Explore a comprehensive collection of Bitcoin-related topics, offering insights into everything from foundational concepts to advanced solutions. Delve into the mechanics, innovations, and potential of Bitcoin in the world of decentralized finance.
What Is Bitcoin Mining?
Bitcoin mining is the engine driving the world’s largest decentralized financial network. But how does it work, and why does it matter? This article dives into the intricate process of mining, detailing how miners validate transactions, secure the blockchain, and introduce new bitcoin into circulation. From the evolution of mining hardware to its environmental controversies, we explore the pivotal role mining plays in Bitcoin’s ecosystem and its implications for the future of global finance.
What Is Bitcoin Mining?
Bitcoin has reshaped our understanding of currency, transactions, trust procedures, and value systems at large. The backbone of this new trustless cryptographic exchange is a process known as " mining." But what exactly does mining mean in this context, and why is it so crucial to the innovation of the bitcoin network?
This article elaborates on the world of bitcoin mining, expanding on its mechanisms, significance, and controversies.
Understanding The Bitcoin Ledger And Mining
After a bitcoin transaction is initiated, it must be verified and added to the decentralized ledger.
In a traditional financial system, some authority verifies transactions and updates its central ledger. In this new decentralized system, there is no authority to manage the ledger of transactions; therefore, a novel method for recording transactions is required. This is the duty of miners.
After passing initial verification, a bitcoin transaction enters a pool where it waits to be picked up by a miner and included in a block—a digital record of recent transactions. Miners can't include every pending transaction in the block they submit, therefore they pick the transactions offering the highest fees.
With transactions selected, miners seek to add their block to the blockchain, aka the bitcoin universal ledger.
This happens through a process called mining, hence the participants are called “miners.” Let's break down this process in more detail.
Bitcoin Mining: A Proof Of Work
The process of adding a block to the blockchain is called mining because it involves work on the miner’s’part, and they are rewarded for this work with bitcoin. This is a bit like “discovering” or “unearthing” the bitcoin because it is the only way for new bitcoin to be minted.
The "work" of mining is a competition of solving complex computational puzzles. By solving these puzzles, miners verify “blocks" and link them to a chain of previous transaction entries, earning the fresh bitcoin and transaction fees for their work.
The competition among miners is as much about computational power as it is about speed. The process is essentially a brute-force guessing game. Miners attempt to find the correct hash—a specific string of characters—through trial and error. The miner with the most computational resources typically has a better chance of discovering the correct hash first.
The first miner with the correct hash wins the right to add their block to the blockchain. This method is known as the proof-of-work consensus mechanism.
Consensus mechanisms enable network participants to agree on the current state of the ledger. Different mechanisms use various methods to decide who gets the privilege of adding a new block to the blockchain. In the proof-of-work system, this right is granted to the miner who first solves the mathematical puzzle by finding the correct hash.
After finding this hash, they broadcast their solution to the entire network. If everything checks out, the new block is added to the blockchain, and the successful miner receives a reward in the form of newly minted bitcoin, plus any transaction fees.
The Mining Process Step-by-Step
- Transaction Collection: Miners gather pending transactions from the network's memory pool and assemble them into a candidate block.
- Block Validation: They ensure transactions are valid, unspent, and comply with the network's rules.
- Proof-of-Work Calculation: Miners compute the hash of the block header until they find a hash that meets the network's target.
- Block Broadcasting: Upon finding a valid hash, the miner broadcasts the new block to the network.
- Verification By Nodes: Other nodes verify the block's validity. If accepted, the block is added to the blockchain, and the miner receives the block reward.
Securing The Network
Visualize miners continuously adding blocks of data to an ever-growing chain, each agreeing on which block is correct—this is the essence of proof-of-work security. To further clarify, it helps to break down the mechanisms of mining that keep the network secure.
The puzzles miners solve involve hash functions—mathematical algorithms that convert input data into a fixed string of characters. The hash for each block is generated based on both the transactions within that block and the hash of the preceding block.
This means that altering any transaction in an earlier block would change the hashes of all subsequent blocks, which would be immediately noticeable to the network of miners who previously agreed on the correct chain. All nodes in the network accept the longest valid chain of blocks as the true blockchain.
The only way a malicious actor could attack such a network would be by controlling 51% of the hash rate. The hash rate represents the total computational power of the bitcoin network. With over half the hash rate, the attacker can mine blocks faster than the rest of the network combined.
Because bitcoin nodes follow the longest valid chain, by consistently adding blocks, the attacker can make their version of the blockchain the longest, causing the network to accept it over others. A higher hash rate, therefore, increases network security, making it more resistant to attacks.
The bitcoin network is the largest and most distributed blockchain in the world; acquiring sufficient mining equipment to exceed 50% hash rate involves astronomical costs. Further, once such an attack is carried out, the value of bitcoin would plummet due to it being compromised.
Mining, therefore, secures the bitcoin network by making an attack almost completely impossible computationally, and always impractical economically.
Evolution Of Mining Hardware
In bitcoin's early days, mining could be performed using a regular computer's CPU. New hardware soon became needed because the bitcoin network adjusts the mining difficulty every 2,016 blocks (targeting approximately every two weeks as the intended average) to ensure that blocks are added roughly every 10 minutes.
If miners collectively are solving puzzles too quickly, the difficulty increases; if too slowly, it decreases.Due to this, as the bitcoin network becomes more popular, the computational resources needed to compete in mining grow alongside it.
Today, mining is predominantly conducted using ASICs (application-specific integrated circuits), specialized hardware designed explicitly for mining bitcoin, offering significantly greater efficiency and higher hash rates.
Due to the increasing hardware costs of running a mining operation, mining pools have sprung up to continue allowing everyday bitcoin users to participate in network security.
Solo mining involves a miner working independently to find blocks, which is akin to winning a lottery. Mining pools allow miners to combine their computational resources, providing more consistent and predictable rewards. Participants in a mining pool contribute their hash power and receive a portion of the rewards equivalent to their computational contribution.
The Great Energy Controversy
Bitcoin mining is energy-intensive due to the computational power required as the mining difficulty increases. Estimates suggest that bitcoin's annual energy consumption rivals that of some small countries. The exact figure fluctuates based on the hash rate and energy efficiency of mining hardware.
Environmental concerns are the main controversy behind bitcoin mining. Environmental activists argue that this extreme energy can lead to significant greenhouse gas emissions because most electricity for mining comes from fossil fuels.
Bitcoin advocates typically respond to these concerns by pointing out three things:
- Renewable Energy: An increasing number of mining operations are powered by renewable sources like hydro, solar, and wind energy. The value created by bitcoin mining can further push innovation and capital in green energy sources.
- Energy Efficiency: Advances in ASIC technology aim to reduce energy consumption per hash. As bitcoin mining technology advances, energy consumption will decrease.
- Layer 2 Solutions: As more bitcoin transactions come off the native chain, congestion and computational demands on the PoW network will be alleviated.
The Future Of Bitcoin Mining
Bitcoin mining is a foundational component of the bitcoin network, ensuring security, validating transactions, and introducing new bitcoin into circulation. While it presents opportunities for profit and technological advancement, it also poses significant challenges, particularly concerning its environmental impact.
As mining moves forward, the balance between reaping the benefits of this groundbreaking technology and mitigating its drawbacks will define the trajectory of bitcoin and its role in the global financial system.
Bitcoin & The Move Ecosystem: An Overview Of Key Players And Implications
Dive into the groundbreaking convergence of the Move ecosystem and Bitcoin DeFi.
Move is one of the more interesting developments in the cryptocurrency space over the past few years, as it addresses some of the key security issues with digital assets that have been found in previously existing blockchain programming languages.
While Sui and Aptos are the two key Layer 1 cryptocurrency networks that have integrated the Move programming language, there are also rising attempts to bring this technology to the Ethereum and Bitcoin ecosystems. While Ethereum has always tended to quickly adapt any new blockchain technology as it appears, this new Move ecosystem is emerging around the same time as various bitcoin liquidity layers on top of bitcoin, which makes it possible for Bitcoin Finance (BTCFi) to join in on these new capabilities.
So, who are the key players in the Move ecosystem, and how will bitcoin make its way into this emerging area of DeFi? Let’s take a closer look at Move and how it can merge with BTCFi.
What Is Move?
The Move programming language was originally developed by Meta for the Diem (formerly Libra) project. It is built to support secure asset handling in digital transactions. Inspired by Rust, Move offers a resource-based type system where assets behave as unique, non-clonable resources, ensuring that they have a single owner and are protected from duplication, which is a common vulnerability in blockchain environments. With these capabilities, Move addresses many limitations faced by existing blockchain languages, particularly Solidity, which underpins Ethereum and has a number of known security vulnerabilities such as reentrancy attacks.
Although Diem was discontinued due to regulatory pressures, Move’s foundational elements survived and found new life in new cryptocurrency projects like Sui and Aptos. Move also includes an efficient virtual machine, known as MoveVM, which is optimized for high performance, parallel execution, memory management, and compiler optimizations to enhance transaction speeds and throughput. Additionally, it provides modularity and composability, making it a straightforward tool for developers to create, connect, and deploy smart contracts.
Move’s strong type system and formal verification also make it particularly appealing for developers prioritizing asset security. By integrating these features with a modular design, Move empowers developers to create sophisticated decentralized applications on multiple layers of blockchain environments. Additionally, Solidity-based contracts can be deployed alongside Move-based contracts without any modifications, which enables seamless compatibility between the two ecosystems.
Key Existing Projects In The Move Ecosystem
While still somewhat nascent, a number of projects built around the Move programming language have already been deployed, and many others are in the works. These projects include Layer 1 cryptocurrency networks like Sui and Aptos, an Ethereum Layer 2 network called M2, and Sui’s liquidity protocol known as Navi.
Sui
Sui is a Layer 1 blockchain designed for seamless, high-speed digital asset transactions. Initially contributed to by Mysten Labs, whose team members include former Meta engineers from the Diem project, Sui reflects lessons learned from Diem’s development.
The architecture of this cryptocurrency network enables sub-second finality and low transaction costs by processing transactions in parallel. This approach not only improves scalability but also allows Sui to handle complex on-chain assets, as its object-based model, which includes improvements over Move’s original design, supports more dynamic digital asset management. In fact, Sui has extended the Move language into Sui Move, which notably enables new features specifically for NFTs.
Sui’s consensus mechanism is rather complex and uses a combination of delegated proof of stake (DPoS), Byzantine fault tolerance (BFT), and directed acyclic graph (DAG) to make sure all nodes are on the same page with transaction ordering in a way that maximizes low latency and high throughput. The BFT-based protocol consensus is known as Mysticeti and is the main vehicle for consensus generation, while DAG and DPoS are used for specific tasks. The key innovation here is to use a combination of different consensus mechanisms for different needs in order to maximize efficiency.
Since its mainnet launch, Sui has shown notable growth with millions of active accounts and billions of transactions. In particular, the gaming niche has been a key area of focus for this network’s growth.
NAVI
NAVI is the main liquidity protocol on the Sui blockchain, which enables users to borrow assets or provide liquidity in return for yield in a manner similar to the well-known DeFi app Aave.
While it has many similarities with Aave, NAVI also comes with additional features and goes beyond what other liquidity protocols have offered in the past. For example, NAVI is designed with advanced features like automatic leverage vaults, which enable users to automate strategies related to their leveraged positions, and “Isolated Market,” which limits the risk associated with newly listed assets. Additionally, it offers dynamic collateralization ratios that move based on market demands.
Aptos
Aptos is another Layer 1 blockchain aimed at delivering high-speed, scalable, and developer-friendly solutions for decentralized applications. Launched on October 12, 2022 by Avery Ching and Mo Shaikh, Aptos is capable of reaching up to 160,000 transactions per second with under one-second finality. Much like Sui, this efficiency stems from the use of the Move programming language.
A key attribute of Aptos is its Parallel Execution Engine (Block-STM), which allows multiple transactions to be processed concurrently and avoids delays caused by single transaction failures. This further increases transaction throughput and reduces latency. Aptos’s consensus mechanism is somewhat similar to Sui’s, using a combination of BFT and proof of stake (PoS); however, Aptos uses traditional PoS as opposed to Sui’s use of DPoS.
Since launch, Aptos has rapidly grown, attracting strong community engagement and significant institutional support, including over $350 million in funding from investors like a16z, FTX Ventures, and Coinbase Ventures.
Cetus
Cetus stands out as the leading DEX in the Move ecosystem, renowned for its concentrated liquidity protocol that enhances trading efficiency while delivering a seamless user experience. By fostering a flexible and robust liquidity network, Cetus accommodates a wide array of assets and use cases. Its permissionless architecture further empowers users, developers, and applications to easily integrate and leverage its protocols.
Key Features include:
- Deep liquidity pools enabling low-slippage trades
- Permissionless architecture for developer flexibility
- Comprehensive support for diverse assets
Movement Labs
Blockchain development firm Movement Labs has raised funding from the likes of Polychain Capital and Aptos Labs to accelerate the integration of Move solutions within Ethereum’s ecosystem. With its Ethereum Layer 2 network known as Movement, Movement Labs aims to enable a theoretical transaction capacity of over 160,000 transactions per second while simultaneously improving smart contract security.
Movement uses its own Move-EVM (MEVM), which allows users from both MoveVM and EVM-based systems to use the Layer 2 network. This feature significantly reduces the risk of attacks such as reentrancy and arithmetic errors, which have plagued many Ethereum-based protocols. The Movement network’s infrastructure will also offer the flexibility to launch custom rollups that are secure and compatible with Ethereum.
Through their specific approach to developing with Move, Movement Labs hopes to merge the massive Ethereum user base with the power of the Move programming language.
Bringing BTCFi To The Move Ecosystem With Lorenzo
Lorenzo Protocol is at the forefront of integrating Bitcoin and BTCFi into the Move ecosystem as the first omnichain Bitcoin liquidity layer within the MoveVM landscape. This innovation allows Bitcoin liquidity to seamlessly flow through the Move ecosystem while leveraging liquid staking solutions to enhance potential returns for Bitcoin holders.
By collaborating with key projects featured in this article, Lorenzo bridges Bitcoin’s history of decentralization and security with Move’s advanced architecture, tailored to meet DeFi’s evolving demands. While Bitcoin remains a cornerstone cryptocurrency, its legacy technology and limited scripting capabilities hinder its application in modern decentralized systems. Lorenzo overcomes these limitations by unlocking Bitcoin’s potential for use in DeFi.
The simultaneous rise of Move-based DeFi platforms and Bitcoin’s integration into this ecosystem, driven by projects like Lorenzo, represents a significant evolution in blockchain technology. Platforms like Sui, Aptos, and Movement are merging Move’s enhanced security features and efficient processing capabilities with Bitcoin’s established market presence.
This convergence showcases how blockchain technology continues to evolve, combining Bitcoin’s reliability with Move’s cutting-edge features to create a more secure, efficient, and interconnected DeFi landscape. As Bitcoin liquidity becomes more accessible and Move’s ecosystem expands, we are likely witnessing the foundation of a more interoperable and widely adopted decentralized financial future.
This union of Bitcoin’s trusted asset status with next-generation blockchain technology could be pivotal in driving mainstream DeFi adoption.
Who Owns The Most Bitcoin? View The Biggest Whales
An overview of the world's top Bitcoin holders, spanning individuals, companies, and countries.
True ownership is the core value proposition of cryptocurrencies. Without a decentralized solution to ownership, property can only owned via a trusted third party such as the government.
Bitcoin, the first cryptocurrency, was created to bring ownership out of the hands of a central authority and back into the proverbial hands of the owners themselves. Since its inception, owning bitcoin has become the gold standard of self-custody, and millions of people around the world have clamored to hoard some themselves.
Bitcoin has attracted a diverse range of investors, from individuals to corporations to governments. Bitcoin ownership, however, is far from evenly distributed. A small number of wallets hold a large portion of the total supply, which could have serious implications for the market.
For this reason, the question of who owns the most bitcoin has always been a topic of great intrigue, especially considering bitcoin’s role in the future of decentralized finance and the world at large. This article will categorize the major global bitcoin holdings and elaborate on the entities that control them.
Individual Holders
Satoshi Nakamoto
No discussion on bitcoin ownership can begin without mentioning Satoshi Nakamoto. Nakamoto is believed to have mined around 1.1 million bitcoin in the early days of the network.
Mysteriously, these coins have remained untouched since Nakamoto disappeared from the public eye in 2010.
Holding about 5% of the total supply, Nakamoto is estimated to be the largest bitcoin owner, controlling coins worth over $30 billion, as of November 2024. Despite this massive fortune, Nakamoto has never spent nor transferred these coins a single time, adding to the enigma surrounding bitcoin’s creator.
This immobility of Nakamoto’s stash reassures the cryptocurrency community that these holdings won’t suddenly flood the market, an undeniable risk when a single entity controls so much of the supply.
The Winklevoss Twins
Cameron and Tyler Winklevoss, famously known for their legal battles with Mark Zuckerberg over Facebook, became some of bitcoin’s earliest and most vocal proponents. Their belief in the long-term potential of bitcoin has cemented their position as some of the most influential figures in the digital assets space.
The twins reportedly bought 70,000 BTC in the early 2010s, and their holdings have grown substantially since then. This investment helped them establish Gemini, a regulated cryptocurrency exchange that is one of the largest in the world.
Tim Draper
Venture capitalist Tim Draper is another significant individual holder. Draper is the founder of Draper Fisher Jurvetson, Draper Venture Network, and Draper Associates, just to name a few.
He purchased 30,000 BTC in 2014 from the U.S. Marshals auction, following the Silk Road seizure, and invested in over 50 cryptocurrency companies, including Coinbase, Ledger, Tezos and Bancor. His initial bitcoin investment alone has grown substantially, making him one of the richest bitcoin billionaires.
Michael J. Saylor
Michael Saylor, CEO of MicroStrategy, has become one of the loudest proponents of bitcoin. His company’s decision to use bitcoin as its primary reserve asset has led to the accumulation of 279,420 BTC, the largest amount held by any publicly traded company (more on this below).
Outside of his company, Saylor also has stated that he personally holds around 17,000 BTC, making him one of the largest individual holders. Saylor is a bitcoin evangelist in the strongest sense and sees bitcoin as the best (if not only) long-term store of value.
Changpeng Zhao (CZ)
As the founder of Binance, the world’s largest cryptocurrency exchange by trading volume, CZ is another core deity in the cryptocurrency pantheon.
While his personal bitcoin holdings aren’t publicly known, his net worth is estimated at roughly $96 billion. At a minimum, CZ’s early investment in bitcoin (when he sold his apartment to buy bitcoin in 2014) is publicly known, and alone makes him a billionaire.
Mr. 100
Although many large whale wallets are anonymous, none are more infamous than “Mr. 100.”
Since November 2022, after the collapse of FTX, this wallet has consistently received 100 BTC, almost daily, amassing 52,996 BTC (valued at over $3.5 billion) as of 2024. This accumulation spree has made the wallet the 14th-largest holder of bitcoin globally — one of the largest held by an individual, if “he” is one. Blockchain intelligence suggests that the wallet may be used for managing Upbit’s cold storage, although this has not been officially confirmed.
Corporations: Investment vs. Custody
When investigating the largest corporations that hold bitcoin, it is important to divide between those who invest in bitcoin and those who hold it on behalf of users, such as cryptocurrency exchanges.
Company Investments
MicroStrategy
MicroStrategy has led the corporate adoption of bitcoin as a treasury reserve asset. The company holds 279,420 BTC, which represents a significant portion of the company’s balance sheet. CEO Michael Saylor has convinced his investors that bitcoin is the ultimate store of value and has continually raised money to make large bitcoin purchases. This bold strategy has positioned MicroStrategy as the penultimate institutional holder of bitcoin.
Tesla, Inc.
In early 2021, Tesla made a significant move by purchasing $1.5 billion worth of bitcoin. As of 2024, Tesla holds 10,500 BTC, valued at around $698 million. Tesla’s decision to invest in bitcoin was part of its broader strategy to diversify its holdings and provide liquidity for future transactions. Tesla even briefly accepted bitcoin as payment for its vehicles. However, the company suspended this initiative, citing environmental concerns related to bitcoin mining.
Galaxy Digital Holdings
Galaxy Digital, founded by former hedge fund manager Mike Novogratz, is a financial services firm with three operating businesses: Global Markets, Asset Management, and Digital Infrastructure Solutions. Galaxy currently holds 17,518 BTC, worth over $1 billion, and plays a key role in institutional bitcoin adoption by supporting businesses and infrastructure.
Marathon Digital
A major bitcoin mining company, Marathon Digital holds 13,716 BTC, primarily obtained through its mining operations. Marathon focuses on becoming the largest bitcoin mining operation in North America, leveraging low-cost energy sources to fuel its massive bitcoin mining infrastructure. Although Marathon occasionally sells bitcoin to pay for operations, it keeps a significant amount of its balance sheet as an investment vehicle.
Largest Bitcoin Custodians
Coinbase
Coinbase, one of the most popular cryptocurrency exchanges in the U.S., is the largest custodian of bitcoin. Coinbase is a core entry point for both retail and institutional investors, it even helps manage funds for the U.S. government. The company now holds approximately 1 million bitcoin as part of its operational reserves and user assets.
Binance
Binance is the world’s largest cryptocurrency exchange by trading volume and holds significant amounts of bitcoin in custody on behalf of its users. As of 2024, Binance controls 643,546 BTC, spread across several wallets. These holdings are managed as part of its trading and exchange operations. Binance’s size and global reach make it the international key player in the bitcoin ecosystem.
Bitfinex
Bitfinex, one of the oldest advanced cryptocurrency exchanges, retains a loyal user base of retail and institutional investors. The company has been reported to hold approximately 204,338 BTC as of 2024. Despite past regulatory challenges and security breaches, Bitfinex remains one of the largest bitcoin custodians, providing liquidity to the market and facilitating large scale trading.
Robinhood
Robinhood, the popular U.S.-based trading platform, reportedly holds 118,300 BTC in a single wallet, making it one of the largest custodians of bitcoin. Robinhood’s bitcoin custody includes assets held on behalf of its users, many of whom are retail investors who prefer the convenience of using a traditional brokerage platform for cryptocurrency trading.
Companies that have ETF products
Since the creation of bitcoin ETFs, much of bitcoin has fallen under the control of institutions that provide these products. Many of these entities are traditional banking giants positioning themselves as safe points for entry into the cryptocurrency world.
The largest BTC holders among the ETF titians are:
BlackRock: 357,548 bitcoin
Grayscale: 221,841 bitcoin
Fidelity Investments: 174,926 bitcoin
Ark Invest / 21Shares: 45,008 bitcoin
Governments
United States
The United States government holds the largest amount of bitcoin, totaling 213,297 BTC, valued at approximately $14.82 billion. These assets were primarily obtained through cryptocurrency seizures related to criminal activities. For example, a significant portion, about 69,000 BTC, came from the dismantling of the Silk Road alone.
China
Despite its ban on cryptocurrency trading and mining, China remains a significant holder of bitcoin. The Chinese government holds approximately 190,000 BTC, valued at around $13.2 billion. Most of these funds were seized from the PlusToken Ponzi scheme, one of the largest cryptocurrency frauds.
United Kingdom
The United Kingdom has also accumulated a substantial bitcoin reserve through law enforcement seizures, amounting to about 61,000 BTC. Much of this bitcoin was confiscated as part of a money laundering operation involving cryptocurrency exchanges operations in bad faith on U.K. territory.
El Salvador
Unlike other countries that primarily hold bitcoin through seizures, El Salvador has proactively purchased bitcoin as part of its national financial strategy. El Salvador became the first country to adopt bitcoin as legal tender and has been regularly purchasing bitcoin since. The country holds 5,800 BTC, valued at approximately $400 million.
Ukraine
Ukraine has received a significant amount of bitcoin through donations to support its defense against Russia during the ongoing conflict. So far, the government has received 651.3 BTC, while the Come Back Alive Foundation has received 685.1 BTC. These donations are actively used to fund war efforts, leaving a current balance of 186.18 BTC.
Bitcoin Total Supply
After detailing all the major holders of bitcoin, its important to put these holding in the context of the current total supply.
40% of bitcoin ownership falls into the above categories of identifiable participants such as individuals, companies, miners, governments, and dormant supply.
14% of the total supply is dormant, assumed to be lost or inaccessible. This includes Satoshi Nakamoto’s mined coins, comprising 5.2% of the total BTC supply.
Exchanges control 11% of the total supply, with Binance and Coinbase leading the pack at 3.12 and 4.51% respectively.
Mining companies alone control about 9%, with Marathon being the largest holder.
ETFs compose 3.63% of the total, led by BlackRock and Greyscale.
Public companies control only 1.18%, the top being MicroStrategy and Tesla.
Governments control only 1.16% of the total supply. The U.S. is by far the largest holder with a 0.92% share in the total supply.
Whale wallets of individuals control about 20% of the total supply, although this number is difficult to calculate. None of the top identifiable holders even reach half a percentage point of the total supply
Although the bitcoin supply may seem to be controlled by only a few powerful wallets, the data shows that the picture is not so bleak. No single entity controls more than 5% of the supply, and even these companies are not beholden to the wishes of a single person. At the end of the day, the bitcoin network is likely safe from the massive sales that would send the price into a tailspin, and the core holders of bitcoin are resolute holders, if not dedicated to the cause.
The Global Landscape of Bitcoin Regulation
Explore the evolving global landscape of Bitcoin regulation, with key insights into how major jurisdictions handle this decentralized asset.
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Bitcoin operates without a central authority, relying on blockchain technology to facilitate peer-to-peer transactions. This innovation has garnered significant attention from investors and prompted governments and regulatory bodies worldwide to grapple with its legal implications.
The legal status of bitcoin varies dramatically across different jurisdictions. While some countries embrace it, others impose strict regulations or outright bans.
Bitcoin’s decentralized nature poses unique challenges for regulators accustomed to overseeing centralized financial institutions. Key concerns include:
- Financial Stability: The volatility of bitcoin’s price can impact financial markets.
- Consumer Protection: Lack of regulation may expose users to fraud and scams.
- Illicit Activities: Anonymity features can facilitate money laundering, tax evasion, and financing of illegal activities.
- Taxation: Defining bitcoin for tax purposes affects how gains are reported and taxed.
This article provides a comprehensive global overview of bitcoin regulation separated by region. Not every country in each region is covered, rather this article focuses on major cryptocurrency hubs and regulatory movements.
It aims at a broad sweep of legal trends for various regions with distinctive approaches.
The Divisions are:
- USA
- UK & Commonwealth
- European Union
- Asia
- Latin America
- Middle East
- Africa
United States
The United States is the global financial leader, and its regulatory decisions see the widest reach, both in and outside its borders. For this reason, it deserves its own in-depth treatment, as its regulatory outlook is the most consequential in the current and future legal landscape of bitcoin.
Understanding bitcoin’s legal status in the U.S. requires examining the roles of different federal agencies that regulate various aspects of cryptocurrency. Further, these agencies typically have parallels in other countries; therefore, learning about what each does will also help one track foreign regulations.
1. Financial Crimes Enforcement Network (FinCEN)
Role
A bureau of the U.S. Department of the Treasury, FinCEN safeguards the financial system from illicit use, combats money laundering, and promotes national security through the collection and analysis of financial intelligence.
Regulation
In 2013, FinCEN issued guidance classifying administrators and exchangers of virtual currencies as money services businesses under the Bank Secrecy Act. This classification subjects them to registration, reporting, and record-keeping obligations.
Implications
Bitcoin exchanges and certain wallet providers must implement anti-money laundering (AML) and know your customer (KYC) policies. Users may be required to verify their identities when transacting through regulated platforms.
2. Internal Revenue Service (IRS)
Role
The IRS administers federal tax laws and collects taxes.
Regulation
In 2014, the IRS issued Notice 2014–21, stating that virtual currencies like bitcoin are treated as property for federal tax purposes. Consequently, general tax principles applicable to property transactions apply to transactions using cryptocurrency. Further, new reporting requirements came into effect in 2024, requiring businesses to report cryptocurrency transactions over $10,000.
Implications
Users and investors must report bitcoin transactions and holdings on their tax returns. Capital gains or losses from the sale or exchange of bitcoin are subject to taxation. Miners must report the fair market value of mined bitcoin as income at the time of receipt.
3. Securities and Exchange Commission (SEC)
Role
The SEC’s mission is to protect investors, maintain fair and efficient markets, and facilitate capital formation.
Regulation
The SEC has clarified that while bitcoin itself is not considered a security, other digital assets, particularly those issued through ICOs (initial coin offerings), may be classified as securities under the Howey Test. The SEC oversees offerings and sales of digital assets that are securities to ensure compliance with federal securities laws.
Implications
Investors should exercise caution with digital assets that may be considered securities. Platforms offering trading of such assets may need to register as national securities exchanges. Noncompliance can lead to enforcement actions, penalties, and loss of investment even if the user only held bitcoin on the platform.
4. Commodity Futures Trading Commission (CFTC)
Role
The CFTC regulates the U.S. derivatives markets, including futures, swaps, and certain kinds of options.
Regulation
The CFTC classifies bitcoin and other virtual currencies as commodities under the Commodity Exchange Act (CEA). This designation gives the CFTC authority over cryptocurrency derivatives markets and enforcement jurisdiction over fraud and manipulation in underlying spot markets.
Implications
Users trading bitcoin futures, options, or other derivatives are subject to CFTC regulations. The CFTC actively monitors markets for fraudulent or manipulative activities, enhancing investor protection, but also requiring compliance with additional regulatory obligations.
The UK and Commonwealth
The U.K. and commonwealth countries share a largely similar legal framework to the United States, but have slightly different regulations and exchanges accessible for users.
U.K.
The U.K. has positioned itself as a global leader in fintech and blockchain innovation, with comprehensive regulations that aim to foster both growth and consumer protection.
- The Financial Conduct Authority (FCA) regulates cryptocurrency businesses, requiring registration and adherence to AML/KYC standards.
- In 2024, new rules mandate that all advertisements for crypto-assets must be approved by an FCA-registered firm, to ensure they do not mislead retail investors.
- HM Revenue & Customs (HMRC) treats cryptocurrencies as property, subject to capital gains tax.
Canada
- Cryptocurrency exchanges are considered money services businesses (MSBs) and must register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).
- The Canada Revenue Agency (CRA) treats bitcoin as a commodity. Transactions are barter transactions, and gains are subject to income tax or capital gains tax, depending on the circumstances.
Australia
- Licensing of Exchanges: All cryptocurrency exchanges must be registered with AUSTRAC and meet strict AML/KYC standards.
- The Australian Taxation Office (ATO) treats cryptocurrencies as assets for capital gains tax purposes.
- New regulations also require exchanges to maintain records of all transactions.
European Union
The EU stands out as a global leader in cryptocurrency regulation, having implemented one of the most comprehensive frameworks for the digital asset market: Markets in Crypto-Assets (MiCA). This unified framework applies to cryptocurrencies across member states.
MiCA covers various types of cryptocurrency assets, including bitcoin, stablecoins, and security tokens. MiCA also includes provisions to ensure that retail investors have clear information about the risks associated with cryptocurrency investments. Issuers are required to produce detailed whitepapers for digital assets, outlining their business models, tokenomics, and associated risks.
- Licensing Requirements: Cryptocurrency service providers must obtain licenses to operate in the EU.
- AML and KYC: Requires firms to implement stringent reporting mechanisms to detect and prevent suspicious activities.
- Investor Protection: Issuers must comply with transparency requirements, ensuring that investors are protected from fraudulent activity.
Asia
Asia presents a wide spectrum of regulatory approaches to bitcoin. From the permissive frameworks in Japan and Singapore to the chaotic unclarity of India and even an outright ban in China.
China
China has adopted a restrictive approach on the mainland but allowed for the blockchain industry to grow and thrive in Hong Kong.
In 2017, China banned ICOs and shut down domestic cryptocurrency exchanges. At the same time, authorities intensified efforts to eliminate bitcoin mining due to concerns about energy consumption and lack of proper control.
On the other hand, in Hong Kong, the government is positioning the city as a hub for wideranging digital and Web3 innovation, with new regulations aimed at facilitating retail trading, and attracting institutional investment.
Japan
Japan has long been a pioneer in cryptocurrency regulation, being one of the first countries to recognize bitcoin as legal property in 2017. The Financial Services Agency (FSA) now enforces stricter operational requirements for exchanges, particularly in areas of security, capital reserves, and anti-money laundering (AML) procedures.
South Korea
South Korea has emerged as one of the world’s most active cryptocurrency markets. In 2023, South Korea passed new legislation aimed at increasing transparency in cryptocurrency trading and strengthening AML rules.South Korea has continued to impose stricter regulations on cryptocurrency exchanges, requiring detailed recordkeeping and reporting of suspicious transactions.
Singapore
Singapore has consistently ranked among the most crypto-friendly jurisdictions in Asia, attracting blockchain startups and cryptocurrency exchanges with its clear regulatory frameworks. Singapore has introduced a more comprehensive regulatory regime to further strengthen consumer protections while promoting responsible growth in the cryptocurrency sector.
India
As of 2024, India has yet to pass comprehensive cryptocurrency legislation, though various bills have been proposed.
The Cryptocurrency and Regulation of Official Digital Currency Bill, which aims to prohibit all private cryptocurrencies (incuding bitcoin), has been in limbo since 2021. Despite the regulatory pergatory, in 2022, the government introduced a 30% tax on crypto profits, aligning it with taxation on other speculative investments like gambling.
Latin America
Across Latin America, cryptocurrencies are being used as tools for financial survival, investment, and innovation. El Salvador made history by being the first country to adopt bitcoin as legal tender, and continues to inspire other LATAM countries with its experiment. Countries like Brazil and Argentina have taken proactive steps to regulate the market, ensuring consumer protection while encouraging technological innovation.
El Salvador
El Salvador’s Bitcoin Law, enacted in September 2021, mandates that all businesses in the country accept bitcoin as a form of payment, provided they have the necessary technology. The Chivo wallet, a government-backed bitcoin wallet, was launched alongside this law to facilitate everyday transactions using bitcoin.
In 2024, the Salvadoran government remains committed to bitcoin adoption through various initiatives, including:
- Expanding the network of Bitcoin ATMs across the country.
- Introducing further educational programs to help citizens understand how to use bitcoin effectively.
- Providing subsidies and incentives for businesses that adopt bitcoin.
- Building a geothermal valcano power plant to mine bitcoin.
Brazil
Brazil has emerged as one of the most progressive countries in South America regarding cryptocurrency regulation. In 2023, the country passed comprehensive legislation aimed at providing clarity to the cryptocurrency market. Proposed bills aim to regulate cryptocurrencies and require exchanges to register with authorities.
Argentina
In Argentina, cryptocurrencies have gained significant popularity as a hedge against rampant inflation and economic instability. The Argentine government has introduced regulations aimed at controlling the growing cryptocurrency market while trying to prevent capital flight. Taxation policies have been implemented, including a tax on cryptocurrency gains, and exchanges must report customer activity to the government.
Middle East
The Middle East has emerged as a dynamic region for cryptocurrency innovation, Nations, like United Arab Emirates (UAE), are positioning themselves as global cryptocurrency hubs, while others, such as Saudi Arabia, have taken a more cautious stance.
Dubai and Abu Dhabi is leading the charge in the Middle East’s cryptocurrency space, offering one of the most comprehensive regulatory environments in the region.
- Dubai is home to the world’s first dedicated cryptocurrency industry regulator, the Virtual Assets Regulatory Authority (VARA). VARA oversees the regulation of digital assets in Dubai, and continues to expand its licensing framework for virtual asset service providers (VASPs), allowing cryptocurrency companies to operate with legal certainty while adhering to strict AML and KYC.
- Abu Dhabi operates a separate but equally progressive regulatory framework through the Abu Dhabi Global Market (ADGM). The ADGM offers licensing and regulatory oversight for cryptocurrency exchanges, custodians, and blockchain-based companies.
Saudi Arabia
Saudi Arabia has taken a more cautious approach to cryptocurrency, reflecting its conservative financial policies. The country’s regulatory body, the Saudi Arabian Monetary Authority (SAMA), has not implemented a full-scale ban on cryptocurrencies, but has repeatedly warned against their use for trading or investment.
Africa
Africa also presents a diverse range of regulatory approaches to cryptocurrencies, reflecting the continent’s varied economic and social contexts.
Nigeria
Nigeria has emerged as one of the leaders in bitcoin adoption, driven by a combination of high inflation, limited access to traditional banking, and a young population eager to embrace digital financial solutions. However, Nigeria’s government has maintained a cautious but flexible stance on decentralized cryptocurrencies. While the Central Bank of Nigeria had initially banned banks from facilitating cryptocurrency transactions in 2021, the country has since softened its stance.
South Africa
South Africa has one of the most developed financial systems in Africa and has approached cryptocurrency regulation with a structured and transparent framework. South Africa’s Financial Sector Conduct Authority (FSCA) regulates cryptocurrencies under financial services laws. Only in 2022, South Africa officially recognized digital assets as financial products, meaning that exchanges and service providers must comply with financial laws similar to those governing traditional financial services.
An Evolving Landscape
The global legal landscape of bitcoin is dynamic and multifaceted, reflecting the challenges of regulating a borderless, decentralized technology. While some countries embrace bitcoin’s potential for innovation and economic growth, others focus on its risks to financial stability and security.
For users and investors, staying informed about regulatory developments is crucial. Compliance with legal requirements not only mitigates risks but also contributes to the legitimacy and maturity of the cryptocurrency market.
Investors should remember:
- Due Diligence: Users must understand the legal status of bitcoin in their jurisdiction.
- Record-Keeping: Accurate records are essential for tax reporting and legal compliance.
- Professional Advice: Consulting legal and financial experts can help navigate complex regulations.
These tips are especially important given how rapidly bitcoin, and its regulations, are developing globally.
Here’s What the Top 5 Asset Managers In The World Think About Bitcoin
Top asset managers like BlackRock and Fidelity are shifting their stance on Bitcoin, with institutional demand growing for crypto exposure. Discover how the world’s largest financial players now view Bitcoin.
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While the bitcoin network was originally launched as a way to disrupt many aspects of the traditional financial system, some of the largest financial institutions and asset managers in the world are now becoming key nodes on the network.
Most representatives of the traditional financial system were extremely critical of bitcoin as an asset in its early days, but much of the sector has now come around to the idea that the cryptocurrency could at least operate as a potential source of portfolio diversification. With more institutional investors demanding access to bitcoin price exposure from their financial services providers, many of the largest asset managers and financial advisors in the world have completed a 180-degree turn in terms of their public statements on bitcoin and other cryptocurrencies.
With this in mind, let’s take a look at what the top five asset managers in the world (according to ADV Ratings) think about bitcoin.
1. BlackRock ($10.4 Trillion AUM)
BlackRock’s stance on bitcoin has evolved quite significantly in recent years. Initially, the firm was cautious about cryptocurrencies, viewing them as speculative and too volatile for institutional portfolios. In fact, BlackRock CEO Larry Fink referred to bitcoin as an “index of money laundering” back in 2017.
However, as digital assets matured and demand from investors grew, BlackRock has shifted its perspective. Indeed, as bitcoin infrastructure developed — such as the rise of secure custodial services and increased regulatory clarity — BlackRock saw potential in offering easier, more structured access to the asset. The firm also recognized bitcoin’s appeal to younger generations, high net worth individuals, and financial institutions who were increasingly demanding exposure to digital assets.
In 2023, the company made a bold move by filing for a bitcoin exchange-traded fund (ETF), which signaled a pivotal moment for institutional adoption of the cryptocurrency. This filing helped reshape how major financial institutions view cryptocurrencies due to BlackRock’s pivotal role in the global economy and its status as the largest asset manager in the world. Now, BlackRock manages the largest bitcoin ETF, known as the iShares Bitcoin Trust, offering streamlined access to the asset for traditional investors, without the security and usability burdens of direct cryptocurrency exchange trading.
Fink himself has also embraced bitcoin’s potential as a store of value, describing it as a way of “digitizing gold.” He emphasized the demand for transparent, digitized assets and recognized that bitcoin could play a significant role in diversifying portfolios. The BlackRock CEO has also highlighted how bitcoin and blockchain technology align with his vision of modernizing financial systems. Additionally, he expressed optimism about the transformative potential of digital versions of real-world assets (RWAs), noting that they can improve efficiency and transparency in the global financial system.
With all that said, BlackRock Head of Digital Assets Robbie Mitchnik has made it clear that there is not much interest from their institutional clients in digital assets outside of bitcoin, with some interest in Ethereum’s native ether cryptocurrency being the only slight exception to that general observation.
2. Vanguard ($9.3 Trillion AUM)
Vanguard has taken a notably conservative stance on bitcoin and other cryptocurrencies, at least when compared to the more proactive approach taken by some of its competitors on this list. The financial titan has often cited concerns about price volatility, lack of regulation, and the speculative nature of cryptocurrencies as key reasons for their caution. Vanguard has historically prioritized long-term, yield-producing investment strategies.
Digital assets like bitcoin, with their dramatic price swings, have not historically aligned with this philosophy.
In addition to not creating their own spot bitcoin ETF offering, Vanguard also does not even allow their clients to access crypto-related products on its brokerage platform. This strong resistance to allowing their clients any access to bitcoin price exposure clearly makes Vanguard the most critical asset manager on this list in terms of its view of the cryptocurrency asset class, and some bitcoin enthusiasts have even moved their assets elsewhere in response to this policy.
In a now-infamous post on its corporate blog from Vanguard Global Head of ETF Capital Markets Janel Jackson and multiple communications with investors, the firm has consistently emphasized the risks and volatility associated with digital assets. “In Vanguard’s view, crypto is more of a speculation than an investment,” said Jackson. “This is at the root of our decision to not offer crypto products, whether our own or others.”
Vanguard claims that cryptocurrencies lack intrinsic value since they don’t generate income like stocks or bonds, and are subject to extreme price swings, which makes them unsuitable for the average investor. For longtime cryptocurrency market observers, these takes can come off as extremely naive and outdated. Vanguard also warns that even a small allocation of bitcoin in a portfolio can dramatically increase risk due to its high volatility. Furthermore, Vanguard has pointed out that while blockchain technology, which underpins cryptocurrencies like bitcoin, has the potential to improve the existing financial order, cryptocurrencies themselves are not a fit for their investment offerings.
Of course, Vanguard’s past criticisms of bitcoin and other cryptocurrencies do not necessarily mean that they will continue to take this view in the future. In fact, the financial institution’s new CEO Salim Ramji was the ETFs lead at BlackRock at the time they launched their bitcoin ETF. Such leadership could push Vanguard to reconsider digital assets as viable investment options, allowing them the opportunity to catch up with their competitors in terms of exposure to the emerging digital asset class. While this is the first time Vanguard has hired a new CEO from an external source, whether it will lead to a change in its view of the cryptocurrency market remains to be seen.
3. Fidelity ($5.3 Trillion AUM)
Fidelity was among the first major institutions to offer services related to digital assets through the launch of Fidelity Digital Assets in 2018, which was established to provide institutional clients with custody and trading services for bitcoin and other cryptocurrencies. In fact, the financial giant was mining bitcoin in 2017 as a way to learn about this emerging asset class.
Fidelity views bitcoin as a distinct asset within the broader cryptocurrency ecosystem, often referring to it as “digital gold” due to its decentralized nature, scarcity, and use case as a store of value. While they support the development of and experimentation with other cryptocurrencies and blockchain-powered technologies, Fidelity emphasizes bitcoin’s unique potential to serve as an inflation hedge and a long-term investment, distinguishing it from other cryptocurrencies that may be more speculative or tied to specific, technology-focused use cases.
For individual clients, the firm provides a cryptocurrency trading platform through its Fidelity Crypto service, allowing users to buy and sell bitcoin and ether directly within their existing Fidelity accounts. This integration simplifies the process for retail investors looking to dip their toes into digital assets, while maintaining the familiar interface of their traditional investment platform. Additionally, Fidelity has launched spot bitcoin and ether ETFs, both of which are the third-largest offerings when compared to their respective competitors.
In a previous report, Fidelity recommended an allocation of up to 5% of a young investor’s portfolio. Additionally, Fidelity CEO Abby Johnson has also doubled down on her long-term conviction around bitcoin through multiple cryptocurrency bear markets.
4. State Street ($4.3 Trillion AUM)
State Street took its first significant steps into the cryptocurrency space in 2018 through a strategic partnership with cryptocurrency exchange Gemini. The partnership with the Winklevoss twins’ exchange enabled its clients to have a bridge between traditional finance and the burgeoning world of cryptocurrencies, and was initially focused on providing a reporting mechanism for users of Gemini’s custody services. This allowed State Street’s clients to consolidate their holdings of digital assets alongside traditional investments in a single interface.
Building on this early venture, State Street significantly expanded its cryptocurrency ambitions with the launch of State Street Digital in June 2021. This dedicated division represents a more comprehensive approach to digital assets and blockchain technology, and illustrates the firm’s long-term commitment to the sector. State Street Digital aims to evolve the company’s existing digital capabilities into a unified, multi-asset platform that integrates cryptocurrency, blockchain, and other emerging technologies. This expansion goes beyond mere custody services, encompassing areas such as tokenization, distributed ledger technology, and central bank digital currencies (CBDCs).
It’s possible that regulatory issues prevented State Street from getting more involved in bitcoin and other cryptocurrencies around the time State Street Digital was launched, as the original head of the subsidiary referred to the U.S. Securities and Exchange Commission’s (SEC) SAB 121 rule–where traditional banks are required to keep an equivalent amount of cash on hand for all of the cryptocurrency assets they custody on behalf of their clients–as an “insane” policy.
More recently, there has been a strategic overhaul of State Street Digital, which initially included layoffs at the State Street department focused on digital assets. Having said that, State Street Digital has also been rejuvenated with new projects and partnerships.
Notably, a specific project explored by State Street Digital included the potential issuance of a stablecoin backed by customer deposits, according to a report in Bloomberg. And while State Street did not get involved in the bitcoin and ether ETF boom of 2024, they’re exploring more advanced, managed cryptocurrency ETF offerings through a partnership with Galaxy Digital. While they’ve taken a more cautious approach than other asset managers on this list, it’s clear that State Street sees the potential of this technology and has plans to make up for lost ground.
That said, State Street is still very much in an exploratory stage when it comes to digital assets and blockchain technology in general. The financial institution’s stance on bitcoin and other cryptocurrencies remains unclear, as they’re involved with a number of experiments in distributed ledger technology (DLT) as well. For example, State Street is a shareholder in Fnality International, which is more about making traditional institutions more efficient and productive rather than building on an entirely new monetary system on the bitcoin network.
5. Morgan Stanley ($3.6 Trillion AUM)
Finally, the fifth-largest asset manager in the world, Morgan Stanley, perfectly illustrates the average traditional financial giant’s usual evolution on bitcoin and other cryptocurrencies. While one of the bank’s analysts claimed bitcoin’s value could be zero in 2017, another analyst recently referred to the cryptocurrency’s massive growth in 2024, in addition to the development of stablecoins and CBDCs, as potential threats to U.S. dollar dominance.
While not necessarily promoting the merits of bitcoin in the past, Morgan Stanley analysts have kept an eye on the digital sector as a whole, releasing reports on the future of the asset class on a somewhat regular basis. Additionally, Morgan Stanley had bitcoin on its books even prior to the approval of various spot bitcoin ETFs by way of holdings in the Grayscale Bitcoin Trust in various funds before it was converted to an ETF.
More recently, Morgan Stanley revealed holdings of $188 million worth of BlackRock’s iShares Bitcoin Trust, in addition to smaller holdings of two other spot bitcoin ETFs. Additionally, some of its financial advisors are now able to reach out to specific clients and recommend an allocation to bitcoin via the ETFs offered by BlackRock and Fidelity. This action followed a due diligence process where the bank did a deep dive on the merits of bitcoin and its potential long-term value proposition.
Despite this new activity around the bitcoin ETFs, the bank’s own view around the cryptocurrency remains unclear, as its former CEO and current executive chairman James Gorman referred to bitcoin as a speculative asset that should play a very small role in any wealthy individual’s portfolio as recently as January 2024. That said, it’s important to remember that there can be varying opinions within institutions as large as the ones included on this list.
What These Views Mean For Bitcoin
When looking at how the five largest asset managers in the world are currently valuing and interacting with bitcoin, it’s clear that “digital gold” is here to stay. The emergence of regulated spot bitcoin ETFs in the U.S. market absolutely changed how this asset is viewed in traditional finance, and it has even forced the hands of those who aren’t at all convinced of the cryptocurrency’s value proposition. Additionally, the claims from large banks that bitcoin is nothing more than a Ponzi scheme or some other type of speculative scam are almost entirely gone.
That said, it’s important to remember that the bitcoin network’s original purpose was to replace many of the services provided by the financial institutions covered in this list, namely in the areas of payments and value storage, with a more decentralized alternative. Additionally, the emergence of Ethereum has shown that there is the potential for further disruption through the decentralization of other financial activities, such as asset exchange and lending.
While protocols like Lorenzo are helping the bitcoin network develop into a complete replacement for the traditional financial services industry, institutions such as BlackRock, Fidelity, and others covered in this article will still have a major role to play in the coming years in terms of onboarding the average person to the world of decentralized finance.
These institutions will become increasingly involved as more regulatory clarity in the U.S. (where all of these institutions are based) is achieved, and they’ll also provide critical assistance to bitcoin as key nodes on the network offering ease of use, liquidity, and a higher degree of trust in the asset. For better or worse, this acceptance from institutions that people already trust can do wonders for how the masses view bitcoin.
What Is Bitcoin Shared Security?
Explore how bitcoin shared security enhances smaller blockchain networks.
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Originally designed as standalone systems, early blockchains operated in isolation, each vying to become the dominant platform. The terms “Bitcoin killer” or “Ethereum killer” became widespread as new projects aimed to surpass each other.
Internet battles were fought bitterly about the pros and cons of different consensus mechanisms, debating trade-offs in security and centralization.
However, the landscape has significantly matured with major projects recognizing the benefits of unifying ecosystems. Major blockchains now focus on becoming increasingly interconnected and sharing infrastructure.
This interconnectivity has given rise to the concept of shared security, where smaller, less secure blockchains can leverage the robustness of more established ones like bitcoin.
Let’s break down blockchain security and explore how bitcoin shared security offers solutions in this new paradigm of collaboration.
The Blockchain Security Challenge
At the heart of blockchain technology lies the principle of decentralization.
Consensus algorithms, such as proof of work and proof of stake, play a crucial role in maintaining this integrity. They ensure that all nodes agree on the state of the ledger and protect the network from fraudulent activities.
In PoW, miners expend computational power to solve complex mathematical puzzles, while in PoS, validators stake their tokens to participate in block creation. Both mechanisms make it extremely uneconomical for malicious actors to gain control of the network.
However, the security of these consensus algorithms is directly proportional to the number of active participants. A blockchain with a limited number of validators is vulnerable to a 51% attack, which involves a single entity gaining control to then manipulate the ledger. Only the largest most established blockchains require prohibitively excessive resources to take them over.
For small or midsized blockchains, building a large enough active community of network participants to secure their network in nearly impossible — especially with well-established blockchains already demanding incredible resources. Further, without enough participants to secure the network, small blockchains struggle to gain the trust of users and investors.
This creates a Catch-22: small blockchains need a strong user base to be secure, but they need to be secure to attract a strong user base.
How Shared Security Can Help
Shared security emerges as a solution to this dilemma.
By leveraging the security infrastructure of larger “blue chip” networks, smaller chains can enhance their own security without needing to build a community from scratch. This relationship is a win-win: the smaller chain gains security, while the larger chain extends its utility.
For instance, bitcoin is renowned for its unparalleled decentralization and security, underpinned by the largest network of miners, nodes, and network participants. Shared security allows these smaller chains to “borrow” bitcoin’s security, effectively making them more decentralized and much harder for attackers to compromise.
Successfully attacking the smaller chain would require compromising the larger, more secure chain — a significantly more daunting and costly endeavor. If secured by bitcoin, such an attack becomes practically impossible.
Approaches To Bitcoin Shared Security
Several methods have been developed to attempt shared security with a variety of native blockchains. The most successful historically have been with Ethereum, but bitcoin has recently emerged with some interesting novel ways to implement shared security.
Merge Mining
Merge mining allows miners to simultaneously mine blocks on multiple blockchains using the same PoW algorithm. This method leverages bitcoin’s mining power to secure smaller networks without additional resource expenditure.
By participating in merge mining, miners can earn rewards from multiple blockchains, incentivizing them to contribute to the security of these networks.
Namecoin was one of the first projects to implement merge mining with bitcoin. By sharing bitcoin’s mining power, Namecoin enhanced its security while providing a decentralized domain name system.
However, merge mining requires compatibility in hashing algorithms, and can be difficult to integrate.
Bitcoin Anchoring
Bitcoin anchoring involves periodically recording a hash of a smaller blockchain’s state onto the bitcoin blockchain.
This process creates a timestamped proof of the smaller blockchain’s state, anchored in bitcoin’s immutable ledger. Any attempt to alter the smaller blockchain would be evident unless the attacker could also alter bitcoin’s blockchain.
This method enhances the security and integrity of the smaller blockchain by leveraging bitcoin’s resistance to tampering. It also provides transparency and verifiability, as anyone can check the anchored hashes on the bitcoin network.
Babylon’s “Merge Staking” Breakthrough
Babylon is a new bitcoin shared security solution inspired by the concept of merge mining. Babylon introduces “bitcoin staking,” a design that allows bitcoin security to ground the PoS blockchain ecosystem. Coining the concept of “merge staking,” Babylon aims to allow bitcoin holders to stake their assets to secure PoS networks.
In Babylon’s model, bitcoin holders can participate in securing PoS blockchains without bridging or swapping processes. They stake their bitcoin through the Babylon Layer 2 and this stake is used to validate blocks on integrated PoS networks.
This not only enhances the security of these PoS networks but also provides bitcoin holders with opportunities to earn staking rewards without bridging to the native PoS itself.
A bitcoin holder initiates the staking process by locking their bitcoin in a self-custody vault. This vault operates under a Babylon “staking contract,” where the bitcoin is locked until the holder requests it back.
Once bitcoin is locked in the staking contract, the staker can begin validating transactions on the PoS chain. If a staker commits a protocol violation (for example, validating two conflicting blocks), the system automatically exposes the staker’s private key, allowing the community to slash their staked bitcoin by sending it to a burn address.
The staking process uses bitcoin timestamping to ensure tight synchronization between the PoS chain and the bitcoin network. It aggregates timestamps from multiple PoS chains, enabling Babylon to interact with many PoS networks simultaneously.
Bitcoin is never moved off the bitcoin network. The bitcoin remains locked in the staking contract on Babylon while validators sign blocks on the PoS chain using their keys.
Key Benefits include:
- Protection: A PoS blockchain is only as secure as the underlying stake validating its network. By staking bitcoin, PoS blockchains become secured by the most secure asset in the world, as opposed to a proprietary token.
- Utility: Bitcoin holders can participate in securing other networks, earning staking rewards without liquidating their bitcoin holdings. This provides additional utility for bitcoin, encouraging long-term holding and engagement within the broader blockchain ecosystem.
- Interconnection: Shared security models promote interoperability between bitcoin and other blockchains.
- Capital efficiency: By utilizing bitcoin’s existing security infrastructure, smaller blockchains can avoid the significant costs associated with building and maintaining their own robust security systems. This allows them to allocate resources toward development and user experience improvements. Moreover, bitcoin which would otherwise sit dormant can earn rewards and spread its security.
Liquid Staking And Beyond
Liquid staking has transformed the way cryptocurrency holders engage with staking by unlocking capital that was previously illiquid. Bitcoin staking is proving to be no different.
Here’s how it works: Users deposit the funds they wish to stake into a liquid staking protocol. The protocol stakes the cryptocurrency on their behalf and, in return, issues liquid staking tokens (LSTs). These LSTs serve as a sort of receipt or voucher, redeemable on a 1:1 basis with the original deposited tokens. Essentially, LSTs mirror the value of the staked tokens and can be traded or used in DeFi applications, just like the underlying asset.
Babylon extends the concept of liquid staking by integrating third-party platforms with its bitcoin staking model, offering a unique solution to enhance the security of PoS blockchains without making any bitcoin illiquid.
Here, users deposit their native tokens into third-party liquid staking platforms that are partnered with Babylon. These platforms then stake the tokens into Babylon instead of the users. The liquid staking platform then issues receipt tokens to the users, representing their staked assets. These receipt tokens retain liquidity, allowing users to trade or use them in DeFi applications while still earning staking rewards from Babylon.
A user can then redeposit these LST tokens into the liquid staking platform and receive the Babylon staking rewards, plus their original bitcoin.
Babylon can even enable restaking, where the staked assets are used to secure additional networks or applications within the blockchain ecosystem. Users receive liquid restaking tokens that are redeemable for the original receipt tokens, plus any additional rewards from restaking.
Between liquid staking and restaking, the the security of bitcoin can not only be spread around PoS consensus mechanisms but also allow DeFi users to extend bitcoin throughout their financial activites
A Still-Growing Movement
The rise of bitcoin shared security marks a pivotal moment in the evolution of blockchain technology. Newer blockchains can now increase their resilience against attacks and foster greater trust among investors.
Projects like Babylon are at the forefront of this movement, unlocking new use cases for bitcoin and integrating it more deeply into the DeFi ecosystem. Through these collaborative efforts, bitcoin is poised to play an increasingly foundational role in securing and connecting the entire blockchain industry.
What Is A 51% Attack And How Do They Work?
51% attacks have always been a shadowy threat looming over blockchains. But how scary are they, really?
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Decentralization is one of the core principles of the cryptocurrency economy. Instead of relying on a single company or entity, blockchains generally rely on a distributed network of nodes that help ensure they remain secure and operate efficiently.
Because of this, blockchains can be incredibly resilient in the face of attempted attacks.
But there’s one type of vulnerability, called a 51% attack, that stands out from the rest, due to its potential to completely undermine that principle of decentralization.
But what exactly is a 51% attack? Here’s everything you need to know.
What Is A 51% Attack?
A 51% attack is a type of attack on a blockchain network where one entity gains control over more than half (51%) of that blockchain’s mining hash rate, computational power, or staked tokens. By centralizing the control of a blockchain into the hands of a single bad actor or entity, 51% attacks have the potential to subvert the principles of decentralization, security, and trustlessness that define blockchains. The concept of such attacks has been discussed since the early days of bitcoin, including in Satoshi Nakamoto’s original bitcoin whitepaper from 2008.
If an entity were to gain control over 51% (or more) of a network, it could allow them to significantly disrupt the integrity of that blockchain in a variety of ways, including reversing transactions, blocking new transactions from being confirmed, the double-spending of tokens, or even the creation of an alternative version of that blockchain (known as a “fork”) that could fragment the network and confuse users.
How Does A 51% Attack Work?
Any 51% attack starts with the exploiters trying to gain majority control over that blockchain. While typically, risks around 51% attacks have centered around proof-of-work blockchains like bitcoin, they’re theoretically possible on proof-of-stake chains as well.
For a proof-of-work chain, where miners compete to solve complex cryptographic puzzles in exchange for block rewards, attempting a 51% attack would require the attacker to amass enough computational power to take over the network. This typically means buying or building enough mining rigs that they’ve amassed at least as much power as the rest of all the other miners in the network combined — if not more.
Alternatively, an attacker could join, or create, malicious mining pools, which are essentially miners who combine their computational power to work together and increase their chances of earning rewards. If an attacker is able to influence enough miners to join a pool, they could potentially accumulate 51% of a network’s hashrate.
Once the exploiter gains control over 51% of the network, they have a range of options at their disposal.
They can opt to:
Partition The Chain
This means that the hacking group or entity has essentially segregated its group away from the main network’s miners. With this separation, the hackers can continue with mining operations but can refrain from sharing updates with the primary network.
Add New Blocks
With the majority of the network under their control, the attacking entity could also opt to add blocks to the blockchain faster than the rest of the network can. If the attack continues for some time, eventually the difference in length between the two versions of that blockchain will become proportional to the difference in the hashing power between the hackers and the main network.
Reintegrate With The Network
If the hacking group opts to rejoin the network following the initial partition, the original network, and the competing version created by the hackers will both begin spreading through the entire network. If the new chain has more blocks than the initial chain, then typically the new chain will replace the original chain, meaning that the attackers will have gained the ability to execute a wide variety of potential threats.
What Are The Risks Of A 51% Attack?
If an attacker was able to successfully acquire enough computing power to partition a chance, add new blocks, and then reintegrate that new chain with the original network, then there can be serious implications for that blockchain and its users, including:
Double-spending
Upon the advent of digital currencies and assets, a key concern was around the potential to “double-spend.” Since digital currencies are just data, they can potentially be copied and spent more than once if not managed properly. But through blockchain and its consensus mechanisms, it can be ensured that only valid transactions are recorded and that once a transaction is confirmed, it can’t be altered or reversed.
But if an attacker gained control over 51% of a network, all that goes out the window, and the most feared consequence is that they’d move to try to double-spend tokens. To do this, the attackers would first need to record a regular transaction. Then, they could use their control over the network to change the blockchain to show that they never spent the money at all, and repeat that over, and over.
Denial Of Service Attack
Another potential consequence of a 51% attack is a denial of service attack. Essentially, the attacker could block the addresses of other miners, making it impossible for certain transactions to be confirmed. At the same time, since attackers have control over most of the network, they’d be able to potentially prioritize their own transactions over the legitimate ones that they’re blocking. This would not only delay real users but could also lead to the attacker’s false transactions becoming permanent.
Loss Of Trust
Blockchains operate on a trustless nature. Since there’s no centralized entity in control, trust is essentially distributed across the network of nodes and miners. When operating correctly, this means that there’s no single point of failure, and that it’s extremely difficult for a blockchain to confirm an illegitimate transaction. But after a 51% attack, a user’s trust in that blockchain could be permanently eroded because of the seriousness of the exploit, which could make it challenging to retain users, could lead to a drop in that network’s native currency, and could make it difficult to continue to grow and scale that chain.
Are 51% Attacks Likely?
While 51% attacks might be the most feared of all potential blockchain exploits, they’re actually extremely unlikely — at least for major blockchains. To successfully take over 51% of the bitcoin network, for example, it would cost an estimated $20 billion to do so. And to take over 51% of all staked ETH tokens, it could cost even more. And as these blockchains acquire more users and become more decentralized, the task only grows more difficult.
To take over bitcoin’s network, the exploiter would have to not only have the funds to buy billions of dollars of mining equipment, but also have the funds to pay massive electricity bills to keep them running, in addition to even finding a source for such a hefty amount of computing power. Bitcoin mining uses up as much electricity as some entire nations, meaning the costs would add up quickly, since taking over the network would require even more power.
Beyond the sheer cost, there’s also no guarantee that if one did take over 51% of the network, it would be successful. Theoretically, validators and miners could also coordinate against a suspected hacker, and have options including choosing to restart the blockchain from a period in time before the hack happened. For the largest, most-used blockchains, these potential deterrents have been strong enough to avoid a 51% attack.
But smaller blockchains that don’t have as much mining power or staked tokens can be far more vulnerable.
Successful 51% attacks in recent years include:
Bitcoin Gold: This blockchain was 51% attacked twice, first in 2018 and then in 2020. In 2018, the 51% attack led to $18 million in double-spending of the chain’s native token. In 2020, the blockchain was exploited again, to the tune of around $70,000 in double-spending.
Ethereum Classic: Ethereum Classic has been the subject of multiple 51% attacks, stemming from the fact that it is a relatively lightly used blockchain. In 2020, ETC suffered three 51% attacks in the span of a month. In one of the attacks, an exploiter paid around $200,000 to acquire enough computing power to take over the chain, then went on to double-spend more than $5.5 million in ETC tokens.
Vertcoin: A largely unknown blockchain, Vertcoin was 51% attacked in 2018 and in 2019. In its first exploit, about $100,000 in the blockchain’s native currency was double-spent.
Bitcoin Remains Secure
While 51% attacks are possible in theory and they have occurred on smaller, less secure blockchains, they’re an extremely unlikely threat for the most major blockchains in the cryptocurrency ecosystem. The scale of the financial, logistical, and computational resources required to execute such an attack acts as a powerful deterrent.
At the same time, the fact that 51% attacks are possible in theory underscores the necessity of maintaining a robust and sufficiently decentralized network and ensuring security remains paramount.
Why Bitcoin Is Essential To The Future Of Global Energy
Bitcoin mining cuts energy waste, stabilizes grids, and boosts renewable adoption, positioning it as vital to the future of global energy.
Bitcoin is known as a completely digital phenomenon, which still turns off some people who prefer their financial system to involve something which they can hold in the palm of their hands. However, the reality is the bitcoin network very much interacts with the physical world via the mining process. In fact, the energy-intensive nature of bitcoin mining makes bitcoin an essential component of the future of global energy markets due to the way it changes the demand side of the equation for energy producers.
While creating an ultimate buyer of last resort is the most critical change that bitcoin mining brings to energy markets, there are also second order factors to consider. Whether it’s improving the economics of renewable energy sources or enabling nation states to better capitalize on their local energy production, it’s clear bitcoin mining is having a massive impact on global energy usage. And this is all despite the large amount of fear, uncertainty, and doubt regarding the bitcoin industry which has been heavily promoted in the mainstream press.
So, what’s the reality of bitcoin’s impact on the future of global energy? And why does the bitcoin network require so much energy to function in the first place? Let’s take a deep dive on the matter, including real world examples of how the bitcoin mining process is already changing the energy market.
Why Bitcoin Uses So Much Energy
The key innovation with bitcoin was finding a decentralized solution to the double-spending problem, which enabled the first form of a decentralized digital cash system. Previous attempts at the development of digital cash had failed, as the entities in control of ordering transactions and preventing the same money being spent more than once were centralized. Gold-backed digital currencies that did not surveil their users, such as E-Gold and Liberty Reserve, were shut down by the U.S. government, and a decentralized solution was needed to make a digital cash system resistant to legal and regulatory attacks.
Bitcoin creator Satoshi Nakamoto solved the double-spending problem by launching a decentralized network of miners who would take on the task of ordering transactions in a digital cash system. To prove their value and trustworthiness to the network, miners expend energy in an easily provable way via a process known as proof of work (PoW). By finding the solution to a math problem, a miner can prove they have spent a certain amount of energy on computational resources.
Since the miner is expending resources and incurring these upfront costs, they are incentivized to act honestly in exchange for newly-issued bitcoin and transaction fees. It should be noted that, contrary to previously held beliefs by some bitcoin users, miners do not have control over users of the bitcoin network and are simply needed to order transactions properly in a chain of blocks (commonly known as the blockchain).
In other words, bitcoin’s impact on the global energy industry is a direct result of the PoW mining process that is used to order transactions on the network in a decentralized manner, which has resulted in a large amount of energy usage.
Over time, the amount of energy expended by miners through this PoW mining process has exploded. While early bitcoin users were able to mine bitcoin with nothing more than a single laptop, the mining process has grown into a specialized industry these days with hardware built specifically for use in the bitcoin mining process, and access to cheap electricity becoming a key component of a profitable mining operation. In fact, there are now a number of bitcoin mining companies that are publicly traded on various stock markets around the world.
Currently, the bitcoin network hashrate is estimated at roughly 650 million terahashes per second. This amounts to implied energy usage of 2% of all energy use in the United States and 29% of the energy used in the United Kingdom, according to Digiconomist. In fact, the bitcoin network’s total energy use is estimated to be somewhere around that of Kazakhstan and/or the Philippines, as examples.
Disputing The Attacks On Bitcoin’s Energy Use
Most of the discussion around bitcoin’s energy use in the mainstream press up to this point has been rather negative in nature, and it makes sense to refute some of these claims before going further down the bitcoin energy rabbit hole. There are three common ways in which this relatively new use of global energy has been attacked so far.
Firstly, many people tend to view bitcoin’s use of energy as a strict negative, with many commentators referring to bitcoin’s energy use as wasteful. Secondly, bitcoin has seen heavy criticism related to the kind of energy that is used to power the network’s hashrate. In other words, the second concern revolves around bitcoin mining’s potentially negative impact on the environment and climate change. Thirdly, it is often stated that alternative mechanisms for solving the double-spending problem, such as proof of stake (PoS) or traditional, centralized databases, can do the same things as bitcoin while using much lower amounts of energy.
Myth #1: Bitcoin Mining Wastes Energy
The first point is rather subjective and can be rejected rather quickly on those grounds. Those who say bitcoin is wasting energy are simply making a value judgment on bitcoin itself. They do not see the value of bitcoin, so they think any use of energy to power the network is inherently wasteful. It would be no different from someone who does not celebrate Christmas complaining about the energy that is used to power Christmas lights during the holiday season.
In reality, the market is likely the best measure as to whether bitcoin is a waste of energy or not. It’s clear that many people around the world value what the bitcoin asset and network provide in terms of its use as a global, apolitical financial system, and the amount of energy that is used in the mining process is a direct reflection of that valuation. In other words, the people who say bitcoin mining is wasteful are empirically wrong.
It should also be noted that many estimates regarding the amount of energy the bitcoin network will use in the future have been wrong and based on false assumptions. For example, various studies regarding the energy use involved in a single bitcoin transaction are oftentimes ignorant of Bitcoin Layer 2 networks such as Lightning Network and Lorenzo Appchain. As bitcoin continues to grow over time, it is likely that a single transaction on the base bitcoin blockchain will represent thousands of bitcoin transfers on these secondary protocol layers.
One of the most notable examples of the hysteria that has been built around bitcoin’s energy use was a 2017 Newsweek article titled, “Bitcoin Mining on Track to Consume All of the World’s Energy by 2020.”
It should also be noted that a large percentage of current global energy production is wasted, which is an area where bitcoin mining’s flexibility in terms of instantly turning the hardware devices on or off to help balance electrical grids can be extremely helpful. In fact, according to Core Scientific founder Darin Feinstein, the amount of energy that is wasted globally on a yearly basis could power 200 bitcoin networks, as of 2022.
Myth #2: Bitcoin Mining Is Bad For The Environment
The response to the second criticism of bitcoin mining being bad for the environment is similar to the response to the first criticism. In both cases, bitcoin is being subjectively put into a separate category as compared to all other uses of electricity.
Bitcoin mining devices are simply plugged into the local electrical grid in a manner no different than a Tesla vehicle. The type of energy used to power the bitcoin’s network hashrate simply depends on the types of energy that are available in various locations around the world. Riot Platforms infamously countered the environmental concerns around bitcoin mining by pointing out that bitcoin mining devices themselves do not emit any carbon in a parody of the claims being made against the industry in an article by The New York Times. While the video was meant to be comical, the point that was being made is that the emissions come from the energy generation sources themselves and not from the bitcoin miners.
Those who are concerned about a potential negative impact of bitcoin mining on the environment should aim their frustration at the energy providers themselves rather than the bitcoin miners who are simply following the local laws and regulations to operate their businesses. Bitcoin miners will use whatever is the cheapest form of energy generation in the world. And in many cases, that form of energy does indeed come in a renewable form. They have nothing against clean, sustainable forms of energy, and they would definitely use those forms of energy to power their businesses if the financial incentives lead them in that direction.
On top of all that, it’s also important to note that nearly 60% of bitcoin’s network hashrate does come from clean energy sources, according to August 2023 data from the Bitcoin Mining Council. This is much higher than the ratio of renewables found in global energy production, which is estimated at one-seventh by Our World in Data.
From this perspective, it would appear that environmentalists would be better off directing their anger towards other industries if they’re going to be subjective about energy being used for specific purposes. In fact, bitcoin mining has the side effect of improving the economics of various sustainable energy sources, which will get to later in this article. With this in mind, it’s also worth pointing out that one of the more notable campaigns for complaining about bitcoin’s supposed negative effect on climate change, which is the “Change the Code, Not the Climate” campaign from Greenpeace USA, is funded by the co-founder of a more centralized bitcoin competitor known as xrp, invented and produced by Ripple, which is a company we’ll cover in the next section.
Myth #3: Bitcoin Doesn’t Need Proof Of Work
Finally, the criticism that alternatives to bitcoin, such as Ethereum or Venmo, prove that bitcoin mining is indeed a wasteful process misses the entire value proposition of bitcoin as a cryptocurrency.
While it’s true that Ethereum and other cryptocurrency networks’ use of PoS dramatically lowers the amount of energy that is used in their respective consensus mechanisms, PoS is generally seen as less secure and more centralized than PoW by many bitcoin experts. For example, bitcoin’s use of PoW enables the transactions on the network to be processed by an ever-changing, dynamic group of miners rather than a mostly static, increasingly enshrined group of stakeholders. This is due to the fact that a staker must sell some of their stake in order for their role in network consensus to decline, while in bitcoin existing miners can be simply outcompeted by new entrants.
As covered previously, the point of bitcoin is to have a sufficiently decentralized form of digital cash that cannot be controlled by some entity or group of entities that effectively become a new trusted third party in the network. In addition to the concerns around centralization and security related to PoS, bitcoin is also extremely difficult to change, especially when it comes to something as ingrained in the system as the PoW mining process (as illustrated by the bitcoin blocksize war).
