So, for those of you who don’t know, I am Shinobi(@brian_trollz on Twitter). This account/name is a legacy from when I did nothing but troll people, that’s in the past (or so I claim….). I’ll probably be shifting avatars here soon. Publishing this is hopefully the start of something I kind of just did unilaterally without talking to anyone else from Block Digest about, so we’re gonna kind of see how this goes and how they feel about it.
My hope is this can become an aggregation of good written content in this space, and a place I can start writing more and publishing as well as open to other writers as a single place people can find all the meaningfully valuable content cross posted. Obviously, myself and everyone at the Digest take integrity and accuracy of information seriously, so there is no way this is going to work except white listing based on our judgement. That is just the situation as it is. That said, it’s going to be a while on the opening up front. As I said I am kind just doing this unilaterally, and given the reputational nature of a group “brand” like this, decisions as to who gets to publish are a group decision.
I hope the others don’t get mad at me and agree with the utility in this, but we’ll see. Now onto business!
Ten Years Behind, Ten Years Ahead
It’s a new year, and with that new year come all the normal social media circle jerking centered around predictions of “what will happen in 2020!” I wanted to extend that out a bit, and look at the next decade. But first, I wanted to spend a minute going over the last (yeah, I know I’m a year late, blah blah) to really drill in how far things have come.
Mining and Network Security
In 2010 the network was secured by hobbyists desktop CPUs, trivially over powered by any large resourceful actor. At the start of 2020 it is secured by billions of dollars of hardware consuming the collective electricity requirements of entire small nations, supplied to the operators by many different companies valued at billions of dollars (given, pie in the sky valuations, but still). In 10 years, the security mechanism of the network shifted from consumer hardware and hobbyists to specialized ASIC equipment and professionally managed data center operations.
In 2010 you could send Bitcoin to public keys (or IP addresses), timelock transactions(JUST the transaction, not the UTXO), do raw multisig which were massive and expensive even to send to, and oh yeah: anyone could spend any coins using OP_RETURN due to a bug. And yes, I know the script system had much more back then, I’m talking about what was practically doable for an average person. In 2020…well I think I have to bullet point this:
- Use P2SH to make sending money to more advanced scripts (like multisig) cheaper for the sending party.
- Timelock an actual UTXO to an absolute blockheight or UNIX timestamp.
- Timelock an actual UTXO to a relative blockheight or UNIX timestamp interval from it’s creation.
- Construct transactions that do not have malleable TXIDs for second layer protocols/chained transactions thanks to Segregated Witness. (Also, we can now upgrade script easier due to SegWit having its own versioning. There are only so many undefined OPs in Bitcoin script that can be defined to add new script functions to Bitcoin script. SegWit versioning allows adding new functions by using new Witness versions instead of using up very scarce undefined OPs.)
- Utilize a basic in-development version of the Lightning Protocol, a second layer enabled by the malleable fix implemented in SegWit.
- Have actually deployed sidechains in which more advanced and/or experimental features can be deployed and tested easier.
Ten years has produced an impressive amount of primitives with which to build upon the core foundation of Bitcoin’s base network and blockchain. Especially considering the complexity and difficulty of trying to ascertain consensus on upgrades, and then implementing and deploying such upgrades if it is present.
In 2010, Bitcoin was just an insignificant blip on the radar. The CIA had only just noticed and taken interest in it. Their response was to have a developer come in and give a talk, resulting in the disappearance of Satoshi Nakamoto. Other than that, people weren’t paying attention, politicians weren’t paying attention, most agencies weren’t paying attention (except Alphabet ones we might not know about now). Bitcoin was an obscure nothing.
In 2020…Bitcoin has spawned an entire market and industry worth hundreds of billions of dollars. Exchanges have made billions in revenue from trading fees. Miners have made billions of dollars collectively in return for their operational investments. Tens of millions, possibly hundreds of millions, of people own Bitcoin (metrics here are very vague and hard to really distill meaningful information from). We’ve gone from the CIA barely taking interest, to essentially every meaningful government in the world regularly having legislature or committee meetings to discuss Bitcoin and everything it has spawned in terms of its macro-economic and geopolitical consequences, and how to respond to them. Nations have launched cryptocurrencies. Nations have sanctioned cryptocurrency addresses. They are officially at the table. Back in 2010 only one agency that is notorious for having their nose everywhere was paying attention (that we know), now the entire world is paying attention.
Things have changed. As the metaphor goes, good luck stopping the train.
The Next Decade Of Technical Potential
We’re already starting to see the seeds of second layer potential develop from the base layer primitives that have been added or optimized in the first decade. Lightning, while still subject to some pretty big limitations, is really starting to thrive. And that is just the limited first version that is currently specified and deployed. There are now sidechains of various kinds deployed: Liquid, RSK, and even token chains tied to Bitcoin developed by Commerceblock. This is just the start.
