Bitcoin in 2019
Scaling Of Bitcoin
There are two different approaches to tackle Bitcoins scalability problems, on-chain, and off-chain scaling. On-chain scaling means increasing the block size or making the transaction data leaner. An increased block size is not a good idea, because it will heavily favor centralization of full nodes. Fewer and fewer nodes can participate in the network because the hardware requirements of running a full-node would skyrocket with increased block size. Good on-chain scaling solutions are SegWit (Segregated Witness), which was implemented successfully on 24. August 2017.
Another good on-chain scaling solution is the implementation of Schnorr Signatures.
Schnorr Signatures help Bitcoin to scale on-chain and are additionally improving privacy. The reduce on-chain transaction size, enable faster validation of transactions and improve the privacy of multi-signature wallets. It works by aggregating multiple signatures into one signature, which leads to reduced transaction size.
For example, our previous 3 of 4 scriptSig held 3 different DER formatted signatures (one for each participant), if we use Schnorr Signatures the unlocking script would simply have 1 signature representing an aggregate of each participants signature.
This technique also increases privacy because signatures in multi-party wallets would look like any other, these multi-party transactions will be indistinguishable from normal transactions. Schnorr Signatures are expected to reduce the use of storage and bandwidth by at least 25%, which is a huge efficiency gain.
The Lightning Network is an off-chain scaling solution. It is a Layer2 application that operates on top of the Bitcoin blockchain.
Layer2 solutions are the most promising scalability solutions because they operate on a layer above the traditional blockchain.
Lightning uses smart contracts to form a decentralized network which is anchored into the Bitcoin blockchain. This enables instant payments across the network at high volume and high speed. The underlying concept is called „Bidirectional Payment Channels“. First, two participants create a ledger entry on the Bitcoin blockchain, this requires all participants to sign off on any spending of funds.
The next step is that both users create transactions which are credited to the ledger entry, but not get broadcasted to the Bitcoin blockchain. The final balanced gets settled on the Bitcoin blockchain when the payment channel is closed. So two users can send each other payments back and forth using the Lightning Network, these transactions are recorded on a separate balance and the final balance will be attached to the blockchain as soon as the channel is closed.
With this technology, it is possible to facilitate transactions off-chain without limitations. Security is given because any participant can close the channel at any time and get the final balance recorded tot he blockchain.
The Lightning Network was launched on 15th March 2018 and is growing at a spectacular rate.
This technology allows for payments that are settled in seconds and cost a fractal of a cent.
MimbleWimble is a proposal for blockchain that could be implemented as a sidechain attached to Bitcoin.
It works with concepts like Confidential Transactions and "one-way aggregate signatures" (OWAS) to allow private transactions and better scalability. With Mimblewimble, the receiver generates the blinding factor which is used to prove ownership of BTC. They use "excess value" for this, which is the difference between the inputs and outputs. It is basically a set of random numbers that ensures that only the user who generated the blinding factor (e.g. the receiver) can spend the Bitcoins.
Mimblewimble also alters the look of transactions with the technique that blocks will only have lists of new inputs, new outputs, and signatures which are created from the excess value. These values are encrypted, but nodes can verify that no Bitcoins are being created or destroyed. The excess value signatures will then prove that all the transactions are valid since they only add up if the whole transaction does.
This ensures that neither values or the destination of the transactions are known because all inputs and outputs are all contained in one block and are not separated. This protocol could be incorporated into Bitcoin in the near future or exist as an Altcoin.
Bitcoin sidechains are called Drivechains and the development makes rapid progress. Sidechains are separate blockchains that are connected to the mother-chain (Bitcoin). The concept was first introduced in 2014 with the release of this paper:
The paper discussed “pegged sidechains, which enables bitcoins and other ledger assets to be transferred between multiple blockchains.” It also introduced the concept of pegged sidechains, defining the two-way peg which is the technical underpinning pegged sidechains. The two-way peg is a method to transfer BTC from the main chain into the sidechain and back. It works like this: when assets are transferred from mainchain to sidechain, no BTC is actually “transferred” between blockchains.
If we transact between the main chain and the sidechain, the desired amount of BTC is blocked on the main chain and the same amount of BTC is released on the sidechain. This works in both directions. An added security protocol ensures that the same Bitcoins are not blocked on both chains simultaneously.
Paul Sztorc, the creator of Bitcoin Hivemind created a way to implement sidechains. He is the creator of Drivechain. Drivechain incentives miners to be „consensus proxies“. Drivechains also use the two-way pegs (2WP) model.
There are small differences, however. If someone transfers BTC from the main-chain to the sidechain, the BTC gets locked to a unique P2SH address. The sidechain client then watches the main chain and observes when the coin transfer takes place into the sidechains. The client waits till the funds are locked on the main chain and then (after a security waiting period) releases the BTC on the sidechain.
