Top Stories of the Week - 5/26
This week, we write about Presidential Candidates’ views of bitcoin, Ledger’s controversial key recovery scheme, and metaplex turning on fees. Subscribe here and receive Galaxy's Weekly Top Stories, and more, directly to your inbox.
Presidential Candidates Embrace Bitcoin
RFK Jr. and republican party candidates Ron Desantis and Vivek Ramaswamy express support for Bitcoin and digital assets. At the Bitcoin 2023 conference last week in Miami, Democratic candidate for president Robert F. Kennedy Jr. Gave a fiery and well-received speech expressing strong support for Bitcoin. Kennedy highlighted Bitcoin’s importance as a tool to protect against government overreach, noting that it can help combat enhanced surveillance and financial control. Kennedy, a longtime environmentalist, criticized the hostile climate for crypto companies and investors, including the 30% Bitcoin mining tax floated by a White House economic council, though he did say he and others would continue to press the industry to make use of environmentally friendly power sources. Kennedy received loud applause when he expressed strong support for protecting the right to self-custody, running nodes at home, and for reviewing whether individuals “like Ross Ulbricht” should have their sentences commuted. RFK Jr. partnered with Bitcoin payments provider OpenNode to accept donations via Bitcoin’s Lightning Network, a first for a presidential candidate.
Shortly after Kennedy, former pharmaceutical company founder, investor, and Republican candidate for president Vivek Ramaswamy also voiced strong support for Bitcoin. Ramaswamy argued for “putting the Fed back into its place” and strengthening the U.S. dollar, while also arguing that Bitcoin “should actually empower me to do what I want to do as the U.S. president, which is to stabilize the U.S. dollar as a unit of measurement and put the Federal Reserve back in its place with that as its single mandate.”
On a Twitter Space hosted by David Sacks and Elon Musk Wednesday night, Florida Governor Ron DeSantis announced his presidential campaign and stated “as president, we’ll protect the ability to do things like Bitcoin.” DeSantis alleged that “Bitcoin represents a threat to the [current regime], they’re trying to regulate it out of existence.” DeSantis also pledged support people’s right to trade in digital assets like Bitcoin, voiced opposition to “Chokepoint 2.0,” and demanded congressional authorization for any CBDC.
While none of these candidates are currently leading in polls,nonetheless it is extremely notable that presidential candidates from both political parties are expressing support for Bitcoin and digital assets.
DeSantis likely has the best chance of the three to end up in the oval, though he trails Trump 54% to 19% in an average of the latest polls (Ramaswamy is around 3%). Kennedy is trailing Biden 61% to 17%, though it appears unlikely that the Democratic Party will even run a primary.
Meanwhile, the Biden administration has actively and specifically targeted crypto, even going so far as to invoke “tax loopholes for crypto bros” in its debt-ceiling negotiations. Its Council of Economic Advisors has written harshly of the Bitcoin and crypto, its National Ecnomic Council has called for crackdowns and “mitigation” of crypto’s impact on the economy, its allies in Congress have repeatedlycriticized the industry and called for crackdowns, regulators it has appointed at the SECand OCC have embarked on expansive campaigns of regulatory enforcement and discouragement, and on and on.
Former President Trump’s stance on digital assets at this point is not clear. During his presidency, Trump was not receptive, although mostly not directly hostile. In 2021, Trump called Bitcoin “a scam against the dollar,” and tweeted “I am not a fan of Bitcoin and other cryptocurrencies.” While regulators he appointed had a mixed bag. The SEC did not approve any Bitcoin ETFs, and did conduct relatively significant enforcement, but it also allowed Bill Hinman’s speech on Ethereum’s decentralization and didn’t propagate an expansive campaign to force fit all of crypto into existing securities regulations. Under Treasury Secretary Mnuchin, FinCEN pushed “midnight rulemaking” after Trump’s defeat to Biden that would have significantly expanded know-your-customer requirements for “unhosted wallets,” which the industry vigorously opposed and succeeded in having tabled at FinCEN. The OCC under Brian Brooks, however, did produce guidance that opened the door for regulated national banks to use crypto assets and participate in crypto networks.
Long story short – we've come a long way when 3 of the biggest alternative candidates president are all staking out pro-crypto positions and courting campaign donations at Bitcoin conferences. But if the battle comes down to President Biden vs. Former President Trump, crypto will be low on the agenda, and it’s not clear crypto will have any advocate in that fight. -AT
Taxing Public Goods on Solana
Metaplex, the largest NFT minting service on Solana, announced that protocol fees will be introduced for users who mint NFTs on the platform.Metaplex also announced that its NFT token metadata program will become immutable within 18 months, making it impossible for NFT issuers to edit their tokens after issuance. This announcement received significant backlash from the Solana community, including developers who raised practical concerns and others who were fundamentally opposed to the idea of taxation on something that shouldpublic good like minting NFTs on a permissionless blockchain. Metaplex's COO admitted they didn't anticipate the scale of the backlash as the fees seemed reasonable to them.
