Week of 1.5.20 - Issue #10
Welcome to the tenth edition of the ₿it Economy! Each week, I break down the top stories in Bitcoin in a simple in clear format. Enjoy!
Topics: Hashrate, Tether Migration & Taproot
S1: Bitcoin Hashrate Hits All-Time High
What is it? - Bitcoin's weekly average hashrate has approximately rose 14% in the past week from 93 exahashes per second (EH/s) on December 30th to more than 106 EH/s on January 5th. January 1st saw the metric for the first time in history exceed 119 EH/s, surpassing the previous record of 114 EH/s set back in October. For those who have no clue, hashrate is the general measure of the processing power of the Bitcoin network. Therefore, the speed at which a mining machine complete an operation in the Bitcoin code. As Bitcoins are mined, blocks of verified transactions have to be "hashed" before being added to the ever-growing chain of blocks. Therefore, this is a great indicator of the overall health of the Bitcoin network as well as miner confidence. A higher hashrate suggests one's mining device is completing more hashes per second therefor increasing the chances of solving the next block and receiving the reward. However, a low hashrate translates to a longer period for the network to verify transaction and mine new Bitcoins.
Why it Matters? - Those who have followed the newsletter should be familiar with mining. The objective is to add blocks onto the blockchain by allocating one's devices computational power to solve a cryptographic problem. Miners are fully aware that a record high hash rate leads to more intense competition to obtain block reward (i.e., a higher operation cost), yet the miners just keep on increasing. As the Bitcoin network grows and can compute more hashes per second, its hashrate increases. The chart below shows the price of BTC along the mean difficult of finding a hash that meets the protocol requirement that day.
We can begin to see a correlation between Bitcoin's price and the network's hashrate. Looking at mining activity can be a key figure when determining the price volatility of Bitcoin. Miners like stable cash flows, hence why they join mining pools. They do not play short term games trying to win a block, they socialize winnings. When miners have accumulated a large sum of Bitcoin and need to sell, they often do so on exchanges and OTC desks. Thus, when the price is steadily rising, so is the profitability to mine. As more Bitcoin passes hands the higher in the market, miners will continue to mine on the network, steadily increasing the hashrate. As the price of BTC increases, the value of the block reward increases as well, which incentivizes miners to bring more hashrate online to mine.
The higher the rate of a cryptocurrency network, the more expensive to 51% attack. The security budget protects the network against 51% attacks which primarily occur on the tip of the blockchain, rather than an entire chain rewrite, which would require significantly more resources and capital. There is a built in incentive against miner fraud. In order to gain a majority of ash power, a miner needs to invest in enough mining equipment to overpower the current hashrate or honest miners. Hypothetically speaking, say a bad actor invested in 1.5 million Bitmain S17 Pros — that would cost around $3,000,000,000. After investing that much money, the last thing a miner would want is to destroy their investment by attacking the digital asset. As such an attack would be immediately apparent and highly concerning, the market would react negatively, causing a crash in the price of Bitcoin, therefore reducing the bad actor's profits from block rewards and transaction fees. Thus, it best economically for all actors to play by the rules than cheat.
“As the number of users grows, the value per coin increases. It has the potential for a positive feedback loop; as users increase, the value goes up, which could attract more users to take advantage of the increasing value.” — Satoshi Nakamoto
Final Take - The larger the Bitcoin network grows, the more secure it becomes.
S2: Tether (USDT) Migration from ERC20 to
What is it? - Tether, a stablecoin issuer implemented a cross-platform swap of $15 million worth of Tether to Liquid, operated by Blockstream from Ethereum. There is a lot to break down in that sentence so let's start with the stablecoin; a type of cryptocurrency that is designed to maintain a stable market price due to their values being pegged to other assets such as the US dollar or gold. Bitcoin is volatile in nature therefore stablecoins make for practical usage by allowing for secure, convenient transactions without the high volatility. As for tether, it is an asset issued by Tether Limited whose value is pegged to the value of the U.S. Dollar, Euro, and Japanese Yen. The past several years have seen Tether reserves questioned leading to an investigation by the New York AG. That is neither here nor there, but the organization did state that "'Every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which included affiliated entities".
