Protocol
Henceforth, references to Bitcoin (B) mean the network, the software, the entire protocol. References to bitcoin (b), mean the currency embedded in that protocol.
I’m glad this convention has emerged, it has bothered me for a while. Obviously, when starting a sentence, you’ll still have an issue and will simply have to do your best.
A weekend to remember
On Friday evening Bitcoin’s hash rate started to drop quite steeply as Chinese miners in the North West of the country went offline. Various news reports emerged following the incident and it was revealed that a comprehensive power outage for safety inspections was underway in Xinjiang, China. There was an accident in a coal mine trapping 21 miners, resulting in facilities in the region simply being turned off. The drop in hash, as you can see, was steep.
1. It proves Bitcoin is not decentralised
I felt like it proved the opposite. This was a massive disruption in what is one of the most prominent regions in the world for bitcoin mining (because of the cheap electricity). As far as the protocol was concerned nothing happened, it carried on working exactly as intended, with every other region in the world unaffected and well represented. Fair enough, the block times went up from 10 minutes to 12 minutes, but this will correct at the next difficulty adjustment.
Indeed, this proved that these sorts of occurrences were considered in the design of the protocol.
2. China controls Bitcoin
3. Miners are going bust and turning off hash
If you have a good idea, it must be resilient. It must exist in the wild and be able to withstand criticism, it must withstand the things that happen in the physical world like we saw this weekend. The more it is tested in this way, the more resilient the idea becomes. Far from this being a bad weekend, it was an excellent weekend for Bitcoin. This was a new kind of test, we haven’t seen it before on this scale and it passed it so easily it was zen-like.
As to the prophets of doom, the criticism is helpful and sometimes fun but it would be much more useful to simply come up with a better idea. That is, a more elegant solution to the problem of digital scarcity. All you need is about 200 years of mathematical ingenuity, some computer science and a solo genius. It couldn’t be that hard, could it?
The r/bitcoin board went on to be incredibly relevant in subsequent years. A lot of its members were pivotal in development of Bitcoin and also just spreading the word.
Everything new is crazy at first. Anything that challenges a deeply established status quo is likely to be rubbished. The most surprising thing really is that it is still true today. Most “professional” advisors do not want to touch bitcoin or any cryptocurrency. It strikes me that this is distinctly unprofessional, since at the very least one should understand something sufficiently to be able explain why you are not involved.
Look at the chart below, read some books, do some homework. Then decide. Shooting from the hip is costing them a fortune.
Binance
One of the things we look for when selecting assets for our Managed Fund is what we call an “economic imperative”. Does anyone really need to use the token? The cryptocurrency exchange Binance has inherently understood this with the design of their token, incentivising clients heavily to use their token to pay for trading fees. So much so, that they have developed an entire ecosystem around it. The discounts for using BNB when trading on their exchange are compelling, up to 40%.
To reward investors in the token, Binance returns a percentage of their revenue every quarter by burning tokens, this simply means taking them out of circulation forever, much like a stock buy-back. So, the token works for investors, it works for customers and it works for Binance too; especially in the early days when it paid for their start-up capital.
The scale of these Binance token burns is enormous, $0.6 billion Q1 2021. You can see the growth in the USD value of the burns in the third column which shows just how fast this company is growing.
If we assume $0.6 billion as their quarterly run rate, that is $2.4 billion annually in token burn. This is effectively the yield for investors, at the current market cap of $75 billion that is about 3.3%. There are a number of ways we might interpret this:
Firstly, you might consider that the figure is low given the risk involved in cryptocurrency, 3.3% yield is available on low-risk investments on the ASX. BHP Billiton is yielding 6.58% right now. No comparison, right?
Another view might be that one of the fastest growing companies in the world (still only four years old) is on sale. The best developers in the world are working there, like they once worked for Google. We know that because of the quality of the releases in extremely complex product sets. We know from the sheer scale of recruitment at Binance that something significant is happening there. Indeed it is impressive to have any yield at all so early in the growth cycle.
Incidentally, on 4th March 1986 Microsoft shares were worth 10 cents, 4 years later they had increased 10 fold to $1 and everyone had “missed the boat”. Today of course they are $261 and you would have had an awful lot of dividends on the way through. Binance and Microsoft aren’t the same and the experience won’t be the same, but as examples go of software companies at the cutting edge of new technology, it’s as good one.
Taproot
Back when Bitcoin was designed, Satoshi Nakamoto used the open source encryption protocol known as ECDSA (Elliptic Curve Digital Signature Algorithm). At the time there was a superior algorithm available known as a Schnorr signature. It had been developed and patented by the German mathematician Clauss Schnorr, the patent expired in 2008 the year before Bitcoin’s launch, but it was too late to include it.
Schnorr signatures have a critical advantage over ECDSA and that is they are mathematically additive. So, one signature plus another signature results in a third signature that is both valid, and crucially for Bitcoin, the same size as the other two.
If you have a Bitcoin wallet with a multi-signature arrangement (so requiring two different or more sets of keys to sign it) your signatures will cost you twice (or more) as much as single signature address. Right now that isn’t relevant because transaction costs are still low, but in time it will be significant. If you have an interest in the maths behind this, there is a full and excellent explanation here.
The whole upgrade is known as Taproot and there is rather more to it than simply making things more efficient. It will make a profound difference to the scripting capability within Bitcoin. In effect this means that if you write a smart contract to execute a particular transaction on Bitcoin under certain conditions it is now far easier and far more private than it previously was. That is predominantly due to the additive feature Schnorr provides.
Activating things in Bitcoin is not easy though. The earliest this can happen is at block 709632 (roughly November 12th this year), the latest it can activate is a year later. Supposedly, the change is not controversial, but we’ll have to wait six months to find out for sure. A detailed explanation of the activation criteria can be found here from one of the developers who released the code.
This change is very subtle, as usual it will be little understood, but it could be hugely significant.
Euro-Trash
Agent Lagarde is back in action this week talking about the digital Euro. The ECB has completed its public consultation and decided now was the right time to totally misrepresent the results of their research.
The number one feature people want is privacy. It is overwhelming in the report and bravo to the respondents for making it plain to the ECB.
“They don’t want such digital currency to be anonymous”
This is absolutely not what respondents said. They were not presented with this option at all because the ECB knows they would have chosen it, indeed it is not mentioned anywhere.
Respondents were led in the question, as usual, being asked what should we do about terrorism financing and tax avoidance. Anonymity was never offered, they were expressly told they could not have it.
I have been involved in surveys before at large organisations, it generally works like this. Someone senior decides what they want, they then commission a survey of customers or staff. The questions are then carefully crafted aiming at the desired result and when the answers come back, they are presented in such a way that they support the desired outcome. This happens even when they very clearly do not support it. The pre-selected option is then pursued because it is “what customers/staff want”. Everyone secretly knows it is wrong but cheers for it anyway, one must be a team player after all. Then, it fails and the senior ego is fired.
In this case there was no need for a survey. The ECB also put out their Annual Report this week which proved what we already know. In Europe 73% of all retail payments are made with cash. You know cash, the anonymous payment thing. This is extraordinarily high. The report also shows a huge increase in cash in circulation in the Euro-zone in the last year, mostly I would think because of pandemic hoarding and a complete lack of trust in the ECB not to collapse their system.
At best, the ECB is being disingenuous here but it feels worse to me. It’s like some strange monetary gulag that only really supports a very small part of the European population, while being penury for everyone else.
Once again, rules for thee but not for me. Here’s a reminder of why you should not be surprised.
