After YouTube struck down crypto accounts this month, it rekindled interest in decentralized media platforms and freedom from censorship. Changpeng Zhao, CEO of Binance was discussing how to monetize decentralized videos on Twitter and Chico Crypto moved their entire video library to a decentralized file system. The general rhetoric of the crypto space was that YouTube messed with the wrong group of people.
Brave, the web browser winning over the crypto community recently published research on their decentralized VPN. VPN⁰ is still being tested, but it promises to solve the risk of peer to peer hosting through other decentralized VPN solutions.
Why decentralize a VPN?
Many American crypto traders don’t like U.S. exchanges because they don’t let you lose your money quick enough. This pushes U.S. traders to purchase a VPN and access sites with margin like BitMex. Decentralized products generally don’t require identification to use, and anonymity is popular in that trading crowd.
Crypto enthusiasts also tend to be more familiar with the ability to keep others from selling your data. That is the main appeal of decentralizing a VPN. There are many VPNs who sell your data to third parties.
Right now you can choose a decentralized VPN that connects you to someone else in the world who might be doing illegal things with it, one that sells your data, or one that is pricier than a Netflix subscription.
Brave doesn’t discuss any subscription fees, but promises to be a solution for the first two issues mentioned.
How do they do it?
They do it by using long winded cryptographic techniques that I won’t bore you with. Essentially, it all boils down to this quote.
“VPN⁰ allows relay nodes to control which traffic they transmit, without learning what content it contains”
In order to make sure it worked for real world usage, they integrated their tech with ProtonVPN, OpenVPN and Mainline using a Raspberry Pi. Everything worked out, and they think they can beat out any competition.
“This post has presented VPN⁰, to the best of our knowledge, the first dVPN with strong privacy requirements and high performance.”
Speed of VPN⁰s zero knowledge calculation is the bottleneck they claim to be researching now. There is no release date, but if everything works like they say it will and is affordable, the product will likely win over crypto traders and blockchian enthusiasts.
One of my favorite things to do on Twitter is to look at replies to attention grabbing tweets. I assume this is what most media trained people do as it is so easy to post fake news, and comments will always have some sort of counter. Today I logged on, clicked a tweet and a message popped up saying, “some replies were hidden by the author.” Twitter’s leniency on censorship has been only reason I’ve never written my argument for decentralized social media, but this notification triggered my fingers.
There are a million reasons to decentralize things, but I will only expand on those that I am most familiar with.
What would decentralized social media look like?
In truly decentralized environments, things will (ideally) run themselves. This usually means a team of developers make an algorithmic based network on which people can send information to one another. If the design is updated, people have the option to stay on the non-updated version.
Developers need to be compensated for their time, so they usually add some sort of currency that plays a role in the network. I won’t act like I’m some sort of economist, but what I do know is that developers of large cap projects can pay their rent at the end of the month.
To keep it short, the dream scenario would be a platform that could never be taken down, users could choose which version they want and one that is worth developing.
Ownership of content
“Every time the local news replies to a viral tweet with “hey can we use this footage” and the guy who tweeted it says “sure” and not “fuck off” or “pay me” I die a little inside.”
When I think of content ownership, I think of Basic Attention Token (BAT). Since I am neither an expert on BAT nor a psychic, I will predominantly talk about this from the perspective of current grievances rather than future solutions.
We’ve all seen a media outlet use citizen reporting to help break a story. Most of the time, a person who stumbles upon important information will not know what it’s worth and give it away for free. This is mostly because there isn’t a way to evaluate the worth of information within the short time that it is exclusive or relevant.
An environment like brave browser allows people to turn on ads and receive BAT in micro-payments. These micro-payments have the potential to create expendable income that is easier to donate online then to cash out. So unless a content consumer is really struggling to pay their bills, the BAT they receive from watching ads will sit in their browser’s wallet.
In an instance where an individual just reported exclusive information through a decentralized platform, they can turn on a paywall and charge $0.05 worth of BAT to those who would like to view it. This means that instead of a media outlet framing the original reporting inside of an article that they have ads placed on, they summarize the information, share a link and viewers can pay the $0.05 to see the original post if they would like.
Would decentralized social media promote freedom of speech?
I am your typical social justice warrior college student, but if people are being racist online, I want to see it. In my opinion, hiding things doesn’t make them go away.
On Twitter, accounts will be banned pretty quickly for using hateful language. This only means that Twitter has an accurate gauge of how many people in whichever area are ignorant and it is not available for the general public.