Blockstream, a San-Francisco based Bitcoin focused startup, aims to take the core secure peer-to-peer (P2P) functionality of Bitcoin and extend it to other digital assets so that decentralized, P2P finance can come to fruition. Sounds great right? Well, the startup launched Liquid, a sidechain-based settlement network for traders and exchanges enabling faster, more confidential Bitcoin transactions in October of 2018. Liquid's target market has been large exchanges and the traders who play within their digital walls who are looking to move bitcoin between each other more frequently.
Liquid is a sidechain-based settlement network for traders and exchanges enabling faster, more confidential Bitcoin transactions and issuance of digital assets. The Liquid Protocol pools bitcoin from multiple sources into a sidechain in order to reduce costs and increase speed. In more specific terms. a sidechain is simply a separate blockchain that is built upon a parent blockchain that allows assets from that parent blockchain to be used on that chain. Liquid's native asset, L-BTC (Liquid Bitcoin), is backed by a two-way peg with the bitcoin network, meaning L-BTC can be exchanged for Bitcoin and vice-versa.
The overall liquid tether on the Liquid Network is transparent on Tether's transparency report. Liquid supports both confidential issuance amount and transparent, and tether uses the transparent option. This transactions remain confidential throughout the entire process.
Why It Matters? - So, you are probably asking, what does this have to do with Bitcoin? With major networks experiencing scalability and efficiency issues, developers and investors have look to the potential of layer-2 sidechain-based solutions in order to improve usability for several major use cases. The bottom line is that the nature of the blockchain is such that anyone can view any transaction occurring on-chain. To dupe the blockchain analysis companies and to ensure the longevity of Bitcoin, stronger privacy measure is needed. Liquid Network employs Confidential Transaction technology which ensures that the amount and asset type are known only to the transacting parties, enhancing the privacy of both L-BTC and issued asset transactions. As Greg Maxwell explains in a 2017 talk, the amounts transacted are the key piece of information for analysis companies. The addresses, amounts, and asset types of each transaction can be hidden on the blockchain. The benefit to such a system is that it allows network participants selective disclosure. Selective disclosure gives participants the ability to preserve the integrity of information that may be sensitive to their business or trading operations, while simultaneously offering the ease and flexibility of sharing this data in a frictionless manner with authorized parties.
Moreover, they improve the situation by making the transaction amounts private, while preserving the ability of the public network to verify that the ledger entries still add up. This tool allows the transferred tether to remain private between off exchange accounts on Liquid. Retail and Institutional investors can move around assets without the worry about frontrunning, the practice by market makes of dealing on advance information provided by their brokers , before their clients have been given the information. Bots like Whale Alert will be rendered useless as the technology further develops. Private USDT transactions alleviates a notable pain point for traders who do not need to worry when moving assets around exchanges. Since the Bitcoin blockchain is available for public audit, external actors can witness the movement of large funds to an exchange and front run, driving up the order book and forcing the trader to incur slippage.
Final Take - Transaction privacy is fundamental for the new age financial services.
S3: Taproot Review in Final Stages
What is it? - The proposal for Taproot, a new privacy focused development for Bitcoin, is in the final stages of the review process. Introduced by Bitcoin Core developer Greg Maxwell in January of 2018, Taproot would expand on Bitcoin's smart contract flexibility, while offering more privacy in doing so. All bitcoins are essentially locked up in scripts: a couple of lines code embedded in a transaction included in the blockchain, that define how coins can be spent in the next transaction. In order to spend, one must provide a signature to prove ownership of the respective bitcoins. Different conditions such as multi-signature or timelocks can be combined to create mature types of smart contracts on the Bitcoin protocol. Taproot is a technical; solution to signing transaction scripts. Its most functional role is to homogenize, in a content perspective, the transaction output. The result will be for the details of the Bitcoin transaction output difficult to distinguish by outsides. To put it simpler, Taproot works to make Bitcoin transactions look exactly the same on the blockchain explorer and impossible to tell each from one another, which naturally guarantees Bitcoin with considerable good privacy. Though the upgrade is focused on Taproot, the development would not be possible if not for the Schnorr signature algorithm. Pieter Wuille provides a great explanation of the development below.
The Schnorr signature algorithm, developed by Claus-Peter Schnorr, is known for its highly security, fast verification, non-malleability and signature aggregation. They are a specific type of multisignature (MuSig) which can be verified very efficiently, and which avoid exposing the number of signers to the blockchain. A multisignature is a form of technology used to add additional security for cryptocurrency transactions.