Simply put, a proposal to change bitcoin from PoW to PoS would be a nonstarter. Indeed, Greenpeace’s Ripple-co-founder-funded campaign to make this exact change has basically gone nowhere. Notably, Ripple was previously also sued by the U.S. Securities and Exchange Commission for unregistered securities offerings as part of its more easily attacked bitcoin competitor. It’s also worth noting that PoS can be used as consensus mechanisms for Bitcoin Layer 2 networks, such as Lorenzo Appchain, without any necessary protocol changes at the Bitcoin Layer 1 level. This allows more experimentation to take place on bitcoin without affecting the base layer.
In terms of comparisons of bitcoin to financial technology apps such as Venmo and Cash App, which have been made by the likes of Nobel Laureate and New York Times columnist Paul Krugman, there is a complete misunderstanding of bitcoin’s underlying value proposition. Bitcoin is a permissionless and censorship-resistant digital cash system with its own monetary asset that works globally. On the other hand, apps like Venmo are completely surveilled, are only compatible with U.S. dollars, can restrict access to specific users, can censor transactions, and only work in the U.S. The two systems are simply not comparable.
How Bitcoin Is An Essential Component Of The Global Energy Equation
The main variable of the global energy equation altered by the emergence of bitcoin mining is the ability to instantly convert any form of energy into digital money, namely bitcoin. Bitcoin mining is effectively a buyer of last resort when it comes to energy, which means less energy is wasted.
Various forms of energy can come with a large amount of waste due to the fact that energy demands can vary. The simplest example here is that energy demands tend to collapse at night when most people are sleeping. Much of the energy generated during this time is effectively wasted if it cannot be stored properly, which tends to be the case. By having a new source of demand for energy around the clock and all days of the week, energy providers can increase their revenue and remove a large amount of waste from their business.
For example, extra natural gas extracted from oil is usually burned through a process known as flaring due to a lack of nearby infrastructure to provide demand and make it economical to capture and sell. By using a mobile generator, oil production sites can use this excess energy for bitcoin mining and reduce the need to flare gas. Not only does this improve the oil producer’s bottom line, but it also leads to less carbon emissions due to the reduction of flaring. Other examples of wasted energy can be found in solar and wind, as these forms of renewable energy tend to have spikes in supply based on local weather conditions that surpass demand.
Due to the improved financial reality that bitcoin mining can provide to energy producers, the process of mining bitcoin has moved closer and closer to direct sources of energy over time. This gradual move from hobbyists plugging mining equipment into their home electricity connection to energy producers relying on bitcoin mining to improve their bottom lines makes sense when you consider that electricity is the key expense involved in the bitcoin mining process.
In addition to improving the financial situation for energy producers by providing a constant source of demand, bitcoin mining can also be used as a stabilizing force for energy grids. This is because a bitcoin mining operation can be turned on or off in an instant with the flip of a switch without causing further damage to the underlying business. For example, having an Amazon warehouse instantly drop its consumption of energy from the grid would lead to a number of additional issues for that business such as packages not getting delivered. With a bitcoin mining operation, the business equation is simply energy goes in and bitcoin comes out. There aren’t other aspects of the business that are negatively affected by a power outage.
This is an incredibly rare attribute when it comes to major consumers of electricity, and it makes bitcoin mining the perfect ingredient in demand response protocols where miners can get paid to turn off their hardware devices in times when demand for electricity spikes. Conversely, bitcoin miners are also able to turn on additional mining capacity in times of low demand.
The goal here is to keep the amount of demand for electricity matched up with the available supply, which helps prevent waste, malfunctions related to frequency or voltage instability, and rolling blackouts. The efficiency gains that come with a more stable energy grid that can be enabled by bitcoin mining have been compared to the ways in which cars use gas more efficiently when traveling at a constant speed on a highway as opposed to the stop-and-go traffic of city streets. Additionally, a stable grid also leads to stable and more predictable energy prices. This is especially useful in remote areas with microgrids or underdeveloped electrical infrastructure.
When Bitcoin Mining Goes Wrong
Of course, there have been a number of instances where bitcoin mining has turned out to be more of a stress on existing grids rather than a stabilizing effect. However, these cases tend to involve miners moving into a particular area and using as much cheap energy as possible rather than being integrated as part of a stabilizing tool for the grid itself.
For example, bitcoin miners that flocked to Kazakhstan in search of low electricity costs ended up turning the country’s power surplus into a deficit through overuse. According to MIT Technology Review, this overloading of Kazakhstan’s electricity grid partially came as a result of tax breaks, crony politics, and a relaxed governance structure. By the end of 2021, bitcoin miners were using 7% of Kazakhstan’s energy supply. As a result, power shortages and blackouts became commonplace. Eventually, public protests led to the government cutting bitcoin miners off of the electrical grid.
This situation in Kazakhstan illustrates how bitcoin mining is simply a tool that is also open to misuse. For this new tool for the energy industry to be beneficial to society as a whole, it needs to be implemented in the correct manner. Governments and energy producers can use bitcoin mining to improve the energy grid and the viability of various power generation schemes; however, lawmakers and regulators also need to be on the lookout for bitcoin miners who just want to use preexisting incentive structures to exploit local energy grids.
A Boon For Sustainable Energy Sources
As covered previously, bitcoin mining has been heavily and wrongly attacked for the amount of carbon emissions that happen as a result of the energy used in the mining process. And in reality, bitcoin mining can actually improve the economics of various forms of renewable energy.
For example, bitcoin mining can be helpful in not wasting as much unused energy when it comes to wind and solar energy plants. These forms of energy tend to generate excess power at specific parts of the day, which is then curtailed and basically thrown away.
While the wind is still blowing at night and generating power, this is also when most people are sleeping and not using as much energy. Additionally, solar power generation tends to peak at the middle of the day, which leads to excess power generation during that time. However, when bitcoin mining is added to the equation, the revenue generated by these renewable energy sources can be massively increased thanks to the constant demand for electricity that is involved in the mining process.
This steady and predictable demand for electricity from the bitcoin mining process can go as far as incentivizing the creation of new power plants based on renewable energy or revitalizing failing renewable energy plants. And as covered previously, the stabilization bitcoin mining can provide to the grid more generally can also be particularly beneficial in systems that incorporate wind and solar, which are notably more volatile in terms of energy production levels. Grids based on renewable energy sources oftentimes have to revert to balancing themselves through purchases of additional, dirty energy from other grids; however, a stabilization solution involving bitcoin mining removes this need to depend on less desirable sources of energy in certain situations.
While it’s true that bitcoin mining effectively improves the profitability of any source of energy, this impact is felt most heavily in renewable forms of energy due to the more volatile energy supply shocks that tend to be found with those sources. In this way, bitcoin mining can act as an accelerant for those who would like to see the world move to an economy that is more dependent on renewable energy sources.
This was also the finding of a report (PDF) released by the Bitcoin Clean Energy Initiative (BCEI) back in 2021. According to the report, “Bitcoin mining presents an opportunity to accelerate the global energy transition to renewables by serving as a complementary technology for clean energy production and storage.”
The BCEI was originally founded by Block, which was known as Square at the time and now works on a number of different bitcoin-focused initiatives, in addition to its more well-known products like Square and Cash App.
The purest form of bitcoin mining’s ability to accelerate the development of renewable energy sources comes from the fact that bitcoin miners can be placed at renewable energy plants before a grid has even been developed. This helps calm the fears of investors who are needed for the plant to be built in the first place. Even in a scenario where the plant remains isolated and more development does not take place around it, these investors can ensure they’ll have at least one major source of revenue in the form of bitcoin mining.
At the end of the day, bitcoin miners are effectively incentivized to seek out areas where there is too much energy as compared to local demand and improve the economics of those energy sources.
Bitcoin’s Role In Energy Underscores Its Geopolitical Importance
Bitcoin mining also changes the global energy market from a geopolitical perspective. An energy market where excess production can be converted into bitcoin is very different from one where that energy can only be monetized by selling it to the highest bidder that is deemed acceptable by the global community of nations. For example, a country that has been sanctioned by the United States and its allies may find it more difficult to find a buyer for their excess energy. However, they are now able to monetize this energy in a permissionless, unregulated manner through bitcoin mining.
The bitcoin asset itself is notable for its ability to offer an alternative to the current global financial system, which is largely dominated by the U.S. And by mining bitcoin, these nation states are able to establish a decentralized computer network as a key trade partner that exists outside of the current geopolitical power structure.
Notably, Russia passed a law to legalize bitcoin mining at a time when it is also facing economic sanctions from the U.S. and others as a response to the invasion of Ukraine. Iran has also joined the fun, and this trend of energy-rich geopolitical opponents of the U.S. getting into bitcoin mining should not be viewed as a coincidence. That said, the U.S. itself is also becoming a global hub of this activity.
Bitcoin mining could alter the global power structure in a way that benefits energy-rich countries, as they stand to benefit the most from the emergence of the bitcoin mining industry. This also gives these countries an incentive to be supportive of bitcoin more generally, as more activity on the bitcoin network means more revenue for bitcoin miners. Of course, every country should be aware of this alteration to the economics of energy production, as any energy producer stands to see increased revenue.
Projects That Illustrate Bitcoin’s Global Energy Impact
Now that the basic premise behind bitcoin mining’s impact on the global energy market has been explained, let’s take a look at some of the more prominent projects around the world that illustrate the general thesis that has been outlined so far.
Balancing Texas’s Electrical Grid
One of the most notable illustrations of bitcoin mining’s ability to stabilize an energy grid can be found in Texas. The Texas power grid, managed by the Electric Reliability Council of Texas (ERCOT), has previously faced challenges with fluctuating energy prices and occasional service disruptions. After multiple snowstorms in late 2021, the power grid came just minutes from a complete failure. Amid these issues, the growing bitcoin mining industry in the state saw an opportunity to help stabilize the grid, an idea that U.S. Senator Ted Cruz found to be compelling. The general idea is based around how bitcoin miners can quickly adjust their energy usage.
This flexibility is crucial in a grid like ERCOT’s, which requires a delicate balance between energy supply and demand. By absorbing surplus energy that would otherwise be wasted, particularly from renewable sources like wind and solar, bitcoin miners help maintain this balance. This balance ensures that the entire grid remains stable and avoids disastrous scenarios where power plants go dark and blackouts occur. The setup in Texas is particularly advantageous for the bitcoin mining industry, as the miners are paid to power down their operations when other entities connected to the grid need access to power.
While critics of ERCOT’s bitcoin mining plan to stabilize the grid say that this simply increases the demand for power across the grid in aggregate at a time when the system is already under stress, the reality is the implementation of bitcoin mining across the grid leads to the generation of more power generally, meaning there is excess power that can be accessed in rare instances where the demand for power spikes. ERCOT’s plan already proved useful during a heatwave in 2022 when bitcoin miners shut down their hardware as demand spiked.
Bitcoin Mining Brings Historic Hydroelectric Plant Back To Life
An historic hydroelectric plant in Mechanicville, New York, nearly faced demolition some years ago, but now it has instead been nominated for national engineering landmark status. The plant, owned by Albany Engineering Corp., is believed to be the oldest renewable energy facility in continuous operation globally, despite brief interruptions. Originally built in 1897, the plant was abandoned by National Grid, leading Albany Engineering Corp. to invest years into restoring it to full capacity. However, running the plant using its original 1800s machinery offers little profit, prompting the company to supplement its revenue by mining bitcoin.
Mining bitcoin has proven more lucrative for Albany Engineering Corp., generating three times the income compared to selling electricity to National Grid, according to Times Union. CEO Jim Besha Sr. has noted that while they are experimenting with bitcoin mining using renewable energy, he remains cautious about bitcoin as a long-term investment, converting their earnings into cash rather than holding onto the cryptocurrency. The plant’s nomination for landmark status could help preserve its legacy, adding to the protections already provided by its listing on the National Register of Historic Places.
Balancing The Grid And Growing Food With Bitcoin Mining In Iceland
While Iceland’s abundant green energy has made it a prime location for bitcoin mining, the country also faces significant challenges in food sustainability, relying heavily on imports for essential food items like grains and vegetables.
Despite its reputation for renewable energy, Iceland’s reliance on food imports reveals a gap in self-sufficiency, with imports of tropical fruits alone totaling over $9 million. However, innovative approaches involving bitcoin mining like those previously seen in the Netherlands and Prague offer potential solutions. By repurposing excess heat from bitcoin mining operations to power greenhouses, these models show how mining can support local agriculture and reduce the need for imports, according to Forbes.
Iceland stands at the crossroads of opportunity, where it can leverage its green energy not only for economic gains through bitcoin mining but also to enhance its food sustainability. With the right strategies, Iceland could lead by example, demonstrating that technological innovation and sustainable agriculture can coexist.
This project shows that, in addition to increasing revenue for generators of renewable energy, bitcoin mining also has the potential to lower costs for business operations that require heat generation.
El Salvador’s Volcano Energy
Since 2021, El Salvador has harnessed the power of its Tecapa volcano to mine nearly 474 bitcoin, adding approximately $29 million to the government’s bitcoin portfolio, according to Reuters. This innovative approach, fueled by geothermal energy, reflects President Nayib Bukele’s commitment to integrating cryptocurrency into the country’s economy in an effort to lower their reliance on the U.S. dollar and the associated global financial system.
The state-owned geothermal power plant generates 102 megawatts of electricity, with 1.5 megawatts dedicated to running 300 processors for bitcoin mining. While cryptocurrency mining has faced global criticism for its high energy consumption and environmental impact, El Salvador’s use of green energy presents a sustainable alternative. Since becoming the first nation to adopt bitcoin as legal tender in 2021, alongside the U.S. dollar, El Salvador continues to leverage its renewable resources to support its ambitious cryptocurrency goals, despite facing criticism from international bodies like the International Monetary Fund.
Gridless Energizes Rural Africa
In Africa, Gridless has found a way to use bitcoin mining to combat the problem of a lack of electricity in rural parts of the continent. A large portion of the estimated 770 million people without access to electricity in the world live in Africa, which is why Gridless has focused its operations there.
The primary challenges in rural Africa include insufficient infrastructure and limited disposable income, which forces many to prioritize more essential needs over electricity. Traditional microgrids have been deployed in these regions for years, but they often struggle with financial sustainability and inefficiencies. Gridless seeks to address these issues by integrating bitcoin mining with microgrid technology. By partnering with energy producers, Gridless ensures that excess electricity, which would otherwise go to waste, is used for bitcoin mining, thus making microgrids more viable and extending power to remote areas.
There are many more examples of the impact bitcoin mining has already had on energy producers and electricity consumers around the world, but these four projects give some added insight into how this industry is already having a global impact.
While bitcoin’s use of energy has mostly been ridiculed in the media as wasteful and bad for the environment, it’s clear that the reality of the situation is much more complex. Bitcoin mining is becoming an integral part of global energy infrastructure, as this new source of demand alters the existing energy economics. These changing economics will continue to evolve and have second-order effects on other areas such as climate change and geopolitics. The specific way in which the world’s energy use will change based on bitcoin mining is not yet 100% clear; however, what is clear is that it is something that all energy producers, whether in the form of private companies or nation states, must understand to get the most out of their energy production.
Bitcoin’s Energy Future
Bitcoin’s integration into the global energy landscape is transforming how we think about power consumption and energy markets. As a buyer of last resort, bitcoin mining is reducing energy waste, stabilizing grids, and even revitalizing renewable energy sources. This unique demand for electricity is pushing energy producers to innovate and create more efficient systems, offering both economic and environmental benefits.
Looking ahead, the interplay between bitcoin mining and global energy production is poised to grow stronger. Whether it’s helping emerging nations monetize excess energy or incentivizing the growth of clean energy infrastructure, bitcoin is playing an essential role in shaping the future of global energy. Energy producers, policymakers, and environmental advocates must consider these dynamics as they plan for a more sustainable and decentralized energy future.
Who Is Bitcoin Creator Satoshi Nakamoto?
Since the launch of Bitcoin, the identity of its creator has become one of the 21st century's greatest mysteries.
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Satoshi Nakamoto’s identity has been an obsession for crypto enthusiasts since the Genesis block. Nonetheless, the pseudonymous cypherpunk has kept his(?) identity a complete mystery for over 15 years.
Only one thing is certain about Nakamoto: He is the creator of bitcoin.
Without a doubt, Nakamoto changed the world forever; many consider his creation a literal miracle. He single-handedly revolutionized finance by conceiving a decentralized form of internet value. The vision for this invention is the foundation for the entire blockchain industry.
Wallets linked to Nakamoto contain somewhere between 750,000 and 1,100,000 bitcoin. According to current valuations, his net worth is somewhere around $73 billion making him about the 15th-richest person in the world.
Despite the tremendous fame and wealth of Satoshi Nakamoto, his identity remains one of the greatest mysteries of the 21st century.
This article will discuss what little is known about the creator of bitcoin and survey prominent theories about his possible identity. It will close with a discussion of Nakamoto as more than a person and focus on what he means to bitcoin conceptually.
Conceiving Bitcoin
Nakamoto did not drop bitcoin from the heavens, never to be heard from again; he was an active participant in the early community and many cryptography spaces. Much of what we know about his vision and work on bitcoin comes from his email and forum correspondences with the metzdowd.com mailing list and the P2P foundation website.
According to these messages, he started working on bitcoin early in 2007 and indicated some desire to solve fundamental problems with banking, seemingly prompted by the 2007/2008 financial crashes.
The biggest issue he saw with digital currency was the so-called “double-spend” issue, the unauthorized production and spending of money, and he proposed bitcoin’s peer-to-peer distributed timestamp server as a potential solution.
Satoshi Nakamoto did not invent blockchains or cryptocurrency. It was his novel decentralized approach to blockchains that was so groundbreaking. This involved using ledgers, Merkle trees, timestamps, incentives, cryptography, and a consensus mechanism that solved the double-spending problem, finally making digital money possible.
Personal Details
Although he communicated with a variety of people online from 2007 to 2010 and logged hundreds of messages, Nakamoto always remained anonymous. That said, details of his online footprint have left plenty of room for speculation.
First off, given the nature of the original code for bitcoin, it’s obvious that Nakamoto was professionally skilled and acquainted with cutting-edge cryptography and programming. In fact, many have exclaimed that the code for bitcoin is so perfect that Satoshi Nakamoto is either a genius or a pseudonym for a team of people.
The only personal information detailed by Nakamoto himself is on his P2P Foundation account, where much of his forum correspondence took place. The account says he is “a 37-year-old man who lives in Japan,” and his profile claimed his birthday to be April 5th, 1975. Many, however, have pointed out that his native use of British English and his references to “London Times” point to a person of commonwealth origin.
This is about all the personal information discovered about Satoshi Nakamoto. His communication with the bitcoin community mysteriously ended in 2010, with his final message saying that he had “moved on to other things.”
Possible Identities
There have been countless guesses about Nakamoto’s true identity. Here are some of the most prominent ones.
Hal Finney
The most popular and widely accepted “best guess” to Nakamoto’s identity is Hal Finney.
Hal was a renowned computer science genius and the recipient of the first sent bitcoin. Hal has been the most popular candidate for the title of bitcoin creator since the beginning of widespread internet inquiry. To much disappointment, he was aware of the rumors and consistently denied being Satoshi Nakamoto up until his death in 2014.
Hal’s expertise in cryptography and close involvement with bitcoin’s early development have kept his name in most people’s mouths speculating about Nakamoto’s identity. His way of writing, British origin, and the fact that his neighbor’s name was Dorian Nakamoto have all been used as additional fuel for the fire. Further, Hal became immobile due to Lou Gehrig’s disease and stopped contributing to the internet the day Nakamoto posted his last message.
However, one major thorn in this theory is that Hal Finney was competing in a 10-mile race when Satoshi Nakamoto responded to emails and transacted on bitcoin, newly surfaced evidence reveals.
Nick Szabo
Nick Szabo was a computer scientist and cryptographer known for his work on digital contracts and for creating “bit gold,” a precursor to bitcoin that shares many similarities. His deep understanding of the concepts underlying bitcoin is the primary source of weight behind this theory.
Looser evidence is simply that Hal Finney and Nick were friends. Hal was the first recipient of Szabo’s now famous 1998 private email list called “Libtech,” where Szabo released bit gold. This could explain why Hal Finny was the first bitcoin user; they even collaborated on developing bit gold.
Hal Finney lived close to Dorian Nakamoto, went to the same high school, and seemed well acquainted. Given that Nick Szabo lived in the same state as both men and was friends with Finney, this could be a connection enough for Szabo to use the name.
Despite the enthusiasm drummed up online, Szabo has repeatedly denied being Nakamoto. Szabo is alive and well, continuing to take part in the bitcoin ecosystem and touring industry conferences.
Craig Wright
Australian computer scientist Craig Wright is the most infamous claimant to the name of Satoshi Nakamoto.
Wright has been publicly in court and in the media, claiming to have invented bitcoin. Wright presented what he purported to be cryptographic proof of his identity, but the broader cryptocurrency community quickly dismissed his evidence as fraudulent.
Despite his media presence and numerous attempts, Wright has never been able to provide conclusive documentation that he is the real Nakamoto. Almost all bitcoin enthusiasts view his assertions with skepticism and disgust.
A Group
Another theory is that Satoshi Nakamoto is not an individual but rather a group of people working together under a shared pseudonym. Two main arguments support the idea that Nakamoto could be a group.
Multidisciplinary Expertise: The design of bitcoin’s consensus mechanism, cryptographic elements, economic incentives, and peer-to-peer network all required specialized knowledge. It’s more plausible that a group of experts with different backgrounds came together to create bitcoin than a single person mastering all these domains.
Timing And Activity Patterns: Observers have noted that Nakamoto’s activity patterns (posting messages, developing code, and responding to emails) suggest that the workload was shared among several individuals. The timing of messages and code updates shows a pattern that would be difficult for a single person to maintain, suggesting that the work was divided among a group to ensure continuous development and communication.
Satoshi Nakamoto As A Concept
Beyond the endless quest to unmask Satoshi Nakamoto’s true identity lies a more philosophical inquiry: What does Satoshi Nakamoto mean to bitcoin? Satoshi is not merely a person but a symbol of the core principles underlying bitcoin and the broader cryptocurrency movement. Nakamoto embodies the ideals of decentralization, anonymity, and resistance to centralized financial control.
His commitment to these principles is underscored by the decision to remain anonymous despite the monumental success of bitcoin. Nakamoto’s vision for bitcoin was to create a system that functioned independently of any single person or entity, a truly decentralized network. Nakamoto’s decision to step back from the limelight has ensured that bitcoin remains a decentralized and resilient system, which continues to thrive and evolve without the direct influence of its creator.
In many ways, the mystery of Satoshi Nakamoto has added to bitcoin’s allure, capturing the imaginations of people worldwide and ensuring that the principles of decentralization and trustless systems continue to gain traction. Ultimately, the true identity of Satoshi Nakamoto may not matter; what is important is the revolutionary idea that he brought to life.
A History Of Cryptocurrency Liquid Staking
Explore the history and evolution of crypto liquid staking and key innovations that have shaped its development.
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Liquid staking is among the most transformative blockchain innovations in recent history, due to how it has helped unlock new potential for on-chain liquidity, decentralization, and yield generation.
Staked tokens are left locked up and illiquid with traditional staking mechanisms, creating massive liquidity constraints. With liquid staking, however, users can stake their tokens while retaining their liquidity, bolstering that blockchain’s decentralization and its DeFi ecosystem.
As more proof-of-stake blockchains have proliferated throughout the cryptocurrency ecosystem, a variety of liquid staking protocols have launched, helping solve for some of traditional staking’s limitations and to expand cryptocurrency use cases.
In this article, we’ll explore the history and evolution of liquid staking, key innovations that have shaped its development, and how it has become a vital component in the cryptocurrency landscape.
The Origins Of Liquid Staking
As proof-of-stake blockchains began to gain favor over proof-of-work due to sustainability and scalability concerns, the introduction of staking mechanisms became commonplace with blockchains, wherein staked tokens worked to help secure the network and ensure sufficient decentralization.
With this method, though, staked tokens typically couldn’t be used for other financial activities, creating a massive capital inefficiency, as generally a large portion of a network’s tokens end up getting staked. Ethereum, for example, has nearly 30% of its circulating supply staked, while Avalanche has 54% of its total supply staked, and Solana’s staking ratio sits at 65%.
Liquid staking emerged as a solution to help unlock this trapped liquidity. Once a user stakes tokens using a liquid staking protocol, they’ll receive a derivative token (or liquid staking token) that represents the value of their staked assets. While their original tokens work to help secure the operations of that blockchain, these derivative tokens can be used for a variety of DeFi purposes, such as trading or collateral for loans.
In 2020, the implementation of ETH 2.0 allowed users to stake their tokens in preparation for the network’s transition to proof of stake. But doing so meant they couldn’t unstake until ETH’s transition to a proof-of-stake network was fully complete (which didn’t happen until Sept. 2022).
Lido was among the earliest liquid staking platforms, launching in 2020 amid this transition to proof-of-stake to help users retain their liquidity.
Users who stake using Lido receive a derivative token, stETH, which represents their staked ETH, plus any earned rewards. These stETH tokens can then be used within DeFi protocols like Aave and Compound, or for a variety of yield farming strategies, allowing users to earn yield from both staking, and from any activities conducted with their derivative tokens.
Since launching on ETH, Lido has also launched liquid staking on a variety of blockchains including Polygon, Optimism, Arbitrum, and BNB Smart Chain.
The Rise Of Liquid Staking Across Blockchains
As Lido gained popularity and quickly emerged as the preeminent liquid staking platform, the concept began to spread to other blockchains, with each protocol adapting to that blockchain’s unique technical and economic environments.
Solana
Marinade Finance, which launched in 2021, was the earliest liquid staking protocol released on Solana. Similar to Lido, users of Marinade receive a derivative token, mSOL, in exchange for their SOL, and can use mSOL across Solana’s DeFi ecosystem. Marinade’s liquid staking strategy involves automatically distributing stakes across dozens of validators, which helps reduce risks associated with a validator going offline, or changing their commission fees.
Other liquid staking platforms on Solana include Jito, SolBlaze, and marginfi.
Polkadot
Acala, also launched in 2021, was the first liquid staking protocol available on the Polkadot network and is significant for how it pioneered liquid staking for Polkadot’s multichain architecture and helped unlock liquidity for its ecosystem.
Polkadot relies on a series of “parachains” which are application-specific blockchains connected to the main network, meaning any liquid staking token needs to be compatible with the network’s entire suite of parachains.
When staking using Acala, users receive LDOT in return, which can then be utilized across the entire cross-chain network of the Polkadot ecosystem. For Polkadot, which has around 60% of its supply staked, liquid staking has helped unlock a significant amount of liquidity and helped facilitate the groundwork for a cross-chain DeFi ecosystem.
Other liquid staking platforms on Polkadot include Parallel Finance and Bifrost.
Avalanche
Similar to other blockchains, the launch of BENQI on Avalanche in 2021 was a massive step toward unlocking liquidity and improving the usability of AVAX’s DeFi ecosystem. When users stake via BENQI, they receive sAVAX in return, a derivative token that was integrated into a variety of lending, borrowing, and yield-farming platforms early into its launch.
Users of sAVAX can yield farm on Pangolin and take out loans on Aave, while still earning rewards on their initial staked tokens.
Other liquid staking protocols on Avalanche include Ankr and Balancer.
The Arrival Of Liquid Staking On Bitcoin
While liquid staking has gained traction on proof-of-stake networks, Bitcoin’s proof-of-work architecture has largely prevented a similar boom native to the Bitcoin ecosystem. The Bitcoin network’s lack of smart contract compatibility, slow consensus mechanism, and low data availability, make it far from ideal to be used for complex transactions like liquid staking or DeFi applications.
But the emergence of liquid staking platforms, such as Lorenzo Protocol, has the potential to help unlock bitcoin’s massive liquidity, while also paving the way for a bitcoin-native DeFi ecosystem.
Currently, almost all of the liquidity that comprises Bitcoin’s $1 trillion-plus market cap is locked on Bitcoin’s main network, either in exchange balances or self-custody wallets. And it’s locked there due to Bitcoin’s inherent limitations.
But that liquidity represents a massive potential opportunity for bitcoin. What if that capital could be utilized across the DeFi ecosystem?
Using platforms like Lorenzo, the potential of that locked capital can finally be realized. Holders of bitcoin now have the ability to stake their bitcoin, similar to how they would any proof-of-stake token, and receive a derivative token in exchange, which can then be used across a variety of proof-of-stake networks.
With Lorenzo, users can request their bitcoin be staked, after which it gets sent to a verified financial institution, which serves as the staking agent and completes the staking execution. Upon confirmation that the BTC has been staked, users will then receive an equivalent amount of value in derivative tokens, stBTC. These tokens are smart-contract compatible and can be used for DeFi purposes across a variety of EVM-compatible blockchains.
Through facilitating the ability to make their bitcoin liquidity interoperable across multiple blockchains, liquid staking on Bitcoin represents a significant advancement in the evolution of Bitcoin into a multi-chain, DeFi-compatible asset.
What’s Next?
Liquid staking has emerged as a solution to address the liquidity constraints of traditional staking methods, enabling stakers to maintain liquidity while securing the network. With its rise across major proof-of-stake blockchains, liquid staking has significantly expanded DeFi use cases, enhanced decentralization, and has helped enable a more efficient DeFi ecosystem.
As its potential extends to bitcoin, expect a new range of financial applications for bitcoin that will be enabled by the unlocking of the asset’s massive liquidity.
What Is Segregated Witness (SegWit) And How Does It Work?
Among Bitcoin's most significant early challenges were scalability and mutability. Then, SegWit came along and changed everything.
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Despite the enthusiasm of Bitcoin Maximalists who view bitcoin as perfect from the start, the original blockchain design was not without flaws.
Among the most significant challenges were transaction scalability and mutability. These were the largest obstacles to bitcoin realizing its potential as a global currency and which hindered its broader application.
Transaction scalability refers to the amount of transactions bitcoin can process. Bitcoin was programmed to settle 1 mb of transactions about every 10 minutes. This comes out to about 4.6 transactions per second. Compared to Visa however, which processes about 1,700 transactions per second, the scalability issues hindering bitcoin from becoming a more widely used currency is clear.
Transaction mutability is the ability to alter a transaction ID before it is confirmed on the blockchain. This means that malicious actors could invalidate the next transaction a receiver makes. This feature of bitcoin makes building Layer 2 solutions difficult, as the second layer relies upon the consistency of the base layer.
SegWit not only helps alleviate these two issues with the original bitcoin network, but its solution also opens up an entirely new world of use cases for bitcoin.
This article will detail the history, inner workings, and impact of SegWit on the world of bitcoin.
History Of SegWit
SegWit was a proposal made by Dr. Pieter Wuille in December 2015 that suggested reformatting the composition of a bitcoin transaction.
A bitcoin transaction is a combination of the sender’s address, the receiver’s address, and a digital signature that verifies the sender owns the needed bitcoin.
Dr. Wuille proposed “segregating” the signature data, aka witness data, from the main transaction. This is where SegWit gets its name, segregating the witness data.
This upgrade is an ingenious way to store more transactions inside bitcoin’s 1-megabyte block size limit. Here’s how it’s done.
How Segwit Works
SegWit moves the signature/witness data outside the base transaction to its own separate structure. This data is still transmitted, but only as an attachment at the end of the transaction.
Leaving the witness data empty in the base transaction allows more transactions in the leftover space without exceeding the original 1mb limit.
Segwit is able to do this by introducing a new transaction format that is backwards-compatible with the original format. The new block format includes a 3 mb block extension, the new witness data location. This reformatting means that the block size becomes 4 mb while the base transaction is still just 1 mb.
When a SegWit transaction is broadcast, nodes that have upgraded to support SegWit recognize the new format and can process the transaction with witness data separately. No need for a hard fork, as the base transaction size is exactly the same.
Block Weight Versus Block Size
Given bitcoin’s decentralized nature, it might sound odd that an upgrade can come around and fundamentally change the block size of the bitcoin network. Part of the way SegWit does this is simply by redefining block capacity.
SegWit introduces a concept called “block weight,” calculated using the formula:
Block Weight = (Base Transaction Size * 3) + Total Transaction Size
Base Transaction Size: This refers to the transaction size without the witness data.
Total Transaction Size: This includes both the base transaction and the witness data.
Each block has a maximum weight of 4 million weight units, equivalent to the previous 1 mb size limit in terms of the old definition of block size.
What Segwit Directly Solves
The Segwit upgrade sought to alleviate transaction scalability and mutability issues, and was a great success by all accounts.
For scalability, the initial effect is obvious; by increasing the number of transactions per block, more transactions could be processed per second. This helps reduce congestion, enabling faster transaction processing and lower fees, especially when network activity surges.
SegWit solves transaction mutability in the same way. By separating the witness data from the transaction data, the transaction ID remains unchanged even if the witness data is altered. This protects the transaction ID from malicious tampering and ensures Layer 2 solutions have a secure, immutable base layer.
Although SegWit successfully fixes the core issues it was proposed for, its ultimate impact was far greater than Dr. Wuille could have ever expected.
A Snowball Effect
SegWit resulted in a series of interlocking and mutually dependent developments that ultimately transformed the face of the bitcoin ecosystem. The most important achievements resulting from SegWit are the advent of Bitcoin Layer 2 solutions, smart contracts on bitcoin, the Taproot upgrade, and Ordinals.
Layer 2 Solutions
Layer 2 solutions require stable transaction IDs to create secure additional layers. Segwit gives bitcoin this crucial property by eliminating transaction malleability.
A great example of this is the Lighting Network, the most significant Layer 2 that bloomed after SegWit. The Lightning Network relies on the creation of payment channels that allow users to conduct multiple transactions off-chain, with only the final state being recorded on the blockchain. With SegWit-enabled transactions, these payment channels can be securely managed without the risk of transaction malleability affecting the channel’s integrity.
All other Layer 2s, such as Stacks, Liquid Networks, Rootstock, and more, require the same stability in the base layer for their various operations.
Smart Contracts
Smart contracts are computer programs built on a blockchain that automatically execute a set of rules. Smart contracts are the essential infrastructure powering the entire decentralized economy: All its platforms, tools, and organizations run on these programs.
Although bitcoin’s scripting language is not as advanced as those of some other blockchain platforms, SegWit enhances its capabilities in several ways that allow for smart contracts:
- Layer 2 solutions: Layer 2s can use their increased throughput and programmability to add smart contracts to bitcoin themselves. For example, Rootstock and Stacks are Layer 2 solutions that support smart contract execution, enabling the development of a decentralized infrastructure on bitcoin.
- Script versioning: SegWit introduces the script versioning concept, allowing new features and upgrades to be added to the bitcoin scripting language without requiring a hard fork.
- Block space: More space is available in each block, which means larger smart contracts can be executed. This is especially beneficial for smart contracts that require a lot of data to be processed.
Taproot
Taproot is an upgrade to the bitcoin protocol that builds on SegWit signatures to improve privacy and efficiency. Taproot allows all participants in a transaction to agree on a single public key and signature.
Taproot reduces the size of these transactions, making them cheaper and faster to process. SegWit’s improvements in transaction structure and script versioning made the Taproot upgrade possible without needing a hard fork.
Ordinals
Ordinals are a numbering system applied to individual satoshis (aka sats, the smallest unit of bitcoin). Like a serial number, each sat has a unique ordinal number. This number is an individual identifier for each satoshi based on when it was mined.
In principle, this numbering system is all that is needed to make sats nonfungible. Every sat is unique and identifiable through its individual number. Once the satoshi is connected to external media, it can function as an NFT. This is where SegWit comes in.
The SegWit upgrade means users can store more data inside bitcoin’s 1-megabyte block size via the new witness data structure. The introduction of this arbitrary data is what helps enable Ordinals; now, full pieces of media can be added in as additional arbitrary data with the bitcoin transaction. Once a piece of media is attached to a bitcoin transaction with a single satoshi, this data is forever linked to that satoshi.
Even if this interaction with satoshis was possible after SegWit, it was impractical due to the speed and efficiency of making such transactions. Taproot solved this problem, and soon after this upgrade, bitcoin NFTs were born.
The Legacy Of SegWit
The implementation of SegWit has been instrumental in addressing significant challenges to bitcoin’s growth and functionality. In essence, SegWit has resolved foundational technical challenges and catalyzed a wave of innovation, expanding bitcoin’s capabilities and securing its place as a versatile foundation for the future decentralized world.
As bitcoin continues to evolve, the success of SegWit will undoubtedly shape the possibility of additional upgrades and be a symbol of how bitcoin can address seeming limitations.
The Ultimate Guide To Bitcoin Liquid Staking Protocols
Review the top Bitcoin liquid staking protocols available.
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The Story Of Mt. Gox: Origins, Collapse, And Aftermath
How a platform launched for Magic: The Gathering card trading services become the epicenter of Bitcoin's most notorious exchange collapse.
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Mt.Gox wasn’t meant to be the epicenter of one of cryptocurrency’s greatest crises.
The very name of this trading platform — short for “Magic: The Gathering Online Exchange” — shows it was primarily for people interested in swapping trading cards rather than exchanging virtual tokens. However, as founder Jed McCaleb dove deeper into digital assets, he sensed an opportunity to make Mt.Gox far more than a portal for Magic card players.
From 2010 onwards, Mt.Gox became the epicenter for bitcoin trading services, eventually controlling 70% of total bitcoin transactions.
However, because of this rapid rise, Mt.Gox also became the juiciest target for cryptocurrency hackers. In hindsight, everyone should have seen the Mt.Gox collapse coming; at the time, traders using this exchange were shocked by their losses.
To this day, the bitcoin community feels the sting of the Mt.Gox hack, but this painful episode has had a few positive repercussions.
A Brief History of Mt.Gox’s Fame and Fall
Jed McCaleb created Mt.Gox for Magic cards in 2006, but he pivoted to use this URL as a central trading hub for bitcoin in 2010.
While McCaleb got Mt.Gox off the ground and running, it was the French programmer Mark Karpelès who took Mt.Gox to its full potential as the company’s new leader. Although Karpelès successfully grew the Mt.Gox brand in the cryptocurrency community, he didn’t account for the increased attention from hackers, nor did he pay attention to increasing warning signs, like a security breach in June 2011 where hackers stole 25,000 bitcoin.
Despite a string of close calls, trading halts, and bitcoin thefts, it wasn’t until 2014 that Mt.Gox suffered its irrecoverable hack. 740,000 bitcoin — or 3.5% of the total supply — vanished from Mt.Gox users’ accounts, triggering the company to file for bankruptcy. In the immediate aftermath, bitcoin lost 90% of its value from the recent $1,000 high, highlighting Mt. Gox’s significance in the cryptocurrency ecosystem.
The Aftermath and Legal Battles
Court dramas are notorious for taking years to play out. Add the complexities of the uncharted cryptocurrency industry to the mix, and it’s no wonder the legal ramifications of Mt.Gox persisted until 2024. Not only was this case centered around a novel form of digital currency, but it took place under Japan’s legal code. Plus, the Mt.Gox case involved further nuances due to embezzlement and data manipulation charges for Mark Karpelès.
Despite the years of debate over how to repay creditors, the Tokyo District Court eventually approved a rehabilitation plan, and a portion of the recovered funds have begun working their way into the digital assets market. In 2024, major industry news headlines followed Mt.Gox’s first repayments to creditors, which some traders and analysts feared would put pressure on bitcoin’s market price.
Mt. Gox’s Implications for the Bitcoin Ecosystem
If there was any silver lining to the Mt.Gox hack, it highlighted the weaknesses in encryption and security on centralized exchanges (CEXs).
Many founders of the next wave of CEXs, including Kraken’s Jesse Powell and Gemini’s Winklevoss brothers, directly cite the Mt.Gox hack as inspiration to create safer, better-regulated platforms for digital assets. Also, as more CEXs entered the cryptocurrency ecosystem, the share of bitcoin became more spread between different platforms, helping avoid the centralization risk Mt.Gox posed.
Despite the improvements in CEX security following Mt.Gox, vulnerabilities in the centralized model became a “central” theme again following the fall of trading sites like FTX and lending platforms like Celsius in 2022. Many digital currency traders are still searching for safer alternatives to buy and use their bitcoin, without sharing personal information or worrying about counterparty risk.
The rise in distrust towards centralized entities might spur the continued growth and adoption of decentralized finance (DeFi) alternatives within the bitcoin ecosystem. Although bitcoin’s DeFi sector is still young, Layer 2 projects continue to build with bitcoin as their base layer and offer innovative, intermediary-free services.
Moving Toward a Decentralized Bitcoin Economy
While the wounds of Mt. Gox are still tender, developers and traders have learned a great deal from this infamous event. The cryptocurrency ecosystem has been far more secure and compliant since the days of Mt.Gox, but there are still concerns surrounding the overreliance on centralized entities. Besides risking another hack or liquidity crisis, traders recognize CEXs still have the power to withhold funds on a whim — a situation directly opposed to the decentralized ethos of bitcoin.
The mounting distrust in centralized cryptocurrency institutions continues to drive the growth in DeFi services, particularly on the bitcoin blockchain. Lorenzo Protocol is proud to be at the forefront of this latest evolution in the bitcoin economy, which has the power to erase all traces of centralization. With bitcoin as the foundation for trading, lending, and re-staking services, users may have all the tools to transfer and use their bitcoin without fretting about another Mt.Gox-esque mess.
Bitcoin Halving: What It Is And How It Works
The bitcoin halving is one of the most pivotal and enigmatic events in the cryptocurrency industry.
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The bitcoin halving gives the protocol its fundamental deflationary economics, has broad economic impact that is difficult to define, and occurs approximately every four years until the day the last bitcoin is mind.
It is, perhaps, the most fundamental, mysterious, and foreboding event in bitcoin, all wrapped into one, piquing the interest (and, sometimes, fear) of every bitcoin enthusiast.
The following information seeks to, at least partially, demystify the halving and allow potential bitcoin investors to understand key concepts such as market cycles, block rewards, and bitcoin supply dynamics.
A Quick Recap On How Bitcoin Works
To understand the halving, it’s beneficial to first cover how the bitcoin blockchain functions.
When a user submits a bitcoin transaction, it must be verified and recorded on the blockchain. Once initiated, the transaction sits in a pool, waiting to be selected by a miner and included in a block. A block is just a digital file for recording transactions.
Miners pick submitted transactions to put into their block and race to add this block to the blockchain. Miners must solve a complex mathematical puzzle to link their block to the others. This sounds complicated, but it’s essentially just a brute-force guessing game. Miners try to discover the correct hash (a string of characters) by simple trial and error to solve the puzzle. Therefore, the miner with the most computational power wins the race. This type of system is called a proof-of-work consensus mechanism.
A consensus mechanism is a system that allows various network participants to agree on the state of the ledger. In the case of bitcoin, the proof-of-work consensus mechanism determines who has the privilege of adding a block to the blockchain. This right is given to the miner who discovers the correct hash first.
Once a miner finds the hash, they broadcast their solution to the rest of the network. The other nodes verify that this is, in fact, the correct hash. If everything is verified, the block is added and the winning miner is rewarded newly mined bitcoin plus the transaction fees.
New bitcoin can only be created by the block reward given to miners. This is where the halving comes in.
The Halving
The halving is a rule designed into the mechanism that rewards miners. It requires that the amount of bitcoin distributed to the winning miner be cut in half every 210,000 blocks. Since bitcoin blocks are generated approximately every 10 minutes, the halving occurs about every four years.
This event, the reduction of the block reward, is a significant milestone in bitcoin economics. This ever-diminishing reward, being the sole mechanism for creating new bitcoin, ensures that the amount of new bitcoin entering the market decreases over each four-year cycle, resulting in a planned, consistent lowering of the digital currency’s inflation rate. Hence, bitcoin is described as deflationary, which is in stark contrast to traditional fiat currencies.
The halving does not go on forever. Although the block reward could be cut in half continuously to infinitesimal small numbers, the creator of bitcoin actually put a hard limit on the supply so that only 21 million bitcoin would ever be created.
Because of this, given that the publishing year of this article is 2024, we can expect 28 more BTC halvings, with the last one estimated for the 2130s, when the last bitcoin is mined. After the last halving, miners will only receive transaction fees as a reward for adding a new block.
Bitcoin’s deflationary economic model and hard supply cap are some of its most talked-about features. These aspects endow bitcoin with absolute scarcity, a quality that many find attractive and that underpins its role as a store of value.
The halving, in addition to these features, also has broader economic implications.
Impact Of The Halving
Due to the halving restricting the supply of bitcoin without affecting the demand for it, many see the halving as a catalyst for upward price movement. This is based on simple supply and demand theory, which states that if demand remains stable and supply goes down, then the price must increase.
The reality of bitcoin’s price movement is more complicated. Although the supply of new bitcoin being put into the market is lowered, the amount the halving affects the supply is not obviously significant enough to directly affect the price given other supply dynamics, such as the number of sellers versus hodlers in the market.
That said, in the early days of bitcoin, when the market was much smaller, an event like the halving could have had a large effect on bitcoin’s price. Historically, the year following the halving has seen bitcoin peak at multiple times the amount it was trading at during the halving.
The first halving occurred on November 28, 2012, and reduced the block reward to 25 BTC from 50 BTC.
- Price at time of halving: $13
- Following year’s peak: $1,152
The second halving occurred on July 16, 2016, and reduced the block reward to 12.5 BTC.
- Price at time of halving: $664
- Following year’s peak: $17,760
The third halving occurred on May 11, 2020, and reduced the block reward to 6.25 BTC.
- Price at time of halving: $9,734
- Following year’s peak: $67,549
The fourth halving occurred on April 19, 2024, reducing the block reward to currently 3.125 BTC, and despite bitcoin breaking its previous all-time high, the effect has yet to be fully seen at the time of this writing.
Although the original pump after the first halving could have been due to supply and demand dynamics, the effect of the following years is more likely the result of a self-fulfilling prophecy, where investors expect the event to raise the price and, therefore, buy in anticipation of it.
Nonetheless, bitcoin’s price historically does, in fact, increase after the halving, and then subsequently fall in price for a significant period of time. This has caused what many see as the market’s natural “cycles,” and these cycles are generally measured according to the four-year period dictated by the halving.
Mining Profitability
The other major effect of bitcoin’s halving is that it reduces profitability for miners. Miners are the entities that secure the bitcoin network. If they are not making a profit from their efforts, they will stop mining bitcoin, and therefore, make the network vulnerable to attack.
With each halving, miners’ profits are reduced by 50%, i.e., halved. This necessitates a significant rise in the price of bitcoin to counterbalance the reduced profits and ensure that operational costs do not exceed the income from mining. The rising price is a critical factor in miners’ profitability, given the relatively constant energy costs, computer costs, and transaction fees compared to the halving of mining rewards.
This creates one of the central problems the bitcoin community contemplates: what happens when the last bitcoin is mined? The traditional answer has been that transaction fees will pay miners enough to keep them protecting the bitcoin network. However, the narrative that bitcoin is digital gold and not everyday currency implies that relatively few transactions will be going through the network, potentially putting the network in danger.
Everything Follows Bitcoin
The bitcoin halving is one of the most pivotal and enigmatic events in the cryptocurrency industry. The historical price trends following each halving have skyrocketed not only bitcoin but the market at large. The whole industry stands at attention, waiting for the action after each halving; this mechanism defines the seasons of the market.
As bitcoin approaches its eventual supply cap, the halving will continue to be a focal point for investors, miners, and enthusiasts alike. Understanding its implications is crucial for anyone involved in the bitcoin ecosystem, as it not only shapes the economic landscape of the cryptocurrency but also influences broader market cycles and investor behavior.
The Top Marketplaces To Buy And Sell Bitcoin Ordinals
5 Ordinals marketplaces stand out as noteworthy options that each Bitcoin participant should be aware of.
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Ordinals are the latest treasures of the decentralized digital realm.
Like traditional NFTs, they sit at the nexus of art, finance, and blockchain technology. Also, like traditional NFTs, news coverage has decried either their immense price or their threat to the sanctity of the blockchain industry.
Ordinals are controversial, complicated, and (in some cases) extremely valuable. No wonder crowds are blindly scrambling into whatever marketplace is selling them!
But before the hasty Ordinals investor inputs their information into the first marketplace on Google, they should know the top players and how to differentiate them. Before even this, it’s important to have a refresher on what Ordinals are.
What Are Ordinals?
Most people know Ordinals as NFTs for bitcoin. While this is technically true, the real picture is more complex.
Ordinals are serial numbers assigned to satoshis (the smallest unit of bitcoin) based on when they were mined. The Ordinals protocol inscribes additional data, such as an image or text, to a satoshi using its unique serial number.
Learn more about Ordinals:
https://medium.com/@lorenzoprotocol/the-beginners-guide-to-ordinals-9092e9db9954
This makes the associated satoshi a non-fungible token that is tradable and embedded in the bitcoin blockchain.
Inscribed satoshis are similar to rare coins; their value is no longer dependent solely on being a unit of currency but rather on being a collector’s item in its own right, i.e., possessing numismatic value beyond the minted face price of the coin. In the same vein, they shouldn’t be put in the same wallet as currency to spend because they aren’t meant to be traded equally to any other coin. This is why Ordinals require their own digital wallets; this protects users from perhaps accidentally spending the inscribed sat when they use their bitcoin wallet.
What Is An Ordinals Marketplace?
An Ordinals marketplace is a platform that enables you to trade, inscribe, and discover bitcoin Ordinals.
When Ordinals first appeared in January 2023, early adopters traded the digital artifacts peer-to-peer, primarily using Discord servers. Trading in this way carries a higher risk of being scammed, and access to the right servers is extremely limited. Ordinals marketplaces emerged to meet the demand for secure, seamless trading.
For collectors, Ordinals marketplaces offer an easy way to see new releases, recent sales, and what’s popular. Marketplace teams can also restrict bad actors and scams, making traders feel more confident when trading Ordinals.
For creators, marketplaces offer a streamlined way to enter the Ordinals realm. Creators without a technical background can benefit from straightforward inscription services and development assistance programs offered by major platforms.
Platforms offering development assistance carefully select which artists to showcase and collaborate with. These selected artists can benefit from the enhanced legitimacy and exposure that this brings.
Choosing A Marketplace
Picking the best Ordinals marketplace will largely depend on individual goals. Different marketplaces might be better for creators, collectors, or have a niche community presence.
The following are general criteria to help anyone interested in Ordinals compare marketplaces:
- Popularity: How many users are registered
- Liquidity: How many sales are being made
- Wallet compatibility: How can it connect with the needed wallet
- Security: How robust is the security of the platform
- User experience: How easy the platform is to navigate and use
- Fee structure: How expensive it is to use the platform
Top 5 Ordinals Marketplaces
These are the top five Ordinals marketplaces that every bitcoin participant should be aware of today.
Magic Eden
Magic Eden stands firmly as the largest ordinals marketplace, capturing over 60% of marketplace trading volume according to data from Dune Analytics. This makes it the most liquid marketplace for bitcoin Ordinals.
Magic Eden has brought a myriad of collector-centric features to the Ordinals space, implementing features such as bidding, rarity index, and automatic connection between their secondary marketplace and Launchpad minting platform.
The Launchpad platform provides development support to creators. Magic Eden accepts only 3% of all creator applications, so users can have confidence in the quality of the projects being featured.
Trades are subject to a 2% transaction fee. This is higher than other marketplaces on this list, but it may be worth the cost to users who want to benefit from the marketplace’s liquidity and ease of use.
Compatible with wallets: Magic Eden, Xverse, Unisat, Leather, OKX, Token Pocket
OKX
OKX has a competitive edge as a major international exchange serving users in over 100 countries. It already has the second-highest marketplace volume, and with the growth of such a large exchange, it will likely be onboarding traders at an unmatched pace.
In addition to being a marketplace, the platform features a wallet browser extension and inscription service. Users enjoy low trading fees of 0.060%, and OKX recently launched zero-fee Rune trading.
This makes OKX a fantastic combination of low cost and high liquidity. Additionally, users have access to the security and customer service of a large international exchange.
Unfortunately, U.S.-based users are unable to access the platform due to compliance and regulatory hurdles.
Compatible with wallets: OKX, WalletConnect, Phantom, Unisat, Xverse
Unisat
Unisat is a decentralized marketplace with additional wallet and inscription services. The easy-to-navigate platform makes it simple to discover new collections and stay informed of marketplace trends. Unisat also has a native wallet and a search engine that can query inscriptions within seconds.
Unisat offers 0% marketplace fees for users with over 500 Unisat points. Users who fall short of that number are subject to 0.5% trading fees. Users receive 1 Unisat point per inscription, and OG passholders receive a 20% discount across all marketplaces.
Overall, Unisat is a great platform for users who care about decentralization and low fees. The platform rewards users for participating — getting the most out of the Unisat marketplace requires users to commit time to its use.
Like other decentralized exchanges, Unisat suffers from lower trading volume and next to no customer support.
Compatible with wallets: Unisat, Xverse, Leather, OKX, Bitget, Phantom, Magic Eden, Enkrypt
Gamma.io
Gamma functions as both a marketplace and a no-code launchpad, providing a portal for artists and creators looking to make their mark in the bitcoin space. Gamma provided one of the first inscription services and at one point represented nearly 10% of all network inscriptions.
Collectors can enjoy curated collection drops while creators benefit from the Gamma Partner Program, inscription services, and handy guides to navigating creation in the NFT space.
Gamma is a destination for over 3,000 creators and 45,000 collectors. With over 600,000 items sold, Gamma facilitates fewer transactions than other marketplaces featured on this list. Still, it is well established and holds its own as an art-focused space for creators and collectors on the hunt for something unique.
Compatible with wallets: Leather, Xverse, Unisat
Ordinals Wallet
The Ordinals Wallet is the most popular Ordinals wallet on the market. To date, this wallet reports over $82 million in total trading volume, more than 470,000 wallets opened, the facilitation of over 545,000 successful trades, and more than 875,000 Ordinals Inscriptions created.
Ordinals Wallet includes a marketplace for trading Ordinals. The simple, effective design includes a list of Ordinals collections where users can track statistics like volume, change, and number of owners.
Despite its popularity as a wallet, the trading volume on the native marketplace is less than that of competitors and is more skeletal compared to the robust features of other marketplaces. Nonetheless, Ordinals Wallet stands as one of the oldest and most-respected projects in the Ordinals ecosystem.
Compatible with wallets: Ordinals Wallet, Unisat, OKX, Phantom, Xverse, Leather
Get Started With Ordinals
As Ordinals rise in popularity, the number of Ordinals markets have also grown significantly. Any of the above five Ordinals marketplaces are perfect for exploring the new world of bitcoin Ordinals.
However, it’s important to remember that this industry changes quickly and all the data provided is subject to drastic changes month over month. It’s best to keep up with the data proactively as one investigates marketplaces to interact with; the image below of marketplace trading volumes should be a great example of just how much these marketplaces can change in terms of liquidity in just one year.
Ready to take the next step towards trading Ordinals? Read our Ordinals wallet guide:
https://medium.com/@lorenzoprotocol/the-top-5-bitcoin-ordinals-wallets-4f6078f8b673
The 9 Best Bitcoin Books: A Comprehensive Overview
These are the must-read Bitcoin books, from entry-level to expert.
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Most Bitcoiners remember where they first heard about the digital currency; at minimum, they remember the first time bitcoin really “clicked” for them.
Likely, it was a blogpost, a YouTube video, or even a conversation with a friend that was the moment bitcoin struck them as the inevitable future of finance (although many will say it was reading the bitcoin white paper).
In these revelations, they start thinking about bitcoin as the ultimate solution to a myriad of global problems. Epiphanies are addicting, especially when associated with personal gain.
Once the initial realization wears off, people typically spend vast amounts of time chasing that feeling, hunting down deeper and deeper interpretations of bitcoin and its meaning for humanity. Everyone needs to start mapping their hunt, and for many, that means starting a reading list.
The following collection of books begins with bitcoin basics and ends with literature that would challenge even the most resolute maximalist. It has something for everyone to add to the syllabus of their bitcoin education and the itinerary of their bitcoin journey.
List Key
The first through third titles below are broad books for beginners. Skip these if you already have a general knowledge of what bitcoin is, and Bitcoiner history.
The fourth through sixth titles are books considered absolute classics by most die-hard bitcoin devotees. These are still easy enough to approach as a starting place for advanced readers.
Numbers six through nine one should only approach once they have a good grasp on core industry principles and narratives. They are challenging to digest, use technical language, and provide details about bitcoin from a nuanced to even antagonistic perspective.
(There’s also a bonus book at the very bottom, but it is for theoretically-minded people and not the faint of heart!)
1. Bitcoin for the Befuddled by Conrad Barski and Chris Wilmer
This book is perfect for teenagers, young adults, or anyone starting to take their first steps toward bitcoin. Barski and Wilmer use simple language to boil down difficult concepts into easy-to-digest chunks. They cover bitcoin’s history, theory, and technology, along with step-by-step guides and plenty of illustrations.
2. The Basics of Bitcoins and Blockchains: An Introduction to Cryptocurrencies and the Technology that Powers Them by Antony Lewis
Antony Lewis’s bestseller has a writing style that is on par with what most adults can expect from blog posts or news articles. This book offers clear explanations and practical information on using and storing bitcoin. It also covers the blockchain industry more generally, making it a perfect starting place for comparing bitcoin with the industry at large.
3. Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money by Nathaniel Popper
Digital Gold is best for those who want the narrative behind bitcoin and the main figures in the early industry. It provides a detailed history of bitcoin and early blockchain culture so that the reader can track where bitcoin comes from on a human level. It also serves as a perfect foundation for many cultural references any beginning cryptocurrency-curious user is sure to see online — for example, the mystery of Satoshi Nakamoto!
4. Mastering Bitcoin by Andreas M. Antonopoulos
At this point, we start to get into “the classics.” Mastering Bitcoin is considered the bible for Bitcoiners. Antonopoulos covers everything from the basics of how bitcoin works to more technical concepts, like decentralized networks and cryptographic principles. This book is the typical first step for people diving deeper into bitcoin. It is very accessible but doesn’t hold back on technical explanations, and it expects the reader’s full attention.
5. The Bitcoin Standard: The Decentralized Alternative to Central Banking by Saifedean Ammous
If Mastering Bitcoin is the first step deeper into bitcoin, The Bitcoin Standard typically radicalizes these newcomers into maximalists. It’s a right of passage for any genuine Bitcoiner. This book discusses the economic principles behind central banking and how bitcoin can fix many of its problems. Ammous dives into the history and theory behind money while arguing for bitcoin’s superiority over traditional currencies. It’s a compelling account of the potential for bitcoin to become a universal global currency.
6. The Internet of Money by Andreas M. Antonopoulos
The Internet of Money is a companion to Mastering Bitcoin, which goes further into the philosophical and social implications of bitcoin. The book is just a collection of talks by Antonopoulos, providing insights into the future of money and bitcoin’s ability to change the global financial system. It explores the broader impact of decentralized technologies in a way that is missed in The Bitcoin Standard, making it the perfect footnote after reading the previous two books.
7. Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction by Arvind Narayanan, Joseph Bonneau, Edward Felten, Andrew Miller, and Steven Goldfeder
This academic-style book is a thorough introduction to the technology behind bitcoin. The authors cover technical elements in cryptographic principles, consensus mechanisms, and other aspects of blockchain technology. This book is perfect for university students interested in the inner workings of cryptocurrencies.
8. Attack of the 50-foot Blockchain by David Gerard
Attack of the 50-foot Blockchain is the best-selling anti-cryptocurrency book. It is often pointed to as the place where Bitcoiners go to become disillusioned. Inside, it presents an alternate account of many of the narratives and goals of the authors on this list. It is the perfect book for bitcoin enthusiasts to challenge themselves and poke holes in the prevailing ideas gathered from previous reads.
9. Resistance Money by Andrew M. Bailey, Bradley Rettler and Craig Warmke
Resistance Money is the newest book on this list, published in 2024, and goes over many of the big questions that still tie the industry in a knot. It presents a philosophical account of bitcoin and uses various analytic tools to make the case that bitcoin is a net positive for society. The perspective is balanced, discussing many ideas industry leaders tend to avoid and admits the imperfections of blockchain technology. This book should only be read by someone who understands the theory, technology, and problems with bitcoin.
(Bonus) Šum #10.2 — Cryptocene by PJ Ennis, Nick Land and Edmund Berger
This book is actually shorter sections from three different books that take widely abstract approaches to cryptocurrency. If readers are interested in one, they can challenge themselves to read the whole source material for the “out-there” perspectives they find inside.
The first entry, Bleakchain, is a piece of short fiction about a post-cryptocurrency age in the 31st century. Characters discuss the world they are imprisoned in and the history of cryptocurrencies becoming religions.
The second entry is the first chapter of Nick Land’s Crypto-Current. Land is a highly controversial philosophical figure, and this whole book should only be read by those with a firm grasp of contemporary developments in academic philosophy. It is often called the most extreme vision of cryptocurrency possible. The book sees digital currency as an agent of dehumanization (in a good way) and the culmination of objects that rework space and time.
At face value, Waveforms, the third entry, is less crazy than the other two. This essay mainly discusses blockchain in terms of long-term economic cycles and whether blockchain technology requires new socio-political paradigms. However, as it develops, it argues that blockchain requires new forms of reasoning and social organization that become increasingly hard to follow.
(Available via pdf)
Knowledge Is Power
Bitcoin is more than just a new form of internet money; it represents a collection of revolutionary technologies, theories, and cultural shifts. It stands as a significant historical event that society is still grappling with, requiring a variety of approaches to fully comprehend the multifaceted nature of the Bitcoin movement.
This list is designed to guide dedicated readers toward the layered and interconnected discussions surrounding Bitcoin. It seeks to demonstrate the depth of knowledge available in Bitcoin education and to persuade readers that investing time in learning about Bitcoin could be as valuable to their future as owning Bitcoin itself.
What Are Liquid Staking Tokens?
Liquid Staking Tokens (LSTs) offer advantages over traditional staking structures by enhancing liquidity and boosting capital efficiency.
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Liquid staking is a specific means of staking a cryptocurrency asset, usually for securing proof-of-stake blockchains, that allows users to retain access to the value being staked for other purposes. Upon staking, the protocol automatically generates a liquid staking token (LST), which provides liquidity via a derivative token while the original cryptocurrency remains staked. This LST acts as a receipt, proving ownership of the staked cryptocurrency, and can be transferred, stored, traded, and used within decentralized finance (DeFi) and other supported applications.
Liquid staking enhances staking by offering greater liquidity and capital efficiency compared to traditional staking methods. Typically, the staking process involves bonding and unbonding periods that make the staked cryptocurrency unavailable for other applications while it is staked, but liquid staking overcomes this by issuing the transferable LST. In addition to ownership of the underlying staked assets, the LSTs also hold the rights to any rewards accrued.
Advantages of Liquid Staking Tokens
LSTs offer notable advantages over traditional staking structures by enhancing the liquidity of the underlying staked assets and allowing that capital to be used more efficiently. While previous systems led to yield strictly through the staking process, LSTs enable access to additional returns by allowing that liquidity to remain active in the DeFi ecosystem across multiple chains. Users benefit from the opportunity to delve into yield farming and other DeFi strategies, potentially boosting their returns while still enjoying the utility of their staked assets. In fact, the existence of LSTs means the same underlying collateral can effectively be staked multiple times through a process known as Loop Staking.
Moreover, LSTs provide exceptional flexibility compared to staking protocols that don’t offer such tokens. While there are oftentimes long unbonding periods typically associated with the staking process, LSTs allow extreme simplicity and less restrictions on the movement of value in and out of the staking process. Bonding restrictions are effectively removed with LSTs, as the LSTs can be sold for a replacement of the collateral from where the LST derives its value. Indeed, the staking process as a whole can be simplified into the buying and selling of these LSTs, as the one who holds the LST holds the rights to the yield associated with the stake and the deposited collateral. With Lorenzo Protocol, the rights to the yield and underlying principal can even be split into two separate tokens.
Examples Of Different Liquid Staking Protocols
Although the liquid staking process is pretty straightforward, this concept is implemented differently depending on the underlying blockchain.
On Ethereum, where liquid staking originated, EigenLayer allows staked ether (ETH) to be staked across various decentralized protocols, without moving it off the Layer 1 Ethereum blockchain. This preserves the underlying security model of Ethereum itself by allowing staked ETH to also be used in other staking protocols simultaneously. Acting as an intermediary, EigenLayer facilitates the creation of restaking pools, requiring that its smart contract be set as the withdrawal credential for the staked ETH. This setup enables the enforcement of additional slashing conditions based on the additional staking protocols the staker opts to validate, using cryptographic proofs for verification. Additionally, validators receive derivative ERC-20 LSTs representing their staked ETH and associated rights, which are liquid and can be used in further applications.
Babylon introduces an innovative approach to enabling bitcoin hodlers to participate in a proof-of-stake security model. The protocol circumvents Bitcoin’s limited scripting capabilities to emulate advanced smart contract functionalities. This allows the creation of staking contracts directly on the Bitcoin blockchain, using scripts that define specific conditions for locking, unlocking, and slashing bitcoin used for staking.
Key scripting elements include OP_CHECKSEQUENCEVERIFY for timelock mechanisms and OP_CHECKSIG for signature verification. It should be noted that Babylon is only able to enable bitcoin to be used for staking. For accessing more advanced features, such as liquid staking or restaking to multiple chains, additional protocols like Lorenzo are required, as Babylon alone does not support these functionalities.
Most liquid staking protocols for other cryptocurrency networks, such as Jito on Solana, work in a manner similar to EigenLayer on Ethereum, and Bitcoin’s limited scripting language is the reason things work differently there.
Types Of Liquid Staking Tokens
There are also a variety of different ways LSTs tokens can be issued to stakers. In their simplest form, LSTs are issued to the staker on a relevant blockchain network immediately after the stake has been deposited at the base layer. These newly issued tokens hold the right to withdraw the original stake and any yield the stake accrued at the end of the specific staking period. Due to the yield that is associated with this stake, the tokens should trade at a premium when compared to the base cryptocurrency when it is not staked.
Another concept that was briefly mentioned in the previous section is liquid restaking. This is similar to liquid staking, but the key difference is that the underlying cryptocurrency is staked on more than one network. Liquid restaking tokens (LRTs) are similar to LSTs in that they represent the underlying cryptocurrency and any yield associated with it from the various staking protocols where it has been connected. Due to the existence of more than one staking protocol, LRTs tend to trade at an even greater premium than LSTs.
LSTs and LRTs can also be separated into two different tokens in some liquid staking protocols. These two separate tokens represent the base cryptocurrency collateral and the yields associated with that collateral. The separation of the yield from the base stake allows the staked cryptocurrency to trade closer to a one-to-one basis with its derivative token. This effectively makes the liquid staking process a way to move the staked cryptocurrency to the same proof-of-stake cryptocurrency network it is securing. The tokens that represent that base cryptocurrency stake are known as liquid principal tokens (LPTs), while the tokens that represent the rights to the yield accrued by the stake are known as yield-accruing tokens (YATs).
Unlocking Liquidity and Flexibility
Liquid staking tokens represent a significant advancement in the staking process, offering users the flexibility to unlock liquidity while still participating in blockchain security. By enabling the use of staked assets in decentralized finance and other applications, LSTs provide a dual benefit of staking rewards and additional yield opportunities.
This innovation not only increases capital efficiency but also expands the utility of staked assets across multiple platforms and chains. As the landscape of liquid staking continues to evolve, LSTs are likely to play a crucial role in the future of decentralized finance, offering both security and flexibility. For investors and blockchain enthusiasts alike, understanding and leveraging liquid staking tokens could be a key strategy in maximizing returns in the growing world of DeFi.
What Are Liquid Principal Tokens (LPTs)?
LPTs represent a user's principal balance, tokenized. This functionality enables new features and technical capabilities for bitcoin.
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Cryptocurrency holders and investors have been able to stake their digital assets to participate in consensus and governance on proof-of-stake blockchains for roughly a decade; however, there have recently been some notable new capabilities introduced into the staking process.
For example, Babylon has enabled bitcoin to be used as collateral for alternative proof-of-stake (PoS) networks, and the same crypto asset can be used to provide security to multiple different networks at the same time.
Perhaps the most important innovation over the past few years has been the ability to access the liquidity associated with a particular stake via liquid principal tokens (LPTs). Through this process, users can simultaneously stake their cryptocurrency assets while also using derivatives, based on that stake, in various decentralized finance (DeFi) applications.
What Is Liquid Staking?
Liquid staking enhances traditional staking by providing users with access to the liquidity of their staked assets. In a typical PoS blockchain, participants lock up their funds to secure the network, rendering their tokens unavailable until they’re unstaked. However, liquid staking allows users to stake their coins while maintaining access to that value for use in other blockchain applications such as lending, payments, trading, yield-bearing DeFi applications, and more.
Additionally, this concept can be extended to liquid restaking, which allows the same cryptocurrency assets to be staked on multiple networks simultaneously.
Notably, there are key differences in how liquid staking works on Bitcoin and Ethereum. Liquid staking on Ethereum through the EigenLayer smart contract allows users to stake ETH natively, due to the expressive nature of the cryptocurrency network’s scripting language. Conversely, Bitcoin’s Babylon protocol uses a combination of native scripting and off-chain cryptographic techniques to enable staking in an ad-hoc manner, requiring additional protocols like Lorenzo for full liquid restaking functionality.
What Are Liquid Staking Tokens (LSTs)?
Liquid staking tokens (LSTs) represent staked cryptocurrency on PoS blockchains. They enable users to maintain the liquidity of their assets while earning rewards by participating in staking. If the base collateral is involved in multiple staking protocols, then the assets are more properly defined as liquid restaking tokens (LRTs). Even though the original assets are staked and supporting network operations, the corresponding LSTs or LRTs can still be used elsewhere, even on completely separate cryptocurrency networks by way of secure bridging mechanisms.
When users stake their cryptocurrency, they can receive LSTs that represent the value of their staked assets. Whoever holds the LSTs is who has the rights to withdraw the staked cryptocurrency from the underlying staking protocol. These tokens allow users to maximize their investments without forfeiting the benefits of staking. In other words, they’re able to gain yield from multiple different sources using the same underlying collateral.
How Liquid Principal Tokens Are Created Using Lorenzo Protocol
When a user decides to stake their bitcoin via Lorenzo Protocol, they will send their bitcoin on the bitcoin blockchain to a specific multisig address. Once this transaction has been confirmed by Lorenzo, the user can receive the principal of their staking deposit in the form of LPTs on the Lorenzo appchain. From here, the LPTs can be used in decentralized applications directly on the Lorenzo appchain or bridged to other networks.
The Lorenzo’s native LPT is stBTC. Notably, the yield awarded on the stake the stBTC tokens derive their value from is not attached to these tokens. Instead, the staked bitcoin and the rights to the rewards associated with that stake are separated into two separate tokens on Lorenzo appchain. The tokens associated with the staking rewards are known as yield-accruing tokens (YATs), and only the holder of those tokens can access the staking yield.
Benefits Of Liquid Principal Tokens For Bitcoin
Through the creation of LPTs in Lorenzo Protocol, new features and technical capabilities can be enabled for bitcoin. Any of the alternative cryptocurrencies can now be implemented as Bitcoin Layer 2 networks, with the staked bitcoin both providing security for the network and enabling a secure two-way pegging mechanism between bitcoin on the base bitcoin blockchain and the new secondary layer.
Whether a user wants to bring the expressiveness of Ethereum or privacy of Monero to their bitcoin usage, Lorenzo Protocol can enable any use case. By bringing every cryptocurrency use case to bitcoin, the overall utility of the cryptocurrency, and thus the market overall, increases due to the increased scale and liquidity of the bitcoin economy.
What Are Yield Accruing Tokens (YATs)?
YAT tokens represent a user's right to redeem earned yield on Lorenzo Protocol and are freely tradeable across the DeFi ecosystem.
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Liquid Staking Tokens (LSTs) are one of the key innovations in the world of proof-of-stake blockchains over the past few years, as they allow stakers to retain control over the value associated with their stake, via derivative tokens.
This ability to access the liquidity that has been staked into a particular financial protocol means that value can now be used in all other areas of decentralized finance (DeFi), even applications that enable earning additional yield by staking that same value elsewhere.
LSTs can also be further split into the base collateral and the yield associated with that collateral’s staking work. The tokens that are simply associated with the yield related to the underlying stake are known as yield-accruing tokens (YATs).
Let’s dive deeper into liquid staking, LSTs, and YATs.
What Is Liquid Staking?
Liquid staking offers a fresh take on traditional staking by granting access to the liquidity of staked assets. Normally, in a proof-of-stake blockchain, funds are locked to secure the network, making them inaccessible until they are unstaked. Liquid staking changes this by allowing users to stake their tokens while retaining the flexibility to use their value within DeFi activities.