Drivechain uses the concept of „merged mining“ for this procedure. This is a new method which leverages game theory for mining Drivechain. The involved miners work on main chain and sidechain in parallel. The first block that is hashed and attached tot he motherchain ist he Drivechain. The hash of this block is put into the coinbase transaction of the Bitcoin block and then overlooked by the Bitcoin network.
If the Bitcoin difficulty is reached, the block is accumulated and sent out to the network's nodes. Then the Drivechain block is put together with all the information from the associated Bitcoin Block. This gives Drivechain a high amount of Security because it is anchored into the Bitcoin blockchain.
Merged mining is used to send Bitcoin to sidechains, but the move back is different. If assets are moved from Drivechain to the Bitcoin blockchain the simplified payment verification method is used.
Drivechain improves scalability by reducing the risk of congestions as the main chain is not flooded with transactions. Anyone can create a new blockchain project with new digital assets on a sidechain. Sidechains can be used as Testnets for new Bitcoin technologies, and in case of failure, it will not impair the main chain. Any kind of cryptocurrency and consensus mechanism can be created on a sidechain with Drivechain. This feature could make Altcoins obsolete and propel Bitcoin into an existence as a truly global digital currency.
Rootstock (RSK) is such a project that will be built into a BTC-sidechain. It is a smart contract platform with a 2-way peg to Bitcoin that also utilizes merge-mining. RSK enables Turing-complete smart contract functionality, near instant payments and higher-scalability. RSK does not mint or has pre-mined coins, this means it has no speculative value and does not compete with Bitcoin. And with merge-mining, the same security as Bitcoin in terms of double-spend prevention and settlement finality can be achieved. Rootstock scales to 100 transactions per second without sacrificing decentralization or Security.
Bitcoin Financialisation and Ecosystem
„A Global Regulated Ecosystem for Digital Assets“
Bakkt is a company with the goal of enabling consumers and institutions to buy, sell, store and spend digital assets on a global network. The aim is to provide a federally regulated market for Bitcoin and a warehousing solution, along with consumer and merchant applications. The initial focus is on the trading and conversion of Bitcoin versus fiat currencies. Bakkt was formed by the Intercontinental Exchange (ICE) which is an operator of global exchanges, clearing houses, data and listings services. The ICE is a financial giant, it owns the New York Stock Exchange (NYSE), among other exchanges. For the creation of Bakkt, the ICE made partnerships with the Boston Consulting Group (BCG), Starbucks (for their experience with cashless payment systems) and Microsoft (for their blockchain experience with AZURE and their cloud solutions).
The name „Bakkt“ is a play on “backed,” as in “asset-backed securities.“
First components of Bakkt:
- 1-day physically delivered Bitcoin futures contract.
- Physical warehousing solution which is reviewed and approved by the CFTC (Commodity Futures Trading Commission).
But Bakkt goes even further, when it is finished it will be a fully regulated exchange where digital assets can be bought, sold, stored and spent. Bakkt is aiming to develop open technology to connect the existing market and merchant infrastructure to the blockchain. Bakkt is a gamechanger because:
- The storage solutions eliminate threats of hacking.
- Futures contracts are backed by physical BTC
- Bakkt doesn’t support trading on margin, this improves market integrity and price discovery.
Bakkt plans for 2019 involve leveraging Microsoft cloud solutions for connected markets, issuing Crypto Debit Cards and allow 401k pension accounts and funds to invest in Bitcoin. Starbucks is on board as a partner and they aim to build a technology which allows users to convert their crypto to fiat-currencies seamlessly and while in the payment process to pay for goods and services. The ultimate goal is to transform Bitcoin into a trusted global currency with broad usage. Bakkt brings transparency and trust to previously unregulated markets. The potential is absolutely gigantic.
In my opinion, two things are missing for institutional money and the mainstream to invest in Bitcoin:
- Trading on official and fully regulated exchanges
- Safe storage for digital assets
Bakkt solves both of these problems at once and paves the way for Bitcoin to arrive in the Mainstream and this will be the final step to transform BTC from „funny internet money“ to an asset class of its own. I expect the demand for BTC to rise sharply by the time Bakkt launches because the futures contracts are settled in BTC. Bakkt will actually trade Bitcoin, not just speculate on its price movements. This will lead to transparent, efficient price discovery and this paves the way for the first Bitcoin-ETF to get approved. And this is just the beginning, Bakkt opens the floodgates for institutional investors, funds, pension programmes and retail investors. And with the custody solution, it allows the safe and regulated storage of digital assets on an institutional scale, for the first time ever. All stored assets are fully insured.
The targeted launch is 24. January 2019.
We wrote a detailed overview of Bitcoin ETF in Earlier Blockchain Whispers analysis earlier.
ETF stands for exchange-traded fund, which is basically a security that tracks some underlying assets (for example equities, bonds or commodities). The issuer of the ETF takes custody of the underlying assets it tracks and then issues a number of shares that represent ownership. These shares can be easily traded (like stocks) and therefore remove a lot of barriers for investors who are willing to invest in this particular asset.