Schnorr and Taproot
Just over the horizon, we have the combination of Schnorr and Taproot. On the Schnorr side of things, this is a much cheaper to verify signature scheme in batches, as well as the next big leap in optimizing the construct of multi-signature scripts in Bitcoin. Multisig started out as just stuffing all the public keys and script for the multisig in a transaction output to send to it, and having to include all of that in the input to spend it. P2SH optimized the output aspect, by including a constant length hash of the public keys and scripts of the multisig, saving fees for anyone sending to a multisig address and leaving an increased cost only for the sender. SegWit arguably “optimized” further by making spending multisig UTXOs cheaper with the witness discount. Schnorr takes all this incremental optimization to the extreme. You combine the individual public keys into a single key, which everyone can collaborate to make a single signature for, and just check that. This creates massive cost savings for all use of multisig, including second layers like Lightning and federated sidechains, and creates a privacy benefit as well by making all of these multisig UTXOs indistinguishable from single signature ones.
Now that doesn’t just magically make everything completely private. Lightning channel states (transactions) still require separate key paths for their penalty transactions to react to submission of old states. That means those have to be in the output scripts which creates a fingerprint. Taproot solves this with its crypto-magic allowing you to commit a merkle tree of different spending conditions, that require only the condition used and merkle proof to the merkle root to spend, to a normal looking Schnorr public key. Now you can hide that penalty script path with taproot. You can hide any conditional script path with Taproot, buried underneath a perfectly normal looking Schnorr key that allows all participants to agree on something and make a perfectly normal looking transaction.
SIGHASH_ANYPREVOUTPUT (previously SIGHASH_NOINPUT) is hopefully the next new primitive to come down the pipeline. It is a new public key format/sighash flag upgrade. Sighash flags specify which parts of a transaction a signature is committing to. This functionality is there so that you can do something like sign just your input and outputs, but allow other people to add their own inputs and outputs to a transaction without invalidating it. But currently, a signature has to commit to an exact UTXO from an exact transaction. SIGHASH_ANYPREVOUT, among other things, would enable committing a signature to just a UTXO script, not an actual specific UTXO. This allows a new way (eltoo) to construct Lightning channel states that does not require a penalty key or deal with old states by allowing the cheated party to confiscate all the money. Instead, the current channel state could simply re-spend the old channel state if it lost the double spend race, guaranteeing everyone gets their current channel balance on chain as opposed to a prior outdated balance. You accomplish that by just re-using the same script in the right place and using SIGHASH_ANYPREVOUT.
This removes a lot of risks regarding you losing current channel states resulting in a penalty transaction taking your funds for an honest mistake. It also enables MUCH more. Now we can have Lightning channels with more than 2 participants, and can even stack “sub-channels” on top of those. Also, SIGHASH_ANYPREVOUT and eltoo enable the creation of Statechains, a type of federated channel construct that allows new participants to enter and exit completely off chain with the trust assumption that the federation will not collude with past participants to defraud anyone. This opens a lot of potential for what I’ve been calling to myself “multi-party static UTXO protocols.”
OP_CTV is a proposal by Jeremy Rubin to enable a very basic type of “covenant” on Bitcoin. A covenant is more complicated restrictions to spending a coin beyond signatures from certain keys. The type of covenant Rubin’s proposal would implement is a “template.” Essentially, this allows a UTXO’s script to require specific exact outputs to be created by the spending transaction. So once a UTXO is created using OP_CTV, it is enforced by consensus that the UTXO has to be spent to specific addresses in the specific amounts defined in that UTXO’s script. You can even chain these together so that one of these UTXOs is forced to make a few more of them, which are then forced to make a few more, on and on.
This has enormous general applicability all over the place. In high fee environments, a single UTXO can be made by a custodial entity that 100% under consensus rules guarantees all of their customers funds will wind up under their customers control, even though they don’t have immediate access to them in the moment. This has a lot of potential synergy with multi-party channels (channel factories), in that a mass “withdrawal” done like this can also simultaneously create and be used as a channel factory. OP_CTV can be used to create payment channels that at least work uni-directionally without the receiving end having to participate or have a key online to receive payments (and remember you can stack channels on top of each other). It can even be used to allow a single channel to process more HTLCs at one time by bundling them together with the same trick that first example with custodial withdrawals uses. And might even create some potential for new types of coinjoins.
Putting Everything Together
Assuming all the above proposals are adopted and incorporated into Bitcoin, I really think that aside from the developers actually working on the leading edge of these things, people don’t even have the faintest clue what types of protocols and services will be built using these primitives. Or the weird things where there is no clear dividing line between service or protocol.
They will enable multi-party channels with theoretically unbounded participant numbers, that can stack sub-channels on top with smaller sub-groups of the participants of the base channel. Channels can be built on top of these “channel factories” that allow people to receive money without having keys online for a hot wallet. These multi-party channels can themselves be stacked on top of federated channels (statechains) that allow participants to enter or exit with zero on-chain activity! And the construct of channel “splicing” will allow liquidity to move relatively seamlessly between different channels in ways that will enable all kinds of things people haven’t even really began thinking about.