Liquid staking mechanisms differ significantly between the Bitcoin network and alternative cryptocurrency networks with more expressive scripting languages. On Ethereum, for example, the EigenLayer smart contract allows users to stake ETH directly within the blockchain. In contrast, Bitcoin’s Babylon protocol relies on a mix of native scripting and off-chain cryptographic methods to facilitate staking. This approach requires additional protocols, such as Lorenzo, to achieve complete liquid staking functionality on Bitcoin.
What Are Liquid Staking Tokens (LSTs)?
Liquid Staking Tokens (LSTs) represent staked cryptocurrency on a proof-of-stake protocol. These are the tokens that allow participants to retain the flexibility to buy, sell, or trade their tokens, even while they are staked — which is considered by many to be an incredible “value add” compared to merely hodling. This added liquidity makes staking more appealing and adaptable to various financial strategies.
When users stake their assets, they receive an equivalent amount of LSTs, which can then be freely traded or used within different DeFi protocols. This innovation means that staked assets are no longer locked and inaccessible; instead, they can continue to generate returns and be employed in other DeFi activities, thereby enhancing overall capital efficiency.
How Yield Accruing Tokens Are Created Using Lorenzo Protocol
When a user first decides to stake their bitcoin in exchange for yield via Lorenzo Protocol, they will first need to send their desired amount of bitcoin to a specific address on the base bitcoin blockchain generated by the protocol. Once the bitcoin has been received, Lorenzo Protocol can issue ERC-20 tokens based on both the principal bitcoin amount and the yield that will be accrued. These tokens can then be used via any number of crypto networks, including Bitcoin Layer 2 networks.
The tokens derived from the base staking collateral are referred to as liquid principal tokens (LPTs), while the tokens associated with the yield are known as yield-accruing tokens (YATs).
Users can decide whether they want to accrue the yield associated with their underlying stake over time or simply sell off the rights to those future earnings to someone else. This will be particularly appealing to those who are simply interested in moving their bitcoin to Layer 2 networks via Lorenzo Protocol.
The Benefits Of Yield Accruing Tokens For Bitcoin
Once the YATs are issued, they can be used like any other ERC-20 token in DeFi. This means users can use these tokens for collateralized borrowing of other tokens, collateralized issuance of stablecoins, and much more.
By separating the yield from the principal bitcoin staking deposit, users are also able to access the liquidity of the staking deposit on a one-to-one basis without a premium on the staked bitcoin. After all, the rights to bitcoin that are generating yield are more valuable than the rights to bitcoin that are held in cold storage. As DeFi is often referred to as a system of financial Legos, the separation of yield into YATs also provides more optionality and creativity in terms of building new applications for bitcoin.
With the combined use cases of providing security to Bitcoin Layer 2 networks and enabling bitcoin to be used on these secondary layers, it’s clear that LSTs, LPTs, and YATs can extend use cases and liquidity of bitcoin.
Bitcoin now has the capability to capture the value associated with every popular DeFi use case.
The Beginner’s Guide To Bitcoin Layer 2s
Layer 2 solutions have emerged to address Bitcoin's challenges, improving the network and generating a booming DeFi sector.
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Although the cryptocurrency industry pioneer, bitcoin has faced challenges in recent years keeping up with the ever-changing world of blockchain. Compared to other blockchains, bitcoin is slow, expensive, and lacking in features like smart contracts that are now underpinning the industry.
Layer 2 (L2) solutions have emerged to address these challenges, bringing upgrades and improvements to the bitcoin network.
Blockchains consist of an execution layer and a consensus layer. The execution layer manages users’ transactional activities, while the consensus layer protects and validates these transactions. Conceptually speaking, the execution layer maintains the blockchain activity while the consensus layer maintains the blockchain’s identity. The structure of an L2 is typically to improve the functionality of the execution layer while being sufficiently connected to the consensus layer.
In short, let the blockchain do more while still being the same blockchain.
Examining L2s requires understanding what capabilities they add this to bitcoin. Because the basic ideas and terms of this technology have alienated many bitcoin enthusiasts, this guide aims to help users grasp Layer 2 solutions by explaining their functionalities and types.
Upgrading Bitcoin
L2s enhance the bitcoin network by removing inherent limitations such as high fees, low speeds, and lack of smart contracts — all qualities which favor an unhackable, uncensorable maximum security model, as well as decentralization — qualities which will not be surrendered by the base layer. Improvements to blockchain execution capabilities are generally described in terms of scalability — the amount of transactions that can be processed on the blockchain in any given time period.
Because “scaling” a blockchain is too broad a descriptor for the variety of functionalities added, this section instead breaks down the main improvements to the execution layer and what this means in terms of what bitcoin can do.
Faster And Cheaper
Due to its transaction fees and block size limitations, bitcoin’s native chain is expensive and slow. These limitations are cited as the main bottleneck inhibiting broad functionality and adoption. Layer 2 solutions, at the most basic level, seek to solve this problem. They try to increase the network’s speed and output while keeping fees as low as possible.
The most obvious use case for making bitcoin faster and cheaper is microtransactions. Microtransactions are the small frequent transactions people make everyday. No one will use bitcoin to buy a coffee or a toothbrush if the transaction fee is half the total cost and takes 30 minutes to be confirmed.
The most popular and oldest layer 2 for bitcoin focuses on exactly this problem. The Lightning Network allows users to conduct micro-transactions with minimal fees and almost instant confirmation times. Reducing the cost and speed of transactions allows for the everyday usage necessary for mass adoption, such as tipping, small purchases, or running a business that accepts bitcoin.
Smart Contracts And DAPPs
Smart contracts are computer programs built on a blockchain that automatically execute a set of rules. The distributed computing power of the underlying blockchains executes a smart contract in a decentralized manner. Smart contracts can be used to make a digital agreement between parties with no third party to authorize the terms. Further, smart contracts are the foundation of decentralized applications (DAPPs). These are computer applications that use the decentralized execution technology in a blockchain to run programs without a centralized third party.
Smart contracts are the essential infrastructure powering the entire decentralized economy, all its platforms, tools, and organizations run on these programs. Bitcoin was not originally designed to support complex smart contracts and their development requires much higher TPS than bitcoin can natively mange. Therefore, things like DeFi and DAOs have traditionally been exclusive to smart contract-compatible blockchains such as Ethereum.
However, Layer 2 solutions can use their increased throughput and additional programmability to add such capabilities to bitcoin. For example, Rootstock and Stacks are layer 2 solutions that support smart contract execution, enabling the development of a decentralized infrastructure on bitcoin.
How Layer 2 Solutions Work
Layer 2 solutions function by transferring some computational execution off the main blockchain while maintaining a connection to the native bitcoin network. The methods for doing this can be broadly categorized into sidechains, state channels, and roll-ups.
Although there is additional nuance to many layer 2 solutions and not all fit perfectly into these categories, such distinctions allow for a general picture of the core types of layer 2s.
Sidechains
Sidechains are independent blockchains that run in parallel to the bitcoin main chain.
Sidechains that have some systematic dependence on the native chain, this dependence is generally seen through a pegging mechanism. Users lock their bitcoin on the main chain, which is then mirrored by minting equivalent assets on the sidechain. This relationship between the blockchains allows users to interact with the sidechain’s unique features (such as smart contracts) while still being anchored to the bitcoin network.
Further, sidechains often have their own consensus mechanisms, such as Proof of Stake or federated consensus, to secure the network independently of the bitcoin main chain. Through these consensus mechanisms, such chains can create their own incentives for participation, such as alternative rewards or their own native tokens.
Notable Side Chains:
- Rootstock: This sidechain introduces smart contract functionality to bitcoin, allowing developers to build dApps and more complex financial instruments.
- Liquid Network: Liquid focuses on fast and confidential transactions, particularly beneficial for exchanges and traders needing quick and private transfers.
- Stacks: Stacks is a blockchain and cryptocurrency for smart contracts, decentralized finance, non-fungible tokens, and dApps.
State Channels
State channels allow participants to conduct multiple transactions off-chain and then record the final state on the bitcoin blockchain. This process significantly reduces the number of transactions that need to be processed on-chain.
State channels maintain a connection to the bitcoin network through multi-sig addresses. With these addresses, multiple parties must sign off on a transaction, ensuring that off-chain transactions are secure and agreed upon by all involved parties. This method provides a secure link to bitcoin by ensuring that off-chain transactions within the state channel can be finalized and enforced when added to the main chain. Additionally, state channels will use security entities like “Watchtowers,” who are users that monitor the network for malicious activity and receive rewards.
The most well-known implementation of state channels for bitcoin is the Lightning Network. Here two parties open a channel by locking a certain amount of bitcoin into a multi-signature address. Once the channel is open, they can conduct unlimited transactions off-chain. Only the final state of the channel is recorded on the bitcoin blockchain network.
Rollups
Rollups work by aggregating multiple transactions into a single batch. Rollups interact with the bitcoin network by periodically committing aggregated transactions to the main chain. This process ensures that the state of the rollup is consistent with the main chain.
There are two main types of rollups: optimistic rollups and zero-knowledge rollups (zk-rollups).
- Optimistic rollups: These are “optimistic” because they assume transactions are valid and only perform a check if a dispute is raised. This approach minimizes immediate computational load but requires a mechanism to handle disputes effectively.
- zero-knowledge rollups These use cryptographic proofs to verify transactions according to minimal information about the transaction. This method retains higher privacy and speed, although it can be more complex and dangerous to implement.
Rollups are just starting to be seen on Ethereum and other blockchains, while implementation with bitcoin is still in the conceptual stage and has yet to be launched outside of research.
Challenges For Layer 2s
Despite the variety of use cases and the serious commitment by most of the bitcoin community, Layer 2 solutions face several challenges.
- Security risks: While Layer 2 solutions aim to enhance security, they also introduce new attack vectors. For instance, rollups must handle potential fraud disputes, and sidechains need to ensure their consensus mechanisms are resistant to attacks.
- Complexity: Implementing and maintaining Layer 2 solutions can be complex. Developers need to ensure seamless integration with the bitcoin network while maintaining usability and security.
- Interoperability: Different Layer 2 solutions often operate independently, which can lead to fragmentation. Ensuring interoperability between various Layer 2 solutions is a significant issue that needs to be addressed to realize the full potential of these technologies.
The Obvious Solution
It is almost universally agreed upon that Layer 2 solutions are needed for bitcoin to reach mass adoption. By enabling microtransactions and smart contracts, they expand bitcoin’s use cases to compete with the latest blockchain movements.
A basic understanding of the mechanisms of rollups, sidechains, and state channels, along with their security measures and connectivity to the bitcoin network, is essential for users to navigate emerging projects. Bitcoin Layer 2 solutions represent a crucial evolution in the bitcoin ecosystem, as they allow bitcoin to reclaim its role as the foundation and center of the blockchain industry.
How Ordinals Launched The Bitcoin DeFi Boom
The innovation of Ordinals helped usher in a rush of developer activity that has helped spark a DeFi boom native to bitcoin.
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Introduced in January 2023 by developer Casey Rodarmor, Bitcoin Ordinals instantly became one of the most talked about topics in cryptocurrency and related ecosystems.
The innovation of Ordinals, which are akin to NFTs directly onto bitcoin’s blockchain, immediately expanded bitcoin’s utility, changed perceptions of what can be possible on bitcoin, and helped to usher in a rush of developer activity that has helped spark a DeFi boom that’s native to bitcoin.
The Innovation Of Ordinals
Launched amid the depths of a bear market, Ordinals were created to find new ways to utilize bitcoin’s blockchain capacity. They represent a significant step forward in how data can be used on bitcoin. They’re made possible by a 2017 upgrade to bitcoin’s blockchain called Segregated Witness (SegWit), which created ways for users to add additional, non-transaction-related data onto bitcoin blocks.
The concept underpinning Ordinals, known as “inscriptions,” involves inscribing this data (such as images, videos, or other files) onto the smallest units of bitcoin (known as satoshis). Inscribing is the process of putting a piece of data onto the blockchain, where it will remain forever accessible and unchangeable. And each satoshi that’s inscribed becomes a unique entity on bitcoin’s blockchain, similar to non-fungible tokens. These individual satoshis can then accrue value and be traded like any other token. For bitcoin, which largely lacked many use cases beyond payments on its native network, Ordinals serve as a creative way to leverage bitcoin’s capabilities for new use cases, without necessitating any changes to its core protocol.
Initially, many in the bitcoin community questioned the utility of Ordinals, citing concerns over crowding blockspace with non-financial data and the potential for high transaction fees. Since bitcoin was built to serve as a decentralized global currency, some argued, there’s no room for non-financial purposes, they said. But the innovation has proven popular — there are more than 66 million inscriptions.
Collectively, they have a market cap of more than $2.2 billion.
How Ordinals Paved The Way For DeFi On Bitcoin
The introduction of Ordinals quickly opened up a new raft of possibilities for what can be done natively on bitcoin, including NFTs, other programmable assets, and perhaps most importantly, a foundation for DeFi on bitcoin.
Ordinals’ initial launch spurred a wave of original art being “minted” on bitcoin, particularly generative art and games, such as the popular ’90s shooter “DOOM.” The popularity of the Ordinals protocol also helped usher in further innovations for bitcoin, including the experimental BRC-20 token standard that allows for the creation of fungible and programmable tokens natively on bitcoin.
And together, these innovations and the rush of developer and user activity they’ve ushered in, has helped to spark a wave of new applications aimed at underpinning the burgeoning, multi-billion dollar Ordinals economy.
Supporting the Ordinals ecosystem requires an interconnected network of inscription services, wallets, bridges, decentralized exchanges (DEXs), Layer 2s, and other solutions. And within that ecosystem, a host of new bitcoin-native financial use cases have been enabled.
Using a decentralized app (dApp) like Ordinal Hub or Gamma, for example, users can seamlessly mint their own inscriptions in a relatively low-cost, user-friendly manner. With a self-custody wallet like Ordinal Wallet (which also combines as a marketplace), those inscriptions can then be hodl’d, or listed for sale to other collectors. Apps like Emblem Vault have also helped add utility to Ordinals, since when using Emblem Vault, users can “wrap” their Ordinals, receive Ethereum-compatible “representations” of those Ordinals (that are backed by the original Ordinal’s value) and then trade them on non-Ordinals specific marketplaces, enabling cross-chain activity.
The Ordinals ecosystem has even spurred lending protocols, like Liquidium, which help facilitate borrowing or lending against the value of one’s Ordinals. Since its launch last year, Liquidium has facilitated more than 15,000 Ordinals-backed loans, including an $80,000 loan against a rare Ordinal in April 2024. Notably, this loan was taken out against an Ordinal that was wrapped using Emblem Vault and moved onto an Ethereum-based marketplace, highlighting the potential interoperable use cases that Ordinals have opened up for bitcoin.
Off the back of Ordinals-related developments, a plethora of bitcoin DeFi companies have spawned, all dedicated to building products and services on top of bitcoin. Layer 2s, staking protocols, lending/borrowing protocols, and much more have contributed to a boom in bitcoin building.
As a result, the TVL of bitcoin DeFi has grown from under $100 million in TVL when Ordinals launched to over $1 billion at its peak (so far at time of writing).
Where Ordinals Fall Short
While Ordinals might have helped to initiate a new wave of activity on bitcoin, they still some major limitations — most of which are a direct result of the inherent limitations of bitcoin.
Scalability Limitations
Since Ordinals require the embedding of large amounts of data into bitcoin transactions, this can significantly increase the size of individual transactions and more rapidly consume available blockspace, which is already limited. This can also impact bitcoin’s main use case of facilitating financial transactions, since during times of high demand for Ordinals, for example, the network’s processing times for payments or other financial transactions could be slowed down, causing transaction fees to skyrocket.
Technical Hurdles
The Ordinals protocol itself is a huge technical undertaking. Since bitcoin wasn’t designed for the storage of non-financial data, managing and retrieving these large volumes of data like images, text, or games, introduces inefficiencies and complexities for use cases at scale. Additionally, while innovations like BRC-20 tokens, which are built atop the Ordinals protocol, do introduce a level of programmability for bitcoin native assets, bitcoin’s lack of smart-contract compatibility limits the types of interactions that users can have with inscribed assets, compared to assets built atop Ethereum, for example.
Complicated User Experience
While platforms do exist to facilitate the creating, trading, and management of Ordinals, it is often not as seamless as standard bitcoin transactions, especially because of the reliance on external tools. Depending on the UX design or technical capabilities of these tools, as well as the technical understanding of some users, certain types of actions could be inaccessible to less technical or knowledgable users.
What’s Next For Ordinals?
The creation of the Ordinals protocol has already served to expand both real-world use cases for bitcoin, as well as people’s mentalities around what’s even possible for bitcoin.
But it’s likely that Ordinals will be an initial step in a long line of attempts to unlock bitcoin liquidity and expand bitcoin’s utility. Casey Rodarmor, the founder of Ordinals, has already launched his next project, called Runes, which aims to expand on some of the functionalities Ordinals helped create, but in ways that are less technically complex and more scalable.
Why Bitcoin Makes Sense As The Base Layer Of DeFi
Any truly decentralized financial system must have a decentralized monetary system at the base layer, and that's what Bitcoin provides.
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The concept of decentralized finance (DeFi) first rose to prominence during the 2020–2022 cryptocurrency bull market. Built almost entirely on Ethereum at the time, the basic idea was to expand the decentralization and censorship resistance bitcoin enabled for payments and savings to other areas of finance (e.g., borrowing, lending, and trading). While DeFi has been mostly proven out on Ethereum and other blockchains with more expressive smart contracting capabilities, there has been a more recent expansion of interest in bringing these use cases to the bitcoin network.
For many, combining the strongest and most credible cryptocurrency with some of the technical development that has taken place on other networks in the 15+ years since bitcoin was introduced could be the perfect way to build out the next evolution of the DeFi ecosystem.
Let’s dive deeper into why there is so much excitement around bringing DeFi apps to bitcoin.
How Bitcoin Is Different From Other Cryptocurrencies
At the base layer, bitcoin is specifically designed to serve as a global, digitally native, decentralized, and apolitical monetary system that prioritizes and rewards savers more effectively than the current U.S. dollar-dominated financial system. As the first digital asset that requires no permission to use, has a monetary policy that was “set in stone” when the network first launched, enables wealth to be stored as information, and has censorship-resistant payments, bitcoin makes sense as the perfect native money of the internet’s financial system.
No other cryptocurrency, whether focused on payments or other use cases, comes close to bitcoin in terms of the credibility of its monetary policy — enabled by the high degree of decentralization in the system. And it is the credibility of that monetary policy that makes bitcoin the best digitally-based store of value.
Other cryptocurrencies tend to have various centralizing forces and other factors that put the credibility of the monetary policy into question. For example, Elon Musk’s outsized influence over Dogecoin, as indicated by the effect his X posts have on the Dogecoin price, indicates that the cryptocurrency’s monetary policy could be altered if Musk desired to change it. While stablecoins have become a popular medium of exchange in the Web3 space, the reality is these tokens are pegged to fiat currencies (usually the U.S. dollar) and centrally issued with the backing of real-world financial accounts, which makes it unclear if they’ll remain permissionless and censorship-resistant over the long term. Even ether, which is sometimes referred to as the only real competition to bitcoin, has seen its issuance rate altered on several occasions, and discussions have begun regarding another potential change in the near future.
As bitcoin creator Satoshi Nakamoto wrote in the early days of the project, one of the key benefits of the system is that a central bank does not need to be trusted to not debase the currency. This enables long-term clarity and predictability in terms of the monetary supply. With alternative digital assets, the central bank has been replaced by some other third party, as the level of decentralization and widespread adoption achieved by bitcoin has not been replicated. As a recent example, the validators of the Solana network have altered that cryptocurrency’s monetary policy in order to increase their revenue.
Any truly decentralized financial system must have a decentralized monetary system at the base layer, and that’s what bitcoin provides.
Due to its monetary credibility, bitcoin is able to act as the best possible money and collateral for DeFi use cases such as collateral-backed stablecoins and decentralized derivatives trading. As bitcoin continues to become a trusted, reliable store of value in the free market, more financial tools can be built on top of that solid, sturdy foundation.
The Block Size War As A Case Study
Bitcoin’s block size war can be seen as clear supporting evidence for the difficulties associated with changing any rules of the bitcoin network. While the vast majority of large miners, exchanges, and wallet providers pushed for a hard-forking (backwards incompatible) increase to bitcoin’s block size limit, the plan was ultimately abandoned due to a lack of consensus among the underlying userbase. No other cryptocurrency network has successfully withstood this sort of strong-armed social attack on its underlying ruleset.
While soft-forking (backwards compatible) feature additions with widespread consensus take place in bitcoin from time to time, more controversial alterations, such as an increase to the block size limit via a hard fork, or an alteration to bitcoin’s monetary policy, are effectively nonstarters as the incentives are to keep everyone on the same network and only implement changes with clear benefits to pretty much everybody participating in the system, i.e., an overwhelming consensus must occur for any change to take place.
DeFi In Practice, Not In Name Only
Many Layer 1 blockchains other than bitcoin make the mistake of focusing on tech features and mass adoption. These pursuits have the side effect of harming the trustworthiness of the base asset as a store of value through increased centralization and inefficient use of block space. Instead, the features that have been implemented in many of these alternative Layer 1 cryptocurrency networks can simply be added as Bitcoin L2 networks. This allows the base monetary layer to remain stable and trustworthy, while more experimentation can take place on secondary layers.
For example, much of Ethereum’s Layer 1 block space is filled up with transactions involving centrally issued tokens, such as stablecoins and non-fungible tokens (NFTs). This increases costs for those who actually need the level of decentralization offered by a Layer 1 blockchain to transfer a crypto-native asset such as ether. Indeed, much of the activity in the DeFi space today is built around centrally issued stablecoins, which puts into question how much of the DeFi sector is decentralized in name only (DINO). On the bitcoin network, the focus is on the promotion and utility of the bitcoin asset itself as money, especially at the base layer.
Scaling and enabling additional use cases via Layer 2 networks in bitcoin is also quite different from how things work on other cryptocurrency networks. For example, Solana is focused on processing every activity directly on its Layer 1 blockchain, while Ethereum has a rollup-centric roadmap that enables more blockchains to eventually settle back down to its Layer 1 network. With bitcoin, the use of the base blockchain or even Layer 2 blockchains is limited as much as possible. Indeed, various Bitcoin L2 networks do not involve a new blockchain at all. Examples include: the Lightning Network, Ark Protocol, Fedimint, and Mercury Layer.
The general scaling and development philosophy in bitcoin is to interact with the base blockchain as little as possible in order to both preserve decentralization and increase user privacy. While throwing everything onto a blockchain can lower transaction costs and enable more people to onboard onto the system today, this is not seen as a practical solution over the long term due to the negative impact such a plan has on decentralization and privacy. This is a trend seen in alternative Layer 1 cryptocurrency networks more generally.
As mentioned previously, much of the activity in DeFi today is built around centralized stablecoins. While these tokens have undoubtedly helped DeFi grow in its early days, it’s also created a situation where the vast majority of this activity could be outlawed with the strike of a pen.
As indicated by the relatively slow and patient bitcoin development process, the bitcoin network is intended to last more than 100 years and not simply attract investors by jumping on every new crypto-crazed buzzword. Instead, that sort of activity can take place on Bitcoin L2 networks. The aforementioned hard-forking block size increase associated with the block size war would have been the easy way out for scaling the bitcoin network to more users over the short term; however, taking the slow and steady approach of multi-layer scaling allows the network to get both increased capacity and retained decentralization over the long term, while also offering better privacy.
A Note On Tokenization
In addition to a slow and steady approach to development that leads to sturdier DeFi protocols built for the long term, another aspect of bitcoin culture relevant to DeFi is an avoidance of tokenization. It’s basically impossible to keep up with all of the cryptocurrencies and tokens that exist these days, and nearly all of them are useless. Even when looking at the top digital assets ranked by market capitalization, it’s clear that the platforms with expressive smart contracts could be operating as Bitcoin Layer 2 networks without a new “gas” token.
This is not to say that no new tokens need to exist. However, there’s no reason to reinvent the money aspect of a DeFi app when bitcoin is already available and much more liquid and trustworthy than any new cryptocurrency that is going to be created. A digitally native asset that is used for governance or revenue sharing, for example, makes great sense in the bitcoin realm. However, going back to the long-term development approach, it’s also possible these sorts of tokens could eventually be removed from the equation in various bitcoin DeFi protocols. Only time will tell.
Bringing DeFi Capabilities To Bitcoin
Bitcoin’s approach of keeping the base layer decentralized and difficult to change protects the credibility of the underlying bitcoin asset, which allows it to act as the best base money in DeFi. Tech experimentation is then able to take place on secondary layers, which allows bitcoin to get the best of both worlds in terms of stability for bitcoin as an asset and experimentation in terms of new capabilities for that asset.
Additionally, bitcoin users’ slow and steady approach to the development process should lead to DeFi apps and protocols that actually include decentralization, rather than DINO projects involving risky shortcuts. While networks such as Ethereum and Solana have clearly provided some value over the short term, it is now time for Bitcoin Layer 2 networks to bring these capabilities to the world’s most valuable cryptocurrency.
How To Create A Bitcoin Wallet
The beginner's guide to creating a new Bitcoin cryptocurrency wallet.
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Just like with regular money, holding cryptocurrency typically requires a wallet. If one is looking to buy and sell, or to send or receive bitcoin, the first step is setting up a bitcoin wallet.
There are three main types of wallets for bitcoin: centralized exchange wallets, digital self-custody wallets, and hardware wallets.
Learn about top bitcoin wallets:
https://medium.com/@lorenzoprotocol/the-top-5-bitcoin-ordinals-wallets-4f6078f8b673
Setting up a bitcoin wallet doesn’t cost anything, and anyone can have as many bitcoin wallets as they’d like. All that’s needed is a computer or mobile phone, and access to the internet.
Here’s a rundown of the three most popular types of bitcoin wallets, and how one can set them up.
Centralized Exchange Wallet
Centralized exchanges, like Coinbase, Binance, or Kraken, are platforms that facilitate the buying and selling of cryptocurrencies using a bank account or debit card. Opening a centralized exchange account usually requires banking information, as well as some form of government ID uploaded to the exchange.
When using a centralized exchange, users log in with a username and password, similar to other websites. Typically, once a user creates an account, wallet addresses are generated for them, which then allows them to send or receive any of the cryptocurrencies available on that platform.
When one opens a Coinbase account and buys some bitcoin, for example, now they’ll have a bitcoin wallet address, and can use that wallet to send bitcoin to anyone in the world, as well as receive bitcoin from anyone by sharing their wallet’s public address.
An important distinction about centralized exchange wallets, though, is that they are custodial wallets, meaning that users don’t actually have full ownership over their funds.
Legally, just like banks and depositors’ fiat funds, the exchanges are the ones who own the cryptocurrency. While they do manage it on behalf of the users/creditors, the risk of losing access to the cryptocurrency held on that platform due to local regulations, platform downtime, or account hacks — and without compensation — always exists.
Centralized exchange wallets are typically best for beginner cryptocurrency users, or as a way to easily purchase bitcoin or other tokens, before moving them into a self-custody wallet.
Software Self-Custody Wallet
Software self-custody wallets are another popular solution to store one’s digital assets.
Typically, they’re accessible via iOS or Android applications, internet browser extensions, or desktop downloads. And instead of being secured by a username and password, they’re secured by a cryptographically generated string of random words, known as a “private key.”
Popular software self-custody wallets include Coinbase Wallet, BlueWallet, and Sparrow Wallet. Once a self-custody wallet is set up, it will generate a wallet address for various cryptocurrencies, just like on a centralized exchange. Users can then easily move assets in and out of their self-custody wallets via the wallet address for that token.
Unlike centralized exchanges, setting up a self-custody wallet doesn’t require having a bank account, debit card, or government ID. All that’s needed is a device with access to the internet.
Perhaps the biggest difference between an exchange wallet, and a software self-custody wallet though, is that when using a self-custody wallet users have full control over their cryptocurrency. Unlike exchanges, which hold the tokens on users’ behalf, when using a self-custody wallet, users maintain sole possession and control over their assets, as long as they control their private keys.
This means that no matter where someone is in the world, no matter what device they’re using, as long as they have their private key, they can access their software self-custodial wallet.
One key risk associated with software self-custody wallets though, is that since they’re linked to one’s internet-connected device, there always exists the chance of obtaining malware that can compromise access to one’s private key and assets. It is recommended therefore that users always store their private key offline, such as by writing it on a piece of paper that is stored somewhere safely.
Hardware Wallets
Hardware wallets are physical cryptocurrency wallets, and are widely considered to be the most secure solution to store bitcoin. Hardware wallets are also self-custody solutions, meaning users retain full possession and total control over their cryptocurrency.
Unlike software self-custody wallets though, hardware wallets typically are not connected to the internet, which makes them incredibly resilient in the face of potential hackers. Instead of generating and storing private keys on an internet-connected device, they’re stored directly on the hardware wallet, which is usually a USB-type of device that can be inserted into a computer.
Popular hardware wallets include Ledger and Trezor.
Once one purchases a hardware wallet, typically users need to download the software associated with that wallet from the manufacturer. When the hardware wallet is plugged into a computer, it utilizes the software to connect to the internet, to allow the transfer of tokens. Assets can be moved to a hardware wallet from software self-custody wallets, as well as centralized exchange wallets.
Choosing The Right Wallet For Your Needs
Creating a Bitcoin wallet is a straightforward process that opens the door to participating in the world of cryptocurrency.
Whether choosing a centralized exchange wallet for convenience, a software self-custody wallet for control, or a hardware wallet for maximum security, each option has its unique advantages. Understanding the features and risks of each type can help users make informed decisions about how to best manage their digital assets.
With the right wallet, anyone can securely store, send, and receive Bitcoin, ensuring they have a solid foundation for their cryptocurrency journey.
Do Layer 2s Defeat The Bitcoin Commodity Narrative?
L2s reveal a grand narrative for bitcoin, enabling use cases that cement bitcoin's position as a commodity.
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Layer 2 (L2) solutions aim to alleviate the well-known scalability issues of the bitcoin network, but these very issues characterize the prevailing and most widely accepted narrative surrounding bitcoin: that it is a commodity, not a currency.
A commodity is a useful or valuable raw material that can be bought or sold. Bitcoin is often compared to commodities such as gold, the bitcoin community even describes it as “digital gold.” This has highlighted bitcoin’s ability to serve as a superb store of value, but doesn’t help bitcoin’s case for being a viable currency.
L2s not only answer the charge that bitcoin can’t be a global currency, they add functionality to the network that extends its influence far past a payment network. But with that answer comes several questions:
- Can technological advancements force the bitcoin community to change its narrative?
- How can the bitcoin community support this narrative when L2s force them to renege their original reasons for presenting it?
- In what sense is bitcoin a raw material analogous to gold?
- How do layer 2 solutions support or diminish this analogy?
This article aims to answer these questions and more while investigating the economic position of bitcoin post-layer 2s.
Digital Currency To Digital Commodity
The original bitcoin narrative goes as follows: Bitcoin was created as a form of digital currency; its creator intended it to be a decentralized replacement for fiat currency.
This digital money was designed to be scarce and deflationary with a supply forever capped at 21 million via its mining mechanism, which halves the amount of bitcoin created every four years. The miners who secure the network are then paid transaction fees once all the bitcoin is mined. The idea that bitcoin mass adoption implies being used frequently in transactions like a global currency is baked into the protocol structure itself.
Shortly after bitcoin started to gain a following users pointed out some problems with the original vision of bitcoin as a currency. This primarily had to do with problems of scalability and the ability to process a high volume of transactions. A native bitcoin transaction is too slow and costly for everyday transactions such as buying a coffee, yet the definition of currency requires the item to be used as general use money. Unfortunately, the transaction pace and fees are unchangeable features of the native blockchain and, therefore, seem to permanently bottleneck global adoption as a currency.
Instead of giving up on bitcoin, the narrative surrounding its economic position changed to “digital gold.” The idea was that because bitcoin isn’t feasible as a currency, the community should instead treat it as a basic digital object useful for storing value by virtue of its scarcity and immutability. This narrative caught on, and laws even followed suit, with many countries officially classifying bitcoin accordingly as a commodity.
This conversation continues as an important debate within legal regimes as regulations differ surrounding the ownership, sale, and exchange of currencies vs. commodities. The legal definition of bitcoin characterizes how it can be adopted in various countries; a misclassification can stifle or even ban its existence.
How Layer 2 Solutions Challenge The Bitcoin Narrative
A layer 2 solution is a blockchain built on top of or alongside another that extends the functionality of the base chain. Typically, the goal of a layer 2 solution is to make the native blockchain scalable. For Bitcoin, at least at first, this meant making transactions cheaper and faster.
The most popular layer 2 solution to do this is the Lightning Network. The Lightning Network operates by creating payment channels between users. Two parties can open a channel by locking a certain amount of Bitcoin into a multi-signature address. Once the channel is open, they can conduct unlimited transactions off-chain. Only the final state of the channel, once it is closed, is recorded on the Bitcoin blockchain.
By moving small transactions off the main blockchain and settling them after the fact, L2s can make bitcoin transactions nearly instant and fees practically non-existent. Such upgrades force one to reconsider if bitcoin can be a system of money in general use:
Everyday Use
With low cost and fast transactions bitcoin can become viable for everyday transactions such as buying a coffee.
User Growth
As bitcoin becomes more practical for daily transactions, the user base can expand to those previously restricted by fees. This reinstates the possibility of bitcoin as a universal global currency.
Adoption by Businesses
Lower transaction costs and faster settlement times make Bitcoin more attractive to merchants and businesses.
Spending
Now that bitcoin can be used as easily as any other currency, this new functionality promotes spending bitcoin as opposed to holding. This permanently affects the economics of Bitcoin as it implies a circulating supply similar to a currency widely used.
At face value, the advent of bitcoin layer 2s seem to deter its classification as a commodity, the original gripes with bitcoin being widely adopted as a currency are at least in principle defeated. Further, the basic economic dynamics of bitcoin must change with the expectation that it will be changing hands more frequently. The original considerations that led the global community to accept bitcoin as a commodity no longer hold. If the lightning network becomes globally adopted, bitcoins main use will be a general money and it will better fall within the classification of currency.
However, scaling bitcoin past its original limit gave it far more use cases than being used as money. This additional usefulness of bitcoin beyond being simple money forces one to reconsider the way it is defined as a commodity.
Layer 2s Beyond Lighting: An Explosion Of Use Cases
Ironically, the cryptocurrency industry has moved far past “currency.” Elements such as smart contracts, dApps, and NFTs have brought more functionalities to blockchain technology than bitcoin’s creator could have imagined.
As layer 2 solutions use secondary blockchains to extend the functionality of the base chain, it’s natural that bitcoin layer 2 solutions would emerge to give bitcoin the capabilities revered in other blockchains.
Layer 2 solutions such as Stacks and Rootstock built methods to connect smart contract compatible blockchains to the native bitcoin network. The execution of smart contracts on the bitcoin blockchain opens up the world of decentralized infrastructure. Decentralized applications such as DeFi protocols, video games, and social media platforms can now be powered and secured by the bitcoin network.
Furthermore, scaling solutions and other innovations allow for non-fungible tokens (NFTs) to be created and traded on the bitcoin blockchain. This brings the ecosystem of art, collectibles, and other NFT use cases directly onto bitcoin.
A new vision of bitcoin is starting to solidify among followers of these developments. The possibility of the bitcoin blockchain acting as the ultimate foundation for the entire decentralized ecosystem. Through these layer 2 solutions, developers can create any tool or application and access the robust decentralization and security of the bitcoin network.
Bitcoin is by far the most decentralized and secure blockchain network that exists; by building on bitcoin, developers leverage these unmatched properties of the bitcoin network and can apply them to their projects.
The Gold Analogy Revisited
Although bitcoin may be used in the future as a global currency, its expanding functionality due to layer 2 solutions points back to the definition of commodity. Usefulness is a core feature of commodities. Raw materials are useful in a variety of ways, such as art, building materials, food, and stores of value.
If bitcoin was just used as a medium of exchange and a store of value, like general money, it would be more similar to a global digital currency. But layer 2 solutions demand that bitcoin be so much more. The bitcoin network is set to be the foundation for the future of all decentralized infrastructure, a kind of ultimate digital commodity. This can be seen clearer by revisiting the gold analogy.
In the shape of a coin, gold can be used as currency. If put in wiring or as a building material, it can lend its properties to help build physical infrastructure. Seen just as a pretty mineral, it can be made into a piece of art. Gold is a simple material with certain characteristics that allow it to take on many roles.
Similarly, bitcoin can be used as a currency via the lighting network. It can be built into decentralized infrastructure to make it more secure by using programs like Stacks. It can even be minted into an art piece via the ordinal protocol. Here, we can see bitcoin as the ultimate digital material used in various ways in a variety of final products.
The features of the bitcoin network correlate with the properties of materials like gold. The robustness of bitcoin security, the wide reach of the network, and the history of its use are all analogous to mineral properties (shininess, hardness, conductivity, etc.) that make them useful.
In the end, layer 2 solutions challenge but do not defeat the narrative that bitcoin is a digital commodity. Although the bitcoin community is forced to reconsider in what way bitcoin is a commodity, the narrative of bitcoin is stronger for it. Layer 2s reveal an even more grandiose narrative for bitcoin, and the use cases they allow for bolster the case for bitcoin as a commodity more than was previously conceivable.
Comparing bitcoin to gold does bitcoin a disservice; the ultimate usefulness of Bitcoin as a commodity extends far past what gold ever achieved.
A Beginner’s Guide To Bitcoin
The comprehensive get started guide to Bitcoin for beginners.
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Bitcoin was created in 2009 based on a core foundational principle: What if there was peer-to-peer, digital money that wasn’t controlled by governments or banks?
Founded by pseudonymous creator Satoshi Nakamoto, the first ever cryptocurrency was born in the aftermath of the 2008 global financial crisis, amid high unemployment and insolvent banks across the world.
Nakamoto outlined his vision for bitcoin in his now famous whitepaper, titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” In it, he detailed a plan for an alternative payments system for individuals. But instead of relying on third-party institutions, like banks or governments, transactions were to be facilitated solely by mathematical algorithms known as cryptographic proofs.
Since bitcoin’s blockchain went live on Jan. 3, 2009, it has grown from being practically worthless, into becoming one of the most important asset classes in history, with its creation spurring thousands of new blockchains and hundreds of thousands of new cryptocurrencies.
What Is Bitcoin?
Put simply, bitcoin is a currency that’s native to the internet that any one individual or institution can’t control. In its purest form, bitcoin functions as a medium to exchange value between parties irrespective of location.
But it can function as other things too, like an investment, “digital gold,” or a hedge against inflation in local currencies.
As a currency though, bitcoin is defined by a few fundamental qualities:
- There will only ever be 21 million bitcoin, making it an inflation-resistant currency.
- Anyone can access bitcoin and send bitcoin anywhere in the world, without needing a bank or any financial intermediary.
- Every bitcoin transaction is tracked on a decentralized, public ledger.
Most currencies we’re familiar with today, such as the U.S. dollar, or the euro, are government-issued currencies — also known as “fiat currencies” because they are unbacked, worthless notes that only possess any trading value because a head of state says so, and citizens must comply.
Bitcoin, though, is issued by a decentralized network of interconnected computers, and as a result, isn’t limited by arbitrary limitations imposed by governments or banks. Spending, holding, or transferring bitcoin can be done without a middleman (like a bank or payment processor), and anyone can transfer as much bitcoin as they’d like, to anyone in the world.
Why Is Bitcoin Special?
Bitcoin is more than its $1 trillion-plus market capitalization.
These are a few reasons why bitcoin represents a new kind of money:
Bitcoin champions privacy
Using banks or payment processors often means sharing unnecessary personal information in order to complete simple transactions. With bitcoin, there are no bank statements, email addresses, or identifying information required to send or receive bitcoin.
And since bitcoin is secured by cryptography, there’s an extremely low risk of having your personal financial information compromised.
Bitcoin is open source
Everything about bitcoin is available publicly. The whitepaper that preceded its creation can be read online easily, for free. And since it’s an open-source program and a public blockchain, every single bitcoin transaction can be viewed publicly.
This makes it nearly impossible to be manipulated; miners won’t confirm fraudulent transactions and it is highly unlikely for any single entity to take over a majority of bitcoin’s mining capacity to force the network to do so.
Bitcoin is accessible to all
Bitcoin isn’t limited by borders, banking hours, or social status. Anyone with access to the internet can access bitcoin anytime. And there aren’t any limits on how much you are allowed to send, or to whom.
Bitcoin is secure
Since its inception in 2009, the bitcoin network has never been hacked. This is a result of its decentralized nature, which prevents there from being a single point of failure that’s vulnerable to a hack.
How Does Bitcoin Work?
The bitcoin network is composed of bitcoin (BTC), which is the network’s native currency, and the bitcoin blockchain, which is what allows transactions to be verified and stored in a way that’s public and secure.
As the world’s first completely open-source payment network, bitcoin isn’t managed by any individual or company. Instead, it relies on its blockchain, which is a public ledger that tracks who owns what, similar to how a bank might track assets, and a decentralized network of “miners.”
Bitcoin miners are essentially a system of specialized computers that run open-source code to track and verify every transaction being logged, as well as unlock new bitcoin.
You can think of these miners as akin to a real gold miner. But, instead of digging deep underground for gold, bitcoin miners are essentially competing to solve a complex math problem first, to earn a reward in bitcoin, while also providing their combined computing power to the bitcoin network to ensure its stability, security, and decentralization.
Every 10 minutes or so, a new batch of transactions is added to the blockchain, via new “blocks.” The validity of those blocks is confirmed by the miners through solving the math problem, and once confirmed, the data from new transactions gets added to bitcoin’s blockchain — now part of a permanent, unalterable record. The miner who solved the problem more efficiently is awarded new bitcoin, with the amount of bitcoin awarded being cut in half every four years, until all 21 million bitcoin have been unlocked.
As of June 2024, more than 19 million bitcoin have been mined.
In the early days of bitcoin, almost anyone with a desktop PC could attempt to mine bitcoin. But as the endeavor got more competitive, requiring increasingly expensive equipment, publicly traded firms now exist with the sole purpose of pooling resources together to mine bitcoin, making it difficult for the average person to get involved.
As bitcoin mining gets more competitive though, bitcoin’s network becomes more secure and more decentralized, since the amount of computing power required to “take over” a majority of bitcoin’s mining capacity is ever-increasing.
Even if one miner, or a group of miners attempted to defraud the blockchain, all the other miners are still in place to verify the correctness of any transactions before they’re officially verified and stored on the blockchain. To even attempt to override the majority of bitcoin miners would cost billions of dollars in hardware costs alone, plus enormous amounts of electricity, to acquire enough computing power to take over the network via a fabled “51% attack.”
Where Does Bitcoin Get Its Value?
Currencies have value for a variety of reasons.
Fiat, or government-controlled currencies, technically aren’t backed by anything and often derive their value from a combination of supply and demand; faith in that government’s ability to collect and levy taxes; and belief that other parties will accept that currency in commerce. But those currencies are reliant on governments and banks, to manage them and to facilitate their use.
Bitcoin derives its value from similar factors, like supply and demand. But instead of bitcoin holders needing faith in any one government to uphold its value or usage, its decade-plus history as a viable and convenient way to store value has given holders faith in its stability.
And critically, unlike fiat currencies, bitcoin is verifiably scarce. While tens of billions of U.S. dollars are printed annually, there will only ever be 21 million bitcoin. This protects bitcoin from the inflationary pressures of other fiat currencies and means that in the long term, it is near certain that bitcoin’s value in terms of fiat currencies will continue to rise, because it’s proven itself to be a viable and convenient way to store value, which means it can easily be traded for goods, services, or other assets. It’s scarce, secure, portable (compared to, say, gold), and easily divisible, allowing transactions of all sizes.
How Can I Buy And Store Bitcoin?
The easiest way to purchase bitcoin is via a reputable cryptocurrency exchange, such as Coinbase or Binance. Using a cryptocurrency exchange, you can connect a bank account or debit card, and purchase the amount in bitcoin that you’d like.
Beyond cryptocurrency exchanges, there are also peer-to-peer trading platforms like Paxful that allow you to purchase or sell bitcoin directly to another individual.
Once you have some bitcoin, you have the option to either leave it on an exchange or move it into a self-custody wallet. Keeping your bitcoin on an exchange is often the most hassle-free way to hold bitcoin. However, using a self-custody wallet is widely seen as more secure.
While on exchanges, you’re relying on that exchange to remain in operation, whereas with a self-custody wallet, you’re guaranteed to always have access to your bitcoin as long as you have your wallet’s “private keys,” which are a cryptographic, randomly generated password that grants you access to your assets.
Bitcoin: A Financial Revolution
Bitcoin has firmly established itself as a groundbreaking financial asset since its inception in 2009. Born out of a desire for a decentralized, peer-to-peer digital currency, Bitcoin offers a unique blend of features that set it apart from traditional fiat currencies. Its fixed supply of 21 million coins ensures its inflation resistance, while its decentralized nature promotes security and transparency.
As a medium of exchange, store of value, and even an investment vehicle, Bitcoin has proven its versatility and resilience. The global, borderless nature of Bitcoin makes it accessible to anyone with an internet connection, breaking down barriers imposed by traditional financial systems. Moreover, its robust security, backed by cryptographic proofs and a decentralized network of miners, has maintained its integrity over the years.
Whether viewed as “digital gold,” a hedge against inflation, or simply a new kind of money, Bitcoin’s impact on the financial landscape is undeniable. As more people and institutions recognize its value and potential, Bitcoin continues to gain traction and legitimacy in the world of finance.
For beginners, understanding Bitcoin’s foundational principles, its workings, and its potential applications is crucial. Whether you are considering investing in Bitcoin or simply exploring its possibilities, it’s clear that Bitcoin is more than just a digital currency; it represents a paradigm shift in how we perceive and use money in the digital age.
Bitcoin’s $600 Billion Layer 2 Opportunity
Layer 2s have the potential to bring global Web3 innovation back to Bitcoin, creating a potential $600B DeFi opportunity.
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Bitcoin has remained the largest cryptocurrency in the market since its inception in January 2009; however, bitcoin is far from the only cryptocurrency in the market. Currently, bitcoin’s dominance of the cryptocurrency market share is measured at just under 55%, and the dominance metric has been on a downward slide since the 95% level it once held, all the way back in 2013.
The bitcoin dominance index (BDI) is far from a perfect measurement of the cryptocurrency market, but it’s undeniable that alternative cryptocurrencies have become more prominent over the years, especially in times of large boom cycles.
That said, recent developments in the Bitcoin Layer 2 network ecosystem could reverse this trend. While cryptocurrency users have opted for alternative networks in search of specific use cases not available on bitcoin in the past, such as enhanced privacy or more expressive smart contracts, the boom in new networks pegged to bitcoin can enable all of these use cases and more on the world’s oldest and most valuable cryptocurrency network.
Layer 2 networks have the potential to bring all of the innovation that has taken place outside of bitcoin back to the world’s first blockchain, a feat that has been theorized for at least ten years. Does this mean the cryptocurrency market’s current total valuation of $2.4 trillion will all be sucked up by bitcoin?
Let’s take a closer look at how this return to bitcoin could happen and how it could affect the bitcoin price going forward.
Bringing The DeFi Market To Bitcoin
When it comes to cryptocurrencies other than bitcoin, the vast majority of the market is built around blockchains with more expressive smart contracting capabilities. Ethereum, which is the second largest cryptocurrency network by its market cap of $408 billion as of this writing, is the most obvious example here. There are also a number of chains that have built off the success of Ethereum by copying the technology and building out networks that are compatible with the Ethereum Virtual Machine (EVM). Some of the most prominent examples of Ethereum copycats include BNB Chain, Avalanche, and Tron. Additionally, Solana has attempted to carve out its own niche with its own development environment and a focus on on-chain scaling. Ethereum itself has taken a similar approach to bitcoin in terms of scaling via a multi-layer approach.
With these blockchains that enable more expressivity in smart contract development, decentralized applications (dApps) have been built that are intended to enable cryptocurrency use cases other than simple payments. Protocols for decentralized exchanges, lending, liquid staking, and more are some of the more prominent examples of dApps that have been built on Ethereum and other, similar chains. Due to the applications that can be used on these cryptocurrency networks, they’re also where stablecoins are generally issued — despite the fact that the largest stablecoin, Tether USD, was originally issued on a meta protocol on top of bitcoin. Non-fungible tokens (NFTs) and meme coins also first rose to prominence on these sorts of blockchains; however, the developments of Ordinals and Runestones has already brought those use cases back to bitcoin.
Decentralized finance (DeFi) has become an enormous aspect of the overall cryptocurrency market, with DeFiLlama estimating the total value locked (TVL) in various protocols at just under $100 billion. However, less than 2% of that TVL is found on bitcoin and its various Layer 2 networks. In fact, most of the DeFi activity that involves bitcoin currently takes place on Ethereum via the wrapped bitcoin (WBTC) ERC-20 token, which involves the backing of a centralized custodian.
Bitcoin Layer 2 Networks For DeFi
While there is some DeFi-related activity found on bitcoin’s base blockchain, the possibilities are rather limited due to the lack of expressive smart contracts at that layer. For this reason, many of the DeFi apps built around bitcoin are likely to be found on L2 networks. Many of these L2s, such as Lorenzo App Chain, are compatible with the EVM and can deploy any DeFi app that has already been deployed on Ethereum.
In some ways, Ethereum itself is already an L2 of sorts for bitcoin due to the level of success achieved by the aforementioned WBTC up to this point. However, there is plenty of room for improvements that can be made via true L2s that can enable more secure two-way peg mechanisms and remove the need for a non-bitcoin cryptocurrency to pay for gas. Indeed, the recent improvements to the two-way peg model based on federated, multisig custody made possible by BitVM were a key catalyst for the recent revival of Bitcoin Layer 2 developments.
This puts into question the need for alternative blockchains at the base layer, especially for those who view bitcoin as the base money of the cryptocurrency market. Additionally, this allows bitcoin’s base, monetary layer to remain sufficiently decentralized and begin to ossify while also extending the capabilities of the cryptocurrency via L2s. After all, it is the credibility of bitcoin’s unwavering monetary policy that differentiates it from other, more centralized cryptocurrencies on the market. This is one of the main reasons it makes sense to use bitcoin as the base layer of a greater DeFi ecosystem.
The Alternative Cryptocurrency Market
Outside of smart contracts, the other major use case for cryptocurrencies outside of bitcoin is payments. There are two main categories of payment-focused cryptocurrencies that offer potential advantages over bitcoin: privacy cryptocurrencies and cryptocurrencies with low transaction fees.
In terms of privacy-focused cryptocurrencies, Monero and Zcash are the two most prominent examples. Notably, the core technologies used in both of these cryptocurrencies were first proposed for bitcoin itself; however, those changes were never made to bitcoin due to the associated tradeoffs in various areas such as scalability and auditability.
While bitcoin’s main on-chain privacy enhancer, CoinJoin, has faced legal attacks in the form of the arrests of the founders of Samourai Wallet and the complete shutdown of Wasabi Wallet, there are a variety of ways to enhance privacy through L2 networks. Ark is a notable L2 payments protocol that also provides a high degree of privacy for its users. Mercury Layer also enables off-chain coin swaps that can provide privacy gains for users. Additionally, Fedimint enables traditional anonymous digital cash via a federated custody model.
In terms of more hypothetical L2s that could enhance bitcoin privacy, there is nothing to stop an anonymous developer from deploying a version of Tornado Cash on any of the EVM-compatible L2s. Additionally, a Zcash drivechain may eventually find its way to the Bitcoin L2 ecosystem. Of course, a privacy-focused proof-of-stake L2 could be launched using Lorenzo’s existing staking liquidity as well.
There have been many cryptocurrencies marketed as cheaper alternatives to bitcoin. Some of the major examples include XRP, dogecoin, bitcoin cash, and litecoin, which account for over $50 billion of the cryptocurrency market when combined. Of course, bitcoin’s answer to this particular use case is the Lightning Network. However, there are still some potential usability issues here, especially when it comes to the need to make a potentially expensive on-chain transaction to open a channel. The aforementioned Ark protocol may eventually turn into an alternative to the Lightning Network, which doesn’t necessitate an on-chain transaction to get started. There’s also the possibility for a sidechain with a large block size limit to develop; however, it’s important to remember that solution comes with tradeoffs in terms of centralization.
While payments-focused cryptocurrencies tend to be a smaller part of the entire cryptocurrency market cap, they’re still an important aspect of bitcoin’s development over the long term, as it evolves from a store of value to also becoming a more prominent medium of exchange.
$600 Billion And Beyond
The current total cryptocurrency market cap of $2.4 trillion can be misleading, as this metric oftentimes includes errors in the form of double counting the same underlying asset in multiple forms (e.g. bitcoin and wrapped bitcoin) or overstated market caps of tokens with highly centralized supply distributions. Additionally, there are some crypto tokens, such as NFTs and meme coins, that bitcoin is inherently unable to replace.
That said, it’s clear that there is a $600 billion or more opportunity for bitcoin here in terms of replacing the most popular DeFi platforms and alternative cryptocurrencies with L2 solutions. After all, just Ethereum and Solana combined are currently worth more than $470 billion.
Of course, the current overall cryptocurrency market cap is also not the limit on how large bitcoin can grow. And centralizing all major crypto use cases around bitcoin as the base currency is a major step on the cryptocurrency’s path towards becoming, as Twitter and Square co-founder Jack Dorsey puts it, the native currency of the internet. Once bitcoin establishes itself as the king of the digital financial realm, it can obtain the necessary liquidity and network effects to then begin to make an impact in the real world.
In other words, before bitcoin can rival gold and the U.S. dollar in any real way, it must first defeat the likes of ETH, XRP, and DOGE. Additionally, access to a more liquid and stable cryptocurrency benefits the DeFi apps themselves, as that cryptocurrency would perform better as collateral for various use cases. It also makes things less mentally taxing for the end user, as they only need to worry about one form of digital money. While stablecoins are the dominant medium of exchange in the crypto market today, their centralized nature makes them subject to restrictions and regulations. In many ways, stablecoins are more of an evolution of the preexisting, fiat currency system rather than a revolution in money and finance from the base layer.
Through the development of various Bitcoin L2s, whether it be the Lightning Network for payments or Lorenzo App Chain for Ethereum-esque DeFi apps, it’s clear that bitcoin has the ability to adopt all cryptocurrency use cases and therefore usurp the vast majority of the cryptocurrency market cap (outside of non-fungible tokens and meme coins). Additionally, further developing bitcoin’s network effects by bringing altcoin liquidity back to the original cryptocurrency will lead to a stronger and more stable native currency for the internet.
Why DeFi Is Needed For Bitcoin’s Growth
Only through the development of a proper DeFi ecosystem can Bitcoin underpin a global cryptocurrency economy.
Bitcoin’s status as the leading cryptocurrency on the market has long been solidified.
It boasts a more than $1 trillion market cap, has attracted billions of dollars of institutional investment via spot ETFs in the U.S., and its status as an inflation-resistant store of value is driving cryptocurrency adoption in countries worldwide.
But bitcoin’s growth story is far from finished.
That’s because the asset’s full value lies in its potential to serve as an asset that underpins a global, cryptocurrency-based economy. But the only way that’s possible is through building secure pathways that allow bitcoin to be used across the decentralized finance (DeFi) ecosystem.
What if your bitcoin could be enabled for DeFi use cases like algorithmic lending, yield farming, or decentralized insurance policies? Or if you could easily port your bitcoin to other blockchains to use it for trading on decentralized exchanges (DEXs), liquidity pools, or as loan collateral?
In this article, we’ll explore why developing a global ecosystem of such functionalities is essential to bitcoin’s globalization, and what Lorenzo Protocol is doing to help.
How DeFi Can Help Redefine Bitcoin
In its current iteration, bitcoin is largely a passive asset with a primary use case of being “digital gold.”
That’s because bitcoin’s basic scripting language is incompatible with the rest of the digital token economy, including the $100 billion DeFi ecosystem. As a result, most bitcoin that’s owned by investors is simply sitting idle in wallets, without many simple or efficient ways to transact outside of the bitcoin blockchain. But, the creation of secure pathways that allow bitcoin to be integrated with DeFi protocols can transform it from something seen as passive into a more active financial tool with utility, like most other cryptocurrencies.
Bitcoin’s integration with the DeFi ecosystem would unlock a variety of new, bitcoin-based financial services that take advantage of the asset’s massive liquidity, security benefits, and status as the most trusted and popular cryptocurrency on the market. While in the short term, it could be challenging to convince those with a bitcoin “maximalist” mindset about the benefits of making bitcoin compatible with other blockchains or protocols, many are recognizing that in the long term, such innovations will be required if bitcoin is going to truly reach global adoption.
Bitcoin use cases that DeFi can help unlock include:
DEX Trading And Liquidity Pools
Today, much of the trading on decentralized exchanges happens on Ethereum and Solana. But bitcoin, with its $1.3 trillion market cap and more than $20 billion in daily trading volume, is by far the most liquid cryptocurrency on the market.
What if that liquidity could be used on decentralized trading platforms?
Bitcoin’s availability on DEXs would instantly make bitcoin more accessible, especially in regions with restricted access to centralized exchanges, which is where investors primarily need to buy their bitcoin. And integrating bitcoin’s deep liquidity with decentralized trading protocols would instantly help strengthen the DeFi ecosystem.
Utilizing bitcoin’s liquidity in liquidity pools, for example, could allow for more stable liquidity pools and protocols while strengthening their capital efficiency by reducing volatility.
Algorithmic Financial Services
Many investors are attracted to DeFi due to its permissionless nature, which is enabled by the use of smart contracts that automatically execute transactions once certain parameters are hit.
Making bitcoin accessible on DeFi platforms means that bitcoin could be used for a new crop of financial services including algorithmic lending or borrowing, as well as yield farming. Currently, bitcoin’s lack of smart contract compatibility makes this impossible. But if bitcoin existed in smart contract compatible formats, it could be used for more complex transactions like being used as collateral for stablecoin loans, for example, where interest rates adjust based on market demand.
Decentralized Insurance
The DeFi ecosystem’s utility isn’t just around strictly financial applications, like borrowing, trading, or liquidity pooling. Smart contracts and decentralized capital also have the potential to redefine industries like insurance and risk management. The ability to unlock bitcoin’s liquidity to be used as collateral for policies, or to be used as payouts for insurance claims, could reduce the need for centralized intermediaries and lower the cost for many types of insurance.
And bitcoin’s integration into the DeFi ecosystem could also help facilitate the correction of novel insurance products tailored specifically to the cryptocurrency markets, such as wallet insurance, smart contract failure insurance, or other crypto-native risks that can’t easily be covered by traditional insurance firms.
Why Bitcoin Can’t Do It Alone …
Bitcoin is the biggest cryptocurrency.
But it’s not the newest, or most technologically advanced. And due to some of its inherent technical limitations, notably including a lack of smart contract compatibility, unscalable storage capacity, and an insufficient Bitcoin Layer 2 ecosystem, it’s currently impossible to realize bitcoin’s full potential.
- Bitcoin’s lack of smart contract compatibility, for example, precludes it from integrating with existing DeFi protocols, since smart contracts are essential to how every DeFi protocol operates.
- Bitcoin’s storage capacity, which is limited to 1 megabyte (MB) of transaction data per block, is insufficient for any transaction more complex than simple payments. Just 1MB of storage isn’t enough to handle actions like liquidity pooling or token swaps, especially during periods of high demand.
- Some Bitcoin Layer 2’s already exist. But due to bitcoin’s lack of smart contract compatibility many struggle to do their main job of scaling bitcoin, because they have to tackle a wider array of issues introduced by bitcoin’s inherent limitations.
… And How Lorenzo Protocol Is Helping Bitcoin Overcome Its Limitations
Lorenzo Protocol is being built to assist with the creation of a thriving, cross-chain, bitcoin-based DeFi economy. Our approach to scaling bitcoin helps hodlers use their bitcoin as an active financial asset instead of just a passive one while also enhancing security for the cryptocurrency and Web3 ecosystem(s) overall.
For the DeFi ecosystem to help bitcoin unlock its full potential, though, first there need to be secure pathways to converting bitcoin into smart contract-compatible formats.
To help achieve this, our liquid staking protocol allows users to take bitcoin they’ve staked and receive a liquid principle token (LPT) that’s pegged 1:1 to their underlying staked bitcoin. This staking token, stBTC, is smart-contract and EVM-compatible, which means they can be moved to other proof-of-stake blockchains to be staked and help secure those networks, or be used as collateral to participate in yield farming, algorithmic lending, or an array of other DeFi use cases.
We expect billions of dollars worth of bitcoin to be staked in the coming years across protocols. As the staking market grows, we aim to cultivate a cross-chain stBTC DeFi economy built around the token’s utility.
Scaling Beyond Passive Asset Potential
Bitcoin has already managed to grow into a $1 trillion-plus asset class without DeFi. But for bitcoin to truly become the cornerstone asset of the digital token economy, its integration into the DeFi ecosystem is pivotal for unlocking its potential beyond being just a passive asset.
The enabling of bitcoin to be used for DeFi use cases helps broaden bitcoin’s utility, while also serving to strengthen the DeFi and Web3 ecosystems more broadly. Achieving this vision is the greatest bitcoin mission in existence today.
The Beginner’s Guide To Bitcoin Ordinals
Many credit Ordinals for sparking the Bitcoin DeFi boom, but they continue to be controversial among Bitcoiners.
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Bitcoin Ordinals are the latest milestone on the road to bitcoin adoption and the spread of blockchain technology. Ordinals combine the latest innovations in the bitcoin blockchain with the budding world of non-fungible tokens (NFTs).
But what are Ordinals? And why are people buying them? The answer to these two questions is couched in the combination mentioned above.
What Bitcoin Ordinals are is a technical question requiring a nuanced explanation of some of the most recent developments in the bitcoin space, such as the SegWit and Taproot upgrades. These technical enhancements are the necessary components that allow for embedding additional data into a bitcoin transaction. More specifically, it involves associating more data with a single satoshi (the smallest unit of bitcoin)
Why would people buy a single satoshi with a bit of additional data? To understand this, one has to understand why people are buying NFTs. The core ideas motivating the world of NFTs are convincing investors to buy Ordinals: ideas such as rarity, uniqueness, and artistic/historical value.
In short, the Ordinals are sats turned into NFTs: NFTs baked directly into the bitcoin blockchain.
Confusing as it may sound, before learning about the technical details of “what” Ordinals are, it is best to start with the “why” and focus on what makes NFTs valuable.
Why Buy NFTs?
NFTs are non-fungible tokens. Fungibility is the ability for something to be replaced perfectly by another thing. For example, one dollar for another dollar. It doesn’t matter which dollar someone has, as no value or functionality has been lost by exchanging one for another. Bitcoin is fungible in this way, one bitcoin is exactly the same as any other bitcoin.
Something is non-fungible when it can’t be replaced, aka it’s completely unique. Artwork is the best example of this; the Mona Lisa can’t be equivalently exchanged for another artwork, and more so, it can’t even be replaced by an exact replica of the Mona Lisa. The object we keep in the museum is the original, irreplaceable, and unique work of Leonardo Da Vinci. Non-fungible tokens share this property; they are not equivalent to any other tokens.
NFTs are created on a blockchain with a unique identifier for every token. This identifying information is typically connected via metadata to an external piece of media, such as a picture. Creating a token and linking its metadata to something is called minting.
In the NFT space, minting an NFT is seen as owning the associated piece of media. Like owning a famous piece of art, investors rarely hold the art in their homes, but instead, they have a certificate of ownership. An NFT is more like such a certificate than it is like physically possessing the art itself. Regardless, this certificate is sold for the price the piece of art is valued at, NFTs are traded based on the perceived value of the unique item it is connected to.
This is more than an analogy; in the NFT world, trading these tokens connected to digital media is participating in a collectors market. Such a market values ownership over unique individual items of some historical or creative significance.
What Are Bitcoin Ordinals?
Time for the nitty-gritty of what an Ordinal technically is.
Ordinals are a numbering system applied to satoshis. Like a serial number, each sat has a unique ordinal number associated with it. This number is an individual identifier for each sat based on when it was mined.
In principle, such a numbering system is all that is needed to make sats non-fungible. Every sat is completely unique and identifiable through its individual number.
However, to function like NFTs, the sat has to connect to external media. This is where SegWit and Taproot come in.
Segregated Witness (SegWit)
SegWit was an update to the bitcoin blockchain that “segregated” the witness data (the signature) into a separate section that supported additional arbitrary information. This upgrade means users can store a larger amount of data inside bitcoin’s 1 megabyte blocksize. The introduction of this arbitrary data is what helps enable Ordinals.
Taproot
The Taproot upgrade was built on the foundation SegWit established. Taproot allows multiple signatures to be batched together and validated as one. Along with increasing efficiency and scalability, this further reduced the limits on the amount of arbitrary data that could be included in a bitcoin transaction.
By allowing efficient sizable amounts of arbitrary data in bitcoin transactions, SegWit and Taproot add the missing component needed to make Ordinal-defined satoshis into NFTs. These sats are now completely unique and ready to hold the metadata associated with media, such as text or pictures.
However, it’s important to note that Ordinals do not suddenly make bitcoin non-fungible in general. The Ordinal numbering system is not a part of the bitcoin blockchain; rather, it is a tool to track individual sats and their associated transaction data. The blockchain still treats all sats as any other; the additional data makes no difference to their on-chain functionality.
How Are Ordinals Created?
Creating an Ordinal involves adding the wanted media content to an individual satoshi through a process called inscribing. The inscription of an Ordinal is the information one wants to attach to a particular token; this is the metadata determining the content of the NFT, such as a picture.
To attach such information, a user adds the media file to the witness data of a transaction by sending a single sat to a Taproot-enabled wallet. This might sound simple, but users must identify the sat they wish to send and ensure it isn’t used for the network fee. Remember, the bitcoin blockchain does not natively recognize Ordinals any differently from other sats.
At first, only operators of a full bitcoin node with a special wallet could manipulate sats in this way. Nowadays, there are plenty of tools associated with Ordinal wallets, and there are also marketplaces that streamline the process.
Although Ordinals are units of bitcoin, trading and transferring them is not the same as sending bitcoin or traditional NFTs. Ordinals need to be tracked and held separately from normal bitcoin so they are not mistakenly used in other transactions. This requires specialized Ordinal wallets with specific functionalities to handle Ordinals.
Further, normal NFT marketplaces do not support bitcoin assets. This has spawned a distinctive subsection of NFT marketplaces specializing in selling and promoting Ordinals.
NFTs vs Ordinals
The previous discussion makes it seem that Ordinals are the same as NFTs, but there are some key differences between traditional NFTs that new collectors need to understand.
- On-chain hosting: An inscription is housed directly in the data on the blockchain, unlike traditional NFTs which are usually just links connected to an externally hosted file. This makes inscriptions more secure and permanent because they are directly a part of the decentralized and immutable bitcoin ledger.
- Token type: A traditional NFT is not just an individual unit of a network currency like ether; it is its own type of token traded on the network. In this way, a traditional NFT could never be mistaken for a normal network unit and used for gas fees, etc.
- Scarcity: There will never be more than 21 million bitcoin. This gives a hard cap to the amount of Ordinals that can be created (although an extraordinarily high number). Traditional NFTs, on the other hand, can be minted in unlimited quantities.
- Smart contract support: Ordinals do not support complex smart contract functionalities such as detailed attributes, ownership rights, royalties, and other programmable functionalities that can trigger under specific conditions.
The Controversy
Ordinals bring a major branch of the Web3 industry firmly into the bitcoin ecosystem. It might seem that the bitcoin community would naturally welcome Ordinals with open arms. But any collector under this impression will be surprised at the heated debate and hatred for these new digital artifacts in the bitcoin community.
Bitcoin maximalists and conservatives have pushed back against the advent of Ordinals for clogging the bitcoin blockchain with meaningless transactions. Some even call it an attack on the bitcoin infrastructure.
The debate centers on two points. That the bitcoin network should only be used for financial transactions and that the additional transactions make bitcoin more expensive to use. Without a doubt, Ordinals increase the number of on-chain transactions, which can drive up fees. This only gets worse as Ordinals become more popular and accessible.
Proponents of Ordinals often point out that Layer 2 innovations can make bitcoin more scalable and accommodate Ordinal transactions. Regardless, some bitcoin maximalists feverishly oppose Ordinals and see NFTs broadly as corrupting cryptocurrency’s original mission.
It is the responsibility of the individual investor to decide where they stand on these issues. As the blockchain industry evolves, many solutions to these core problems are sure to emerge. In the meantime, early Ordinal adopters will continue to buy and hold their assets, hoping for untold future value.
Why Liquid Staking Changes Bitcoin Forever
Liquid staking transforms Bitcoin from just a store of value into an active asset that can be used across an array of DeFi use cases.
Decentralized finance (DeFi) is one of the cryptocurrency industry’s biggest and most in-demand use cases.
There’s approximately $100 billion of value currently locked into DeFi protocols, and by using these protocols, investors can trade tokens, lend and borrow, earn yield, and more — all without using any financial institutions or other third-party intermediary gatekeepers.
But bitcoin, despite being the most popular and highest-valued cryptocurrency to date, is largely incompatible with the broader DeFi ecosystem due to the scalability issues inherent to its underlying technical design. Its slow consensus mechanism, lack of smart contract compatibility, and limited data storage capacity make it currently impossible to build a DeFi ecosystem around bitcoin, and limits bitcoin’s primary use case to being that of a store of value — and a clunky, but reliable internet currency as its second-best.
But what if there was a way to move bitcoin away from being just a store of value into an active asset that can be used across multiple blockchains for an array of DeFi use cases?
Lorenzo’s bitcoin liquid staking protocol aims to do just that, by helping solve some of bitcoin’s native limitations and unlock bitcoin liquidity, by building a secure path to convert bitcoin assets into smart contract-compatible formats.
Understanding Bitcoin’s DeFi Limitations
There’s plenty to love about bitcoin. It’s verifiably scarce, incredibly secure, and has been the best-performing asset class across all markets since its 2009 inception.
But as an asset to be used as part of the broader DeFi ecosystem, bitcoin has some massive limitations which, to date, have stunted its adoption.
These include:
Limited Data Storage
Among bitcoin’s biggest issues is the fact it simply can’t store that much information. Each bitcoin block can only hold 1 megabyte (MB) of transaction data, which makes it impossible to process DeFi transactions — such as lending or liquidity pooling — in bitcoin’s native state. Since many DeFi transactions rely on the ability to process and store significant amounts of data, bitcoin’s limited data capacity would inevitably lead to network congestion, especially during periods of high demand.
Bitcoin’s blockchain, in an ideal state, can only handle about seven transactions per second (TPS), compared to 20,000 TPS on Sei’s blockchain, just for example. In the DeFi ecosystem, where fast transaction settlement is paramount, such limitations would create untold missed opportunities and multiple gross inefficiencies.
Lack Of Smart Contract Compatibility
At the core of the functionality of every DeFi protocol are smart contracts that help automate financial transactions based on algorithms or predetermined rules. But bitcoin’s scripting language can’t integrate with these smart contracts.
Instead, bitcoin supports just the most basic functions, an intentional decision by its pseudonymous creator to maximize its security. But bitcoin’s inability to integrate with smart contracts makes it impossible for bitcoin to natively execute the complex actions that DeFi platforms require for computing-intensive calculations, such as automatic interest calculation, yield farming strategies, and dynamic liquidity pool management.
Liquidity Issues In Staking
Currently, the staking options available for bitcoin hodlers require users to lock their tokens up for extended periods of time. But in markets like the DeFi ecosystem, much of the appeal is in DeFi’s ability to offer fluid and dynamic financial opportunities. When bitcoin is forced to be locked up, it means investors lose an inherent ability to respond quickly to market conditions or capitalize on new opportunities, which limits the flexibility, utility, and long-term financial potential of their bitcoin.
The Opportunity Of Bitcoin DeFi
The DeFi ecosystem is a $100 billion (and growing) market that is going to serve as the underpinning of a future financial system that utilizes digital assets. So, why shouldn’t the most secure and most liquid cryptocurrency play a significant role in its growth?
Bitcoin becoming compatible with DeFi protocols will facilitate a variety of use cases for the currency, beyond being just a store of value.
Turning Bitcoin Into An Active Asset
To many, bitcoin is seen as “digital gold.” But that’s only because it’s not yet compatible with the rest of the digital token economy. By solving some of bitcoin’s native limitations, bitcoin has the potential to become a yield-generating asset that allows investors to earn rewards without sacrificing liquidity. Through the conversion of bitcoin into DeFi compatible formats, users can more seamlessly use bitcoin as collateral for lending or borrowing, as well as for a variety of yield-farming strategies currently only available to investors by using other cryptocurrencies.
Unlocking Bitcoin Liquidity
Currently, one of the biggest problems facing bitcoin is that the billions of dollars of liquidity that comprises bitcoin’s $1.3 trillion market cap is essentially locked up due to bitcoin’s limitations, plus the limitations of existing staking solutions.
