Statechains, a semi-trusted layer-2 protocol! Bitcoin Tech Talk Issue #181
Some things people in Bitcoin come up with really surprise me. Segwit and Lightning are two that come to mind, as they did things that, at the time, I didn’t think possible. Segwit made it possible to increase the block size while making everything backwards compatible. Lightning made instant provable payments in Bitcoin without a third party.
For me, Statechains falls in the same category. The essential idea is to have a semi-trusted third party that enforces UTXO transfer, but has no actual ability to take or freeze Bitcoins without any onchain transaction. What’s more, this transfer can be combined with Lightning to create new channels, so a Lightning network channel can be opened without any onchain transaction. If it sounds crazy, it should. The detractors of Lighting have argued that you need onchain transactions to create these channels and that given the Bitcoin block size, that there wouldn’t be enough. Statechains gives us an unexpected way to open channels and not only that, to do off-chain transactions in a semi-trusted, yet non custodial setting.
The main limitation of Statechains is that entire UTXOs have to be transferred, meaning that if a UTXO has 5 BTC, you can pay someone 5 BTC or otherwise use some sort of Lightning add-on to get the change back. The other limitation is the use of a separate entity that has one of the two keys. It is possible for the separate entity to screw the current owner of the UTXO by cooperating with a past owner, but there are some mitigations around this as well.
Overall, it’s an interesting and unexpected layer-2 technology whose time seems to have come. The idea has been taken up by CommerceBlock who posted to the dev list on some alternatives to parts of Statechains that don’t exist in Bitcoin yet.
Bitcoin
Bitmex has come out with an article on who funds Bitcoin development. Notable funders include Chaincode Labs, Blockstream, Square, MIT DCI, Xapo and Digital Garage. Notably absent from this list are Coinbase, Blockchain.info, Circle and Binance. We know that many of these companies have made a lot of money off of Bitcoin, so the fact that they contribute little back speaks to their modus operandi.
Fees getting high? There’s a nice open-source tool called mempool to estimate fees based on your full bitcoin node. You can run this tool side-by-side with your node and it will give all sorts of stats in a nice slick interface as you can see here. The tool is rapidly iterating and worth using as your own backend to calculate fees. The next version looks like it will have a block explorer built-in.
Parker Lewis has written an excellent piece on the value proposition of Bitcoin. He argues that Bitcoin is a currency that allows for maximal freedom and explains the fragility of the fiat system. Especially enlightening are the actions of the Fed and why Bitcoin is an excellent alternative as a self-sovereign money.
Lightning
Breez has updated their lightning app to be more merchant-friendly with a PoS mode (point of sale). This is a welcome development as merchants are far more likely to receive payments than to send and such nodes should behave differently. Creating better user experiences around the receipt of LN transactions and adding the right amount of liquidity is an excellent step towards its adoption.
Jameson Lopp has come out with a nice blog post on how to set up a self-hosted version of earn.com using BTCPay. You can set up so that you get paid in Lightning to answer an email. It’s an interesting idea and using Lightning to pay for this sort of service seems much more appropriate than on-chain payments as the amounts are generally less and the need for speed a bit more.
Economics, Engineering, Etc.
Here is another article that looks at stock-to-flow’s co-integration and this one comes to the conclusion that the stock-to-flow ratio has an effect on the Bitcoin price. This is all the more remarkable since the stock-to-flow ratio has more or less been programmed in since 2009. That the price would follow this trend 11 years later without any further inputs is truly remarkable and says something about laws of supply and demand. Of course, this could easily be invalidated in the next 20 months, so we wait and see.
A US House of Representatives previously had a bill in the house (mostly related to the coronavirus) which had an interesting provision in it: the digital dollar. Many pundits were out in force calling this the Facebook to Bitcoin’s MySpace. The provision gives everyone a “digital wallet” at a federal reserve member bank or state bank or credit union starting January 1, 2021. Essentially, this provision has little to nothing to do with cryptocurrency and is just another way to create direct banking for every person in the US! The main reason for the provision is to allow direct payments to individuals. These digital wallets “may not be subject to any account fees, minimum balances, or maximum balances” and “shall provide functionality and service levels not less favorable than those that the member bank offers for its existing transaction accounts.” In other words, this isn’t a cryptocurrency at all, just a way to guarantee that every US person has a bank account. The “digital dollar” is closer to WeChat than anything else. It didn’t make it into the stimulus bill, but from a privacy perspective, it’s something to be very careful about in the future.
CoinTelegraph has an in-depth analysis of the Bitcoin blockchain data from 2017-2019. The main conclusions are that more people own Bitcoin now (addresses are going exponential), transaction volume seems to no longer correlate with price increases, the number of addresses with 1BTC+ has been increasing linearly and segwit continues to gain adoption.
An interesting study by the open money initiative points out that Venezuela is the driver of Bitcoin activity in South America. According to the study, most of the activity to and from Venezuela using Bitcoin relates to remittances and FX conversion. Bitcoin is used at least a bit as a store of value, but the main use case seems to be getting around capital controls.
Podcasts, etc.
I did two shows this week, one on the previous newsletter examining the BTC selloff and another on the second half of the Satoshi whitepaper.
My books are available if you want something to read during your quarantine.
Fiat delenda est.