Bitcoin (BTC) price received a boost as news that lawmakers in Paraguay plan to present a bill to make BTC legal tender spread across Twitter. Shortly after the unconfirmed news surfaced on Twitter, Bitcoin price rallied to $35,289 before slightly pulling back below the key short-term resistance level.
Congratulations Paraguay
• a bill has been submitted to make #BITCOIN legal tender
• reading likely to occur on July 14th
• they wish to be a crypto hub
• promotion of green energy mining
• some interest from Argentina & Brazil now too
— djThistle (@DJThistle01) June 24, 2021
While the cryptocurrency Fear and Greed Index still indicates a sentiment of Extreme Fear, it’s worth noting that the measure has risen from 14 on June 23 to 22 on June 24 as traders begin to view the drop below $29,000 and Bitcoin’s rising open interest as signs that the current corrective phase may have ended.
Cryptocurrency fear and greed index. Source:Alternative
While traders’ sentiment may have improved slightly, Cointelegraph analyst Marcel Pechman suggested that investors could be waiting for the $6 billion in Bitcoin and Ether (ETH) quarterly futures and options to expire on June 25 before making a more decisive move.
Stocks reach new record highs, altcoins rally
The crypto market wasn’t the only market to rally today. Traditional markets also rose to new highs after U.S. President Joe Biden revealed that he had reached an agreement on a $953 billion bipartisan infrastructure spending plan with the Senate.
Following the announcement, the S&P 500 and Nasdaq each rallied to new record intraday highs and closed the day up 24.65 points and 97.98 points respectively, while the Dow gained more than 322 points on the day.
As one would expect, altcoins also surged higher as Bitcoin price and traditional markets moved higher. Ether (ETH) rallied back above the psychologically important $2,000 level, while Tron (TRX) and Celo gained 26% and 28% respectively. CELO’s move appears to be driven by the listing of its Celo Euro (cEUR) stablecoin on KuCoin exchange.
Prior to the recent price rise, VORTECS™ data from Cointelegraph Markets Pro began to detect a bullish outlook for CELO on June 22.
The VORTECS™ Score, exclusive to Cointelegraph, is an algorithmic comparison of historic and current market conditions derived from a combination of data points including market sentiment, trading volume, recent price movements and Twitter activity.
VORTECS™ Score (green) vs. CELO price. Source:Cointelegraph Markets Pro
As seen in the chart above, the VORTECS™ Score for CELO climbed into the green and reached a high of 73 on June 22, one hour before its price began to spike 56% over the next day. The VORTECS™ Score turned green again on June 24, reaching a high of 74 as CELO began to rally another 25%.
The overall cryptocurrency market cap now stands at $1.4 trillion and Bitcoin’s dominance rate is 46.6%.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.
The BIS recently proposed Basel III capital requirements for banks holding cryptoassets on their balance sheets. The proposal treats stablecoins prudently, rightly suggesting they can more or less fit into the existing Basel framework. But the BIS proposed treatment of what it’s calling Group 2 cryptoassets — cryptocurrencies that have no issuer, such as bitcoin — completely misses the biggest risk: settlement risk for the banks handling the bitcoin. Traditional banks are simply not set up operationally or technologically to hold on-balance sheet assets, such as bitcoin, that settle in minutes with irreversibility.
Bitcoin has no operational fault tolerance.
This is one reason why bitcoin inherently doesn’t integrate well with existing banking systems, where clawbacks, transaction reversibility and operational fault tolerance are common. Moreover, most banks still reconcile their accounts with central banks or correspondent banks only once a day or a few times a day.
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It’s not hard to imagine a scenario in which this is a problem for a bank that trades bitcoin. Owing to fast settlement, the bank could build an outsized bitcoin exposure and not even discover this until its overnight reconciliation. Moreover, Group 2 cryptoassets have none of the mechanisms built into traditional financial markets to mitigate settlement problems — not the discount window, permitted failures to deliver, collateral substitution in securities financing, or ETF market makers authorized to create uncovered short positions, among myriad examples of operational fault tolerance in traditional markets.
What’s more, the structural features that protect against settlement risks in traditional finance don’t apply to Bitcoin. Central institutions can serve as lenders of last resort or clearinghouses that allow banks to withstand temporary settlement failures, such as the Fed (dollars); DTCC (securities); ICE, CME, and LCH (derivatives); and LBMA member banks (gold). And for these assets, the banking system in aggregate controls nearly all of the underlying collateral.