Ensuring bitcoin’s compatibility with the DeFi ecosystem means that investors could leverage their bitcoin for a variety of purposes, without needing to sell any of their tokens. Unlocking bitcoin liquidity also helps deepen the liquidity of DeFi protocols, which strengthens and helps the ecosystem work more efficiently overall.
Since bitcoin is the cryptocurrency asset with the most liquidity, users having the ability to bring their tokens into liquidity pools or to lending or borrowing protocols, for example, can create better capital efficiency, less volatility on DeFi platforms, and more stable financial products.
Cross-Chain Interoperability
The future of the cryptocurrency ecosystem is a cross-chain one. That means building ways for bitcoin to be compatible with DeFi protocols won’t merely enhance bitcoin’s utility — it would foster a more robust and unified cryptocurrency-based financial system overall.
Bitcoin being able to be seamlessly moved across blockchains means that bitcoin’s security features can be used to secure other blockchains, while also earning yield for bitcoin hodlers. And for bitcoin hodlers who primarily have only interacted with bitcoin’s blockchain to date, cross-chain opportunities for bitcoin can help bring new users and liquidity to different corners of the DeFi ecosystem.
How Lorenzo Protocol Is Making Bitcoin DeFi Possible
Lorenzo’s liquid staking is a novel approach to scaling bitcoin and building a cross-chain bitcoin token economy that allows bitcoin hodlers to participate in staking on proof-of-stake blockchains, while also maintaining both their personal liquidity and bitcoin’s built-in security benefits.
The solution enhances liquidity for bitcoin hodlers and DeFi protocols by bringing democratized access to staking (as there are no staking minimums or lockup periods) and enhanced security for the cryptocurrency and Web3 ecosystem overall, since bitcoin is being used to help secure other proof-of-stake blockchains.
Through Lorenzo, users can move their assets onto PoS networks through Babylon via liquid staking tokens pegged 1:1 to the value of their underlying staked bitcoin. Babylon is a two-sided marketplace between stakers and PoS networks, where networks that need the security provided by staking reward bitcoin stakers with yield generated from those PoS networks.
When using our liquid staking protocol, users can choose from a list of the PoS networks to stake on and a staking period, and once their bitcoin is staked, they’ll receive an equivalent amount of stBTC, Lorenzo’s liquid staking token. With stBTC, which is smart contract compatible, investors can earn yield on other PoS networks, or use their tokens’ collateral to participate in a whole new emerging world of potentially very lucrative DeFi applications.
Liquid staking is the only viable solution to create a robust, multi-chain bitcoin token economy, as it allows for the simple conversion of bitcoin into smart contract-compatible formats without imposing the native limitations of bitcoin’s network, or other Bitcoin Layer 2s. We expect quite literally billions of dollars worth of bitcoin to be staked in the coming years, and as the staking market for bitcoin grows, stBTC will eventually have a cross-chain DeFi economy built around its utility, where investors use stBTC for liquidity pools, for trading, as collateral for lending or borrowing, and more.
Advancing Bitcoin
Lorenzo’s Protocol represents a significant advancement in the evolution of bitcoin into a multi-chain, DeFi-compatible asset. Liquid staking for bitcoin helps address some of the native network’s fundamental limitations, while also facilitating the conversion of bitcoin into an active asset with use cases beyond being just digital gold.
Looking ahead, as the liquid staking market for bitcoin continues to grow, Lorenzo’s roadmap also includes plans for launching Bitcoin Layer 2-as-a-Service (L2aaS). Through offering Bitcoin Layer-2-as-a-service, users and developers will be able to tailor blockchain networks to their specific needs without extensive technical expertise, while also enhancing bitcoin’s scalability, while reducing transaction costs.
A Beginner’s Guide To Bitcoin Inscriptions
Explore how Bitcoin inscriptions revolutionize NFTs by embedding media directly on the blockchain
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With the advent of Bitcoin Ordinals, inscriptions became the hottest thing in the world of Web3. A mix of skyrocketing prices and bold new narratives continue to siphon off collectors from the old world of traditional NFTs.
Advocates for inscriptions highlight how they solve many problems weighing down the NFT industry; they say inscriptions are more concrete, secure, and integrated.
They are everything NFTs wanted to be but never could become.
This pitch convinces swarms of new collectors from the bitcoin ecosystem, and other blockchains are following suit. But is all this just hype?
Traditional NFT collectors and bitcoin maximalists are asking the same questions:
- Do inscriptions really solve the problems with NFTs?
- What’s the connection between inscriptions and bitcoin?
- Most importantly, where can inscriptions be bought and sold?
The following beginner’s guide will answer all these questions and more. But first, here is a wrap-up of NFTs.
NFTs As Collectibles
Non-fungible tokens (NFTs) are blockchain tokens designed to be completely unique. Unlike currency, NFT tokens are not equivalent to each other or interchangeable, they each have an individual on-chain identity.
Through a process called minting, users create these tokens and connect them to pieces of media via the token’s metadata. This piece of media is typically an image, text, video, or audio file.
Traditionally, NFTs are seen as instantiating a piece of media into a single concrete object. Like the canvas a masterpiece is painted on, the token gives individual existence to an image/form that could be reproduced elsewhere. Copying the Mona Lisa perfectly onto another canvas doesn’t mean the copy is now the real deal; the first object that Leonardo Da Vinci painted the image on is considered the authentic artwork. In the same way, the digital media being minted by a unique token is supposed to be the “real” instantiation of that item.
People who want to invest in a piece of media trade the minted NFT tokens like digital collectible objects. These are supposed to have the inherent artistic or historical value of the connected media content, they are the proof of one’s ownership of said piece.
The Big Problem With NFTs
The problem with traditional NFTs is the disconnect between the token and the piece of media.
The media is not literally in the token’s metadata, as this data is not generally robust enough to hold full media files. Often, this data is just a link to the piece, which is hosted on an external server. If the server goes down, the link in the NFT will no longer work. Further, if a bad actor got involved, they could even change the piece of data connected with the token by accessing the server.
This is just a symptom of a deeper problem pointed to by NFT critics: collectors are buying just a link, not the item itself. There is no necessary connection between the token bought and the media, the digital item is never even on the blockchain, therefore investors are not buying the piece of media at all.
Inscription attempts to solve the problem of necessary connection by bringing the piece of media associated with an NFT fully on-chain.
Ordinals: Bitcoin Inscribed
Bitcoin Ordinals popularized inscription as a method of creating NFTs.
Ordinals are a numbering system applied to satoshis (the smallest unit of bitcoin). Like a serial number, each satoshi has a unique ordinal number associated with it. This new system allows each individual sat to be tracked and identified.
Recent developments in the bitcoin space, such as the SegWit and Taproot upgrades, allowed for embedding additional data into a bitcoin transaction. More specifically, they allow for the association of more data with a single satoshi.
Combining Ordinal numbering and these recent on-chain innovations, bitcoin enthusiasts could convert sats into NFTs through a method they called inscription. The inscription of an Ordinal is the information one wants to attach to a particular token; this is the data determining the content of the NFT, such as a picture.
To inscribe a piece of media to a sat, a user adds the wanted data to the information embedded in the transaction of a single sat. Because of SegWit and Taproot, attachments large enough to house an entire media file can be included in a transaction.
The bitcoin blockchain stores the complete media and permanently connects the individual satoshi to this piece via its transaction history on the immutable bitcoin ledger. One can not inspect the satoshi in question without necessarily finding the connected media.
Ordinal advocates claim that owning a traditional NFT is like having a certificate of authenticity for a painting housed in a far-away museum. On the other hand, owning an Ordinal is like directly possessing an artwork painted on a worldwide indestructible canvas.
Inscriptions vs NFTs
Inscriptions have a few key advantages over traditional NFTs because of their on-chain integration. Advocates claim that these quell the anxiety NFTs owners have about losing their collectables.
Immutability: Inscriptions are housed on the blockchain itself: like all information on a decentralized ledger, this means that the data can’t be changed. It is cryptographically set in stone.
Decentralization: The nodes hosting and verifying blockchain data are distributed; there is no central authority that can dictate or censor the information on-chain. This means there is no single point of failure.
Security: Because there isn’t any dependence on an external server to hold the inscription content, the data is as secure as the native blockchain itself. One would need to attack the whole network to change a single piece of data.
Permanence: Due to the above considerations, it’s much harder, if not impossible, to tamper with or destroy an inscription. Nothing short of eliminating or taking over the entire underlying bitcoin blockchain could break an inscription.
Inscriptions Outside Bitcoin
Originally inscriptions were synonymous with Bitcoin Ordinals, but in the last year, a myriad of other chains have hopped on the bandwagon. In principle, just about any blockchain that allows substantial metadata in its transitions can create its own equivalent on-chain NFTs.
Each chain will have slightly different mechanisms that allow for token inscriptions. Just like Ordinals require their own wallets and marketplaces, collectors should remember that this is often the case for holding or buying any other inscriptions.
Popular chains with their own inscriptions include Solana, Ethereum, And Doge.
Where To Purchase Inscriptions
All readers are likely itching to know to get their toes wet in the inscription game.
As discussed above, inscriptions require specialized wallets and marketplaces. As inscriptions become increasingly popular, new tools and infrastructure pop up to meet the demand. The last year has been an explosion of tools and platforms.
The most robust inscription infrastructure is built for Bitcoin Ordinals. These wallets and marketplaces are the most tried and tested in the inscription industry.
For Ordinals wallets, Xverse, Unisat, and Leather are some of the best in the business. Before deciding on one, It’s best to note differences in security and marketplace integration.
For Ordinal marketplaces, Magic Eden, OKX, and Unisat are core names. Here, one should note differences in liquidity and popularity.
As far as collections, Bitcoin Ordinals have equivalents of recognizable traditional NFT collections. Names include Bitcoin Rocks and Bitcoin Punks. Bitcoin specific collections are becoming popular as well, the biggest being Runestones and Bitcoin Wizards.
For artists looking to create their own inscriptions, the above marketplaces have integrated tools to help users inscribe sats and list collections.
The second largest inscription market is Ethscriptions. The only significant marketplace in this ecosystem is the Etch market. Here, traditional NFT collections are often given Ethscription counterparts, such as Ethereum Punks or Ethereum Apes.
Other markets, such as Solana and Doge inscriptions, are too new to have any significant infrastructure. But rest assured, with inscriptions booming, this will change any day. In fact, by the time this article is released, new wallets and marketplaces might be released and finding their first users.
What Is Bitcoin’s Lightning Network, And How Does It Work?
The Lightning Network boosts Bitcoin's scalability through off-chain transactions, enabling quicker, more efficient payments.
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The Lightning Network is the most prominent Bitcoin Layer 2 network in existence today, and it has long been hailed as a key building block for the scalability of the world’s most valuable blockchain.
While not a solution to every problem facing bitcoin, the Lightning Network can tweak the cryptocurrency network’s scaling equation from transactions per second to new users per second without sacrificing too much in terms of decentralization and censorship resistance. Additionally, it may be an important technology for tying together a large number of different Bitcoin L2s that could develop in the coming years.
But what is the Lightning Network, and how does it work? Let’s take a deep dive into this Bitcoin L2 focused on payments.
The Problem Of Scaling Bitcoin
While bitcoin was originally launched as a peer-to-peer digital cash system with cheap, blockchain-based payments, the reality is that this system was never going to scale to a large user base while publishing all transactions on the base blockchain. In the past, bitcoin has peaked at processing just under nine on-chain transactions per second. Although on-chain transactions were basically free for the early years of the network’s development, the limitations of the system were hit in 2016 when the capacity limit of one megabyte per block was reached for the first time.
As the network grew in popularity, scarce block space on the network filled up, and there was eventually a crisis where on-chain transactions became both historically expensive and unpredictable in terms of when they would be confirmed in a block.
This situation was the crux of the blocksize war, in which various proposals for dealing with bitcoin’s capacity limits and long-term scalability were debated by users. Some saw a simple increase to bitcoin’s block size limit as the most straightforward option over the near term, but the problem was many of the most prominent proposals related to this method of scaling used a hard fork — a type of change that would effectively require all users to move over to a new, backwards-incompatible bitcoin network. This made finding consensus on such a change quite difficult.
Additionally, various contributors to the bitcoin protocol up to that point preferred a multi-layer scaling approach where the limited amount of block space available on the blockchain could be used more efficiently. It was thought that simply increasing the amount of data that could be held by the blockchain would also increase the cost of operating a full node, which would further centralize the network and put into question the properties that make bitcoin valuable in the first place. By allowing users to opt into Bitcoin L2s, smaller payments, such as a purchase of a cup of coffee, could be made off of the base blockchain while still retaining a high degree of decentralization. There were also a number of changes large, centralized entities could make to use block space more efficiently such as transaction batching.
Eventually, the upgrade that was chosen via consensus as the best path forward was a soft-forking (backwards compatible) change known as Segregated Witness (SegWit). This change enabled both a block size increase and a fix to the transaction malleability issue, which would enable more efficient and secure off-chain scaling mechanisms for bitcoin payments, such as the Lightning Network.
What Is The Lightning Network At A High Level?
The Lightning Network is effectively a network of smart IOUs where different parties can send off-chain payments to each other in an extremely low-trust manner. Instead of making an on-chain transaction for each transfer, users send signed cryptographic proofs of payment to each other without broadcasting them to the larger bitcoin network. After a large number of payments have been made, those connected to the Lightning Network can eventually cash out to the base bitcoin blockchain whenever they’d like.
The key innovation here is that an on-chain imprint is not needed for every payment. Instead, users can take advantage of the blockchain in situations where someone tries to lie about the history of payments that have taken place on the Lightning Network. In such a scenario, the victim of the theft attempt simply publishes a cryptographic proof to the blockchain regarding the history of off-chain payments that were made.
In a way, the Lightning Network alters the scaling equation for bitcoin from payments per second to user onramps and offramps per second. Once a user has joined the Lightning Network via an on-chain transaction, they can send an unlimited number of payments, assuming sufficient liquidity.
How Does The Lightning Network Technically Work?
Payment Channels
From a technical perspective, the Lightning Network is a network of payment channels. A payment channel is created when two bitcoin users obtain collaborative custody over some amount of bitcoin via a 2-of-2 multisig address (i.e., requiring each party to sign the transaction). These two users can then send bitcoin back and forth to each other without touching the bitcoin blockchain. This is accomplished by having the users sign transactions that allow the users to withdraw the bitcoin back to their own addresses without broadcasting the transaction to the network to be mined.
For example, Alice and Bob could each send 2 bitcoin to a 2-of-2 multisig address for a total of 4 bitcoin. If Alice wants to send 1 bitcoin to Bob, she and Bob will collaborate on signing two transactions from the 2-of-2 multisig address without broadcasting them to the network. The first transaction sends 3 of the 4 bitcoin to Bob’s personal address, while the second one sends 1 bitcoin to Alice’s personal address. Despite nothing occurring on the blockchain, both parties now have the ability to publish these transactions whenever they feel like it. So, in effect, Alice now has ownership over 1 bitcoin in the 2-of-2 multisig address, while Bob has ownership over 3 bitcoin.
Payment channels are a powerful tool in themselves, but the innovation with the Lightning Network is to generalize this concept to connect many more parties. Extending the above example with Alice and Bob, we can imagine there is another bitcoin user named Carol who also has a payment channel open with Bob. With the Lightning Network, Alice can send bitcoin to Carol without having to open a channel with her directly because they both have channels open with Bob.
For a further technical overview of how the Lightning Network works, let’s go through the process of opening a channel, sending a payment, and closing a channel.
Opening A Lightning Network Channel
Opening a Lightning Network channel is similar to the traditional payment channel process described above. A user will need to create a 2-of-2 multisig address with another party — hopefully one that is already well-connected to many other Lightning Network users — to get started. The two users will then fund the multisig address and create their commitment transactions in order to establish the opening of the Lightning channel. Notably, the commitment transactions must be signed prior to the broadcasting of the transactions funding the 2-of-2 multisig address.
Sending A Lightning Network Transaction
Sending a payment via the Lightning Network when two parties have a channel opened directly with each other is essentially just the updating of commitment transactions. The commitment transactions are what allow each user to withdraw the bitcoin they own based on the current state of the Lightning channel. They are updated with each payment made via the Lightning channel; however, they are only broadcast to the blockchain in a situation where dispute resolution is needed via the blockchain.
These commitment transactions also use OP_CHECKSEQUENCEVERIFY (CSV) to ensure that the outputs associated with them cannot be spent until the other party has had time to dispute. Lightning users also share revocation keys with each other after updating their commitment transactions, which can be used to prove that an outdated state of the Lightning channel has been published.
Routing Lightning Network Transactions With HTLCs
Of course, the key innovation with the Lightning Network is that it allows a network of payment channels to interact with each other. This is made possible through the use of hashed timelock contracts (HTLCs). An HTLC is a type of bitcoin smart contract that locks funds based on a secret known only by the original creator of the contract. Additionally, a timelock, via the OP_CHECKLOCKTIMEVERIFY (CLTV) opcode, is involved so the original creator of the contract can reclaim the funds after a certain period of time in a situation where the recipient does not accept the payment.
Let’s say Alice wants to send a 1 bitcoin Lightning payment to Carol through Bob. For simplicity, we will say that each of these channels have 2 bitcoin in them, with ownership of the 2 bitcoin being evenly split between the two parties.
Alice will create an HTLC for 1 bitcoin and send it to Bob. Alice’s new commitment transaction for her channel with Bob will set the amount she can withdraw from the channel to 0 bitcoin. However, instead of simply increasing Bob’s commitment transaction to 2 bitcoin, he receives the HTLC. Bob will then go through the same process Alice just went through, creating an HTLC and lowering the balance in his channel with Carol to 0 bitcoin.
Upon receiving the HTLC from Bob, Carol is able to use a secret provided to her by Alice to unlock the funds in the HTLC. During this process, Carol also reveals the secret to Bob. Bob is then also able to use the same secret to unlock the bitcoin in the HTLC sent to him by Alice as well. The end result is that Alice sent 1 bitcoin to Bob and Bob sent 1 bitcoin to Carol.
This entire process happens atomically, meaning either all payments happen or none of them happen. Once the HTLCs are dealt with, each channel’s commitment transactions are updated to reflect the outcome of the successful payment.
Closing A Lightning Network Channel
When a user wants to close a Lightning channel, they can ask their counterparty to do so in a collaborative manner. In such a situation, the process is no different from creating any other normal 2-of-2 multisig transaction where a new transaction is created with sufficient fees and the proper amounts are returned to each users’ respective personal address.
Closing A Channel When Something Goes Wrong
While cooperative channel closures are the norm on the Lightning Network, there are a variety of situations where one party may become uncooperative. For example, if the other party is offline or otherwise uncommunicative, a user will not be able to organize a collaborative channel closure. This is where the publication of the aforementioned commitment transactions comes into play.
When a commitment transaction is published, the user will not have access to their funds instantly. This is due to the use of CSV on the commitment transactions. The other party will be given a predetermined period of time (measured in blocks) to dispute the outcome of the commitment transaction. These transactions can be disputed by revealing a revocation key, used to prove there is a more recent state of the Lightning channel ignored by the published commitment transaction. When the revocation process is found to be valid, the revocating user is able to instantly withdraw all of the funds held in the channel.
The Future Of The Lightning Network
It’s no secret that the Lightning Network is far from perfect as it exists today, but it’s also already providing a powerful scaling tool for the network. Some have made the claim that the Lightning Network has failed, but that’s nowhere near the truth. The Lightning Network is definitely a useful tool for specific situations, and that will become clearer over time.
Even if it’s difficult for users to operate their own Lightning nodes right now — and it can be expensive to open and close channels at times — the fact that users can send and receive bitcoin between exchanges instantly at no cost (and without any on-chain footprint) should be seen as a victory for scaling, especially when considering the amount of overall bitcoin activity that is still centralized around these entities. Additionally, there is the potential for stablecoins issued on the Lightning Network — via protocols such as Taproot Assets and RGB — to eventually become the preferred medium of exchange for that particular type of digital asset.
It’s also worth noting that it’s unclear how the Lightning Network will ultimately evolve, as it is currently used in a mostly custodial way due to the usability benefits such a setup can provide. Some people envision a future where individual users are operating their own Lightning nodes at home and connecting to them from their mobile phones, while others see a situation where the Lightning Network acts more of a connecting glue between a variety of other Bitcoin L2s. Indeed, it’s clear that the Lightning Network will be the most effective option for swapping between Bitcoin L2s because it enables instant and low-cost atomic swaps.
The Lightning Network’s evolution will partly depend on how improvements can be made to it over time. There are a number of theoretical alterations that could be made to the protocol to improve how channel liquidity is managed and how often the base blockchain needs to be touched, but many of these proposals would necessitate the addition of a covenants mechanism to bitcoin via a soft fork. One of the most notable potential changes for Lightning — enabled by covenants — is Eltoo, which would provide for better mechanisms for Lightning wallet backups and enable more than two parties to open a single channel with each other. There’s also Ark, which is a separate Bitcoin L2 system that could end up being a replacement for the Lightning Network with many similar goals.
That said, it’s still early days for the development of the Lightning Network, and it will only evolve to fill in the gaps and use cases where it makes the most sense. Additionally, off-chain bitcoin transactions can take place via a variety of other upper-layer protocols, and each of these Bitcoin L2s can offer something different that isn’t found in their alternatives. For example, the Lightning Network was launched with a focus on payments, while Lorenzo App Chain and a variety of other Bitcoin L2s have focused on bringing some of the more expressive smart contracting functionality found in Ethereum back to bitcoin.
The Lightning Network has proven to be a powerful addition to the base bitcoin network, but at the end of the day, it is only one of many tools in the toolbox for scaling bitcoin by using the base blockchain as efficiently as possible.
The Shared Security Model: How Bitcoin Secures Layer 2 Blockchains
BTC shared security boosts Layer 2 blockchains to enhance scalability, speed, and security across the cryptocurrency ecosystem.
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Bitcoin’s monolithic infrastructure has built a formidable reputation in the cryptocurrency community for its impenetrable security.
Since bitcoin’s launch in 2009, it has proven to be a predictable, resilient, and efficient network for processing electronic peer-to-peer (P2P) payments, just as Satoshi Nakamoto hoped.
“Bitcoin is backed by the largest computer network in the world, a network orders of magnitude larger than the combined size of the clouds that Amazon, Google, and Microsoft have built over the last 15–20 years.” — Cathie D Wood, Founder of ARK Invest
However, as bitcoin’s popularity grew, scalability issues became increasingly pressing concerns for the nascent blockchain. To galvanize its own extreme security standards, the bitcoin protocol forfeited flexibility in favor of decentralization, which makes adapting to changing circumstances, and onboarding billions of users, much more challenging.
To address these scalability challenges, Layer 2 blockchains (L2s) have begun building on top of bitcoin’s core architecture and offering much more enhanced services to users. Rather than competing with bitcoin’s base layer (as “alt” coins attempt), all of these L2s rely on bitcoin’s design to secure their operations, forming one of the most unique — and potentially most disruptive — symbiotic relationships in the cryptocurrency space.
Thanks to “shared security” with bitcoin’s blockchain, a new generation of L2s is poised to supercharge bitcoin’s growth and create a new ecosystem of decentralized finance (DeFi) built on bitcoin’s blockchain.
What Is “Shared Security” On Bitcoin?
The concept of “shared security” in the cryptocurrency industry refers to using an established blockchain, like bitcoin, as the basis for building secondary add-on projects. Rather than creating separate, self-sovereign blockchains with distinct features and functionalities, L2s leverage the security standards of a Layer 1 network, dramatically reducing their development time, resource expenditure, and technical requirements.
In the case of bitcoin, new decentralized projects settle transactions on bitcoin’s payment ledger, which also means they inherit the decentralization, size, and legacy of bitcoin’s proof-of-work (PoW) mining algorithm. Since L2s fall back on the bitcoin blockchain, they have greater freedom to create more innovative and scalable solutions for their users.
How Are L2s Using Shared Security On Bitcoin?
Each L2 has distinct technical specifications, but these protocols conduct all of their transaction processing and data storage off of the bitcoin blockchain (aka “off-chain”) to provide a faster and cheaper alternative to the bitcoin base chain. The “shared security” aspect kicks in whenever L2s interact with bitcoin’s blockchain to finalize transaction data or resolve disputes. Periodically, L2s send transaction information to the bitcoin mainnet for final processing, giving these secondary networks enhanced legitimacy.
For example, some bitcoin L2s include “anchoring” protocols, in which nodes regularly compile a list of transactions and attach a cryptographically verifiable hash function before submitting them to the bitcoin blockchain. It’s also common for L2s to use snapshots or “rollup” solutions — including Zero-Knowledge Succinct Non-Interactive Argument (ZK-SNARKs) or optimistic rollups — to provide irrefutable data on transactions to the main blockchain. ZK-SNARKs involve creating “validity proofs” by solving advanced computational problems off-chain and attaching them to the transaction data, whereas optimistic rollups assume all incoming transactions are valid and allow nodes to dispute information before final approval.
As an example, the Lightning Network (LN) operates as a fast and low-fee L2 using the bitcoin protocol. When users open an account on the LN, they create an off-chain “state channel” with other LN participants, and they’re free to send their bitcoin as an IOU to other users throughout the L2. Whenever LN users want to redeem the bitcoin in their account, they close their state channel and settle their transaction history on bitcoin’s official, i.e., Layer 1, final payment ledger. Even though LN traders have to pay bitcoin network fees to open and close their LN accounts, they’re free to send bitcoin as many times as they want within the LN to enjoy fast and virtually feeless transfers.
What Are The Benefits Of Bitcoin Shared Security?
Although the name “shared security” emphasizes the secure foundation bitcoin provides for L2s, that doesn’t mean the bitcoin base layer isn’t benefiting from this arrangement. Rather than leeching off of bitcoin’s software design, L2s play a massive role in scaling bitcoin’s operations and introducing more use cases for the world’s largest cryptocurrency.
Strong Foundational Layer Security
Shared security opens the doors for up-and-coming decentralized projects to take advantage of the oldest and largest PoW blockchain. Not only does this foster development on innovative and emerging Web3 projects, it provides bitcoin with a way to offer its high security standards to global developers. The more L2s that build using bitcoin as their base layer, the greater bitcoin’s reputation grows as the “ground floor” for all Web3 security, potentially providing the foundation for future activity in sectors like DeFi, GameFi, and non-fungible token (NFT) trading.
Scalability, Speed, And Efficiency
L2s have the power to process far more transactions off-chain and to batch data using cryptographic hash functions and rollups. Plus, since these L2s take some of the transactional burden off of bitcoin’s shoulders, they naturally reduce congestion on bitcoin’s main chain, further decreasing the risk of network congestion and bottlenecks. By spreading cryptocurrency transactions throughout multiple L2s, bitcoin boosts its transaction throughput, translating to a more enjoyable user experience with lower odds of slow transfer speeds or high fees.
Liquidity In DeFi
Another benefit of linking L2s to bitcoin through shared security is that these secondary applications help seamlessly connect bitcoin to the wider world of Web3. Specifically, L2s open the possibility of using bitcoin in DeFi applications, including decentralized borrowing, liquidity pools on decentralized exchanges, and liquid staking. The more interconnected L2 protocols become — and the more convenient they make the transfer experience — the easier time traders have using bitcoin as the basis for their DeFi activities.
With the introduction of liquid re-staking services like the Lorenzo Protocol, it’s also possible to use bitcoin to create liquid staking derivatives (LSDs) and participate in DeFi yield opportunities. The transferability, interoperability, and tokenization features offered on L2s help make bitcoin a premier DeFi asset, thus driving more liquidity into Web3 protocols.
Innovation
L2s let bitcoin take care of the processes required to secure a decentralized network, which allows developers to free up their imaginations to ponder what else is possible in Web3. Beyond DeFi, L2 programmers have already begun exploring wild use cases on top of bitcoin, including preserving classic Nintendo video games on-chain and creating a fiat-denominated stablecoin with bitcoin as the basis. Bitcoin’s high security standards allow a fresh wave of developers and cryptographers to use this blockchain as their starting base when exploring the outer reaches of decentralized technology.
Using Bitcoin’s Shared Security For Superior Scalability
With shared security, bitcoin “shares” many of its intangible value propositions (i.e., its longevity, trustworthiness, and battle-tested resilience) with the broader cryptocurrency community. At the same time, the L2s relying on these attractive traits boost bitcoin’s potential by effectively distributing transactions, improving network efficiency, and expanding the use cases for bitcoin.
These numerous benefits make bitcoin shared security the ultimate “win-win” in cryptocurrency. L2s enjoy the increased safety of bitcoin’s blockchain, and bitcoin enjoys an enhanced efficiency while expanding its reach into Web3. Even in these early stages of development, it’s safe to say shared security will play a pivotal role in realizing a more fully bitcoin-based digital economy in the near future.
The Top 5 Bitcoin Ordinals Wallets
Explore the top 5 Bitcoin Ordinals Web3 wallets, each featuring key differentiators.
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Established bitcoin wallets rarely support the collection of digital artifacts, but the demand for Ordinals continues to skyrocket. Record sales are making news every month, and mainstream investors are just starting to cue into the potential value of these so-called “bitcoin NFTs.”
Many investors are overzealous and immediately start looking for marketplaces to buy Bitcoin Ordinals; they don’t want to miss out on profiting from the very “now” hype. Despite being founded on the bitcoin blockchain, these collectors don’t realize that storing an Ordinal is not quite the same as holding bitcoin, or an NFT.
Holding an Ordinal requires a unique type of wallet, and navigating the landscape of new Ordinal wallets popping up requires a basic understanding of what makes Ordinals distinct before choosing one.
This article is the eager investor’s map and key to the exciting new world of ordinal wallets.
What Are Ordinals And Why Are They Valuable?
Ordinals reference a numbering scheme described in the ordinal protocol. Each satoshi (aka “sat” or “sats,” the smallest unit of bitcoin) is assigned a sequence of ordinal numbers to define the order it was mined, allowing specific identification and tracking of each unique sat.
These ordinal numbers can then be referenced to inscribe data onto a specific sat to create Ordinal Inscriptions. Like NFTs, Ordinals derive their value from their uniqueness, scarcity, and recorded digital proof of ownership. Unlike NFTs, Ordinal’s data is securely stored directly on the bitcoin blockchain.
Outside of unique Ordinal Inscriptions, some sats are deemed valuable if their ordinal numbers prove their rarity regarding key moments in bitcoin history (i.e., the first sat ever created, or the first sat of a new halving epoch). Hence the advent of Runes.
Since the release of the Ordinal protocol in early 2023, Ordinal’s popularity has risen dramatically, with 65 million Ordinals inscribed as of mid-April 2024 (a growth rate of over 2000% in under a year, starting from May 2023).
As Ordinals adoption has grown, the surrounding ecosystem (including Ordinals marketplaces and Ordinals wallets) has also substantially improved. This budding infrastructure provides a simple and secure way to create, trade, collect, and store digital artifacts.
What Is An Ordinals Wallet And How Is It Different?
The purpose of an Ordinals wallet is to manage bitcoin assets and Ordinals assets separately. A person who collects rare coins would not deposit their collection into an online bank account, nor would they use a rare quarter in a vending machine.
The Ordinal’s value hinges on possession of the unique inscribed satoshi, not from the associated fiat currency equivalent, so it is important to store Ordinals outside of one’s regular bitcoin account to avoid it being accidentally transferred during a regular transaction.
Ordinals wallets typically have features to manage both bitcoin assets and Ordinals simultaneously.
They often support broad functionalities such as the creation, viewing, trading, and storage of Ordinals. Further, they implement rigorous security measures, integrate well with other decentralized applications, and allow users to interact directly with the bitcoin blockchain. However, they should not require extensive funds, storage capacity, or technical expertise.
A good ordinal wallet needs to be secure, easy to use, and readily accessible.
The Top 5 Ordinal Wallets
1. Ordinals Wallet
Ordinals Wallet is the most popular Ordinals wallet on the market. Launched on February 16, 2023, the community-funded project was designed to address the limitations of previously released wallets.
At the time of this writing (May 2024) this wallet reports over $82 million in total trading volume, more than 470,000 wallets opened, the facilitation of over 545,000 successful trades, and more than 875,000 Ordinal inscriptions created.
Users can fully manage their digital assets directly within the application, including the ability to view, buy, sell, store, and inscribe Ordinals. This product, similar to most Ordinals wallets, supports bitcoin and Ordinals on a single platform, removing the need to maintain multiple wallets.
The wallet’s user-friendly interface and intuitive layout and design have resulted in positive feedback from both beginners and knowledgeable users. Strong security features, including a non-custodial system, ensure that users always have direct control over their assets via user-created passwords not stored on external servers.
2. Xverse Wallet
The Xverse is an open-source, non-custodial, Web3 bitcoin wallet. Xverse’s primary focus is providing exceptional support for other popular Bitcoin Layer 2 protocols like Ordinals, Lightning Network, and Stacks.
Where the Xverse wallet really shines is in prioritizing user privacy and anonymity. It protects client privacy by not collecting or storing any user data, forgoing know-your-customer (KYC) and anti-money laundering (AML) processes during wallet creation.
Additionally, the wallet encrypts all security keys with user-set passwords on the user’s device, not sharing or storing it elsewhere. Xverse’s open-source code provides full transparency into its security methodology and processes, allowing regular audits by security consultant companies, like Least Authority.
Along with typical wallet features that allow users to browse, purchase, sell, and store their Ordinals, users can create Ordinal inscriptions by uploading an image or text to the app and sending a transaction to the associated address. Xverse relies on its partnership with Gamma, a Bitcoin Ordinal marketplace, to inscribe new Ordinals.
3. Leather Wallet (Formerly Hiro Wallet)
Leather Wallet, formally known as Hiro Wallet, is a non-custodial bitcoin wallet that released Ordinals support features on February 14, 2023. Leather also supports Bitcoin L2 layers like Stacks and has plans to incorporate Lighting Network support soon.
Leather Wallet released its Ordinals support features just ahead of competitor products like Ordinals Wallet and Xverse Wallet, and remains one of the most interconnected Ordinals wallets. It boasts seamless integration with the most popular decentralized Ordinals marketplaces and platforms, providing users with a myriad of options for creating and trading Ordinal inscriptions.
Leather is also a very widely used wallet, reporting 375,000 total downloads, above 100,000 active monthly users, and over 300,000 processed transactions per month.
4. OKX Wallet
OKX Wallet is a decentralized multi-chain wallet built to prioritize user integration into the universe of Web3. As a multi-chain wallet, the focus isn’t just on bitcoin, but instead on providing cross-chain interconnectivity across over 50 blockchains.
OKX Wallet users can also mint and purchase BRC-20 tokens. In 2023 they adopted the BRC20-S standard, an open-source protocol that provides users with the option to stake BRC-20 tokens directly from the platform.
This cements OKX as one of the most versatile Ordinals wallets on the market. OKX Wallet’s security systems also passed an audit conducted by the blockchain security firm SlowMist.
5. MetaMask
MetaMask wallet is a non-custodial multi-chain wallet and browser extension that helps users seamlessly integrate with Web3 dApps. Initially designed as an Ethereum blockchain wallet, MetaMask provides access and support for a wide range of tokens and dApps across the Ethereum network. Metamask is one of the most popular tools in the cryptocurrency space with over 30 million users.
Now, in partnership with Generative XYZ, they have created an easy-to-use interface to interact with and store bitcoin and Ordinals assets — an interconnectivity game changer for users who primarily operate within the Ethereum network. When users connect their existing MetaMask wallet to Generative, a unique signature is generated to create a Bitcoin Taproot key and address.
By sticking with Metamask for Ordinal endeavors, users can rely on the legitimacy of this industry-leading technology while exploring new territory.
The Bottom Line
As Ordinals have risen in popularity, the number of Ordinals wallets has also grown significantly. Any of the five Ordinals wallets listed above more than exceed even skilled users’ expectations in these criteria, with most excelling chiefly in a few key areas.
The main factors to consider when choosing a wallet include:
- Full interoperability with Ordinals assets (view, transfer, buy, sell, store)
- Easy processes for creating new Ordinal inscriptions
- Integration with dApps and Web3
- Robust security features
- Management of a diverse digital asset portfolio from one wallet
- Popularity in the cryptocurrency market
It is up to the reader’s discretion which option best suits their needs.
Breaking Down Blockchains: Monolithic Vs Modular Cryptocurrencies
Explore the distinctions between monolithic and modular blockchains in cryptocurrency.
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When bitcoin launched in 2009, it set the standard for software development in the cryptocurrency sector. Following the bitcoin protocol’s historic precedent, succeeding generations of cryptographers relied heavily on this blockchain’s monolithic framework when crafting their Web3 projects. However, as usage ramped up on the bitcoin network, cryptographers began to notice undesirable features of the monolithic model — particularly bitcoin’s inability to effectively scale to meet increasing user demand.
To address the scalability concerns on the bitcoin blockchain, some programmers began designing their cryptocurrencies using a more flexible “modular” tech stack. Although modular blockchains aren’t always “better” than bitcoin’s traditional monolithic architecture, they offer a viable strategy to handle increased user adoption.
So, how do monolithic and modular blockchains compare, and what benefits and drawbacks does each bring to the cryptocurrency ecosystem? Let’s take a closer look at the intricacies of these software models, and how they both play a role in bitcoin’s current evolution.
Defining Monolithic And Modular Blockchains
Monolithic and modular blockchains perform the same essential functions — including peer-to-peer (P2P) payment processing and distributed data storage — but they go about their decentralized duties differently. In a monolithic blockchain like bitcoin, all the chain’s features occur within one cohesive and interdependent codebase. From transaction processing to consensus mechanisms to data storage, the nodes on a monolithic blockchain take care of all these responsibilities on one layer.
The distinguishing feature of modular blockchains is that these networks split the tasks a chain has to complete into distinct software segments (or “modules”). Although all the modules on a modular blockchain are in constant communication, nodes are only responsible for keeping tabs on their sliver of network activity. By breaking up a cryptocurrency’s architecture into separate units, modular blockchains create a more efficient assembly line model, making it simpler to upgrade operations for maximum scalability.
Benefits And Risks Of Monolithic Versus Modular Architectures
Since modular blockchains are inherently more adaptable than their monolithic predecessors, it’s common to view them as an “upgrade” in cryptocurrency history. While modularity offers unique value propositions for many Web3 programmers — especially in terms of scalability — that doesn’t mean they’re inherently “better” than the monolithic model. Each software framework has significant benefits and tradeoffs that developers will consider before deciding how to build their projects.
Security
Due to the monolithic model’s longevity in the cryptocurrency market, it’s more widely trusted and battle-tested than newer modular chains. Many developers feel the integrated design of monolithic blockchains makes them more impenetrable than modular blockchains since potential hackers need to break into the blockchain’s entire system rather than target isolated modules. Modular blockchains also have to rely on intricate inter-layer communication protocols — often using self-executing programs like smart contracts — to successfully transmit data without a third party, which adds another potential weak point.
On the other hand, programmers in favor of modular blockchains argue the deliberate separation between layers minimizes the impact of a hypothetical security breach. If an attacker managed to corrupt one module in a cryptocurrency’s blockchain, this issue is more self-contained, making it easier to patch the problem without disrupting the entire network. By contrast, a successful attack on a monolithic blockchain would have an immediate ripple effect on the whole network’s operations. So, even though it’s typically more challenging to break into a monolithic blockchain, these networks are more susceptible to extreme and potentially irrecoverable disruptions.
Scalability
Monolithic blockchains (especially bitcoin) prioritize security and decentralization over scalability, while modular blockchains were designed with scalability as a priority. Separating functions through multiple modules helps avoid data congestion, translating to speedier transaction throughput and lower fees. Modular blockchains are also more adaptable to change since it’s easier for developers to implement upgrades on specific problem areas without requiring a complete network overhaul.
Interoperability
Another aspect of a modular blockchain’s superior scalability is its enhanced cross-chain communication (aka interoperability). The coding standards on modular blockchains aren’t as rigid and self-contained as they have to be for monolithic blockchains to work, which opens the possibility of linking to other decentralized networks in Web3.
For example, the Lorenzo Liquid Bitcoin Staking Protocol supports liquid bitcoin re-staking on native Layer 2s and Ethereum decentralized apps (dApps) thanks to compatibility with the Ethereum Virtual Machine (EVM). The relaxed technical standards within the modular framework make it easier to connect dApps and cryptocurrencies from multiple networks rather than restricting network activity to one blockchain ecosystem.
Development And Maintenance
Monolithic blockchains aren’t always “easier” to code than modular models, but they tend to be simpler for programmers to conceptualize and deploy since everything is within one framework. With modular blockchains, developers have to consider numerous moving parts and intricate inter-chain communication systems, which often hampers the initial development phase.
However, once a modular blockchain goes live, the more fragmented architecture makes it easier for developers to update and adapt these chains. Because monolithic blockchains are intertwined, they take considerable time, effort, and coordination even when making minor protocol updates, making ongoing development, governance, and maintenance more challenging.
The Best Of Both Blockchains?
Shared security erases the monolithic versus modular split: Rather than scrapping the monolithic model, there are ways to avoid radical network shifts and still take advantage of the modular framework’s scalability. Thanks to the concept of “shared security,” new modular blockchain projects can link their protocols directly to an established monolithic chain like bitcoin and immediately take advantage of its decentralization, size, and reputation.
Layer 2s (L2s) using shared security on bitcoin finalize all of their transaction data on the base layer, but they process transactions off-chain for superior scalability. This unique software arrangement cuts down on development time for L2s, instantly raises security standards, and helps expand Layer 1 cryptocurrencies like bitcoin throughout Web3.
Mixing Monolithic And Modular For Bitcoin’s Future Success
Every blockchain developer has different opinions on the merits and risks of modular versus monolithic designs, but there’s usually no simple choice between these design options. There are, however, undeniable tradeoffs when choosing one blockchain framework over the other.
Traditionally, monolithic blockchains have a higher safety reputation, while modular blockchains are better known for their scalability. Picking the “best” blockchain infrastructure always depends on the specific goals a cryptocurrency project wants to accomplish.
While the monolithic model continues to work for processing secure payments on bitcoin’s core infrastructure, the Lorenzo Protocol believes modular models will play an important role in the next stage of the cryptocurrency industry’s growth. Specifically, shared security with modular L2s provides a way to infuse the benefits of these blockchain architectures, helping to establish bitcoin’s monolithic model as “the” foundation for Web3 security, and broadening bitcoin’s utility in decentralized finance (DeFi).
The shared security between monolithic and modular blockchains accentuates the positives of both models, making secure scalability a possibility for the bitcoin network.
The Definitive Guide To Bitcoin Runes
Runes is the latest way to issue new tokens on Bitcoin. This is your guide to the protocol.
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The Runes protocol is the latest development in the explosion of new tokenization models that have appeared on top of bitcoin’s base layer over the past year or two.
At a time when mostly useless meme coins are gaining massive attention in the cryptocurrency market, the Runes protocol allows a new way of issuing fungible tokens on bitcoin which offers improvements over the somewhat successful BRC-20 standard. Launched on the fourth bitcoin halving at block 840,000, the Runes protocol led to a massive spike in transaction fees that allowed miners to earn more revenue after the halving of the block reward had occurred, than they were earning prior to the event.
Let’s take a closer look at the Runes protocol on bitcoin and whether it has a chance at standing the test of time as the preferred method for issuing fungible tokens on the world’s most valuable blockchain.
Token Issuance On Bitcoin
Although tokenization did not really come to prominence until the initial coin offering (ICO) bubble on Ethereum in 2017, the reality is the original forms of cryptocurrency token issuance were founded on bitcoin.
The colored coins concept, which was the original form of tokenization on bitcoin, goes back as far as 2012, and a variety of protocols for issuing both fungible and non-fungible tokens (NFTs) on top of bitcoin have developed over the years. Two of the most prominent protocols were Mastercoin (now called Omni) and Counterparty. In fact, Tether USD (USDT), which is by far the largest and most popular stablecoin in the world, was originally issued via Omni.
Despite the long history of tokenization on bitcoin, the world’s most valuable blockchain only began competing with other layer-one cryptocurrency networks in terms of token issuance in earnest last year with the creation of Ordinals. According to Cryptoslam, bitcoin is now a main hub of NFT activity, thanks to this development.
More recently, the BRC-20 token standard was built on top of Ordinals as a way of issuing fungible tokens on bitcoin. Additionally, Taproot Assets and RGB have been developed as additional options for issuing tokens on top of bitcoin and transferring them via the Lightning Network.
While many bitcoin maximalists are against the idea of alternative crypto assets in general, the reality is many people love gambling on small-cap meme coins — even if there’s no true, long-term valuation thesis behind them. Additionally, the most successful form of tokenization, stablecoins, has proven utility as the preferred medium of exchange in the cryptocurrency market. USDT alone currently sits at a roughly $110 billion market cap.
Due to the clear demand for additional tokens found throughout the cryptocurrency space, it makes sense for those who view bitcoin as the cryptocurrency market’s base money to build protocols for tokenization directly on top of the bitcoin network — removing the need for alternative layer-one blockchains for this particular use case.
Enter Bitcoin Runes
The Runes protocol is the latest addition to the ways in which new tokens can be issued on top of bitcoin. This new protocol was developed by Casey Rodarmor, who was also the bitcoin developer behind the Ordinals phenomenon. Compared to BRC-20s, Runes is a much more practical and efficient protocol. This should not come as a shock because BRC-20 is a rather crude protocol that was thrown together quickly as more of a proof-of-concept than anything else.
To be clear, the focus of Runes is on fungible tokens rather than NFTs, although Rodarmor admittedly does not see much value in these kinds of tokens. “I’m highly skeptical of ‘serious’ tokens, but Runes is without a doubt a ‘serious’ token protocol,” Rodarmor posted on X.
The main way Runes offers an improvement in efficiency is by not bloating bitcoin’s set of unspent transaction outputs (UTXOs), as bitcoin’s OP_RETURN functionality is used to store token data more efficiently. Notably, OP_RETURN outputs do not need to be tracked and stored by bitcoin full nodes, as they’re provably unspendable.
According to data from Glassnode, bitcoin’s UTXO set skyrocketed following the launch of the BTC-20 token standard in March 2023. In addition to increasing data storage requirements for bitcoin full nodes, basing BRC-20 tokens on Ordinals also has the side effect of increasing costs for users due to the need for more block space to be used in transactions related to the tokens than is the case with Runes.
Much like Taproot Assets and RGB, Runes can also be transferred over the Lightning Network, which is yet another efficiency gain over BRC-20s. However, unlike Taproot Assets and RGB, Runes does store data related to the tokens directly on the blockchain. That said, Runes does not have its own native token, which is the case with Omni and Counterparty.
How Bitcoin Runes Work Technically
Runes work by sending OP_RETURN transactions on the bitcoin network. An OP_RETURN is a special opcode that allows users to attach up to 80 bytes of additional data to a particular transaction.
The OP_RETURN opcode is used for creating, minting, transferring, and burning tokens in the Runes protocol. These OP_RETURN transactions in the Runes protocol are known as Runestones. Additionally, Runes are stored in specific outputs in the UTXO set.
How Bitcoin Runes Are Created
To create Bitcoin Runes, data must first be embedded into an OP_RETURN transaction. This process is known as etching. Here is the info that can be included in the OP_RETURN transaction associated with the new tokens:
- Rune: This is the name of the token. It can contain between one and 28 characters; however, the only valid characters are capital A-Z and spaces represented by the “•” character. If a name is not chosen, a name will be assigned based on the transaction’s data.
- Divisibility: This is a number that represents the number of decimal places that exists for the token’s divisibility.
- Currency Symbol: This is the official currency symbol for the token that should be displayed following a displayed token amount. The default is “¤”.
- Premine: Creators of Runes can use this field to reserve a specific amount of the token for themselves.
- Open Mint Terms: The token creator can set terms of an open mint if they’d like to allow the minting of the token supply to be public and open to others. The terms to set for an open mint include mint cap, amount per mint transaction, start block height, end block height, start block offset, and end block offset.
Once a Rune has been etched, it then must be minted based on the terms outlined in the etching to come into existence. To mint Runes, a user must create an OP_RETURN transaction that includes the Rune ID in the Mint field and the associated output to assign the tokens via the Pointer field. The Rune ID is based on the block height and transaction index related to the Rune’s original etching. If an output is not provided in the OP_RETURN, then the Runes will be assigned to the first non-OP_RETURN output in the minting transaction.
As a side note, the Rune field was a major reason for the massive fee spike on the bitcoin network when the Runes protocol originally launched, as users were attempting to outbid each other for the rights to etch Runes with specific, noteworthy names, or especially for the “claim-to-fame factor” of being included in block 840,000
Transferring Bitcoin Runes
The process for transferring Runes is not too dissimilar from creating new Runes in the first place. An OP_RETURN transaction is, again, all that is needed to transfer Runes; however, the data that must be entered into the OP_RETURN field for this type of Runestones message is a little bit different than it is with etching or minting.
The only three pieces of information needed to transfer Runes via Runestones are the Rune ID, the amount to transfer, and the output where the Runes should be transferred. Again, if a destination output is not provided, then the Runes will be assigned to the first non-OP_RETURN output in the associated transaction. In fact, if an output with some Runes associated with it is sent to a new bitcoin address without an associated Runestones message, then the default action is for 100% of the Runes associated with the former output to be assigned to the first non-OP_RETURN output in the transaction.
Burning Bitcoin Runes
There is also a process for burning Runes via Runestones. This is done by choosing a provably unspendable OP_RETURN output as the recipient of the Runes.
Additionally, Runestones with errors in them will burn the associated Runes. These are known as cenotaphs. Malformed etchings will also generate Runes that are unmintable. Cenotaphs can also be used as an upgrade mechanism for the Runes protocol.
Those who wish to dive deeper can read the full Runes specification for the Ord client.
The Future Of Bitcoin Runes And Tokens On Bitcoin
For now, the future of tokenization on bitcoin is rather unclear, as several different, competing protocols are either already live or in development, offering this same functionality. It’s unclear if the Runes protocol will stand the test of time, but it’s clear that there is demand for gambling on these sorts of low-value, meme-based tokens for now. Additionally, the Runes protocol itself could be extended and evolved to enable new use cases.
Over the long term, it may be more efficient for this sort of activity to take place on Bitcoin Layer 2 networks like Lorenzo App Chain. There’s also the potential for these types of tokens to be originally created on bitcoin’s base blockchain before then being ported up to secondary network layers for transfers, as use cases in decentralized finance (DeFi), and other functionality.
That said, the Runes protocol has proven to be another source of increased transaction revenue for miners over the short term, and much more of that kind of activity will be needed over the long term to ensure the viability of the network. When Runes are combined with Ordinals, Bitcoin L2s, and other recent developments, it seems that there will be plenty of activity on bitcoin to incentivize miners to keep the network secure. Whether it’s through Runes or some other protocol, there is a clear demand for alternative cryptocurrency assets built directly on top of bitcoin.
The Definitive Guide To Bitcoin Smart Contracts
Discover the emerging smart contract boom on Bitcoin
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While bitcoin was originally launched with a simple focus on becoming a global, peer-to-peer digital cash system, the cryptocurrency landscape has expanded far beyond that initial use case since those early days.
Many of these additional use cases have been developed on alternative blockchains with more expressive scripting languages, such as Ethereum and Solana, as Bitcoin Script is rather limited in terms of overall functionality.
Through the use of smart contracts written in some of the more expressive cryptocurrency scripting languages, alternative blockchains have been able to attract millions of users who are interested in more than watching number go up or making uncensorable transactions.
But what are smart contracts exactly? And why has all of this development taken place outside of the bitcoin network? Is it possible that bitcoin will be able to adopt all of these alternative use cases of blockchain technology? Let’s take a closer look at the growing intersection between bitcoin and smart contracts.
Understanding Smart Contracts
A smart contract is any sort of contract enforced by code rather than the traditional legal system or some other centralized authority. This code is usually deployed on a decentralized, blockchain-based network. Smart contracts were first discussed by well-known cypherpunk Nick Szabo way back in 1994, roughly 20 years before the concept would be popularized by the launch of Ethereum.
Smart contracts can range from the simplest of implementations to high levels of complexity. For example, it could be said that a standard bitcoin transaction is a smart contract. Once a bitcoin user has signed a transaction with their private key, the transfer of that bitcoin to another address is enforced via the blockchain. On the other end of the spectrum, decentralized finance (DeFi) protocols on various blockchain networks can combine a collection of different smart contracts into larger applications such as the creation of synthetic, derivative-based tokens and decentralized exchanges with automated market makers.
It should be noted that the term smart contract has expanded to include practically any use of cryptography in the world of finance over the past decade, as many platforms have used it as more of a buzzword to attract investment than anything else. For example, it could be argued that so-called smart contracts that involve some trusted third party (usually in the form of an oracle) as part of their design are not true smart contracts, as the enforcement of that contract is essentially in the hands of the third party. In other words, the intended outcome of the code execution is not necessarily the final law of the land in those scenarios.
Advantages Of Smart Contracts
So, why would someone use a smart contract on a blockchain rather than a traditional agreement backed by the local legal system? Some of the key potential advantages of smart contracts include:
- No “trusted” third parties: Smart contracts in their truest form do not involve any trusted third parties for dispute resolution. As Szabo once wrote, trusted third parties are security holes, and they can create issues in terms of costs, censorship, and more. This lack of third parties is also the base feature that enables several other advantages of smart contracts.
- Increased transparency: With a smart contract published on a public blockchain, the rules of the contract and how those rules are enforced are free for anyone to verify. This can lead to increased transparency where it does not exist in equivalent systems which do exist in traditional contracts. For example, the entire world can view all of the trades that take place on a decentralized exchange like Uniswap.
- Increased privacy: It may seem like a contradiction for smart contracts to offer both transparency and privacy, but smart contracting systems can be built with different goals in mind. A core philosophy of smart contracts on bitcoin is to leave as little information on the blockchain as possible, which enables a greater degree of privacy for those involved in those contracts. For example, it would be advantageous if blockchain observers were unable to tell if an on-chain bitcoin transaction was a standard payment or the opening of a Lightning Network channel. Additionally, some smart contract designs, such as CoinJoin, are specifically built to improve user privacy.
- Immutability: Once a smart contract has been deployed on a blockchain, it cannot be altered (unless allowed for by the initial design of the smart contract). This allows all parties to know exactly how the rules of the contract will be implemented in all potential outcomes. Of course, it should be noted that smart contracts are only as immutable as the underlying blockchain, as illustrated by the reversal of the hack of the DAO (aka Genesis DAO) on Ethereum via a hard fork back in 2016.
- Increased speed and efficiency: While traditional contracts can involve manual paperwork and legal proceedings, smart contracts can be finalized instantly once the triggers for ultimate resolution have been met.
- Lower costs: Depending on the use case, smart contracts issued on blockchains can offer lower costs than the alternative options. For example, it is oftentimes cheaper to send a transaction via a stablecoin rather than a bank wire. That said, a smart contract will not be a cheaper option in every scenario, as interactions with public, decentralized blockchains can be much more costly than a centralized database. Much like smart contracts themselves, blockchains have become a buzzword-fueled technology that people sometimes turn to out of desire rather than necessity.
- Borderless: Smart contracts are issued on blockchains, which operate on a global, permissionless basis via the internet. This means any two parties from around the world can come to an agreement on the terms of a contract — even if they reside in different jurisdictions which traditionally had not worked well together.
Bitcoin’s Limited Scripting Language
Contrary to popular belief, smart contracts exist on bitcoin today. The reason many people associate smart contracts more with other blockchains such as Ethereum and Solana is that bitcoin’s limited scripting language means there is a limit to what can be accomplished on the base blockchain.
In Ethereum, there is basically no limit to what can be accomplished in terms of writing decentralized applications, as developers can write their smart contracts from scratch. In bitcoin, the primitives for each smart contract are effectively added over time on an as-needed basis after they’ve been proven useful and worth it in terms of security tradeoffs.
For example, the OP_CHECKLOCKTIMEVERIFY (CLTV) and OP_CHECKSEQUENCEVERIFY (CSV) opcodes were added to bitcoin because they could be used as building blocks for the Lightning Network, which was seen as a key scaling breakthrough for bitcoin payments. On the other hand, complex, smart-contracts-based applications such as Uniswap and Maker simply cannot be built on the base bitcoin blockchain today, as the tools needed to develop them do not exist in Bitcoin Script.
It should be noted that the limitations on Bitcoin Script were intentionally implemented by bitcoin creator Satoshi Nakamoto. Bitcoin originally launched with additional opcodes, such as OP_CAT, that are no longer active on the network because Satoshi deactivated them due to security concerns. Some of the issues that bitcoin is able to avoid with this design decision include the prevention of stablecoin issuers from garnering unwanted control over the network and potential issues related to miner extractable value (MEV).
That said, some smart contracts can be written on bitcoin today via various mechanisms. Here are some of the more notable types of smart contracts that can be written with the current form of Bitcoin Script:
- Multisignature addresses: A multisig address is a bitcoin address that, as indicated by the name, requires multiple signatures to send a transaction. For example, a company or organization could require two-of-three executives to sign off on every transaction from the treasury. This is a type of smart contract that exists at the base of many bitcoin applications and enables features such as improved wallet security, federated sidechains, and the Lightning Network.
- Time-locked transactions: Time-locked transactions are used to prevent the spending of some specific bitcoin prior to a certain time in the future. For example, someone could use this type of smart contract to prevent themselves from spending their savings until a later date or preventing a loved one from spending their inheritance until a certain block height. CLTV and CSV are two opcodes that enable this smart contract functionality, in addition to the nLockTime parameter. These opcodes are also key building blocks of the Lightning Network and cross-chain atomic swaps, where cryptographic proofs are used to prove that an off-chain spending commitment has been made.
- Meta protocols for tokens: While token offerings did not really take off until they were implemented by Ethereum, the reality is various meta protocols for issuing alternative assets on top of bitcoin have existed since around 2013. Originally referred to as colored coins, meta protocols for token issuance on bitcoin did not gain much use until the invention of Ordinals and Inscriptions in 2023. That said, Tether USD, which is by far the largest stablecoin in the world by market cap, was originally issued on a bitcoin meta protocol known as Mastercoin (now Omni). Other meta protocols for issuing both fungible and non-fungible tokens (NFTs) on bitcoin include Stamps, RGB, Taproot Assets, Runes, and Counterparty.
- Discreet log contracts (DLCs): DLCs are bitcoin’s answer to the oracle problem for smart contracts, where a third party must be trusted to decide the outcomes of bets between two or more parties. This mechanism enables a large amount of privacy and scalability for these sorts of bets, as the vast majority of data is handled off of the blockchain. Notably, the oracle(s) for the smart contract does not necessarily know the details of the bet. DLCs can be used to create financial derivatives on both the base bitcoin blockchain and the Lightning Network.
It should be noted that multiple bitcoin smart contracts are also sometimes combined to create more advanced, upper-layer protocols. For example, both multisig addresses and time-locked transactions are used to create the Lightning Network.
Bitcoin’s Vision For Private, Efficient Smart Contracts
Despite the reality that bitcoin can be difficult to change at the base protocol layer, several alterations have been made to the network’s consensus rules over time to enable additional smart contract functionality. For example, while multisig addresses are extremely common on the bitcoin network today, they were not available in the original version of the protocol.
In 2021, an improvement known as Taproot was added to bitcoin in an effort to enhance the privacy and efficiency of smart contracts. Indeed, this improvement was a major step forward in terms of the design goal of minimizing the amount of information related to smart contract execution that is forever stored in the bitcoin blockchain. In addition to having an extreme focus on safety and security, bitcoin smart contracts tend to be implemented in an off-chain manner where privacy and scalability can be maximized.
The Taproot upgrade coincided with the addition of Schnorr signatures to bitcoin, which allows multisig transactions to look no different than traditional, single-sig transactions on the blockchain. This means that, for example, an opening or closing of a Lightning Network channel will look the same as a normal on-chain transaction where Bob is simply sending some bitcoin to Alice. This makes it difficult to understand the true meaning behind on-chain interactions by bitcoin users, in addition to lowering the amount of block space that needs to be used through the use of signature aggregation.
Additionally, the use of Merkelized Abstract Syntax Trees (MAST) makes it so that only the executed form of a smart contract is revealed on the blockchain. While there could be a number of potential different outcomes of a particular smart contract, MAST improves privacy and scalability by only publishing the data that is relevant to the end result of smart contract’s execution. However, it should be noted that more data is revealed when there is some sort of off-chain smart contract dispute that needs to be resolved by reverting to the blockchain.
Taproot also made it easier to introduce new opcodes in the future, which could be used as building blocks for more expressive smart contracts. Tapscript was introduced via the Taproot upgrade, which also came with the OP_SUCCESSx opcodes. These are effectively placeholders for future opcodes to be seamlessly added to bitcoin.
With all that said, it should be mentioned that Taproot was the last soft-forking change that was made to bitcoin. It has become more difficult to make these sorts of changes to bitcoin as time has progressed, as the network’s protocol rules slowly move towards ossification. As the bitcoin user base grows and becomes increasingly diverse, it may become even more difficult, if not impractical, to coordinate changes to bitcoin’s scripting language.
Bitcoin Smart Contracts On Secondary Layers
As part of bitcoin developers’ desire to limit interactions with the base blockchain layer, a multi-layer approach to scaling the cryptocurrency to billions of potential users has been thought of as the correct path forward for many years. Notably, Ethereum has also pivoted to this focus on Layer 2 (L2) networks over the past few years.
Much of the financial activity that involves the bitcoin asset does not necessarily need the high degree of decentralization and censorship resistance provided by the base bitcoin blockchain, so it makes sense to let users opt into secondary networks built on top of that base layer via smart contracts.
The most prominent L2 network on bitcoin today is the Lightning Network, which is currently mostly focused on the payments use case. While the Lightning Network itself is built on a number of different bitcoin smart contracts, this L2 does not offer much in terms of enabling additional smart contracting capabilities. However, the Lightning Network does allow smart contracts that exist at bitcoin’s base layer, such as tokenization and DLCs, to operate in a faster and cheaper off-chain environment.
In terms of the expansion of bitcoin’s smart contracting capabilities, most of that activity has taken place on federated sidechains up to this point. Liquid is a sidechain that closely resembles bitcoin itself with a variety of additional features and opcodes. Another sidechain comes in the form of Rootstock, which is compatible with the Ethereum Virtual Machine (EVM), meaning any Ethereum app can be deployed on the sidechain.
While both Liquid and Rootstock have enabled more experimentation when it comes to using bitcoin in smart contracts, adoption of these platforms has been rather minimal. This could be due to a variety of reasons such as a dislike of the federated sidechain security model or the fact that fees on the base bitcoin blockchain are still relatively low in the grand scheme of things. Of course, many smart contracting systems reintroduce some form of counterparty risk anyway, usually in the form of a trusted oracle. Then again, there is also a general preference for simply hodling bitcoin and not reintroducing financial risk among many bitcoin users.
Due to innovations such as Babylon and BitVM, alternative sidechain security models are now possible, which has led to the development of proof of stake (PoS)-based models. It remains to be seen as to whether these new forms of L2 bitcoin networks will be able to gain more traction than previous sidechain iterations, but the level of L2 experimentation is bound to increase in the coming years.
Of course, the case can also be made that other Layer 1 blockchain networks, such as Ethereum and Binance Smart Chain, can also be seen as L2 networks for bitcoin. In fact, the amount of bitcoin that has been ported over to Ethereum via the Wrapped Bitcoin (WBTC) ERC-20 token dwarfs the combined size of Lightning Network, Liquid, and Rootstock. Some networks operate in a gray area between sidechain and alternative cryptocurrency networks, such as Stacks, where a new native cryptocurrency exists alongside a focus on the use of bitcoin as money.
Popular Applications Of Bitcoin Smart Contracts Today
While it’s technically possible to build decentralized applications via smart contracts on bitcoin today, the reality is that there are not many popular examples that can be pointed to as successful projects right now. WBTC is a popular token used in some of the largest and most well-known DeFi projects, such as Uniswap and Aave, but there has yet to be an example of product-market fit when it comes to building these sorts of apps directly on top of bitcoin itself.
That said, there are three notable bright spots to look at when it comes to the use of bitcoin smart contracts to build decentralized applications so far: Sovryn, the Lightning Network, and Ordinals.
Sovryn
Sovryn is the one bitcoin app that enables basically everything one would find in the sorts of apps built on Ethereum. Originally deployed on Rootstock, Sovryn is also expected to be deployed on Build on Bitcoin in the near future. The DeFi app has anything and everything a bitcoin user could want in terms of DeFi activity, including a decentralized exchange, a collateral-backed stablecoin, NFTs, borrowing, lending, a decentralized autonomous organization (DAO), staking, and more.
Sovryn peaked at roughly $160 million of total value locked (TVL) in the protocol back in November 2021, and it has about half of that amount locked in the DeFi app at the time of this writing.
Lightning Network
While the Lightning Network has long been touted as the major L2 development for bitcoin so far, the level of success it has actually achieved up to this point is up for debate. While there are more payments taking place on Lightning Network than many payment-focused altcoins, there are clearly some issues that still need to be worked out. Indeed, many of the most popular and noteworthy Lightning-enabled wallets, such as Wallet of Satoshi and Chivo Wallet, operate in a completely custodial manner.
The relatively low amount of bitcoin that is locked up in the Lightning Network at any one time is often pointed to as proof of its failure when it comes to adoption, but the reality is TVL is not a very useful metric for measuring the success of a payments protocol. Much of the activity in Lightning is currently built around low-value transactions related to Nostr and gaming, and these sorts of use cases do not require much bitcoin to be on the network, especially when considering that the same bitcoin can be reused for multiple payments within intentionally circular economies.
Ordinals And Inscriptions Projects
Based on the temporary spikes in transaction fees that have been found on bitcoin over the past year or so, Ordinals and Inscriptions have garnered a large amount of attention and controversy. While some bitcoin users see Ordinals as a healthy integration of the NFT concept for bitcoin, others see the large amount of block space taken up by Inscriptions as nothing more than spam.
In addition to NFT-esque Ordinals collections, there have also been many meme tokens that have launched via this process. As of April 2024, bitcoin is now the largest blockchain for NFT sales volume, according to CryptoSlam, and the Ordinals concept has been the key driving force behind this phenomenon.
The Future Of Smart Contracts On Bitcoin
It can be extremely difficult to make changes to bitcoin, but there are some developments in the works to bring additional smart contracts to bitcoin via soft forks. Additionally, there are a large number of upper-layer network developments in the works that will work fine with the base bitcoin protocol as it exists today. Improvements will also no doubt be made to the Lightning Network, sidechains, and other bitcoin smart contracting systems that already exist today.
While most smart contract activity takes place on Ethereum and its Layer 2 networks right now (even the activity involving bitcoin), a merger between bitcoin as an asset and smart contracts as a technology could alter this current paradigm over the long term.
Will New Opcodes Be Soft-Forked Into Bitcoin?
The basic rules of the bitcoin network were definitely “set in stone” to some degree when the network originally launched back in January 2009. However, slight alterations to the protocol have been made from time to time via backwards-compatible soft forks. Multisig addresses, smart contracts related to the Lightning Network, Segregated Witness, and Taproot all came to bitcoin via this methodology, and there are a number of proposals floating out there in the ether in terms of new smart contracts that could be added to Bitcoin Script.
Covenants
Bitcoin covenants would allow users to better set conditional rules on how, when, or where some bitcoin can be sent. For example, a covenant may only allow some bitcoin to be spent to some specific addresses after a specific period of time has passed. The ability to effectively enhance control over and add restrictions to bitcoin spending conditions could enable a wide variety of different use cases and improve smart contracting systems that already exist on bitcoin today.
There are several covenant proposals that have been published by various bitcoin developers over the past few years. Some of the most well-known covenant proposals for bitcoin include OP_CHECKTEMPLATEVERIFY (CTV) and OP_CAT, the second of which was available in the original version of bitcoin before it was deactivated by Satoshi. The merits of many different covenant proposals have been debated by bitcoin developers, as there is a desire to get the right balance between increasing programmability without adding too much complexity that could increase bitcoin’s attack surface. Additionally, there are those who say the addition of covenants is simply not worth the security tradeoffs, as there are no proven use cases.
Potential Use Cases Of Covenants
One of the key use cases of covenants that has been discussed for a long time is the concept of vaults, which would offer an extra layer of protection against theft and hacks. The basic idea is that bitcoin held in a certain address can only be spent in a predetermined way that would disincentivize an attacker. For example, it could be required that funds be sent to an intermediary address before being sent to any address of a user’s choosing, with a timelock also being added to that intermediary address to allow the rightful owner of the bitcoin to prevent a theft attempt. Simple versions of vaults are possible on bitcoin today; however, they can be made more efficient and secure if bitcoin were to have covenants.
Covenants could also enable several improvements for existing Layer 2 bitcoin networks such as the Lightning Network and sidechains. In terms of the Lightning Network, covenants could enable improvements, such as channel factories, which allow Lightning users to interact with the base bitcoin blockchain on a less frequent basis, thus lowering total costs. For sidechains, covenants may be useful for improving the security and efficiency of various two-way pegging mechanisms. There also exists the potential for improvements to privacy-focused protocols such as CoinSwap, the development of congestion control, and improvements for other L2 networks that already exist today such as Ark and Mercury Layer.
Drivechains
As previously covered, sidechains already exist on bitcoin; however, current implementations rely on a security model based around a federation of signatories behind a multisig address. There are also proof-of-stake-based models, such as Lorenzo Appchain, coming online, but drivechains would offer a third option where the funds on the sidechain are controlled by the bitcoin miners.
Drivechains are an extremely controversial proposal at this time, but some segments of the bitcoin user base believe that they are the best possible solution to the two-way peg problem and will offer the highest degree of censorship resistance for sidechains. Detractors feel as though drivechains alter the game theory at the base network level by putting large amounts of bitcoin in the collective hands of miners. That said, the end goal here is to enable low-trust bitcoin sidechains for greater levels of experimentation with smart contracts and other use cases.
Notably, a version of drivechains could be implemented today via BitVM; however, it would be made much more secure with the introduction of two Bitcoin Improvement Proposals (BIPs): BIP 300 and BIP 301.
Simplicity
Simplicity is an advanced, high-level scripting language for bitcoin developed by Blockstream that offers formal verification and more expressive smart contracts. Integrating Simplicity into bitcoin has been referred to as a potential “final soft fork” by Blockstream CEO Adam Back, as it could potentially allow the base protocol to ossify.
In a bitcoin world with Simplicity, bitcoin smart contract developments would work more like they do in the Ethereum world, where developers are free to write any smart contract they wish. Simplicity also offers formal verification, meaning smart contracts can be proven to behave exactly as they are intended before they are used, which can limit security issues and bugs. This feature does not exist in Ethereum’s Solidity scripting language, where a large number of error-prone smart contracts have led to billions of dollars worth of losses over the years. The addition of Simplicity to bitcoin would be seen as extremely controversial today, but it is expected to be added to the Liquid sidechain at some point in 2024.
Better Bitcoin Sidechains
Going forward, sidechains will be a key area to watch in terms of smart contract development on bitcoin, as these L2 networks are able to offer much more experimentation. It’s likely that a large number of new sidechain concepts will be tried as bitcoin continues to scale out via a multi-layer approach, and it’s unclear if the majority of activity will take place on federated sidechains, drivechains, or PoS-based models like Lorenzo and Botanix.
The key issue that still has plenty of room for improvement is the two-way peg that enables bitcoin to move back and forth between the base chain and L2 networks. Over a long enough timeline, it’s possible that some sort of system based on zero-knowledge proofs will be the ultimate pegging mechanism for these secondary bitcoin layers.
The Lightning Network Will Continue To Develop And Expand
The Lightning Network is still rather basic when it comes to its feature set; however, that’s bound to change in the near future. Two of the latest developments on the Lightning Network that could lead to greater levels of adoption are Taproot Assets and DLCs. Stablecoins have been a key area of adoption in the cryptocurrency market over the past few years, and the bitcoin ecosystem has missed out on this opportunity ever since on-chain fees rose and Tether USD (USDT) slowly moved to alternative networks.
With Taproot Assets (and other, similar protocols), stablecoins can be issued on bitcoin and sent over the Lightning Network, making it a faster and cheaper alternative to some of the other blockchain networks like Ethereum and Tron. With DLCs, use cases such as dollar-pegged holdings and trust-minimized derivatives can be enabled on Lightning.
As mentioned previously, the addition of a covenants proposal or Simplicity to bitcoin could also help make the Lightning Network become more efficient in terms of its use of the base bitcoin blockchain, and there is still a large amount of work to do in terms of scaling this L2 network to potentially billions of users around the world.
Going forward, it’s possible that the Lightning Network will act more as a glue that allows users to instantaneously swap between various L2 bitcoin networks at basically no cost. That said, the Lightning Network is seen as the L2 that has the fewest trust assumptions in terms of how funds on the network are custodied at the base layer, as Lightning transactions are simply self-custodial bitcoin transactions that have yet to be broadcasted and included in a block.
