bookmark_borderSearching deep: The quest for Bitcoin scalability through layer two protocols

The quest for a workable Bitcoin scalability solution is still ongoing with developmental efforts in protocols like the Lightning Network and Statechains.

As the largest cryptocurrency by market capitalization, Bitcoin’s (BTC) effectiveness as a medium of exchange is still a matter for debate. Unlike fiat money that is inherently infinite in supply and must be managed by a central bank, Bitcoin is akin to gold in that it is commodity money with a finite supply of 21 million.

However, the supply cap is not the major stumbling block for BTC as a medium of exchange, but rather, the transaction throughput. While Satoshi Nakamoto envisioned Bitcoin as a peer-to-peer electronic cash system capable of facilitating online payments without a central counterparty, seven transactions per second on average is hardly the standard for scalability.

Indeed, scalability is only one of three major metrics required for any currency system to succeed as a medium of exchange along with adoption and liquidity. There is an argument to be made of Bitcoin’s growing adoption around the world across several strata of the global economy.

Price volatility that has seen Bitcoin peak at $58,000 and then briefly fall below the $30,000 mark within the first two months of 2021 likely indicates lingering issues with liquidity. However, it’s important to note that the current period is being characterized by a bullish advance that began in October 2020. Ultimately, some analysts expect Bitcoin’s volatility to level out as more institutions take up positions in the market.

What do the critics say?

Bitcoin’s scalability problem is even older than the network itself. Indeed, upon first proposing the system back in 2008, James A. Donald replied to Satoshi Nakamoto with: “The way I understand your proposal, it does not seem to scale to the required size.”

This astute observation has been at the heart of some of the more contentious and controversial debates within the Bitcoin ecosystem. Disagreements over how to solve the problem have even resulted in multiple hard forks.

These days, when Bitcoin critics cannot definitively dismiss BTC’s store of value proposition, scalability seems to be a low-hanging fruit with which to craft some anti-Bitcoin soundbite. Speaking during the 2021 Daily Journal annual shareholders meeting, Berkshire Hathaway vice-chairman Charlie Munger remarked that Bitcoin will never become a global medium of exchange due to its price volatility.

The 97-year-old billionaire investor is no stranger to espousing anti-Bitcoin sentiments. Indeed, together with Warren Buffett, the two Berkshire Hathaway chiefs have been responsible for some of the more colorful negative remarks among Bitcoin. From being “rat poison squared” to “trading turds,” Munger once slammed BTC investors for celebrating the life and work of Judas Iscariot.

Munger, like Buffett, is among a class of Wall Street Bitcoin critics who have often claimed that Bitcoin has no intrinsic value. However, with the price of BTC continuing its relentless upward advance over the past decade while attracting significant institutional interest, detractors now seem to be left with only the scalability argument.

Even among mainstream crypto adopters, Bitcoin’s inability to scale at the base protocol level also seems to be a significant issue. In an address during the Future of Money conference back in February, Mastercard executive vice chair Ann Cairns declared that BTC was not suited to its crypto payment plans.

According to Cairns: “Bitcoin does not behave like a payment instrument […] It’s too volatile and it takes too long to transact.” As previously reported by Cointelegraph, Mastercard recently announced plans to offer support for cryptocurrency payment on its network.

Lightning Network node count rises, but slowly

Together with the 10-minute block creation time, the one-megabyte block size acts as the actual transaction throughput constraint for the Bitcoin network. The block size debate of 2017 that ultimately led to the Bitcoin Cash hard fork proved the adamance of Bitcoin purists to the 1MB block size ethos.

With the “big blockers” now firmly on their own Bitcoin forks like BCH and Bitcoin SV, the question of how to get BTC to scale without changing a thing on the protocol level still lingers. From Bitcoin banks to sidechain protocols, and even deferred settlement infrastructure layers like the Lightning Network, several developmental projects are currently ongoing to make Bitcoin more suitable for microtransactions like paying for coffee.

