suffered exploits because they lacked even basic governance. The operational structure of these protocols was extremely opaque. As an individual, assessing the decentralization of DAOs was difficult and requires some form of standardized parameters, which is what DAOmeter tries to provide. 

Ultimately, despite the popular notion that DAOs are autonomous, the reality is that much of it can never be fully autonomous and enforceable on-chain.

You can have all the on-chain votes youd like, but lots of DAO operations come down to the social layer. Who owns the GitHub account? Who controls the DNS [domain name system]? Who is in-charge of handing over a password to the elected personnel? says JokeRaces McCaffery.

Growth

While DAOs struggle to decentralize, many seem to forget that they are still fundamentally profit-oriented organizations. That means that DAOs cant afford to forget about revenue and growth.

To scale, DAOs centralize some decision-making in the hands of experts. One trendy idea in the past year that DAOs have been experimenting with is working groups. In DAO nomenclature, they also go by subDAOs. Metropolis (previously Orca Protocol) calls them pods. Maker calls them core units, and Gitcoin calls them workstreams.

These structures resemble the ubiquitous M-shaped organizational structures in modern capitalism today. Historically, the capitalist firm was a centralized U-shaped firm with decision-making power concentrated in the hands of a few top executives. As the firm expanded into regional markets, it grew increasingly incapable of managing the rapidly increasing scope of complex administrative decisions.

To remain nimble and adapt as the firm grew, the modern capitalist firm underwent a structural decentralization, empowering mid-level managers with the autonomy to run the local branch as they deem fit. Pioneered by General Motors president Alfred Sloan in the 1920s, this crucial organizational innovation allowed firms to overcome knowledge problems and also aligned the incentives and rewards to lower management, effectively allowing them to work as mini-entrepreneurs within a large corporation.

DAOs are witnessing the same tendency toward a similar organizational structure, except that its evolving bottom-up from a dispersed, decentralized status quo.

James Waugh, co-founder of Fire Eyes DAO, tells Magazine, In advising many DAOs, we sometimes recommend the setup of working groups to focus on certain areas that are hypercritical, particularly those involving technical work where smart contracts need timely upgrading.

Yet its entirely common for redundant working groups to exist and to be a complete waste of time, however. Whether or not theyre efficient really depends on the kinds of people in them.

Decentralization maxis also complain that too many working groups and managerial experts might mean less transparency over how DAOs operate. Its a complaint that isnt completely without merit. 

In the early days of Bankless DAO, many internal project managers requested for funds then delivered work of questionable value. We implemented a variety of solutions like reputational systems within Discord, KPI-based funding and timelocks to deter rent seeking, Frogmonkee, an early core contributor of Bankless DAO, tells Magazine.

Ultimately, DAO governance boils down to the fact that DAOs are made up of a pluralistic archipelago of individuals with different value preferences and priorities. Some wish to pump their holdings in the short-term, while others are interested in the long-term health of the project. Some are genuinely altruistic actors, and then there are delegates exchanging favors under the table by agreeing to vote on each others proposals.

Dual governance structures

In such a marketplace of conflicting values, a clear separation of powers can help foil potential insider collusion. Some DAOs are actively experimenting with such dual governance models, such as Optimisms Token House and Citizen House. OP tokenholders and delegates occupy the former, while the latter is an identity-based community of citizens with soulbound tokens that acts as a check and balance on the Token House.

Shawn Grubb, a delegate at Gitcoin, tells Magazine, Optimisms experiment with bicameral houses is a smart way to segregate the various stakeholder groups: the tokenholders who care about pumping their bags, the active contributors with a job, and the broader community who believes in Optimism and seeks project funding. The key is balancing the power of different stakeholder groups rather than the plutocratic status quo, where plutocratic tokenholders reserve only the power. 

Optimism isnt alone. In recent months, a group of Lido insiders have taken it upon themselves to push for a similar dual-governance model. The problem stems from Lidos wildly successful liquid staking product, stETH, which controls a market share of 32% staked ETH. This poses a looming threat to the underlying security of the Ethereum layer 1, as it comes dangerously close to the 33% consensus threshold, which could theoretically allow Lido to exercise control over Ethereums consensus layer. In June 2022, Lido DAO proved that self-regulation was not forthcoming after it unanimously shot down a vote to self-limit its stake flow.