There were several corrections and clarifications about the announcement that Metaplex later communicated days after the original announcement. For instance, the create fee does not apply to compressed NFTs, which use a different program to mint NFTs in a cost-efficient fashion. Additionally, the fees may only be applicable during the 18-month immutability window, suggesting that they might not be indefinite. In response to criticism regarding the potential escalation of fees if SOL's price increases, Metaplex confirmed that they will monitor and adjust fees based on market conditions and that Metaplex is motivated to ensure that fees are minimally disruptive and promote growth and usage of the protocol.
On most public blockchains, the ability to mint an NFT involves the use of an open-source and free standard, such as ERC-721. It happens that, on Solana, the only real way to mint an NFT is to use Metaplex, which is a private, closed-source NFT minting platform (or use similar platforms offered by NFT exchanges). The decision by Metaplex to impose fees on Solana users minting NFTs was poorly received, specifically because users had come to think of it as a public good, and taxing a public good contradicts some of the core values of web3. The Solana NFT community is understandably frustrated, as minting NFTs has, until now, only required payment of the initial transaction fee. Although Metaplex is charging a mere 0.01 SOL to mint, the community should have been more involved in the decision-making process for such a significant change to the most used NFT minting service in the Solana ecosystem. However, we credit Metaplex for reviewing the community’s responses and removing the proposed fees on updating, verifying, and freezing NFTs. This decision removes 100% of the fee burden for already existing creators and their communities. Despite Metaplex removing fees for everything expect minting, giving users a reason to leave the network will impede the revival of Solana’s NFT ecosystem.
From Metaplex's perspective, implementing a revenue-generating feature is essential for sustaining a resource-intensive operation. Protocols require active maintenance and support, which incurs costs in the long run. Despite having raised $46mn in Jan 2022, Metaplex's decision to introduce protocol fees during a bear market indicates that this move is necessary for the company's longevity. Fee proceeds will be used to fund dev work on the Token Metadata immutability initiative as well as the broader suite of Metaplex programs.
Metaplex faces immense pressure from Magic Eden, the leading Solana marketplace, which offers minting services through their launchpad. Magic Eden has a significant competitive advantage in the minting service arena, as their main revenue generator comes from marketplace fees, perhaps allowing Magic Eden (or other marketplaces with similar economic models) to win the minting sector as well. As other Solana NFT protocols adopt minting services, Metaplex will be at a disadvantage in retaining market share. In the spirit of open source, we also hope someone develops and releases a free and open NFT minting program on Solana. -GP
Ledger Courts Controversy with Key Recovery Program
Last week, Ledger, one of the world's leading cryptocurrency hardware wallet providers, announced a new feature called "Ledger Recover." This feature would allow users to store encrypted backups of their seed phrases with a set of three custodians, enabling the restoration of private keys even if the users lose or forget their seed phrases. As a part of this feature, a know-your-customer (KYC) verification process would be required. However, in response to strong criticism from the cryptocurrency community, Ledger has decided to delay the release of this feature until it can release the code for it.
The announcement sparked significant controversy within the cryptocurrency community. Many members criticized the idea of sharing seed phrases with anyone other than the wallet owners themselves, feeling betrayed by Ledger's previous assertions that wallet private keys would never leave a device. Concerns were also raised regarding potential threats such as custodian hacks, data leaks from KYC providers, and law enforcement control over Ledger users' data. Additionally, the fact that the code for the "Recover" feature wasn't open source at the time of the announcement led to criticisms about the inability to audit the safety of the proposed custody mechanism.
In response to the backlash, Ledger's CEO, Pascal Gauthier, stated that the company would accelerate its open sourcing roadmap and include as much of the Ledger operating system as possible, starting with core components of the OS and the Ledger Recover feature. Gauthier maintained that offering key recovery services is essential to onboard a new wave of crypto users for whom self-custody might feel too challenging. He cited that many crypto users either do not own their private keys or put their private keys at risk by using less secure forms of self-custody and challenging methods of storing and securing their seed phrases.
One consensus take that has emerged here is that of course to onboard billions of users, we need ways to recover keys. We don’t disagree with that, generally speaking, but the fact that these keys can be recovered unilaterally by Ledger and its 2 partners—without the cryptographic involvement of the hardware device holder—is problematic and opens up a variety of attack vectors. For example, a government could then order Ledger to affect the transfer of digital assets out of a holder’s wallet. While that order could be legitimate, it could also come from an authoritarian government or be used to target marginalized or opposition figures. Ultimately, that the private key can be extricated from the hardware device at all is troubling, and it opens up an attack vector that doesn’t need to exist. For example, users can achieve a similar key recovery experience with much better security by utilizing a multisig setup along the lines of what Casa and Unchained Capital offer clients. And regardless of whether this is a dud, a big deal, or a really big deal, Ledger isn’t benefitting from the fact that they’ve long been criticized for using closed-source firmware (making it difficult for researchers to actually understand what’s going on under the hood) and for the July 2020 hack and leak of their entire marketing database, essentially giving attackers the physical address of most of the hardware wallets ever purchased. Ledger could have handled the comms on this product better, and they’ve now delayed the rollout, which seems prudent. This type of product is certainly needed by the many people who have accidentally lost their private keys, but more transparency around how keys can be kept secure is advisable. -AT
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