Bitcoin Thrives on Adversity. Bitcoin Tech Talk #246

Bitcoin has had its share of adversity in its life. What put Bitcoin on the map was Wikileaks. They had their PayPal donation account revoked in 2010. Searching for another means of donations, they found Bitcoin. That, in turn, led to a huge surge in the interest in Bitcoin, which Satoshi felt Bitcoin was too young for. He famously said that the “swarm is headed toward us.”

2011 brought The Silk Road which became a major use case for Bitcoin. This was the dominant narrative for Bitcoin’s use case, as a transactional currency for illegal drugs. The arrest of Ross Ulbricht in 2013 put an end to The Silk Road, and ended the narrative. Many thought this to be the end of Bitcoin, but Bitcoin faced the adversity and not just survived, but thrived. The 6 weeks after Ross Ulbricht’s arrest gave us a spectacular bull run.

2014 brought the block size wars, which was the narrative that Bitcoin needed to scale one way or the other to be successful. The corporations and miners wanted a straight increase in block size through a backwards-incompatible hard fork and the developers and users wanted a technically more complicated but backwards compatible set of features called Segwit. Many pundits, including myself, thought that a hard fork would destroy Bitcoin due to the confusion in the market. Yet when Bitcoin Cash hard forked from Bitcoin in August 2017, Bitcoin not only didn’t die, but thrived. Similarly, when The Segwit2x hard fork failed to even launch, Bitcoin went on another bull run of epic proportions.

As Bitcoin has faced and dealt with adversity, the market has responded by going on a major bull run. Adversity is good for Bitcoin.

Bitcoin faces more adversity now as miners are being booted from China. Hash rate difficulty is set to go down by around 25% in the next few days, indicating that there’s 25% less hash power than there was in the previous period. The cheap stranded energy in China seems to have run its course and the equipment is presumably headed elsewhere.

We can speculate on why China is doing this, including clearing the way for CBDCs or having different uses for the previously stranded energy. Such speculation wouldn’t really enlighten what’s going to happen with the market. What’s important here is that mining is still very profitable and equipment procurement has been the bottleneck for the last year. The current situation presents an opportunity for people skilled in operations and logistics to make a lot of money. The market is, in a sense, waiting to see how such people will handle the current crisis.

The market has done this before. In 2013, the market saw that not everyone who owned Bitcoin was a drug user. Transactions were not the main reason for Bitcoin’s existence. In 2017, the market saw that corporations were not in charge and that it really was decentralized. Bitcoin owners really were self-sovereign and didn’t have a central point of failure. In 2021, the market is waiting to see if the mining equipment and energy are vulnerable to nation-state interference. Is Bitcoin resilient to nation-state level regulation? That’s the question we’re all waiting to see Bitcoin handle.

As before, I expect Bitcoin to pass with flying colors, and that usually brings with it a nice bull run.

Bitcoin

Antoine Riard makes the case for full RBF as the default policy for Core. He points out the many ways in which opt-out RBF, the current policy, can be abused for DDoS attacks on Lightning. For example, before an RBF transaction is broadcast, a malicious party can send an out-out RBF. There are many attacks like this, which can be deficient to the user experience. His argument is pretty solid and I hope full RBF is made network policy to make second layers more secure.

Kraken has a blog post on the infected Ledger devices from last week. The post goes into how the phishing attack used a modified Ledger device and replaced some components. The post was enlightening in how sophisticated such attacks can be and how subtle the modifications. There is no way a normal user would be able to tell the difference between a modified and unmodified Ledger. This is not an easy problem to solve and I hope hardware wallet manufacturers take some time to think of good solutions.

Andrew Chow has a proposal for the Taproot address derivation using HD keys. Along the same lines he’s also proposing upgrades to PSBT for all the new Taproot features. These are needed additions given that Taproot is going to be activating in November. Adding Taproot is not going to be easy for a lot of wallets and standards like this will help immensely in getting wallets to adopt Taproot. I hope some standard MuSig and backup MAST trees become BIPs to help wallets out.