Why it Matters? - Since 2012, scripts are often not publicly visible at first through a method called P2SH, pay to script hash. In this case, when the owner spends the coins, he reveals the script as well as the solution to the script at the same time, thereby reducing overall privacy. Though this method works, there are limitations on data storage and privacy. Everyone learns all the different ways in which funds could have been spent, which can, reveal what kind of wallet was used and perhaps even more. The proposal from Wuille is actually a package of multiple upgrades, pointing right to the two fundamental weaknesses of Bitcoin — the insufficiency of privacy and the short of functional expansiveness.
There has been much debate over the past few years on how the Bitcoin network should scale, so that millions (and eventually billions) of people can use it at once, in a seamless manner. There is limited blockspace for transactions and a new one is mined every 10 minutes. This limitation is by design, to ensure than the censorship resistant, decentralized, immutable and open access characteristics are preserved. Currently, most blockchains implement a multiple locking mechanism with actual multiple signatures but the design has a few drawbacks: security, efficiency, and privacy. The main difference between Schnorr signatures and the current Elliptic Curve Digital Signature Algorithm (ECDSA) is that Schnorr signatures are linear. The linear property allows different keys on the same message to be added together in a certain way to produce a valid signature for the sum of the keys.
A large concern with ECDSA and other MuSig schemes is that they assume signers of transactions have control of how and when their keys are generated and that they have a reliable and secure memory. Many Bitcoin users do not have access to their keys and how they are generated, and have less control over third parties and how they use the keys. MuSig creates short, consistently sized signatures that look the same to verified. This relieves the burden of the signer for their details remain private. MuSig also proves a provable security using public keys. They aim to give signers the flexibility in the way one produce and provide mutlisignatures to transactions without exposing details on the key production. Schnorr signatures and Taproot with transcript improve scalability and privacy by hiding scripts and obscuring keys, and limit the ability for third parties to ascertain the types of transactions occurring. Learn more about the proposal here.
Final Thought - This is the type of stuff that almost nobody gives a crap about, yet it is one of the most bullish indicators for bitcoin. Bitcoin developments which contribute to the scalability, decentralization, and fungibility actually make bitcoin valuable.
Market Watch
- High: $8,193.17
- Low: $7,355.27
- ATTOW: $8,148.64
Bitcoin saw a 5% jump early in the week, opening the doors for a rally above $8,500. The asset hit a two-month high of $8,464 on Wednesday, January 8th. This week was filled with global controversy, following the US airstrikes on Iran and the killing of Iranian military leaders. Bitcoin began to move in sync with assets such as gold, often seen as a store of value to investors. Whether Bitcoin is a safe-haven or not was the key discussion of the past week. As tension cooled off, the asset began to lose some steam and is trading back in an uptrend above the $7,500 and $7,800 support levels. A bull flag pattern has begun to form where an asset is in a strong uptrend. If the price were to settle above $8,200, the sentiment would be bullish. Those two price levels have acted as strong support while resistance has begun around $8,150. If positive sentiment progresses, we could see the price test the $8,600 resistance level. However, if sentiment shifts and Bitcoin closed below $7,600, expect $7,000 - $7,200 to be in play.
Announcements
- Ride The Lightning App Major UX Upgrade Release v0.6.0 - Link
- C-lightning-REST Release v0.2.0 - Link
- Polar v0.2.0 Release - Link
- Zeus v0.2.0-beta2 Release - Link
- Whirlpool CLI 0.10.2 released - Link
- Pine partners with Azteco to redeem Bitcoin Vouchers - Link
Interesting Reads
- Bitcoin Optech Newsletter #79 - Link
- Cloud Extraction Technology - Link
- Making Regulatory Progress with Bitcoin ETFs & Pricing - Link
- Bitcoin Becomes the Flag of Technology - Link
- How to Resist Censorship with Bitcoin - Link
- Bitcoiner Maximalism - Link
Great Listens
- Neil Woodfine: Who needs the Internet Anyway? - Link
- Tales from the Crypt #126: Jeff Vandrew - Link
Final Quote
With e-currency based on cryptographic proof, without the need to trust a third party middleman, money can be secure and transactions effortless. Bitcoin open source implementation of P2P currency.
—Satoshi Nakamoto, Founder of Bitcoin
Have a great week!