Lidos proposed dual governance structure would, in theory, bring the DAO back into alignment with the interests of the Ethereum protocol. This is done by granting Lido users (stETH holders) veto power against the DAO, a feature that competitor liquid staking protocol Yearn.finance has also implemented.

For Lido, dual governance (and implementing staking routers) should be its next logical steps. It alleviates many of the current concerns around the DAO, said Hasu on the Bell Curve podcast.

Finding a balance

In sum, DAO governance isnt easy. Driving growth while committing to decentralization is no small feat, and it will take many years before governance reaches equilibrium.

Yet the philosophical principles that blockchain organizations embody decentralization, transparency, egalitarianism are all values very much worth striving for. After all, its unheard of for a multimillion-dollar company in the traditional business world to be debating operational strategies openly on a forum or that allows anyone to enter and begin contributing without going through a tedious interview process.

Even in its imperfect state, the open and transparent context in which DAOs operate is perhaps the biggest bulwark against the centralization of power. 

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Famed Japanese artist Takashi Murakami’s new exhibition comments on digital ego and the shaky status of the NFT industry.

Even if you arent personally familiar with famed Japanese contemporary artist Takashi Murakami, you have surely seen his work.

The pop artists brightly colored signature characters have appeared on everything from limited edition Louis Vuitton bags to Supreme shirts to Vans skateboarding shoes.

Having collaborated with celebrities like Drake, Kanye West and Billie Eilish, and institutions such as the Museum of Modern Art and Gagosian, Murakami is, without a doubt, one of the biggest conventional artists to try their hand at making nonfungible tokens (NFTs). Despite this, his projects still havent blown up to the extent of other prominent contemporary artists like Beeple.

Many are convinced that is set to change, claiming Murakamis flowers are well on their way to becoming as iconic as CryptoPunks and Bored Apes. After a hotly anticipated but ultimately disappointing NFT launch that coincided with the 2022 crypto collapse, the artist is finally having another go at the medium. A new exhibit at San Franciscos Asian Art Museum shows how Murakami creates original tokens from scratch.

High art and low art

While many take Murakamis flowers at face value, there is more to them than meets the eye. Inspired by the postwar Japan in which he grew up, these deceptively jolly icons critique the perversion and violence that underscore the countrys otaku and kawaii subcultures.

The stylized imagery of these cultures is becoming increasingly popular in western countries thanks to the export of Japanese manga, anime and video games, and Murakami taking a page out of Andy Warhol’s book exposes the commercialization of these mediums by way of embracing and even exploiting them. His studio isnt so much a studio as it is a full-fledged factory, operated by 25 assistants who help him satisfy the demand for his personal brand.

Unifying Murakamis scattered oeuvre is his Superflat theory, which not only refers to the two-dimensional quality that bridges traditional Japanese visual culture to its contemporary counterparts, but also to the idea that Japan, as a society, makes little distinction between high and low art between the art you find in a museum and the art you find on billboards or the pages of a manga.

This, Murakami says, is in stark contrast to the West, where professional critics decide what kind of creative output deserves to be displayed in galleries and what does not. Presently, NFTs are still largely relegated to the second group a classification he hopes to change.

After finding huge success with traditional media, uncontrollable events and poor timing conspired against the artists NFT efforts. Murakamis first flowers launched right before the downfall of FTX, causing their value to plummet from $260,000 to just $2,200 per token on OpenSea. Displaying a level of humility seldom seen in the worlds of both art and crypto, Murakami paused his sales and apologized to his investors.

He followed up this apology with a lengthy statement saying he would take a step back from the NFT marketplace and figure out how to create digital art that matched the value of its real-world counterparts. He asked himself the kinds of questions that confuse the non-initiated. Should he use ERC-721 or 1155? Did he need IPFS or independent smart contracts? What about opening his own physical storefront?

Unfamiliar people

The crypto collapse left a mixed impression on Murakami, who will be exploring his frustration with the volatility of the metaverse in an exhibit he calls Unfamiliar People Swelling of Monsterized Human Ego. Running from Sept. 15, 2023, until Feb. 12, 2024, it largely consists of mixed media pieces depicting humanoid monsters.

Influenced by traditional ukiyo-e woodblock prints, his familiar kawaii style, and even Spanish painter Francisco Goyas nightmarish painting Saturn Devouring His Son (which a young Murakami remembers seeing on a museum trip with his parents), the distorted figures presented in Murakamis exhibit comment on the corroding influence of digital technology: the relentless self-promotion on social media and the adulterating anonymity of internet message boards.