My last word in this section is: this is only considering what can be done with things I consider direct parts of the Bitcoin protocol stack itself. You can do a lot more if you start looking at centralized custodial services, and what subset of Bitcoin’s properties those can provide ignoring regulatory or legal barriers from doing so. Which leads me to the next section:
Bitcoin Banks (To The Old-Timers: Binks)
It’s happening. Guaranteed. Done deal. In the bag. It’s just a question of when? Germany cleared banks to custody and handle Bitcoin and Bitcoin accounts for customer starting 2020. Who will be the first?
This is one thing that people will spaz out about, and I get why, but ultimately I think it’s childishly naive to think this wouldn’t happen. First off, banks don’t exist just to hold your money for you and process payments. They make loans. There is a reason they do this, it’s a useful thing in an economy and society, it provides a return to the liquidity providers (with risk) and allows entrepreneurs to engage in endeavors they otherwise would not be able to finance. This alone guarantees they will continue to exist. Loans are based on trust, they require coordinators and people to manage and track them. They require central points: banks.
That said, I guarantee they will thrive on just custodying Bitcoin and processing payments on their own private second layers. People like having someone to call for customer support, they like having recourse when things go wrong, they like having specialists take care of things they are not specialized in. This is why people have a Google or Facebook account, and don’t run their own SMTP server or decentralized social media node. Now, I absolutely think things are going to shift back in that direction and that we’re already seeing the beginnings of that, but that trend is going to be a generational thing. It’s not going to happen overnight, and possibly not even within our lifetime. Or maybe things just trend that direction and falter before actually getting all the way to the extreme. Who knows. But I do know what the world is like today, and I do know the reasons it is like that today. So this will happen, count on it.
Fear not though, all is not lost. Centralized but private electronic cash has been possible since David Chaum came up with the original “Ecash” design in the 1980s. Extending these designs to encompass more complicated “smart contract” analogs with a centralized enforcement probably isn’t impossible, or even relatively hard. It is also perfectly possible to offer accounts denominated in Bitcoin without KYC/AML intrusion or doxxing. The impediments to these things have nothing to do with technological limitations, and everything to do with legal, regulatory, and social impediments. Those are things that can be shaped and directed. Yes, at the scales necessary for these types of impediments being removed the effort would be massive, but one cannot honestly say it is impossible.
There’s even an incentive to push people in that direction: regulatory arbitrage. Given that Bitcoin is global and entirely digital, any jurisdictions loosening regulations and laws regarding financial services could see revenue influxes from across the entire world by doing so.
The Political Arena
We are now full on in the spot light of the global political arena. Ignore that at your own peril.
Yes Bitcoin the technology is apolitical. Neutral. All technology is. But if you try and make the argument that Bitcoin’s effects on the world around it at scale are not political, and do not politically back everyone into a choice between individual liberty and full on totalitarianism, you are asleep. I’m American, this is going to be to some degree Amero-centric, so we’ll lay it out like this:
The right: The direction, DIRECTION, the Republican party leans. I am not saying it embodies it, just its a landmark in that direction.
The left: The direction the Democrat party leans. Again, same disclaimers as above.
Bitcoin’s mere existence shapes the environment to favor right leaning political structures. Structures that bias their actions towards those favoring individual liberty above all else. The bigger Bitcoin gets, the more it shapes the environment around it to favor that type of political structure. That is just the reality. The bigger Bitcoin gets, the more inevitable it is politicians begin framing it in these left/right terms. They will do it because that is what politicians do, and there is the kernel of truth in that framing to reinforce it plus the hyperbole, lies, and exaggerations that tag along for the ride.
This divide will likely concentrate mostly around two issues:
- Wealth inequality: Bitcoin will be a hot-button topic in relation to this isssue. Bitcoin will definitely redistribute massive wealth, but not even close to evenly.
- Environmentalism: the narrative that Bitcoin is hurting the environment will not be going away any time soon.
I could very well be wrong, but I see these dynamics playing out as almost foregone conclusions personally. Its just how Bitcoin falls into the current tug of war going on globally between ranges on the political spectrum. There is a giant tug of war going on everywhere between more localized small scale sovereignty, and less localized larger scale relinquishment of sovereignty to massive sovereign entities. Bitcoin naturally empowers and encourages the former, and is the natural enemy of the latter. As it grows larger, it will become more inter-connected with politics around the world, and this is likely a rough idea of how it will play out.
This will play out all over the world on the national level, the state level, probably even down to the city level after enough time. This will eventually get to the point where it moves beyond the point of international bodies debating regulation to respond to Bitcoin. It will start moving into the territory of alliances between nations based on their stance regarding Bitcoin. Once things really escalate to that level, it really is an open question how exactly that starts playing out.