There are also technologies similar to the Lightning Network that are coming online and could offer alternative options for specific use cases. Fedimint is an ecash system based on federated bitcoin custody (similar to Liquid) that enables anonymous transactions that are fast and cheap. Additionally, Ark is an even newer concept that could solve some of the liquidity and privacy issues found with Lightning.
The Lightning Network still has a number of limitations in its current form and is definitely not a silver bullet in terms of scaling bitcoin to the global population. Instead, it is one of potentially many tools that will allow anyone to use bitcoin while maintaining some degree of decentralization and censorship resistance.
Bitcoin Is Ready For A Smart Contract Boom
The future is now when it comes to smart contracts on bitcoin. There are already a number of tools available to those who wish to deploy smart contracts on top of the world’s most valuable cryptocurrency network, and these tools are bound to become more powerful and secure in the coming years. Thanks to the emergence of Ordinals, BitVM, and other recent breakthroughs, there has never been as much excitement around building decentralized applications on top of bitcoin as there is today.
The idea of building everything around bitcoin rather than splintering the cryptocurrency user base into many different, incompatible systems has existed since at least the release of the original sidechains white paper all the way back in 2014, and now the tools to realize that vision are coming online. There is no reason everything cannot be built on top of bitcoin as the core source of truth and smart contract dispute resolution.
Some bitcoin smart contract projects have been around for a few years now, but there will be an explosion in development activity thanks to platforms like Lorenzo Protocol building out new L2s on top of the world’s most secure blockchain. And since Lorenzo’s appchain is compatible with the EVM, it is easy to port over existing applications and write new smart contracts built specifically for bitcoin.
Appendix: Resources for Further Exploration
- Ark Deep Dive: https://www.arkpill.me/deep-dive
- Babylon Bitcoin Staking White Paper: https://docs.babylonchain.io/assets/files/btc_staking_litepaper-32bfea0c243773f0bfac63e148387aef.pdf
- Bitcoin Optech: https://bitcoinops.org/
- BitVM 2: https://bitvm.org/bitvm2
- Bitcoin Covenants Wiki: https://covenants.info/
- Drivechain: https://www.drivechain.info/
- Lightning Network Documentation: https://docs.lightning.engineering/
- Liquid Documentation: https://docs.blockstream.com/liquid/technical_overview.html
- Lorenzo Protocol Documentation: https://lorenzo-protocol.gitbook.io/lorenzoprotocol
- Ordinal Theory Handbook: https://docs.ordinals.com/
- RGB Documentation: https://rgb.tech/docs/
- Rootstock Documentation: https://dev.rootstock.io/
- Stacks: https://docs.stacks.co/
- Taproot Assets Documentation: https://docs.lightning.engineering/the-lightning-network/taproot-assets
- The DAO: https://gyazo.com/6b875ea63bc2d1241818ee3544ec9420
What Is Bitcoin Staking Slashing?
Learn key staking slashing risks and how Lorenzo's liquid restaking enhances security and accessibility for Bitcoin stakers.
In cryptocurrency networks based on proof of stake (PoS), those willing to stake their assets and participate in block validation are rewarded with a return on their investment. When everything is operating smoothly, this can be a way for cryptocurrency users to easily earn predictable, annual returns and passive income on their holdings.
However, there is no such thing as free money. Staking, like all elements of the crypto industry, carries with it a variety of risks.
One key area comes in the form of slashing. Slashing is the key security mechanism in PoS systems that prevents stakers from abusing their power on these networks, but it can also haunt those who simply are not fully aware of how to properly stake their coins.
This comprehensive guide will get you fully caught up on staking slashing and how to avoid it when navigating the rapidly growing bitcoin DeFi landscape. Let’s dive in.
What Is Slashing?
Slashing is a security mechanism used in PoS cryptocurrency networks that discourages and penalizes bad behavior by the validators on the network. The validators are the nodes on the network entrusted with the responsibility of creating new blocks, similar to the proof-of-work (PoW) miners in bitcoin.
These validators must put up an amount of cryptocurrency as collateral for the right to participate in block creation, and this collateral can be seized in situations where the validator is not acting in the best interest of the network, or has become negligent. This seizure of collateral is known as slashing.
Reasons Why Slashing May Occur
Each PoS cryptocurrency network has its own set of standards when it comes to slashing. However, there are a few common reasons why slashing may occur:
- A validator has signed multiple different blocks at the same block height, which can cause network instability in terms of not knowing which block to follow and when transactions are finalized.
- A validator has not participated in the consensus process for an extended period of time and has gone offline.
- A validator refuses to include specific, individual transactions or certain types of transactions, effectively implementing a form of censorship.
- A validator proposes blocks that contain invalid transactions or break some other consensus rule regularly.
It should be noted that different degrees of slashing can be used to punish different types of malicious or unwanted behavior. For example, a validator that is only offline for a short period is likely to have less of their stake slashed than a validator that was actively trying to attack the network via censorship or some other means.
In emergency scenarios, new slashing conditions can also be deployed to remove specific validators from the consensus process. For example, the rest of the network could come together to slash the stake of a hacker, government, or other unwanted entity that was able to gain too much control over the staking process.
How Does Staking Slashing Work On Bitcoin?
It should be noted that slashing on bitcoin works differently than every other cryptocurrency network due to bitcoin’s use of PoW and a relatively limited scripting language at the base blockchain layer. While other networks can implement rather straightforward smart contracts directly on the blockchain to handle the staking process, staking on bitcoin necessitates the use of a separate protocol, such as Babylon. Additionally, there is no staking in bitcoin directly, and Babylon is used to enable cross-chain staking for alternative PoS chains that wish to secure their networks with bitcoin-based liquidity.
While PoS chains that have expressive smart contracting capabilities can implement their slashing mechanisms directly on their chains, Babylon uses a system of simpler bitcoin scripts and off-chain cryptographic proofs to handle slashing for bitcoin that is being used to secure other PoS chains.
Specifically, Babylon uses extractable one-time signatures (EOTS) to ensure that a staker’s bitcoin private key can be made public in a situation where it is used to sign conflicting messages related to validation on a secondary PoS chain. This private key that has been made publicly available can then be used to slash the Babylon staker’s staked bitcoin by sending the funds to an unspendable bitcoin address.
While the result is the same (the staker loses their money), the way slashing is implemented in Babylon’s protocol for cross-chain bitcoin staking differs quite substantially from traditional PoS models.
How to Avoid Bitcoin Staking Slashing
As covered previously, the main reason slashing exists is to punish validators who wish to engage in malicious behavior; however, even well-meaning validators can get slashed if they aren’t properly managing their nodes.
Here are some key pointers to keep in mind when it comes to not getting slashed when staking bitcoin or any other cryptocurrency:
- A validating node should remain online and available to the staked cryptocurrency networks at all times. Missing a block signing opportunity or attestation can lead to slashing for inactive nodes.
- Practice proper private key management. While the validating node itself should remain online, the private key associated with the bitcoin staked on the node should be held in a separate hardware device to prevent hackers from taking advantage of the stake for their own, potentially nefarious purposes.
- Keep node software up to date. PoS chains tend to move faster and receive updates more often than bitcoin, and sometimes the updates pushed out to these networks involve fixes for emergency-level bugs.
- Understand the PoS chains that are being validated and stay up to date on the latest news relevant to these systems. While slashing conditions tend to be rather similar between chains, unique rulesets are implemented every now and then. It’s difficult to follow the rules associated with slashing if the rules are unknown.
- Research the reliability and reputation of PoS chains before staking any bitcoin on them. Chains that are relatively new without diverse userbases may offer attractive yields; however, those higher rates of return come with additional implied risk. After all, it does not take many resources for a bad actor to control a chain that has not had much stake added to it.
- Opt into a validator service provider, such as Lorenzo, that can simplify the entire validation process and implement additional guardrails to avoid potential slashing scenarios.
Avoid Bitcoin Staking Slashing with Lorenzo Protocol
One of the key benefits of Lorenzo is that it simplifies the entire staking process in a way that minimizes the likelihood of slashing to occur. There are a set of security mechanisms in place on the Lorenzo protocol that are intended to avoid slashing scenarios at all costs. These features include:
- Lorenzo offers staking insurance for a small fee, which allows stakers to potentially get reimbursed in a situation where a slashing condition takes place. The slashing insurance pool is managed by Lorenzo DAO.
- Before PoS chains are added to Lorenzo’s liquid staking system, they are reviewed and approved by the Lorenzo DAO. This means less credible projects will not be able to offer their PoS chains to Lorenzo users.
- The operators of the Babylon nodes handling the staking of bitcoin at the base layer of the system receive credit scores, which ensures that the operators with the highest uptimes and most responsible activity will take care of the vast majority of the staking for Lorenzo users.
Of course, the easiest way to gain the benefits of bitcoin staking without having to worry about slashing at all is to acquire stBTC, which is the liquid staking token derivative issued by Lorenzo to stakers. Holders of stBTC are able to access the value of the BTC that has been staked in addition to staking rewards. While slashing risks still exist for holders of these tokens, they are minimized by putting the responsibility of avoiding slashing into the hands of specialists in the form of Lorenzo operators. While stBTC is initially issued on the Lorenzo appchain, it can be transported across blockchains and the entire decentralized finance (DeFi) landscape.
Lorenzo is also built on top of Babylon, which has its own set of features for slashing avoidance. Anyone getting involved with bitcoin staking for the first time may want to look into stBTC and Lorenzo first, as the platform makes it much easier to avoid costly mistakes that could lead to loss of funds via slashing.
How Lorenzo Protocol Liquid Staking Democratizes Bitcoin Staking
Lorenzo Protocol democratizes Bitcoin staking, enabling pooled investments and liquid stBTC tokens for broader access and flexibility.
Bitcoin staking platform Babylon has enabled a whole new wave of economic activity on top of the world’s largest cryptocurrency network; however, this base protocol does not enable staking for everyone equally. Indeed, there are some limitations to Babylon overall when it comes to enabling access to smaller-denomination stakers, along with a lack of some advanced staking features such as liquid staking.
Having said that, there are upper-layer bitcoin staking protocols, such as Lorenzo Protocol, that can bring these features and more to bitcoin stakers. Let’s take a closer look at how Lorenzo liquid staking democratizes bitcoin staking and makes its use cases and potential yields accessible to as many users as possible.
The Current State Of Bitcoin Staking
Babylon is effectively the default protocol for those who wish to cross-chain stake their bitcoin to validate other proof-of-stake (PoS) chains. While Babylon was the first protocol to enable such activity to happen directly from the base bitcoin blockchain, it comes with some limitations in terms of its feature set.
One of the key limitations of Babylon is it does not offer any functionality for pooled staking. PoS chains have a minimum amount of cryptocurrency that must be staked to become a validator on the chain, so those who do not have enough capital are unable to participate in consensus. For example, if the minimum staking amount is one bitcoin, then anyone staking less than that amount will be unable to earn a yield. To be clear, this minimum amount of bitcoin for staking is set by each individual PoS chain, and not via the Babylon protocol.
Lowering The Threshold For Bitcoin Staking With Lorenzo Protocol
Lorenzo has been able to take the base Babylon protocol and extend it with more features. One of the most important features offered by Lorenzo is enabling pooled bitcoin staking for Babylon, which allows users with smaller bitcoin holdings to stake their coins. Here’s the technical process for how Lorenzo achieves this:
- A small-value staker starts by choosing which PoS chains they wish to validate and depositing their bitcoin into a Lorenzo delegate vault. This is a multisig bitcoin address controlled by Lorenzo validators.
- The Lorenzo delegate vault is where the aggregation of many different Lorenzo users’ bitcoin for staking purposes occurs. Since the delegate vault holds more bitcoin in aggregate than an individual staker, the Lorenzo validators can stake the bitcoin via Babylon and earn the rewards available to those with holdings above the minimum staking thresholds set by various PoS chains. The specific node operator responsible for validation on the PoS chains is automatically chosen by Lorenzo protocol. A native reputation system is used to make sure the node operator has high uptimes and has been operating in a responsible manner on whichever PoS chains the staker has chosen.
- After the staker’s deposit has occurred and been confirmed on the Lorenzo appchain, they will receive an equivalent amount of stBTC, which is a derivative token that allows the user to access the liquidity of the bitcoin that has been staked via Babylon.
- When a user decides they are ready to unstake their bitcoin, they can do it unilaterally without any necessary social interaction with other members of Lorenzo protocol. When signing an unstaking transaction, a staker must also return an amount of stBTC to the unstaking contract that is equivalent to the amount they wish to unstake.
The Bitcoin Liquid Staking Token
While the above description explains how those who wish to stake bitcoin with Babylon can do so under the minimum thresholds set by PoS chains, another way Lorenzo democratizes access to bitcoin staking is through the stBTC token. When a user stakes their bitcoin through Lorenzo Protocol to Babylon, they receive the stBTC token, which is a derivative of the bitcoin that is being held in the Babylon Protocol. The owner of this token has access rights to both the bitcoin that has been staked on Babylon and the rewards associated with staking on various PoS chains.
The stBTC token represents the ultimate form of democratization in bitcoin staking because users can simply purchase these tokens on the open market instead of staking their bitcoin. Through stBTC, the friction involved with staking bitcoin is further reduced, setting the stage for anyone to participate — even if they don’t want to deal directly with bitcoin while staking.
Empowering The Masses
Lorenzo Protocol is pioneering a transformative approach to bitcoin staking that breaks down traditional barriers to entry and champions inclusivity. By facilitating pooled staking and introducing the stBTC token, Lorenzo empowers individuals with smaller bitcoin holdings to engage actively in cryptocurrency’s economic benefits.
This model not only enhances liquidity but also ensures that the potential yields and benefits of bitcoin staking are accessible to a broader audience. The future of bitcoin staking is set to be more democratic, opening new possibilities for participation and investment in the digital asset landscape.
From HODL To Pour: How Liquid Restaking Unlocks The Bitcoin Economy
Liquid restaking transforms Bitcoin's DeFi potential, offering hodlers flexibility and liquidity without sacrificing underlying value.
Even during the depths of the 2022–2023 “crypto winter” (aka the crash and brutal public shaming of the broader cryptocurrency market as a whole) the growing demand for liquid staking services has nonetheless proven to remain red hot.
According to DeFiLlama, the total value locked (TVL) in DeFi liquid staking stood at a healthy $7.7 billion at the start of 2023. Even more impressive, this number continued to climb to over $33 billion by January 2024, and it nearly doubled to $59 billion by March.
Following this dramatic climb, cryptocurrency publications like CoinDesk went on record claiming that liquid staking is “the biggest category in decentralized finance (DeFi).”
Liquid restaking enhances the concept of liquid staking by allowing users to stake their cryptocurrencies to support a network and earn rewards, while also receiving a liquid derivative token that represents their staked assets. Unlike basic liquid staking, where the focus is primarily on earning staking rewards with the added benefit of liquidity, liquid restaking further capitalizes on this liquidity by enabling these derivative tokens to be actively used in various DeFi applications, traded, or utilized as collateral, thus offering greater flexibility and utility within the crypto ecosystem.
Although proof-of-stake (PoS) chains like Ethereum (ETH) hog the limelight in the liquid restaking revolution, don’t count bitcoin (BTC) out. In fact, liquid restaking might be the catalyst the king cryptocurrency needs to achieve its full glory.
In this article, you’ll discover how liquid restaking is already redefining what traders and investors think of bitcoin’s possibilities.
How Could Liquid Restaking Shake Up The Bitcoin Blockchain? — The Psychological Impact
First, consider some revealing statistics: 45% of bitcoin hasn’t moved in three years according to analysts, and 11% hasn’t moved between five to seven years. Considering bitcoin’s current mainstream identity as “digital gold” and a “hedge against inflation” — plus bitcoin’s long-standing, meme-friendly “HODL” culture — it’s no surprise that so many bitcoin investors put this cryptocurrency into their no-touch portfolio.
While this narrative is a major reason behind bitcoin’s worldwide attraction, it creates a sense of illiquidity as most market participants hope to desperately cling to their coins, as they fully expect bitcoin’s price to experience massive appreciation in just the coming decade or two, much less even longer ($1 billion in 2038, according to Fidelity Investments). In turn, this creates a psychological barrier to the hodler from using or selling bitcoin for other investments or transactions.
The primary benefit liquid restaking brings to bitcoin’s ecosystem is that liquid restaking provides a way to give Bitcoiners the “best of both worlds.” Liquid stakers still maintain ownership rights over their satoshis when they send them to a liquid staking provider. However, instead of merely locking away their bitcoin in an interest-bearing vault, the liquid staking derivatives (LSDs) from these protocols let traders restake their synthetic bitcoin for potentially higher yields in multiple other DeFi opportunities now competing for every bitcoin hodler’s liquidity.
With this new technological and psychological paradigm, traders have more of an incentive to use the unmatched stability of bitcoin as their basis for exploring the possibilities of DeFi, thus improving liquidity and giving bitcoin yet another new value proposition: the bitcoin network can now potentially serve as the superior bedrock layer for all the world’s DeFi activity.
Examining ETH’s Liquid Staking Evolution — Clues To BTC’s Liquid Staking Trajectory?
As much as bitcoin maximalists want to see bitcoin as the core of the DeFi infrastructure, Ethereum is currently the leader in this category, having a distinct first-mover advantage in DeFi. As the first smart contract blockchain and an innovator in the broader cryptocurrency ecosystem, Ethereum has always played a pivotal role in DeFi’s evolution. However, with the introduction of liquid staking and restaking, using ether as the standard for DeFi activity has only become more dominant. The increased adoption of ETH due to liquid staking provides a clue into how this new model could positively impact the bitcoin economy.
For evidence of liquid staking’s impact on DeFi liquidity, consider that the TVL in ETH liquid staking sat at $11.2 billion in March of 2023 and ballooned to over $50 billion in March of 2024.
Lido Finance remains the leader for ETH staking services, with the market cap for its staked ether derivative (stETH) rising from $4.11 billion in January 2023 to over $21 billion one year later.
More DeFi lending and borrowing protocols, including MakerDAO and Aave, now integrate with hot liquid staking tokens like stETH, further increasing its popularity and usability in the DeFi ecosystem.
As impressive as these growth figures are, financial analysts believe the flexibility and demand for LSDs will contribute to an ever-increasing positive cycle for ether liquidity. Given the opportunities and conveniences LSDs offer investors — and the increased accessibility throughout DeFi applications — firms such as HashKey Capital project the liquid staking market to 2x by 2025.
Led by liquid staking products like Lido’s stETH, LSDs have the potential to bring Ethereum’s total staked ETH to a $1 trillion market cap, dramatically increasing the Beacon Chain’s security and securing ETH’s dominance as the most trusted and active asset in DeFi.
How Liquid Restaking Unlocks The Bitcoin Economy
It is clear that Ethereum’s liquid staking protocols positively impact network activity and adoption, but how do these numbers translate to bitcoin’s situation? After all, bitcoin operates on the proof-of-work (PoW) consensus model rather than Ethereum’s proof-of-stake Beacon Chain. Why would LSDs of bitcoin supercharge bitcoin’s liquidity throughout the cryptocurrency-related ecosystem?
To address this question, let’s take a step back and review the basic reasons LSDs are such a powerful liquidity enhancer. Researchers Stefan Scharnowski and Hossein Jahanshahloo at Cardiff University identified two key ways LSDs achieve their positive impacts in the cryptocurrency markets. The first benefit of LSDs is their flexibility throughout DeFi, which includes their usability in yield-bearing opportunities and their transferability on cryptocurrency exchanges. Along with this ease of use within DeFi, Scharnowski and Jahanshahloo note the lack of lock-up periods on many liquid staking protocols as a significant feature influencing trader psychology and overall liquidity (or lack thereof, more specifically).
Just because bitcoin’s core consensus model uses PoW doesn’t mean it can’t take advantage of the benefits of LSDs, both in terms of DeFi usage and transferability. The durability of the PoW model — in addition to bitcoin’s longevity, size, and decentralization in the cryptocurrency space — all provide a unique value proposition as a liquid staking token versus other cryptocurrency assets.
Traders using BTC-derived LSDs have the guarantee of the bitcoin blockchain’s security backing up each of their tokens, providing an unparalleled level of trust for DeFi derivative assets.
While bitcoin’s base layer provides extreme trust and reliability for LSDs, the tokenization process also promises to help bitcoin branch out without forfeiting PoW consensus. By tokenizing staked bitcoin, developers have greater flexibility to make bitcoin an interoperable, multi-chain asset while preserving the core mining infrastructure. Bitcoin-derived LSDs unlock the potential to earn and use one’s bitcoin both within its native DeFi ecosystem as well as across other major chains, including Ethereum and Solana (SOL) by offering standards like ERC-20 or SPL for bitcoin-staked tokens. The intersection of these positive features opens the door to make bitcoin the most trusted and liquid token in DeFi, greatly enhancing bitcoin’s flexibility to become the true native currency of the internet, while respecting its now-traditional role as “digital gold” amongst traditional savers. However, generally speaking, more use cases (i.e., utility) generally means more potential value, so bitcoin hodlers and even “bitcoin maxis’’ do have much to gain from embracing bitcoin liquidity on other layers, if also maintaining that the security promise of base-layer bitcoin can truly be met.
What Does The Future Of Restaking Hold For Bitcoin?
While the prospects of using bitcoin in liquid staking and restaking are immense, it’s important to remember just how fresh this field is. Even on blockchains like Ethereum, liquid staking is one of the newest innovations, and there are still many questions about how staking as a service will evolve, and what bitcoin’s potential place in the coming ecosystem will become.
However, as more Layer 2 projects build on top of bitcoin’s foundation — and as adoption for LSDs continues to skyrocket — it’s crystal clear that liquid staking and restaking will be crucial in the future of bitcoin’s worldwide adoption. As staking products become more widely accessible, bitcoin just might reach unprecedented liquidity in the ensuing years.
What Is Crypto Liquid Staking?
Unlock the future of blockchain with liquid staking: Enhance security, retain liquidity, and democratize investments.
Staking is the process of committing resources to a cause or investment while retaining ownership and the potential for gains or losses. In traditional finance, it often means investing with an expectation of rewards, balancing risk against potential returns.
However, blockchain technology has revolutionized these concepts. Decentralized finance (DeFi) has redefined traditional roles like lending and third-party involvement, with staking at the forefront of this transformation.
Liquid staking, a recent innovation in the blockchain sphere, offers a nuanced evolution of staking principles, enhancing security and utility. This article delves into liquid staking, a groundbreaking approach that combines the benefits of staking with improved liquidity and flexibility.
Proof Of Stake
The origins of staking lie in a key innovation in blockchain architecture — the proof-of-stake consensus mechanism.
The consensus mechanism of a blockchain is the system that determines which network participant gets the privilege of adding a block of new data to the permanent chain. A proof-of-work blockchain, such as bitcoin, bestows this privilege on the winner of a computational competition.
This blockchain secures the network by computing power; an opponent attempting to successfully attack such a network (“Bitcoin is backed by the largest computer network in the world, a network orders of magnitude larger than the combined size of the clouds that Amazon, Google, and Microsoft have built over the last 15–20 years.” Ark Invest’s Cathie Wood) would require having over 51% of this power.
In a sufficiently large network, such as bitcoin, having access to this many computational resources has now proven to be a de facto impossibility. And a “successful” attack only lasts for about 10 minutes: so per game theory, the would-be attacker simply counts the cost in advance of sustaining such an attack, and quickly learns that their resources would be better exhausted by simply buying more bitcoin.
Despite the extreme security of a proof-of-work blockchain, this mechanism makes the network inefficient in terms of both energy and output. It requires constantly running an enormous number of computers to secure the network. Proof of stake seeks to address these concerns.
A proof-of-stake blockchain hands out the privilege of adding a block at random to a small group of investors who have committed enough money to support the network. The far fewer participants needed means the network is substantially more efficient than proof-of-work chains.
Participants in a proof-of-stake blockchain commit value to the network by staking the blockchain’s native token. Staking tokens means locking them up in the network so they can’t be used for a set period of time; i.e., investor funds are not typically considered liquid, once staked.
A proof-of-stake chain is secured by the fact that attacking the network would require owning over 51% of all the staked coins. For a sufficiently large blockchain, this would not only be impractically expensive but also destroy the value of the staked tokens, thereby ruining the financial motive for attacking the network in the first place.
Why Stake?
To function, proof-of-stake networks need to convince users to stake their tokens, but users hesitate to do so because of the risks inherent in illiquidity.
Liquidity is the ability to use your assets, it’s the availability of capital to the market. Something is illiquid when it is not exchangeable; low liquidity means something is difficult to exchange, and high liquidity means something easy to exchange. Consider the differences between buried treasure, a house, and stone-cold cash.
When you stake your assets, you give up liquidity by locking the tokens, essentially burying them in the network for a set contracted time. This comes with certain risks that disincentivize participation in the network.
Since these tokens are locked, they can’t be sold in the sudden advent of a substantial price drop, meaning they could be worth far less when later unlocked. Additionally, they can’t be removed if a participant needs their money back, or the network is somehow compromised.
Proof-of-stake chains do not themselves mitigate this risk, but rather they pay users for taking it. The network acts similarly to how old-school bank savings accounts were designed. Today, proof-of-stake chains reward participants staking by paying a percentage back to the holder based on the size of their stake, which allows holders to earn true passive income on their holdings.
The Liquid Staking Revolution
But what if tokens could be staked and receive rewards without making the holder illiquid? It might sound contradictory, but this is the idea behind liquid staking. Liquid staking allows staking participants to remain liquid while still receiving rewards.
Here’s how:
Using a liquid staking protocol, participants deposit the native token they want to stake into the third-party liquid staking platform, instead of staking them directly with the native network. The platform then stakes the tokens themselves and issues a receipt token to the user who deposited funds.
Receipt tokens are redeemable for the native tokens initially deposited in the platform. Holders of these receipt tokens receive a percentage of the rewards that the platform earns by staking the original token directly in the network. The difference is that the user can use the receipt token to trade and participate in DeFI, thereby retaining their liquidity.
Of course, this token isn’t as liquid as the original because the market for the receipt token is significantly smaller. Further, the user pays a percentage of the staking reward to the liquid staking platform. However, for many users, this is a small price to pay for the freedom to benefit from the value of their staked tokens.
What Are The Benefits Of Liquid Staking?
The most obvious reasons investors prefer liquid staking, over traditional methods, follow directly from the ability to retain their liquidity. Receipt assets can be traded, sold, or used in other DeFi applications, providing liquidity while still earning staking rewards.
Some other benefits are less obvious:
- Access for small investors: Some proof-of-stake networks require a large minimum investment for staking. This bars smaller investors from contributing to the network and participating in governance. Through liquid staking, individuals can participate with smaller amounts because these platforms aggregate multiple users’ stakes to meet minimum requirements.
- Democratization: Although governance decisions ultimately lie with the liquid staking platform that manages the pools of staked tokens, these applications often provide mechanisms for its users to participate in voting for the native blockchain. This allows voting power to be distributed among the smaller investors who would otherwise not have any say in network decisions.
- Easy access: Navigating the process of staking cryptocurrency can be a daunting task for even the most technical retail investor. Liquid staking platforms make for user-friendly options for contributing to a favorite proof-of-stake blockchain.
What are the risks of liquid staking?
Blockchain exists to address the risks of centralized control in our financial systems. The risks of liquid staking are founded on foregoing the benefit of blockchain infrastructure’s decentralized nature, and instead locking your tokens into a centralized protocol.
- Smart contract vulnerabilities: Liquid staking protocols run on smart contracts, so a single bug or mistake in the contract can cause users to lose their funds if hackers exploit the vulnerability.
- Platform punishment: If the liquid staking platform acts maliciously against the native staking network, funds can be slashed by the network as a function of enforcing the proof-of-stake protocols.
- Redemption liquidity: The value of the receipt token depends on its ability to be converted to the original token via redemption. However, in some cases, mismanagement or liquidity crunch cripples the redemption process.
- Token Depeging: The trading price of the receipt token can fall below the market price of the underlying token due to a liquidity crunch on exchanges, simple unexpected news, or even the spreading of malicious fear, uncertainty and doubt (FUD) about any given project, or its team.
The Necessity Of Liquid Staking
The core benefits and risks of liquid staking are themselves an extension of the central dynamic at play in staking more generally — the back and forth between centralization and decentralization.
A proof-of-stake network comes with the built-in risks of centralization. It puts power over the network in the hands of a select few whale investors. Liquid staking both exacerbates this risk by pooling investor money into centralized points of control, and it mitigates risks by allowing smaller investors to contribute to the network freely.
This journey — from staking to liquid staking — reflects the broader evolution of blockchain technology as it adapts to overcome the unique challenges of decentralized finance.
What Is Crypto Liquid Restaking?
Unlock the future of blockchain with liquid staking: Enhance security, retain liquidity, and democratize investments.
Staking cryptocurrency is the act of locking tokens in a blockchain network and receiving rewards for the holdings. By locking up capital, staking secures the network of a proof-of-stake blockchain.
Successfully attacking a proof-of-stake network requires owning 51% of all staked tokens. In a sufficiently large network like Ethereum, this is prohibitively expensive — the more capital locked, the more secure the network.
However, due to a loss of liquidity and high minimum commitment requirements, convincing enough people to lock away their money is no easy task.
That’s where liquid restaking comes in, it frees up capital locked in the network while maintaining its security.
But this innovation doesn’t just let loose capital, it opens Pandora’s box and allows network security to spread like wildfire across the entire decentralized ecosystem. Through liquid restaking, decentralized applications can access the security and capital of an underlying network such as Ethereum or Bitcoin.
It all starts with liquid staking protocols and the use cases for LSTs.
Liquid Staking And LSTs
Liquid staking unlocks capital for stakers by allowing them to stake their cryptocurrency without becoming illiquid, meaning they do not lose the ability to use the value of the locked tokens. This seeming contradiction is made possible by third-party liquid staking protocols.
Read more about liquid staking: https://medium.com/@lorenzoprotocol/what-is-liquid-staking-494b25dcf6cd
This blockchain secures the network by computing power; an opponent attempting to successfully attack such a network (“Bitcoin is backed by the largest computer network in the world, a network orders of magnitude larger than the combined size of the clouds that Amazon, Google, and Microsoft have built over the last 15–20 years.” Ark Invest’s Cathie Wood) would require having over 51% of this power.
In a sufficiently large network, such as bitcoin, having access to this many computational resources has now proven to be a de facto impossibility. And a “successful” attack only lasts for about 10 minutes: so per game theory, the would-be attacker simply counts the cost in advance of sustaining such an attack, and quickly learns that their resources would be better exhausted by simply buying more bitcoin.
Despite the extreme security of a proof-of-work blockchain, this mechanism makes the network inefficient in terms of both energy and output. It requires constantly running an enormous number of computers to secure the network. Proof of stake seeks to address these concerns.
A proof-of-stake blockchain hands out the privilege of adding a block at random to a small group of investors who have committed enough money to support the network. The far fewer participants needed means the network is substantially more efficient than proof-of-work chains.
Participants in a proof-of-stake blockchain commit value to the network by staking the blockchain’s native token. Staking tokens means locking them up in the network so they can’t be used for a set period of time; i.e., investor funds are not typically considered liquid, once staked.
A proof-of-stake chain is secured by the fact that attacking the network would require owning over 51% of all the staked coins. For a sufficiently large blockchain, this would not only be impractically expensive but also destroy the value of the staked tokens, thereby ruining the financial motive for attacking the network in the first place.
Why Stake?
To function, proof-of-stake networks need to convince users to stake their tokens, but users hesitate to do so because of the risks inherent in illiquidity.
Liquidity is the ability to use your assets, it’s the availability of capital to the market. Something is illiquid when it is not exchangeable; low liquidity means something is difficult to exchange, and high liquidity means something easy to exchange. Consider the differences between buried treasure, a house, and stone-cold cash.
When you stake your assets, you give up liquidity by locking the tokens, essentially burying them in the network for a set contracted time. This comes with certain risks that disincentivize participation in the network.
Since these tokens are locked, they can’t be sold in the sudden advent of a substantial price drop, meaning they could be worth far less when later unlocked. Additionally, they can’t be removed if a participant needs their money back, or the network is somehow compromised.
Proof-of-stake chains do not themselves mitigate this risk, but rather they pay users for taking it. The network acts similarly to how old-school bank savings accounts were designed. Today, proof-of-stake chains reward participants staking by paying a percentage back to the holder based on the size of their stake, which allows holders to earn true passive income on their holdings.
The Liquid Staking Revolution
But what if tokens could be staked and receive rewards without making the holder illiquid? It might sound contradictory, but this is the idea behind liquid staking. Liquid staking allows staking participants to remain liquid while still receiving rewards.
Here’s how:
Using a liquid staking protocol, participants deposit the native token they want to stake into the third-party liquid staking platform, instead of staking them directly with the native network. The platform then stakes the tokens themselves and issues a receipt token to the user who deposited funds.
Receipt tokens are redeemable for the native tokens initially deposited in the platform. Holders of these receipt tokens receive a percentage of the rewards that the platform earns by staking the original token directly in the network. The difference is that the user can use the receipt token to trade and participate in DeFI, thereby retaining their liquidity.
Of course, this token isn’t as liquid as the original because the market for the receipt token is significantly smaller. Further, the user pays a percentage of the staking reward to the liquid staking platform. However, for many users, this is a small price to pay for the freedom to benefit from the value of their staked tokens.
What Are The Benefits Of Liquid Staking?
The most obvious reasons investors prefer liquid staking, over traditional methods, follow directly from the ability to retain their liquidity. Receipt assets can be traded, sold, or used in other DeFi applications, providing liquidity while still earning staking rewards.
Some other benefits are less obvious:
- Access for small investors: Some proof-of-stake networks require a large minimum investment for staking. This bars smaller investors from contributing to the network and participating in governance. Through liquid staking, individuals can participate with smaller amounts because these platforms aggregate multiple users’ stakes to meet minimum requirements.
- Democratization: Although governance decisions ultimately lie with the liquid staking platform that manages the pools of staked tokens, these applications often provide mechanisms for its users to participate in voting for the native blockchain. This allows voting power to be distributed among the smaller investors who would otherwise not have any say in network decisions.
- Easy access: Navigating the process of staking cryptocurrency can be a daunting task for even the most technical retail investor. Liquid staking platforms make for user-friendly options for contributing to a favorite proof-of-stake blockchain.
What are the risks of liquid staking?
Blockchain exists to address the risks of centralized control in our financial systems. The risks of liquid staking are founded on foregoing the benefit of blockchain infrastructure’s decentralized nature, and instead locking your tokens into a centralized protocol.
- Smart contract vulnerabilities: Liquid staking protocols run on smart contracts, so a single bug or mistake in the contract can cause users to lose their funds if hackers exploit the vulnerability.
- Platform punishment: If the liquid staking platform acts maliciously against the native staking network, funds can be slashed by the network as a function of enforcing the proof-of-stake protocols.
- Redemption liquidity: The value of the receipt token depends on its ability to be converted to the original token via redemption. However, in some cases, mismanagement or liquidity crunch cripples the redemption process.
- Token Depeging: The trading price of the receipt token can fall below the market price of the underlying token due to a liquidity crunch on exchanges, simple unexpected news, or even the spreading of malicious fear, uncertainty and doubt (FUD) about any given project, or its team.
The Necessity Of Liquid Staking
The core benefits and risks of liquid staking are themselves an extension of the central dynamic at play in staking more generally — the back and forth between centralization and decentralization.
A proof-of-stake network comes with the built-in risks of centralization. It puts power over the network in the hands of a select few whale investors. Liquid staking both exacerbates this risk by pooling investor money into centralized points of control, and it mitigates risks by allowing smaller investors to contribute to the network freely.
This journey — from staking to liquid staking — reflects the broader evolution of blockchain technology as it adapts to overcome the unique challenges of decentralized finance.
Bitcoin & Taxes: A Primer On The Tax Implications Of Bitcoin Investing
Navigate Bitcoin taxes with ease: Understand key tax events, reporting, and strategies to optimize your crypto investments.
Even cryptocurrency cynics begrudgingly admit bitcoin is here to stay. Despite multiple obituaries over the years, bitcoin (BTC) is de facto digital gold, and investors worldwide are taking notice. Thanks to the increased popularity and accessibility of bitcoin, more people are itching to claim their slice of scarce satoshis while they still can.
But just because bitcoin is an “alternative asset” doesn’t mean it gets a free pass from tax authorities. Bitcoin may transcend physical borders, but tax treatment varies significantly depending on where investors live and there are penalties for those who don’t comply. Whether people trade or hodl their bitcoin, they must consider the tax implications of every cryptocurrency transaction.
The Basics Of Bitcoin Taxation: What Qualifies As A Taxable Event?
From a tax perspective, cryptocurrency traders should be more concerned when they sell bitcoin rather than when they buy. A tax liability often occurs when receiving bitcoin — especially if a user accepts bitcoin as a business or employee, or earns passive income through staking rewards, mining activities, etc. Aside from these scenarios, tax authorities look at when investors sell their satoshis, whether they profited from their investment, and exactly how much profit is earned from the sale of the asset.
And don’t think taxes can be avoided by swapping bitcoin for another cryptocurrency! The commonly used “like-kind” exemption does not apply when trading cryptocurrencies. Taxes apply whether selling bitcoin for fiat currency or any other digital asset, including stablecoins. Either way, the user spent/traded the bitcoin, and a trackable gain or loss occurred.
One nontaxable event would be the transfer of one’s bitcoin to a private wallet for safekeeping. There’s no reason to fear tax implications as long as the bitcoin isn’t spent, staked, or sold.
Keeping A Personal Bitcoin Ledger: Bitcoin Tax Reporting Requirements
No matter how a particular jurisdiction views bitcoin, cryptocurrency traders must present meticulous records of their bitcoin transactions during the tax reporting process.
Although super-organized investors can use a spreadsheet to keep tabs on these transfers, this manual method isn’t practical, especially as people make frequent trades or engage in activities like decentralized finance (DeFi).
Typically, the best strategy is to use cryptocurrency-specific tax software that generates approved documents for your jurisdiction. Often, these programs link with exchanges’ application programming interfaces (APIs) and public wallet addresses to make it a breeze for Bitcoiners to monitor and report every purchase, sale, and transfer.
Specific Bitcoin Tax Guidelines: Examples Of Local Bitcoin Laws
Bitcoin Tax Laws in the United States
In the U.S., the Internal Revenue Service (IRS) views bitcoin as property, taxing Americans with either capital gains or general income, depending on whether trading or earning bitcoin.
To calculate expected capital gains liability, first determine the average purchase price (aka cost basis) for bitcoin, subtract it from the price it sold for, and figure the total profit. Next, refer to how long the bitcoin has been held (and your income bracket, as both will impact your tax percentages). Generally, short-term capital gains are higher than long-term gains (i.e., longer than one year), so beyond price appreciation there’s a taxation-related incentive to hodl bitcoin.
The two primary forms Americans fill out with their bitcoin details are Schedule D and Form 1040, both of which are due on April 15.
Bitcoin Tax Policies in the European Union
Although the European Union’s Markets in Crypto-Assets (MiCA) regulation established greater clarity on cryptocurrency policies, it still allows each country great flexibility to devise its own tax policies. Generally, the EU states: bitcoin traders who sell their holdings for fiat or other cryptocurrencies are liable for capital gains. Miners and stakers also usually have to pay income tax on the bitcoin that they earn through their activities, altho discussions are still being had worldwide about whether a tax applies to mined currency that has not been yet sold.
However, there are a few exemptions to these general rules. For example, Portugal is well-known for its relaxed policies for long-term bitcoin hodlers. While any bitcoin transactions within one year of purchase are subject to capital gains taxes, Portugal doesn’t require investors to pay taxes when they sell bitcoin after 365 days.
Since there’s so much diversity of tax laws in the EU, it’s essential for residents to carefully review their local policies when filing bitcoin taxes.
Other Notable Country-Specific Cryptocurrency Tax Laws
- Canada: Similarly to the U.S., the Canada Revenue Agency (CRA) taxes residents with bitcoin in line with either business income or capital gains policies. Most bitcoin traders file a Schedule 3 form to report their gains and losses, but businesses also have to submit Form T2125, if they accept bitcoin as payment.
- Australia: The Australian Taxation Office (ATO) views bitcoin as a form of property, so Australians should expect to pay capital gains or income taxes when they file their forms. Bitcoin hodlers down under can find the gains and losses section of the Australian Tax Form in Section 18.
- Japan: The Japanese government classifies cryptocurrency as “miscellaneous income,” which residents report in Section 6 of the standard income tax filing form (aka Form A). Although bitcoin isn’t formally viewed as “property” in Japan, the country uses capital gains and income policies like many other nations.
Pro Tax Tips For Bitcoin Traders: Tax Planning Strategies To Keep In Mind
Unless traders move to countries with ultra-relaxed policies, there’s no way to “get out” of paying a percentage on bitcoin gains. However, there are a few strategies which all cryptocurrency investors can use to potentially decrease their tax burden.
- Focus on hodling: While it’s tempting to jump in and out of the cryptocurrency market for quick profit trading, patience is a lucrative virtue. Typically, long-term capital gains aren’t as high as short-term capital gains, meaning anyone who holds their bitcoin for over a year usually won’t have to pay as much to tax authorities. Even if investors enjoy the thrill of day, or swing, trading it’s wise to keep a no-touch hodl portfolio for tax advantages.
- Look into tax loss harvesting: For traders who frequently engage in buying and selling bitcoin, carefully weigh the profits and losses from your positions before the end of the year. Like other investment vehicles, you usually enjoy tax breaks when you sell cryptocurrency assets at a loss. By strategically taking a few “Ls” in your portfolio, you can balance out your wins and pay less on tax day.
- Consider cryptocurrency retirement accounts: It’s getting easier to find reputable retirement platforms willing to help investors rollover IRAs or 401(k)s into alternative assets like bitcoin. Although these platforms restrict yearly deposits and withdrawals in accordance with tax codes, they offer traders the same tax exemptions found in traditional retirement accounts. If you plan to keep bitcoin for the long haul, it makes sense to consider using an IRA to hodl more of your potential gains; keep in mind however, that this is a form of third-party custody, so the buyer would not enjoy bitcoin’s self-sovereign features if held in such an account.
Don’t Wait — Or Hesitate — To Learn About Bitcoin Taxes
Although there are many nuances to bitcoin taxation policies, the most significant taxable events usually happen after bitcoin is sold, as most nations treat cryptocurrency as property. If you have any questions about filing bitcoin tax returns, it’s best to consult a certified tax professional in your area who is familiar with cryptocurrency legislation. None of the content in this article should be considered financial advice. Working with a licensed tax professional is the best path to compliance when the time comes to report and pay your cryptocurrency taxes.
Bitcoin In Developing Countries: Empowerment And Challenges
Bitcoin empowers developing nations: a beacon of financial independence amidst challenges.
They say that necessity is the mother of invention.
Banks, governments, intermediaries, and third parties have inherently been a part of the rent-seeking fiat currency system, sucking our labor’s value away from us, when instead, we’d intended to store our exchanged time and labor in this rechargeable battery called money.
However, the malfeasance of the central banks’ oversight, and their repeated history of abuses of authority and trust (i.e., money printing, reducing the percentage of silver in a government-issued currency, etc.), made people worldwide know that they had long ago lost control over their hard-earned and sometimes harder-saved money. This almost single-handedly led to the creation of bitcoin, which was launched entirely to eliminate all unnecessary entities and third-party intermediaries and their friction, thus giving all people worldwide the potential to maintain 100% exclusive control of and authority over their life savings.
Bitcoin’s maturation journey over the years has been nothing short of phenomenal. Skepticism was prevalent during the early days while widescale adoption rates were scanty. However, thanks partly to timely upgrades and bitcoin’s numerous evolving use cases becoming quite apparent to more and more people worldwide, bitcoin has grown to become a household name.
From retail investors to well-established names from the western world’s traditional financial (TradFi) realm, bitcoin has managed to entice almost every user category imaginable. Notably, developing countries — especially those already ravaged by hyperinflation and dictatorial regimes — have played a critical role in steepening bitcoin’s adoption curve.
Bitcoin As A Tool for Financial Empowerment
Owing to its decentralized and borderless nature, bitcoin has been able to provide extremely remote users connectivity with the entire world and the ability to participate in trade and commerce . Even those born in underprivileged situations without any banking access or government-issued ID can now offer their time, goods, and services to millions of potential customers and clients worldwide.
The numbers speak for themselves. Take Nigeria, for example:
The World Bank has time and again pointed out that this western African nation significantly contributes to the number of unbanked people around the world. A Consensys survey from 2023 revealed that cryptocurrency awareness was highest in Nigeria compared to all other countries, with 99% of males and 100% of females asserting that they had heard of the asset class.
78% affirmed knowing how cryptocurrency functions. When it comes to investing in cryptocurrency, only 5%-6% of respondents from Nigeria were hesitant. The other 57% claimed that they will “definitely” invest in cryptocurrency over the next 12 months, while 33% asserted that they will “probably” invest.
The excessive middlemen fees and unreasonable sanctions and restrictions inherent in TradFi have enticed people worldwide to increasingly investigate digital currencies. This is largely thanks to features like a peer-to-peer (P2P) design that enables value transfer transactions that never require “authorization” (and therefore can’t be declined either) to move freely amongst individuals, rather than through institutions. “Rules not rulers” is the enduring mantra.
The lack of rent seekers in the middle reduces the transfer fees greatly in most cases, and increases efficiency in remittance markets, especially while making international transfers. Ultimately, this makes using bitcoin more affordable for people underserved by the TradFi system, especially in regions with soaring remittance fees.
Several nations across the world remain plagued by economic instability. In the last five years, bitcoin has fetched hodlers roughly 1400% returns, while Reliance Industries, one of India’s top stocks, has only risen by 140% in this same duration. Bitcoin’s ROI is much higher when the time duration is zoomed out even further, indicating that the king coin has shielded investors better than TradFi alternatives by smashing through public skepticism and assuming the now-dominant role of both an inflation hedge and a store of value. However, whether or not bitcoin will finally conquer the challenge of becoming, as advertised, our true peer-to-peer digital currency, suited for that daily cup of coffee, remains to be proven.
Adoption Of Bitcoin In Developing Countries
Bear markets have hindered bitcoin’s adoption, but on the wider macro timeframe, it’s clear that the asset’s adoption curve continues to ascend.
A recent report by Chainalysis pointed out that developing countries from Asian and African regions dominated the cryptocurrency adoption index. India occupied the first position, followed by Nigeria and Vietnam. Places like the Philippines, Indonesia, Pakistan, and Thailand were also a part of the top ten on the list.
Several factors like currency devaluation, limited access to traditional banking services, youth having a growing interest in modern fin-tech solutions, and high smartphone penetration have been the key drivers.
Chainalysis pointed out,
“Crypto(currency) adoption is strongest in countries categorized by the World Bank as lower middle income (LMI). This is crucial, as LMI countries account for a plurality of the world’s population at 40%.”
Challenges And Barriers To Adoption
Bitcoin has inherently been an upwardly volatile asset, historically setting off caution bells for potential investors still unfamiliar with bitcoin’s actual properties — its use cases — which define its market value.
That same volatility is a double-edged sword.
On one hand, it can help investors actualize quick gains, while on the other, it also possesses the potential to slash down their investment value within minutes. This is one of the main reasons why several regulators around the world continue to remain skeptical about bitcoin.
However, it should be noted that the very large bitcoin purchases that began occurring with the approval of exchange-traded funds (ETFs) in the U.S. are long-term holds, widely expected to ease the sudden drops and famed bitcoin volatility.
Time will tell.
Some countries, such as India, have outright banned bitcoin and other cryptocurrency assets in the past. However, with time, they ended up revoking the same ban, and instead implemented the obligatory deterrent of taxes on profits. Regulators around the world have been following similar paths by adopting measures, including mandatory licensing of exchanges, and an overall tightening up of the legislative screws to safeguard the interests of investors.
On the other side of the spectrum, there are countries like El Salvador where the government has wholeheartedly adopted bitcoin, and even encouraged citizens to follow suit by making this digital currency their legally accepted tender.
In some countries, investors have appreciated the clarity provided, while in other countries, dissatisfaction about the stringency continues to prevail, obstructing the path of mass adoption. Adding to the barriers, the lack of digital literacy, limited internet access in rural areas, and the slow development of financial infrastructures have also caused hindrances to a certain extent.
Solutions And Strategies For Overcoming Challenges
Investing in digital literacy and outreach programs to educate people about bitcoin and its underlying technology will help improve adoption. Parallelly, tie-ups involving stalwarts from the cryptocurrency space would help spread awareness and help people truly understand the benefits of adopting bitcoin (and others) as currencies and a viable asset class. This, in turn, would equip them to take calculated risks in hopes of high ROIs.
Additionally, developing localized solutions tailored to the specific needs and preferences of users in different regions could also prove beneficial. Keeping the government involved while trying to notch up bitcoin’s adoption and usage would give investors additional confidence and make it a win/win for all parties.
The Future of Bitcoin In Developing Countries
In several regions, people from the cryptocurrency community have been actively trying to assist with outreach and education in rural regions, leading to increased knowledge and adoption. In Africa, for example, where internet penetration has always been a problem, Kgothatso Ngako, a native software developer, developed Machankura — a tool to “tackle this issue.” Machankura leverages the Lightning Network, allowing Africans to send and receive bitcoin with basic non-smart mobile phones.
Bitcoin aside, several emerging technology sectors like DeFi give people access to global markets. In fact, by providing liquidity on decentralized exchanges (DEXes), investors can take part in yield farming, thus accessing interesting and potentially lucrative trading and investment opportunities from anywhere in the world. This synergizes with bitcoin and other tokenized assets by expanding their utility and accessibility, amplifying their role as a decentralized and borderless store of value and financial instrument.
Paving The Road For Bitcoin Empowerment
In developing countries, bitcoin serves as a beacon of hope offering financial inclusion and access to global markets for many who have been left behind or completely excluded by the TradFi system.
Yet, amidst this promise lies a tangled web of challenges — from the regulatory point of view to technological barriers — stifling the transformative potential many others — like El Salvador — already embrace. With continued improvements to global bitcoin education, accessibility, and utility, barriers to adoption can be broken down to pave the way for a future where bitcoin can truly redefine the financial landscape.
Scaling Bitcoin: Layer 2 Solutions and Beyond
Discover Lightning Network, sidechains, and innovative Lorenzo Protocol's L2-as-a-Service for enhanced transaction efficiency.
While bitcoin is an extremely powerful tool in terms of enabling complete self-sovereignty over one’s wealth, the high degree of decentralization in the system creates issues for the blockchain in terms of scalability.
In order for the bitcoin network to retain all of the properties that make bitcoin both valuable and useful, such as its unwavering monetary policy and censorship-resistant transactions, the barrier for anyone to participate in securing the bitcoin network by running a full node must remain low. It is the ability for each user to operate a full node that removes the need to trust other parties on the network.
To keep the costs associated with operating a full node low, the capacity of each new block of transactions is constrained. This decreases the amount of data each node must process and store, thus lowering the costs of operating those nodes.
Due to this limitation on transaction capacity, it has long been thought that bitcoin should scale in a multilayer manner where users can opt into upper-layer protocols for specific types of transactions that do not need to be held in a decentralized database for the rest of eternity. In other words, there’s no reason to broadcast a drink order at a local coffee shop on a costly, heavily decentralized blockchain, morning after morning.
By creating Layer 2 solutions for bitcoin, the on-chain footprint of each user can be limited. This enables a greater level of activity on the bitcoin network overall while also keeping transaction costs at a manageable level. Additionally, these Layer 2 networks can be used to test new, cutting-edge features, such as more expressive smart contracts or improved privacy, without altering the base bitcoin protocol.
With all this in mind, let’s take a look at the Layer 2 solutions that exist today, how Lorenzo Protocol offers something different, and how bitcoin scaling may evolve going forward.
Examples of Layer 2 Scaling Solutions Today
The most prominent example of a Layer 2 bitcoin scaling solution today is the Lightning Network. This second-layer payments protocol effectively enables the caching of bitcoin transactions in a manner similar to a bar tab. Instead of making an on-chain transaction for every bitcoin payment, a network of presigned bitcoin transactions is used to track who owes what to each user. When users no longer wish to transact with each other, they can settle their balances on the base bitcoin blockchain with these presigned transactions, similarly also to settling a hotel bill’s incidentals all at once after checking out.
Another Layer 2 bitcoin scaling solution is sidechains. These are alternative blockchains that use bitcoin as their native token rather than some new cryptocurrency asset. Sidechain users are able to transfer their bitcoin from the main bitcoin blockchain to these new blockchains to gain access to alternative features and rulesets. The idea is to enable the sorts of use cases found on alternative blockchains, such as Ethereum or Monero, without the need for the creation of an entirely new asset or token.
Liquid Network and Rootstock are two sidechains that are live today; however, they have seen limited adoption. Currently, these Layer 2 solutions necessitate the backing of a multisig federation at the base bitcoin blockchain layer to control the funds on the sidechain, but there are a number of improvements in development, such as enhancements made possible by BitVM, to further decentralize these systems. It should be noted that many people would dispute whether the current, federated version of sidechains should be classified as a true Layer 2 solution.
Other Layer 2 solutions deserving honorable mentions that have not yet gained much traction include Fedimint and Statechains. Additionally, there are Layer 2 networks built on bitcoin that also have their own native tokens, such as Stacks.
Lorenzo Protocol’s Bitcoin Layer-2-as-a-Service
Lorenzo Protocol is one way to improve the sidechain concept. Instead of using a group of permissioned functionaries, as is the case with Liquid and Rootstock, Lorenzo Protocol creates a new bitcoin Layer-2-as-a-service based on proof of stake (PoS). This allows the system to be more of a base layer for a variety of different upper-layer bitcoin protocols rather than a standalone Layer 2 network.
Lorenzo Protocol is effectively an intermediary step between the base bitcoin blockchain and various Layer 2 systems that takes care of technical tasks such as settlement, consensus, and a two-way peg with bitcoin. Notably, the Layer 2 solutions built on top of Lorenzo Protocol all share the same staking liquidity and act as different blockchain modules built on top of that shared staking liquidity. With this design architecture, users are able to create new, modular bitcoin Layer 2 networks at the click of a button.
Additionally, the use of PoS has two key benefits over the federated model used today. For one, a PoS system is less permissioned, as anyone with access to the relevant cryptocurrency asset — in this case bitcoin — is able to participate. On top of that, the use of PoS instead of a federation of known entities can improve the privacy of the validators in the system, thus improving censorship resistance.
The Future of Bitcoin Scaling
While a few bitcoin Layer 2 solutions already exist, it’s clear that the space is about to explode with new experiments and activity in 2024. This is an area any cryptocurrency investor must track closely, as a new layer built on bitcoin could potentially remove the need for certain alternative assets created for specific use cases.
Much of the innovation that has taken place over the past few years is now coming back to bitcoin, as exemplified by the inscriptions phenomenon. Additionally, various soft fork proposals in bitcoin, especially in the area of covenants, should be watched closely, as these could further enhance the security and efficiency of Layer 2 systems.
Lorenzo Protocol intends to enable and enhance much of this new Layer 2 activity through its use of bitcoin shared security and improvements to the federated sidechain model.
How Does Bitcoin Work? A Simple Guide to Blockchain, Mining, and Transactions
Exploring Bitcoin from its inception to its role in the financial revolution, including blockchain tech, mining processes, and peer-to-peer transactions.
In 2009, Satoshi Nakamoto altered history by creating the world’s first decentralized, cryptographically secured digital currency: bitcoin.
Bitcoin operates on a distributed database called a blockchain, which acts as a universal ledger recording and verifying transactions. It allows for peer-to-peer transactions which are protected by cryptographic, yet publicly visible, techniques. This establishes a secure, transparent, and trustless network of value exchange. Bitcoin/satoshis are the units of exchange on this network; the blockchain ledger records the value transferred between network users.
The blockchain is secured, and bitcoin is issued, by a process called mining, which is performed by specialized computer systems, called central processing units (CPU), to solve computational puzzles. By completing these puzzles, miners verify registers of transactions called “blocks” and connect them to a chain of previous entries to win bitcoin.
This incentivizes people who engage in the mining process, aka “miners,” to mine bitcoin, and in doing so, contribute to maintaining the security of the bitcoin ecosystem.
To understand more deeply how bitcoin works, first, a grasp of how an average user would send and receive bitcoin using a digital wallet is helpful.
A User’s Journey
The casual bitcoin user can think of their digital wallet analogously to a physical one; it’s what they’ll use to store, receive, and send digital currency. Behind the scenes, however, a digital wallet is doing something very different.
A digital wallet has two parts: a public and private key. The public key is a string of characters that identifies one’s personal wallet amongst millions. It’s just like a home address that can be shared with anyone to allow them to send anyone something directly. Hence, this is called the wallet address. The private key is also a series of characters, but these are more like a passcode that only the user will know.
To send or receive bitcoin, a wallet address is all most people need to know about. Popular digital wallets store the private keys of their users themselves, while users instead access funds via their third-party application with a normal username and password. Here, sending and receiving bitcoin is as easy as inputting someone’s wallet address via a QR code, or sharing a code.
A Transaction’s Journey
To understand what makes blockchain so groundbreaking, one needs to dive deeper than the user experience and look at what happens after the user submits the transaction. Besides the sender and receiver’s address, the transaction requires the sender’s private key to prove that the sender owns the funds. This is done by leaving a signature in the transaction with the private key.
Nodes then verify the transaction; they ensure the sender has enough bitcoin in their wallet for the transaction and that the signature is correct. Now verified, the transaction sits in a pool waiting to be selected by a miner and included in a block. A block is just a digital file for recording transactions.
Due to the limited block size (1mb), miners can’t include all the transactions waiting in the pool; therefore, they naturally pick the transactions with the highest transaction fees (many wallets allow users to raise or lower the amount of this fee, according to high or low priority on confirmation time). Once selected, miners race to add their block of transactions to the blockchain.
A Miner’s Work
This race is just as much a test of strength. To make an addition to the blockchain, miners must solve a complex mathematical puzzle. This sounds complicated, but it’s really a brute-force guessing game. To solve the puzzle, miners try to discover the correct hash (a string of characters) by simple trial and error. Therefore, the miner with the most sheer computational power tends to win the race. This type of system is called a proof-of-work consensus mechanism.
A consensus mechanism allows various network participants to reach an agreement about the ledger’s state. Different types of consensus mechanisms are essentially different ways of choosing who gets the privilege of adding a block to the blockchain. In proof-of-work, the right to add a block is given to whoever discovers the correct hash first.
Once a miner finds the hash, they broadcast their solution to the rest of the network. The other nodes readily verify that this is, in fact, the correct hash. If everything is verified, the block is added and the winning miner is rewarded the newly mined bitcoin plus the transaction fees. Now that the contest is decided, the community of miners sets out to work on adding the subsequent block based on this new addition.
Blockchain: The Big Picture
Keeping in mind this image of miners adding blocks of data to a long series of blocks and agreeing to add the correct block, one will have a general picture of a blockchain. To further clarify this image, consider the hash the winning miner needed to solve. This hash connects the blocks; the hash generated to solve each block is determined by both the transactions in the block and the hash of the previous block in the series. Changing any transaction in an earlier block will change the hash of all future blocks.
They are effectively “chained” together. This is the most basic picture of a blockchain. It’s a decentralized public ledger of transactions distributed amongst a network of nodes constantly verified, added to, and connected.
Now you have a grasp of what blockchain is, but the big picture is really all about the why. Two words sum up the point of blockchain: security and transparency.
Security
Transactions are spread across all nodes in the network, meaning there is no single point of failure or control that could compromise the network. This is the value of decentralization. Moreover, each block connects to the historical chain through its hash. Tampering with any previous transaction is impossible without invalidating the resulting hash. This means the blockchain is immutable. Any attempt to alter even a single transaction would require modifying all subsequent blocks–a computationally impractical and nearly impossible feat.
Transparency
The cryptographic method of proving ownership via a private key means senders remain anonymous while the transactions are public. The visibility of the blockchain transactions allows all users to verify the on-chain information independently. Further, constant public verification is baked into the very system of adding a block to the chain; the community of nodes must verify all the transactions recorded along with the addition of those in the new block.
What Makes Bitcoin Different
Much of the above discussion applies to proof-of-work blockchains, but what makes bitcoin unique?
The cornerstone of bitcoin’s advantage is its unmatched security. Remember, a blockchain network is only as decentralized as the participants in its operation are diverse. Here, bitcoin has an edge over other PoW chains; it has by far the largest community of miners and nodes around the world. Successfully attacking the bitcoin network (meaning controlling over half the mining power, i.e., over half the computers) would be so costly that acquiring the needed computational power is practically impossible.
New bitcoin can only be created by the block reward given to miners. The amount of new bitcoin issued with every new block is halved every four years, and eventually the reward will cease altogether, leaving miners only the transaction fees as a reward for their work. Given this system, we know the total amount of possible bitcoin to be mined is 21 million. Therefore, the value of bitcoin can’t be diminished over time by inflation, thus allowing the bitcoin network the power to preserve any user’s wealth, indefinitely.
The trifecta of security, scarcity, and history (as the first blockchain) make bitcoin a uniquely universal store of value. Think about its value in terms of supply and demand. Its fixed supply restricts the number of coins in possible circulation, the desire to securely transact stabilizes demand for the network, and finally, the historical value of bitcoin gives it an edge well out of reach for competing blockchains.
The Future of Finance
Bitcoin’s inception marks a paradigm shift in the financial world. Its underlying technology, blockchain, ensures a secure, transparent, and immutable system for transactions, setting a new standard for financial exchanges. The mining process not only secures the network but also introduces a novel way to create and distribute currency, governed by the principles of scarcity and computational work, rather than central authority.
Bitcoin has paved the way for numerous other digital currencies and blockchain applications. However, its unique combination of security, scarcity, and history has cemented its place as the leader of this financial revolution. Bitcoin stands as a testament to the innovation of decentralized technology, allowing the essential elements of value exchange to persist liberated from their previous material conditions in a new realm of computational abstraction.
The Beginner's Guide To Bitcoin Spot ETFs
Bitcoin Spot ETFs blend crypto growth with traditional investing ease, offering a new pathway to digital asset exposure.
Since its inception in 2009, bitcoin has transitioned from a niche internet curiosity into a full-fledged asset class, coveted by both ordinary individuals and the largest financial institutions alike.
And there’s no surprise why — bitcoin’s 1,576% annual average return between 2010 and 2022 outpaced every other major asset class available to investors by a significant margin.
Despite more than a decade of often-enormous gains though, perhaps nothing has legitimized bitcoin in the eyes of newly interested retail investors more so than this year’s approval of the first spot bitcoin ETFs for trading in the U.S. The ETFs, which now give investors a way to gain exposure to bitcoin via the stock market, launched on January 11, 2024 and have quickly become among the most successful ETF launches of all time.
This article dives into what every investor should know about them.
What Are Bitcoin Spot ETFs?
Exchange-traded funds, or ETFs, are among the most popular investment vehicles on the market, with roughly $10 trillion in assets under management (AUM) worldwide.
They’re offered by a range of financial institutions and can hold stocks, commodities, or bonds in them. ETFs are designed to track the price of their underlying assets and the firms who offer them sell individual shares of these funds on the stock market, where they can be purchased just like any other stock.
Bitcoin spot ETFs are similar to other ETFs, except they’re backed by bitcoin instead of traditional assets, making them the first digital currency backed spot ETFs in the U.S.
Spot bitcoin ETFs in the U.S. are a significant step for the adoption of bitcoin, as investors now have the opportunity to benefit from bitcoin’s price action without needing to use a cryptocurrency exchange or own bitcoin itself. Nearly a dozen leading financial institutions, including BlackRock, Fidelity, and Franklin Templeton, are offering spot bitcoin ETFs, and the offerings have quickly become among the most popular ETFs ever.
Notably, spot bitcoin ETFs are different from bitcoin futures ETFs, which have been available in the U.S. since 2021. Instead of offering direct exposure to bitcoin’s price, futures ETFs offer indirect exposure through futures contracts, which are agreements to buy or sell bitcoin on a future date at a predetermined price.
How Is A Bitcoin Spot ETF Different From Buying Bitcoin?
There are significant differences between owning shares in a spot bitcoin ETF and holding bitcoin directly.
When investors buy shares in a bitcoin spot ETF, the fund operator running that ETF then buys an equivalent amount in bitcoin to back the shares. If bitcoin’s price goes up, the price of the ETF’s shares will go up. If bitcoin’s price goes down, so will the ETF’s share prices. But, one still doesn’t own any bitcoin; ETF shares can’t be exchanged for any of the bitcoin that backs the fund, meaning the institutions that are buying up bitcoin don’t necessarily need to sell, even if investors sell their shares.
ETFs are designed to closely follow the price movements of the assets they’re backed by. But their gains or losses might not always be identical to those of bitcoin, because of factors including demand for the ETF itself and the expense ratio of the ETF. Still, owning shares in a spot bitcoin ETF is expected to be a preferable way to first get some exposure to bitcoin for many investors, especially those who are already investing in individual retirement accounts, or those managing large amounts of capital, like hedge funds or pensions.
Owning bitcoin directly though, requires buying bitcoin from an exchange like Coinbase or Kraken. Doing so provides much more freedom with what can be done with bitcoin, such as sending it to a self-custody wallet, or using it to interact with the broader bitcoin ecosystem.
How Can I Invest In Bitcoin ETFs?
Investing in spot bitcoin ETFs is simple — they’re available for purchase on most platforms where stocks are purchasable.
Choosing the “best” ETF is subjective. But generally, investors flock toward the ETFs that have the most liquidity, the lowest expense ratios, and the highest tracking accuracy. Within a month of trading, for example, the spot bitcoin ETFs offered by BlackRock and Fidelity both became the most liquid ETF launches of all time, garnering $3 billion of inflows respectively, a sign that they are highly liquid and likely will continue to be in the long term. Meanwhile, other ETFs might be less liquid but have advantages, such as lower fees.
Spot bitcoin ETFs make sense as part of a diversified investment portfolio for many investors, especially on a long-term timeline.
For more conservative investors, a small allocation toward a spot bitcoin ETF can provide at least some exposure to the highest-performing asset class of our generation, while also eliminating many of the direct risks and complexities associated with owning bitcoin directly.
Investors with more conviction might prefer to own bitcoin outright. Still, the spot bitcoin ETFs can be an opportunity to increase bitcoin exposure through a tax-advantaged investment account, like an IRA, which is something that otherwise couldn’t be done when buying bitcoin directly.
Why Are The Potential Benefits Of Investing In A Bitcoin ETF?
To some investors, bitcoin spot ETFs can have some perceived benefits over owning bitcoin directly.
Accessibility
In some ways, spot bitcoin ETFs are more accessible to investors in comparison to buying bitcoin directly, because they don’t require any familiarity with cryptocurrency exchanges.
And critically, bitcoin spot ETFs also allow investors to get exposure to bitcoin using capital that they otherwise could not have moved onto a cryptocurrency exchange. If an investor with an individual IRA, for example, wanted to move some of that capital into bitcoin, they’d likely incur a penalty. And large investors who manage hedge funds, family offices, pension funds, and other large pools of capital, are often unable to move capital into cryptocurrency exchanges, due to a lack of regulatory certainty still surrounding cryptocurrency in the U.S.
Regulatory Oversight
Since ETFs are stocks and under the jurisdiction of the U.S. Securities and Exchange Commission, spot bitcoin ETF issuers are required to adhere to a comprehensive set of investor protection rules, related to disclosures, financial reporting, and market manipulation. Spot bitcoin ETF issuers, for example, must provide regular reports detailing the fund’s performance and how it tracks the price of bitcoin, must disclose how the bitcoin that backs the fund is stored, and must comply with rules in place to ensure ETF shares are priced fairly.
While cryptocurrency exchanges also must comply with many regulations, uncertainty in the U.S. over which government agency has jurisdiction over cryptocurrency markets means many of these same investor protections might not apply.
Tax Efficiency
While trading cryptocurrency can often lead to complex tax implications, owning shares in a spot bitcoin ETF can be much simpler. For investors, tax implications are only triggered once they sell shares of a spot bitcoin ETF, and would operate just like stocks: shares held for less than a year would trigger a short-term capital gains tax, while shares held longer than a year would trigger a long-term capital gains tax.
What Are The Risks With Investing In Bitcoin ETFs?
Although bitcoin ETFs are managed by some of the largest financial institutions in the world, several risks remain that all investors should be aware of.
Liquidity
Among the biggest risks in purchasing spot bitcoin ETFs is choosing a product that doesn’t have enough liquidity or trading volume. Bitcoin is a highly liquid asset on its own, but not every spot bitcoin ETF will be liquid to the same degree, which could have implications during times of high market volatility. Illiquid ETFs could have wide spreads between the prices that buyers are willing to pay and sellers are willing to sell, posing potential challenges for institutional investors who may need to move large amounts of money around quickly, yet without impacting market prices.
Volatility
Bitcoin and cryptocurrencies generally, are volatile investments. In uptrends, this creates the potential for outsized gains. But in downtrends, it means there could be significant losses.
The same is true for shares of spot bitcoin ETFs, since they are directly correlated to bitcoin’s price.
During times of high volatility, the ETFs could attract more trading volume than usual from either buyers or sellers. During these times, if a particular ETF is seeing high trading volumes, the ETF shares can spike or fall more than bitcoin’s actual price movements due to the rise in volume.
Tracking Errors
While the spot ETFs are designed to follow bitcoin’s price as closely as possible, there are a variety of reasons why it might not do so perfectly at all times. Discrepancies between the performance of an ETF and the performance of its underlying assets are called “tracking errors.”
Common reasons for tracking errors include:
ETF Fees
Since ETFs are products managed by financial institutions, they incur operating costs such as management fees, custodial fees, and marketing fees. These costs are passed onto shareholders via a reduction in the fund’s net asset value, which can create gaps between the ETF’s performance and its underlying assets.
Trading Hours
Bitcoin is an asset that can be traded any time of day, any day of the week, and on all holidays worldwide. However, since stock markets operate on set trading hours, any significant changes to bitcoin’s price that happen outside of those hours may not be immediately reflected in the price of ETF shares and can create tracking errors, even if only temporarily.
A New Paradigm Emerging
The introduction of spot bitcoin ETFs to the U.S. market represents a massive shift, not just in the accessibility of bitcoin, but also in investor perceptions of bitcoin itself.
After years of skepticism, investors from all ends of the spectrum are flocking to get exposure as bitcoin spot ETFs are on pace to surpass gold ETFs’ AUM by the end of 2024. While owning spot bitcoin ETFs is still distinctly different from owning bitcoin directly, they offer investors a simple and familiar way to get exposure to bitcoin’s potential upside gains, without some of the potential risks associated with them attempting direct cryptocurrency transactions.
What Is Bitcoin Mining?
Bitcoin mining is the engine driving the world’s largest decentralized financial network. But how does it work, and why does it matter? This article dives into the intricate process of mining, detailing how miners validate transactions, secure the blockchain, and introduce new bitcoin into circulation. From the evolution of mining hardware to its environmental controversies, we explore the pivotal role mining plays in Bitcoin’s ecosystem and its implications for the future of global finance.
What Is Bitcoin Mining?
Bitcoin has reshaped our understanding of currency, transactions, trust procedures, and value systems at large. The backbone of this new trustless cryptographic exchange is a process known as " mining." But what exactly does mining mean in this context, and why is it so crucial to the innovation of the bitcoin network?
This article elaborates on the world of bitcoin mining, expanding on its mechanisms, significance, and controversies.
Understanding The Bitcoin Ledger And Mining
After a bitcoin transaction is initiated, it must be verified and added to the decentralized ledger.
In a traditional financial system, some authority verifies transactions and updates its central ledger. In this new decentralized system, there is no authority to manage the ledger of transactions; therefore, a novel method for recording transactions is required. This is the duty of miners.
After passing initial verification, a bitcoin transaction enters a pool where it waits to be picked up by a miner and included in a block—a digital record of recent transactions. Miners can't include every pending transaction in the block they submit, therefore they pick the transactions offering the highest fees.
With transactions selected, miners seek to add their block to the blockchain, aka the bitcoin universal ledger.
This happens through a process called mining, hence the participants are called “miners.” Let's break down this process in more detail.
Bitcoin Mining: A Proof Of Work
The process of adding a block to the blockchain is called mining because it involves work on the miner’s’part, and they are rewarded for this work with bitcoin. This is a bit like “discovering” or “unearthing” the bitcoin because it is the only way for new bitcoin to be minted.
The "work" of mining is a competition of solving complex computational puzzles. By solving these puzzles, miners verify “blocks" and link them to a chain of previous transaction entries, earning the fresh bitcoin and transaction fees for their work.
The competition among miners is as much about computational power as it is about speed. The process is essentially a brute-force guessing game. Miners attempt to find the correct hash—a specific string of characters—through trial and error. The miner with the most computational resources typically has a better chance of discovering the correct hash first.
The first miner with the correct hash wins the right to add their block to the blockchain. This method is known as the proof-of-work consensus mechanism.
