China miners not buying Filecoin's "Coronavirus excuse"

Filecoin, which you can think of as the decentralized answer to Dropbox, has delayed yet again its mainnet launch date. The project allows users to buy and sell unused space on their harddrives, via the Interplanetary File System—and like many projects these days, it’s relying on Chinese miners to be the backbone of support. Some 70% of its nodes are based in China, in fact.

This is the second delay in less than a month—the first one was announced January, before coronavirus was a thing. But again, on February 19, the company announced yet another six-week delay, citing both development challenges and the impact of coronavirus.

“...it has come to our attention that many of our communities in China have continued to be affected by the coronavirus outbreak,” the statement said. “Some of our Chinese community members have directly asked us to wait to launch Testnet Phase 2 for two or three weeks, until they can safely return to work. We hear you, and your safety is our priority!”

This was upsetting news to some Chinese Filecoin miners. That’s because many of them have been buying up and stockpiling mining rigs in anticipation of the mainnet launch. Now, they’re miffed that they have to wait even  longer for their capital investments to pay back.

Their anxiety is justified. Since Filecoin keeps updating standards of the mining rigs, miners who bought their machines in 2018 or 2019 are worried that the old machines will be incompatible with the new hardware standards, incurring permanent loss of their initial investment.

Filecoin is a super popular blockchain protocol among Chinese. Described as “born with a golden spoon (含着金钥匙出生)”, Chinese investors believe that the project is legitimate because it is funded by some of the most well-known investors in the world, including Sequoia Capital, Andreessen Horowitz, Union Square Ventures and Winklevoss Capital.

Why do projects like Filecoin receive so much attention in China? There are two parts to the answer. First, there’s a severe lack of domestic investment options in China. Other than the Chinese stock market, which has mostly been in the dumps since the financial crisis, and the real estate market, which has been in a bubble, China’s burgeoning middle class has nowhere to go to enjoy a decent return on their savings.

Second, China imposes strict capital control, meaning that money cannot be easily sent in or out. Because crypto is borderless, many investors turn into legitimate projects, proven by legitimate VCs, to onboard their fiat to crypto and send abroad (money laundering at retail level). 

Some Chinese miners complained that the virus was simply being used as an excuse—in reality, the epidemic shouldn’t affect mining since most miners purchased their machines way before the outbreak.

Filecoin has said that the delay would  help miners return safely to their workplaces. That sounds plausible, but tends to fall apart on closer examination. Mining farms are not operationally heavy and require less human capital. Given that most of the country has resumed working and only very few heavily infected regions remain shut down, miners should have no issue travel physically to their workplaces.

It’s not uncommon that software development suffers from delay (see, for instance  Ethereum.) Yet linking the delay to the virus outbreak is a stretch. The latest delay made many miners pessimistic about Filecoin’s real go-live date, which many joked would be at the end of 2020.

In Chinese, there’s an old saying that “one postponement causes a depletion of energy, the second postponement causes depletion of morale, and the final postponement causes death 一鼓作气，再而衰，三而竭.” Let’s hope Filecoin doesn’t postpone a third time.

Top 3 other things that happened last week

#1: Praise from the Party: “To combat coronavirus, we need blockchain”

There is another old phrase in China: “An old man loses a horse, but it might yield a good result.”  The phrase traces back to an ancient story where an old man lost his horse, but it came back a few months later with an even better horse companion.

But the good news actually turned sour when the old man’s son broke his leg riding the horse. The story tells us that good luck can yield bad results—and vice versa.

The saying came to mind this week when the Chinese government claimed that Coronavirus—rather than being a source of delay and problems—unexpectedly accelerated new technology development. It cited online education, video conferencing, telemedicine through the use of AI, IoT, big data, and blockchain.

Blockchain received special praise from the People’s Daily as the tech helped accelerate combating Coronavirus. The article pointed out that blockchain has been used widely in the areas of donation tracking, supply-chain tracking, and financing. In other words, the epidemic showed us the real power of having distributed-ledger systems, aka databases.

It’s understandable why the Chinese government tries so hard to praise technology. In the midst of a national lockdown, good news is rare. To feed its propaganda engine and keep its people satisfied, the government is scrambling to find anything that’s remotely positive. It  makes the loss of the horse more bearable.

#2. Traders shrugged off the OKex and Bitfinex attacks

The western media covered the denial of service attacks on OKex and Bitfinex as if it were a pretty big deal last week. But in fact, most traders were blasé.

The attacks came to light, as most things there do these days, with a Weibo post, on Friday. Jay Hao, CEO of OKEx, a crypto exchange famous for its derivative trading, tweeted on Weibo that OKEx survived a series of distributed denial-of-service (DDoS) attacks from another exchange “frenemy (友商).”

DDoS attacks can damage or crash the target’s network by exhausting the server’s CPU or memory. More immediately though, they make it virtually impossible for any traffic to get through to the target.

Hard on the heels of the OKEx attack, a DDoS attack hit Bitfinex, a Hong-kong based crypto exchange.  Paulo Ardoino, Bitfinex’s CTO, said that it too had suffered from “a very sophisticated DDoS attack.”

Exchanges going offline—especially the smaller ones—is not especially unusual. Indeed, traders there refer to this as a “regular meal (家常便饭),” slang that describes frequent accidents in Chinese. And there is always a lot of suspicion in China whenever an exchange goes offline. Two traders told me that exchanges will often unplug their own power, aka shutting themselves down, during trading surges.

Why? When trading volume spikes, exchanges’ backend servers often can’t handle the load. To prevent catastrophic damage, the exchanges shut down to avoid trading error.

In this case, the attacks seemed to be real. And there were some upset customers venting on Wechat. But for most, it was just another day in crypto.

#3: Fcoin revived? Or prosecuted?

After Fcoin’s abrupt shutdown last week, the founder announced the platform was down, but would return at some point. Jian Zhang, who is also Fcoin’s CEO, claimed that he plans to reopen the exchange along with FMEX, a “contract trading platform” Zhang proposed in 2019 as a parallel exchange to the existing Fcoin platform . As usual, few details were revealed other than that Zhang claimed he would refund his users’ money, and then hand over administrative power to the Fcoin community.

That’ll be fun to watch! The Fcoin’s “community” looks more like a lynch mob these days.

It turns out that a number of people in the community, (aka “victims,”) were busy ambushing Zhang’s wife, Ying Ying Li ,and his parents in Hangzhou Friday. That’s when the family was reportedly caught purchasing fake IDs  to escape China. The vigilantes took the family to the local police station where they called on more victims to give evidence against the exchange.

The “Fcoin community” also discovered many real estate assets that the family had throughout China. “His parents like to brag about their wealth,” one victim wrote in a Wechat group mainly comprised of the angry Fcoin victims who went to the police.

Zhang responded in a Wechat message that his wife and family no longer have ties with the Fcoin exchange. Note that his wife was Fcoin’s head of operations and marketing, in August 2018.

Thinking about Zhang’s recent apology, in which he said  that “the road to hell is paved with good intentions,” one cannot help wondering about his definition of good intentions.

Do you know?

水军, which literally means “water army” in Chinese, refers to swarms of paid trollers. (The “water” part of the name refers to flooding the Internet with comments.) Water armies are real people, not bots, paid to spread fake news. Given that China has almost 1.5 billion people, real-people trolling isn’t as big of a challenge.