You have two options:
- Work within whatever your local political process is to push things in the direction of localized smaller scale sovereignty.
- Opt out of the political process and its results where you can, and shut up and comply with its results where you can’t.
Big Boys Entering The Ring
Bigger markets = more liquidity = bigger players. This has already been occurring in a serious way for the past few years. The end of the last bull market saw the launch of the first cash settled Bitcoin futures. Since then we’ve seen trading start (and stop) for multiple Bitcoin products traded on legacy financial platforms. We now also have physically settled (delivering real BTC) futures from Bakkt, as well as options on those futures and their own cash settled futures product. German banks have been cleared to handle and offer cryptocurrency to their customers. The Swiss financial authorities and institutions have been friendly with the ecosystem for years.
These types of institutional entities and pools of liquidity entering the space is going to fundamentally alter the structure of this market to the foundation. With them is going to come the government regulations, government restrictions, and government requirements that come along with the legacy world. How much of the liquidity in this market that is attracted to the platforms these players build will dictate how much influence legacy government regulations have in the overall ecosystem in the scope of the market and pricing mechanism. The more liquidity on these restricted platforms, the more indirect control governments will have over the pricing mechanism of Bitcoin. This indirect control over the pricing mechanism could potentially translate into another degree removed of indirect control over the outcome of any future consensus disputes. This is something to be wary of.
The observable trends suggest to me that the entrance into this market by these large pools of liquidity could very easily wind up crowding out the types of fly-by-night no-KYC bucket shops currently making up a very sizable percentage of market platforms. This is going to make the market overall more restricted, more difficult to navigate while avoiding government bureaucracy and regulation, and potentially even difficult to maintain ideal consensus on the protocol itself if it follows through far enough to that extreme.
This very well could lead ultimately to a hard line partitioning the black market from the clear market in terms of Bitcoin trading platforms, maybe even Bitcoins themselves if things do not go our way regarding Bitcoin upgrades that ultimately compose to massive privacy improvements. Or if we become lax in defending our own rights to privacy if we reside in jurisdictions where those rights are recognized. This landscape is changing, and one way or another have to adapt.
Decentralizing The Infrastructure
Twitter censorship. Facebook censorship. Youtube censorship. Political bias. Political interference. Even DNS and VPS censorship. That is the world we are living in with regards to companies providing services on the internet or operating internet infrastructure. This isn’t a universal situation everywhere, nor is this type of censorship applied evenly to all things or activities, but it is undeniably a growing trend.
This needs to be attacked socially (though in a very thought out and cautious manner), but also technologically. The Fediverse is an experiment in creating a middle ground between a protocol and service through their federated environment where anyone can run a Mastodon instance (among many things) and connect them together through federations. Bluesky is a recent initiative started by Jack Dorsey at Twitter to engage in research to determine the viability of transforming Twitter from a private service into an open protocol, and if viable try to do so. We also have goTenna working on consumer products to actually decentralize physical infrastructure for data transmission. The bandwidth is limited, but it’s a start. There are also numerous DIY mesh networking projects.
That leads me into the efforts along this vein directly relating to Bitcoin itself. goTenna partnered with Samourai Wallet to produce txTenna. This allows someone to initially broadcast their Bitcoin transactions over a mesh network to obscure their identity, bouncing the transaction around the local goTenna network until it finds a node that can push it over the internet to the Bitcoin network. There is also the LochaMesh project in Venezuela, born out of the intermittent electricity and internet access due to the instability in the country. Their designs incorporate communication tools as well as Bitcoin and Lightning functionality, and they are according to my last understanding attempting to take their DIY project in a commercial direction to make available easily to consumers.
It would be remiss of me to go into this topic without talking about the Blockstream Satellite Feed. I wouldn’t call this full on “decentralization” of infrastructure, it is very much still centralized, but I would call it a substantial change that would be foolish to ignore. First, it is centralized. It is entirely dependent on centralized companies’ satellites; these companies are very much in a position to turn them off at any time. Second, it’s free and completely private. Being a one way broadcast from the satellite, all you have to do is set it up and point a dish in the sky and you’re receiving the Bitcoin blockchain. That doesn’t leave network fingerprints to identify you as a Bitcoin user, and as a benefit it’s free delivery of large amounts of data. So you depend on central entities, but gain a large degree of privacy.
These types of projects and different ways of designing and running infrastructure will continue thriving on the fringes of both Bitcoin and the internet in general over the next decade. There are also numerous ways to compose these things. Blockstream has partnered with txTenna to link their satellite feed now. I think that integration can go even further. Mesh and radio technology isn’t enough to scale the entire network globally using nothing else, but it can fill gaps or handle distribution for “sub-networks” concerned mostly with just propagating transactions and validating blocks. A node could receive blocks from the satellite feed and then propagate them over shorter range mesh networks that can handle higher throughput. This type of synergy might even translate to mining; with Compact Blocks miners can transmit only the block header and a small piece of data to construct the actual block from your mempool. If the latency trade off is practical, miners could attempt to use these types of mesh networks to obscure their physical location slightly during block propagation while receiving real-time block relay from an anonymous satellite feed.