His core theme the swelling ego not only applies to toxic online discourse but also to the mismanagement of media personalities like Elon Musk, Mark Zuckerberg and Sam Bankman-Fried, whose irresponsible behavior has tarnished the reputations of entire industries and technologies.

Despite his negative experiences with making and selling NFTs, Murakami isnt pessimistic. He believes the crypto collapse, far from bursting an already oversized bubble, will go down in financial history as little more than a temporary setback.

Both economically and conceptually, he tells Magazine, the current decline of virtual currencies simply marks a shaky transitional period. Therefore, I am not worried at all, and am still running several NFT projects. I will continue to bridge the metaverse and the real world in the art scene. He thinks that in the near future, with the rise of young critics and creators who understand the concept, NFT art will become common all at once.

Standing in contrast to Murakamis Unfamiliar People series are various physical reimaginings of his NFTs, including painted renditions of the Murakami.Flowers. Previously sold at Gagosian, Murakami created these paintings to help secure and stabilize the value of his NFTs, whose floor price on OpenSea remains as low as it can be. Some of the paintings, meanwhile, have sold for upwards of $70,000.

Also present at the exhibit is a sculpture of the digital avatars Murakami made in collaboration with RTFKT, a digital fashion and collectible organization known for its work on video game engines, blockchain authentication and augmented reality, in addition to its futuristic sneaker designs.

Inspired by Snapchats Bitmoji, Murakami and RTFKT created over 20,000 character models to represent players in online games, each with uniquely designed eyes, mouths, clothes and even behavioral traits. Murakami describes his sculpture as a cyborg. Not only because it has a reflective silver surface with mechanical patterns etched into it, but also because the digital avatars on which it is based are part human and part machine.

Changing value in contemporary art

When asked if making NFT art is in any way different from making traditional art, Murakami answered: yes and no.

Contemporary art since Marcel Duchamp has clearly been a world of transcendental conceptual art, he says, so I thought that an understanding of the metaverse would come somewhat naturally for the fans of contemporary art. I instantly understood and entered into that worldview, but to my surprise, others didnt follow. I think the big deterrent has been a certain inability to change the value system of the contemporary art world, and a resulting unwillingness to understand NFTs. Right now, these two words are still completely separated.

At the moment, most western critics do not see NFT art as art. They think the imagery is poorly executed and childish, and insist the concept of the metaverse is a fraud, according to Murakami. Their aversion to NFTs fueled in part by self-preservation is so fervent that they reject Murakamis tokens whilst celebrating their painted equivalents. No doubt, the swollen egos of Unfamiliar People contain traces of these individuals as well.

Perhaps the western art world should be more like Japans. There, the destruction of the Second World War and subsequent occupation by the U.S. army completely dismantled the countrys traditional social structure. As a result, says Murakami, Japan found itself in a very unique situation where high art could not be established since there were no elites to claim it as theirs and theirs alone. He adds:

In Japan there is no distinction between high art and low art, and we are bound by the obsession that high art must also be dragged down to the realm of the low and be enjoyable to everyone.

This, paired with the demand for iconography reminiscent of Japanese manga and anime, indicates that Japan should have a rich and vibrant NFT market. However, this is not the case. According to Murakami, plenty of Japanese artists especially manga artists are interested in making the switch, but are prevented from doing so by strict regulations that make such ventures unprofitable.  

The virtual currency ecosystem the Japanese government has thought up, he explains, is so complicated and negative that the manga or anime creators would not be enticed to leave their normal economic sphere. Therefore, there has been no sign of the NFT market developing at all here.

The situation isnt much better in America at least, not right now. Although the crypto world is gradually picking itself up from the FTX fiasco, NFTs are yet to recover. 

After hitting their peak value in January 2022, many tokens plummeted. By September of that year, volumes had all but disappeared and demand had vanished. Murakamis flowers arent the only NFTs raise their floor price; BoredApes and CryptoPunks are in the same boat. 

The current situation is so bad that many NFT creators dont know what to do or where to go next. Murakami is the rare exception, but perhaps that is because as a renowned artist his source of status and income isnt exclusively tied to tokens. For him, creating NFTs is an artistic experiment as much as it is an act of embracing what he (and many others) still believe to be the future of both creativity and commerce.

