0% rates, $700B more being printed, 0% reserve requirement! Bitcoin Tech Talk Issue #179
The federal reserve has lowered the fed funds rate to 0-0.25% on Sunday and announced the creation of another round of quantitative easing for $700B this time. I’ve been saying that negative rates are coming, but I didn’t expect it to get to zero this fast. In a central-bank managed monetary system, low rates from the fed essentially means more money being created through debt. Member banks can expand on this money by pyramiding on top of it to lend even more money. The idea is to provide more liquidity as the businesses suffering through the current crisis can battle through until consumer sentiment gets better instead of dying off.
Of course, this is not without consequences. This will essentially bail out sick companies that have no business existing as they don’t provide much value to anyone. More importantly, the new money printing will dilute everyone else that’s been holding cash and will eventually lead to price rises everywhere else. Monetary expansion (at least $700B plus whatever new loans it makes at 0%) dilutes all current holders of money and tends to only pump stores of value with stocks and real estate being the main beneficiaries. Lastly, the 0% reserve requirement effectively means that banks can lend out (read: print) as much money as they want. The trick will be to find qualified businesses and people to loan the money to and that is what we call pushing on a string. We are headed for a lot of central bank intervention.
The actions of the US central bank are not over as the two actions in the past two weeks (0.5% drop and the 1% drop and $700B open market operations) are probably not sufficient to unroll the insane amount of debt that’s been issued the last 12 years. I fully expect negative rates and a bigger QE before the summer is over.
All this is to remind you why Bitcoin was created in the first place. Bitcoin is scarce and the supply limited. Fiat money can and has been diluted on a moment’s notice. Even on a Sunday afternoon before futures markets open.
Bitcoin
3 years after they were complaining about fee congestion, Coinbase finally implemented transaction batching. Instead of sending out a transaction per customer withdrawal of Bitcoin, they’ve finally combined withdrawals into a single transaction. This is a step that most exchanges have done from the beginning and it’s puzzling why it took them so long. Among other things that they did instead include, moving to reactJS, launching a single ticker for a basket of cryptocurrencies, bribing users to learn more about certain altcoins and so on.
Leonard Fournier has an interesting paper framing adapter signatures as Verifiably Encrypted Signatures (VES). Adapter signatures are signatures where some useful data is leaked to the counterparty when published. This can enable atomic swaps, discrete log contracts and many other things as shown in the paper. It’s a technical read, but well worth reading and if you’re interested in different layer-2 technologies, learning the possible tools involved like VES will go a long way.
Bitcoin 0.19.1 has been released. These include mostly bug fixes to make the software more stable.
Lightning
t-bast has a route-blinding proposal on his github. This is motivated by the fact that Rusty wants to create an offers protocol, but the current rendezvous routing does not allow for this. In rendezvous routing, the payees choose some route from a third party to themselves and then tell the payor to choose a route to the third party. This works well for one-time things, but does not work when you need some back-and-forth like with offers. The route-blinding protocol essentially allows negotiation between two nodes without revealing their information to nodes in between.
Economics, Engineering, Etc
Just about anyone that was paying attention to the Bitcoin price this past week was in for an emotional roller coaster. There may be something of a forward indicator in the Miner’s Rolling Inventory figure. Essentially, the miners were hoarding more of the Bitcoin in January and that may be why the price was going up then. The current capitulation to $5000 or so may be the result of that inventory being sold. Stock-to-flow model being what it is, we can expect this to change drastically post-halving.
Stephen Livera has written a great Bitcoin newbie guide here. He introduces Bitcoin from a monetary perspective and gives a great argument for its usefulness as savings technology. As the world goes down into hunker down mode, this sort of introduction will be great to understand scarcity.
Nicolas Dorier has written on BTCPay’s experience setting up a foundation to hold BTCPay’s funds. I found the article to be insightful and a bit sad. The regulatory hurdles and setup of these things sounds like a giant pain. This seems to be the reason why more foundations aren’t being set up as the onus is on people who aren’t lawyers and accountants to set up the legal and financial infrastructure. That said, the setup is having an effect as BTSE has donated $80k to BTCPay developer Andrew Camilleri.
Whiterabbit has published an analysis to MakerDAO’s troubles this week. Essentially, these loans fell below the agreed on loan-to-value ratio and thus, their collateral had to be sold off. As the collateral is locked to a smart contract, these are then auctioned off to the highest bidder. However, because the ETH network was clogged and the oracles that report the price and the auctions that are supposed to take place on-chain didn’t really work and the locked up collateral (ETH) sold for $0. The people that bought those ETH earned somewhere around $6M, which is the amount the amount the people who took out loans lost. Essentially, the people that took out loans got penalized severely and there’s not much they can do about it. The community in MakerDAO is essentially printing more MakerDAO tokens to compensate. If this reminds you of what the Fed is doing by printing to money, that’s exactly what this is.
As I’ve said before, complicated smart contracts are not easily analyzable, and this incident shows just how badly designed MakerDAO is. It’s a fragile system full of flaws and it’s not going to be mainstream anytime soon.
Podcasts, Speaking Gigs, Etc
I talked about Bitcoin and its value proposition as well as some interesting things coming down the line with Swan Bitcoin here. Every conference is now postponing or moving online, which should make for an interesting next few months.
If you’re looking for something productive to do while stuck at home, I would humbly suggest my books.
Fiat delenda est.