I see a lot of potential for co-existence or integration between Lightning Network and mesh networking technology as well. Global Mesh Labs is working on the Lot49 Protocol to incentivize mesh network nodes by integrating Lightning Network to pay for relaying data. This is a very interesting direction things could go as far as evolving synergy between Bitcoin and mesh networking protocols, but its viability remains to be seen. Personally, I’m very optimistic but cautious in my expectations. Even without this type of tight integration of the two things though, mesh networking can be very useful for Bitcoin. I think it will be inevitable for localized Lightning sub-networks to start growing where everyone is peered over the mesh network, only interacting with local people over the mesh network, and receiving feeds of the blockchain for security. A few bridge nodes can route money in and out of these sub-networks as needed. At global scale those types of network structures just make sense to me and seem like a natural pattern things will fall into.
This stuff isn’t going mainstream in the next decade, but expect rapid progress and development as the die-hards and the crazies rapidly iterate on the fringes.
Watershed Moments To Come
Think back through Bitcoin’s history. I guarantee you a handful of events just popped into your mind first, like landmarks. If you kept thinking your mind probably started filling in from there with those landmark events as anchors.
Don’t take these as hard predictions, ignore the coating of hyperbole I can’t stop myself from adding everywhere, and note these don’t come with dates. I’m going to run through a list of “watershed moments” or macro-scale shifts in things that I think are practically guaranteed to happen or begin in the next decade.
— A Visit To The US Supreme Court —
Bitcoin creates an inherent contradiction within the current regulatory and legal framework, at least in the US and everywhere the US effectively dictates things, relating to how Bitcoin itself inherently works and two major themes in regulations and law.
- KYC/AML Laws: These exist to ensure that financial institutions know the individuals they are dealing with for the purposes of preventing criminal operations, money laundering, or terrorist financing occurs through the use of their services. This requires incredibly invasive information collection, tracking, and communication of said information between different institutions. It requires throwing privacy out the window. Or does it?
- Financial Privacy Laws: The reason things like KYC/AML exist in a country like the United States with the 4th Amendment to our Constitution is because of things like the Right to Financial Privacy Act. There are laws that restrict the situations and conditions under which the government can obtain financial records on its citizens. These laws were implemented after a Supreme Court case challenging KYC/AML law (ironically called the Bank Secrecy Act) held that financial records are the property of the institution and not customer.
See the contradiction? All of this is based on the notion that the record of financial activity is privately held in privileged silos not visible to the general public. That the government access doesn’t equate to the public’s access. That is not how Bitcoin works. Everything is right there on the blockchain for everyone to see. So while financial institutions are required to enforce KYC/AML laws and identify their customers, are they also not required to protect the privacy of their customers financial activity short a legal order to divulge it?
We’re at the point where privacy tools are actually starting to make real developments in the Bitcoin ecosystem, and we’re already starting to see behavior indicating a trend of this being marked as “bad behavior” by Bitcoin exchanges that leads to account scrutiny(and possible closure and/or seizure down the line) in response to use of privacy tools. Now, I don’t see anything in the near future in the United States smashing down all KYC/AML laws in the land, but I do see an incredibly strong argument to make against this type of reaction by exchanges and institutions to their customers using privacy tools.
The argument is this simple: they have a right to protect their privacy from the point of view of the general public at large. This system doesn’t keep all the records private by default, only revealing selectively to authority. Everything is in the open and publicly verified, by architectural requirement. So if I have a Constitutional right to privacy in the old model, do I not have one in this new model?
Now again: this is in no way a strong enough basis to smash down all KYC/AML and requirements to identify customers. But I do think this is a strong enough basis to potentially cement by Supreme Court ruling that businesses are not allowed to censor or target customers simply on the basis of using privacy preserving tools in activities not related to those businesses. If things continue in the direction they seem to be going, I think this type of legal challenge to such practices is inevitable. How will it turn out if I am right? I guess we’ll find out if I am right.
— Inevitable Mining Landscape Evolution—
Mining is probably the easiest thing to point at besides the price to really demonstrate to a normal person how far Bitcoin has come in the last decade. Consumer desktops to data centers in a decade. That change will continue to happen at a rapid pace, and part of the next shift is already underway. Vertical integration. Things went from desktop CPUs, to GPUs, to special ASICs. But those ASICs were still something easily accessible to retail consumers, small group buyers, smaller professional operations. It was still easy to get efficient and current hardware at different scales (though different prices depending on your scale).