Consensus mechanisms enable network participants to agree on the current state of the ledger. Different mechanisms use various methods to decide who gets the privilege of adding a new block to the blockchain. In the proof-of-work system, this right is granted to the miner who first solves the mathematical puzzle by finding the correct hash.
After finding this hash, they broadcast their solution to the entire network. If everything checks out, the new block is added to the blockchain, and the successful miner receives a reward in the form of newly minted bitcoin, plus any transaction fees.
The Mining Process Step-by-Step
- Transaction Collection: Miners gather pending transactions from the network's memory pool and assemble them into a candidate block.
- Block Validation: They ensure transactions are valid, unspent, and comply with the network's rules.
- Proof-of-Work Calculation: Miners compute the hash of the block header until they find a hash that meets the network's target.
- Block Broadcasting: Upon finding a valid hash, the miner broadcasts the new block to the network.
- Verification By Nodes: Other nodes verify the block's validity. If accepted, the block is added to the blockchain, and the miner receives the block reward.
Securing The Network
Visualize miners continuously adding blocks of data to an ever-growing chain, each agreeing on which block is correct—this is the essence of proof-of-work security. To further clarify, it helps to break down the mechanisms of mining that keep the network secure.
The puzzles miners solve involve hash functions—mathematical algorithms that convert input data into a fixed string of characters. The hash for each block is generated based on both the transactions within that block and the hash of the preceding block.
This means that altering any transaction in an earlier block would change the hashes of all subsequent blocks, which would be immediately noticeable to the network of miners who previously agreed on the correct chain. All nodes in the network accept the longest valid chain of blocks as the true blockchain.
The only way a malicious actor could attack such a network would be by controlling 51% of the hash rate. The hash rate represents the total computational power of the bitcoin network. With over half the hash rate, the attacker can mine blocks faster than the rest of the network combined.
Because bitcoin nodes follow the longest valid chain, by consistently adding blocks, the attacker can make their version of the blockchain the longest, causing the network to accept it over others. A higher hash rate, therefore, increases network security, making it more resistant to attacks.
The bitcoin network is the largest and most distributed blockchain in the world; acquiring sufficient mining equipment to exceed 50% hash rate involves astronomical costs. Further, once such an attack is carried out, the value of bitcoin would plummet due to it being compromised.
Mining, therefore, secures the bitcoin network by making an attack almost completely impossible computationally, and always impractical economically.
Evolution Of Mining Hardware
In bitcoin's early days, mining could be performed using a regular computer's CPU. New hardware soon became needed because the bitcoin network adjusts the mining difficulty every 2,016 blocks (targeting approximately every two weeks as the intended average) to ensure that blocks are added roughly every 10 minutes.
If miners collectively are solving puzzles too quickly, the difficulty increases; if too slowly, it decreases.Due to this, as the bitcoin network becomes more popular, the computational resources needed to compete in mining grow alongside it.
Today, mining is predominantly conducted using ASICs (application-specific integrated circuits), specialized hardware designed explicitly for mining bitcoin, offering significantly greater efficiency and higher hash rates.
Due to the increasing hardware costs of running a mining operation, mining pools have sprung up to continue allowing everyday bitcoin users to participate in network security.
Solo mining involves a miner working independently to find blocks, which is akin to winning a lottery. Mining pools allow miners to combine their computational resources, providing more consistent and predictable rewards. Participants in a mining pool contribute their hash power and receive a portion of the rewards equivalent to their computational contribution.
The Great Energy Controversy
Bitcoin mining is energy-intensive due to the computational power required as the mining difficulty increases. Estimates suggest that bitcoin's annual energy consumption rivals that of some small countries. The exact figure fluctuates based on the hash rate and energy efficiency of mining hardware.
Environmental concerns are the main controversy behind bitcoin mining. Environmental activists argue that this extreme energy can lead to significant greenhouse gas emissions because most electricity for mining comes from fossil fuels.
Bitcoin advocates typically respond to these concerns by pointing out three things:
- Renewable Energy: An increasing number of mining operations are powered by renewable sources like hydro, solar, and wind energy. The value created by bitcoin mining can further push innovation and capital in green energy sources.
- Energy Efficiency: Advances in ASIC technology aim to reduce energy consumption per hash. As bitcoin mining technology advances, energy consumption will decrease.
- Layer 2 Solutions: As more bitcoin transactions come off the native chain, congestion and computational demands on the PoW network will be alleviated.
The Future Of Bitcoin Mining
Bitcoin mining is a foundational component of the bitcoin network, ensuring security, validating transactions, and introducing new bitcoin into circulation. While it presents opportunities for profit and technological advancement, it also poses significant challenges, particularly concerning its environmental impact.
As mining moves forward, the balance between reaping the benefits of this groundbreaking technology and mitigating its drawbacks will define the trajectory of bitcoin and its role in the global financial system.
Who Owns The Most Bitcoin? View The Biggest Whales
An overview of the world's top Bitcoin holders, spanning individuals, companies, and countries.
True ownership is the core value proposition of cryptocurrencies. Without a decentralized solution to ownership, property can only owned via a trusted third party such as the government.
Bitcoin, the first cryptocurrency, was created to bring ownership out of the hands of a central authority and back into the proverbial hands of the owners themselves. Since its inception, owning bitcoin has become the gold standard of self-custody, and millions of people around the world have clamored to hoard some themselves.
Bitcoin has attracted a diverse range of investors, from individuals to corporations to governments. Bitcoin ownership, however, is far from evenly distributed. A small number of wallets hold a large portion of the total supply, which could have serious implications for the market.
For this reason, the question of who owns the most bitcoin has always been a topic of great intrigue, especially considering bitcoin’s role in the future of decentralized finance and the world at large. This article will categorize the major global bitcoin holdings and elaborate on the entities that control them.
Individual Holders
Satoshi Nakamoto
No discussion on bitcoin ownership can begin without mentioning Satoshi Nakamoto. Nakamoto is believed to have mined around 1.1 million bitcoin in the early days of the network.
Mysteriously, these coins have remained untouched since Nakamoto disappeared from the public eye in 2010.
Holding about 5% of the total supply, Nakamoto is estimated to be the largest bitcoin owner, controlling coins worth over $30 billion, as of November 2024. Despite this massive fortune, Nakamoto has never spent nor transferred these coins a single time, adding to the enigma surrounding bitcoin’s creator.
This immobility of Nakamoto’s stash reassures the cryptocurrency community that these holdings won’t suddenly flood the market, an undeniable risk when a single entity controls so much of the supply.
The Winklevoss Twins
Cameron and Tyler Winklevoss, famously known for their legal battles with Mark Zuckerberg over Facebook, became some of bitcoin’s earliest and most vocal proponents. Their belief in the long-term potential of bitcoin has cemented their position as some of the most influential figures in the digital assets space.
The twins reportedly bought 70,000 BTC in the early 2010s, and their holdings have grown substantially since then. This investment helped them establish Gemini, a regulated cryptocurrency exchange that is one of the largest in the world.
Tim Draper
Venture capitalist Tim Draper is another significant individual holder. Draper is the founder of Draper Fisher Jurvetson, Draper Venture Network, and Draper Associates, just to name a few.
He purchased 30,000 BTC in 2014 from the U.S. Marshals auction, following the Silk Road seizure, and invested in over 50 cryptocurrency companies, including Coinbase, Ledger, Tezos and Bancor. His initial bitcoin investment alone has grown substantially, making him one of the richest bitcoin billionaires.
Michael J. Saylor
Michael Saylor, CEO of MicroStrategy, has become one of the loudest proponents of bitcoin. His company’s decision to use bitcoin as its primary reserve asset has led to the accumulation of 279,420 BTC, the largest amount held by any publicly traded company (more on this below).
Outside of his company, Saylor also has stated that he personally holds around 17,000 BTC, making him one of the largest individual holders. Saylor is a bitcoin evangelist in the strongest sense and sees bitcoin as the best (if not only) long-term store of value.
Changpeng Zhao (CZ)
As the founder of Binance, the world’s largest cryptocurrency exchange by trading volume, CZ is another core deity in the cryptocurrency pantheon.
While his personal bitcoin holdings aren’t publicly known, his net worth is estimated at roughly $96 billion. At a minimum, CZ’s early investment in bitcoin (when he sold his apartment to buy bitcoin in 2014) is publicly known, and alone makes him a billionaire.
Mr. 100
Although many large whale wallets are anonymous, none are more infamous than “Mr. 100.”
Since November 2022, after the collapse of FTX, this wallet has consistently received 100 BTC, almost daily, amassing 52,996 BTC (valued at over $3.5 billion) as of 2024. This accumulation spree has made the wallet the 14th-largest holder of bitcoin globally — one of the largest held by an individual, if “he” is one. Blockchain intelligence suggests that the wallet may be used for managing Upbit’s cold storage, although this has not been officially confirmed.
Corporations: Investment vs. Custody
When investigating the largest corporations that hold bitcoin, it is important to divide between those who invest in bitcoin and those who hold it on behalf of users, such as cryptocurrency exchanges.
Company Investments
MicroStrategy
MicroStrategy has led the corporate adoption of bitcoin as a treasury reserve asset. The company holds 279,420 BTC, which represents a significant portion of the company’s balance sheet. CEO Michael Saylor has convinced his investors that bitcoin is the ultimate store of value and has continually raised money to make large bitcoin purchases. This bold strategy has positioned MicroStrategy as the penultimate institutional holder of bitcoin.
Tesla, Inc.
In early 2021, Tesla made a significant move by purchasing $1.5 billion worth of bitcoin. As of 2024, Tesla holds 10,500 BTC, valued at around $698 million. Tesla’s decision to invest in bitcoin was part of its broader strategy to diversify its holdings and provide liquidity for future transactions. Tesla even briefly accepted bitcoin as payment for its vehicles. However, the company suspended this initiative, citing environmental concerns related to bitcoin mining.
Galaxy Digital Holdings
Galaxy Digital, founded by former hedge fund manager Mike Novogratz, is a financial services firm with three operating businesses: Global Markets, Asset Management, and Digital Infrastructure Solutions. Galaxy currently holds 17,518 BTC, worth over $1 billion, and plays a key role in institutional bitcoin adoption by supporting businesses and infrastructure.
Marathon Digital
A major bitcoin mining company, Marathon Digital holds 13,716 BTC, primarily obtained through its mining operations. Marathon focuses on becoming the largest bitcoin mining operation in North America, leveraging low-cost energy sources to fuel its massive bitcoin mining infrastructure. Although Marathon occasionally sells bitcoin to pay for operations, it keeps a significant amount of its balance sheet as an investment vehicle.
Largest Bitcoin Custodians
Coinbase
Coinbase, one of the most popular cryptocurrency exchanges in the U.S., is the largest custodian of bitcoin. Coinbase is a core entry point for both retail and institutional investors, it even helps manage funds for the U.S. government. The company now holds approximately 1 million bitcoin as part of its operational reserves and user assets.
Binance
Binance is the world’s largest cryptocurrency exchange by trading volume and holds significant amounts of bitcoin in custody on behalf of its users. As of 2024, Binance controls 643,546 BTC, spread across several wallets. These holdings are managed as part of its trading and exchange operations. Binance’s size and global reach make it the international key player in the bitcoin ecosystem.
Bitfinex
Bitfinex, one of the oldest advanced cryptocurrency exchanges, retains a loyal user base of retail and institutional investors. The company has been reported to hold approximately 204,338 BTC as of 2024. Despite past regulatory challenges and security breaches, Bitfinex remains one of the largest bitcoin custodians, providing liquidity to the market and facilitating large scale trading.
Robinhood
Robinhood, the popular U.S.-based trading platform, reportedly holds 118,300 BTC in a single wallet, making it one of the largest custodians of bitcoin. Robinhood’s bitcoin custody includes assets held on behalf of its users, many of whom are retail investors who prefer the convenience of using a traditional brokerage platform for cryptocurrency trading.
Companies that have ETF products
Since the creation of bitcoin ETFs, much of bitcoin has fallen under the control of institutions that provide these products. Many of these entities are traditional banking giants positioning themselves as safe points for entry into the cryptocurrency world.
The largest BTC holders among the ETF titians are:
BlackRock: 357,548 bitcoin
Grayscale: 221,841 bitcoin
Fidelity Investments: 174,926 bitcoin
Ark Invest / 21Shares: 45,008 bitcoin
Governments
United States
The United States government holds the largest amount of bitcoin, totaling 213,297 BTC, valued at approximately $14.82 billion. These assets were primarily obtained through cryptocurrency seizures related to criminal activities. For example, a significant portion, about 69,000 BTC, came from the dismantling of the Silk Road alone.
China
Despite its ban on cryptocurrency trading and mining, China remains a significant holder of bitcoin. The Chinese government holds approximately 190,000 BTC, valued at around $13.2 billion. Most of these funds were seized from the PlusToken Ponzi scheme, one of the largest cryptocurrency frauds.
United Kingdom
The United Kingdom has also accumulated a substantial bitcoin reserve through law enforcement seizures, amounting to about 61,000 BTC. Much of this bitcoin was confiscated as part of a money laundering operation involving cryptocurrency exchanges operations in bad faith on U.K. territory.
El Salvador
Unlike other countries that primarily hold bitcoin through seizures, El Salvador has proactively purchased bitcoin as part of its national financial strategy. El Salvador became the first country to adopt bitcoin as legal tender and has been regularly purchasing bitcoin since. The country holds 5,800 BTC, valued at approximately $400 million.
Ukraine
Ukraine has received a significant amount of bitcoin through donations to support its defense against Russia during the ongoing conflict. So far, the government has received 651.3 BTC, while the Come Back Alive Foundation has received 685.1 BTC. These donations are actively used to fund war efforts, leaving a current balance of 186.18 BTC.
Bitcoin Total Supply
After detailing all the major holders of bitcoin, its important to put these holding in the context of the current total supply.
40% of bitcoin ownership falls into the above categories of identifiable participants such as individuals, companies, miners, governments, and dormant supply.
14% of the total supply is dormant, assumed to be lost or inaccessible. This includes Satoshi Nakamoto’s mined coins, comprising 5.2% of the total BTC supply.
Exchanges control 11% of the total supply, with Binance and Coinbase leading the pack at 3.12 and 4.51% respectively.
Mining companies alone control about 9%, with Marathon being the largest holder.
ETFs compose 3.63% of the total, led by BlackRock and Greyscale.
Public companies control only 1.18%, the top being MicroStrategy and Tesla.
Governments control only 1.16% of the total supply. The U.S. is by far the largest holder with a 0.92% share in the total supply.
Whale wallets of individuals control about 20% of the total supply, although this number is difficult to calculate. None of the top identifiable holders even reach half a percentage point of the total supply
Although the bitcoin supply may seem to be controlled by only a few powerful wallets, the data shows that the picture is not so bleak. No single entity controls more than 5% of the supply, and even these companies are not beholden to the wishes of a single person. At the end of the day, the bitcoin network is likely safe from the massive sales that would send the price into a tailspin, and the core holders of bitcoin are resolute holders, if not dedicated to the cause.
The Global Landscape of Bitcoin Regulation
Explore the evolving global landscape of Bitcoin regulation, with key insights into how major jurisdictions handle this decentralized asset.
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Bitcoin operates without a central authority, relying on blockchain technology to facilitate peer-to-peer transactions. This innovation has garnered significant attention from investors and prompted governments and regulatory bodies worldwide to grapple with its legal implications.
The legal status of bitcoin varies dramatically across different jurisdictions. While some countries embrace it, others impose strict regulations or outright bans.
Bitcoin’s decentralized nature poses unique challenges for regulators accustomed to overseeing centralized financial institutions. Key concerns include:
- Financial Stability: The volatility of bitcoin’s price can impact financial markets.
- Consumer Protection: Lack of regulation may expose users to fraud and scams.
- Illicit Activities: Anonymity features can facilitate money laundering, tax evasion, and financing of illegal activities.
- Taxation: Defining bitcoin for tax purposes affects how gains are reported and taxed.
This article provides a comprehensive global overview of bitcoin regulation separated by region. Not every country in each region is covered, rather this article focuses on major cryptocurrency hubs and regulatory movements.
It aims at a broad sweep of legal trends for various regions with distinctive approaches.
The Divisions are:
- USA
- UK & Commonwealth
- European Union
- Asia
- Latin America
- Middle East
- Africa
United States
The United States is the global financial leader, and its regulatory decisions see the widest reach, both in and outside its borders. For this reason, it deserves its own in-depth treatment, as its regulatory outlook is the most consequential in the current and future legal landscape of bitcoin.
Understanding bitcoin’s legal status in the U.S. requires examining the roles of different federal agencies that regulate various aspects of cryptocurrency. Further, these agencies typically have parallels in other countries; therefore, learning about what each does will also help one track foreign regulations.
1. Financial Crimes Enforcement Network (FinCEN)
Role
A bureau of the U.S. Department of the Treasury, FinCEN safeguards the financial system from illicit use, combats money laundering, and promotes national security through the collection and analysis of financial intelligence.
Regulation
In 2013, FinCEN issued guidance classifying administrators and exchangers of virtual currencies as money services businesses under the Bank Secrecy Act. This classification subjects them to registration, reporting, and record-keeping obligations.
Implications
Bitcoin exchanges and certain wallet providers must implement anti-money laundering (AML) and know your customer (KYC) policies. Users may be required to verify their identities when transacting through regulated platforms.
2. Internal Revenue Service (IRS)
Role
The IRS administers federal tax laws and collects taxes.
Regulation
In 2014, the IRS issued Notice 2014–21, stating that virtual currencies like bitcoin are treated as property for federal tax purposes. Consequently, general tax principles applicable to property transactions apply to transactions using cryptocurrency. Further, new reporting requirements came into effect in 2024, requiring businesses to report cryptocurrency transactions over $10,000.
Implications
Users and investors must report bitcoin transactions and holdings on their tax returns. Capital gains or losses from the sale or exchange of bitcoin are subject to taxation. Miners must report the fair market value of mined bitcoin as income at the time of receipt.
3. Securities and Exchange Commission (SEC)
Role
The SEC’s mission is to protect investors, maintain fair and efficient markets, and facilitate capital formation.
Regulation
The SEC has clarified that while bitcoin itself is not considered a security, other digital assets, particularly those issued through ICOs (initial coin offerings), may be classified as securities under the Howey Test. The SEC oversees offerings and sales of digital assets that are securities to ensure compliance with federal securities laws.
Implications
Investors should exercise caution with digital assets that may be considered securities. Platforms offering trading of such assets may need to register as national securities exchanges. Noncompliance can lead to enforcement actions, penalties, and loss of investment even if the user only held bitcoin on the platform.
4. Commodity Futures Trading Commission (CFTC)
Role
The CFTC regulates the U.S. derivatives markets, including futures, swaps, and certain kinds of options.
Regulation
The CFTC classifies bitcoin and other virtual currencies as commodities under the Commodity Exchange Act (CEA). This designation gives the CFTC authority over cryptocurrency derivatives markets and enforcement jurisdiction over fraud and manipulation in underlying spot markets.
Implications
Users trading bitcoin futures, options, or other derivatives are subject to CFTC regulations. The CFTC actively monitors markets for fraudulent or manipulative activities, enhancing investor protection, but also requiring compliance with additional regulatory obligations.
The UK and Commonwealth
The U.K. and commonwealth countries share a largely similar legal framework to the United States, but have slightly different regulations and exchanges accessible for users.
U.K.
The U.K. has positioned itself as a global leader in fintech and blockchain innovation, with comprehensive regulations that aim to foster both growth and consumer protection.
- The Financial Conduct Authority (FCA) regulates cryptocurrency businesses, requiring registration and adherence to AML/KYC standards.
- In 2024, new rules mandate that all advertisements for crypto-assets must be approved by an FCA-registered firm, to ensure they do not mislead retail investors.
- HM Revenue & Customs (HMRC) treats cryptocurrencies as property, subject to capital gains tax.
Canada
- Cryptocurrency exchanges are considered money services businesses (MSBs) and must register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).
- The Canada Revenue Agency (CRA) treats bitcoin as a commodity. Transactions are barter transactions, and gains are subject to income tax or capital gains tax, depending on the circumstances.
Australia
- Licensing of Exchanges: All cryptocurrency exchanges must be registered with AUSTRAC and meet strict AML/KYC standards.
- The Australian Taxation Office (ATO) treats cryptocurrencies as assets for capital gains tax purposes.
- New regulations also require exchanges to maintain records of all transactions.
European Union
The EU stands out as a global leader in cryptocurrency regulation, having implemented one of the most comprehensive frameworks for the digital asset market: Markets in Crypto-Assets (MiCA). This unified framework applies to cryptocurrencies across member states.
MiCA covers various types of cryptocurrency assets, including bitcoin, stablecoins, and security tokens. MiCA also includes provisions to ensure that retail investors have clear information about the risks associated with cryptocurrency investments. Issuers are required to produce detailed whitepapers for digital assets, outlining their business models, tokenomics, and associated risks.
- Licensing Requirements: Cryptocurrency service providers must obtain licenses to operate in the EU.
- AML and KYC: Requires firms to implement stringent reporting mechanisms to detect and prevent suspicious activities.
- Investor Protection: Issuers must comply with transparency requirements, ensuring that investors are protected from fraudulent activity.
Asia
Asia presents a wide spectrum of regulatory approaches to bitcoin. From the permissive frameworks in Japan and Singapore to the chaotic unclarity of India and even an outright ban in China.
China
China has adopted a restrictive approach on the mainland but allowed for the blockchain industry to grow and thrive in Hong Kong.
In 2017, China banned ICOs and shut down domestic cryptocurrency exchanges. At the same time, authorities intensified efforts to eliminate bitcoin mining due to concerns about energy consumption and lack of proper control.
On the other hand, in Hong Kong, the government is positioning the city as a hub for wideranging digital and Web3 innovation, with new regulations aimed at facilitating retail trading, and attracting institutional investment.
Japan
Japan has long been a pioneer in cryptocurrency regulation, being one of the first countries to recognize bitcoin as legal property in 2017. The Financial Services Agency (FSA) now enforces stricter operational requirements for exchanges, particularly in areas of security, capital reserves, and anti-money laundering (AML) procedures.
South Korea
South Korea has emerged as one of the world’s most active cryptocurrency markets. In 2023, South Korea passed new legislation aimed at increasing transparency in cryptocurrency trading and strengthening AML rules.South Korea has continued to impose stricter regulations on cryptocurrency exchanges, requiring detailed recordkeeping and reporting of suspicious transactions.
Singapore
Singapore has consistently ranked among the most crypto-friendly jurisdictions in Asia, attracting blockchain startups and cryptocurrency exchanges with its clear regulatory frameworks. Singapore has introduced a more comprehensive regulatory regime to further strengthen consumer protections while promoting responsible growth in the cryptocurrency sector.
India
As of 2024, India has yet to pass comprehensive cryptocurrency legislation, though various bills have been proposed.
The Cryptocurrency and Regulation of Official Digital Currency Bill, which aims to prohibit all private cryptocurrencies (incuding bitcoin), has been in limbo since 2021. Despite the regulatory pergatory, in 2022, the government introduced a 30% tax on crypto profits, aligning it with taxation on other speculative investments like gambling.
Latin America
Across Latin America, cryptocurrencies are being used as tools for financial survival, investment, and innovation. El Salvador made history by being the first country to adopt bitcoin as legal tender, and continues to inspire other LATAM countries with its experiment. Countries like Brazil and Argentina have taken proactive steps to regulate the market, ensuring consumer protection while encouraging technological innovation.
El Salvador
El Salvador’s Bitcoin Law, enacted in September 2021, mandates that all businesses in the country accept bitcoin as a form of payment, provided they have the necessary technology. The Chivo wallet, a government-backed bitcoin wallet, was launched alongside this law to facilitate everyday transactions using bitcoin.
In 2024, the Salvadoran government remains committed to bitcoin adoption through various initiatives, including:
- Expanding the network of Bitcoin ATMs across the country.
- Introducing further educational programs to help citizens understand how to use bitcoin effectively.
- Providing subsidies and incentives for businesses that adopt bitcoin.
- Building a geothermal valcano power plant to mine bitcoin.
Brazil
Brazil has emerged as one of the most progressive countries in South America regarding cryptocurrency regulation. In 2023, the country passed comprehensive legislation aimed at providing clarity to the cryptocurrency market. Proposed bills aim to regulate cryptocurrencies and require exchanges to register with authorities.
Argentina
In Argentina, cryptocurrencies have gained significant popularity as a hedge against rampant inflation and economic instability. The Argentine government has introduced regulations aimed at controlling the growing cryptocurrency market while trying to prevent capital flight. Taxation policies have been implemented, including a tax on cryptocurrency gains, and exchanges must report customer activity to the government.
Middle East
The Middle East has emerged as a dynamic region for cryptocurrency innovation, Nations, like United Arab Emirates (UAE), are positioning themselves as global cryptocurrency hubs, while others, such as Saudi Arabia, have taken a more cautious stance.
Dubai and Abu Dhabi is leading the charge in the Middle East’s cryptocurrency space, offering one of the most comprehensive regulatory environments in the region.
- Dubai is home to the world’s first dedicated cryptocurrency industry regulator, the Virtual Assets Regulatory Authority (VARA). VARA oversees the regulation of digital assets in Dubai, and continues to expand its licensing framework for virtual asset service providers (VASPs), allowing cryptocurrency companies to operate with legal certainty while adhering to strict AML and KYC.
- Abu Dhabi operates a separate but equally progressive regulatory framework through the Abu Dhabi Global Market (ADGM). The ADGM offers licensing and regulatory oversight for cryptocurrency exchanges, custodians, and blockchain-based companies.
Saudi Arabia
Saudi Arabia has taken a more cautious approach to cryptocurrency, reflecting its conservative financial policies. The country’s regulatory body, the Saudi Arabian Monetary Authority (SAMA), has not implemented a full-scale ban on cryptocurrencies, but has repeatedly warned against their use for trading or investment.
Africa
Africa also presents a diverse range of regulatory approaches to cryptocurrencies, reflecting the continent’s varied economic and social contexts.
Nigeria
Nigeria has emerged as one of the leaders in bitcoin adoption, driven by a combination of high inflation, limited access to traditional banking, and a young population eager to embrace digital financial solutions. However, Nigeria’s government has maintained a cautious but flexible stance on decentralized cryptocurrencies. While the Central Bank of Nigeria had initially banned banks from facilitating cryptocurrency transactions in 2021, the country has since softened its stance.
South Africa
South Africa has one of the most developed financial systems in Africa and has approached cryptocurrency regulation with a structured and transparent framework. South Africa’s Financial Sector Conduct Authority (FSCA) regulates cryptocurrencies under financial services laws. Only in 2022, South Africa officially recognized digital assets as financial products, meaning that exchanges and service providers must comply with financial laws similar to those governing traditional financial services.
An Evolving Landscape
The global legal landscape of bitcoin is dynamic and multifaceted, reflecting the challenges of regulating a borderless, decentralized technology. While some countries embrace bitcoin’s potential for innovation and economic growth, others focus on its risks to financial stability and security.
For users and investors, staying informed about regulatory developments is crucial. Compliance with legal requirements not only mitigates risks but also contributes to the legitimacy and maturity of the cryptocurrency market.
Investors should remember:
- Due Diligence: Users must understand the legal status of bitcoin in their jurisdiction.
- Record-Keeping: Accurate records are essential for tax reporting and legal compliance.
- Professional Advice: Consulting legal and financial experts can help navigate complex regulations.
These tips are especially important given how rapidly bitcoin, and its regulations, are developing globally.
Here’s What the Top 5 Asset Managers In The World Think About Bitcoin
Top asset managers like BlackRock and Fidelity are shifting their stance on Bitcoin, with institutional demand growing for crypto exposure. Discover how the world’s largest financial players now view Bitcoin.
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While the bitcoin network was originally launched as a way to disrupt many aspects of the traditional financial system, some of the largest financial institutions and asset managers in the world are now becoming key nodes on the network.
Most representatives of the traditional financial system were extremely critical of bitcoin as an asset in its early days, but much of the sector has now come around to the idea that the cryptocurrency could at least operate as a potential source of portfolio diversification. With more institutional investors demanding access to bitcoin price exposure from their financial services providers, many of the largest asset managers and financial advisors in the world have completed a 180-degree turn in terms of their public statements on bitcoin and other cryptocurrencies.
With this in mind, let’s take a look at what the top five asset managers in the world (according to ADV Ratings) think about bitcoin.
1. BlackRock ($10.4 Trillion AUM)
BlackRock’s stance on bitcoin has evolved quite significantly in recent years. Initially, the firm was cautious about cryptocurrencies, viewing them as speculative and too volatile for institutional portfolios. In fact, BlackRock CEO Larry Fink referred to bitcoin as an “index of money laundering” back in 2017.
However, as digital assets matured and demand from investors grew, BlackRock has shifted its perspective. Indeed, as bitcoin infrastructure developed — such as the rise of secure custodial services and increased regulatory clarity — BlackRock saw potential in offering easier, more structured access to the asset. The firm also recognized bitcoin’s appeal to younger generations, high net worth individuals, and financial institutions who were increasingly demanding exposure to digital assets.
In 2023, the company made a bold move by filing for a bitcoin exchange-traded fund (ETF), which signaled a pivotal moment for institutional adoption of the cryptocurrency. This filing helped reshape how major financial institutions view cryptocurrencies due to BlackRock’s pivotal role in the global economy and its status as the largest asset manager in the world. Now, BlackRock manages the largest bitcoin ETF, known as the iShares Bitcoin Trust, offering streamlined access to the asset for traditional investors, without the security and usability burdens of direct cryptocurrency exchange trading.
Fink himself has also embraced bitcoin’s potential as a store of value, describing it as a way of “digitizing gold.” He emphasized the demand for transparent, digitized assets and recognized that bitcoin could play a significant role in diversifying portfolios. The BlackRock CEO has also highlighted how bitcoin and blockchain technology align with his vision of modernizing financial systems. Additionally, he expressed optimism about the transformative potential of digital versions of real-world assets (RWAs), noting that they can improve efficiency and transparency in the global financial system.
With all that said, BlackRock Head of Digital Assets Robbie Mitchnik has made it clear that there is not much interest from their institutional clients in digital assets outside of bitcoin, with some interest in Ethereum’s native ether cryptocurrency being the only slight exception to that general observation.
2. Vanguard ($9.3 Trillion AUM)
Vanguard has taken a notably conservative stance on bitcoin and other cryptocurrencies, at least when compared to the more proactive approach taken by some of its competitors on this list. The financial titan has often cited concerns about price volatility, lack of regulation, and the speculative nature of cryptocurrencies as key reasons for their caution. Vanguard has historically prioritized long-term, yield-producing investment strategies.
Digital assets like bitcoin, with their dramatic price swings, have not historically aligned with this philosophy.
In addition to not creating their own spot bitcoin ETF offering, Vanguard also does not even allow their clients to access crypto-related products on its brokerage platform. This strong resistance to allowing their clients any access to bitcoin price exposure clearly makes Vanguard the most critical asset manager on this list in terms of its view of the cryptocurrency asset class, and some bitcoin enthusiasts have even moved their assets elsewhere in response to this policy.
In a now-infamous post on its corporate blog from Vanguard Global Head of ETF Capital Markets Janel Jackson and multiple communications with investors, the firm has consistently emphasized the risks and volatility associated with digital assets. “In Vanguard’s view, crypto is more of a speculation than an investment,” said Jackson. “This is at the root of our decision to not offer crypto products, whether our own or others.”
Vanguard claims that cryptocurrencies lack intrinsic value since they don’t generate income like stocks or bonds, and are subject to extreme price swings, which makes them unsuitable for the average investor. For longtime cryptocurrency market observers, these takes can come off as extremely naive and outdated. Vanguard also warns that even a small allocation of bitcoin in a portfolio can dramatically increase risk due to its high volatility. Furthermore, Vanguard has pointed out that while blockchain technology, which underpins cryptocurrencies like bitcoin, has the potential to improve the existing financial order, cryptocurrencies themselves are not a fit for their investment offerings.
Of course, Vanguard’s past criticisms of bitcoin and other cryptocurrencies do not necessarily mean that they will continue to take this view in the future. In fact, the financial institution’s new CEO Salim Ramji was the ETFs lead at BlackRock at the time they launched their bitcoin ETF. Such leadership could push Vanguard to reconsider digital assets as viable investment options, allowing them the opportunity to catch up with their competitors in terms of exposure to the emerging digital asset class. While this is the first time Vanguard has hired a new CEO from an external source, whether it will lead to a change in its view of the cryptocurrency market remains to be seen.
3. Fidelity ($5.3 Trillion AUM)
Fidelity was among the first major institutions to offer services related to digital assets through the launch of Fidelity Digital Assets in 2018, which was established to provide institutional clients with custody and trading services for bitcoin and other cryptocurrencies. In fact, the financial giant was mining bitcoin in 2017 as a way to learn about this emerging asset class.
Fidelity views bitcoin as a distinct asset within the broader cryptocurrency ecosystem, often referring to it as “digital gold” due to its decentralized nature, scarcity, and use case as a store of value. While they support the development of and experimentation with other cryptocurrencies and blockchain-powered technologies, Fidelity emphasizes bitcoin’s unique potential to serve as an inflation hedge and a long-term investment, distinguishing it from other cryptocurrencies that may be more speculative or tied to specific, technology-focused use cases.
For individual clients, the firm provides a cryptocurrency trading platform through its Fidelity Crypto service, allowing users to buy and sell bitcoin and ether directly within their existing Fidelity accounts. This integration simplifies the process for retail investors looking to dip their toes into digital assets, while maintaining the familiar interface of their traditional investment platform. Additionally, Fidelity has launched spot bitcoin and ether ETFs, both of which are the third-largest offerings when compared to their respective competitors.
In a previous report, Fidelity recommended an allocation of up to 5% of a young investor’s portfolio. Additionally, Fidelity CEO Abby Johnson has also doubled down on her long-term conviction around bitcoin through multiple cryptocurrency bear markets.
4. State Street ($4.3 Trillion AUM)
State Street took its first significant steps into the cryptocurrency space in 2018 through a strategic partnership with cryptocurrency exchange Gemini. The partnership with the Winklevoss twins’ exchange enabled its clients to have a bridge between traditional finance and the burgeoning world of cryptocurrencies, and was initially focused on providing a reporting mechanism for users of Gemini’s custody services. This allowed State Street’s clients to consolidate their holdings of digital assets alongside traditional investments in a single interface.
Building on this early venture, State Street significantly expanded its cryptocurrency ambitions with the launch of State Street Digital in June 2021. This dedicated division represents a more comprehensive approach to digital assets and blockchain technology, and illustrates the firm’s long-term commitment to the sector. State Street Digital aims to evolve the company’s existing digital capabilities into a unified, multi-asset platform that integrates cryptocurrency, blockchain, and other emerging technologies. This expansion goes beyond mere custody services, encompassing areas such as tokenization, distributed ledger technology, and central bank digital currencies (CBDCs).
It’s possible that regulatory issues prevented State Street from getting more involved in bitcoin and other cryptocurrencies around the time State Street Digital was launched, as the original head of the subsidiary referred to the U.S. Securities and Exchange Commission’s (SEC) SAB 121 rule–where traditional banks are required to keep an equivalent amount of cash on hand for all of the cryptocurrency assets they custody on behalf of their clients–as an “insane” policy.
More recently, there has been a strategic overhaul of State Street Digital, which initially included layoffs at the State Street department focused on digital assets. Having said that, State Street Digital has also been rejuvenated with new projects and partnerships.
Notably, a specific project explored by State Street Digital included the potential issuance of a stablecoin backed by customer deposits, according to a report in Bloomberg. And while State Street did not get involved in the bitcoin and ether ETF boom of 2024, they’re exploring more advanced, managed cryptocurrency ETF offerings through a partnership with Galaxy Digital. While they’ve taken a more cautious approach than other asset managers on this list, it’s clear that State Street sees the potential of this technology and has plans to make up for lost ground.
That said, State Street is still very much in an exploratory stage when it comes to digital assets and blockchain technology in general. The financial institution’s stance on bitcoin and other cryptocurrencies remains unclear, as they’re involved with a number of experiments in distributed ledger technology (DLT) as well. For example, State Street is a shareholder in Fnality International, which is more about making traditional institutions more efficient and productive rather than building on an entirely new monetary system on the bitcoin network.
5. Morgan Stanley ($3.6 Trillion AUM)
Finally, the fifth-largest asset manager in the world, Morgan Stanley, perfectly illustrates the average traditional financial giant’s usual evolution on bitcoin and other cryptocurrencies. While one of the bank’s analysts claimed bitcoin’s value could be zero in 2017, another analyst recently referred to the cryptocurrency’s massive growth in 2024, in addition to the development of stablecoins and CBDCs, as potential threats to U.S. dollar dominance.
While not necessarily promoting the merits of bitcoin in the past, Morgan Stanley analysts have kept an eye on the digital sector as a whole, releasing reports on the future of the asset class on a somewhat regular basis. Additionally, Morgan Stanley had bitcoin on its books even prior to the approval of various spot bitcoin ETFs by way of holdings in the Grayscale Bitcoin Trust in various funds before it was converted to an ETF.
More recently, Morgan Stanley revealed holdings of $188 million worth of BlackRock’s iShares Bitcoin Trust, in addition to smaller holdings of two other spot bitcoin ETFs. Additionally, some of its financial advisors are now able to reach out to specific clients and recommend an allocation to bitcoin via the ETFs offered by BlackRock and Fidelity. This action followed a due diligence process where the bank did a deep dive on the merits of bitcoin and its potential long-term value proposition.
Despite this new activity around the bitcoin ETFs, the bank’s own view around the cryptocurrency remains unclear, as its former CEO and current executive chairman James Gorman referred to bitcoin as a speculative asset that should play a very small role in any wealthy individual’s portfolio as recently as January 2024. That said, it’s important to remember that there can be varying opinions within institutions as large as the ones included on this list.
What These Views Mean For Bitcoin
When looking at how the five largest asset managers in the world are currently valuing and interacting with bitcoin, it’s clear that “digital gold” is here to stay. The emergence of regulated spot bitcoin ETFs in the U.S. market absolutely changed how this asset is viewed in traditional finance, and it has even forced the hands of those who aren’t at all convinced of the cryptocurrency’s value proposition. Additionally, the claims from large banks that bitcoin is nothing more than a Ponzi scheme or some other type of speculative scam are almost entirely gone.
That said, it’s important to remember that the bitcoin network’s original purpose was to replace many of the services provided by the financial institutions covered in this list, namely in the areas of payments and value storage, with a more decentralized alternative. Additionally, the emergence of Ethereum has shown that there is the potential for further disruption through the decentralization of other financial activities, such as asset exchange and lending.
While protocols like Lorenzo are helping the bitcoin network develop into a complete replacement for the traditional financial services industry, institutions such as BlackRock, Fidelity, and others covered in this article will still have a major role to play in the coming years in terms of onboarding the average person to the world of decentralized finance.
These institutions will become increasingly involved as more regulatory clarity in the U.S. (where all of these institutions are based) is achieved, and they’ll also provide critical assistance to bitcoin as key nodes on the network offering ease of use, liquidity, and a higher degree of trust in the asset. For better or worse, this acceptance from institutions that people already trust can do wonders for how the masses view bitcoin.
What Is Bitcoin Shared Security?
Explore how bitcoin shared security enhances smaller blockchain networks.
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Originally designed as standalone systems, early blockchains operated in isolation, each vying to become the dominant platform. The terms “Bitcoin killer” or “Ethereum killer” became widespread as new projects aimed to surpass each other.
Internet battles were fought bitterly about the pros and cons of different consensus mechanisms, debating trade-offs in security and centralization.
However, the landscape has significantly matured with major projects recognizing the benefits of unifying ecosystems. Major blockchains now focus on becoming increasingly interconnected and sharing infrastructure.
This interconnectivity has given rise to the concept of shared security, where smaller, less secure blockchains can leverage the robustness of more established ones like bitcoin.
Let’s break down blockchain security and explore how bitcoin shared security offers solutions in this new paradigm of collaboration.
The Blockchain Security Challenge
At the heart of blockchain technology lies the principle of decentralization.
Consensus algorithms, such as proof of work and proof of stake, play a crucial role in maintaining this integrity. They ensure that all nodes agree on the state of the ledger and protect the network from fraudulent activities.
In PoW, miners expend computational power to solve complex mathematical puzzles, while in PoS, validators stake their tokens to participate in block creation. Both mechanisms make it extremely uneconomical for malicious actors to gain control of the network.
However, the security of these consensus algorithms is directly proportional to the number of active participants. A blockchain with a limited number of validators is vulnerable to a 51% attack, which involves a single entity gaining control to then manipulate the ledger. Only the largest most established blockchains require prohibitively excessive resources to take them over.
For small or midsized blockchains, building a large enough active community of network participants to secure their network in nearly impossible — especially with well-established blockchains already demanding incredible resources. Further, without enough participants to secure the network, small blockchains struggle to gain the trust of users and investors.
This creates a Catch-22: small blockchains need a strong user base to be secure, but they need to be secure to attract a strong user base.
How Shared Security Can Help
Shared security emerges as a solution to this dilemma.
By leveraging the security infrastructure of larger “blue chip” networks, smaller chains can enhance their own security without needing to build a community from scratch. This relationship is a win-win: the smaller chain gains security, while the larger chain extends its utility.
For instance, bitcoin is renowned for its unparalleled decentralization and security, underpinned by the largest network of miners, nodes, and network participants. Shared security allows these smaller chains to “borrow” bitcoin’s security, effectively making them more decentralized and much harder for attackers to compromise.
Successfully attacking the smaller chain would require compromising the larger, more secure chain — a significantly more daunting and costly endeavor. If secured by bitcoin, such an attack becomes practically impossible.
Approaches To Bitcoin Shared Security
Several methods have been developed to attempt shared security with a variety of native blockchains. The most successful historically have been with Ethereum, but bitcoin has recently emerged with some interesting novel ways to implement shared security.
Merge Mining
Merge mining allows miners to simultaneously mine blocks on multiple blockchains using the same PoW algorithm. This method leverages bitcoin’s mining power to secure smaller networks without additional resource expenditure.
By participating in merge mining, miners can earn rewards from multiple blockchains, incentivizing them to contribute to the security of these networks.
Namecoin was one of the first projects to implement merge mining with bitcoin. By sharing bitcoin’s mining power, Namecoin enhanced its security while providing a decentralized domain name system.
However, merge mining requires compatibility in hashing algorithms, and can be difficult to integrate.
Bitcoin Anchoring
Bitcoin anchoring involves periodically recording a hash of a smaller blockchain’s state onto the bitcoin blockchain.
This process creates a timestamped proof of the smaller blockchain’s state, anchored in bitcoin’s immutable ledger. Any attempt to alter the smaller blockchain would be evident unless the attacker could also alter bitcoin’s blockchain.
This method enhances the security and integrity of the smaller blockchain by leveraging bitcoin’s resistance to tampering. It also provides transparency and verifiability, as anyone can check the anchored hashes on the bitcoin network.
Babylon’s “Merge Staking” Breakthrough
Babylon is a new bitcoin shared security solution inspired by the concept of merge mining. Babylon introduces “bitcoin staking,” a design that allows bitcoin security to ground the PoS blockchain ecosystem. Coining the concept of “merge staking,” Babylon aims to allow bitcoin holders to stake their assets to secure PoS networks.
In Babylon’s model, bitcoin holders can participate in securing PoS blockchains without bridging or swapping processes. They stake their bitcoin through the Babylon Layer 2 and this stake is used to validate blocks on integrated PoS networks.
This not only enhances the security of these PoS networks but also provides bitcoin holders with opportunities to earn staking rewards without bridging to the native PoS itself.
A bitcoin holder initiates the staking process by locking their bitcoin in a self-custody vault. This vault operates under a Babylon “staking contract,” where the bitcoin is locked until the holder requests it back.
Once bitcoin is locked in the staking contract, the staker can begin validating transactions on the PoS chain. If a staker commits a protocol violation (for example, validating two conflicting blocks), the system automatically exposes the staker’s private key, allowing the community to slash their staked bitcoin by sending it to a burn address.
The staking process uses bitcoin timestamping to ensure tight synchronization between the PoS chain and the bitcoin network. It aggregates timestamps from multiple PoS chains, enabling Babylon to interact with many PoS networks simultaneously.
Bitcoin is never moved off the bitcoin network. The bitcoin remains locked in the staking contract on Babylon while validators sign blocks on the PoS chain using their keys.
Key Benefits include:
- Protection: A PoS blockchain is only as secure as the underlying stake validating its network. By staking bitcoin, PoS blockchains become secured by the most secure asset in the world, as opposed to a proprietary token.
- Utility: Bitcoin holders can participate in securing other networks, earning staking rewards without liquidating their bitcoin holdings. This provides additional utility for bitcoin, encouraging long-term holding and engagement within the broader blockchain ecosystem.
- Interconnection: Shared security models promote interoperability between bitcoin and other blockchains.
- Capital efficiency: By utilizing bitcoin’s existing security infrastructure, smaller blockchains can avoid the significant costs associated with building and maintaining their own robust security systems. This allows them to allocate resources toward development and user experience improvements. Moreover, bitcoin which would otherwise sit dormant can earn rewards and spread its security.
Liquid Staking And Beyond
Liquid staking has transformed the way cryptocurrency holders engage with staking by unlocking capital that was previously illiquid. Bitcoin staking is proving to be no different.
Here’s how it works: Users deposit the funds they wish to stake into a liquid staking protocol. The protocol stakes the cryptocurrency on their behalf and, in return, issues liquid staking tokens (LSTs). These LSTs serve as a sort of receipt or voucher, redeemable on a 1:1 basis with the original deposited tokens. Essentially, LSTs mirror the value of the staked tokens and can be traded or used in DeFi applications, just like the underlying asset.
Babylon extends the concept of liquid staking by integrating third-party platforms with its bitcoin staking model, offering a unique solution to enhance the security of PoS blockchains without making any bitcoin illiquid.
Here, users deposit their native tokens into third-party liquid staking platforms that are partnered with Babylon. These platforms then stake the tokens into Babylon instead of the users. The liquid staking platform then issues receipt tokens to the users, representing their staked assets. These receipt tokens retain liquidity, allowing users to trade or use them in DeFi applications while still earning staking rewards from Babylon.
A user can then redeposit these LST tokens into the liquid staking platform and receive the Babylon staking rewards, plus their original bitcoin.
Babylon can even enable restaking, where the staked assets are used to secure additional networks or applications within the blockchain ecosystem. Users receive liquid restaking tokens that are redeemable for the original receipt tokens, plus any additional rewards from restaking.
Between liquid staking and restaking, the the security of bitcoin can not only be spread around PoS consensus mechanisms but also allow DeFi users to extend bitcoin throughout their financial activites
A Still-Growing Movement
The rise of bitcoin shared security marks a pivotal moment in the evolution of blockchain technology. Newer blockchains can now increase their resilience against attacks and foster greater trust among investors.
Projects like Babylon are at the forefront of this movement, unlocking new use cases for bitcoin and integrating it more deeply into the DeFi ecosystem. Through these collaborative efforts, bitcoin is poised to play an increasingly foundational role in securing and connecting the entire blockchain industry.
What Is A 51% Attack And How Do They Work?
51% attacks have always been a shadowy threat looming over blockchains. But how scary are they, really?
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Decentralization is one of the core principles of the cryptocurrency economy. Instead of relying on a single company or entity, blockchains generally rely on a distributed network of nodes that help ensure they remain secure and operate efficiently.
Because of this, blockchains can be incredibly resilient in the face of attempted attacks.
But there’s one type of vulnerability, called a 51% attack, that stands out from the rest, due to its potential to completely undermine that principle of decentralization.
But what exactly is a 51% attack? Here’s everything you need to know.
What Is A 51% Attack?
A 51% attack is a type of attack on a blockchain network where one entity gains control over more than half (51%) of that blockchain’s mining hash rate, computational power, or staked tokens. By centralizing the control of a blockchain into the hands of a single bad actor or entity, 51% attacks have the potential to subvert the principles of decentralization, security, and trustlessness that define blockchains. The concept of such attacks has been discussed since the early days of bitcoin, including in Satoshi Nakamoto’s original bitcoin whitepaper from 2008.
If an entity were to gain control over 51% (or more) of a network, it could allow them to significantly disrupt the integrity of that blockchain in a variety of ways, including reversing transactions, blocking new transactions from being confirmed, the double-spending of tokens, or even the creation of an alternative version of that blockchain (known as a “fork”) that could fragment the network and confuse users.
How Does A 51% Attack Work?
Any 51% attack starts with the exploiters trying to gain majority control over that blockchain. While typically, risks around 51% attacks have centered around proof-of-work blockchains like bitcoin, they’re theoretically possible on proof-of-stake chains as well.
For a proof-of-work chain, where miners compete to solve complex cryptographic puzzles in exchange for block rewards, attempting a 51% attack would require the attacker to amass enough computational power to take over the network. This typically means buying or building enough mining rigs that they’ve amassed at least as much power as the rest of all the other miners in the network combined — if not more.
Alternatively, an attacker could join, or create, malicious mining pools, which are essentially miners who combine their computational power to work together and increase their chances of earning rewards. If an attacker is able to influence enough miners to join a pool, they could potentially accumulate 51% of a network’s hashrate.
Once the exploiter gains control over 51% of the network, they have a range of options at their disposal.
They can opt to:
Partition The Chain
This means that the hacking group or entity has essentially segregated its group away from the main network’s miners. With this separation, the hackers can continue with mining operations but can refrain from sharing updates with the primary network.
Add New Blocks
With the majority of the network under their control, the attacking entity could also opt to add blocks to the blockchain faster than the rest of the network can. If the attack continues for some time, eventually the difference in length between the two versions of that blockchain will become proportional to the difference in the hashing power between the hackers and the main network.
Reintegrate With The Network
If the hacking group opts to rejoin the network following the initial partition, the original network, and the competing version created by the hackers will both begin spreading through the entire network. If the new chain has more blocks than the initial chain, then typically the new chain will replace the original chain, meaning that the attackers will have gained the ability to execute a wide variety of potential threats.
What Are The Risks Of A 51% Attack?
If an attacker was able to successfully acquire enough computing power to partition a chance, add new blocks, and then reintegrate that new chain with the original network, then there can be serious implications for that blockchain and its users, including:
Double-spending
Upon the advent of digital currencies and assets, a key concern was around the potential to “double-spend.” Since digital currencies are just data, they can potentially be copied and spent more than once if not managed properly. But through blockchain and its consensus mechanisms, it can be ensured that only valid transactions are recorded and that once a transaction is confirmed, it can’t be altered or reversed.
But if an attacker gained control over 51% of a network, all that goes out the window, and the most feared consequence is that they’d move to try to double-spend tokens. To do this, the attackers would first need to record a regular transaction. Then, they could use their control over the network to change the blockchain to show that they never spent the money at all, and repeat that over, and over.
Denial Of Service Attack
Another potential consequence of a 51% attack is a denial of service attack. Essentially, the attacker could block the addresses of other miners, making it impossible for certain transactions to be confirmed. At the same time, since attackers have control over most of the network, they’d be able to potentially prioritize their own transactions over the legitimate ones that they’re blocking. This would not only delay real users but could also lead to the attacker’s false transactions becoming permanent.
Loss Of Trust
Blockchains operate on a trustless nature. Since there’s no centralized entity in control, trust is essentially distributed across the network of nodes and miners. When operating correctly, this means that there’s no single point of failure, and that it’s extremely difficult for a blockchain to confirm an illegitimate transaction. But after a 51% attack, a user’s trust in that blockchain could be permanently eroded because of the seriousness of the exploit, which could make it challenging to retain users, could lead to a drop in that network’s native currency, and could make it difficult to continue to grow and scale that chain.
Are 51% Attacks Likely?
While 51% attacks might be the most feared of all potential blockchain exploits, they’re actually extremely unlikely — at least for major blockchains. To successfully take over 51% of the bitcoin network, for example, it would cost an estimated $20 billion to do so. And to take over 51% of all staked ETH tokens, it could cost even more. And as these blockchains acquire more users and become more decentralized, the task only grows more difficult.
To take over bitcoin’s network, the exploiter would have to not only have the funds to buy billions of dollars of mining equipment, but also have the funds to pay massive electricity bills to keep them running, in addition to even finding a source for such a hefty amount of computing power. Bitcoin mining uses up as much electricity as some entire nations, meaning the costs would add up quickly, since taking over the network would require even more power.
Beyond the sheer cost, there’s also no guarantee that if one did take over 51% of the network, it would be successful. Theoretically, validators and miners could also coordinate against a suspected hacker, and have options including choosing to restart the blockchain from a period in time before the hack happened. For the largest, most-used blockchains, these potential deterrents have been strong enough to avoid a 51% attack.
But smaller blockchains that don’t have as much mining power or staked tokens can be far more vulnerable.
Successful 51% attacks in recent years include:
Bitcoin Gold: This blockchain was 51% attacked twice, first in 2018 and then in 2020. In 2018, the 51% attack led to $18 million in double-spending of the chain’s native token. In 2020, the blockchain was exploited again, to the tune of around $70,000 in double-spending.
Ethereum Classic: Ethereum Classic has been the subject of multiple 51% attacks, stemming from the fact that it is a relatively lightly used blockchain. In 2020, ETC suffered three 51% attacks in the span of a month. In one of the attacks, an exploiter paid around $200,000 to acquire enough computing power to take over the chain, then went on to double-spend more than $5.5 million in ETC tokens.
Vertcoin: A largely unknown blockchain, Vertcoin was 51% attacked in 2018 and in 2019. In its first exploit, about $100,000 in the blockchain’s native currency was double-spent.
Bitcoin Remains Secure
While 51% attacks are possible in theory and they have occurred on smaller, less secure blockchains, they’re an extremely unlikely threat for the most major blockchains in the cryptocurrency ecosystem. The scale of the financial, logistical, and computational resources required to execute such an attack acts as a powerful deterrent.
At the same time, the fact that 51% attacks are possible in theory underscores the necessity of maintaining a robust and sufficiently decentralized network and ensuring security remains paramount.
Why Bitcoin Is Essential To The Future Of Global Energy
Bitcoin mining cuts energy waste, stabilizes grids, and boosts renewable adoption, positioning it as vital to the future of global energy.
Bitcoin is known as a completely digital phenomenon, which still turns off some people who prefer their financial system to involve something which they can hold in the palm of their hands. However, the reality is the bitcoin network very much interacts with the physical world via the mining process. In fact, the energy-intensive nature of bitcoin mining makes bitcoin an essential component of the future of global energy markets due to the way it changes the demand side of the equation for energy producers.
While creating an ultimate buyer of last resort is the most critical change that bitcoin mining brings to energy markets, there are also second order factors to consider. Whether it’s improving the economics of renewable energy sources or enabling nation states to better capitalize on their local energy production, it’s clear bitcoin mining is having a massive impact on global energy usage. And this is all despite the large amount of fear, uncertainty, and doubt regarding the bitcoin industry which has been heavily promoted in the mainstream press.
So, what’s the reality of bitcoin’s impact on the future of global energy? And why does the bitcoin network require so much energy to function in the first place? Let’s take a deep dive on the matter, including real world examples of how the bitcoin mining process is already changing the energy market.
Why Bitcoin Uses So Much Energy
The key innovation with bitcoin was finding a decentralized solution to the double-spending problem, which enabled the first form of a decentralized digital cash system. Previous attempts at the development of digital cash had failed, as the entities in control of ordering transactions and preventing the same money being spent more than once were centralized. Gold-backed digital currencies that did not surveil their users, such as E-Gold and Liberty Reserve, were shut down by the U.S. government, and a decentralized solution was needed to make a digital cash system resistant to legal and regulatory attacks.
Bitcoin creator Satoshi Nakamoto solved the double-spending problem by launching a decentralized network of miners who would take on the task of ordering transactions in a digital cash system. To prove their value and trustworthiness to the network, miners expend energy in an easily provable way via a process known as proof of work (PoW). By finding the solution to a math problem, a miner can prove they have spent a certain amount of energy on computational resources.
Since the miner is expending resources and incurring these upfront costs, they are incentivized to act honestly in exchange for newly-issued bitcoin and transaction fees. It should be noted that, contrary to previously held beliefs by some bitcoin users, miners do not have control over users of the bitcoin network and are simply needed to order transactions properly in a chain of blocks (commonly known as the blockchain).
In other words, bitcoin’s impact on the global energy industry is a direct result of the PoW mining process that is used to order transactions on the network in a decentralized manner, which has resulted in a large amount of energy usage.
Over time, the amount of energy expended by miners through this PoW mining process has exploded. While early bitcoin users were able to mine bitcoin with nothing more than a single laptop, the mining process has grown into a specialized industry these days with hardware built specifically for use in the bitcoin mining process, and access to cheap electricity becoming a key component of a profitable mining operation. In fact, there are now a number of bitcoin mining companies that are publicly traded on various stock markets around the world.
Currently, the bitcoin network hashrate is estimated at roughly 650 million terahashes per second. This amounts to implied energy usage of 2% of all energy use in the United States and 29% of the energy used in the United Kingdom, according to Digiconomist. In fact, the bitcoin network’s total energy use is estimated to be somewhere around that of Kazakhstan and/or the Philippines, as examples.
Disputing The Attacks On Bitcoin’s Energy Use
Most of the discussion around bitcoin’s energy use in the mainstream press up to this point has been rather negative in nature, and it makes sense to refute some of these claims before going further down the bitcoin energy rabbit hole. There are three common ways in which this relatively new use of global energy has been attacked so far.
Firstly, many people tend to view bitcoin’s use of energy as a strict negative, with many commentators referring to bitcoin’s energy use as wasteful. Secondly, bitcoin has seen heavy criticism related to the kind of energy that is used to power the network’s hashrate. In other words, the second concern revolves around bitcoin mining’s potentially negative impact on the environment and climate change. Thirdly, it is often stated that alternative mechanisms for solving the double-spending problem, such as proof of stake (PoS) or traditional, centralized databases, can do the same things as bitcoin while using much lower amounts of energy.
Myth #1: Bitcoin Mining Wastes Energy
The first point is rather subjective and can be rejected rather quickly on those grounds. Those who say bitcoin is wasting energy are simply making a value judgment on bitcoin itself. They do not see the value of bitcoin, so they think any use of energy to power the network is inherently wasteful. It would be no different from someone who does not celebrate Christmas complaining about the energy that is used to power Christmas lights during the holiday season.
In reality, the market is likely the best measure as to whether bitcoin is a waste of energy or not. It’s clear that many people around the world value what the bitcoin asset and network provide in terms of its use as a global, apolitical financial system, and the amount of energy that is used in the mining process is a direct reflection of that valuation. In other words, the people who say bitcoin mining is wasteful are empirically wrong.
It should also be noted that many estimates regarding the amount of energy the bitcoin network will use in the future have been wrong and based on false assumptions. For example, various studies regarding the energy use involved in a single bitcoin transaction are oftentimes ignorant of Bitcoin Layer 2 networks such as Lightning Network and Lorenzo Appchain. As bitcoin continues to grow over time, it is likely that a single transaction on the base bitcoin blockchain will represent thousands of bitcoin transfers on these secondary protocol layers.
One of the most notable examples of the hysteria that has been built around bitcoin’s energy use was a 2017 Newsweek article titled, “Bitcoin Mining on Track to Consume All of the World’s Energy by 2020.”
It should also be noted that a large percentage of current global energy production is wasted, which is an area where bitcoin mining’s flexibility in terms of instantly turning the hardware devices on or off to help balance electrical grids can be extremely helpful. In fact, according to Core Scientific founder Darin Feinstein, the amount of energy that is wasted globally on a yearly basis could power 200 bitcoin networks, as of 2022.
Myth #2: Bitcoin Mining Is Bad For The Environment
The response to the second criticism of bitcoin mining being bad for the environment is similar to the response to the first criticism. In both cases, bitcoin is being subjectively put into a separate category as compared to all other uses of electricity.
Bitcoin mining devices are simply plugged into the local electrical grid in a manner no different than a Tesla vehicle. The type of energy used to power the bitcoin’s network hashrate simply depends on the types of energy that are available in various locations around the world. Riot Platforms infamously countered the environmental concerns around bitcoin mining by pointing out that bitcoin mining devices themselves do not emit any carbon in a parody of the claims being made against the industry in an article by The New York Times. While the video was meant to be comical, the point that was being made is that the emissions come from the energy generation sources themselves and not from the bitcoin miners.
Those who are concerned about a potential negative impact of bitcoin mining on the environment should aim their frustration at the energy providers themselves rather than the bitcoin miners who are simply following the local laws and regulations to operate their businesses. Bitcoin miners will use whatever is the cheapest form of energy generation in the world. And in many cases, that form of energy does indeed come in a renewable form. They have nothing against clean, sustainable forms of energy, and they would definitely use those forms of energy to power their businesses if the financial incentives lead them in that direction.
On top of all that, it’s also important to note that nearly 60% of bitcoin’s network hashrate does come from clean energy sources, according to August 2023 data from the Bitcoin Mining Council. This is much higher than the ratio of renewables found in global energy production, which is estimated at one-seventh by Our World in Data.
From this perspective, it would appear that environmentalists would be better off directing their anger towards other industries if they’re going to be subjective about energy being used for specific purposes. In fact, bitcoin mining has the side effect of improving the economics of various sustainable energy sources, which will get to later in this article. With this in mind, it’s also worth pointing out that one of the more notable campaigns for complaining about bitcoin’s supposed negative effect on climate change, which is the “Change the Code, Not the Climate” campaign from Greenpeace USA, is funded by the co-founder of a more centralized bitcoin competitor known as xrp, invented and produced by Ripple, which is a company we’ll cover in the next section.
Myth #3: Bitcoin Doesn’t Need Proof Of Work
Finally, the criticism that alternatives to bitcoin, such as Ethereum or Venmo, prove that bitcoin mining is indeed a wasteful process misses the entire value proposition of bitcoin as a cryptocurrency.
While it’s true that Ethereum and other cryptocurrency networks’ use of PoS dramatically lowers the amount of energy that is used in their respective consensus mechanisms, PoS is generally seen as less secure and more centralized than PoW by many bitcoin experts. For example, bitcoin’s use of PoW enables the transactions on the network to be processed by an ever-changing, dynamic group of miners rather than a mostly static, increasingly enshrined group of stakeholders. This is due to the fact that a staker must sell some of their stake in order for their role in network consensus to decline, while in bitcoin existing miners can be simply outcompeted by new entrants.
As covered previously, the point of bitcoin is to have a sufficiently decentralized form of digital cash that cannot be controlled by some entity or group of entities that effectively become a new trusted third party in the network. In addition to the concerns around centralization and security related to PoS, bitcoin is also extremely difficult to change, especially when it comes to something as ingrained in the system as the PoW mining process (as illustrated by the bitcoin blocksize war).
Simply put, a proposal to change bitcoin from PoW to PoS would be a nonstarter. Indeed, Greenpeace’s Ripple-co-founder-funded campaign to make this exact change has basically gone nowhere. Notably, Ripple was previously also sued by the U.S. Securities and Exchange Commission for unregistered securities offerings as part of its more easily attacked bitcoin competitor. It’s also worth noting that PoS can be used as consensus mechanisms for Bitcoin Layer 2 networks, such as Lorenzo Appchain, without any necessary protocol changes at the Bitcoin Layer 1 level. This allows more experimentation to take place on bitcoin without affecting the base layer.
In terms of comparisons of bitcoin to financial technology apps such as Venmo and Cash App, which have been made by the likes of Nobel Laureate and New York Times columnist Paul Krugman, there is a complete misunderstanding of bitcoin’s underlying value proposition. Bitcoin is a permissionless and censorship-resistant digital cash system with its own monetary asset that works globally. On the other hand, apps like Venmo are completely surveilled, are only compatible with U.S. dollars, can restrict access to specific users, can censor transactions, and only work in the U.S. The two systems are simply not comparable.
How Bitcoin Is An Essential Component Of The Global Energy Equation
The main variable of the global energy equation altered by the emergence of bitcoin mining is the ability to instantly convert any form of energy into digital money, namely bitcoin. Bitcoin mining is effectively a buyer of last resort when it comes to energy, which means less energy is wasted.
Various forms of energy can come with a large amount of waste due to the fact that energy demands can vary. The simplest example here is that energy demands tend to collapse at night when most people are sleeping. Much of the energy generated during this time is effectively wasted if it cannot be stored properly, which tends to be the case. By having a new source of demand for energy around the clock and all days of the week, energy providers can increase their revenue and remove a large amount of waste from their business.
For example, extra natural gas extracted from oil is usually burned through a process known as flaring due to a lack of nearby infrastructure to provide demand and make it economical to capture and sell. By using a mobile generator, oil production sites can use this excess energy for bitcoin mining and reduce the need to flare gas. Not only does this improve the oil producer’s bottom line, but it also leads to less carbon emissions due to the reduction of flaring. Other examples of wasted energy can be found in solar and wind, as these forms of renewable energy tend to have spikes in supply based on local weather conditions that surpass demand.
Due to the improved financial reality that bitcoin mining can provide to energy producers, the process of mining bitcoin has moved closer and closer to direct sources of energy over time. This gradual move from hobbyists plugging mining equipment into their home electricity connection to energy producers relying on bitcoin mining to improve their bottom lines makes sense when you consider that electricity is the key expense involved in the bitcoin mining process.
In addition to improving the financial situation for energy producers by providing a constant source of demand, bitcoin mining can also be used as a stabilizing force for energy grids. This is because a bitcoin mining operation can be turned on or off in an instant with the flip of a switch without causing further damage to the underlying business. For example, having an Amazon warehouse instantly drop its consumption of energy from the grid would lead to a number of additional issues for that business such as packages not getting delivered. With a bitcoin mining operation, the business equation is simply energy goes in and bitcoin comes out. There aren’t other aspects of the business that are negatively affected by a power outage.
This is an incredibly rare attribute when it comes to major consumers of electricity, and it makes bitcoin mining the perfect ingredient in demand response protocols where miners can get paid to turn off their hardware devices in times when demand for electricity spikes. Conversely, bitcoin miners are also able to turn on additional mining capacity in times of low demand.
The goal here is to keep the amount of demand for electricity matched up with the available supply, which helps prevent waste, malfunctions related to frequency or voltage instability, and rolling blackouts. The efficiency gains that come with a more stable energy grid that can be enabled by bitcoin mining have been compared to the ways in which cars use gas more efficiently when traveling at a constant speed on a highway as opposed to the stop-and-go traffic of city streets. Additionally, a stable grid also leads to stable and more predictable energy prices. This is especially useful in remote areas with microgrids or underdeveloped electrical infrastructure.
When Bitcoin Mining Goes Wrong
Of course, there have been a number of instances where bitcoin mining has turned out to be more of a stress on existing grids rather than a stabilizing effect. However, these cases tend to involve miners moving into a particular area and using as much cheap energy as possible rather than being integrated as part of a stabilizing tool for the grid itself.
For example, bitcoin miners that flocked to Kazakhstan in search of low electricity costs ended up turning the country’s power surplus into a deficit through overuse. According to MIT Technology Review, this overloading of Kazakhstan’s electricity grid partially came as a result of tax breaks, crony politics, and a relaxed governance structure. By the end of 2021, bitcoin miners were using 7% of Kazakhstan’s energy supply. As a result, power shortages and blackouts became commonplace. Eventually, public protests led to the government cutting bitcoin miners off of the electrical grid.
This situation in Kazakhstan illustrates how bitcoin mining is simply a tool that is also open to misuse. For this new tool for the energy industry to be beneficial to society as a whole, it needs to be implemented in the correct manner. Governments and energy producers can use bitcoin mining to improve the energy grid and the viability of various power generation schemes; however, lawmakers and regulators also need to be on the lookout for bitcoin miners who just want to use preexisting incentive structures to exploit local energy grids.
A Boon For Sustainable Energy Sources
As covered previously, bitcoin mining has been heavily and wrongly attacked for the amount of carbon emissions that happen as a result of the energy used in the mining process. And in reality, bitcoin mining can actually improve the economics of various forms of renewable energy.
For example, bitcoin mining can be helpful in not wasting as much unused energy when it comes to wind and solar energy plants. These forms of energy tend to generate excess power at specific parts of the day, which is then curtailed and basically thrown away.
While the wind is still blowing at night and generating power, this is also when most people are sleeping and not using as much energy. Additionally, solar power generation tends to peak at the middle of the day, which leads to excess power generation during that time. However, when bitcoin mining is added to the equation, the revenue generated by these renewable energy sources can be massively increased thanks to the constant demand for electricity that is involved in the mining process.
This steady and predictable demand for electricity from the bitcoin mining process can go as far as incentivizing the creation of new power plants based on renewable energy or revitalizing failing renewable energy plants. And as covered previously, the stabilization bitcoin mining can provide to the grid more generally can also be particularly beneficial in systems that incorporate wind and solar, which are notably more volatile in terms of energy production levels. Grids based on renewable energy sources oftentimes have to revert to balancing themselves through purchases of additional, dirty energy from other grids; however, a stabilization solution involving bitcoin mining removes this need to depend on less desirable sources of energy in certain situations.
While it’s true that bitcoin mining effectively improves the profitability of any source of energy, this impact is felt most heavily in renewable forms of energy due to the more volatile energy supply shocks that tend to be found with those sources. In this way, bitcoin mining can act as an accelerant for those who would like to see the world move to an economy that is more dependent on renewable energy sources.
This was also the finding of a report (PDF) released by the Bitcoin Clean Energy Initiative (BCEI) back in 2021. According to the report, “Bitcoin mining presents an opportunity to accelerate the global energy transition to renewables by serving as a complementary technology for clean energy production and storage.”
The BCEI was originally founded by Block, which was known as Square at the time and now works on a number of different bitcoin-focused initiatives, in addition to its more well-known products like Square and Cash App.
The purest form of bitcoin mining’s ability to accelerate the development of renewable energy sources comes from the fact that bitcoin miners can be placed at renewable energy plants before a grid has even been developed. This helps calm the fears of investors who are needed for the plant to be built in the first place. Even in a scenario where the plant remains isolated and more development does not take place around it, these investors can ensure they’ll have at least one major source of revenue in the form of bitcoin mining.
At the end of the day, bitcoin miners are effectively incentivized to seek out areas where there is too much energy as compared to local demand and improve the economics of those energy sources.
Bitcoin’s Role In Energy Underscores Its Geopolitical Importance
Bitcoin mining also changes the global energy market from a geopolitical perspective. An energy market where excess production can be converted into bitcoin is very different from one where that energy can only be monetized by selling it to the highest bidder that is deemed acceptable by the global community of nations. For example, a country that has been sanctioned by the United States and its allies may find it more difficult to find a buyer for their excess energy. However, they are now able to monetize this energy in a permissionless, unregulated manner through bitcoin mining.
The bitcoin asset itself is notable for its ability to offer an alternative to the current global financial system, which is largely dominated by the U.S. And by mining bitcoin, these nation states are able to establish a decentralized computer network as a key trade partner that exists outside of the current geopolitical power structure.
Notably, Russia passed a law to legalize bitcoin mining at a time when it is also facing economic sanctions from the U.S. and others as a response to the invasion of Ukraine. Iran has also joined the fun, and this trend of energy-rich geopolitical opponents of the U.S. getting into bitcoin mining should not be viewed as a coincidence. That said, the U.S. itself is also becoming a global hub of this activity.
Bitcoin mining could alter the global power structure in a way that benefits energy-rich countries, as they stand to benefit the most from the emergence of the bitcoin mining industry. This also gives these countries an incentive to be supportive of bitcoin more generally, as more activity on the bitcoin network means more revenue for bitcoin miners. Of course, every country should be aware of this alteration to the economics of energy production, as any energy producer stands to see increased revenue.
Projects That Illustrate Bitcoin’s Global Energy Impact
Now that the basic premise behind bitcoin mining’s impact on the global energy market has been explained, let’s take a look at some of the more prominent projects around the world that illustrate the general thesis that has been outlined so far.
Balancing Texas’s Electrical Grid
One of the most notable illustrations of bitcoin mining’s ability to stabilize an energy grid can be found in Texas. The Texas power grid, managed by the Electric Reliability Council of Texas (ERCOT), has previously faced challenges with fluctuating energy prices and occasional service disruptions. After multiple snowstorms in late 2021, the power grid came just minutes from a complete failure. Amid these issues, the growing bitcoin mining industry in the state saw an opportunity to help stabilize the grid, an idea that U.S. Senator Ted Cruz found to be compelling. The general idea is based around how bitcoin miners can quickly adjust their energy usage.
This flexibility is crucial in a grid like ERCOT’s, which requires a delicate balance between energy supply and demand. By absorbing surplus energy that would otherwise be wasted, particularly from renewable sources like wind and solar, bitcoin miners help maintain this balance. This balance ensures that the entire grid remains stable and avoids disastrous scenarios where power plants go dark and blackouts occur. The setup in Texas is particularly advantageous for the bitcoin mining industry, as the miners are paid to power down their operations when other entities connected to the grid need access to power.