But the banking system will never control most of the bitcoin, ether, or other Group 2 cryptoassets. Why? Because individuals own the vast majority, and it is squirreled away (or lost) and rarely traded, if at all. Only an estimated 22% of the bitcoin supply is free float. During bull markets, that percentage can drop to 12%. Collateral is always scarce, and failure to timely deliver it is default.
To be clear, none of this is a Bitcoin problem. I’ve been a Bitcoiner since 2012 and welcome new entrants to the burgeoning network. But I’m also a Wall Street veteran who started three new businesses inside big banks — and, as a longtime “plumber” of both the crypto and legacy systems, I see the Basel III framework overlooking a clear disconnect between traditional financial markets and cryptoassets.
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Thankfully, there is a safe and sound way to integrate bitcoin and other Group 2 cryptoassets into banking systems:
Conduct all bitcoin activities in a ring-fenced bank that is either stand-alone or is a bankruptcy-remote subsidiary of a traditional (leveraged) bank.
Use no leverage in the bank. No rehypothecation. Hypothecation is fine, but the bank must not permit greater than 1:1 leverage. Remember—bitcoin has no lender of last resort or clearinghouse.
Take no credit or interest rate risk within the bank. Hold 100% reserves in cash, T-bills or similar short-term, high-quality liquid assets. The bank makes money on fees, which crypto fintechs have successfully done for years due to high transaction volume.
Pre-fund transactions, so that the bank settles second or simultaneously instead of settling first and thereby avoid “back door” leverage caused by a counterparty failing to deliver.
Permit no collateral substitution or commingling in prime brokerage.
Design IT and operational processes for fast settlement with irreversibility, complete with minute-by-minute risk monitoring and reconciliation processes.
A bank structured according to these guidelines should pose minimal risk to the payment system, regardless of the price volatility of bitcoin, because the bank is designed to withstand a bank run. But this is not just theoretical. A regulatory banking regime that meets the above requirements already exists, and it’s in an unlikely place: Wyoming.
This didn’t happen by accident. Wyoming put in the work. First, Wyoming built the commercial law foundation before enacting its special-purpose depository institution charter for cryptoassets in 2019. Then, it conducted a rulemaking process that has already been through two public comment periods. For its cryptoasset rulemaking, Wyoming had extensive access to people on the information frontier of cryptoassets — including Bitcoin Core developers, CTOs of crypto exchanges, specialist attorneys and a consumer advocate. Next, Wyoming hired Promontory to help draft a 750-page supervisory examination manual for bank supervisors. Then, it trained its examiners and has now begun to train judges in its courts.
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The result is a regulatory regime that’s far tougher on banks than the proposed BIS requirements, and which prioritizes the settlement risks that the BIS proposal missed. The perception has always been that the states lead a “race to the bottom” in bank regulation, but in this case the opposite is true — Wyoming’s laws are tougher, and they’re rightly focused on locking down payment system risk arising from mismatches in settlement speed and finality.
Apart from Wyoming, Texas, Nebraska and Arkansas are the only U.S. states that have clarified the commercial law status of cryptoassets — something that the BIS proposal rightly considers a prerequisite before banks can hold cryptoassets on their balance sheets. Of course, banks should have clear legal title to the assets they own. Right now that is only possible in four U.S. states.
To be clear, banks can and should provide custody services for Group 2 cryptoassets, just as they do for securities. But the BIS capital rules would allow banks to go much further than this, to hold bitcoin on-balance sheet, thereby taking principal risk (i.e., proprietary trading). Ironically, none of the states that have enabled cryptoasset banking (Wyoming, Texas and Nebraska) goes as far as the BIS proposal goes.
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The information frontier for Bitcoin is not on Wall Street. It’s not in Silicon Valley, either. It’s where the Bitcoin Core developers and “whales” (the large owners of bitcoin) are. They came to Wyoming in 2019 to help devise a safe and sound way to plug Bitcoin into the traditional financial system, and they were hyper-focused on settlement. I hope the BIS incorporates their findings. Traditional banks are leveraged, and leverage amplifies mistakes. Getting this wrong could prove bad not only for the banking system’s solvency over time, but also for bitcoin markets by adding to bitcoin’s already high price volatility.