That is going to change, and the starting signs of it are already here. Mining is going to become less and less accessible profitably to the retail and smaller market (ignoring professional hosting arrangements) participants as companies start battening down the hatches. This market is still incredibly volatile, and miners all the way from producers to equipment operators have very large capital investments that can be very risky during market downswings. Things tend to get into a frenzy when the market swings up, and go very badly for unprepared people on the swing down. This time around things are going to get serious in terms of minimizing and managing risk.
Bitmain’s finances becoming public during their IPO attempt in Hong Kong showed how they took massive profits and turned right around and lost them continuing to take massive risks that just happened to work out in a bull market. It hit them very hard, and the HKEX looking at that general pattern due to overall market volatility playing out with all the manufacturers attempting IPOs to differing degrees denied all of them. The overall market these companies compete in was deemed too risky for listing a business that directly exposed on the HKEX. This cuts them off from the capital necessary to continue expansion as Bitcoin grows by orders of magnitude. That is very bad.
The response from Bitmain in terms of adapting (ignoring the recent “coup” attempt internally) has been to make moves to restructure their business to adapt to this harsh lesson. They have numerous farms they operate themselves in China to both self-operate mining equipment and host other peoples’. These types of operations have expanded internationally to Texas and Washington state in the US and Quebec in Canada. The strategic value in operating these farms is creating predictable power costs, and having the dual option of deploying hardware you produce to mine yourself or sell capacity to other miners. Now if you put this together…they’ve positioned themselves to 1) make and sell the metaphorical shovel, 2) dig with it themselves, 3) sell the shovel to someone else and also try to sell them a place to dig. That’s exactly what Bitmain is doing with a new service.
Jihan has also established new financial services and tools Bitmain is offering to help customers hedge some of their risk by taking it on themselves, as well as other more granular arrangements in Bitmain’s favor. It’s unclear whether this specific strategy will stick given drama resulting from the internal struggle between Micree Zhan and Jihan Wu, but it shows an acknowledgement of and a strategy to deal with the risk inherent with this level of market volatility. This is absolutely necessary to survive in the long term in this sector of the ecosystem.
This is the direction this is going, with massive momentum behind it. Actors playing different roles in the mining sector will slowly start to try to sprawl out and handle every layer of the stack they can internally: Production | Research & Design | Hosting | Operation | Electricity Sourcing | Financial Risk Hedging | Lobbying. As economies of scale continue applying pressure to actors in the mining sector and trimming them down to the leanest and most efficient, they will start attempting to internally integrate as much of the entire stack to be able to control and hedge the financial risks.
A second order effect will result from this economy of scale effect playing out Darwinianly amongst all of the miners. Governments will start to creep in at a foundational layer and begin realizing they have influence to exert. To really get across my thinking here, I want to go back in the past for a second and look at some of the mining dynamics in China to my understanding from both “official” reporting and personal sources of mine. Mining exploded in China because of two factors: 1) there is surplus power in many places, 2) the finances of local governments being pretty rekt and lots of local governments being totally fine with mining because they can shave something off the top and see revenue. This dynamic might even be why we haven’t seen the Communist Party crack down on mining despite all the statements and hints to that end except in criminal cases such as power theft.
That dynamic is already playing out everywhere that mining operations are growing to scale. Step one: appease the local government. We’ve seen how things can get with the situation in Quebec with Hydro-Quebec attempting to block and auction power after seeing a huge increase in demand for electricity to mine Bitcoin. Numerous projects across the United States have been established in partnership or cooperation with the local government, in Texas, Washington, Georgia, etc. This is just how it works, you put boots on the ground and that most immediately local government at the very least is sinking their hooks in. Then the one above that can sink in. Then the one above that. The hierarchy of parasites.
We need to be very, VERY conscious of this dynamic. Unless you find Harry Potter’s wand and the magic spell that instantly whisks away every government in the whole world, they’re there and we have to deal with them. There’s only two real strategies to deal with this, and one isn’t really viable.
The non-viable strategy is attempt to take things completely off the grid and into the black market. That’s not happening. You are talking about hiding data centers, with the cumulative network energy consumption being on the scale of whole countries. Non option, and if you want to try and solve this with a POW change fork, good luck. You know where the door is.
The viable strategy is to simultaneously: 1) push at the most local levels for non-restrictive and non-draconian policies where these operations are located (and Bitcoin in general where you live) if you can while 2) pushing at the non-local levels in general for policies that leave sovereignty and and power as localized as possible. If Bitcoiners and other interested groups do not stay vigilant and active in this area, then those initial local hooks will lead to State hooks which lead to Federal hooks from the national government of your country in the foundation of the mining sector: power availability. These hooks are undeniably already there in some places. If action at the social layer is not effective in dealing with this issue, then we fall down a very slippery slope:
- Eventual slide to national level regulation and direct hands poking around in how mining operations are run.
- If Bitcoin continues growing and expanding in value and market relevance exponentially, the situation works out to whichever nation has the cheapest energy reserves to burn through dominates mining.