At a high level, these scaling solutions involve the creation of trustless, centralized (pardon the oxymoron) entities or layer-two networks that maintain lightweight versions of the BTC ledger to handle the actual “coin” transfers without having to maintain the full Bitcoin ledger. These sidechain implementations then transmit the transaction data for final settlement on the actual Bitcoin network.

LN is one of the major Bitcoin scaling solutions under active development by several organizations including Blockstream and Elizabeth Stark’s Lightning Labs. The Lightning Network is perhaps the most popular of the “defer-reconcile” scaling implementations that allow users to create payment channels that offer instant coin transfers at minimal fees.

According to data from LN data aggregator 1ML, there are over 17,300 public Lightning Network nodes and more than 38,400 channels. LN capacity is currently north of 1,100 BTC.

While LN adoption is yet to attain significant heights, layer-two implementation might be about to get a boost with Zap — a Visa-backed Lightning Network payments startup. In February, the company launched Strike — a payments and remittance app that utilizes the Lightning Network for payments.

Strike has also partnered with crypto exchange platform Bittrex to deliver LN-powered payments to over 200 countries around the world. The company plans to issue Strike Visa cards to users in the United States as well as in Europe and the United Kingdom before the end of the year.

What about Statechains?

There is a school of thought that argues Bitcoin scalability is only possible via layer-two solutions. Ruben Somsen, Bitcoin developer, crypto podcaster and founder of the Seoul Bitcoin meetup, is one of the proponents of this argument.

Somsen is an advocate of Statechains, another layer-two implementation but with a twist — transaction participants send private keys instead of actual unspent transaction output, or UTXO. The process involves loading a Statechain-compatible wallet with the exact BTC sum required for the trade followed by the transfer of the private keys from the sender to the recipient.

Since transferring private keys across the blockchain is fee-less and instant, the Statechain idea seems to have gained some traction within the Bitcoin scalability discussion. However, revealing private keys comes with significant security implications.

Thus, in recent times, the Statechain concept has been modified to include a third entity that acts as an intermediary between the transacting parties. Detailing the workings of this counterparty federation within the Statechain matrix, Somsen told Cointelegraph:

“Statechains allow you to take your coins off-chain (meaning cheap transactions) in a way that puts a minimum amount of trust in others. You have to trust a federation, but the federation won’t know that they are getting partial control of your coins, and they can’t refuse peg-outs (moving back to the Bitcoin blockchain).”

Blockchain infrastructure firm CommerceBlock is one of the companies actively developing Statechains as a viable scalability solution for Bitcoin. The firm is credited with introducing the counterparty federation or “Statechain entity” to improve the security of the system. In a conversation with Cointelegraph, CommerceBlock CEO Nicholas Gregory outlined how Statechains operate:

“At a high level, Statechains are simply a way to transfer your private key to another user. To facilitate this, you have to cooperate with a Statechain entity. However, at all times, the user has full control of their funds; at any anytime, they can withdraw their Bitcoin to their own custody. Therefore, the transfer is instant and private.”

While Statechains is a scalability solution on its own, some proponents agree that the system could integrate with the Lightning Network. With Statechains operating on the UTXO level, it is theoretically possible for another layer-two protocol such as the Lightning Network to be implemented on top of Statechains.

Such a hybrid integration could solve the limited node capacity issue of Lightning Network while ensuring the ability to facilitate multiple microtransactions via Statechains. Since the exact transaction amount is loaded into Statechain wallets, it’s impossible to split UTXOs making Statechain in its present iteration unsuitable for microtransactions.

According to Somsen, the Statechains can operate independently as well as function together with the Lightning Network: “Statechains complement the Lightning Network perfectly because opening and closing channels can happen off-chain. This removes a lot of the friction that exists in the current Lightning Network design.”

For Gregory, integrating Statechains with the Lightning Network is among the future developmental plans for CommerceBlock: “Statechains are instant and do not require liquidity lock up; however, you are sending the private key, so you can’t do small or specific denominations. This is where LN excels.”