Blockchain-based sports platform Chiliz has partnered with the Portuguese Football Federation to release fan tokens on Socios.
In a Thursday announcement from Socios, the platform said it will be dropping tokens for the Portugal national football team, also known as A Seleção or “The Selection,” within the next few days for local fans. As with previously tokenized sports franchises, the digital collectibles are minted on the Chiliz blockchain and allow token holders to vote in polls and earn VIP rewards.
“The launch of the $POR Fan Token will allow us to create new ways of reaching our supporters and interact with them in new and innovative ways.” said Portuguese Football Federation’s chief marketing officer Nuno Moura. “This will create new opportunities to engage fans with the Portuguese Team like never before, providing them with exclusive benefits, experiences and rewards.”
While Chiliz through Socios has formed partnerships with major names in sports to release fan tokens, crypto and blockchain firms are apparently vying to sign licensing agreements with sports franchises across Europe and the world. Earlier this month, the French Football Federation announced it would be launching official player nonfungible tokens, or NFTs, with blockchain-based fantasy soccer game Sorare.
Related:NBA 76ers joins fan token platform Socios
In the US, both the Philadelphia 76ers basketball team and National Hockey League’s New Jersey Devils have entered similar partnerships with Socios. The platform reported the sales of all fan tokens have generated more $150 million this year.
As the Harmony blockchain approaches the two-year anniversary of its mainnet launch, decentralized exchange SushiSwap will be deploying Sushi products related to rewards and yield farming.
In a Thursday announcement from Sushi, the project said it would be partnering with Harmony to introduce liquidity mining rewards for Sushi, rewards for Kashi borrowing and lending, Sushi-specific hackathon challenges, and other products. In Harmony’s aim to reach 10 billion people, it will be sponsoring a $1 million hackathon with Sushi featuring four challenges, with additional details to come in July.
“We believe this partnership with Sushi is just the beginning of bringing millions of people into decentralized finance,” said Harmony founder Stephen Tse. “As our mainnet matures, we are onboarding more key DeFi primitives that will enable access to many new communities.”
As part of the partnership, products include Sushi deploying a liquidity mining campaign on Harmony, with $1 million in Onsen (ONE) rewards and $1 million in 1SUSHI rewards available over 12 months. In addition, liquidity providers of Sushi’s ONE/ETH pool can earn SUSHI rewards according to the blockchain’s Onsen campaign.
Sushi’s Kashi lending platform will also offer users $2 million yield rewards on their assets through BentoBox on Harmony. Though the vault is native to Sushi and will not be moving to the new blockchain, Sushi said decentralized apps built using BentoBox — in this case, Kashi — can utilize all its assets.
Related:Cointelegraph Consulting: A review of SushiSwap roll-outs
Launched last year as a Uniswap fork, SushiSwap ranks 6th on CoinMarketCap’s list of decentralized exchanges, behind Uniswap’s v3 and v2 and others. However, data from Messari at the time of publication shows SushiSwap has more than $3 billion in total value locked, with more $86 billion in transactions. Sushi is responsible for roughly 15% of all decentralized exchange volume.
The deal will see FTX invest in Stocktwits and potentially acquire it outright.
The investment is a logical extension of FTX’s recent bid to raise its brand profile.
Cryptocurrency exchange FTX has signed a series of splashy sports and entertainment deals this year. Now, according to multiple sources, FTX and its exuberant founder Sam Bankman-Fried are making a foray into media by taking a stake in Stocktwits, a popular social investing site.
According to two sources who spoke on condition of anonymity, the deal will an involve an initial investment by FTX of around $20 million with an option to buy Stocktwits outright.
Stocktwits declined to confirm or deny the deal, while FTX and Bankman-Fried did not immediately reply to requests for comment.
The popularity of Stocktwits, which launched in 2009 based on the then-novel idea of combining investing and social media, has grown amid the recent mania for meme stocks. The company has a strong community of traders, and claims on its web site 5 million users. The sources say Stocktwits now carries a private valuation above $100 million, more than double the high end of the $10 million to $50 million range Crunchbase last reported in 2016.