- This could easily devolve into a super power like dynamic in terms of mining distribution, which if a stable (or “stable enough”) equilibrium, could wind up leading to a base layer in a much more centralized and restricted access state not conducive to Bitcoin’s full potential.
This aspect of the Bitcoin network/system is the weakest in terms of defensibility from real world “meatspace” threats. Ultimately if the population of a nation empowers its government to do so, they can show up and seize your mining equipment. It would have to be an amazingly resource strapped government or a very unique geographic area for that to be impractical. The only way to deal with this is socially.
And coercion is not the only mechanism for interfering at this layer of Bitcoin. Distorting incentives is another means. Chain Anchor was a protocol proposal out of MIT to effectively bribe miners into initially preferentially, and then exclusively mining KYCed transactions. The end goal was orphan non-compliant blocks. (This out of all citations, READ YOURSELF when you are done with this). These issues of economic incentive distortions can ultimately be resolved only through economic incentive corrections.
This is the “shift” I am most confident on in this piece. I would not call it short-term “OMG we’re fucked!” urgent, but this is not an issue Bitcoiners can afford to be complacent about.
— Neo-Switzerland —
I spoke above of Binks, and the technology possible to “port” subsets of Bitcoin’s properties to them, and the incentives to do so. It’s a jurisdictional arbitrage play with massive potential profits. But there is one interesting potential twist to how that could play out given it is the 21st century and all: cyberspace could itself arguably constitute a jurisdiction. Does anyone remember Darknet Markets? So there are two ways “Neo-Switzerland” could play out: an actual physical jurisdiction legalizing KYC-less or KYC-lite financial businesses and safe havening such operations, or an “extra-jurisdictional” (quotation marks because servers get hosted somewhere) dark net business.
Let’s go through the possibility of a real world nation-state deciding to become a haven jurisdiction for KYC-less or KYC-lite binks. Well to start, Bitcoin is a borderless global currency/settlement network that anyone with internet access can interact with. So the potential customer base that can deposit and withdraw Bitcoin at one of these binks is anyone in the world with an internet connection that can get their hands on Bitcoin. That’s the potential capital inflow that could be attracted in the most insanely optimistic scenario. That’s what you can collect taxes on. Secondly, given a host jurisdiction, these binks can be legally incorporated and accountable entities. Even with no KYC cryptography offers a basis of both assertions of fraud, and refutations of these assertions, at least in terms of a foundation or initial filter from which to start legal disputes. These binks can offer anonymous accounts denominated in BTC, anonymous untraceable cybercash denominated in BTC, loans, escrow services, oracle services for complex smart contracts enforced by the Bink. All the financial services of the legacy world become accessible with a smartphone and either no KYC or so little it feels like 2013 again, and then some with a cherry on top.
This is a giant pile of potential profit for a jurisdiction to seize. And being a jurisdiction, an actual nation-state with a legal system, there is the potential to create enough trust to actually make this workable for international customers. Okay, so from a customers point of view how do you handle something going wrong between you and your bink? If you’re a citizen of that nation simple: you take legal recourse. If you aren’t a citizen? Well…taking legal action across international jurisdictions can be complicated to say the least. And expensive. But if we’re at the point where this bink is operating then we assume the government of this nation wants this to work and attract business right? So the government can account for this asymmetry between citizens bink customers and non-citizens bink customers and craft legislation easing the complexity of non-citizens dealing with disputes between them and their bink. And more importantly, the government can actually enforce this legislation evenly with regards to citizens versus non-citizens.
The other end of the stick is how do the other nations of the world react? The US in particular likes to tell the world how to run their affairs. Especially their financial affairs. How far can you really push things before the US drone-strikes your country into the ground? No one will know unless someone tries this.
That said, I think the type of jurisdiction where this could practically happen would be one of a very few unique profiles. Potentially somewhere such as North Korea, Iran, Venezuela, somewhere that is being heavily sanctioned and shut out from the global financial situation. Desperation is a powerful motivator. Or maybe a Spanish or Italian secession movement is successful, or France slow boils until we see a 21st century French Revolution. Big changes happen after big political upheaval. What if the King of Thailand decided to host KYC-less(or KYC-lite) binks? Thailand is already massively economically dependent on foreign tourism dollars. Why not foreign Bitcoin deposits? Tourism has had many negative consequences for the country…Bitcoin binking wouldn’t unless you thought you would be invaded by China or the US.
This is not something I’m saying is a very likely thing to occur in such a relatively short time period as the next decade, but I’m saying it’s absolutely not crazy to think it might.
Alright, let’s look at the “darknet, no known jurisdiction, totally pseudonymous” scenario. Things are the exact same as the previous scenario as far as deposits and customers, they can process BTC withdrawals and deposits for anyone in the world. But a bink that operates extra-legally cannot legally incorporate in any jurisdiction, or establish any legally accountable entity. That is a major difference in terms of trade offs versus a bink being hosted by a complicit jurisdiction. This is a much more difficult place to attempt bootstrapping a network effect as a bink, in terms of acceptance of your cybercash and deposits rather than direct BTC settlement. A bink’s network effect is rooted entirely on trust in the operator(s) of the bink. That is much easier to build as a legally incorporated and accountable entity of a known jurisdiction. The landscape your relationship with that bink takes place in is established crystal clearly. That is the opposite of how a darknet bink would work.