With these developments and more, the quest for a workable Bitcoin scalability solution is still ongoing. While critics, like Munger, who have been consistently wrong about BTC, continue to drop soundbites, developers are hard at work to solve one of the longest-running operability issues concerning Bitcoin.

bookmark_borderBitcoin price hits $51K as U.S. Senate passes $1.9 trillion stimulus

Bitcoin reaches $51,000 as the U.S. Senate greenlights $1,400 “stimmy” checks for Americans.

The price of Bitcoin (BTC) reached over $51,000 on March 7 after the U.S. Senate passed the anticipated $1.9 trillion stimulus bill, which is roughly two times larger than the market capitalization of BTC.

United States’ President Joe Biden said that the Senate’s approval shows major progress in delivering a “desperately needed” stimulus bill to Americans. He said:

“Today I can say we’ve taken one more giant step forward in delivering on that promise, that help is on the way. It wasn’t always pretty, but it was so desperately needed, urgently needed.”

BTC/USDT 4-hour price chart (Binance). Source: TradingView.com

Why is the stimulus bullish for Bitcoin price?

When a stimulus bill gets passed, it immediately relaxes the financial conditions in the U.S. The past year has shown that the effect of such measures raises investors’ appetite for risk-on assets, including stocks and cryptocurrencies.

In April 2020, when the first stimulus bill was passed, it coincided with a massive bull run in both the U.S. equities market and the cryptocurrency market.

Naturally, investors anticipate the second stimulus package to have a similar effect on the price of Bitcoin in the short term.

Peter Brandt, a long-time trader, said the devaluation of the purchasing power of the U.S. dollar has only started.

The combination of a devaluing dollar and the new stimulus package would likely cause the market sentiment around Bitcoin to improve. Brandt wrote:

“The devaluation of the purchasing power of the U.S. Dollar $DX_F has only just begun. This is why Bitcoin $BTC, real estate, U.S. equities and commodities will continue to trend higher when expressed in $USD fiat terms.”

Consumer price index for all urban consumers. Source: Peter Brandt, Fred

If the U.S. stock market begins to recover after a week-long pullback, it could further catalyze Bitcoin given that equities and cryptocurrencies fell in tandem during the recent correction.

Chinese companies following MicroStrategy’s strategy? 

Atop the improving macro environment for Bitcoin, the first Chinese listed company called Meitu has officially bought $40 million worth of Bitcoin and Ethereum. The company stated:

“The Group has purchased 15,000 units of Ether and 379.1214267 units of Bitcoin (BTC), both cryptocurrencies, in open market transactions at an aggregate consideration of approximately US$22.1 million and US$17.9 million respectively, on March 5, 2021.”

“The first Chinese listed company to buy a large amount of Bitcoin appeared,” a popular Chinese journalist by the name of Wu Blockchain commented on March 7. “Photo-retouching software company Meitu announced that it would buy Bitcoin and Ethereum for 40mln$. But its founder was criticized for issuing multiple ICOs in 2017.” He added: 

Meitu said that crypto has enough room for appreciation, it can diversify the risk of holding cash in fund management. Affected by this, there may be more Chinese companies buying Bitcoin to boost their stock prices, but they may also be banned by the Chinese government.”

If a new trend emerges where public companies in Asia begin to buy Bitcoin, it could lead to an influx of new capital into the Bitcoin exchange market.

While it is unlikely that many publicly listed companies in China would announce Bitcoin purchases due to the uncertain regulatory environment, countries like Japan and South Korea could see a similar trend occur in the next few months.

bookmark_border美图公司已购买约 4000 万美元 BTC 和 ETH

链闻消息,美图公司发布公告,集团于 2021 年 3 月 5 日在公开市场交易中购买了 15,000 枚以太坊和 379.1214267 枚比特币 (BTC),这两种加密货币的总对价分别约为 2210 万美元和 1790 万美元。这些购买是根据董事会先前批准的一项加密货币投资计划进行的,据此,集团可以购买净额不超过 1 亿美元的加密货币,其资金来源为公司现有的现金储备 (但非公司首次公开发行所得的余下款项)。