For FTX, the engaged user base and social media following of Stocktwits (900,000 followers on Twitter) would provide new reach and marketing opportunities. Bankman-Fried has already signed a rash of deals to raise FTX’s profile, including sponsorships with Major League Baseball, the NBA’s Miami Heat, esports outfit TSM, and No. 1 NFL Draft pick Trevor Lawrence (through FTX subsidiary Blockfolio). These deals total hundreds of millions of dollars.
Speaking about the Miami Heat deal in May at the Ethereal Virtual Summit powered by Decrypt, Bankman-Fried said, “I think we originally came at it because we wanted to really get our name out there. And, and this is one of the highest profile ways of doing it.”
Owning part or all of Stocktwits would offer another way to get FTX’s name out there, and given that Stocktwits also runs a small trading platform, it has the potential to expand FTX’s user base.
In addition to drumming up publicity for FTX with frequent media appearances, Bankman-Fried has also expanded his company to include an NFT marketplace, while also working to build up Solana, a fast-growing rival to Ethereum’s blockchain; Bankman-Fried’s decentralized exchange Serum runs on Solana.
Decentralized finance (DeFi) has emerged in 2021 as one of the fastest-growing trends in the crypto sector and as the unique features of DeFi begin to work their way into traditional finance, executives from crypto and conventional business circles warn that regulation could be on the way if the protocols don’t take steps to self-regulate.
On June 23, Mike Novogratz, CEO of Galaxy Digital, warned that DeFi protocols will soon need to decide if they want to incorporate know-your-customer and anti-money-laundering procedures to gain acceptance from regulators or “pay the piper later.”
Starting to think that major DEFI protocols are going to have to decide if they are going to play by the rules that most countries want them to (KYC/AML), or if they are going to flip the middle finger at them. Invest in a compliance layer now or pay the piper later.
— Mike Novogratz (@novogratz) June 23, 2021
On June 17, billionaire investor and DeFi advocate Mark Cuban called for stablecoin regulation after losing money during the Iron Finance ‘bank run’, highlighting the growing calls for regulation in the Wild West world that is DeFi.
In several follow-up tweets, Novogratz expounded upon his position and warned that governments have developed tools to help deal with this growing threat and that it would be wise to work with regulators for the long-term success of the ecosystem.
Novogratz said:
“It’s not wise to think governments have no tools in their kit to go after the bad guys… they do. If we want this ecosystem to grow we need to recognize we need to operate within the rules society sets.”
While the idea of adding KYC and AML features to DeFi goes against the ethos of anonymity and decentralization that many in the crypto community hold dear, it might be something worth considering as the number of DeFi users grows and scam projects proliferate on many protocols.
Related:Beware of ‘soft rugs’ — A growing menace in decentralized finance
Data from Glassnode shows that while the DeFi userbase continues to grow, the month-over-month gains have been declining lately, down from 25% gains in May and 18% gains in April. Currently, June is “on pace to do 12%.”
2021 DeFi user growth. Source:Glassnode
As new users enter the ecosystem, it is important for them to have a positive first experience in order for them to want to continue to engage with DeFi protocols and it’s possible that regulation and accountability could help.
Regarding user concerns related to privacy, Novogratz said that the latest protocol upgrades under development could make privacy and compliance a real-world possibility.
Novogratz said:
“Zero-knowledge compliance and other systems need to be developed for DeFi to scale. I am confident they will be.”
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.
Despite Bitcoin’s big sell-off, New York investment firm Ark Invest is continuing to load up on exposure to the world’s largest digital asset alongside other institutions.
Ark Invest, founded by CEO and CIO Cathie Wood in 2014, has outperformed the market for years now, drawing attention from Wall Street as forward thinkers in traditional finance.
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The firm has used its Ark Next Generation Internet ETF (ARKW), which focuseson companies that are disrupting the traditional internet, to invest in BTC through the digital asset management giant Grayscale.
ARKW ETF trades from June 22ndrevealthat Ark Invest bought the Bitcoin dip, adding a massive 1,046,002 shares of the Grayscale Bitcoin Trust (GBTC), currently valued at just over $30.3 million.
Ark manages several exchange-traded funds (ETFs) focusing on the innovation sector, including robotics, 3D printing, space exploration, and more.
At the time of writing, Bitcoin is trading at $33,500, down nearly 50% from its all-time high.
Cathie Wood has remained a strong advocate for Bitcoin and cryptocurrencies through the recent market turmoil. After Bitcoin sharply fell to $30,000, WoodtoldBloomberg in an interview that she maintains her bullish outlook on the crypto asset and says that the current capitulation is a great buying opportunity.