While critics of ERCOT’s bitcoin mining plan to stabilize the grid say that this simply increases the demand for power across the grid in aggregate at a time when the system is already under stress, the reality is the implementation of bitcoin mining across the grid leads to the generation of more power generally, meaning there is excess power that can be accessed in rare instances where the demand for power spikes. ERCOT’s plan already proved useful during a heatwave in 2022 when bitcoin miners shut down their hardware as demand spiked.
Bitcoin Mining Brings Historic Hydroelectric Plant Back To Life
An historic hydroelectric plant in Mechanicville, New York, nearly faced demolition some years ago, but now it has instead been nominated for national engineering landmark status. The plant, owned by Albany Engineering Corp., is believed to be the oldest renewable energy facility in continuous operation globally, despite brief interruptions. Originally built in 1897, the plant was abandoned by National Grid, leading Albany Engineering Corp. to invest years into restoring it to full capacity. However, running the plant using its original 1800s machinery offers little profit, prompting the company to supplement its revenue by mining bitcoin.
Mining bitcoin has proven more lucrative for Albany Engineering Corp., generating three times the income compared to selling electricity to National Grid, according to Times Union. CEO Jim Besha Sr. has noted that while they are experimenting with bitcoin mining using renewable energy, he remains cautious about bitcoin as a long-term investment, converting their earnings into cash rather than holding onto the cryptocurrency. The plant’s nomination for landmark status could help preserve its legacy, adding to the protections already provided by its listing on the National Register of Historic Places.
Balancing The Grid And Growing Food With Bitcoin Mining In Iceland
While Iceland’s abundant green energy has made it a prime location for bitcoin mining, the country also faces significant challenges in food sustainability, relying heavily on imports for essential food items like grains and vegetables.
Despite its reputation for renewable energy, Iceland’s reliance on food imports reveals a gap in self-sufficiency, with imports of tropical fruits alone totaling over $9 million. However, innovative approaches involving bitcoin mining like those previously seen in the Netherlands and Prague offer potential solutions. By repurposing excess heat from bitcoin mining operations to power greenhouses, these models show how mining can support local agriculture and reduce the need for imports, according to Forbes.
Iceland stands at the crossroads of opportunity, where it can leverage its green energy not only for economic gains through bitcoin mining but also to enhance its food sustainability. With the right strategies, Iceland could lead by example, demonstrating that technological innovation and sustainable agriculture can coexist.
This project shows that, in addition to increasing revenue for generators of renewable energy, bitcoin mining also has the potential to lower costs for business operations that require heat generation.
El Salvador’s Volcano Energy
Since 2021, El Salvador has harnessed the power of its Tecapa volcano to mine nearly 474 bitcoin, adding approximately $29 million to the government’s bitcoin portfolio, according to Reuters. This innovative approach, fueled by geothermal energy, reflects President Nayib Bukele’s commitment to integrating cryptocurrency into the country’s economy in an effort to lower their reliance on the U.S. dollar and the associated global financial system.
The state-owned geothermal power plant generates 102 megawatts of electricity, with 1.5 megawatts dedicated to running 300 processors for bitcoin mining. While cryptocurrency mining has faced global criticism for its high energy consumption and environmental impact, El Salvador’s use of green energy presents a sustainable alternative. Since becoming the first nation to adopt bitcoin as legal tender in 2021, alongside the U.S. dollar, El Salvador continues to leverage its renewable resources to support its ambitious cryptocurrency goals, despite facing criticism from international bodies like the International Monetary Fund.
Gridless Energizes Rural Africa
In Africa, Gridless has found a way to use bitcoin mining to combat the problem of a lack of electricity in rural parts of the continent. A large portion of the estimated 770 million people without access to electricity in the world live in Africa, which is why Gridless has focused its operations there.
The primary challenges in rural Africa include insufficient infrastructure and limited disposable income, which forces many to prioritize more essential needs over electricity. Traditional microgrids have been deployed in these regions for years, but they often struggle with financial sustainability and inefficiencies. Gridless seeks to address these issues by integrating bitcoin mining with microgrid technology. By partnering with energy producers, Gridless ensures that excess electricity, which would otherwise go to waste, is used for bitcoin mining, thus making microgrids more viable and extending power to remote areas.
There are many more examples of the impact bitcoin mining has already had on energy producers and electricity consumers around the world, but these four projects give some added insight into how this industry is already having a global impact.
While bitcoin’s use of energy has mostly been ridiculed in the media as wasteful and bad for the environment, it’s clear that the reality of the situation is much more complex. Bitcoin mining is becoming an integral part of global energy infrastructure, as this new source of demand alters the existing energy economics. These changing economics will continue to evolve and have second-order effects on other areas such as climate change and geopolitics. The specific way in which the world’s energy use will change based on bitcoin mining is not yet 100% clear; however, what is clear is that it is something that all energy producers, whether in the form of private companies or nation states, must understand to get the most out of their energy production.
Bitcoin’s Energy Future
Bitcoin’s integration into the global energy landscape is transforming how we think about power consumption and energy markets. As a buyer of last resort, bitcoin mining is reducing energy waste, stabilizing grids, and even revitalizing renewable energy sources. This unique demand for electricity is pushing energy producers to innovate and create more efficient systems, offering both economic and environmental benefits.
Looking ahead, the interplay between bitcoin mining and global energy production is poised to grow stronger. Whether it’s helping emerging nations monetize excess energy or incentivizing the growth of clean energy infrastructure, bitcoin is playing an essential role in shaping the future of global energy. Energy producers, policymakers, and environmental advocates must consider these dynamics as they plan for a more sustainable and decentralized energy future.
Who Is Bitcoin Creator Satoshi Nakamoto?
Since the launch of Bitcoin, the identity of its creator has become one of the 21st century's greatest mysteries.
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Satoshi Nakamoto’s identity has been an obsession for crypto enthusiasts since the Genesis block. Nonetheless, the pseudonymous cypherpunk has kept his(?) identity a complete mystery for over 15 years.
Only one thing is certain about Nakamoto: He is the creator of bitcoin.
Without a doubt, Nakamoto changed the world forever; many consider his creation a literal miracle. He single-handedly revolutionized finance by conceiving a decentralized form of internet value. The vision for this invention is the foundation for the entire blockchain industry.
Wallets linked to Nakamoto contain somewhere between 750,000 and 1,100,000 bitcoin. According to current valuations, his net worth is somewhere around $73 billion making him about the 15th-richest person in the world.
Despite the tremendous fame and wealth of Satoshi Nakamoto, his identity remains one of the greatest mysteries of the 21st century.
This article will discuss what little is known about the creator of bitcoin and survey prominent theories about his possible identity. It will close with a discussion of Nakamoto as more than a person and focus on what he means to bitcoin conceptually.
Conceiving Bitcoin
Nakamoto did not drop bitcoin from the heavens, never to be heard from again; he was an active participant in the early community and many cryptography spaces. Much of what we know about his vision and work on bitcoin comes from his email and forum correspondences with the metzdowd.com mailing list and the P2P foundation website.
According to these messages, he started working on bitcoin early in 2007 and indicated some desire to solve fundamental problems with banking, seemingly prompted by the 2007/2008 financial crashes.
The biggest issue he saw with digital currency was the so-called “double-spend” issue, the unauthorized production and spending of money, and he proposed bitcoin’s peer-to-peer distributed timestamp server as a potential solution.
Satoshi Nakamoto did not invent blockchains or cryptocurrency. It was his novel decentralized approach to blockchains that was so groundbreaking. This involved using ledgers, Merkle trees, timestamps, incentives, cryptography, and a consensus mechanism that solved the double-spending problem, finally making digital money possible.
Personal Details
Although he communicated with a variety of people online from 2007 to 2010 and logged hundreds of messages, Nakamoto always remained anonymous. That said, details of his online footprint have left plenty of room for speculation.
First off, given the nature of the original code for bitcoin, it’s obvious that Nakamoto was professionally skilled and acquainted with cutting-edge cryptography and programming. In fact, many have exclaimed that the code for bitcoin is so perfect that Satoshi Nakamoto is either a genius or a pseudonym for a team of people.
The only personal information detailed by Nakamoto himself is on his P2P Foundation account, where much of his forum correspondence took place. The account says he is “a 37-year-old man who lives in Japan,” and his profile claimed his birthday to be April 5th, 1975. Many, however, have pointed out that his native use of British English and his references to “London Times” point to a person of commonwealth origin.
This is about all the personal information discovered about Satoshi Nakamoto. His communication with the bitcoin community mysteriously ended in 2010, with his final message saying that he had “moved on to other things.”
Possible Identities
There have been countless guesses about Nakamoto’s true identity. Here are some of the most prominent ones.
Hal Finney
The most popular and widely accepted “best guess” to Nakamoto’s identity is Hal Finney.
Hal was a renowned computer science genius and the recipient of the first sent bitcoin. Hal has been the most popular candidate for the title of bitcoin creator since the beginning of widespread internet inquiry. To much disappointment, he was aware of the rumors and consistently denied being Satoshi Nakamoto up until his death in 2014.
Hal’s expertise in cryptography and close involvement with bitcoin’s early development have kept his name in most people’s mouths speculating about Nakamoto’s identity. His way of writing, British origin, and the fact that his neighbor’s name was Dorian Nakamoto have all been used as additional fuel for the fire. Further, Hal became immobile due to Lou Gehrig’s disease and stopped contributing to the internet the day Nakamoto posted his last message.
However, one major thorn in this theory is that Hal Finney was competing in a 10-mile race when Satoshi Nakamoto responded to emails and transacted on bitcoin, newly surfaced evidence reveals.
Nick Szabo
Nick Szabo was a computer scientist and cryptographer known for his work on digital contracts and for creating “bit gold,” a precursor to bitcoin that shares many similarities. His deep understanding of the concepts underlying bitcoin is the primary source of weight behind this theory.
Looser evidence is simply that Hal Finney and Nick were friends. Hal was the first recipient of Szabo’s now famous 1998 private email list called “Libtech,” where Szabo released bit gold. This could explain why Hal Finny was the first bitcoin user; they even collaborated on developing bit gold.
Hal Finney lived close to Dorian Nakamoto, went to the same high school, and seemed well acquainted. Given that Nick Szabo lived in the same state as both men and was friends with Finney, this could be a connection enough for Szabo to use the name.
Despite the enthusiasm drummed up online, Szabo has repeatedly denied being Nakamoto. Szabo is alive and well, continuing to take part in the bitcoin ecosystem and touring industry conferences.
Craig Wright
Australian computer scientist Craig Wright is the most infamous claimant to the name of Satoshi Nakamoto.
Wright has been publicly in court and in the media, claiming to have invented bitcoin. Wright presented what he purported to be cryptographic proof of his identity, but the broader cryptocurrency community quickly dismissed his evidence as fraudulent.
Despite his media presence and numerous attempts, Wright has never been able to provide conclusive documentation that he is the real Nakamoto. Almost all bitcoin enthusiasts view his assertions with skepticism and disgust.
A Group
Another theory is that Satoshi Nakamoto is not an individual but rather a group of people working together under a shared pseudonym. Two main arguments support the idea that Nakamoto could be a group.
Multidisciplinary Expertise: The design of bitcoin’s consensus mechanism, cryptographic elements, economic incentives, and peer-to-peer network all required specialized knowledge. It’s more plausible that a group of experts with different backgrounds came together to create bitcoin than a single person mastering all these domains.
Timing And Activity Patterns: Observers have noted that Nakamoto’s activity patterns (posting messages, developing code, and responding to emails) suggest that the workload was shared among several individuals. The timing of messages and code updates shows a pattern that would be difficult for a single person to maintain, suggesting that the work was divided among a group to ensure continuous development and communication.
Satoshi Nakamoto As A Concept
Beyond the endless quest to unmask Satoshi Nakamoto’s true identity lies a more philosophical inquiry: What does Satoshi Nakamoto mean to bitcoin? Satoshi is not merely a person but a symbol of the core principles underlying bitcoin and the broader cryptocurrency movement. Nakamoto embodies the ideals of decentralization, anonymity, and resistance to centralized financial control.
His commitment to these principles is underscored by the decision to remain anonymous despite the monumental success of bitcoin. Nakamoto’s vision for bitcoin was to create a system that functioned independently of any single person or entity, a truly decentralized network. Nakamoto’s decision to step back from the limelight has ensured that bitcoin remains a decentralized and resilient system, which continues to thrive and evolve without the direct influence of its creator.
In many ways, the mystery of Satoshi Nakamoto has added to bitcoin’s allure, capturing the imaginations of people worldwide and ensuring that the principles of decentralization and trustless systems continue to gain traction. Ultimately, the true identity of Satoshi Nakamoto may not matter; what is important is the revolutionary idea that he brought to life.
What Is Segregated Witness (SegWit) And How Does It Work?
Among Bitcoin's most significant early challenges were scalability and mutability. Then, SegWit came along and changed everything.
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Despite the enthusiasm of Bitcoin Maximalists who view bitcoin as perfect from the start, the original blockchain design was not without flaws.
Among the most significant challenges were transaction scalability and mutability. These were the largest obstacles to bitcoin realizing its potential as a global currency and which hindered its broader application.
Transaction scalability refers to the amount of transactions bitcoin can process. Bitcoin was programmed to settle 1 mb of transactions about every 10 minutes. This comes out to about 4.6 transactions per second. Compared to Visa however, which processes about 1,700 transactions per second, the scalability issues hindering bitcoin from becoming a more widely used currency is clear.
Transaction mutability is the ability to alter a transaction ID before it is confirmed on the blockchain. This means that malicious actors could invalidate the next transaction a receiver makes. This feature of bitcoin makes building Layer 2 solutions difficult, as the second layer relies upon the consistency of the base layer.
SegWit not only helps alleviate these two issues with the original bitcoin network, but its solution also opens up an entirely new world of use cases for bitcoin.
This article will detail the history, inner workings, and impact of SegWit on the world of bitcoin.
History Of SegWit
SegWit was a proposal made by Dr. Pieter Wuille in December 2015 that suggested reformatting the composition of a bitcoin transaction.
A bitcoin transaction is a combination of the sender’s address, the receiver’s address, and a digital signature that verifies the sender owns the needed bitcoin.
Dr. Wuille proposed “segregating” the signature data, aka witness data, from the main transaction. This is where SegWit gets its name, segregating the witness data.
This upgrade is an ingenious way to store more transactions inside bitcoin’s 1-megabyte block size limit. Here’s how it’s done.
How Segwit Works
SegWit moves the signature/witness data outside the base transaction to its own separate structure. This data is still transmitted, but only as an attachment at the end of the transaction.
Leaving the witness data empty in the base transaction allows more transactions in the leftover space without exceeding the original 1mb limit.
Segwit is able to do this by introducing a new transaction format that is backwards-compatible with the original format. The new block format includes a 3 mb block extension, the new witness data location. This reformatting means that the block size becomes 4 mb while the base transaction is still just 1 mb.
When a SegWit transaction is broadcast, nodes that have upgraded to support SegWit recognize the new format and can process the transaction with witness data separately. No need for a hard fork, as the base transaction size is exactly the same.
Block Weight Versus Block Size
Given bitcoin’s decentralized nature, it might sound odd that an upgrade can come around and fundamentally change the block size of the bitcoin network. Part of the way SegWit does this is simply by redefining block capacity.
SegWit introduces a concept called “block weight,” calculated using the formula:
Block Weight = (Base Transaction Size * 3) + Total Transaction Size
Base Transaction Size: This refers to the transaction size without the witness data.
Total Transaction Size: This includes both the base transaction and the witness data.
Each block has a maximum weight of 4 million weight units, equivalent to the previous 1 mb size limit in terms of the old definition of block size.
What Segwit Directly Solves
The Segwit upgrade sought to alleviate transaction scalability and mutability issues, and was a great success by all accounts.
For scalability, the initial effect is obvious; by increasing the number of transactions per block, more transactions could be processed per second. This helps reduce congestion, enabling faster transaction processing and lower fees, especially when network activity surges.
SegWit solves transaction mutability in the same way. By separating the witness data from the transaction data, the transaction ID remains unchanged even if the witness data is altered. This protects the transaction ID from malicious tampering and ensures Layer 2 solutions have a secure, immutable base layer.
Although SegWit successfully fixes the core issues it was proposed for, its ultimate impact was far greater than Dr. Wuille could have ever expected.
A Snowball Effect
SegWit resulted in a series of interlocking and mutually dependent developments that ultimately transformed the face of the bitcoin ecosystem. The most important achievements resulting from SegWit are the advent of Bitcoin Layer 2 solutions, smart contracts on bitcoin, the Taproot upgrade, and Ordinals.
Layer 2 Solutions
Layer 2 solutions require stable transaction IDs to create secure additional layers. Segwit gives bitcoin this crucial property by eliminating transaction malleability.
A great example of this is the Lighting Network, the most significant Layer 2 that bloomed after SegWit. The Lightning Network relies on the creation of payment channels that allow users to conduct multiple transactions off-chain, with only the final state being recorded on the blockchain. With SegWit-enabled transactions, these payment channels can be securely managed without the risk of transaction malleability affecting the channel’s integrity.
All other Layer 2s, such as Stacks, Liquid Networks, Rootstock, and more, require the same stability in the base layer for their various operations.
Smart Contracts
Smart contracts are computer programs built on a blockchain that automatically execute a set of rules. Smart contracts are the essential infrastructure powering the entire decentralized economy: All its platforms, tools, and organizations run on these programs.
Although bitcoin’s scripting language is not as advanced as those of some other blockchain platforms, SegWit enhances its capabilities in several ways that allow for smart contracts:
- Layer 2 solutions: Layer 2s can use their increased throughput and programmability to add smart contracts to bitcoin themselves. For example, Rootstock and Stacks are Layer 2 solutions that support smart contract execution, enabling the development of a decentralized infrastructure on bitcoin.
- Script versioning: SegWit introduces the script versioning concept, allowing new features and upgrades to be added to the bitcoin scripting language without requiring a hard fork.
- Block space: More space is available in each block, which means larger smart contracts can be executed. This is especially beneficial for smart contracts that require a lot of data to be processed.
Taproot
Taproot is an upgrade to the bitcoin protocol that builds on SegWit signatures to improve privacy and efficiency. Taproot allows all participants in a transaction to agree on a single public key and signature.
Taproot reduces the size of these transactions, making them cheaper and faster to process. SegWit’s improvements in transaction structure and script versioning made the Taproot upgrade possible without needing a hard fork.
Ordinals
Ordinals are a numbering system applied to individual satoshis (aka sats, the smallest unit of bitcoin). Like a serial number, each sat has a unique ordinal number. This number is an individual identifier for each satoshi based on when it was mined.
In principle, this numbering system is all that is needed to make sats nonfungible. Every sat is unique and identifiable through its individual number. Once the satoshi is connected to external media, it can function as an NFT. This is where SegWit comes in.
The SegWit upgrade means users can store more data inside bitcoin’s 1-megabyte block size via the new witness data structure. The introduction of this arbitrary data is what helps enable Ordinals; now, full pieces of media can be added in as additional arbitrary data with the bitcoin transaction. Once a piece of media is attached to a bitcoin transaction with a single satoshi, this data is forever linked to that satoshi.
Even if this interaction with satoshis was possible after SegWit, it was impractical due to the speed and efficiency of making such transactions. Taproot solved this problem, and soon after this upgrade, bitcoin NFTs were born.
The Legacy Of SegWit
The implementation of SegWit has been instrumental in addressing significant challenges to bitcoin’s growth and functionality. In essence, SegWit has resolved foundational technical challenges and catalyzed a wave of innovation, expanding bitcoin’s capabilities and securing its place as a versatile foundation for the future decentralized world.
As bitcoin continues to evolve, the success of SegWit will undoubtedly shape the possibility of additional upgrades and be a symbol of how bitcoin can address seeming limitations.
The Story Of Mt. Gox: Origins, Collapse, And Aftermath
How a platform launched for Magic: The Gathering card trading services become the epicenter of Bitcoin's most notorious exchange collapse.
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Mt.Gox wasn’t meant to be the epicenter of one of cryptocurrency’s greatest crises.
The very name of this trading platform — short for “Magic: The Gathering Online Exchange” — shows it was primarily for people interested in swapping trading cards rather than exchanging virtual tokens. However, as founder Jed McCaleb dove deeper into digital assets, he sensed an opportunity to make Mt.Gox far more than a portal for Magic card players.
From 2010 onwards, Mt.Gox became the epicenter for bitcoin trading services, eventually controlling 70% of total bitcoin transactions.
However, because of this rapid rise, Mt.Gox also became the juiciest target for cryptocurrency hackers. In hindsight, everyone should have seen the Mt.Gox collapse coming; at the time, traders using this exchange were shocked by their losses.
To this day, the bitcoin community feels the sting of the Mt.Gox hack, but this painful episode has had a few positive repercussions.
A Brief History of Mt.Gox’s Fame and Fall
Jed McCaleb created Mt.Gox for Magic cards in 2006, but he pivoted to use this URL as a central trading hub for bitcoin in 2010.
While McCaleb got Mt.Gox off the ground and running, it was the French programmer Mark Karpelès who took Mt.Gox to its full potential as the company’s new leader. Although Karpelès successfully grew the Mt.Gox brand in the cryptocurrency community, he didn’t account for the increased attention from hackers, nor did he pay attention to increasing warning signs, like a security breach in June 2011 where hackers stole 25,000 bitcoin.
Despite a string of close calls, trading halts, and bitcoin thefts, it wasn’t until 2014 that Mt.Gox suffered its irrecoverable hack. 740,000 bitcoin — or 3.5% of the total supply — vanished from Mt.Gox users’ accounts, triggering the company to file for bankruptcy. In the immediate aftermath, bitcoin lost 90% of its value from the recent $1,000 high, highlighting Mt. Gox’s significance in the cryptocurrency ecosystem.
The Aftermath and Legal Battles
Court dramas are notorious for taking years to play out. Add the complexities of the uncharted cryptocurrency industry to the mix, and it’s no wonder the legal ramifications of Mt.Gox persisted until 2024. Not only was this case centered around a novel form of digital currency, but it took place under Japan’s legal code. Plus, the Mt.Gox case involved further nuances due to embezzlement and data manipulation charges for Mark Karpelès.
Despite the years of debate over how to repay creditors, the Tokyo District Court eventually approved a rehabilitation plan, and a portion of the recovered funds have begun working their way into the digital assets market. In 2024, major industry news headlines followed Mt.Gox’s first repayments to creditors, which some traders and analysts feared would put pressure on bitcoin’s market price.
Mt. Gox’s Implications for the Bitcoin Ecosystem
If there was any silver lining to the Mt.Gox hack, it highlighted the weaknesses in encryption and security on centralized exchanges (CEXs).
Many founders of the next wave of CEXs, including Kraken’s Jesse Powell and Gemini’s Winklevoss brothers, directly cite the Mt.Gox hack as inspiration to create safer, better-regulated platforms for digital assets. Also, as more CEXs entered the cryptocurrency ecosystem, the share of bitcoin became more spread between different platforms, helping avoid the centralization risk Mt.Gox posed.
Despite the improvements in CEX security following Mt.Gox, vulnerabilities in the centralized model became a “central” theme again following the fall of trading sites like FTX and lending platforms like Celsius in 2022. Many digital currency traders are still searching for safer alternatives to buy and use their bitcoin, without sharing personal information or worrying about counterparty risk.
The rise in distrust towards centralized entities might spur the continued growth and adoption of decentralized finance (DeFi) alternatives within the bitcoin ecosystem. Although bitcoin’s DeFi sector is still young, Layer 2 projects continue to build with bitcoin as their base layer and offer innovative, intermediary-free services.
Moving Toward a Decentralized Bitcoin Economy
While the wounds of Mt. Gox are still tender, developers and traders have learned a great deal from this infamous event. The cryptocurrency ecosystem has been far more secure and compliant since the days of Mt.Gox, but there are still concerns surrounding the overreliance on centralized entities. Besides risking another hack or liquidity crisis, traders recognize CEXs still have the power to withhold funds on a whim — a situation directly opposed to the decentralized ethos of bitcoin.
The mounting distrust in centralized cryptocurrency institutions continues to drive the growth in DeFi services, particularly on the bitcoin blockchain. Lorenzo Protocol is proud to be at the forefront of this latest evolution in the bitcoin economy, which has the power to erase all traces of centralization. With bitcoin as the foundation for trading, lending, and re-staking services, users may have all the tools to transfer and use their bitcoin without fretting about another Mt.Gox-esque mess.
Bitcoin Halving: What It Is And How It Works
The bitcoin halving is one of the most pivotal and enigmatic events in the cryptocurrency industry.
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The bitcoin halving gives the protocol its fundamental deflationary economics, has broad economic impact that is difficult to define, and occurs approximately every four years until the day the last bitcoin is mind.
It is, perhaps, the most fundamental, mysterious, and foreboding event in bitcoin, all wrapped into one, piquing the interest (and, sometimes, fear) of every bitcoin enthusiast.
The following information seeks to, at least partially, demystify the halving and allow potential bitcoin investors to understand key concepts such as market cycles, block rewards, and bitcoin supply dynamics.
A Quick Recap On How Bitcoin Works
To understand the halving, it’s beneficial to first cover how the bitcoin blockchain functions.
When a user submits a bitcoin transaction, it must be verified and recorded on the blockchain. Once initiated, the transaction sits in a pool, waiting to be selected by a miner and included in a block. A block is just a digital file for recording transactions.
Miners pick submitted transactions to put into their block and race to add this block to the blockchain. Miners must solve a complex mathematical puzzle to link their block to the others. This sounds complicated, but it’s essentially just a brute-force guessing game. Miners try to discover the correct hash (a string of characters) by simple trial and error to solve the puzzle. Therefore, the miner with the most computational power wins the race. This type of system is called a proof-of-work consensus mechanism.
A consensus mechanism is a system that allows various network participants to agree on the state of the ledger. In the case of bitcoin, the proof-of-work consensus mechanism determines who has the privilege of adding a block to the blockchain. This right is given to the miner who discovers the correct hash first.
Once a miner finds the hash, they broadcast their solution to the rest of the network. The other nodes verify that this is, in fact, the correct hash. If everything is verified, the block is added and the winning miner is rewarded newly mined bitcoin plus the transaction fees.
New bitcoin can only be created by the block reward given to miners. This is where the halving comes in.
The Halving
The halving is a rule designed into the mechanism that rewards miners. It requires that the amount of bitcoin distributed to the winning miner be cut in half every 210,000 blocks. Since bitcoin blocks are generated approximately every 10 minutes, the halving occurs about every four years.
This event, the reduction of the block reward, is a significant milestone in bitcoin economics. This ever-diminishing reward, being the sole mechanism for creating new bitcoin, ensures that the amount of new bitcoin entering the market decreases over each four-year cycle, resulting in a planned, consistent lowering of the digital currency’s inflation rate. Hence, bitcoin is described as deflationary, which is in stark contrast to traditional fiat currencies.
The halving does not go on forever. Although the block reward could be cut in half continuously to infinitesimal small numbers, the creator of bitcoin actually put a hard limit on the supply so that only 21 million bitcoin would ever be created.
Because of this, given that the publishing year of this article is 2024, we can expect 28 more BTC halvings, with the last one estimated for the 2130s, when the last bitcoin is mined. After the last halving, miners will only receive transaction fees as a reward for adding a new block.
Bitcoin’s deflationary economic model and hard supply cap are some of its most talked-about features. These aspects endow bitcoin with absolute scarcity, a quality that many find attractive and that underpins its role as a store of value.
The halving, in addition to these features, also has broader economic implications.
Impact Of The Halving
Due to the halving restricting the supply of bitcoin without affecting the demand for it, many see the halving as a catalyst for upward price movement. This is based on simple supply and demand theory, which states that if demand remains stable and supply goes down, then the price must increase.
The reality of bitcoin’s price movement is more complicated. Although the supply of new bitcoin being put into the market is lowered, the amount the halving affects the supply is not obviously significant enough to directly affect the price given other supply dynamics, such as the number of sellers versus hodlers in the market.
That said, in the early days of bitcoin, when the market was much smaller, an event like the halving could have had a large effect on bitcoin’s price. Historically, the year following the halving has seen bitcoin peak at multiple times the amount it was trading at during the halving.
The first halving occurred on November 28, 2012, and reduced the block reward to 25 BTC from 50 BTC.
- Price at time of halving: $13
- Following year’s peak: $1,152
The second halving occurred on July 16, 2016, and reduced the block reward to 12.5 BTC.
- Price at time of halving: $664
- Following year’s peak: $17,760
The third halving occurred on May 11, 2020, and reduced the block reward to 6.25 BTC.
- Price at time of halving: $9,734
- Following year’s peak: $67,549
The fourth halving occurred on April 19, 2024, reducing the block reward to currently 3.125 BTC, and despite bitcoin breaking its previous all-time high, the effect has yet to be fully seen at the time of this writing.
Although the original pump after the first halving could have been due to supply and demand dynamics, the effect of the following years is more likely the result of a self-fulfilling prophecy, where investors expect the event to raise the price and, therefore, buy in anticipation of it.
Nonetheless, bitcoin’s price historically does, in fact, increase after the halving, and then subsequently fall in price for a significant period of time. This has caused what many see as the market’s natural “cycles,” and these cycles are generally measured according to the four-year period dictated by the halving.
Mining Profitability
The other major effect of bitcoin’s halving is that it reduces profitability for miners. Miners are the entities that secure the bitcoin network. If they are not making a profit from their efforts, they will stop mining bitcoin, and therefore, make the network vulnerable to attack.
With each halving, miners’ profits are reduced by 50%, i.e., halved. This necessitates a significant rise in the price of bitcoin to counterbalance the reduced profits and ensure that operational costs do not exceed the income from mining. The rising price is a critical factor in miners’ profitability, given the relatively constant energy costs, computer costs, and transaction fees compared to the halving of mining rewards.
This creates one of the central problems the bitcoin community contemplates: what happens when the last bitcoin is mined? The traditional answer has been that transaction fees will pay miners enough to keep them protecting the bitcoin network. However, the narrative that bitcoin is digital gold and not everyday currency implies that relatively few transactions will be going through the network, potentially putting the network in danger.
Everything Follows Bitcoin
The bitcoin halving is one of the most pivotal and enigmatic events in the cryptocurrency industry. The historical price trends following each halving have skyrocketed not only bitcoin but the market at large. The whole industry stands at attention, waiting for the action after each halving; this mechanism defines the seasons of the market.
As bitcoin approaches its eventual supply cap, the halving will continue to be a focal point for investors, miners, and enthusiasts alike. Understanding its implications is crucial for anyone involved in the bitcoin ecosystem, as it not only shapes the economic landscape of the cryptocurrency but also influences broader market cycles and investor behavior.
The 9 Best Bitcoin Books: A Comprehensive Overview
These are the must-read Bitcoin books, from entry-level to expert.
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Most Bitcoiners remember where they first heard about the digital currency; at minimum, they remember the first time bitcoin really “clicked” for them.
Likely, it was a blogpost, a YouTube video, or even a conversation with a friend that was the moment bitcoin struck them as the inevitable future of finance (although many will say it was reading the bitcoin white paper).
In these revelations, they start thinking about bitcoin as the ultimate solution to a myriad of global problems. Epiphanies are addicting, especially when associated with personal gain.
Once the initial realization wears off, people typically spend vast amounts of time chasing that feeling, hunting down deeper and deeper interpretations of bitcoin and its meaning for humanity. Everyone needs to start mapping their hunt, and for many, that means starting a reading list.
The following collection of books begins with bitcoin basics and ends with literature that would challenge even the most resolute maximalist. It has something for everyone to add to the syllabus of their bitcoin education and the itinerary of their bitcoin journey.
List Key
The first through third titles below are broad books for beginners. Skip these if you already have a general knowledge of what bitcoin is, and Bitcoiner history.
The fourth through sixth titles are books considered absolute classics by most die-hard bitcoin devotees. These are still easy enough to approach as a starting place for advanced readers.
Numbers six through nine one should only approach once they have a good grasp on core industry principles and narratives. They are challenging to digest, use technical language, and provide details about bitcoin from a nuanced to even antagonistic perspective.
(There’s also a bonus book at the very bottom, but it is for theoretically-minded people and not the faint of heart!)
1. Bitcoin for the Befuddled by Conrad Barski and Chris Wilmer
This book is perfect for teenagers, young adults, or anyone starting to take their first steps toward bitcoin. Barski and Wilmer use simple language to boil down difficult concepts into easy-to-digest chunks. They cover bitcoin’s history, theory, and technology, along with step-by-step guides and plenty of illustrations.
2. The Basics of Bitcoins and Blockchains: An Introduction to Cryptocurrencies and the Technology that Powers Them by Antony Lewis
Antony Lewis’s bestseller has a writing style that is on par with what most adults can expect from blog posts or news articles. This book offers clear explanations and practical information on using and storing bitcoin. It also covers the blockchain industry more generally, making it a perfect starting place for comparing bitcoin with the industry at large.
3. Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money by Nathaniel Popper
Digital Gold is best for those who want the narrative behind bitcoin and the main figures in the early industry. It provides a detailed history of bitcoin and early blockchain culture so that the reader can track where bitcoin comes from on a human level. It also serves as a perfect foundation for many cultural references any beginning cryptocurrency-curious user is sure to see online — for example, the mystery of Satoshi Nakamoto!
4. Mastering Bitcoin by Andreas M. Antonopoulos
At this point, we start to get into “the classics.” Mastering Bitcoin is considered the bible for Bitcoiners. Antonopoulos covers everything from the basics of how bitcoin works to more technical concepts, like decentralized networks and cryptographic principles. This book is the typical first step for people diving deeper into bitcoin. It is very accessible but doesn’t hold back on technical explanations, and it expects the reader’s full attention.
5. The Bitcoin Standard: The Decentralized Alternative to Central Banking by Saifedean Ammous
If Mastering Bitcoin is the first step deeper into bitcoin, The Bitcoin Standard typically radicalizes these newcomers into maximalists. It’s a right of passage for any genuine Bitcoiner. This book discusses the economic principles behind central banking and how bitcoin can fix many of its problems. Ammous dives into the history and theory behind money while arguing for bitcoin’s superiority over traditional currencies. It’s a compelling account of the potential for bitcoin to become a universal global currency.
6. The Internet of Money by Andreas M. Antonopoulos
The Internet of Money is a companion to Mastering Bitcoin, which goes further into the philosophical and social implications of bitcoin. The book is just a collection of talks by Antonopoulos, providing insights into the future of money and bitcoin’s ability to change the global financial system. It explores the broader impact of decentralized technologies in a way that is missed in The Bitcoin Standard, making it the perfect footnote after reading the previous two books.
7. Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction by Arvind Narayanan, Joseph Bonneau, Edward Felten, Andrew Miller, and Steven Goldfeder
This academic-style book is a thorough introduction to the technology behind bitcoin. The authors cover technical elements in cryptographic principles, consensus mechanisms, and other aspects of blockchain technology. This book is perfect for university students interested in the inner workings of cryptocurrencies.
8. Attack of the 50-foot Blockchain by David Gerard
Attack of the 50-foot Blockchain is the best-selling anti-cryptocurrency book. It is often pointed to as the place where Bitcoiners go to become disillusioned. Inside, it presents an alternate account of many of the narratives and goals of the authors on this list. It is the perfect book for bitcoin enthusiasts to challenge themselves and poke holes in the prevailing ideas gathered from previous reads.
9. Resistance Money by Andrew M. Bailey, Bradley Rettler and Craig Warmke
Resistance Money is the newest book on this list, published in 2024, and goes over many of the big questions that still tie the industry in a knot. It presents a philosophical account of bitcoin and uses various analytic tools to make the case that bitcoin is a net positive for society. The perspective is balanced, discussing many ideas industry leaders tend to avoid and admits the imperfections of blockchain technology. This book should only be read by someone who understands the theory, technology, and problems with bitcoin.
(Bonus) Šum #10.2 — Cryptocene by PJ Ennis, Nick Land and Edmund Berger
This book is actually shorter sections from three different books that take widely abstract approaches to cryptocurrency. If readers are interested in one, they can challenge themselves to read the whole source material for the “out-there” perspectives they find inside.
The first entry, Bleakchain, is a piece of short fiction about a post-cryptocurrency age in the 31st century. Characters discuss the world they are imprisoned in and the history of cryptocurrencies becoming religions.
The second entry is the first chapter of Nick Land’s Crypto-Current. Land is a highly controversial philosophical figure, and this whole book should only be read by those with a firm grasp of contemporary developments in academic philosophy. It is often called the most extreme vision of cryptocurrency possible. The book sees digital currency as an agent of dehumanization (in a good way) and the culmination of objects that rework space and time.
At face value, Waveforms, the third entry, is less crazy than the other two. This essay mainly discusses blockchain in terms of long-term economic cycles and whether blockchain technology requires new socio-political paradigms. However, as it develops, it argues that blockchain requires new forms of reasoning and social organization that become increasingly hard to follow.
(Available via pdf)
Knowledge Is Power
Bitcoin is more than just a new form of internet money; it represents a collection of revolutionary technologies, theories, and cultural shifts. It stands as a significant historical event that society is still grappling with, requiring a variety of approaches to fully comprehend the multifaceted nature of the Bitcoin movement.
This list is designed to guide dedicated readers toward the layered and interconnected discussions surrounding Bitcoin. It seeks to demonstrate the depth of knowledge available in Bitcoin education and to persuade readers that investing time in learning about Bitcoin could be as valuable to their future as owning Bitcoin itself.
How To Create A Bitcoin Wallet
The beginner's guide to creating a new Bitcoin cryptocurrency wallet.
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Just like with regular money, holding cryptocurrency typically requires a wallet. If one is looking to buy and sell, or to send or receive bitcoin, the first step is setting up a bitcoin wallet.
There are three main types of wallets for bitcoin: centralized exchange wallets, digital self-custody wallets, and hardware wallets.
Learn about top bitcoin wallets:
https://medium.com/@lorenzoprotocol/the-top-5-bitcoin-ordinals-wallets-4f6078f8b673
Setting up a bitcoin wallet doesn’t cost anything, and anyone can have as many bitcoin wallets as they’d like. All that’s needed is a computer or mobile phone, and access to the internet.
Here’s a rundown of the three most popular types of bitcoin wallets, and how one can set them up.
Centralized Exchange Wallet
Centralized exchanges, like Coinbase, Binance, or Kraken, are platforms that facilitate the buying and selling of cryptocurrencies using a bank account or debit card. Opening a centralized exchange account usually requires banking information, as well as some form of government ID uploaded to the exchange.
When using a centralized exchange, users log in with a username and password, similar to other websites. Typically, once a user creates an account, wallet addresses are generated for them, which then allows them to send or receive any of the cryptocurrencies available on that platform.
When one opens a Coinbase account and buys some bitcoin, for example, now they’ll have a bitcoin wallet address, and can use that wallet to send bitcoin to anyone in the world, as well as receive bitcoin from anyone by sharing their wallet’s public address.
An important distinction about centralized exchange wallets, though, is that they are custodial wallets, meaning that users don’t actually have full ownership over their funds.
Legally, just like banks and depositors’ fiat funds, the exchanges are the ones who own the cryptocurrency. While they do manage it on behalf of the users/creditors, the risk of losing access to the cryptocurrency held on that platform due to local regulations, platform downtime, or account hacks — and without compensation — always exists.
Centralized exchange wallets are typically best for beginner cryptocurrency users, or as a way to easily purchase bitcoin or other tokens, before moving them into a self-custody wallet.
Software Self-Custody Wallet
Software self-custody wallets are another popular solution to store one’s digital assets.
Typically, they’re accessible via iOS or Android applications, internet browser extensions, or desktop downloads. And instead of being secured by a username and password, they’re secured by a cryptographically generated string of random words, known as a “private key.”
Popular software self-custody wallets include Coinbase Wallet, BlueWallet, and Sparrow Wallet. Once a self-custody wallet is set up, it will generate a wallet address for various cryptocurrencies, just like on a centralized exchange. Users can then easily move assets in and out of their self-custody wallets via the wallet address for that token.
Unlike centralized exchanges, setting up a self-custody wallet doesn’t require having a bank account, debit card, or government ID. All that’s needed is a device with access to the internet.
Perhaps the biggest difference between an exchange wallet, and a software self-custody wallet though, is that when using a self-custody wallet users have full control over their cryptocurrency. Unlike exchanges, which hold the tokens on users’ behalf, when using a self-custody wallet, users maintain sole possession and control over their assets, as long as they control their private keys.
This means that no matter where someone is in the world, no matter what device they’re using, as long as they have their private key, they can access their software self-custodial wallet.
One key risk associated with software self-custody wallets though, is that since they’re linked to one’s internet-connected device, there always exists the chance of obtaining malware that can compromise access to one’s private key and assets. It is recommended therefore that users always store their private key offline, such as by writing it on a piece of paper that is stored somewhere safely.
Hardware Wallets
Hardware wallets are physical cryptocurrency wallets, and are widely considered to be the most secure solution to store bitcoin. Hardware wallets are also self-custody solutions, meaning users retain full possession and total control over their cryptocurrency.
Unlike software self-custody wallets though, hardware wallets typically are not connected to the internet, which makes them incredibly resilient in the face of potential hackers. Instead of generating and storing private keys on an internet-connected device, they’re stored directly on the hardware wallet, which is usually a USB-type of device that can be inserted into a computer.
Popular hardware wallets include Ledger and Trezor.
Once one purchases a hardware wallet, typically users need to download the software associated with that wallet from the manufacturer. When the hardware wallet is plugged into a computer, it utilizes the software to connect to the internet, to allow the transfer of tokens. Assets can be moved to a hardware wallet from software self-custody wallets, as well as centralized exchange wallets.
Choosing The Right Wallet For Your Needs
Creating a Bitcoin wallet is a straightforward process that opens the door to participating in the world of cryptocurrency.
Whether choosing a centralized exchange wallet for convenience, a software self-custody wallet for control, or a hardware wallet for maximum security, each option has its unique advantages. Understanding the features and risks of each type can help users make informed decisions about how to best manage their digital assets.
With the right wallet, anyone can securely store, send, and receive Bitcoin, ensuring they have a solid foundation for their cryptocurrency journey.
A Beginner’s Guide To Bitcoin
The comprehensive get started guide to Bitcoin for beginners.
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Bitcoin was created in 2009 based on a core foundational principle: What if there was peer-to-peer, digital money that wasn’t controlled by governments or banks?
Founded by pseudonymous creator Satoshi Nakamoto, the first ever cryptocurrency was born in the aftermath of the 2008 global financial crisis, amid high unemployment and insolvent banks across the world.
Nakamoto outlined his vision for bitcoin in his now famous whitepaper, titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” In it, he detailed a plan for an alternative payments system for individuals. But instead of relying on third-party institutions, like banks or governments, transactions were to be facilitated solely by mathematical algorithms known as cryptographic proofs.
Since bitcoin’s blockchain went live on Jan. 3, 2009, it has grown from being practically worthless, into becoming one of the most important asset classes in history, with its creation spurring thousands of new blockchains and hundreds of thousands of new cryptocurrencies.
What Is Bitcoin?
Put simply, bitcoin is a currency that’s native to the internet that any one individual or institution can’t control. In its purest form, bitcoin functions as a medium to exchange value between parties irrespective of location.
But it can function as other things too, like an investment, “digital gold,” or a hedge against inflation in local currencies.
As a currency though, bitcoin is defined by a few fundamental qualities:
- There will only ever be 21 million bitcoin, making it an inflation-resistant currency.
- Anyone can access bitcoin and send bitcoin anywhere in the world, without needing a bank or any financial intermediary.
- Every bitcoin transaction is tracked on a decentralized, public ledger.
Most currencies we’re familiar with today, such as the U.S. dollar, or the euro, are government-issued currencies — also known as “fiat currencies” because they are unbacked, worthless notes that only possess any trading value because a head of state says so, and citizens must comply.
Bitcoin, though, is issued by a decentralized network of interconnected computers, and as a result, isn’t limited by arbitrary limitations imposed by governments or banks. Spending, holding, or transferring bitcoin can be done without a middleman (like a bank or payment processor), and anyone can transfer as much bitcoin as they’d like, to anyone in the world.
Why Is Bitcoin Special?
Bitcoin is more than its $1 trillion-plus market capitalization.
These are a few reasons why bitcoin represents a new kind of money:
Bitcoin champions privacy
Using banks or payment processors often means sharing unnecessary personal information in order to complete simple transactions. With bitcoin, there are no bank statements, email addresses, or identifying information required to send or receive bitcoin.
And since bitcoin is secured by cryptography, there’s an extremely low risk of having your personal financial information compromised.
Bitcoin is open source
Everything about bitcoin is available publicly. The whitepaper that preceded its creation can be read online easily, for free. And since it’s an open-source program and a public blockchain, every single bitcoin transaction can be viewed publicly.
This makes it nearly impossible to be manipulated; miners won’t confirm fraudulent transactions and it is highly unlikely for any single entity to take over a majority of bitcoin’s mining capacity to force the network to do so.
Bitcoin is accessible to all
Bitcoin isn’t limited by borders, banking hours, or social status. Anyone with access to the internet can access bitcoin anytime. And there aren’t any limits on how much you are allowed to send, or to whom.
Bitcoin is secure
Since its inception in 2009, the bitcoin network has never been hacked. This is a result of its decentralized nature, which prevents there from being a single point of failure that’s vulnerable to a hack.
How Does Bitcoin Work?
The bitcoin network is composed of bitcoin (BTC), which is the network’s native currency, and the bitcoin blockchain, which is what allows transactions to be verified and stored in a way that’s public and secure.
As the world’s first completely open-source payment network, bitcoin isn’t managed by any individual or company. Instead, it relies on its blockchain, which is a public ledger that tracks who owns what, similar to how a bank might track assets, and a decentralized network of “miners.”
Bitcoin miners are essentially a system of specialized computers that run open-source code to track and verify every transaction being logged, as well as unlock new bitcoin.
You can think of these miners as akin to a real gold miner. But, instead of digging deep underground for gold, bitcoin miners are essentially competing to solve a complex math problem first, to earn a reward in bitcoin, while also providing their combined computing power to the bitcoin network to ensure its stability, security, and decentralization.
Every 10 minutes or so, a new batch of transactions is added to the blockchain, via new “blocks.” The validity of those blocks is confirmed by the miners through solving the math problem, and once confirmed, the data from new transactions gets added to bitcoin’s blockchain — now part of a permanent, unalterable record. The miner who solved the problem more efficiently is awarded new bitcoin, with the amount of bitcoin awarded being cut in half every four years, until all 21 million bitcoin have been unlocked.
As of June 2024, more than 19 million bitcoin have been mined.
In the early days of bitcoin, almost anyone with a desktop PC could attempt to mine bitcoin. But as the endeavor got more competitive, requiring increasingly expensive equipment, publicly traded firms now exist with the sole purpose of pooling resources together to mine bitcoin, making it difficult for the average person to get involved.
As bitcoin mining gets more competitive though, bitcoin’s network becomes more secure and more decentralized, since the amount of computing power required to “take over” a majority of bitcoin’s mining capacity is ever-increasing.
Even if one miner, or a group of miners attempted to defraud the blockchain, all the other miners are still in place to verify the correctness of any transactions before they’re officially verified and stored on the blockchain. To even attempt to override the majority of bitcoin miners would cost billions of dollars in hardware costs alone, plus enormous amounts of electricity, to acquire enough computing power to take over the network via a fabled “51% attack.”
Where Does Bitcoin Get Its Value?
Currencies have value for a variety of reasons.
Fiat, or government-controlled currencies, technically aren’t backed by anything and often derive their value from a combination of supply and demand; faith in that government’s ability to collect and levy taxes; and belief that other parties will accept that currency in commerce. But those currencies are reliant on governments and banks, to manage them and to facilitate their use.
Bitcoin derives its value from similar factors, like supply and demand. But instead of bitcoin holders needing faith in any one government to uphold its value or usage, its decade-plus history as a viable and convenient way to store value has given holders faith in its stability.
And critically, unlike fiat currencies, bitcoin is verifiably scarce. While tens of billions of U.S. dollars are printed annually, there will only ever be 21 million bitcoin. This protects bitcoin from the inflationary pressures of other fiat currencies and means that in the long term, it is near certain that bitcoin’s value in terms of fiat currencies will continue to rise, because it’s proven itself to be a viable and convenient way to store value, which means it can easily be traded for goods, services, or other assets. It’s scarce, secure, portable (compared to, say, gold), and easily divisible, allowing transactions of all sizes.
How Can I Buy And Store Bitcoin?
The easiest way to purchase bitcoin is via a reputable cryptocurrency exchange, such as Coinbase or Binance. Using a cryptocurrency exchange, you can connect a bank account or debit card, and purchase the amount in bitcoin that you’d like.
Beyond cryptocurrency exchanges, there are also peer-to-peer trading platforms like Paxful that allow you to purchase or sell bitcoin directly to another individual.
Once you have some bitcoin, you have the option to either leave it on an exchange or move it into a self-custody wallet. Keeping your bitcoin on an exchange is often the most hassle-free way to hold bitcoin. However, using a self-custody wallet is widely seen as more secure.
While on exchanges, you’re relying on that exchange to remain in operation, whereas with a self-custody wallet, you’re guaranteed to always have access to your bitcoin as long as you have your wallet’s “private keys,” which are a cryptographic, randomly generated password that grants you access to your assets.
Bitcoin: A Financial Revolution
Bitcoin has firmly established itself as a groundbreaking financial asset since its inception in 2009. Born out of a desire for a decentralized, peer-to-peer digital currency, Bitcoin offers a unique blend of features that set it apart from traditional fiat currencies. Its fixed supply of 21 million coins ensures its inflation resistance, while its decentralized nature promotes security and transparency.
As a medium of exchange, store of value, and even an investment vehicle, Bitcoin has proven its versatility and resilience. The global, borderless nature of Bitcoin makes it accessible to anyone with an internet connection, breaking down barriers imposed by traditional financial systems. Moreover, its robust security, backed by cryptographic proofs and a decentralized network of miners, has maintained its integrity over the years.
Whether viewed as “digital gold,” a hedge against inflation, or simply a new kind of money, Bitcoin’s impact on the financial landscape is undeniable. As more people and institutions recognize its value and potential, Bitcoin continues to gain traction and legitimacy in the world of finance.
For beginners, understanding Bitcoin’s foundational principles, its workings, and its potential applications is crucial. Whether you are considering investing in Bitcoin or simply exploring its possibilities, it’s clear that Bitcoin is more than just a digital currency; it represents a paradigm shift in how we perceive and use money in the digital age.
A Beginner’s Guide To Bitcoin Inscriptions
Explore how Bitcoin inscriptions revolutionize NFTs by embedding media directly on the blockchain
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With the advent of Bitcoin Ordinals, inscriptions became the hottest thing in the world of Web3. A mix of skyrocketing prices and bold new narratives continue to siphon off collectors from the old world of traditional NFTs.
Advocates for inscriptions highlight how they solve many problems weighing down the NFT industry; they say inscriptions are more concrete, secure, and integrated.
They are everything NFTs wanted to be but never could become.
This pitch convinces swarms of new collectors from the bitcoin ecosystem, and other blockchains are following suit. But is all this just hype?
Traditional NFT collectors and bitcoin maximalists are asking the same questions:
- Do inscriptions really solve the problems with NFTs?
- What’s the connection between inscriptions and bitcoin?
- Most importantly, where can inscriptions be bought and sold?
The following beginner’s guide will answer all these questions and more. But first, here is a wrap-up of NFTs.
NFTs As Collectibles
Non-fungible tokens (NFTs) are blockchain tokens designed to be completely unique. Unlike currency, NFT tokens are not equivalent to each other or interchangeable, they each have an individual on-chain identity.
Through a process called minting, users create these tokens and connect them to pieces of media via the token’s metadata. This piece of media is typically an image, text, video, or audio file.
Traditionally, NFTs are seen as instantiating a piece of media into a single concrete object. Like the canvas a masterpiece is painted on, the token gives individual existence to an image/form that could be reproduced elsewhere. Copying the Mona Lisa perfectly onto another canvas doesn’t mean the copy is now the real deal; the first object that Leonardo Da Vinci painted the image on is considered the authentic artwork. In the same way, the digital media being minted by a unique token is supposed to be the “real” instantiation of that item.
People who want to invest in a piece of media trade the minted NFT tokens like digital collectible objects. These are supposed to have the inherent artistic or historical value of the connected media content, they are the proof of one’s ownership of said piece.
The Big Problem With NFTs
The problem with traditional NFTs is the disconnect between the token and the piece of media.
The media is not literally in the token’s metadata, as this data is not generally robust enough to hold full media files. Often, this data is just a link to the piece, which is hosted on an external server. If the server goes down, the link in the NFT will no longer work. Further, if a bad actor got involved, they could even change the piece of data connected with the token by accessing the server.
This is just a symptom of a deeper problem pointed to by NFT critics: collectors are buying just a link, not the item itself. There is no necessary connection between the token bought and the media, the digital item is never even on the blockchain, therefore investors are not buying the piece of media at all.
Inscription attempts to solve the problem of necessary connection by bringing the piece of media associated with an NFT fully on-chain.
Ordinals: Bitcoin Inscribed
Bitcoin Ordinals popularized inscription as a method of creating NFTs.
Ordinals are a numbering system applied to satoshis (the smallest unit of bitcoin). Like a serial number, each satoshi has a unique ordinal number associated with it. This new system allows each individual sat to be tracked and identified.
Recent developments in the bitcoin space, such as the SegWit and Taproot upgrades, allowed for embedding additional data into a bitcoin transaction. More specifically, they allow for the association of more data with a single satoshi.
Combining Ordinal numbering and these recent on-chain innovations, bitcoin enthusiasts could convert sats into NFTs through a method they called inscription. The inscription of an Ordinal is the information one wants to attach to a particular token; this is the data determining the content of the NFT, such as a picture.
To inscribe a piece of media to a sat, a user adds the wanted data to the information embedded in the transaction of a single sat. Because of SegWit and Taproot, attachments large enough to house an entire media file can be included in a transaction.
The bitcoin blockchain stores the complete media and permanently connects the individual satoshi to this piece via its transaction history on the immutable bitcoin ledger. One can not inspect the satoshi in question without necessarily finding the connected media.
Ordinal advocates claim that owning a traditional NFT is like having a certificate of authenticity for a painting housed in a far-away museum. On the other hand, owning an Ordinal is like directly possessing an artwork painted on a worldwide indestructible canvas.
Inscriptions vs NFTs
Inscriptions have a few key advantages over traditional NFTs because of their on-chain integration. Advocates claim that these quell the anxiety NFTs owners have about losing their collectables.
Immutability: Inscriptions are housed on the blockchain itself: like all information on a decentralized ledger, this means that the data can’t be changed. It is cryptographically set in stone.
Decentralization: The nodes hosting and verifying blockchain data are distributed; there is no central authority that can dictate or censor the information on-chain. This means there is no single point of failure.
Security: Because there isn’t any dependence on an external server to hold the inscription content, the data is as secure as the native blockchain itself. One would need to attack the whole network to change a single piece of data.
Permanence: Due to the above considerations, it’s much harder, if not impossible, to tamper with or destroy an inscription. Nothing short of eliminating or taking over the entire underlying bitcoin blockchain could break an inscription.
Inscriptions Outside Bitcoin
Originally inscriptions were synonymous with Bitcoin Ordinals, but in the last year, a myriad of other chains have hopped on the bandwagon. In principle, just about any blockchain that allows substantial metadata in its transitions can create its own equivalent on-chain NFTs.
Each chain will have slightly different mechanisms that allow for token inscriptions. Just like Ordinals require their own wallets and marketplaces, collectors should remember that this is often the case for holding or buying any other inscriptions.
Popular chains with their own inscriptions include Solana, Ethereum, And Doge.
Where To Purchase Inscriptions
All readers are likely itching to know to get their toes wet in the inscription game.
As discussed above, inscriptions require specialized wallets and marketplaces. As inscriptions become increasingly popular, new tools and infrastructure pop up to meet the demand. The last year has been an explosion of tools and platforms.
The most robust inscription infrastructure is built for Bitcoin Ordinals. These wallets and marketplaces are the most tried and tested in the inscription industry.
For Ordinals wallets, Xverse, Unisat, and Leather are some of the best in the business. Before deciding on one, It’s best to note differences in security and marketplace integration.
For Ordinal marketplaces, Magic Eden, OKX, and Unisat are core names. Here, one should note differences in liquidity and popularity.
As far as collections, Bitcoin Ordinals have equivalents of recognizable traditional NFT collections. Names include Bitcoin Rocks and Bitcoin Punks. Bitcoin specific collections are becoming popular as well, the biggest being Runestones and Bitcoin Wizards.
For artists looking to create their own inscriptions, the above marketplaces have integrated tools to help users inscribe sats and list collections.
The second largest inscription market is Ethscriptions. The only significant marketplace in this ecosystem is the Etch market. Here, traditional NFT collections are often given Ethscription counterparts, such as Ethereum Punks or Ethereum Apes.
Other markets, such as Solana and Doge inscriptions, are too new to have any significant infrastructure. But rest assured, with inscriptions booming, this will change any day. In fact, by the time this article is released, new wallets and marketplaces might be released and finding their first users.
What Is Bitcoin’s Lightning Network, And How Does It Work?
The Lightning Network boosts Bitcoin's scalability through off-chain transactions, enabling quicker, more efficient payments.
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The Lightning Network is the most prominent Bitcoin Layer 2 network in existence today, and it has long been hailed as a key building block for the scalability of the world’s most valuable blockchain.
While not a solution to every problem facing bitcoin, the Lightning Network can tweak the cryptocurrency network’s scaling equation from transactions per second to new users per second without sacrificing too much in terms of decentralization and censorship resistance. Additionally, it may be an important technology for tying together a large number of different Bitcoin L2s that could develop in the coming years.
But what is the Lightning Network, and how does it work? Let’s take a deep dive into this Bitcoin L2 focused on payments.
The Problem Of Scaling Bitcoin
While bitcoin was originally launched as a peer-to-peer digital cash system with cheap, blockchain-based payments, the reality is that this system was never going to scale to a large user base while publishing all transactions on the base blockchain. In the past, bitcoin has peaked at processing just under nine on-chain transactions per second. Although on-chain transactions were basically free for the early years of the network’s development, the limitations of the system were hit in 2016 when the capacity limit of one megabyte per block was reached for the first time.
As the network grew in popularity, scarce block space on the network filled up, and there was eventually a crisis where on-chain transactions became both historically expensive and unpredictable in terms of when they would be confirmed in a block.
This situation was the crux of the blocksize war, in which various proposals for dealing with bitcoin’s capacity limits and long-term scalability were debated by users. Some saw a simple increase to bitcoin’s block size limit as the most straightforward option over the near term, but the problem was many of the most prominent proposals related to this method of scaling used a hard fork — a type of change that would effectively require all users to move over to a new, backwards-incompatible bitcoin network. This made finding consensus on such a change quite difficult.
Additionally, various contributors to the bitcoin protocol up to that point preferred a multi-layer scaling approach where the limited amount of block space available on the blockchain could be used more efficiently. It was thought that simply increasing the amount of data that could be held by the blockchain would also increase the cost of operating a full node, which would further centralize the network and put into question the properties that make bitcoin valuable in the first place. By allowing users to opt into Bitcoin L2s, smaller payments, such as a purchase of a cup of coffee, could be made off of the base blockchain while still retaining a high degree of decentralization. There were also a number of changes large, centralized entities could make to use block space more efficiently such as transaction batching.
Eventually, the upgrade that was chosen via consensus as the best path forward was a soft-forking (backwards compatible) change known as Segregated Witness (SegWit). This change enabled both a block size increase and a fix to the transaction malleability issue, which would enable more efficient and secure off-chain scaling mechanisms for bitcoin payments, such as the Lightning Network.
What Is The Lightning Network At A High Level?
The Lightning Network is effectively a network of smart IOUs where different parties can send off-chain payments to each other in an extremely low-trust manner. Instead of making an on-chain transaction for each transfer, users send signed cryptographic proofs of payment to each other without broadcasting them to the larger bitcoin network. After a large number of payments have been made, those connected to the Lightning Network can eventually cash out to the base bitcoin blockchain whenever they’d like.
The key innovation here is that an on-chain imprint is not needed for every payment. Instead, users can take advantage of the blockchain in situations where someone tries to lie about the history of payments that have taken place on the Lightning Network. In such a scenario, the victim of the theft attempt simply publishes a cryptographic proof to the blockchain regarding the history of off-chain payments that were made.
In a way, the Lightning Network alters the scaling equation for bitcoin from payments per second to user onramps and offramps per second. Once a user has joined the Lightning Network via an on-chain transaction, they can send an unlimited number of payments, assuming sufficient liquidity.
How Does The Lightning Network Technically Work?
Payment Channels
From a technical perspective, the Lightning Network is a network of payment channels. A payment channel is created when two bitcoin users obtain collaborative custody over some amount of bitcoin via a 2-of-2 multisig address (i.e., requiring each party to sign the transaction). These two users can then send bitcoin back and forth to each other without touching the bitcoin blockchain. This is accomplished by having the users sign transactions that allow the users to withdraw the bitcoin back to their own addresses without broadcasting the transaction to the network to be mined.
For example, Alice and Bob could each send 2 bitcoin to a 2-of-2 multisig address for a total of 4 bitcoin. If Alice wants to send 1 bitcoin to Bob, she and Bob will collaborate on signing two transactions from the 2-of-2 multisig address without broadcasting them to the network. The first transaction sends 3 of the 4 bitcoin to Bob’s personal address, while the second one sends 1 bitcoin to Alice’s personal address. Despite nothing occurring on the blockchain, both parties now have the ability to publish these transactions whenever they feel like it. So, in effect, Alice now has ownership over 1 bitcoin in the 2-of-2 multisig address, while Bob has ownership over 3 bitcoin.
Payment channels are a powerful tool in themselves, but the innovation with the Lightning Network is to generalize this concept to connect many more parties. Extending the above example with Alice and Bob, we can imagine there is another bitcoin user named Carol who also has a payment channel open with Bob. With the Lightning Network, Alice can send bitcoin to Carol without having to open a channel with her directly because they both have channels open with Bob.
For a further technical overview of how the Lightning Network works, let’s go through the process of opening a channel, sending a payment, and closing a channel.
Opening A Lightning Network Channel
Opening a Lightning Network channel is similar to the traditional payment channel process described above. A user will need to create a 2-of-2 multisig address with another party — hopefully one that is already well-connected to many other Lightning Network users — to get started. The two users will then fund the multisig address and create their commitment transactions in order to establish the opening of the Lightning channel. Notably, the commitment transactions must be signed prior to the broadcasting of the transactions funding the 2-of-2 multisig address.
Sending A Lightning Network Transaction
Sending a payment via the Lightning Network when two parties have a channel opened directly with each other is essentially just the updating of commitment transactions. The commitment transactions are what allow each user to withdraw the bitcoin they own based on the current state of the Lightning channel. They are updated with each payment made via the Lightning channel; however, they are only broadcast to the blockchain in a situation where dispute resolution is needed via the blockchain.
These commitment transactions also use OP_CHECKSEQUENCEVERIFY (CSV) to ensure that the outputs associated with them cannot be spent until the other party has had time to dispute. Lightning users also share revocation keys with each other after updating their commitment transactions, which can be used to prove that an outdated state of the Lightning channel has been published.
Routing Lightning Network Transactions With HTLCs
Of course, the key innovation with the Lightning Network is that it allows a network of payment channels to interact with each other. This is made possible through the use of hashed timelock contracts (HTLCs). An HTLC is a type of bitcoin smart contract that locks funds based on a secret known only by the original creator of the contract. Additionally, a timelock, via the OP_CHECKLOCKTIMEVERIFY (CLTV) opcode, is involved so the original creator of the contract can reclaim the funds after a certain period of time in a situation where the recipient does not accept the payment.
Let’s say Alice wants to send a 1 bitcoin Lightning payment to Carol through Bob. For simplicity, we will say that each of these channels have 2 bitcoin in them, with ownership of the 2 bitcoin being evenly split between the two parties.
Alice will create an HTLC for 1 bitcoin and send it to Bob. Alice’s new commitment transaction for her channel with Bob will set the amount she can withdraw from the channel to 0 bitcoin. However, instead of simply increasing Bob’s commitment transaction to 2 bitcoin, he receives the HTLC. Bob will then go through the same process Alice just went through, creating an HTLC and lowering the balance in his channel with Carol to 0 bitcoin.
Upon receiving the HTLC from Bob, Carol is able to use a secret provided to her by Alice to unlock the funds in the HTLC. During this process, Carol also reveals the secret to Bob. Bob is then also able to use the same secret to unlock the bitcoin in the HTLC sent to him by Alice as well. The end result is that Alice sent 1 bitcoin to Bob and Bob sent 1 bitcoin to Carol.
This entire process happens atomically, meaning either all payments happen or none of them happen. Once the HTLCs are dealt with, each channel’s commitment transactions are updated to reflect the outcome of the successful payment.
Closing A Lightning Network Channel
When a user wants to close a Lightning channel, they can ask their counterparty to do so in a collaborative manner. In such a situation, the process is no different from creating any other normal 2-of-2 multisig transaction where a new transaction is created with sufficient fees and the proper amounts are returned to each users’ respective personal address.
Closing A Channel When Something Goes Wrong
While cooperative channel closures are the norm on the Lightning Network, there are a variety of situations where one party may become uncooperative. For example, if the other party is offline or otherwise uncommunicative, a user will not be able to organize a collaborative channel closure. This is where the publication of the aforementioned commitment transactions comes into play.
When a commitment transaction is published, the user will not have access to their funds instantly. This is due to the use of CSV on the commitment transactions. The other party will be given a predetermined period of time (measured in blocks) to dispute the outcome of the commitment transaction. These transactions can be disputed by revealing a revocation key, used to prove there is a more recent state of the Lightning channel ignored by the published commitment transaction. When the revocation process is found to be valid, the revocating user is able to instantly withdraw all of the funds held in the channel.
The Future Of The Lightning Network
It’s no secret that the Lightning Network is far from perfect as it exists today, but it’s also already providing a powerful scaling tool for the network. Some have made the claim that the Lightning Network has failed, but that’s nowhere near the truth. The Lightning Network is definitely a useful tool for specific situations, and that will become clearer over time.
Even if it’s difficult for users to operate their own Lightning nodes right now — and it can be expensive to open and close channels at times — the fact that users can send and receive bitcoin between exchanges instantly at no cost (and without any on-chain footprint) should be seen as a victory for scaling, especially when considering the amount of overall bitcoin activity that is still centralized around these entities. Additionally, there is the potential for stablecoins issued on the Lightning Network — via protocols such as Taproot Assets and RGB — to eventually become the preferred medium of exchange for that particular type of digital asset.
It’s also worth noting that it’s unclear how the Lightning Network will ultimately evolve, as it is currently used in a mostly custodial way due to the usability benefits such a setup can provide. Some people envision a future where individual users are operating their own Lightning nodes at home and connecting to them from their mobile phones, while others see a situation where the Lightning Network acts more of a connecting glue between a variety of other Bitcoin L2s. Indeed, it’s clear that the Lightning Network will be the most effective option for swapping between Bitcoin L2s because it enables instant and low-cost atomic swaps.
The Lightning Network’s evolution will partly depend on how improvements can be made to it over time. There are a number of theoretical alterations that could be made to the protocol to improve how channel liquidity is managed and how often the base blockchain needs to be touched, but many of these proposals would necessitate the addition of a covenants mechanism to bitcoin via a soft fork. One of the most notable potential changes for Lightning — enabled by covenants — is Eltoo, which would provide for better mechanisms for Lightning wallet backups and enable more than two parties to open a single channel with each other. There’s also Ark, which is a separate Bitcoin L2 system that could end up being a replacement for the Lightning Network with many similar goals.
That said, it’s still early days for the development of the Lightning Network, and it will only evolve to fill in the gaps and use cases where it makes the most sense. Additionally, off-chain bitcoin transactions can take place via a variety of other upper-layer protocols, and each of these Bitcoin L2s can offer something different that isn’t found in their alternatives. For example, the Lightning Network was launched with a focus on payments, while Lorenzo App Chain and a variety of other Bitcoin L2s have focused on bringing some of the more expressive smart contracting functionality found in Ethereum back to bitcoin.
The Lightning Network has proven to be a powerful addition to the base bitcoin network, but at the end of the day, it is only one of many tools in the toolbox for scaling bitcoin by using the base blockchain as efficiently as possible.
Bitcoin & Taxes: A Primer On The Tax Implications Of Bitcoin Investing
Navigate Bitcoin taxes with ease: Understand key tax events, reporting, and strategies to optimize your crypto investments.
Even cryptocurrency cynics begrudgingly admit bitcoin is here to stay. Despite multiple obituaries over the years, bitcoin (BTC) is de facto digital gold, and investors worldwide are taking notice. Thanks to the increased popularity and accessibility of bitcoin, more people are itching to claim their slice of scarce satoshis while they still can.
But just because bitcoin is an “alternative asset” doesn’t mean it gets a free pass from tax authorities. Bitcoin may transcend physical borders, but tax treatment varies significantly depending on where investors live and there are penalties for those who don’t comply. Whether people trade or hodl their bitcoin, they must consider the tax implications of every cryptocurrency transaction.
The Basics Of Bitcoin Taxation: What Qualifies As A Taxable Event?
From a tax perspective, cryptocurrency traders should be more concerned when they sell bitcoin rather than when they buy. A tax liability often occurs when receiving bitcoin — especially if a user accepts bitcoin as a business or employee, or earns passive income through staking rewards, mining activities, etc. Aside from these scenarios, tax authorities look at when investors sell their satoshis, whether they profited from their investment, and exactly how much profit is earned from the sale of the asset.
And don’t think taxes can be avoided by swapping bitcoin for another cryptocurrency! The commonly used “like-kind” exemption does not apply when trading cryptocurrencies. Taxes apply whether selling bitcoin for fiat currency or any other digital asset, including stablecoins. Either way, the user spent/traded the bitcoin, and a trackable gain or loss occurred.
One nontaxable event would be the transfer of one’s bitcoin to a private wallet for safekeeping. There’s no reason to fear tax implications as long as the bitcoin isn’t spent, staked, or sold.
Keeping A Personal Bitcoin Ledger: Bitcoin Tax Reporting Requirements
No matter how a particular jurisdiction views bitcoin, cryptocurrency traders must present meticulous records of their bitcoin transactions during the tax reporting process.
Although super-organized investors can use a spreadsheet to keep tabs on these transfers, this manual method isn’t practical, especially as people make frequent trades or engage in activities like decentralized finance (DeFi).
Typically, the best strategy is to use cryptocurrency-specific tax software that generates approved documents for your jurisdiction. Often, these programs link with exchanges’ application programming interfaces (APIs) and public wallet addresses to make it a breeze for Bitcoiners to monitor and report every purchase, sale, and transfer.
Specific Bitcoin Tax Guidelines: Examples Of Local Bitcoin Laws
Bitcoin Tax Laws in the United States
In the U.S., the Internal Revenue Service (IRS) views bitcoin as property, taxing Americans with either capital gains or general income, depending on whether trading or earning bitcoin.
To calculate expected capital gains liability, first determine the average purchase price (aka cost basis) for bitcoin, subtract it from the price it sold for, and figure the total profit. Next, refer to how long the bitcoin has been held (and your income bracket, as both will impact your tax percentages). Generally, short-term capital gains are higher than long-term gains (i.e., longer than one year), so beyond price appreciation there’s a taxation-related incentive to hodl bitcoin.
The two primary forms Americans fill out with their bitcoin details are Schedule D and Form 1040, both of which are due on April 15.
Bitcoin Tax Policies in the European Union
Although the European Union’s Markets in Crypto-Assets (MiCA) regulation established greater clarity on cryptocurrency policies, it still allows each country great flexibility to devise its own tax policies. Generally, the EU states: bitcoin traders who sell their holdings for fiat or other cryptocurrencies are liable for capital gains. Miners and stakers also usually have to pay income tax on the bitcoin that they earn through their activities, altho discussions are still being had worldwide about whether a tax applies to mined currency that has not been yet sold.
However, there are a few exemptions to these general rules. For example, Portugal is well-known for its relaxed policies for long-term bitcoin hodlers. While any bitcoin transactions within one year of purchase are subject to capital gains taxes, Portugal doesn’t require investors to pay taxes when they sell bitcoin after 365 days.
Since there’s so much diversity of tax laws in the EU, it’s essential for residents to carefully review their local policies when filing bitcoin taxes.
Other Notable Country-Specific Cryptocurrency Tax Laws
- Canada: Similarly to the U.S., the Canada Revenue Agency (CRA) taxes residents with bitcoin in line with either business income or capital gains policies. Most bitcoin traders file a Schedule 3 form to report their gains and losses, but businesses also have to submit Form T2125, if they accept bitcoin as payment.
- Australia: The Australian Taxation Office (ATO) views bitcoin as a form of property, so Australians should expect to pay capital gains or income taxes when they file their forms. Bitcoin hodlers down under can find the gains and losses section of the Australian Tax Form in Section 18.