And Murakami really does believe that. Years after coming up with his idea of Superflat, he argues that the digitization of art has not just verified his theory, but taken it to its logical conclusion:

I believe the era of Superflat has come to an end, at least for the time being, along with the pandemic. The reason is because the full perfection of the web-based society has now been achieved. In other words, the real Superflat society has now become a reality. And with the rise of the metaverse, unknown zones have emerged that will add even more depth to that definitively flattened society; we could say we are now heading for a hyper-Superflat world.

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Crypto OGs Brock Pierce and Tim Draper and other experts provide essential advice on how to protect your hard-earned stack.

Crypto is a volatile place. Money can be as easily lost as made through the ups and downs of Bitcoin and the wider market, and there are massive decisions to make. Should you just hodl invest and do nothing or actively trade the market? How many coins should your portfolio hold? Self-custody or keep your funds on an exchange with pre-determined stop losses?

Basically, how do you protect your stack from the million and one things that can go wrong? We asked Bitcoin OGs and experts in the space for their advice and opinions.

Walk before you can run

When faced with the question of how best to protect your crypto, OG Brock Pierce is circumspect. The former presidential candidate and co-founder of Tether and Block.one points out that not everyone is in the same place.

Early noobs looking to begin their journey might go to Coinbase and purchase their first $20 or $50 worth of crypto, and its not an investment in crypto, but an investment in yourself. However, the moment you have a material investment and that is a different amount for everybody then its important to understand the basics of hodling and investing in crypto,” he says.

Its always better to walk before you can run, to walk in baby steps and dont let FOMO (fear of missing out) cloud your judgment. This is a marathon, a long game, so take you time and be informed.

Self-custody for safety

Pierce repeats the mantra, “Not your keys, not your coins.” This is one of the most widespread pieces of wisdom in the world of crypto, where people are encouraged to take responsibility for holding their own crypto rather than outsourcing it to an exchange that can get hacked.

But there are dangers with this approach, too, and if something goes wrong, there is no centralized bank authority to reset the passwords or refund money lost to scams. Its like holding cash under the mattress the entire responsibility rests with you and is referred to as self-custody in crypto.

Self-custody is the key to safe trading, according to Itai Avneri, deputy CEO and chief operating officer at INX Limited, the first and only fully regulated, end-to-end platform for listing and trading both SEC-registered security tokens and cryptocurrencies.

Self-custody is the key here. Especially when thinking about digital securities and not just crypto. Trading on a centralized exchange that provides the confidence and protection of regulation and, at the same time, trading in a decentralized manner when the customer holds his / her own assets. Generally speaking, your wallet, your keys, your assets. This is the best way to protect yourself from a sudden hold on withdrawals or other events we witnessed in the past year, Avneri says.

But Bitcoin billionaire Tim Draper of Draper VC says that while thats true, institutions arent keeping funds on a Ledger in a drawer.

I no longer believe that my dollars in the bank are very safe. They are subject to political winds and inflation,” he says.

The safest personal money is BOLBitcoin on Ledger. The safest institutional money is BAC Bitcoin at Coinbase, Draper continues.

Diversification: Dont just buy eggs

Pierce points out that people advanced in sophistication can look at investigating yield farming or decentralized finance. This allows people to not only protect their crypto but also to look at increasing it through earning yields but again, this involves risk.

He emphasizes the importance of investing in your own education and notes the importance of diversification.

If you are participating in those markets, then you by necessity take on the counterparty risk associated with those platforms, and how you mitigate those risks is through diversification, but not having all your eggs in one basket. If any one asset fell, it wont wreck (rekt) your entire portfolio.

Diversification in crypto is tricky, as Bitcoin and the rest of the market tend to move up and down at the same time. But Pierce warns against putting too much money in more volatile coins, for example, memecoins, in case of a downturn where the pain will be magnified.

Andrew Latham, a certified financial planner based in Rolesville, North Carolina and the director of content for financial websiteSuperMoney.com, echoes Pierces restraint and suggests looking outside of crypto as well.

The key to surviving market downturns is diversification and a disciplined approach. Dont put all your eggs in one basket. Spreading your investments across various asset classes can help cushion against volatility. Keep a disciplined approach to crypto investing, focusing on long-term goals over short-term market fluctuations.

And while crypto investing is often a little bit too interesting for its good, he says successful investing is often the opposite.

As the old adage goes, ‘Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas,’ Latham says.

