The Institutions are Coming! Bitcoin Tech Talk Issue #198
We’ve been hearing about how institutions are going to be getting into Bitcoin for years now, so it’s understandable that many remain skeptical of their imminent arrival. This event is hoped for because of the implications on price. Institutional demand, if it happens at all, will dwarf consumer demand and given the pretty insane consumer demand back in late 2017, we can expect some serious price appreciation should institutions start getting in en masse.
There have been some signs this year. Investors like Paul Tudor Jones have indicated that they’ve already got some exposure to Bitcoin. There have been bigger volumes on the futures exchanges. But the best sign so far happened this week.
The Office of the Comptroller of Currency (OCC) put out a release saying that banks in the US can custody crypto assets. This is a rather strange proclamation since the people actually in crypto have not been asking for this. So who’s asking?
As financial institutions are heavily regulated and require lots of permission before doing anything, this is likely something from their end. Instutitons are likely asking. But why? The obvious answers are to get additional streams of revenue, especially from their high net worth clients. But more likely, it’s because their clientele are likely asking about getting exposure to Bitcoin and would switch if they can’t. The consumer level success of Bitcoin, in other words, is trickling up to the institutions who can’t keep ignoring an asset that has done phenomenally in the past 10 years.
The timing is also interesting as the current financial crisis probably has had some effect on the people doing the asking. The trillions of dollars of printing are having an effect. I suspect this will result in some well known exchanges being acquired by traditional banks.
Bitcoin
Tadge Dryja has published a Utreexo demo. Utreexo is a way to run a full node with a tiny amount of storage. A full archival node currently requires around 250 GB which stores the whole blockchain, or every transaction from the beginning of Bitcoin. A full pruned node currently requires around 10 GB which stores every unspent transaction output in the blockchain. Utreexo requires just a few hundred bytes because it essentially compresses the entire UTXO set to be a large Merkle Tree. Of course, it’s not all free, the entire blockchain still has to be downloaded, but the storage requirements are drastically reduced through its use.
A new report from Veriphi claims exchanges and users could have collectively saved a lot of Bitcoins in fees using Segwit and batching. The analysis starts from August 2017 and concludes that about 36,000 BTC could have been saved using Segwit and about 21,000 BTC could have been saved using batching. The ones that could have gained the most benefit are exchanges, but unfortunately, their profit margins from listing fees and so on have put optimizations like this on the back-burner. One of the reasons to cheer for the end of alt season is so that optimizations like this are made.
Kraken has created a new model for estimating Bitcoin hashrate. Essentially, the new method involves using the 95% confidence interval instead of the block times, which make the hash rate seem like it’s fluctuating much more than it is. Their conclusion is that the hash rate has been a lot steadier since early 2018, suggesting that mining has become a more professional industry with better risk management and so on.
Lightning
Laolu of Lightning Labs has a really interesting proposal to dynamically upgrade the channel commitments. As payment channels have changed over time to be more secure, what would be nice is if the entire lightning network were able to upgrade. Currently, this is impossible without an on-chain transaction, which given the tens of thousands of channels currently in existence, would be disruptive to the blockchain in terms of activity and fees. A dynamic channel commitment scheme would allow channels to be upgradable on the fly, making channels more secure. This is worth watching, especially as the lightning network continues its development.
Alzashop has published an excellent introduction to the Lightning Network. The article isn’t too technical and has lots of memes that guide in understanding what Lightning is. Good one to send to someone that’s just learned about Bitcoin and wants to know what Lightning is all about.
NiceHash implemented lightning payouts for pool members. This is a clear win for everyone as the on-chain fees are much less now, but the pool members can get immediate payout instead of holding accounts at the pool.
Economics, Engineering, Etc.
BitOoda has an excellent breakdown of miner profitability. It appears that the break even point for miners is around $5000/BTC, which means that they’re making a good amount of money. They project that the hash rate will be in the 260 EH/s in a year’s time, which would be more than double the current hash rate. It also looks like miners take price appreciation into account as they mine, which is an interesting way to run a business.
Visa seems to be gearing up to allow its payment networks to be compatible with Bitcoin. There’s no reason Visa can’t denominate in Bitcoins as they denominate in lots of currencies already. The service they provide of a network of merchants that accept them is a ton better than the misguided attempts by various cryptos to get “merchant adoption.” In a single stroke by a single company, it’s possible for Bitcoin to have far more merchant penetration than many grueling years of convincing single merchants.
Podcasts
I released the second episode of #Bitcoin Fixes This available also on YouTube. I talked to Alex Gladstein about how human rights has changed and continues to change just because of the presence of Bitcoin. I did two shows with Tone, the first on how ETH, LINK and IOTA screwed up and the second on banks custodying Bitcoin and many other topics.
I’m thinking of charging for this newletter, but in the meantime, you can support this newsletter by buying my books!
Fiat delenda est.