There would be no legal accountability for a darknet bink, no government to go to, no legal processes to take, nothing. You get the guarantees you can enforce purely with cryptography, and everything else is enforced through blind trust with no recourse. That’s it. This presents a major bootstrapping problem for this variety of bink. How do you get customers to trust you with their deposits when they have no recourse to take if you defraud them? This quandary in my opinion guarantees that this type of bink would never be able to grow to the size of one that had a legal identity in a safe haven jurisdiction.
A darknet bink would likely never be something used by mainstream users, they would be businesses patronized solely by users in very constrained circumstances. People engaged in risky illegal activity. Scammers. People who have been censored and completely walled out of the legacy financial system. I just don’t see normal people being willing to take the risk of depositing BTC with a bink against which they have no legal recourse, and which is associated only with pseudonyms. There is the potential of creating stronger guarantees than possible now through cryptography, but that starts getting into a strange area. Like I said above when talking about the possible technical developments in the next decade, there is potential for constructs that totally blur the line between service and protocol. If things work out well enough, maybe a darknet bink could make up for the difficulties in establishing trust by building stronger cryptographic safeguards.
I think there is a very good chance things like this start operating in the next decade (especially a simple trust based darknet bink), the only question is how rampant will the exit scams be?
Birth Of A New Market
Bitcoin is evolving into money, that’s what we’re all witnessing and participating in. Speculation, to value transmission, to unit of account. A core and absolutely required dynamic for this evolution to be completed is a massive and liquid arbitrage between Bitcoin, fiat, and goods & services. This arbitrage is what will allow businesses to actually accept and use Bitcoin. Once Bitcoin is large and relatively stable enough, a business can accept it and pay suppliers without the kind of volatility risk that exists currently. The closer Bitcoin’s stability gets to a respective fiat currency, the safer it is to accept and use Bitcoin directly rather than immediately sell for fiat. Arbitrage traders will trade these gaps, businesses will probably arbitrage these pairs themselves! Is it a better return for you to accept Bitcoin or fiat for something? Incentivize with discounts. Is it a better return for you to pay your supplier in Bitcoin or fiat? That’s what you’ll make your decision on. This dynamic is what will truly launch Bitcoin into the realm of money.
Now, the world is shifting rather rapidly in terms of geopolitical balance. The US has spent the last 20 years playing Empire in the wake of 9/11, destroying numerous countries, pressuring the world to isolate others. We are clearly starting to see the reaction to this in the form of other nations beginning to develop alternative settlement systems and moving to lessen dependence on the USD. China and Russia have begun building their own SWIFT alternatives to settle payments. They’re also even trading oil against non-USD currencies. Venezuela is even trying to foster an oil trade in its own centralized “cryptocurrency” the Petro. The world is sick of American over-reach, and they are starting to take action to create platforms and systems not subject to American control and censorship.
This trend will undeniably continue, and inevitably begin to envelop Bitcoin itself. There is no reason why the arbitrage dynamic between Bitcoin <> fiat <> good & services has to start in the retail market. In fact, I think it very likely won’t. Within the next decade I am very confident that a coalition of nations in alignment against the United States will begin trading and settling oil against Bitcoin. If Bitcoin’s market capitalization, liquidity, and price continue growing at the rates they have historically then it is inevitable. The protocol and network can handle it, the products and services to hedge against the risk of volatility are becoming more numerous every year, and the overall liquidity would offer more utility than individual non-USD fiat currencies and nation-state funny “crypto” money.
An event like this would bring massive capital influxes and price movements like you could not comprehend, and I think the chances of this not happening some time in the next decade are extremely low. Buckle up.
This next decade is going to bring change and evolution on such a massive scale it will melt your faces off. I really don’t think many people in this ecosystem really grasp that. Obviously the people building things, the company CEOs, the players actually involved in these shifts and changes know. It’s also definitely fair to say that the astute and balanced observers know as well. But most people who hold Bitcoin, or casually participate or spectate in this space…I don’t think they have any idea.
The last decade was the shift from cypherpunk pipe dream to playing in the minor leagues. This next decade is going to be the shift to the major leagues. Do we all fuck up? Do we knock it out of the park? Does someone get hit in the stands if we hit a homer?
Who knows. I think observant people are capable of seeing inevitable outcomes from large trends, of seeing the large trends themselves and projecting different ways they can go. But how things actually play out ultimately comes down to how do individuals react to recognizing those trends or the outlying and identifiable obvious events.
Things are serious now, and that requires acting and thinking seriously.