The Week: Bitcoin Hits New Mining Milestone and Binance Cranks up the Leverage

Reflecting on a week in which the 18 millionth bitcoin was mined at block 600,000, Binance upped the stakes by raising leverage on its futures trading platform to a staggering 125X, Telegram delayed the launch of its TON blockchain until April 2019 following US regulatory backlash, BAT-powered Brave browser hits 8 million monthly active users and ‘Satoshi’ was added to the Oxford English Dictionary.

Binance Crosses $1 Billion in Profits

Barely two years since it opened for trading, Binance has now reached a cumulative $1 billion in profits. The landmark figure is inferred by the exchange’s quarterly BNB burn, in which more than 2 million of its native tokens were burned to benefit holders. Interestingly, despite the transition of US users to its new Binance.US site, Q3 2019 proved one of the exchange’s most profitable to date, yielding $185.3 million.

Bitcoin Fails Store of Value (SoV) Test, According to G7

A report published by the G7, a group of the world’s most advanced economies, asserts that Bitcoin has so far been unable to prove “reliable and attractive” as either a medium of exchange or as a store of value. The report cites high volatility, scalability limits, complicated UI and regulatory issues among the issues that have hindered adoption and made cryptoassets a “highly speculative asset class.”

Circle Spins out Poloniex

Prominent payments and investments firm Circle has announced that it is spinning out its Poloniex exchange a little over a year after acquiring it for $400 million. Once one of crypto’s most popular exchanges, Poloniex has failed to keep pace with more nimble competitors such as Binance, in part due to the restrictions of being domiciled in the US.

The exchange will now operate as an “independent international company”, and as such US investors will no longer be served by the platform.

18 Million Bitcoin Mined – Should We Be Celebrating?

Bitcoin reached a major milestone this week as coin number 18 million was mined at block 600,000. The landmark not only marks the success of Nakamoto Consensus in governing and incentivising the coordination of mining activity to make this feat possible, it also brings a tinge of excitement to hodlers that there will only ever be a further 3 million bitcoin in existence (or 2,999,999 for the more punctilious among us).

Indeed, Bitcoin’s issuance policy has received a great deal of attention recently. The concept of Bitcoin’s ‘stock-to-flow’ ratio, devised by the mysterious Plan B, has won plaudits beyond the usual crypto echo chamber and is getting attention from a wider audience including regulators and goldbugs.

The theory posits that the disinflationary nature of Bitcoin makes it an attractive investment vehicle due to a ‘statistically significant relationship with market value’. While Bitcoin’s current stock to flow is lower than gold’s, this will change due to the quadrennial halving schedule, the next of which is due in May 2020.

As we get closer to the halving event, it’s likely the scarcity narrative will be replayed ad nauseum in an effort to boost price back towards – and potentially even beyond – previous all-time-highs.

Such a significant supply shock does not come without risks, however, and questions have naturally arisen over what this all means for network security. Earlier this month, three highly respected Bitcoin researchers investigated this very question in a report titled ‘A model for Bitcoin’s security and the declining block subsidy’.

The report provides an outline of the security model that has brought Bitcoin to 18 million without incurring any major security issues at the protocol level. It notes that this security is the result of the carefully crafted set of rules that have incentivised ‘honest’ mining while disincentivising attacks. It offers an ominous warning, however, in stating the following:

The biggest threat to Bitcoin’s security is baked into the protocol itself. The block subsidy schedule, which declines as part of Bitcoin’s fixed emission schedule, will lead to lower predicable income for miners. If a robust blockspace market doesn’t develop…a decline in block rewards poses a substantial risk for the future.

They expand on the reasons for this later in the report. As block subsidies (which currently account for 99% of total block rewards) sharply decline with each halving, the network will lean more heavily on transaction fees (the other component of block rewards) to maintain the security of the network. In essence:

So far, Bitcoin has derived its security from the value of Bitcoin itself. Going forward, it will derive its security from a secondary market that does not yet exist.

To solve this issue, the authors suggest several measures that could be implemented to produce the desired level of security once the block rewards have run to near-zero. These include:

  • Stimulate greater demand for blockspace by implementing protocol changes that make blockspace ‘more attractive and useful’, such as for arbitrary data storage.
  • Change the parameters of the consensus algorithm to allow ‘perpetual issuance’, i.e. removal of the 21 million cap.
  • ‘Crowdfunding’ from large stakeholders to incentivise honest mining (the question in my mind is what level of pressure would need to be applied before a ‘request for crowdfunding’ becomes a tax on the network).
  • Reducing the blocksize to artificially create congestion, incentivising large transaction fees to get priority space.

These options are contentious in their own ways and will no doubt be the source of intense debate in the coming months and years. The authors themselves notes that much of these considerations are hypothetical at this stage – no one knows what effect the halvings in 2020, 2024 and 2028 will have on Bitcoin’s value. By that point however, the reward for each block mined will be under 2BTC, making the topic more of a burning issue that ever.

As we pass 18 million, it’s important to keep in mind that it isn’t the supply schedule alone that has maintained the health of the network for the past decade. Bitcoin’s progress to date has come from the ability of network stakeholders to navigate a range of adversarial environments by placing security as the number one priority. What’s good for Bitcoin’s security is good for Bitcoin.

Tweets of the Week

In the fickle world of crypto, Nic Carter emphasises the importance of sticking to one’s beliefs:

Zack Voell marvels at how everyone’s favourite memecoin continues to defy conventional financial logic:

Amid growing bearish sentiment, Loomdart calls for the remaining bulls to stand up:

The Week’s Best Content:

Recommendation 1 – Dare To DeFi (Away From) Ethereum

Mohammed Fouda discusses whether there is a viable home for decentralised finance (DeFi) projects outside of the Ethereum network, looking specifically at EOS, Cosmos and Tezos.

Recommendation 2 – Digital Asset Investment Report Q3 2019

Grayscale provides insights into the performance of its digital asset products, including the Grayscale Bitcoin Trust. The firm currently has $2.1 billion of assets under management.

Recommendation 3 – CC Forum Panel with Craig Wright, Tone Vays and Nouriel Roubini

What would happen if you got some of crypto’s most outspoken personalities on one stage? CC Forum decided to poke the bear by inviting the group to discuss ‘The global centralised financial system: what are the flaws & challenges and what are the possible solutions?’

Don’t Miss:

Ethereum London: Crypto Collectibles Chat

London

Tuesday 22 October, 6.30pm

Two years after the CryptoKitties hype, non-fungible tokens (NFTs) or ‘collectible’ tokens have yet to really take off. Is that about to change? Find out by visiting Consensys’ offices in East London for a casual chat with the creators of CryptoKaiju.