The real benefit is that the shares of an ETF can easily be obtained and traded and lowers the barrier of entry for investors. With Bitcoin, these barriers are buying the asset and, most of all, safe storage of the asset. A BTC ETF enables technologically inexperienced investors to profit from BTC price movement without going through the hassle of securing their private keys. Hedge funds, pension funds, and 401ks can easily invest in this ETF, so we expect a lot of new capital to flow in Bitcoin. Increased capital inflow decreases volatility and therefore making BTC more stable.
There are two types of Bitcoin ETF proposals:
1. ETFs that Physically Hold Bitcoin (VanEck & SolidX ETF)
2. ETFs that Purchase Bitcoin Derivatives (ProShares, GraniteShares, Direxion)
The second type is likely to not get approved in the future. They try to mimic the performance of Bitcoin by trading Bitcoin futures, options, swaps, money market instruments. This is very risky because of counterparty risk, margin call risk, and rollover risk. Additionally this type requires active management. The first type is more interesting and also more secure. This type of ETF owns the underlying asset it tracks. Every share is backed by the real deal.
The Pros are: low transaction costs, tracks the performance of the underlying asset directly, high liquidity.
The U.S.- Securities and Exchange Commission (SEC) has certain requirements for an ETF to be approved:
- Custody solutions
- immune to manipulation
- sufficient liquidity
- correct valuation of the NAV (Net Asset Value)
All derivatives-backed ETFs were rejected by the SEC on August 23. These ETFs were filed by ProShares and Direxion.
The decision came down to the risk of market manipulation & fraud. The SEC can only approve an ETF that is designed to prevent fraudulent and manipulative acts and practices. The Winklevoss ETF (backed by the underlying asset) was rejected earlier this month. The main argument for rejection was the fact that the price determination of the NAV would only happen on the Gemini exchange (which is owned by the Winklevoss twins). The only remaining big proposal is the ETF from VanEck & SolidX which backed by the CBOE (Chicago Board of Options).
The VanEck & SolidEck ETF proposal backed by the CBOE
This proposal is vastly superior to prior ETF proposals and addresses most of the concerns the SEC has expressed when rejecting prior ETF applications. Reasons are:
- holds physical BTC
- backed by the CBOE, which is a very serious institution
- shares are big (25 BTC = 1 share), this excludes retail investors
Fund: SolidX Bitcoin Shares.
Filer/Exchange: CBOE BZX Exchange.
Trust/Fund Issuer/BTC Custodian: VanEck SolidX Bitcoin Trust.
Trust’s Sponsor/Manager: SolidX Management.
Trust’s Administrator & Cash Custodian: BNY Mellon.
Marketing Agent: Foreside Fund Services.
Marketing: Van Eck Securities Corp.
The SEC can postpone the final ETF decision until 21. February 2019 and we expect them to do so. The development of Bitcoin markets made big leaps forward since the filing for the Winklevoss ETF, for example, we have now very advanced custody solutions (from Coinbase for example) and increasing liquidity leads to decreasing volatility.
The only downturn is the SECs main reason for denial: Market Manipulation. This is difficult to refute right now, but we think that a successful launch of Bakkt can pave the way for an approved Bitcoin ETF because they will provide more Liquidity and a regulated trading environment.
Bitcoin - Fidelity
Fidelity Investments is launching a daughter-company with the aim of bringing access to cryptocurrencies to institutional investors. The Company is called „Fidelity Digital Assets“ and will provide enterprise-grade custody solutions, a cryptocurrency trading execution platform and institutional advising services. All services will be open 24/7.
Fidelity Investments is the fifth-largest asset manager worldwide and manages 7.2 trillion $ worth of customer assets.
The launch of Fidelity Digital Assets is scheduled for early 2019.
Bitcoin in 2019 Summary
Fundamentals and technological progress of Bitcoin are better than ever. We are on the verge of big institutional money entering crypto through the doors of Bitcoin. Schnorr, Layer 2, ETF, Bakkt, MimbleWimble, Drivechains, ETF... are all designed to get us the superior digital currency that can be trusted, scaled and mass-adopted.
On purpose, we don't go into price speculation in this article. We have the most accurate Bitcoin signals in the world (details here). And to achieve such accuracy, the large-scale analysis like this one is important before beginning with any technical analysis and trading. On top of that, this article is here shared for the community benefit, and the biggest value of Bitcoin is not in trading, but in general public, mass adoption as a free, world currency - independent from the Big Banks, money printing, and privacy intrusions that got Satoshi Nakamoto create Bitcoin 10 years ago - nameless and brandless.
Our conclusion for Bitcoin in 2019: Super-strong progress, the verge of the new era.
For Bitcoin Stronger Than Ever,
Lead fundamentals analyst at Blockchainwhispers.com
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