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“We were looking at all the indicators this morning, they’re all suggesting that we are in the capitulation phase, which is a really great time to buy. No matter what the asset is, capitulation is a buy. It’s on sale. Am I saying $35,000 is the low?
Traders, and there are a lot of speculators in Bitcoin, if they are running for the hills just because Bitcoin has broken through a moving average that is important to them… [The correction] could continue, but all our indicators are saying this is capitulation right now.”
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Enjin, a blockchain gaming and nonfungible token platform, has stepped up to decarbonize its footprint by joining the Crypto Climate Accord, a move that adds further credibility to the industry’s growing environmental mandate.
The Crypto Climate Accord is backed by 20 firms from the blockchain, fin-tech and greentech industries. Inspired by the 195-signatory Paris Climate Agreement, the Accord was established in April to address the “large and growing energy consumption of cryptocurrency and blockchain, and the climate impact of their energy use.”
Enjin claims that its JumpNet blockchain has already achieved carbon-negative status nine years ahead of schedule. In March, the company said it planned to enable carbon-neutral NFTs by 2030.
“The creation of new forms of technology should never come at the cost of destroying our environment,” said Enjin CEO Maxim Blagov. “Carbon neutrality for JumpNet is an important step toward our vision of a sustainable NFT ecosystem for Enjin and our partners.”
In addition to decarbonizing newly created tokens, Enjin’s environmental sustainability plan includes supporting the tokenization of the physical economy and decarbonizing existing digital assets. Other measures include upgrading to carbon-neutral nodes and incentivizing carbon reduction technologies.
Environmental concerns have virtually hijacked Bitcoin’s narrative this year, with the likes of Elon Musk casting shade over carbon-intensive mining. The Tesla CEO briefly embraced Bitcoin earlier this year before deciding that BTC payments are no longer acceptable due to environmental risks. Now, he states that his firm is willing to accept payments of the virtual currency, provided there’s more evidence for sustainable mining.
Related:Elon Musk lays out when Tesla will begin accepting Bitcoin payments
Other environmental sustainability efforts within crypto are also underway. As Cointelegraph reported, Tyler and Cameron Winklevoss’ Gemini exchange has purchased carbon credits to reduce Bitcoin’s carbon footprint. Separately, U.S. miner Stronghold Digital Miner recently announced that it raised $105 million to divert waste coal to cryptocurrency mining.
Bitcoin can send transactions and incorporate them into a public blockchain which serves as a ledger. Bitcoin is valuable because we can be certain the transactions included in the ledger are legitimate and not fraudulent. We can be certain they are not fraudulent because of the size of the Bitcoin network. This chapter will explain how the decentralized network incentivizes independent participants to organize and create legitimate transactions on the blockchain.
Decentralized Software
A computer is made up of memory and processing power. Memory is stored information that some computers have more of than others. Processing power is the ability to convert inputs into outputs and some computers can process faster than others. Software comprises rules that a computer is told to follow. A computer takes in inputs, applies the rules it is given, and produces outputs.
Bitcoin is software, but its nature is different from what we are used to because it is decentralized. Most software we are familiar with uses a centralized network to function. Consider Facebook and how it works. When you log in to create an account your information is uploaded to one of the many computers Facebook uses for storing the information of its users. Every time you make a post or comment that information is added to the computer. If the CEO wanted to delete or change your information then he would call the guy who manages the computers, give him your name, and tell him what to do with it. This is all possible because Facebook is a centralized company.
Indeed, most companies we are familiar with operate in a centralized manner and for good reason. The fact that the CEO is a phone call away from making these changes allows the company to function efficiently. In return for this efficiency, the stakeholders of the company (employees, shareholders, and customers) must trust that the CEO is doing what is best for all of them simultaneously. Roughly speaking, the CEO of a company does not require a consensus of agreement from the stakeholders to enact change, and this allows a company to be agile in a competitive market.
At the other end of the spectrum is a decentralized group – where decisions are made by achieving consensus among a group of participants. In its purest form this system does not require trust in a central authority because the will of the stakeholders will always be achieved. This process is inefficient but necessary for enacting operations that are highly subject to moral hazard.