High-conviction bets

Sometimes, it makes sense to be overweight in a blue chip, market-leading token though, as Warren Buffetts 50% portfolio allocation to Apple shows. There are plenty of Bitcoin-only hodlers, but Lakov Levin, the co-founder of the new DeFi investment platform Locus Finance, leans heavily on Ethereum.

Levin suggests: Ethereum is the blockchain, which is used as the fundament for the financial evolution of the 21st century. It is a hub for hundreds of protocols that build value for its users. Holding Ethereum is similar to holding a fraction of the internet and value it provides to users. It is truly a remarkable financial opportunity.”

Levin notes that Ethereums hodlers can stake their assets and receive 5% APR in ETH itself and points out the “Ethereum blockchain burns fees for each transaction made on the blockchain, which makes Ethereum a deflationary asset.”

I do not think that ever in human history we saw a deflationary asset that generates consistent yield and has potential for such innovation, concludes Levin.

A tool to stop losses

Pierce is sanguine about overall market dumps if you are positioned properly. 

If the market falls by 10%, take the hit using something like a stop loss, and try to recover in the next run.

A stop-loss is a risk management tool that automatically sells a token once it reaches a certain floor predetermined by the user. It is designed to limit losses but can be a blunt tool in the crypto world, where movements of 10% are common and could see all assets dumped as a result.

Levin is cautiously bullish on stop losses, which basically allow traders to close a trading position at a specific price.

The effectiveness of any tool lies in the hands of those who use it. The most important thing about ‘stop losses’ is the feeling of control, which protects from the anxiety of being in the market.

One of the scenarios that stop losses is the management of hypotheses on market behavior. When entering a trade, a trader has a hypothesis of the behavior of the market, which leads to opening a trading position.

Stop losses allow you to pick the price where your thesis is rejected by the market and limit your loss, which is a must thing to have for long-term trading. But ‘stop losses’ do not save from cognitive biases, which heavily affect trading. In this case, a trader may re-enter trade a few times, breaking his own rules under the influence of greed or fear. It is important to have discipline to follow your own rules.

One of the rules that I used when trading is when hit by stop loss, I take a break from trading this asset, says Levin.

Pierce is not an active trader and sees himself more as a long-term participant in the market. He appreciates that market volatility is not a negative thing and that tremendous wealth is made in volatile markets the more movement, the more opportunity.

But it’s not for the faint of heart. You know, youre riding a roller coaster ride almost every day, says Pierce.

Options can protect against extreme volatility

All-time highs and all-time lows. Recent reports in The Wall Street Journal point to SpaceX writing down the value of its Bitcoin holdings by $373 million. It is currently unclear whether SpaceX sold or merely reduced the value of its digital assets in its accounts. This may cause difficulty in the future, as U.S. accounting rules dictate that once written down, the value of Bitcoin on company balance sheets cannot be adjusted upward, even if its price rises.

The subsequent downward movement took many by surprise established investors and newbies alike. What other tools are available to users to protect their crypto? Well, a 50-year-old model created by Nobel-prize-winning professors could be an option.

Options trading gives the trader the right or obligation to buy or sell a specific security on a specific date at a specific price its a contract thats linked to an underlying asset such as a stock or security. Since 1973, options have been priced using the Black-Scholes model originally authored by two university professors. This mathematical equation estimates the theoretical value of assets based on implied volatility, taking into account the impact of time and other risk values. It is to this day regarded as one of the best ways to price an option contract.

Asked if he might consider using a tool like options, Pierce is cagey. He reckons that leverage is the demise of most peoples wealth. Leverage is the use of borrowed funds to increase ones trading position beyond what would be available from one’s cash balance alone.

Be very careful playing with leverage. Its a tool for hedging to try and achieve great gains but can be the thing that creates more problems if you are not a skilled trader.

Pierce has bought into options in the past a few times where he tried to swing for the fences with leveraged option bets.

It’s not worked out well, for me, because one of my problems is I’m so close to the market, that the markets are not as rational.

Pierce quotes the recent SEC/Ripple legal action. He didnt trade on this occasion, but if he had, he would have bet on an altcoin bull run.

It didnt happen. If I had followed my gut, then I would have bought and been wrecked the next day.

As Pierce said, thats why hes not an active trader.

Stop losses and options?

A new protocol called Bumper is launching this month, claiming to provide a safety net for downward volatility. It combines stop losses and options in a way that co-founder Jonathan DeCarteret claims is cheaper and more efficient than both those traditional tools.

