The Gentrification of Bitcoin. Bitcoin Tech Talk Issue #201

Back in 2011, Bitcoin was a money for people to buy drugs off the internet and not much else according to the media. In other words, Bitcoin was for those people, not for respectable, law-abiding citizens.

The narrative changed in early 2013. Bitcoin became a place to practice trading, especially for those who craved more action than the stock market could give them. Bitcoin started to be for traders as well.

Later in 2013 came the arrest of Ross Ulbricht, which ultimately killed the drug-money narrative. At that point, Bitcoin became more of an investment, or something to store value long-term. Bitcoin started to be for people that wanted alternative investments, such as libertarians.

2017-2018 showed that Bitcoin was antifragile to all sorts of attack, especially by businesses. Bitcoin started to be for retail investors, not just libertarians.

It’s not a coincidence that these major narrative shifts correspond to boom cycles in Bitcoin. The public seems to wake up to the different ways in which Bitcoin proves itself. This process is what I call the gentrification of Bitcoin.

Much like a neighborhood that gets transformed a little bit at a time, Bitcoin’s usage continues to change over time. Except unlike a neighborhood, it’s not Bitcoin that’s changing, it’s the perception.

The latest narrative shift is that Bitcoin is now considered a safe-haven asset. It’s immune to a lot of the forces that wreck other assets, like, say, the pandemic. Bitcoin is now becoming a part of every portfolio. This narrative is true, and will likely have no small part in the next bull run, but in a sense, it’s still shorting Bitcoin’s reality. Bitcoin is sound money and those that have held for a while understand that it’s the soundest money we’ve ever had.

In other words, the gentrification of Bitcoin is still early.

Bitcoin

Aaron van Wirdum has a great article exploring the concept of payment pools. At heart, the idea is to use Taproot to hold funds in a group pool. Essentially, a 30 BTC output could have 5 owners or 5000 owners, each with a different balance. The technical details are tricky as each spend by any owner has to create a new pool, and that’s where a lot of the technical discussion is currently going on about. There’s also the possible integration with lightning so that payments within a pool can be more efficiently done. The main benefit here is that using payment pools will allow for some serious privacy as hiding your 0.25 BTC balance in a pool of 100 BTC is going to be very resistant to blockchain analysis.

Jameson Lopp has an excellent article on Chinese miner centralization. Much like quantum computing, this is one of the favorite boogeymen brought out whenever anyone wants to discredit Bitcoin. As the article details, a lot of the FUD is a misguided understanding of what the actual dangers are. Jameson also adds a lot of data around where the mining is actually happening and how stratum v2 will take a lot of the centralizing pressures away.

An interesting project called Rudefox Burrow is a way to validate your hardware wallets. BJ Dweck describes what the project is for in this blog post. The whole project uses a read-only raspberry pi to create your own mnemonic seeds using dice rolls and input them into the hardware devices. The device can also be used to verify addresses from the hardware wallets. This is a clever device for the ultra-paranoid and I’ll watch it with interest. BJ, if you’re reading, you should have a way to input a shuffled deck of cards instead of dice rolls.

Lightning

Christian Decker has a really nice analysis of multi-path payments and how it was implemented in c-lightning. MPP is a subset of the routing problem and routing well is an essential part of making the lightning network robust. Generally, the strategy c-lightning takes is one of “split early, split often.” This is a robust approach that preserves good privacy given the state of the network right now. As the lightning network matures, more optimal routing algorithms will no doubt be the subject of a lot of resarch.

Economics, Engineering, Etc.

Kraken has published a useful report on the volatility of Bitcoin in the month of July. Given the crazy prices, you would think the volatility went up in July compared to previous months, but in fact, volatility seems to be settling down a bit. They conclude that BTC has been correlated with gold more than any other asset in July.

Lucas Nuzzi has a long and detailed ETH supply analysis. The response by the Ethereum community on supplygate feels very much like a political one, where they seem mostly to be preaching to their faithful followers and not much to anyone actually asking the questions. We’ve heard excuses like “it doesn’t matter” or that “it’s good enough” or that “Ethereum isn’t trying to be sound money.” The article points out that it does matter and it isn’t good enough. Personally, I wonder why anyone would own ETH long term since it’s known the supply is changed every few months and hard to audit.

YAM collapsed 90% this week due to a smart contract flaw. Details of the flaw are in YAM’s blog post here and in this article here. This is such a fundamental flaw that it’s hard to imagine nobody catching this with even cursory examination or testing. That so much money is in DeFi, no doubt with many contract flaws like this one, boggles the mind. Yet zero-sum games are in demand, especially if they’re sold as non-zero-sum games.

Vulpem Ventures has come out with a nice engineering tool for those who want to develop on the Liquid network. Nice developer tools are a must for any tech to take off and hopefully, this is something that helps more companies take advantage of the benefits of Liquid.

Hector Rosekrans has a short, but good article on diversification in crypto. He argues that we should be diversifying keys, not coins. The risk is in total loss and diversifying into coins that all run together from a price perspective doesn’t reduce that risk while not giving much reduction in volatility. Diversifying keys, on the other hand, makes a lot of sense to reduce catastrophe.

Podcasts

This week on #Bitcoin fixes this we had Saifedean Ammous talk about post-secondary education. So much of the oddities of universities these days, including professors that just do research instead of teach, extremely expensive administrative apparatuses, gluts of postdocs and so on can be explained in large part by the wrong incentives made possible by fiat money.

I was on Tone’s show to talk Bitcoin Cat and supplygate on Tuesday. I was on again on Thursday to talk about the YAM disaster and Bitcoin backed loans.

Got someone bugging you about Bitcoin? Maybe my books can help!

Fiat delenda est.