America’s founding fathers knew this when constructing the balance of powers and our democratic process for electing officials. It allowed society to maintain a high degree of control over those whom they elect to be in charge. Put simply, purely decentralized systems are slow and inefficient, but necessary to eliminate the agency problem where a conflict of interest exists.
The age of computing enabled decentralized systems because the ability to transfer information at near the speed of light made the requirements of decentralization much less onerous. Software became the ideal medium for decentralization. With computing advances came a new universe of ideas that could now be decentralized, but remain operationally feasible.
Image source
Decentralized software is code that is automated enough so that there does not need to be a centralized owner (like a CEO). Instead, it is a set of rules that everyone who interacts with the software is required to follow. Once the rules are set they cannot be changed, UNLESS most network participants agree to make the change.
This agreement is achieved through action because the software is open source – everyone has their own copy of the code which they can change in whatever way they wish. However, if one changes their code too much, they might not be able to interact with other people’s code anymore. Everyone can change their own code however much they would like, but the rules that are followed are those that most of the network chooses to follow. Anybody that does not want to follow them can change their code, but this means that they can only interact with others who have made this change as well. Simply put, if somebody wants to change the Bitcoin software, then they need to convince the majority of participants to do the same. If they cannot, Bitcoin will not change.
Decentralized systems follow a set of rules. The rules change when the majority of participants download software with the rule change. If they do not, the rules remain, and the minority must decide whether to stay or leave.
The Bitcoin Network
The Bitcoin Network exists as the sum of all network participants. Participants are called nodes – a computer with compatible Bitcoin software connected to a network. Each node in the network can participate in multiple ways, depending on the software it uses, and is constrained by its memory and processing power. There are currently approximately 10,000 Bitcoin known nodes worldwide, as seen on the map below:
Image source
Nodes participate in the network via three primary functions: routing, verification, and mining. When a node hears about a transaction it verifies it by checking that the sender has enough bitcoin to spend, that they haven’t spent those bitcoins anywhere else, and that their signature matches their address. If all checks are successful the node routes the transaction to other nodes, but if not, it forgets about it. Mining nodes not only verify and route, but they also add transactions to their memory pools and attempt to record their memory pool copy in the blockchain by solving a computational puzzle (proof of work).
The Mining Process
For a new block to be mined and included in the blockchain, a mining node must solve the proof-of-work (PoW) computational puzzle. The proof-of-work algorithm is solved by generating a hash of the block header items that falls below the difficulty target. Because a hash function’s output is random, the only way to produce a low enough number is by guessing. The difficulty target is used to increase or decrease the chance that a miner solves the proof of work algorithm. The lower the difficulty target is, the harder it becomes to solve because the range of possible answers is smaller.
Recall the block header items from the prior essay:
Block header items with time stamp, difficulty target, and nonce highlighted.
The below formula combines all of these items and hashes them to calculate the block header hash:
block header hash =
hash-function (merkle root + previous block hash + version + time stamp + difficulty target +nonce)
Miners can change what the block header hash is by changing what they put into the nonce field. So, if the block header hash is less than the target difficulty, the block is successfully mined. The reason you cannot just pick a low number is because the hash functions output is random (there is no way to just make it produce a low number).
Miners compete to solve the proof-of-work computational puzzle by iterating the nonce field until it produces a block header hash less than the difficulty target.
The Longest Chain Rule – Resolving Disagreements
Once a miner finds a solution, they immediately broadcast it to their peers (i.e., nodes which they are connected to). Those nodes then verify that the solution is correct and, if so, broadcast the solution to their peers. The chart below shows that 95% of the blockchain will become aware of it in about 40 seconds on average.
Probability density function of block propagation time.
Image source (with Erik Yakes additions)
Nodes accept this new block by incorporating it into their copy of the blockchain. Miners accept this new block and begin mining the next block, with the newest block added to their blockchains, thus restarting the process. This cycle occurs on average every 10 minutes – the difficulty target automatically adjusts to make it so.
Because the difficulty target adjusts to find a block on average every 10 minutes, we know that a miner will receive a block reward every 10 minutes on average for successfully mining the block. The block reward includes the fees which nodes pay on a transaction, and the coinbase transaction creates more new bitcoin.
Block reward= coinbase transaction + block fees
The coinbase transaction rewarded 50 bitcoins in 2008 and is designed to cut in half every four years until the year 2140 when it will reach the maximum supply of 21 million bitcoin.