链闻注,美图曾于 2018 年 1 月 22 日发布区块链白皮书「美图智能通行证」MIP—Meitu Intelligent Passport,其愿景是通过为用户创建一个去中心化、安全加密的身份通行证,2018 年 2 月多家媒体称名为「美链 BeautyChain」,(代币名称 BEC) 的新项目疑似与美图有关,不过美图于 2018 年 4 月发声明宣布终止与 BEC 美链合作,同时重申没有、也不会发行任何数字货币。

原文链接:美图公司已购买约 4000 万美元 BTC 和 ETH

bookmark_border以太坊基金会发起关于「支持 Rollup 发展」的社区捐款申请

链闻消息,以太坊基金会发起关于 Rollup 的社区捐款申请,并呼吁所有对在以太坊上搭建 Rollup 感兴趣的人参与进来,捐款申请截止日期为 2021 年 4 月 16 日。以太坊基金会表示,以太坊生态系统很可能将 Rollup 作为近期和中期未来扩容方案,Optimistic Rollup 和 zkRollup 已经在筹备中,也许很快就会投入使用,捐款目标是发展 Rollup 社区,帮助启动完善的生态系统,让更多应用建立在 Rollup 方案之上。

原文链接:以太坊基金会发起关于「支持 Rollup 发展」的社区捐款申请

bookmark_borderWhat gives Ether token its value?

Ethereum’s Ether coin is arguably valuable for different reasons than Bitcoin.

Bitcoin holds the top spot as the world’s first and largest cryptocurrency. The coin carries worth based on its position as a store of value capable of transacting value globally and comparatively easier than other similar assets, such as gold. Ethereum’s asset, Ether (ETH), has a different value proposition, arguably valuable for a number of reasons. 

“Ethereum derives its value from a number of different factors, including gas fees, its usage as collateral, its ability to be lent and borrowed, its use as a medium of exchange for trading and NFTs [nonfungible tokens], and the fact that it can be staked for interest,” Scott Melker, a crypto trader and the host of The Wolf Of All Streets podcast, told Cointelegraph, adding: “It also has speculative value and is gaining increased attention and interest from institutional investors.”

The backstory behind Ethereum

Ethereum is the network on which its tradable coin, ETH, runs. Ethereum launched in 2015 based on a concept from a programmer named Vitalik Buterin roughly two years prior. In short, Ethereum acts as a platform on which developers can build projects or solutions.

The Ethereum network has become a staple in the crypto space over the years, with many projects based on it. A large number of initial coin offerings used Ethereum in 2017 as a funding vehicle. Crypto assets based on Ethereum’s blockchain are called ERC-20 tokens, although ERC-721 tokens also exist as nonfungible tokens built on the network.

When a project builds on Ethereum, it may come with an asset for use within that ecosystem. That asset would likely be an ERC-20 token. It is not uncommon, however, for projects to switch over to their own mainnet blockchain after launching initially on Ethereum’s blockchain.

Much of the decentralized finance sector of crypto also began on Ethereum, with decentralized exchanges based on Ethereum’s blockchain hosting trading for numerous tokens associated with the niche. DeFi lets participants borrow and lend crypto assets, among other capabilities. As noted by Melker, ETH can play a part in this ecosystem.

Ethereum transaction costs called gas fees

Part of ETH’s value relates to gas fees. Whenever a person sends ETH, they must pay a certain amount of the coin to pay for the transaction — a similar concept to the fees users pay when sending Bitcoin (BTC).

A big difference with ETH, however, is that sending ERC-20 tokens incurs gas fees. To send an ERC-20 token, the transactor must also hold ETH in the same wallet to pay for the transaction. Trading on DEXs also comes with gas fees. Someone might buy and hold ETH for gas fees, giving the coin a base level of demand in the market.