With Twitter implementing the ability for authors of tweets to hide whichever responses they want from the public, the least censored social platform is only becoming more censored.
Another way that decentralization can help free speech when businesses become controlled by governments. A government can ask website to block certain information by threatening to ban their website altogether. It is in the business’s best interest to block the information that they ask because some revenue and exposure is more profitable than none.
All-in-all, it seems that the more money an organization makes, the more they try to censor content within it. People need a place to go that is cool enough to put hatred in its place, but free enough to let it exist.
Organizations impose limits on acceptable content
This issue mostly revolves around YouTube, which in certain situations acts very similarly to a social media site.
Whether making commentary videos or vlogs, many content creators have been demonetized by YouTube for using bad words. Within the past five years, YouTube chose make it much more difficult to make money from creating mature content.
Suddenly, channels who had built a library that contained curse words had their work and success demonetized. This left them with the option of finding their own sponsors and forgoing YouTube ad revenue or censoring themselves.
YouTube is completely within their right to manage their site how they wish, but the sad part is that the creators had nowhere else to go.
On top of censorship, YouTube has had issues with automatically demonetizing or taking videos down for containing clips or sound from other sources. Algorithms are simply not capable of determining fair usage, so they automatically side with the copyright claim if the usage surpasses a certain criteria.
Music reaction videos are huge on YouTube and undeniably help promote artists, but neither the record labels or YouTube seem to care about the person who made the reaction. When record labels claim copyright on a video, YouTube’s algorithm will pick it up and forward all revenue from the video to the record label.
A decentralized platform would have no incentive to have an algorithm in place for these types of things, because they wouldn’t be making money from ads. Instead, the advertisers would be paying users directly for their time and have no affiliation with the content being played.
The money the viewer makes from watching ads would then ideally be donated partly to the person who made the reaction video, and partly to the artist if they had a wallet address.
There are many more reasons to decentralize social media than the ones I’ve listed, and my ideas likely have problems that I am not knowledgeable enough to think of. Regardless, freedom on the internet is trending downwards and the common factor is the interest of big business. The grassroot aspect of blockchain technology naturally leads to conversation of how we can distribute power, and media businesses are powerful.
Feel free to tell me what I’m missing.
U.S. regulators are focusing on making crypto margin trading less accessible to U.S. citizens. There are alternatives like Deribit who offer an identical perpetual swap contract but the exchange has less liquidity. On top of being illiquid, it is too similar in nature and therefore just as easy to regulate. If easy access comes to centrally provided leveraged trading in crypto, there’s only one clear alternative.
The state of crypto margin trading
Trading itself is risky, but adding 100x leverage to the equation lowers chances of success to an even greater extent. Nonetheless, blockchain is all about freedom and the ability to margin trade with a small investment is something unique to the crypto space.
Leveraged trading has reached somewhat of a pinnacle with the rise of BitMex. The platform has been able to get away with letting U.S. citizens leverage their bitcoin by implementing geo-restrictions rather than KYC (know your consumer) policies. It worked for a while, but they are now being investigated by the CFTC for allowing U.S. traders to use their platform. Similar circumstances have resulted in Binance making a separate trading platform for U.S. customers when they released margin trading on their own site.
The slow regulation of freedoms provided by the internet is reminiscent of how torrenting evolved. Bittorrent provided a new peer-to-peer protocol that was was different from Napster because people were exchanging links rather than actual files. New torrenting technology allowed people to continue downloading free music through Limewire and thepiratebay. By the time thepiratebay was hard to access, streaming unlimited music was affordable. Eventually there wasn’t as much of a demand to torrent.
Blurry lines of decentralization
In this situation, Napster to LimeWire is analogous with online exchanges to a decentralized exchange (DEX). Unfortunately, there are various aspects of an exchange that can be decentralized and filling a few of those criteria is enough for companies to market themselves as a DEX.
The founder of Binance himself, Changpeng Zhao, affirmed that his “DEX” platform is not fully decentralized in a tweet,
“A few guys seem to be bent out of shape, take it easy. Don’t call it a DEX. Call it an exchange where users control their own funds, runs on a fast blockchain maintained by a number of nodes, plus a fast and easy UI. That’s it.”
BNB to BTCB swaps are an example of how Binance DEX is not fully decentralized. BNB is Binance’s self minted coin and BTCB is their version of a BTC stable coin. Binance made their own version of Bitcoin since it is incompatible with their network and it is backed by your trust that they own as much BTC as they sell. In this exchange, Binance controls the order book and order matching in this exchange.