Bumpers backtested economic simulations claim a yield improvement of 46.2% over options pricing during the 2022 bear market. This is demonstrated through a historic simulation report audited by Cryptecon and CADlabs.

Decentralised Finance (DeFi) typically has low latency and high frequency of liquidity, which poses certain complexities for the model.

Option desks make great use of pricing risk but have to add their costs on top. Bumper evolves the now half-century-old Black-Scholes equation to leverage all the unique properties of DeFi, such as pooled liquidity, smart contracts and protocol composability. Two years ago, we raised $20 million in funding to create a superior crypto equivalent, says DeCarteret.

Dont fall foul of criminal scams

The membership program Crytolock.ai enables users to save up to 90% of compliance and recovery expenses in case of a crypto breach. Not surprisingly, CEO Roger Ying says to focus on prevention, detection and recovery.

Crypto users need to be educated on ways to prevent, secure and make sure they are not transacting with illicit entities otherwise, they may be implicated in a crypto crime, he says.

Furthermore, there are a growing number of ways to monitor your crypto on the blockchain and be immediately notified of unintended transactions and stop them before they get confirmed. He adds that if you still end up the victim of a hack or rug pull, understanding the necessary processes to recover crypto is very important both in time and expenditure savings.”

Hodling as a safe course

Of course, hodling large-cap cryptocurrencies is probably the safest and easiest way to maintain a position. Pierce recommends using cold storage provided by hardware wallets as a safe way to keep crypto.

Back in the day when I started, we used paper wallets. Youd have a new device, and youd print out the keys, laminate the paper, and chuck it into a safe.

Sorkin is very direct in his hodling actions:

Buy ETH, stake it in Lido, receive LDO and find ways to stake LDO. Otherwise just buy Bitcoin and forget about it completely until late 2024 when halving of BTC happens.

Latham says the key to hodling is patience and conviction. Invest only in cryptocurrencies that you believe have long-term potential and can withstand market downturns. Regularly review your holdings to ensure they still align with your investment goals. Time in the market does beat timing the market, but that only works when you pick cryptocurrencies that dont flop, so its crucial to vet your investments carefully.

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A ragtag group of communists and ZK-rollup fans are working tirelessly to make blockchain games composable and fully on-chain. It’s not easy.

Despite promises of decentralization and trustless ownership, the vast majority of crypto games today are, at best, partially decentralized. Web3 is the branding, but in reality, most are Web2+. Game assets live on-chain, yet the game logic, state and storage remain off-chain on centralized servers.

Why? Simply put, its not easy to build a fully decentralized game on-chain. Blockchains in 2023 are still far too slow for processing the gargantuan number of transactions that video games require. Lattice CEO Ludens tells Cointelegraph:

Building a fully on-chain game right now is a little bit like building video games on a computer from the 1980s. We dont yet have complex on-chain games yet because the blockchains even Layer 2s are not powerful enough right now.

Furthermore, developers have to make important tradeoffs when using blockchain technology to make the game widely accessible to non-crypto audiences.

For instance, Aurorys developers created a hybrid inventory system called Syncspace, which allows players to leave their assets in Aurorys custody, but move them into their Solana wallets if they wish.

Syncspace is Aurorys UX strategy, Julien Pellet, Aurorys infrastructure technical director, tells Magazine. Not every player wants to handle the complexities of a crypto wallet. We accepted that tradeoff by building Syncspace and allowed some assets to live off-chain in order to bring Aurory to a wider audience of non-crypto-native Web2 players

But there are passionate communities of degens interested in full-fat, on-chain autonomous worlds that are built from the bottom up by the players. One group even modded a game to form a communist collective so everyone won the same. Autonomous worlds, as theyre sometimes known, face a lot of hurdles, but given the limitations, the early results are impressive.

How Web3 games started

Web3 games are grappling with a bunch of other issues due to the brief history of the emerging sector. During the last crypto bull cycle, most blockchain games tried to be financial products first and video games second. 

That strategy helped catapult the play-to-earn gaming sector into brief mainstream prominence when token prices were going up. But unfortunately, if the appeal is based on delivering a financial return, then enthusiasm can disappear fast when token prices take a dive. 

Games like Axie Infinity, Pegaxy or Crabada, which once promised spectacular returns for players, have since fallen off a cliff. For Axie, unique active wallets peaked at around 700,000 in November 2021 but now tally more often in the eight to 10,000 range today.