During the DeFi boom of 2020, Ethereum’s network saw high traffic, spiking gas fees to exorbitant levels. High transaction fees continued into 2021. Based on data from YCharts, an average ETH transaction cost $39.49 in February 2021 — significantly higher than levels recorded in years prior. A fee of around $1–$2 would be considered normal. “Ethereum Average Transaction Fee measures the average fee in USD when an Ethereum transaction is processed by a miner and confirmed,” YCharts notes on its site.

The asset’s possible speculatory value

Speculation may have its part in ETH’s value as an asset. Investors may buy ETH coins as a bet on the Ethereum network’s possible future success and adoption into the mainstream world. ETH’s price could possibly also represent speculation on the success or failure of a portion of the crypto industry, given the number of projects built on the network.

Tyler Winklevoss, co-founder and CEO of the Gemini crypto exchange, expressed this thought process in an interview with Casey Adams, an entrepreneur and podcaster, in December 2020. Winklevoss compared crypto industry innovation to that of the internet, although investing in a small portion of the internet during its early years, other than through roundabout methods, would have proven difficult.

Buying ETH arguably offers that type of fractional investment of a broader developing sector. Winklevoss explained by comparing such a purchase to hypothetical partial race track ownership, which would profit more on activity rather than on individual race results.

“Ether is the same thing for indexing a piece of the Ethereum network, which is a […] decentralized global computer,” he said. “A lot of people equate Ether to digital oil,” he added. “If you want to get into the crypto game, my suggestion is own some Bitcoin, digital gold, and own some Ether, digital oil, and with those, you have most of your bases covered.”

Value in Ethereum 2.0

Ethereum’s scaling has been an issue, as seen with the CryptoKitties fad in 2017, and with the DeFi craze that began in 2020. Ethereum 2.0 aims toward a faster experience, but the upgrade is a process and has seen delays.

Eth2 includes the network’s transition to proof-of-stake technology, which hinges on ETH holding at least some level of price value, according to Aditya Asgaonkar, a researcher at the Ethereum Foundation.

“Proof-of-stake operates on the premise that if validators do something bad — if they are trying to attack the system or misbehaving in some way — then they’ll be penalized,” he said during an LA Blockchain Summit panel. “These penalties apply to their stake, which is in the coin ETH, so ETH price has to be, like, greater than zero for the penalties to have any kind of effect in terms of incentive,” he added.

Therefore, validators need a 32-Ether stake to take part in backing the network. Validators that help run the blockchain in a PoS system are paid out for the amount of contribution to the network provided by them. Demand generated by validators accumulating Ether in batches of 32 and the desire to earn yields from staking creates market demand for the coin.

Rising competitors

In light of the competitive crypto market, Binance Smart Chain has surfaced as one of the alternatives. The network acts similarly to Ethereum, except BSC uses Binance’s BNB coin for transaction costs instead of ETH, according to Binance Academy’s explanation of BSC.

Other network competitors include Cardano, Neo and many others. Over the years, the prospect of usurping Ethereum’s network has been a hot topic. Surpassing Ethereum in prevalence would be significant, given Ethereum’s wide usage.

Due to the large number of applications, products and services built on Ethereum, it also benefits from something called the network effect. “The network effect is a phenomenon whereby increased numbers of people or participants improve the value of a good or service,” Investopedia explains, adding: “The Internet is an example of the network effect. Initially, there were few users on the Internet since it was of little value to anyone outside of the military and some research scientists.”

“However, as more users gained access to the Internet, they produced more content, information, and services. The development and improvement of websites attracted more users to connect and do business with each other. As the Internet experienced increases in traffic, it offered more value, leading to a network effect.”

Essentially, the more something is used and built on, the more prevalent it becomes, similar to a wave, gaining momentum as it goes. In the case of Ethereum, the network effect means added trust as the platform is well known and prominent.

In the ever-changing world of crypto, assets rise and fall in popularity and price. Over the years, ETH has shown price strength as well as dominance as a platform on which developers can build. Time will tell, however, if a faster and cheaper network will usurp Ethereum in the long run, or if Ethereum 2.0 will scale the blockchain to meet market demand.

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