The decentralized margin trading solution
At its core, a DEX needs to have five characteristics:
Have an order book
Store zero data in a centralized location
Many decentralized exchanges have the first and second traits down. The most standard thing that a DEX will allow users to do is trade directly from their wallets. As we’ve learned, Binance fails in the rest of the criteria.
Where Binance fails, the 0x protocol steps in. 0x or ZRX is one of the few tradeable projects on Coinbase. The excitement of this project isn’t as much about the performance of the asset as it is it’s role in decentralized trading.
0x is a protocol built off of smart contracts on the Ethereum network that a DEX can build their exchange off of. Basically, it allows creators of a DEX to focus on the features they want to offer to the customers and takes the need for liquidity away.
This is how 0x works:
Trader market buys on dYdX
dYdX uses 0x protocol to find a seller from any exchange using 0x
Shared liquidity pool has potential to be more liquid compared to an independent DEX
Increased liquidity allows for higher leverage than independent DEX
Here, you can see how 0x has successfully provided liquidity in the past:
As a disclaimer, 0x is not always topping the DEX volume charts and has not been doing very well since August. Regardless, the idea of a shared order book allows for more variation in governance. Most DEX’s that use the 0x protocol do not list the ZRX token, which takes away the Binance network conflict of interest. 0x does not require or encourage users of their network to exchange via ZRX.
Immunity of decentralized transactions
According to the Financial Crimes Enforcement Network (FinCEN),
“If a CVC trading platform only provides a forum where buyers and sellers of CVC post their bids and offers (with or without automatic matching of counterparties), and the parties themselves settle any matched transactions through an outside venue (either through individual wallets or other wallets not hosted by the trading platform), the trading platform does not qualify as a money transmitter under FinCEN regulations.”
In essence, regulations do not effect sites assisting peer to peer transactions of currency. Exchange dYdX allows deposits of crypto onto the exchange, but that function of the exchange is vulnerable. If margin trading becomes accessible only via DEX, the cost of paying a gas fee for each transaction will be necessary.
Decentralized exchange costs more
There is no way of getting around the fact that on-chain transaction are slower and more costly than processing off-chain.
Let’s say you would like to long ethereum with makerdao’s dai coin on dYdX with 4x leverage. Compared to BitMex ETH to USD contract, there would be a .075% fee for the market order, and every 8 hours, there is a funding around .01%. Bitmex pays long contracts when funding favors buyers. Funding happens every 8 hours, but if you are in a long term position, funding can be in your favor and help balance the cost.
On dYdX, a DAI to ETH long with any kind of leverage can hit you with 14% APR depending on the time of the year. The interest is compounded continuously, so you will see it start piling up as soon as you enter your trade. On top of that, each time you deposit from your wallet to the exchange, there is a gas fee.
Ethereum is the easiest asset to deposit to dYdX because of wallet and centralized exchange compatibility, so I will use their gas cost as an example. The two main things that determine the cost of gas are the difficulty of the transaction and the market price of Ethereum.
The Ethereum network charged me an $0.42 fee to move $11.49. While 3% is a high fee, the cost is relative to the amount you move. A thousand dollar transaction would have also had the same fee.
Centralized exchanges require gas fees to deposit and withdraw, but there are no gas fees for movement within. One of the main draws to using a DEX is that they do not hold any of your money.
Will it be worth it?
Much like trading itself, we can only analyze the trends. Currently, Google Trends displays a stagnant interest in the term “decentralized exchange.”
The success of decentralized trading depends on technology improving to compete with the speed and cost effectiveness of centralized exchanges. On the flip side, exchanges won’t have to be as complete as what traditional institutional traders are used to. Trading firms don’t occupy the crypto space because it is more difficult to make quick transactions on exchanges. Most of the volume on margin trading sites like BitMex come from independent traders. This means that a good DEX will only need to meet the needs of independent traders.
The most leverage any DEX will offer right now is 4x, which is likely due to the lack of liquidity in the space. A protocol similar to 0x called b0x, says on their website that with their protocol, you could trade with 100x leverage on Ethereum. Even so, the exchange that they advertise to use their protocol only offers 4x. Traders used to using 100x leverage on BitMex will want the same set of options to migrate organically.
Whenever speed, cost and feature sets of a DEX can compete with centralized exchanges is when adoption will speed up. The only alternative is if leveraged trading becomes even harder to access from the U.S. In that case, a number of traders will use the best alternative rather than quitting entirely. The most unregulated alternative to centralized margin trading at this time seems to lie within decentralized exchanges.