The Metaverse Index (MVI) token, which tracks a collection of major gaming and metaverse tokens, is down 95.6% from its all-time high in November 2021.

In response, Web3 games are now shunning the play-to-earn catchphrase that helped propel the sector to prominence, embracing phrases like play-and-earn or play-and-own, and deemphasizing the profits while focusing on benefits such as the ownership of game assets, or simply how fun the game is.

At the end of the day, the core focus of games should be leisure and entertainment, not delivering a financial return, Aurorys backend tech director Jonathan Tang tells Magazine. 

As Web3 game developers, our job is to think of how to leverage blockchain technology and what it brings to video gaming, while keeping the game fun as a priority.

Some believe the emphasis on financial returns has tainted the industrys image, not least due to an influx of scammers.

Pellet adds: The last bull run attracted scammers that have multiple elaborate strategies such as cloned websites and fake projects to divert millions of dollars from legit players and teams. With Web2 games, its much harder to pull off those types of scams.

Enter on-chain games

Encouragingly, however, a smaller community of builders interested in building autonomous worlds are trying to bring on-chain maximalism to blockchain games.

In contrast to their Web2.5 counterparts, fully on-chain games have their assets, and the game logic, state and storage live on-chain. The game state refers to the current status of the gaming world, such as player progression and the items they possess, while game logic simply refers to the rules of the game how players move, interact, collect and consume. 

Why bother with having it all on-chain? Doing so ensures the games state is always immutable and transparent on the blockchain. But most importantly, it opens the door to the same kind of open composability that is possible in DeFi and enables an aggregator like the 1inch Network to build on top of Uniswap or Curve to integrate Synthetix and allow for cross-asset swaps. 

Composability allows anyone to build second-layer rules on top of the games original rules. Second-layer rules in fully on-chain games exist in the form of smart contracts on top of the core game developers original smart contracts. They are simultaneously experienced by all players in the game, unlike third-party mods in traditional gaming that simply alter the players local gaming experience.

Collective action

Take, for example, the on-chain RPG Dark Forest, built on the Gnosis chain in 2019 by pseudonymous creator Gubsheep. Dark Forest saw groups of players in their own DAO (DFDAO) creating permissionless guild systems through external smart contracts. With the guild system, small players were able to overcome collective action problems in competing against big whale players by pooling their own in-game resources together. As DFDAO put it in its blog:

Someone needs to beat orden_gg. Orden_gg has won twice in a row and is at the top of the leaderboard as we speak. If we band together for a collective victory, we can defeat Dark Forests unofficial raid boss together.

DFDAO co-founder toe knee told Magazine: The Astral Colossus (guild) was a mini game above the core DF contracts, but in the eyes of the DF core contract, it was just another player. Instead of being an EOA account like everyone else, it was a smart contract with custom logic that shaped how it would behave differently. This contract was non-upgradeable and verified so players could confirm for themselves that we couldnt change the rules and we couldnt keep their planets after they donated.

Dark Forest players have also created their own in-game marketplaces or even forked the game entirely onto a different chain/layer 2 Gnosis Optimism. The new game Dark Forest Arena introduced new gaming modes previously unavailable.

Communist take over

Or take another on-chain game, OPCraft, a Minecraft-inspired experiment built by the Lattice team on Optimism. Weeks into the launch of the game, one player, calling himself SupremeLeaderOP, created a communist society where any player that opted into the guild would give up all their resources and share them with every other player in the society. 

These rules were not a social promise between players. They were binding and tied to an on-chain smart contract. SupremeLeaderOP could not, even if he so desired, rescind his promises to players or bend the rules of his communist guild. Some players saw the guild as a wacky fun experiment and immediately swore allegiance to the communist Republic, in the process, giving up all their in-game resources in return for access to the guilds collective treasury. As documented on the Lattice blog: 

Once a player had become a comrade, they were able to through smart contracts that the Supreme Leader had deployed mine material for the government treasury and build using treasury material on top of government owned land! The Republic even had a social credit system to prevent freeloading comrades from spending more material from the treasury than they have contributed. Free loading comrades were not allowed to build anymore until they had repaired their social credit through contributing their labor.

In fully on-chain games, players can implement innovative changes rather than having to wait for a core developer to introduce the updates through a centralized patch. Its a level of bottom-up spontaneous creative expression that extends far beyond how we traditionally think of video gaming, but in the Web2 world, experimenters tinkering around on custom game mods eventually spawned billion-dollar game franchises such as Dota and Counter-Strike. Dota was first created permissionlessly as a mod on Blizzards Warcraft 3 game, while Counter-Strike was birthed from a mod on Valves Half-Life game. 