What if different copies of the blockchain from different nodes are solved simultaneously? If there are disagreements between nodes, they follow the longest chain rule:
They work on the first block they receive but save the other branch of the blockchain in case it becomes longer.
One chain will become longer once the next block is found, and the nodes of the shorter chain will switch to mining the longest chain.
Nodes follow the longest chain rule which resolves all disagreements over time.
Incentives – The Proof-of-Work (PoW) Algorithm
An important question to answer: why isn’t some miner’s block just randomly picked every 10 minutes? Why do we have to consume all this energy running computers to solve this problem?
Well, we know PoW creates digital scarcity but there is also another purpose – security. The blockchain is extended by those who solve the algorithm. If a miner solves it they could incorporate transactions that are fraudulent. However, these fraudulent transactions would be rejected by other nodes because they don’t pass verification. So, in order to extend the blockchain with fraudulent transactions, it would have to be extended by the miner who has the interest in doing so. This would require greater than 50% of the computing power of the entire network. So, the more expensive it is to mine, the harder it is for a bad actor to do so.
It would also not be in the bad actor’s best interests to do so. In Satoshi’s words:
He ought to find it more profitable to play by the rules, such rules that favor him with more new coins than everyone else combined, than to undermine the system and the validity of his own wealth.1
In other words, if someone successfully attacked Bitcoin it would simultaneously destroy the value of bitcoin (because the network is no longer secure, so nobody would want bitcoin) and the attack would be worthless. This game-theoretic incentive is a major defense of Bitcoin against bad actors.
The proof-of-work algorithm is like a test. Much time and energy has been spent by students to take tests that produce nothing of tangible value other than proof of their knowledge. By doing so, schools gain credibility from the performance of their graduates and feel comfortable graduating them because they have proven their knowledge.
Similarly, Bitcoin gains credibility by the security of its network. Its security is in the fact that people know with certainty there will only ever be 21 million bitcoin. The cost of mining is what makes this certain. Securing the Bitcoin network means securing a trustless, decentralized monetary medium that is not subject to moral hazard. A monetary system is the foundation of an economy, and in turn its security is of the utmost importance. Fiat money is more like a school without tests.
The Rules Of Bitcoin
With an understanding of what Bitcoin does and how it works we can now summarize the most salient rules that nodes of the Bitcoin network follow. Bitcoin is software, so if you want to know the rules the best way to do that is to review the code. If you don’t know how to do that, below is a summary of the most salient rules. These rules are necessary to grasp how Bitcoin’s software forms transactions, compiles them into blocks, secures the blocks into a chain, and secures a fixed supply schedule of new bitcoins. Below the rules are delineated between the transaction level and block level for ease of understanding, although some rules are not mutually exclusive and could be included in either category.
These rules exist from consensus as network participants willingly accept them. Participants accept them by downloading the Bitcoin software and utilizing it. In fiat systems, rules do not emerge by consensus but by decree (the definition of the word fiat). We do not vote on our monetary policy. Rather, monetary policy is influenced by politicians and controlled by these people:
The Federal Reserve Board of Governors April meeting 2019.
Image source
Why Bitcoin Is So Valuable.
People buy bitcoin because of its superior money properties, increasing its price. Price increases attract more miners, expanding the computing power of the network, and making the network more secure and thus more valuable. This further increases the price over time. As the bitcoin price rises it creates a positive feedback loop in which participants believe it will continue to rise. That is the power of a network effect when applied to a standard of value. This feedback loop is predicated on Bitcoin’s monetary properties (determined by the rules) because people would not have speculated on bitcoin in the first place without them. The monetary properties of bitcoin will be covered in the next essay.
How The Rules Can Change
The Bitcoin software is called Bitcoin Core which can be downloaded at bitcoin.org. This is the most widely used Bitcoin software, but there are other valid versions of the Bitcoin software. The other versions must maintain a minimum level of similarity with Bitcoin Core to participate in the Bitcoin network. This minimum level is that a node needs to check for the validity of transactions and blocks in the same way as other nodes. If it does not, the transactions/blocks it creates and relays will likely not be accepted by other nodes and vice versa. Bitcoin Core is the standard of these rules and thus, the de facto rulebook of Bitcoin.