Lightning

Lightning Labs has released an article on understanding liquidity on the Lightning Network. This is an important part of running a node and not very well understood, so it’s great that they laid out the various important parts of liquidity. The main thing I learned from the article is that liquidity needs are different depending on whether you’re a routing node, a merchant node or a payment node. Worth reading to get smooth operation of your node or if you’re a developer, perhaps making software geared toward a specific type of node.

Kaminski and Mihkalsky argue that gaming and Lightning is set to take off. I’m not a gamer, but this really does feel like there’s enormous potential for more fun experiences using payments especially across ecosystems. Liquidity in most games is tiny, but pooled together, they can make the games more interesting.

There’s a site that’s publishing Lightning technical information in Spanish. Given the popularity in El Salvador and many other similar Bitcoin Beach type projects in Latin America, this is an excellent idea and I hope more resources like this are available for Spanish-speaking developers.

Economics, Engineering, Etc.

Alex Gladstein has a must-read on the CFA Franc, or the currency of monetary imperialism for France. It’s shocking to read about how much France still exercises control over their former colonies through the CFA Franc, but such oppression is not surprising. The US has been doing this to some extent to many other countries since Bretton Woods. The article is a reminder that monetary oppression is alive and real and that this is how many countries stay poor.

Stephan Livera writes on Mises about how fiat money changes culture. His argument is that unsound money has serious consequences and changes how people live. The article cites Jorg Guido Hulsmann, whose book The Ethics of Money Production goes into a lot of the cultural consequences. Definitely worth pondering and reading.

Tom Maxwell makes the case for Bitcoin for the left side of the political spectrum. The argument is basically that the system is rigged and results in endless war. The explanation of how certain people benefit from the Cantillon effect was a nice touch, I thought. I thought he presented the case for Bitcoin in a way that should appeal to those on the left.

Doomberg analyzes what Michael Saylor is doing. The post is thorough in analyzing the moves that Saylor has made with MicroStrategy and the current cap table and equity. The analysis is interesting in that according to the post, the market is assigning a $71k valuation per BTC, which is more than double the current price. Doomberg also speculates that a personal loan is in the future so Saylor can get even more upside.

Nic Carter opines on the China mining ban and the hashrate migration happening now. The main thing I got out of the article is that the energy infrastructure has been upgrading for the last few years and because of the unevenness of the development, there was a lot of stranded energy. The cheap energy in China, in other words, was temporary. There also seems to be some assertion of control by the central government over the provincial governments. Regardless, the hash power is leaving and will distribute the mining significantly.

Quick Hits

ETH 2.0 is barely up and running, but that didn’t prevent one of its projects from suffering a huge security breach. Actually, make that two.

Nassim Taleb makes an argument against Bitcoin.

El Salvador citizens are slated to get $30 in BTC.

Peter St. Onge answers some questions about the El Salvador Bitcoin law.

Events

I will be at The Bitcoin Standard conference on August 12-14 in Mexico and BitBlockBoom in Dallas on August 26-29.

The Programming Blockchain seminar is in Mexico on August 10-11. This is a 2-day seminar for programmers to learn about Bitcoin. You can apply here. I also have a few scholarships available for those that can’t afford it.

Podcasts, Etc.

On this week’s Bitcoin Fixes This, I talked to Ali from Tahini’s about small business, the effects of inflation, and the benefits of using Bitcoin for treasuries.

I read through last week’s newsletter on Twitter Spaces which you can find here.

I was on Tone’s show to talk El Salvador, the China mining ban and Bitclout. I was also on Coin Stories to talk about my origin story.

Lastly, I was on Born to Fly and Solomon Investor to talk about the new book:

My other books are here.

Unchained Capital is a sponsor of this newsletter. I joined as an advisor to be a part of a company that’s enhancing the security for Bitcoin holders. If you need multisig, collaborative custody or bitcoin native financial services, learn more here.

Fiat delenda est.