The on-chain gaming space is nascent, and builders in this space still refer to fully on-chain games very differently. The popular autonomous worlds label was coined by Lattice Labs, but other builders in the on-chain space have referred to the concept as eternal games, infinite games or on-chain realities.

Although the terminology varies, the common denominator underlying these games is hard permanence on the blockchain. Just as smart contracts and tokens will forever exist on-chain, fully on-chain games remain fully uncensorable and alive long after a gaming studio abandons the game.

The tradeoff? Most on-chain crypto games currently resemble turn-based board games with simple game loops like Space Invaders and Pac-Man in the early era of video games.

Limitations, limitations, limitations

In creating the on-chain racing game Rhauscau, creator Stokarz tells Magazine he had to make a bunch of necessary tradeoffs in game design due to cost limitations.

The reason why most on-chain games follow a traditional board game design with minimal game logic is because executing it all on-chain is inexpensive. On the smart contract level, its a one-dimensional play with agents simply changing the positioning of the play.

Although Rhauscau is deployed on the layer-2 Arbitrum Nova, which boasts a throughput speed far higher than Ethereum mainnet, the game is still limited to simple game loops that last five minutes tops.

The first tradeoff with Rhauscaus game design was that it had to be centered around one simple game loop. Too complex games mean more transaction speeds, which would make it too costly for users to pay for it. Its similar to early mobile games like Cut the Rope, Stokarz added.

Partially decentralized Web2.5 games dont face the same trade-offs as on-chain games because the only crypto layer within their games is assets in the form of nonfungible tokens. 

But they make an important sacrifice in another regard: the games open composability.

Future of on-chain games

No one denies fully on-chain games face an uphill battle, and scalability isnt the only problem.

Ludens emphasizes that the immature state of on-chain games is also due to game designers lacking a set of coherent guiding game design principles for building on blockchain ledgers. Game designers should think harder about how to harvest the full affordances of a blockchain ledger in their game design.

But blockchain and software infrastructure is an issue.

On old video games, we saw simplistic text adventure games first. When computers got faster, then came FPS games like Doom. With higher computational power on the blockchain, it will further increase what we can do with game design.

Getting chain infrastructure to a higher throughput would obviously help scale on-chain games greatly. It would allow sharding of the games state and executing it together on multiple chains at the same time.

On the software side of things, he wonders what game engines like Lattices MUD (multi-user-dungeon) will look like years down the road. Can MUD write powerful enough applications as we continue to push it?

Todays video game market is dominated by the Unreal and Unity game engines. Commercial game engines like Unreal only emerged in 1998 after decades of experimentation. Today, they serve as the go-to software framework for game developers to create a game efficiently with much less technical complexity.

MUD aims to achieve something similar for blockchain game developers. The software stack streamlines the task of building an EVM app with various development tools like an on-chain database.

On-chain and on ZK-rollups

Ethereums roadmap is built around scaling via ZK-rollups, and theres a big opportunity on the various layer 2s for game designers to take advantage of faster and cheaper transactions. A small collection of builders on Starknet believe that the layer-2s zero-knowledge proof native architecture is much better poised to scale a fully on-chain game.

Cartridge is building its own game engine called Dojo, among other developer tools for Starknet game developers. Its founder, Tarrance van As, believes that Starknet is the only one with a tractable path to scalability for hundreds of thousands of users eventually.

With Dojo, game developers get a baseline capability of the framework because everything is provable all the time, he tells Magazine.

In the future, your game is not even going to be a layer 2 but a layer 3 or layer 4 on top of Starknet, he says, referring to bespoke blockchain environments designed for specific types of applications that are built in another layer on top of the layer 2. But he adds ZK-proofs can even be generated on the same local PC running the gameplay.

With ZK-proofs, you can even have logic computed on the client itself. We may even be able to run the game on our local device and simply provide the proofs that it was done correctly thanks to the mathematical integrity of ZK-tech.

Van As sees a world of opportunity opening up and believes that in years to come, on-chain games will resemble blockchains a lot more than traditional AAA games. 

On-chain games are free from the restrictions of traditional game publishers such as a financial runway, development cycle and its closed nature. They resemble Ethereum much more in the sense that it evolved from an emergent, bottom-up culture.

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