In order for the rules to change consensus needs to be achieved across the three primary stakeholder groups:
You can see that each group has a form of power, but none have full control. Note that there is a small group of developers that can actually update the code (called commit access) while the rest of the community publicly propose changes.
What if somebody attempted to control this small group of developers with commit access? Well, they have the power to make new software for the community to willingly download but cannot make them download it. Further, all changes to the software are reviewed by community members because it is open source, therefore any changes are quickly identified.
The Bitcoin rules are created by the community and implemented by developers with commit access. Nodes (miners) must download the updated software for the network to accept it and investors must continue to hold and buy bitcoins for the software change to matter.
Changes to the rules of Bitcoin require consensus across the the primary stakeholder groups.
Our fiat financial system is controlled by a highly centralized group. You have a choice of whether you want to abide by the democracy of the Bitcoin system or the continuously changing rules of the present fiat system. As more people adopt the Bitcoin system, this decision will become much easier. However, this adoption will require significant development of the current ecosystem that supports it, covered in the next essay.
References
Bitcoin and Cryptocurrency Technologies, Arvind Narayanan, Joseph Bonneau, Edward Felten, Andrew Miller, Steven Goldfeder, 195
Eric Yakes came from the private equity industry and is a CFA charterholder turned bitcoin pleb and author ofThe 7thProperty: Bitcoin and the Monetary Revolution– a comprehensive/technical resource on money, banking, and bitcoin. He is passionate about enabling the Bitcoin ecosystem through financial services – if you have similar interests send him a DM@ericyakes.
This is a guest post by Eric Yakes. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
Square, ARK Invest, and Paradigm are launching The B Word, a Bitcoin educational initiative targeted at institutions.
An online conference in July will feature Jack Dorsey, Cathie Wood, Adam Back, and others as speakers.
Twitter and Square CEO Jack Dorsey recently said that it’shis mission in lifeto spread adoption and promote awareness of Bitcoin. The latest step in the process? Launching an online conference designed to educate institutions about the leading cryptocurrency.
The B Wordis the name of the initiative, and it will go live on July 21 with an online conference featuring Dorsey and other notable speakers. Square is co-sponsoring the event along with investment firms ARK Invest and Paradigm, as well as the Crypto Council for Innovation.
Along with Dorsey, the online conference will feature ARK Invest founder, CEO, and CIO Cathie Wood, as well as Blockstream co-founder and CEO Adam Back and noted Bitcoin developer John Newbery. It will also include Michael Morell, former acting and deputy director of the CIA and current senior counsel of Beacon Global Strategies.
According to the official website, The B Word “aims to demystify and destigmatize mainstream narratives about Bitcoin, explain how institutions can and should embrace it, and raise awareness around areas of the network that need support.” Along with the conference, The B Word will provide a library of resources for institutions considering using Bitcoin.
The #bitcoin development community above all else.
As more companies and institutions get into the mix, we all want to help protect and spread what makes #bitcoin open development so perfect.
This day is focused on education and actions to do just that.https://t.co/5pxX1LIVVA
— jack (@jack) June 24, 2021
The conference will include five tracks designed to inform participants on various aspects of the Bitcoin ecosystem: Demystifying Bitcoin, Supporting the Developer Ecosystem, Securing the Bitcoin Network, Regulating Bitcoin, and Preserving the Bitcoin Ethos. Amidst all of that will be a live panel featuring Dorsey, Wood, and other speakers, moderated by Square Crypto’s Steve Lee.
“The Bitcoin developer community above all else,” Dorseytweeted todayalongside the announcement. “As more companies and institutions get into the mix, we all want to help protect and spread what makes Bitcoin open development so perfect. This day is focused on education and actions to do just that.”
Dorsey, whocontinually buys Bitcoin,donates to Bitcoin-related efforts, and called theBitcoin whitepaper “poetry,”recently appeared at the Bitcoin 2021 conference todetail his increasingly Bitcoin-centric worldview. “I don’t think there’s anything more important in my lifetime to work on,” he said, adding that other cryptocurrencies “don’t factor in at all” in his view.
“Whatever my companies can do to make it accessible to everyone is how I’m going to spend the rest of my life,” Dorsey stated at Bitcoin 2021. “If I were not at Square or Twitter, I would be working on Bitcoin. If it needed more help than Square or Twitter, I would leave them for Bitcoin.”