- Japan: The Japanese government classifies cryptocurrency as “miscellaneous income,” which residents report in Section 6 of the standard income tax filing form (aka Form A). Although bitcoin isn’t formally viewed as “property” in Japan, the country uses capital gains and income policies like many other nations.
Pro Tax Tips For Bitcoin Traders: Tax Planning Strategies To Keep In Mind
Unless traders move to countries with ultra-relaxed policies, there’s no way to “get out” of paying a percentage on bitcoin gains. However, there are a few strategies which all cryptocurrency investors can use to potentially decrease their tax burden.
- Focus on hodling: While it’s tempting to jump in and out of the cryptocurrency market for quick profit trading, patience is a lucrative virtue. Typically, long-term capital gains aren’t as high as short-term capital gains, meaning anyone who holds their bitcoin for over a year usually won’t have to pay as much to tax authorities. Even if investors enjoy the thrill of day, or swing, trading it’s wise to keep a no-touch hodl portfolio for tax advantages.
- Look into tax loss harvesting: For traders who frequently engage in buying and selling bitcoin, carefully weigh the profits and losses from your positions before the end of the year. Like other investment vehicles, you usually enjoy tax breaks when you sell cryptocurrency assets at a loss. By strategically taking a few “Ls” in your portfolio, you can balance out your wins and pay less on tax day.
- Consider cryptocurrency retirement accounts: It’s getting easier to find reputable retirement platforms willing to help investors rollover IRAs or 401(k)s into alternative assets like bitcoin. Although these platforms restrict yearly deposits and withdrawals in accordance with tax codes, they offer traders the same tax exemptions found in traditional retirement accounts. If you plan to keep bitcoin for the long haul, it makes sense to consider using an IRA to hodl more of your potential gains; keep in mind however, that this is a form of third-party custody, so the buyer would not enjoy bitcoin’s self-sovereign features if held in such an account.
Don’t Wait — Or Hesitate — To Learn About Bitcoin Taxes
Although there are many nuances to bitcoin taxation policies, the most significant taxable events usually happen after bitcoin is sold, as most nations treat cryptocurrency as property. If you have any questions about filing bitcoin tax returns, it’s best to consult a certified tax professional in your area who is familiar with cryptocurrency legislation. None of the content in this article should be considered financial advice. Working with a licensed tax professional is the best path to compliance when the time comes to report and pay your cryptocurrency taxes.
Bitcoin In Developing Countries: Empowerment And Challenges
Bitcoin empowers developing nations: a beacon of financial independence amidst challenges.
They say that necessity is the mother of invention.
Banks, governments, intermediaries, and third parties have inherently been a part of the rent-seeking fiat currency system, sucking our labor’s value away from us, when instead, we’d intended to store our exchanged time and labor in this rechargeable battery called money.
However, the malfeasance of the central banks’ oversight, and their repeated history of abuses of authority and trust (i.e., money printing, reducing the percentage of silver in a government-issued currency, etc.), made people worldwide know that they had long ago lost control over their hard-earned and sometimes harder-saved money. This almost single-handedly led to the creation of bitcoin, which was launched entirely to eliminate all unnecessary entities and third-party intermediaries and their friction, thus giving all people worldwide the potential to maintain 100% exclusive control of and authority over their life savings.
Bitcoin’s maturation journey over the years has been nothing short of phenomenal. Skepticism was prevalent during the early days while widescale adoption rates were scanty. However, thanks partly to timely upgrades and bitcoin’s numerous evolving use cases becoming quite apparent to more and more people worldwide, bitcoin has grown to become a household name.
From retail investors to well-established names from the western world’s traditional financial (TradFi) realm, bitcoin has managed to entice almost every user category imaginable. Notably, developing countries — especially those already ravaged by hyperinflation and dictatorial regimes — have played a critical role in steepening bitcoin’s adoption curve.
Bitcoin As A Tool for Financial Empowerment
Owing to its decentralized and borderless nature, bitcoin has been able to provide extremely remote users connectivity with the entire world and the ability to participate in trade and commerce . Even those born in underprivileged situations without any banking access or government-issued ID can now offer their time, goods, and services to millions of potential customers and clients worldwide.
The numbers speak for themselves. Take Nigeria, for example:
The World Bank has time and again pointed out that this western African nation significantly contributes to the number of unbanked people around the world. A Consensys survey from 2023 revealed that cryptocurrency awareness was highest in Nigeria compared to all other countries, with 99% of males and 100% of females asserting that they had heard of the asset class.
78% affirmed knowing how cryptocurrency functions. When it comes to investing in cryptocurrency, only 5%-6% of respondents from Nigeria were hesitant. The other 57% claimed that they will “definitely” invest in cryptocurrency over the next 12 months, while 33% asserted that they will “probably” invest.
The excessive middlemen fees and unreasonable sanctions and restrictions inherent in TradFi have enticed people worldwide to increasingly investigate digital currencies. This is largely thanks to features like a peer-to-peer (P2P) design that enables value transfer transactions that never require “authorization” (and therefore can’t be declined either) to move freely amongst individuals, rather than through institutions. “Rules not rulers” is the enduring mantra.
The lack of rent seekers in the middle reduces the transfer fees greatly in most cases, and increases efficiency in remittance markets, especially while making international transfers. Ultimately, this makes using bitcoin more affordable for people underserved by the TradFi system, especially in regions with soaring remittance fees.
Several nations across the world remain plagued by economic instability. In the last five years, bitcoin has fetched hodlers roughly 1400% returns, while Reliance Industries, one of India’s top stocks, has only risen by 140% in this same duration. Bitcoin’s ROI is much higher when the time duration is zoomed out even further, indicating that the king coin has shielded investors better than TradFi alternatives by smashing through public skepticism and assuming the now-dominant role of both an inflation hedge and a store of value. However, whether or not bitcoin will finally conquer the challenge of becoming, as advertised, our true peer-to-peer digital currency, suited for that daily cup of coffee, remains to be proven.
Adoption Of Bitcoin In Developing Countries
Bear markets have hindered bitcoin’s adoption, but on the wider macro timeframe, it’s clear that the asset’s adoption curve continues to ascend.
A recent report by Chainalysis pointed out that developing countries from Asian and African regions dominated the cryptocurrency adoption index. India occupied the first position, followed by Nigeria and Vietnam. Places like the Philippines, Indonesia, Pakistan, and Thailand were also a part of the top ten on the list.
Several factors like currency devaluation, limited access to traditional banking services, youth having a growing interest in modern fin-tech solutions, and high smartphone penetration have been the key drivers.
Chainalysis pointed out,
“Crypto(currency) adoption is strongest in countries categorized by the World Bank as lower middle income (LMI). This is crucial, as LMI countries account for a plurality of the world’s population at 40%.”
Challenges And Barriers To Adoption
Bitcoin has inherently been an upwardly volatile asset, historically setting off caution bells for potential investors still unfamiliar with bitcoin’s actual properties — its use cases — which define its market value.
That same volatility is a double-edged sword.
On one hand, it can help investors actualize quick gains, while on the other, it also possesses the potential to slash down their investment value within minutes. This is one of the main reasons why several regulators around the world continue to remain skeptical about bitcoin.
However, it should be noted that the very large bitcoin purchases that began occurring with the approval of exchange-traded funds (ETFs) in the U.S. are long-term holds, widely expected to ease the sudden drops and famed bitcoin volatility.
Time will tell.
Some countries, such as India, have outright banned bitcoin and other cryptocurrency assets in the past. However, with time, they ended up revoking the same ban, and instead implemented the obligatory deterrent of taxes on profits. Regulators around the world have been following similar paths by adopting measures, including mandatory licensing of exchanges, and an overall tightening up of the legislative screws to safeguard the interests of investors.
On the other side of the spectrum, there are countries like El Salvador where the government has wholeheartedly adopted bitcoin, and even encouraged citizens to follow suit by making this digital currency their legally accepted tender.
In some countries, investors have appreciated the clarity provided, while in other countries, dissatisfaction about the stringency continues to prevail, obstructing the path of mass adoption. Adding to the barriers, the lack of digital literacy, limited internet access in rural areas, and the slow development of financial infrastructures have also caused hindrances to a certain extent.
Solutions And Strategies For Overcoming Challenges
Investing in digital literacy and outreach programs to educate people about bitcoin and its underlying technology will help improve adoption. Parallelly, tie-ups involving stalwarts from the cryptocurrency space would help spread awareness and help people truly understand the benefits of adopting bitcoin (and others) as currencies and a viable asset class. This, in turn, would equip them to take calculated risks in hopes of high ROIs.
Additionally, developing localized solutions tailored to the specific needs and preferences of users in different regions could also prove beneficial. Keeping the government involved while trying to notch up bitcoin’s adoption and usage would give investors additional confidence and make it a win/win for all parties.
The Future of Bitcoin In Developing Countries
In several regions, people from the cryptocurrency community have been actively trying to assist with outreach and education in rural regions, leading to increased knowledge and adoption. In Africa, for example, where internet penetration has always been a problem, Kgothatso Ngako, a native software developer, developed Machankura — a tool to “tackle this issue.” Machankura leverages the Lightning Network, allowing Africans to send and receive bitcoin with basic non-smart mobile phones.
Bitcoin aside, several emerging technology sectors like DeFi give people access to global markets. In fact, by providing liquidity on decentralized exchanges (DEXes), investors can take part in yield farming, thus accessing interesting and potentially lucrative trading and investment opportunities from anywhere in the world. This synergizes with bitcoin and other tokenized assets by expanding their utility and accessibility, amplifying their role as a decentralized and borderless store of value and financial instrument.
Paving The Road For Bitcoin Empowerment
In developing countries, bitcoin serves as a beacon of hope offering financial inclusion and access to global markets for many who have been left behind or completely excluded by the TradFi system.
Yet, amidst this promise lies a tangled web of challenges — from the regulatory point of view to technological barriers — stifling the transformative potential many others — like El Salvador — already embrace. With continued improvements to global bitcoin education, accessibility, and utility, barriers to adoption can be broken down to pave the way for a future where bitcoin can truly redefine the financial landscape.
How Does Bitcoin Work? A Simple Guide to Blockchain, Mining, and Transactions
Exploring Bitcoin from its inception to its role in the financial revolution, including blockchain tech, mining processes, and peer-to-peer transactions.
In 2009, Satoshi Nakamoto altered history by creating the world’s first decentralized, cryptographically secured digital currency: bitcoin.
Bitcoin operates on a distributed database called a blockchain, which acts as a universal ledger recording and verifying transactions. It allows for peer-to-peer transactions which are protected by cryptographic, yet publicly visible, techniques. This establishes a secure, transparent, and trustless network of value exchange. Bitcoin/satoshis are the units of exchange on this network; the blockchain ledger records the value transferred between network users.
The blockchain is secured, and bitcoin is issued, by a process called mining, which is performed by specialized computer systems, called central processing units (CPU), to solve computational puzzles. By completing these puzzles, miners verify registers of transactions called “blocks” and connect them to a chain of previous entries to win bitcoin.
This incentivizes people who engage in the mining process, aka “miners,” to mine bitcoin, and in doing so, contribute to maintaining the security of the bitcoin ecosystem.
To understand more deeply how bitcoin works, first, a grasp of how an average user would send and receive bitcoin using a digital wallet is helpful.
A User’s Journey
The casual bitcoin user can think of their digital wallet analogously to a physical one; it’s what they’ll use to store, receive, and send digital currency. Behind the scenes, however, a digital wallet is doing something very different.
A digital wallet has two parts: a public and private key. The public key is a string of characters that identifies one’s personal wallet amongst millions. It’s just like a home address that can be shared with anyone to allow them to send anyone something directly. Hence, this is called the wallet address. The private key is also a series of characters, but these are more like a passcode that only the user will know.
To send or receive bitcoin, a wallet address is all most people need to know about. Popular digital wallets store the private keys of their users themselves, while users instead access funds via their third-party application with a normal username and password. Here, sending and receiving bitcoin is as easy as inputting someone’s wallet address via a QR code, or sharing a code.
A Transaction’s Journey
To understand what makes blockchain so groundbreaking, one needs to dive deeper than the user experience and look at what happens after the user submits the transaction. Besides the sender and receiver’s address, the transaction requires the sender’s private key to prove that the sender owns the funds. This is done by leaving a signature in the transaction with the private key.
Nodes then verify the transaction; they ensure the sender has enough bitcoin in their wallet for the transaction and that the signature is correct. Now verified, the transaction sits in a pool waiting to be selected by a miner and included in a block. A block is just a digital file for recording transactions.
Due to the limited block size (1mb), miners can’t include all the transactions waiting in the pool; therefore, they naturally pick the transactions with the highest transaction fees (many wallets allow users to raise or lower the amount of this fee, according to high or low priority on confirmation time). Once selected, miners race to add their block of transactions to the blockchain.
A Miner’s Work
This race is just as much a test of strength. To make an addition to the blockchain, miners must solve a complex mathematical puzzle. This sounds complicated, but it’s really a brute-force guessing game. To solve the puzzle, miners try to discover the correct hash (a string of characters) by simple trial and error. Therefore, the miner with the most sheer computational power tends to win the race. This type of system is called a proof-of-work consensus mechanism.
A consensus mechanism allows various network participants to reach an agreement about the ledger’s state. Different types of consensus mechanisms are essentially different ways of choosing who gets the privilege of adding a block to the blockchain. In proof-of-work, the right to add a block is given to whoever discovers the correct hash first.
Once a miner finds the hash, they broadcast their solution to the rest of the network. The other nodes readily verify that this is, in fact, the correct hash. If everything is verified, the block is added and the winning miner is rewarded the newly mined bitcoin plus the transaction fees. Now that the contest is decided, the community of miners sets out to work on adding the subsequent block based on this new addition.
Blockchain: The Big Picture
Keeping in mind this image of miners adding blocks of data to a long series of blocks and agreeing to add the correct block, one will have a general picture of a blockchain. To further clarify this image, consider the hash the winning miner needed to solve. This hash connects the blocks; the hash generated to solve each block is determined by both the transactions in the block and the hash of the previous block in the series. Changing any transaction in an earlier block will change the hash of all future blocks.
They are effectively “chained” together. This is the most basic picture of a blockchain. It’s a decentralized public ledger of transactions distributed amongst a network of nodes constantly verified, added to, and connected.
Now you have a grasp of what blockchain is, but the big picture is really all about the why. Two words sum up the point of blockchain: security and transparency.
Security
Transactions are spread across all nodes in the network, meaning there is no single point of failure or control that could compromise the network. This is the value of decentralization. Moreover, each block connects to the historical chain through its hash. Tampering with any previous transaction is impossible without invalidating the resulting hash. This means the blockchain is immutable. Any attempt to alter even a single transaction would require modifying all subsequent blocks–a computationally impractical and nearly impossible feat.
Transparency
The cryptographic method of proving ownership via a private key means senders remain anonymous while the transactions are public. The visibility of the blockchain transactions allows all users to verify the on-chain information independently. Further, constant public verification is baked into the very system of adding a block to the chain; the community of nodes must verify all the transactions recorded along with the addition of those in the new block.
What Makes Bitcoin Different
Much of the above discussion applies to proof-of-work blockchains, but what makes bitcoin unique?
The cornerstone of bitcoin’s advantage is its unmatched security. Remember, a blockchain network is only as decentralized as the participants in its operation are diverse. Here, bitcoin has an edge over other PoW chains; it has by far the largest community of miners and nodes around the world. Successfully attacking the bitcoin network (meaning controlling over half the mining power, i.e., over half the computers) would be so costly that acquiring the needed computational power is practically impossible.
New bitcoin can only be created by the block reward given to miners. The amount of new bitcoin issued with every new block is halved every four years, and eventually the reward will cease altogether, leaving miners only the transaction fees as a reward for their work. Given this system, we know the total amount of possible bitcoin to be mined is 21 million. Therefore, the value of bitcoin can’t be diminished over time by inflation, thus allowing the bitcoin network the power to preserve any user’s wealth, indefinitely.
The trifecta of security, scarcity, and history (as the first blockchain) make bitcoin a uniquely universal store of value. Think about its value in terms of supply and demand. Its fixed supply restricts the number of coins in possible circulation, the desire to securely transact stabilizes demand for the network, and finally, the historical value of bitcoin gives it an edge well out of reach for competing blockchains.
The Future of Finance
Bitcoin’s inception marks a paradigm shift in the financial world. Its underlying technology, blockchain, ensures a secure, transparent, and immutable system for transactions, setting a new standard for financial exchanges. The mining process not only secures the network but also introduces a novel way to create and distribute currency, governed by the principles of scarcity and computational work, rather than central authority.
Bitcoin has paved the way for numerous other digital currencies and blockchain applications. However, its unique combination of security, scarcity, and history has cemented its place as the leader of this financial revolution. Bitcoin stands as a testament to the innovation of decentralized technology, allowing the essential elements of value exchange to persist liberated from their previous material conditions in a new realm of computational abstraction.
The Beginner's Guide To Bitcoin Spot ETFs
Bitcoin Spot ETFs blend crypto growth with traditional investing ease, offering a new pathway to digital asset exposure.
Since its inception in 2009, bitcoin has transitioned from a niche internet curiosity into a full-fledged asset class, coveted by both ordinary individuals and the largest financial institutions alike.
And there’s no surprise why — bitcoin’s 1,576% annual average return between 2010 and 2022 outpaced every other major asset class available to investors by a significant margin.
Despite more than a decade of often-enormous gains though, perhaps nothing has legitimized bitcoin in the eyes of newly interested retail investors more so than this year’s approval of the first spot bitcoin ETFs for trading in the U.S. The ETFs, which now give investors a way to gain exposure to bitcoin via the stock market, launched on January 11, 2024 and have quickly become among the most successful ETF launches of all time.
This article dives into what every investor should know about them.
What Are Bitcoin Spot ETFs?
Exchange-traded funds, or ETFs, are among the most popular investment vehicles on the market, with roughly $10 trillion in assets under management (AUM) worldwide.
They’re offered by a range of financial institutions and can hold stocks, commodities, or bonds in them. ETFs are designed to track the price of their underlying assets and the firms who offer them sell individual shares of these funds on the stock market, where they can be purchased just like any other stock.
Bitcoin spot ETFs are similar to other ETFs, except they’re backed by bitcoin instead of traditional assets, making them the first digital currency backed spot ETFs in the U.S.
Spot bitcoin ETFs in the U.S. are a significant step for the adoption of bitcoin, as investors now have the opportunity to benefit from bitcoin’s price action without needing to use a cryptocurrency exchange or own bitcoin itself. Nearly a dozen leading financial institutions, including BlackRock, Fidelity, and Franklin Templeton, are offering spot bitcoin ETFs, and the offerings have quickly become among the most popular ETFs ever.
Notably, spot bitcoin ETFs are different from bitcoin futures ETFs, which have been available in the U.S. since 2021. Instead of offering direct exposure to bitcoin’s price, futures ETFs offer indirect exposure through futures contracts, which are agreements to buy or sell bitcoin on a future date at a predetermined price.
How Is A Bitcoin Spot ETF Different From Buying Bitcoin?
There are significant differences between owning shares in a spot bitcoin ETF and holding bitcoin directly.
When investors buy shares in a bitcoin spot ETF, the fund operator running that ETF then buys an equivalent amount in bitcoin to back the shares. If bitcoin’s price goes up, the price of the ETF’s shares will go up. If bitcoin’s price goes down, so will the ETF’s share prices. But, one still doesn’t own any bitcoin; ETF shares can’t be exchanged for any of the bitcoin that backs the fund, meaning the institutions that are buying up bitcoin don’t necessarily need to sell, even if investors sell their shares.
ETFs are designed to closely follow the price movements of the assets they’re backed by. But their gains or losses might not always be identical to those of bitcoin, because of factors including demand for the ETF itself and the expense ratio of the ETF. Still, owning shares in a spot bitcoin ETF is expected to be a preferable way to first get some exposure to bitcoin for many investors, especially those who are already investing in individual retirement accounts, or those managing large amounts of capital, like hedge funds or pensions.
Owning bitcoin directly though, requires buying bitcoin from an exchange like Coinbase or Kraken. Doing so provides much more freedom with what can be done with bitcoin, such as sending it to a self-custody wallet, or using it to interact with the broader bitcoin ecosystem.
How Can I Invest In Bitcoin ETFs?
Investing in spot bitcoin ETFs is simple — they’re available for purchase on most platforms where stocks are purchasable.
Choosing the “best” ETF is subjective. But generally, investors flock toward the ETFs that have the most liquidity, the lowest expense ratios, and the highest tracking accuracy. Within a month of trading, for example, the spot bitcoin ETFs offered by BlackRock and Fidelity both became the most liquid ETF launches of all time, garnering $3 billion of inflows respectively, a sign that they are highly liquid and likely will continue to be in the long term. Meanwhile, other ETFs might be less liquid but have advantages, such as lower fees.
Spot bitcoin ETFs make sense as part of a diversified investment portfolio for many investors, especially on a long-term timeline.
For more conservative investors, a small allocation toward a spot bitcoin ETF can provide at least some exposure to the highest-performing asset class of our generation, while also eliminating many of the direct risks and complexities associated with owning bitcoin directly.
Investors with more conviction might prefer to own bitcoin outright. Still, the spot bitcoin ETFs can be an opportunity to increase bitcoin exposure through a tax-advantaged investment account, like an IRA, which is something that otherwise couldn’t be done when buying bitcoin directly.
Why Are The Potential Benefits Of Investing In A Bitcoin ETF?
To some investors, bitcoin spot ETFs can have some perceived benefits over owning bitcoin directly.
Accessibility
In some ways, spot bitcoin ETFs are more accessible to investors in comparison to buying bitcoin directly, because they don’t require any familiarity with cryptocurrency exchanges.
And critically, bitcoin spot ETFs also allow investors to get exposure to bitcoin using capital that they otherwise could not have moved onto a cryptocurrency exchange. If an investor with an individual IRA, for example, wanted to move some of that capital into bitcoin, they’d likely incur a penalty. And large investors who manage hedge funds, family offices, pension funds, and other large pools of capital, are often unable to move capital into cryptocurrency exchanges, due to a lack of regulatory certainty still surrounding cryptocurrency in the U.S.
Regulatory Oversight
Since ETFs are stocks and under the jurisdiction of the U.S. Securities and Exchange Commission, spot bitcoin ETF issuers are required to adhere to a comprehensive set of investor protection rules, related to disclosures, financial reporting, and market manipulation. Spot bitcoin ETF issuers, for example, must provide regular reports detailing the fund’s performance and how it tracks the price of bitcoin, must disclose how the bitcoin that backs the fund is stored, and must comply with rules in place to ensure ETF shares are priced fairly.
While cryptocurrency exchanges also must comply with many regulations, uncertainty in the U.S. over which government agency has jurisdiction over cryptocurrency markets means many of these same investor protections might not apply.
Tax Efficiency
While trading cryptocurrency can often lead to complex tax implications, owning shares in a spot bitcoin ETF can be much simpler. For investors, tax implications are only triggered once they sell shares of a spot bitcoin ETF, and would operate just like stocks: shares held for less than a year would trigger a short-term capital gains tax, while shares held longer than a year would trigger a long-term capital gains tax.
What Are The Risks With Investing In Bitcoin ETFs?
Although bitcoin ETFs are managed by some of the largest financial institutions in the world, several risks remain that all investors should be aware of.
Liquidity
Among the biggest risks in purchasing spot bitcoin ETFs is choosing a product that doesn’t have enough liquidity or trading volume. Bitcoin is a highly liquid asset on its own, but not every spot bitcoin ETF will be liquid to the same degree, which could have implications during times of high market volatility. Illiquid ETFs could have wide spreads between the prices that buyers are willing to pay and sellers are willing to sell, posing potential challenges for institutional investors who may need to move large amounts of money around quickly, yet without impacting market prices.
Volatility
Bitcoin and cryptocurrencies generally, are volatile investments. In uptrends, this creates the potential for outsized gains. But in downtrends, it means there could be significant losses.
The same is true for shares of spot bitcoin ETFs, since they are directly correlated to bitcoin’s price.
During times of high volatility, the ETFs could attract more trading volume than usual from either buyers or sellers. During these times, if a particular ETF is seeing high trading volumes, the ETF shares can spike or fall more than bitcoin’s actual price movements due to the rise in volume.
Tracking Errors
While the spot ETFs are designed to follow bitcoin’s price as closely as possible, there are a variety of reasons why it might not do so perfectly at all times. Discrepancies between the performance of an ETF and the performance of its underlying assets are called “tracking errors.”
Common reasons for tracking errors include:
ETF Fees
Since ETFs are products managed by financial institutions, they incur operating costs such as management fees, custodial fees, and marketing fees. These costs are passed onto shareholders via a reduction in the fund’s net asset value, which can create gaps between the ETF’s performance and its underlying assets.
Trading Hours
Bitcoin is an asset that can be traded any time of day, any day of the week, and on all holidays worldwide. However, since stock markets operate on set trading hours, any significant changes to bitcoin’s price that happen outside of those hours may not be immediately reflected in the price of ETF shares and can create tracking errors, even if only temporarily.
A New Paradigm Emerging
The introduction of spot bitcoin ETFs to the U.S. market represents a massive shift, not just in the accessibility of bitcoin, but also in investor perceptions of bitcoin itself.
After years of skepticism, investors from all ends of the spectrum are flocking to get exposure as bitcoin spot ETFs are on pace to surpass gold ETFs’ AUM by the end of 2024. While owning spot bitcoin ETFs is still distinctly different from owning bitcoin directly, they offer investors a simple and familiar way to get exposure to bitcoin’s potential upside gains, without some of the potential risks associated with them attempting direct cryptocurrency transactions.
A History Of Cryptocurrency Liquid Staking
Explore the history and evolution of crypto liquid staking and key innovations that have shaped its development.
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Liquid staking is among the most transformative blockchain innovations in recent history, due to how it has helped unlock new potential for on-chain liquidity, decentralization, and yield generation.
Staked tokens are left locked up and illiquid with traditional staking mechanisms, creating massive liquidity constraints. With liquid staking, however, users can stake their tokens while retaining their liquidity, bolstering that blockchain’s decentralization and its DeFi ecosystem.
As more proof-of-stake blockchains have proliferated throughout the cryptocurrency ecosystem, a variety of liquid staking protocols have launched, helping solve for some of traditional staking’s limitations and to expand cryptocurrency use cases.
In this article, we’ll explore the history and evolution of liquid staking, key innovations that have shaped its development, and how it has become a vital component in the cryptocurrency landscape.
The Origins Of Liquid Staking
As proof-of-stake blockchains began to gain favor over proof-of-work due to sustainability and scalability concerns, the introduction of staking mechanisms became commonplace with blockchains, wherein staked tokens worked to help secure the network and ensure sufficient decentralization.
With this method, though, staked tokens typically couldn’t be used for other financial activities, creating a massive capital inefficiency, as generally a large portion of a network’s tokens end up getting staked. Ethereum, for example, has nearly 30% of its circulating supply staked, while Avalanche has 54% of its total supply staked, and Solana’s staking ratio sits at 65%.
Liquid staking emerged as a solution to help unlock this trapped liquidity. Once a user stakes tokens using a liquid staking protocol, they’ll receive a derivative token (or liquid staking token) that represents the value of their staked assets. While their original tokens work to help secure the operations of that blockchain, these derivative tokens can be used for a variety of DeFi purposes, such as trading or collateral for loans.
In 2020, the implementation of ETH 2.0 allowed users to stake their tokens in preparation for the network’s transition to proof of stake. But doing so meant they couldn’t unstake until ETH’s transition to a proof-of-stake network was fully complete (which didn’t happen until Sept. 2022).
Lido was among the earliest liquid staking platforms, launching in 2020 amid this transition to proof-of-stake to help users retain their liquidity.
Users who stake using Lido receive a derivative token, stETH, which represents their staked ETH, plus any earned rewards. These stETH tokens can then be used within DeFi protocols like Aave and Compound, or for a variety of yield farming strategies, allowing users to earn yield from both staking, and from any activities conducted with their derivative tokens.
Since launching on ETH, Lido has also launched liquid staking on a variety of blockchains including Polygon, Optimism, Arbitrum, and BNB Smart Chain.
The Rise Of Liquid Staking Across Blockchains
As Lido gained popularity and quickly emerged as the preeminent liquid staking platform, the concept began to spread to other blockchains, with each protocol adapting to that blockchain’s unique technical and economic environments.
Solana
Marinade Finance, which launched in 2021, was the earliest liquid staking protocol released on Solana. Similar to Lido, users of Marinade receive a derivative token, mSOL, in exchange for their SOL, and can use mSOL across Solana’s DeFi ecosystem. Marinade’s liquid staking strategy involves automatically distributing stakes across dozens of validators, which helps reduce risks associated with a validator going offline, or changing their commission fees.
Other liquid staking platforms on Solana include Jito, SolBlaze, and marginfi.
Polkadot
Acala, also launched in 2021, was the first liquid staking protocol available on the Polkadot network and is significant for how it pioneered liquid staking for Polkadot’s multichain architecture and helped unlock liquidity for its ecosystem.
Polkadot relies on a series of “parachains” which are application-specific blockchains connected to the main network, meaning any liquid staking token needs to be compatible with the network’s entire suite of parachains.
When staking using Acala, users receive LDOT in return, which can then be utilized across the entire cross-chain network of the Polkadot ecosystem. For Polkadot, which has around 60% of its supply staked, liquid staking has helped unlock a significant amount of liquidity and helped facilitate the groundwork for a cross-chain DeFi ecosystem.
Other liquid staking platforms on Polkadot include Parallel Finance and Bifrost.
Avalanche
Similar to other blockchains, the launch of BENQI on Avalanche in 2021 was a massive step toward unlocking liquidity and improving the usability of AVAX’s DeFi ecosystem. When users stake via BENQI, they receive sAVAX in return, a derivative token that was integrated into a variety of lending, borrowing, and yield-farming platforms early into its launch.
Users of sAVAX can yield farm on Pangolin and take out loans on Aave, while still earning rewards on their initial staked tokens.
Other liquid staking protocols on Avalanche include Ankr and Balancer.
The Arrival Of Liquid Staking On Bitcoin
While liquid staking has gained traction on proof-of-stake networks, Bitcoin’s proof-of-work architecture has largely prevented a similar boom native to the Bitcoin ecosystem. The Bitcoin network’s lack of smart contract compatibility, slow consensus mechanism, and low data availability, make it far from ideal to be used for complex transactions like liquid staking or DeFi applications.
But the emergence of liquid staking platforms, such as Lorenzo Protocol, has the potential to help unlock bitcoin’s massive liquidity, while also paving the way for a bitcoin-native DeFi ecosystem.
Currently, almost all of the liquidity that comprises Bitcoin’s $1 trillion-plus market cap is locked on Bitcoin’s main network, either in exchange balances or self-custody wallets. And it’s locked there due to Bitcoin’s inherent limitations.
But that liquidity represents a massive potential opportunity for bitcoin. What if that capital could be utilized across the DeFi ecosystem?
Using platforms like Lorenzo, the potential of that locked capital can finally be realized. Holders of bitcoin now have the ability to stake their bitcoin, similar to how they would any proof-of-stake token, and receive a derivative token in exchange, which can then be used across a variety of proof-of-stake networks.
With Lorenzo, users can request their bitcoin be staked, after which it gets sent to a verified financial institution, which serves as the staking agent and completes the staking execution. Upon confirmation that the BTC has been staked, users will then receive an equivalent amount of value in derivative tokens, stBTC. These tokens are smart-contract compatible and can be used for DeFi purposes across a variety of EVM-compatible blockchains.
Through facilitating the ability to make their bitcoin liquidity interoperable across multiple blockchains, liquid staking on Bitcoin represents a significant advancement in the evolution of Bitcoin into a multi-chain, DeFi-compatible asset.
What’s Next?
Liquid staking has emerged as a solution to address the liquidity constraints of traditional staking methods, enabling stakers to maintain liquidity while securing the network. With its rise across major proof-of-stake blockchains, liquid staking has significantly expanded DeFi use cases, enhanced decentralization, and has helped enable a more efficient DeFi ecosystem.
As its potential extends to bitcoin, expect a new range of financial applications for bitcoin that will be enabled by the unlocking of the asset’s massive liquidity.
The Ultimate Guide To Bitcoin Liquid Staking Protocols
Review the top Bitcoin liquid staking protocols available.
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What Are Liquid Staking Tokens?
Liquid Staking Tokens (LSTs) offer advantages over traditional staking structures by enhancing liquidity and boosting capital efficiency.
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Liquid staking is a specific means of staking a cryptocurrency asset, usually for securing proof-of-stake blockchains, that allows users to retain access to the value being staked for other purposes. Upon staking, the protocol automatically generates a liquid staking token (LST), which provides liquidity via a derivative token while the original cryptocurrency remains staked. This LST acts as a receipt, proving ownership of the staked cryptocurrency, and can be transferred, stored, traded, and used within decentralized finance (DeFi) and other supported applications.
Liquid staking enhances staking by offering greater liquidity and capital efficiency compared to traditional staking methods. Typically, the staking process involves bonding and unbonding periods that make the staked cryptocurrency unavailable for other applications while it is staked, but liquid staking overcomes this by issuing the transferable LST. In addition to ownership of the underlying staked assets, the LSTs also hold the rights to any rewards accrued.
Advantages of Liquid Staking Tokens
LSTs offer notable advantages over traditional staking structures by enhancing the liquidity of the underlying staked assets and allowing that capital to be used more efficiently. While previous systems led to yield strictly through the staking process, LSTs enable access to additional returns by allowing that liquidity to remain active in the DeFi ecosystem across multiple chains. Users benefit from the opportunity to delve into yield farming and other DeFi strategies, potentially boosting their returns while still enjoying the utility of their staked assets. In fact, the existence of LSTs means the same underlying collateral can effectively be staked multiple times through a process known as Loop Staking.
Moreover, LSTs provide exceptional flexibility compared to staking protocols that don’t offer such tokens. While there are oftentimes long unbonding periods typically associated with the staking process, LSTs allow extreme simplicity and less restrictions on the movement of value in and out of the staking process. Bonding restrictions are effectively removed with LSTs, as the LSTs can be sold for a replacement of the collateral from where the LST derives its value. Indeed, the staking process as a whole can be simplified into the buying and selling of these LSTs, as the one who holds the LST holds the rights to the yield associated with the stake and the deposited collateral. With Lorenzo Protocol, the rights to the yield and underlying principal can even be split into two separate tokens.
Examples Of Different Liquid Staking Protocols
Although the liquid staking process is pretty straightforward, this concept is implemented differently depending on the underlying blockchain.
On Ethereum, where liquid staking originated, EigenLayer allows staked ether (ETH) to be staked across various decentralized protocols, without moving it off the Layer 1 Ethereum blockchain. This preserves the underlying security model of Ethereum itself by allowing staked ETH to also be used in other staking protocols simultaneously. Acting as an intermediary, EigenLayer facilitates the creation of restaking pools, requiring that its smart contract be set as the withdrawal credential for the staked ETH. This setup enables the enforcement of additional slashing conditions based on the additional staking protocols the staker opts to validate, using cryptographic proofs for verification. Additionally, validators receive derivative ERC-20 LSTs representing their staked ETH and associated rights, which are liquid and can be used in further applications.
Babylon introduces an innovative approach to enabling bitcoin hodlers to participate in a proof-of-stake security model. The protocol circumvents Bitcoin’s limited scripting capabilities to emulate advanced smart contract functionalities. This allows the creation of staking contracts directly on the Bitcoin blockchain, using scripts that define specific conditions for locking, unlocking, and slashing bitcoin used for staking.
Key scripting elements include OP_CHECKSEQUENCEVERIFY for timelock mechanisms and OP_CHECKSIG for signature verification. It should be noted that Babylon is only able to enable bitcoin to be used for staking. For accessing more advanced features, such as liquid staking or restaking to multiple chains, additional protocols like Lorenzo are required, as Babylon alone does not support these functionalities.
Most liquid staking protocols for other cryptocurrency networks, such as Jito on Solana, work in a manner similar to EigenLayer on Ethereum, and Bitcoin’s limited scripting language is the reason things work differently there.
Types Of Liquid Staking Tokens
There are also a variety of different ways LSTs tokens can be issued to stakers. In their simplest form, LSTs are issued to the staker on a relevant blockchain network immediately after the stake has been deposited at the base layer. These newly issued tokens hold the right to withdraw the original stake and any yield the stake accrued at the end of the specific staking period. Due to the yield that is associated with this stake, the tokens should trade at a premium when compared to the base cryptocurrency when it is not staked.
Another concept that was briefly mentioned in the previous section is liquid restaking. This is similar to liquid staking, but the key difference is that the underlying cryptocurrency is staked on more than one network. Liquid restaking tokens (LRTs) are similar to LSTs in that they represent the underlying cryptocurrency and any yield associated with it from the various staking protocols where it has been connected. Due to the existence of more than one staking protocol, LRTs tend to trade at an even greater premium than LSTs.
LSTs and LRTs can also be separated into two different tokens in some liquid staking protocols. These two separate tokens represent the base cryptocurrency collateral and the yields associated with that collateral. The separation of the yield from the base stake allows the staked cryptocurrency to trade closer to a one-to-one basis with its derivative token. This effectively makes the liquid staking process a way to move the staked cryptocurrency to the same proof-of-stake cryptocurrency network it is securing. The tokens that represent that base cryptocurrency stake are known as liquid principal tokens (LPTs), while the tokens that represent the rights to the yield accrued by the stake are known as yield-accruing tokens (YATs).
Unlocking Liquidity and Flexibility
Liquid staking tokens represent a significant advancement in the staking process, offering users the flexibility to unlock liquidity while still participating in blockchain security. By enabling the use of staked assets in decentralized finance and other applications, LSTs provide a dual benefit of staking rewards and additional yield opportunities.
This innovation not only increases capital efficiency but also expands the utility of staked assets across multiple platforms and chains. As the landscape of liquid staking continues to evolve, LSTs are likely to play a crucial role in the future of decentralized finance, offering both security and flexibility. For investors and blockchain enthusiasts alike, understanding and leveraging liquid staking tokens could be a key strategy in maximizing returns in the growing world of DeFi.
What Are Liquid Principal Tokens (LPTs)?
LPTs represent a user's principal balance, tokenized. This functionality enables new features and technical capabilities for bitcoin.
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Cryptocurrency holders and investors have been able to stake their digital assets to participate in consensus and governance on proof-of-stake blockchains for roughly a decade; however, there have recently been some notable new capabilities introduced into the staking process.
For example, Babylon has enabled bitcoin to be used as collateral for alternative proof-of-stake (PoS) networks, and the same crypto asset can be used to provide security to multiple different networks at the same time.
Perhaps the most important innovation over the past few years has been the ability to access the liquidity associated with a particular stake via liquid principal tokens (LPTs). Through this process, users can simultaneously stake their cryptocurrency assets while also using derivatives, based on that stake, in various decentralized finance (DeFi) applications.
What Is Liquid Staking?
Liquid staking enhances traditional staking by providing users with access to the liquidity of their staked assets. In a typical PoS blockchain, participants lock up their funds to secure the network, rendering their tokens unavailable until they’re unstaked. However, liquid staking allows users to stake their coins while maintaining access to that value for use in other blockchain applications such as lending, payments, trading, yield-bearing DeFi applications, and more.
Additionally, this concept can be extended to liquid restaking, which allows the same cryptocurrency assets to be staked on multiple networks simultaneously.
Notably, there are key differences in how liquid staking works on Bitcoin and Ethereum. Liquid staking on Ethereum through the EigenLayer smart contract allows users to stake ETH natively, due to the expressive nature of the cryptocurrency network’s scripting language. Conversely, Bitcoin’s Babylon protocol uses a combination of native scripting and off-chain cryptographic techniques to enable staking in an ad-hoc manner, requiring additional protocols like Lorenzo for full liquid restaking functionality.
What Are Liquid Staking Tokens (LSTs)?
Liquid staking tokens (LSTs) represent staked cryptocurrency on PoS blockchains. They enable users to maintain the liquidity of their assets while earning rewards by participating in staking. If the base collateral is involved in multiple staking protocols, then the assets are more properly defined as liquid restaking tokens (LRTs). Even though the original assets are staked and supporting network operations, the corresponding LSTs or LRTs can still be used elsewhere, even on completely separate cryptocurrency networks by way of secure bridging mechanisms.
When users stake their cryptocurrency, they can receive LSTs that represent the value of their staked assets. Whoever holds the LSTs is who has the rights to withdraw the staked cryptocurrency from the underlying staking protocol. These tokens allow users to maximize their investments without forfeiting the benefits of staking. In other words, they’re able to gain yield from multiple different sources using the same underlying collateral.
How Liquid Principal Tokens Are Created Using Lorenzo Protocol
When a user decides to stake their bitcoin via Lorenzo Protocol, they will send their bitcoin on the bitcoin blockchain to a specific multisig address. Once this transaction has been confirmed by Lorenzo, the user can receive the principal of their staking deposit in the form of LPTs on the Lorenzo appchain. From here, the LPTs can be used in decentralized applications directly on the Lorenzo appchain or bridged to other networks.
The Lorenzo’s native LPT is stBTC. Notably, the yield awarded on the stake the stBTC tokens derive their value from is not attached to these tokens. Instead, the staked bitcoin and the rights to the rewards associated with that stake are separated into two separate tokens on Lorenzo appchain. The tokens associated with the staking rewards are known as yield-accruing tokens (YATs), and only the holder of those tokens can access the staking yield.
Benefits Of Liquid Principal Tokens For Bitcoin
Through the creation of LPTs in Lorenzo Protocol, new features and technical capabilities can be enabled for bitcoin. Any of the alternative cryptocurrencies can now be implemented as Bitcoin Layer 2 networks, with the staked bitcoin both providing security for the network and enabling a secure two-way pegging mechanism between bitcoin on the base bitcoin blockchain and the new secondary layer.
Whether a user wants to bring the expressiveness of Ethereum or privacy of Monero to their bitcoin usage, Lorenzo Protocol can enable any use case. By bringing every cryptocurrency use case to bitcoin, the overall utility of the cryptocurrency, and thus the market overall, increases due to the increased scale and liquidity of the bitcoin economy.
What Are Yield Accruing Tokens (YATs)?
YAT tokens represent a user's right to redeem earned yield on Lorenzo Protocol and are freely tradeable across the DeFi ecosystem.
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Liquid Staking Tokens (LSTs) are one of the key innovations in the world of proof-of-stake blockchains over the past few years, as they allow stakers to retain control over the value associated with their stake, via derivative tokens.
This ability to access the liquidity that has been staked into a particular financial protocol means that value can now be used in all other areas of decentralized finance (DeFi), even applications that enable earning additional yield by staking that same value elsewhere.
LSTs can also be further split into the base collateral and the yield associated with that collateral’s staking work. The tokens that are simply associated with the yield related to the underlying stake are known as yield-accruing tokens (YATs).
Let’s dive deeper into liquid staking, LSTs, and YATs.
What Is Liquid Staking?
Liquid staking offers a fresh take on traditional staking by granting access to the liquidity of staked assets. Normally, in a proof-of-stake blockchain, funds are locked to secure the network, making them inaccessible until they are unstaked. Liquid staking changes this by allowing users to stake their tokens while retaining the flexibility to use their value within DeFi activities.
Liquid staking mechanisms differ significantly between the Bitcoin network and alternative cryptocurrency networks with more expressive scripting languages. On Ethereum, for example, the EigenLayer smart contract allows users to stake ETH directly within the blockchain. In contrast, Bitcoin’s Babylon protocol relies on a mix of native scripting and off-chain cryptographic methods to facilitate staking. This approach requires additional protocols, such as Lorenzo, to achieve complete liquid staking functionality on Bitcoin.
What Are Liquid Staking Tokens (LSTs)?
Liquid Staking Tokens (LSTs) represent staked cryptocurrency on a proof-of-stake protocol. These are the tokens that allow participants to retain the flexibility to buy, sell, or trade their tokens, even while they are staked — which is considered by many to be an incredible “value add” compared to merely hodling. This added liquidity makes staking more appealing and adaptable to various financial strategies.
When users stake their assets, they receive an equivalent amount of LSTs, which can then be freely traded or used within different DeFi protocols. This innovation means that staked assets are no longer locked and inaccessible; instead, they can continue to generate returns and be employed in other DeFi activities, thereby enhancing overall capital efficiency.
How Yield Accruing Tokens Are Created Using Lorenzo Protocol
When a user first decides to stake their bitcoin in exchange for yield via Lorenzo Protocol, they will first need to send their desired amount of bitcoin to a specific address on the base bitcoin blockchain generated by the protocol. Once the bitcoin has been received, Lorenzo Protocol can issue ERC-20 tokens based on both the principal bitcoin amount and the yield that will be accrued. These tokens can then be used via any number of crypto networks, including Bitcoin Layer 2 networks.
The tokens derived from the base staking collateral are referred to as liquid principal tokens (LPTs), while the tokens associated with the yield are known as yield-accruing tokens (YATs).
Users can decide whether they want to accrue the yield associated with their underlying stake over time or simply sell off the rights to those future earnings to someone else. This will be particularly appealing to those who are simply interested in moving their bitcoin to Layer 2 networks via Lorenzo Protocol.
The Benefits Of Yield Accruing Tokens For Bitcoin
Once the YATs are issued, they can be used like any other ERC-20 token in DeFi. This means users can use these tokens for collateralized borrowing of other tokens, collateralized issuance of stablecoins, and much more.
By separating the yield from the principal bitcoin staking deposit, users are also able to access the liquidity of the staking deposit on a one-to-one basis without a premium on the staked bitcoin. After all, the rights to bitcoin that are generating yield are more valuable than the rights to bitcoin that are held in cold storage. As DeFi is often referred to as a system of financial Legos, the separation of yield into YATs also provides more optionality and creativity in terms of building new applications for bitcoin.
With the combined use cases of providing security to Bitcoin Layer 2 networks and enabling bitcoin to be used on these secondary layers, it’s clear that LSTs, LPTs, and YATs can extend use cases and liquidity of bitcoin.
Bitcoin now has the capability to capture the value associated with every popular DeFi use case.
Why Liquid Staking Changes Bitcoin Forever
Liquid staking transforms Bitcoin from just a store of value into an active asset that can be used across an array of DeFi use cases.
Decentralized finance (DeFi) is one of the cryptocurrency industry’s biggest and most in-demand use cases.
There’s approximately $100 billion of value currently locked into DeFi protocols, and by using these protocols, investors can trade tokens, lend and borrow, earn yield, and more — all without using any financial institutions or other third-party intermediary gatekeepers.
But bitcoin, despite being the most popular and highest-valued cryptocurrency to date, is largely incompatible with the broader DeFi ecosystem due to the scalability issues inherent to its underlying technical design. Its slow consensus mechanism, lack of smart contract compatibility, and limited data storage capacity make it currently impossible to build a DeFi ecosystem around bitcoin, and limits bitcoin’s primary use case to being that of a store of value — and a clunky, but reliable internet currency as its second-best.
But what if there was a way to move bitcoin away from being just a store of value into an active asset that can be used across multiple blockchains for an array of DeFi use cases?
Lorenzo’s bitcoin liquid staking protocol aims to do just that, by helping solve some of bitcoin’s native limitations and unlock bitcoin liquidity, by building a secure path to convert bitcoin assets into smart contract-compatible formats.
Understanding Bitcoin’s DeFi Limitations
There’s plenty to love about bitcoin. It’s verifiably scarce, incredibly secure, and has been the best-performing asset class across all markets since its 2009 inception.
But as an asset to be used as part of the broader DeFi ecosystem, bitcoin has some massive limitations which, to date, have stunted its adoption.
These include:
Limited Data Storage
Among bitcoin’s biggest issues is the fact it simply can’t store that much information. Each bitcoin block can only hold 1 megabyte (MB) of transaction data, which makes it impossible to process DeFi transactions — such as lending or liquidity pooling — in bitcoin’s native state. Since many DeFi transactions rely on the ability to process and store significant amounts of data, bitcoin’s limited data capacity would inevitably lead to network congestion, especially during periods of high demand.
Bitcoin’s blockchain, in an ideal state, can only handle about seven transactions per second (TPS), compared to 20,000 TPS on Sei’s blockchain, just for example. In the DeFi ecosystem, where fast transaction settlement is paramount, such limitations would create untold missed opportunities and multiple gross inefficiencies.
Lack Of Smart Contract Compatibility
At the core of the functionality of every DeFi protocol are smart contracts that help automate financial transactions based on algorithms or predetermined rules. But bitcoin’s scripting language can’t integrate with these smart contracts.
Instead, bitcoin supports just the most basic functions, an intentional decision by its pseudonymous creator to maximize its security. But bitcoin’s inability to integrate with smart contracts makes it impossible for bitcoin to natively execute the complex actions that DeFi platforms require for computing-intensive calculations, such as automatic interest calculation, yield farming strategies, and dynamic liquidity pool management.
Liquidity Issues In Staking
Currently, the staking options available for bitcoin hodlers require users to lock their tokens up for extended periods of time. But in markets like the DeFi ecosystem, much of the appeal is in DeFi’s ability to offer fluid and dynamic financial opportunities. When bitcoin is forced to be locked up, it means investors lose an inherent ability to respond quickly to market conditions or capitalize on new opportunities, which limits the flexibility, utility, and long-term financial potential of their bitcoin.
The Opportunity Of Bitcoin DeFi
The DeFi ecosystem is a $100 billion (and growing) market that is going to serve as the underpinning of a future financial system that utilizes digital assets. So, why shouldn’t the most secure and most liquid cryptocurrency play a significant role in its growth?
Bitcoin becoming compatible with DeFi protocols will facilitate a variety of use cases for the currency, beyond being just a store of value.
Turning Bitcoin Into An Active Asset
To many, bitcoin is seen as “digital gold.” But that’s only because it’s not yet compatible with the rest of the digital token economy. By solving some of bitcoin’s native limitations, bitcoin has the potential to become a yield-generating asset that allows investors to earn rewards without sacrificing liquidity. Through the conversion of bitcoin into DeFi compatible formats, users can more seamlessly use bitcoin as collateral for lending or borrowing, as well as for a variety of yield-farming strategies currently only available to investors by using other cryptocurrencies.
Unlocking Bitcoin Liquidity
Currently, one of the biggest problems facing bitcoin is that the billions of dollars of liquidity that comprises bitcoin’s $1.3 trillion market cap is essentially locked up due to bitcoin’s limitations, plus the limitations of existing staking solutions.
Ensuring bitcoin’s compatibility with the DeFi ecosystem means that investors could leverage their bitcoin for a variety of purposes, without needing to sell any of their tokens. Unlocking bitcoin liquidity also helps deepen the liquidity of DeFi protocols, which strengthens and helps the ecosystem work more efficiently overall.
Since bitcoin is the cryptocurrency asset with the most liquidity, users having the ability to bring their tokens into liquidity pools or to lending or borrowing protocols, for example, can create better capital efficiency, less volatility on DeFi platforms, and more stable financial products.
Cross-Chain Interoperability
The future of the cryptocurrency ecosystem is a cross-chain one. That means building ways for bitcoin to be compatible with DeFi protocols won’t merely enhance bitcoin’s utility — it would foster a more robust and unified cryptocurrency-based financial system overall.
Bitcoin being able to be seamlessly moved across blockchains means that bitcoin’s security features can be used to secure other blockchains, while also earning yield for bitcoin hodlers. And for bitcoin hodlers who primarily have only interacted with bitcoin’s blockchain to date, cross-chain opportunities for bitcoin can help bring new users and liquidity to different corners of the DeFi ecosystem.
How Lorenzo Protocol Is Making Bitcoin DeFi Possible
Lorenzo’s liquid staking is a novel approach to scaling bitcoin and building a cross-chain bitcoin token economy that allows bitcoin hodlers to participate in staking on proof-of-stake blockchains, while also maintaining both their personal liquidity and bitcoin’s built-in security benefits.
The solution enhances liquidity for bitcoin hodlers and DeFi protocols by bringing democratized access to staking (as there are no staking minimums or lockup periods) and enhanced security for the cryptocurrency and Web3 ecosystem overall, since bitcoin is being used to help secure other proof-of-stake blockchains.
Through Lorenzo, users can move their assets onto PoS networks through Babylon via liquid staking tokens pegged 1:1 to the value of their underlying staked bitcoin. Babylon is a two-sided marketplace between stakers and PoS networks, where networks that need the security provided by staking reward bitcoin stakers with yield generated from those PoS networks.
When using our liquid staking protocol, users can choose from a list of the PoS networks to stake on and a staking period, and once their bitcoin is staked, they’ll receive an equivalent amount of stBTC, Lorenzo’s liquid staking token. With stBTC, which is smart contract compatible, investors can earn yield on other PoS networks, or use their tokens’ collateral to participate in a whole new emerging world of potentially very lucrative DeFi applications.
Liquid staking is the only viable solution to create a robust, multi-chain bitcoin token economy, as it allows for the simple conversion of bitcoin into smart contract-compatible formats without imposing the native limitations of bitcoin’s network, or other Bitcoin Layer 2s. We expect quite literally billions of dollars worth of bitcoin to be staked in the coming years, and as the staking market for bitcoin grows, stBTC will eventually have a cross-chain DeFi economy built around its utility, where investors use stBTC for liquidity pools, for trading, as collateral for lending or borrowing, and more.
Advancing Bitcoin
Lorenzo’s Protocol represents a significant advancement in the evolution of bitcoin into a multi-chain, DeFi-compatible asset. Liquid staking for bitcoin helps address some of the native network’s fundamental limitations, while also facilitating the conversion of bitcoin into an active asset with use cases beyond being just digital gold.
Looking ahead, as the liquid staking market for bitcoin continues to grow, Lorenzo’s roadmap also includes plans for launching Bitcoin Layer 2-as-a-Service (L2aaS). Through offering Bitcoin Layer-2-as-a-service, users and developers will be able to tailor blockchain networks to their specific needs without extensive technical expertise, while also enhancing bitcoin’s scalability, while reducing transaction costs.
What Is Bitcoin Staking Slashing?
Learn key staking slashing risks and how Lorenzo's liquid restaking enhances security and accessibility for Bitcoin stakers.
In cryptocurrency networks based on proof of stake (PoS), those willing to stake their assets and participate in block validation are rewarded with a return on their investment. When everything is operating smoothly, this can be a way for cryptocurrency users to easily earn predictable, annual returns and passive income on their holdings.
However, there is no such thing as free money. Staking, like all elements of the crypto industry, carries with it a variety of risks.
One key area comes in the form of slashing. Slashing is the key security mechanism in PoS systems that prevents stakers from abusing their power on these networks, but it can also haunt those who simply are not fully aware of how to properly stake their coins.
This comprehensive guide will get you fully caught up on staking slashing and how to avoid it when navigating the rapidly growing bitcoin DeFi landscape. Let’s dive in.
What Is Slashing?
Slashing is a security mechanism used in PoS cryptocurrency networks that discourages and penalizes bad behavior by the validators on the network. The validators are the nodes on the network entrusted with the responsibility of creating new blocks, similar to the proof-of-work (PoW) miners in bitcoin.
These validators must put up an amount of cryptocurrency as collateral for the right to participate in block creation, and this collateral can be seized in situations where the validator is not acting in the best interest of the network, or has become negligent. This seizure of collateral is known as slashing.
Reasons Why Slashing May Occur
Each PoS cryptocurrency network has its own set of standards when it comes to slashing. However, there are a few common reasons why slashing may occur:
- A validator has signed multiple different blocks at the same block height, which can cause network instability in terms of not knowing which block to follow and when transactions are finalized.
- A validator has not participated in the consensus process for an extended period of time and has gone offline.
- A validator refuses to include specific, individual transactions or certain types of transactions, effectively implementing a form of censorship.
- A validator proposes blocks that contain invalid transactions or break some other consensus rule regularly.
It should be noted that different degrees of slashing can be used to punish different types of malicious or unwanted behavior. For example, a validator that is only offline for a short period is likely to have less of their stake slashed than a validator that was actively trying to attack the network via censorship or some other means.
In emergency scenarios, new slashing conditions can also be deployed to remove specific validators from the consensus process. For example, the rest of the network could come together to slash the stake of a hacker, government, or other unwanted entity that was able to gain too much control over the staking process.
How Does Staking Slashing Work On Bitcoin?
It should be noted that slashing on bitcoin works differently than every other cryptocurrency network due to bitcoin’s use of PoW and a relatively limited scripting language at the base blockchain layer. While other networks can implement rather straightforward smart contracts directly on the blockchain to handle the staking process, staking on bitcoin necessitates the use of a separate protocol, such as Babylon. Additionally, there is no staking in bitcoin directly, and Babylon is used to enable cross-chain staking for alternative PoS chains that wish to secure their networks with bitcoin-based liquidity.
While PoS chains that have expressive smart contracting capabilities can implement their slashing mechanisms directly on their chains, Babylon uses a system of simpler bitcoin scripts and off-chain cryptographic proofs to handle slashing for bitcoin that is being used to secure other PoS chains.
Specifically, Babylon uses extractable one-time signatures (EOTS) to ensure that a staker’s bitcoin private key can be made public in a situation where it is used to sign conflicting messages related to validation on a secondary PoS chain. This private key that has been made publicly available can then be used to slash the Babylon staker’s staked bitcoin by sending the funds to an unspendable bitcoin address.
While the result is the same (the staker loses their money), the way slashing is implemented in Babylon’s protocol for cross-chain bitcoin staking differs quite substantially from traditional PoS models.
How to Avoid Bitcoin Staking Slashing
As covered previously, the main reason slashing exists is to punish validators who wish to engage in malicious behavior; however, even well-meaning validators can get slashed if they aren’t properly managing their nodes.
Here are some key pointers to keep in mind when it comes to not getting slashed when staking bitcoin or any other cryptocurrency:
- A validating node should remain online and available to the staked cryptocurrency networks at all times. Missing a block signing opportunity or attestation can lead to slashing for inactive nodes.
- Practice proper private key management. While the validating node itself should remain online, the private key associated with the bitcoin staked on the node should be held in a separate hardware device to prevent hackers from taking advantage of the stake for their own, potentially nefarious purposes.
- Keep node software up to date. PoS chains tend to move faster and receive updates more often than bitcoin, and sometimes the updates pushed out to these networks involve fixes for emergency-level bugs.
- Understand the PoS chains that are being validated and stay up to date on the latest news relevant to these systems. While slashing conditions tend to be rather similar between chains, unique rulesets are implemented every now and then. It’s difficult to follow the rules associated with slashing if the rules are unknown.
- Research the reliability and reputation of PoS chains before staking any bitcoin on them. Chains that are relatively new without diverse userbases may offer attractive yields; however, those higher rates of return come with additional implied risk. After all, it does not take many resources for a bad actor to control a chain that has not had much stake added to it.
- Opt into a validator service provider, such as Lorenzo, that can simplify the entire validation process and implement additional guardrails to avoid potential slashing scenarios.
Avoid Bitcoin Staking Slashing with Lorenzo Protocol
One of the key benefits of Lorenzo is that it simplifies the entire staking process in a way that minimizes the likelihood of slashing to occur. There are a set of security mechanisms in place on the Lorenzo protocol that are intended to avoid slashing scenarios at all costs. These features include:
- Lorenzo offers staking insurance for a small fee, which allows stakers to potentially get reimbursed in a situation where a slashing condition takes place. The slashing insurance pool is managed by Lorenzo DAO.
- Before PoS chains are added to Lorenzo’s liquid staking system, they are reviewed and approved by the Lorenzo DAO. This means less credible projects will not be able to offer their PoS chains to Lorenzo users.
- The operators of the Babylon nodes handling the staking of bitcoin at the base layer of the system receive credit scores, which ensures that the operators with the highest uptimes and most responsible activity will take care of the vast majority of the staking for Lorenzo users.
Of course, the easiest way to gain the benefits of bitcoin staking without having to worry about slashing at all is to acquire stBTC, which is the liquid staking token derivative issued by Lorenzo to stakers. Holders of stBTC are able to access the value of the BTC that has been staked in addition to staking rewards. While slashing risks still exist for holders of these tokens, they are minimized by putting the responsibility of avoiding slashing into the hands of specialists in the form of Lorenzo operators. While stBTC is initially issued on the Lorenzo appchain, it can be transported across blockchains and the entire decentralized finance (DeFi) landscape.
Lorenzo is also built on top of Babylon, which has its own set of features for slashing avoidance. Anyone getting involved with bitcoin staking for the first time may want to look into stBTC and Lorenzo first, as the platform makes it much easier to avoid costly mistakes that could lead to loss of funds via slashing.
How Lorenzo Protocol Liquid Staking Democratizes Bitcoin Staking
Lorenzo Protocol democratizes Bitcoin staking, enabling pooled investments and liquid stBTC tokens for broader access and flexibility.
Bitcoin staking platform Babylon has enabled a whole new wave of economic activity on top of the world’s largest cryptocurrency network; however, this base protocol does not enable staking for everyone equally. Indeed, there are some limitations to Babylon overall when it comes to enabling access to smaller-denomination stakers, along with a lack of some advanced staking features such as liquid staking.
Having said that, there are upper-layer bitcoin staking protocols, such as Lorenzo Protocol, that can bring these features and more to bitcoin stakers. Let’s take a closer look at how Lorenzo liquid staking democratizes bitcoin staking and makes its use cases and potential yields accessible to as many users as possible.
The Current State Of Bitcoin Staking
Babylon is effectively the default protocol for those who wish to cross-chain stake their bitcoin to validate other proof-of-stake (PoS) chains. While Babylon was the first protocol to enable such activity to happen directly from the base bitcoin blockchain, it comes with some limitations in terms of its feature set.
One of the key limitations of Babylon is it does not offer any functionality for pooled staking. PoS chains have a minimum amount of cryptocurrency that must be staked to become a validator on the chain, so those who do not have enough capital are unable to participate in consensus. For example, if the minimum staking amount is one bitcoin, then anyone staking less than that amount will be unable to earn a yield. To be clear, this minimum amount of bitcoin for staking is set by each individual PoS chain, and not via the Babylon protocol.
Lowering The Threshold For Bitcoin Staking With Lorenzo Protocol
Lorenzo has been able to take the base Babylon protocol and extend it with more features. One of the most important features offered by Lorenzo is enabling pooled bitcoin staking for Babylon, which allows users with smaller bitcoin holdings to stake their coins. Here’s the technical process for how Lorenzo achieves this:
- A small-value staker starts by choosing which PoS chains they wish to validate and depositing their bitcoin into a Lorenzo delegate vault. This is a multisig bitcoin address controlled by Lorenzo validators.
- The Lorenzo delegate vault is where the aggregation of many different Lorenzo users’ bitcoin for staking purposes occurs. Since the delegate vault holds more bitcoin in aggregate than an individual staker, the Lorenzo validators can stake the bitcoin via Babylon and earn the rewards available to those with holdings above the minimum staking thresholds set by various PoS chains. The specific node operator responsible for validation on the PoS chains is automatically chosen by Lorenzo protocol. A native reputation system is used to make sure the node operator has high uptimes and has been operating in a responsible manner on whichever PoS chains the staker has chosen.
- After the staker’s deposit has occurred and been confirmed on the Lorenzo appchain, they will receive an equivalent amount of stBTC, which is a derivative token that allows the user to access the liquidity of the bitcoin that has been staked via Babylon.
- When a user decides they are ready to unstake their bitcoin, they can do it unilaterally without any necessary social interaction with other members of Lorenzo protocol. When signing an unstaking transaction, a staker must also return an amount of stBTC to the unstaking contract that is equivalent to the amount they wish to unstake.
The Bitcoin Liquid Staking Token
While the above description explains how those who wish to stake bitcoin with Babylon can do so under the minimum thresholds set by PoS chains, another way Lorenzo democratizes access to bitcoin staking is through the stBTC token. When a user stakes their bitcoin through Lorenzo Protocol to Babylon, they receive the stBTC token, which is a derivative of the bitcoin that is being held in the Babylon Protocol. The owner of this token has access rights to both the bitcoin that has been staked on Babylon and the rewards associated with staking on various PoS chains.
The stBTC token represents the ultimate form of democratization in bitcoin staking because users can simply purchase these tokens on the open market instead of staking their bitcoin. Through stBTC, the friction involved with staking bitcoin is further reduced, setting the stage for anyone to participate — even if they don’t want to deal directly with bitcoin while staking.
Empowering The Masses
Lorenzo Protocol is pioneering a transformative approach to bitcoin staking that breaks down traditional barriers to entry and champions inclusivity. By facilitating pooled staking and introducing the stBTC token, Lorenzo empowers individuals with smaller bitcoin holdings to engage actively in cryptocurrency’s economic benefits.
This model not only enhances liquidity but also ensures that the potential yields and benefits of bitcoin staking are accessible to a broader audience. The future of bitcoin staking is set to be more democratic, opening new possibilities for participation and investment in the digital asset landscape.
From HODL To Pour: How Liquid Restaking Unlocks The Bitcoin Economy
Liquid restaking transforms Bitcoin's DeFi potential, offering hodlers flexibility and liquidity without sacrificing underlying value.
Even during the depths of the 2022–2023 “crypto winter” (aka the crash and brutal public shaming of the broader cryptocurrency market as a whole) the growing demand for liquid staking services has nonetheless proven to remain red hot.
According to DeFiLlama, the total value locked (TVL) in DeFi liquid staking stood at a healthy $7.7 billion at the start of 2023. Even more impressive, this number continued to climb to over $33 billion by January 2024, and it nearly doubled to $59 billion by March.
Following this dramatic climb, cryptocurrency publications like CoinDesk went on record claiming that liquid staking is “the biggest category in decentralized finance (DeFi).”
Liquid restaking enhances the concept of liquid staking by allowing users to stake their cryptocurrencies to support a network and earn rewards, while also receiving a liquid derivative token that represents their staked assets. Unlike basic liquid staking, where the focus is primarily on earning staking rewards with the added benefit of liquidity, liquid restaking further capitalizes on this liquidity by enabling these derivative tokens to be actively used in various DeFi applications, traded, or utilized as collateral, thus offering greater flexibility and utility within the crypto ecosystem.
Although proof-of-stake (PoS) chains like Ethereum (ETH) hog the limelight in the liquid restaking revolution, don’t count bitcoin (BTC) out. In fact, liquid restaking might be the catalyst the king cryptocurrency needs to achieve its full glory.
In this article, you’ll discover how liquid restaking is already redefining what traders and investors think of bitcoin’s possibilities.
How Could Liquid Restaking Shake Up The Bitcoin Blockchain? — The Psychological Impact
First, consider some revealing statistics: 45% of bitcoin hasn’t moved in three years according to analysts, and 11% hasn’t moved between five to seven years. Considering bitcoin’s current mainstream identity as “digital gold” and a “hedge against inflation” — plus bitcoin’s long-standing, meme-friendly “HODL” culture — it’s no surprise that so many bitcoin investors put this cryptocurrency into their no-touch portfolio.
While this narrative is a major reason behind bitcoin’s worldwide attraction, it creates a sense of illiquidity as most market participants hope to desperately cling to their coins, as they fully expect bitcoin’s price to experience massive appreciation in just the coming decade or two, much less even longer ($1 billion in 2038, according to Fidelity Investments). In turn, this creates a psychological barrier to the hodler from using or selling bitcoin for other investments or transactions.
The primary benefit liquid restaking brings to bitcoin’s ecosystem is that liquid restaking provides a way to give Bitcoiners the “best of both worlds.” Liquid stakers still maintain ownership rights over their satoshis when they send them to a liquid staking provider. However, instead of merely locking away their bitcoin in an interest-bearing vault, the liquid staking derivatives (LSDs) from these protocols let traders restake their synthetic bitcoin for potentially higher yields in multiple other DeFi opportunities now competing for every bitcoin hodler’s liquidity.
With this new technological and psychological paradigm, traders have more of an incentive to use the unmatched stability of bitcoin as their basis for exploring the possibilities of DeFi, thus improving liquidity and giving bitcoin yet another new value proposition: the bitcoin network can now potentially serve as the superior bedrock layer for all the world’s DeFi activity.
Examining ETH’s Liquid Staking Evolution — Clues To BTC’s Liquid Staking Trajectory?
As much as bitcoin maximalists want to see bitcoin as the core of the DeFi infrastructure, Ethereum is currently the leader in this category, having a distinct first-mover advantage in DeFi. As the first smart contract blockchain and an innovator in the broader cryptocurrency ecosystem, Ethereum has always played a pivotal role in DeFi’s evolution. However, with the introduction of liquid staking and restaking, using ether as the standard for DeFi activity has only become more dominant. The increased adoption of ETH due to liquid staking provides a clue into how this new model could positively impact the bitcoin economy.
For evidence of liquid staking’s impact on DeFi liquidity, consider that the TVL in ETH liquid staking sat at $11.2 billion in March of 2023 and ballooned to over $50 billion in March of 2024.
Lido Finance remains the leader for ETH staking services, with the market cap for its staked ether derivative (stETH) rising from $4.11 billion in January 2023 to over $21 billion one year later.
More DeFi lending and borrowing protocols, including MakerDAO and Aave, now integrate with hot liquid staking tokens like stETH, further increasing its popularity and usability in the DeFi ecosystem.
As impressive as these growth figures are, financial analysts believe the flexibility and demand for LSDs will contribute to an ever-increasing positive cycle for ether liquidity. Given the opportunities and conveniences LSDs offer investors — and the increased accessibility throughout DeFi applications — firms such as HashKey Capital project the liquid staking market to 2x by 2025.
Led by liquid staking products like Lido’s stETH, LSDs have the potential to bring Ethereum’s total staked ETH to a $1 trillion market cap, dramatically increasing the Beacon Chain’s security and securing ETH’s dominance as the most trusted and active asset in DeFi.
How Liquid Restaking Unlocks The Bitcoin Economy
It is clear that Ethereum’s liquid staking protocols positively impact network activity and adoption, but how do these numbers translate to bitcoin’s situation? After all, bitcoin operates on the proof-of-work (PoW) consensus model rather than Ethereum’s proof-of-stake Beacon Chain. Why would LSDs of bitcoin supercharge bitcoin’s liquidity throughout the cryptocurrency-related ecosystem?
To address this question, let’s take a step back and review the basic reasons LSDs are such a powerful liquidity enhancer. Researchers Stefan Scharnowski and Hossein Jahanshahloo at Cardiff University identified two key ways LSDs achieve their positive impacts in the cryptocurrency markets. The first benefit of LSDs is their flexibility throughout DeFi, which includes their usability in yield-bearing opportunities and their transferability on cryptocurrency exchanges. Along with this ease of use within DeFi, Scharnowski and Jahanshahloo note the lack of lock-up periods on many liquid staking protocols as a significant feature influencing trader psychology and overall liquidity (or lack thereof, more specifically).
Just because bitcoin’s core consensus model uses PoW doesn’t mean it can’t take advantage of the benefits of LSDs, both in terms of DeFi usage and transferability. The durability of the PoW model — in addition to bitcoin’s longevity, size, and decentralization in the cryptocurrency space — all provide a unique value proposition as a liquid staking token versus other cryptocurrency assets.
Traders using BTC-derived LSDs have the guarantee of the bitcoin blockchain’s security backing up each of their tokens, providing an unparalleled level of trust for DeFi derivative assets.
While bitcoin’s base layer provides extreme trust and reliability for LSDs, the tokenization process also promises to help bitcoin branch out without forfeiting PoW consensus. By tokenizing staked bitcoin, developers have greater flexibility to make bitcoin an interoperable, multi-chain asset while preserving the core mining infrastructure. Bitcoin-derived LSDs unlock the potential to earn and use one’s bitcoin both within its native DeFi ecosystem as well as across other major chains, including Ethereum and Solana (SOL) by offering standards like ERC-20 or SPL for bitcoin-staked tokens. The intersection of these positive features opens the door to make bitcoin the most trusted and liquid token in DeFi, greatly enhancing bitcoin’s flexibility to become the true native currency of the internet, while respecting its now-traditional role as “digital gold” amongst traditional savers. However, generally speaking, more use cases (i.e., utility) generally means more potential value, so bitcoin hodlers and even “bitcoin maxis’’ do have much to gain from embracing bitcoin liquidity on other layers, if also maintaining that the security promise of base-layer bitcoin can truly be met.
What Does The Future Of Restaking Hold For Bitcoin?
While the prospects of using bitcoin in liquid staking and restaking are immense, it’s important to remember just how fresh this field is. Even on blockchains like Ethereum, liquid staking is one of the newest innovations, and there are still many questions about how staking as a service will evolve, and what bitcoin’s potential place in the coming ecosystem will become.
However, as more Layer 2 projects build on top of bitcoin’s foundation — and as adoption for LSDs continues to skyrocket — it’s crystal clear that liquid staking and restaking will be crucial in the future of bitcoin’s worldwide adoption. As staking products become more widely accessible, bitcoin just might reach unprecedented liquidity in the ensuing years.
What Is Crypto Liquid Staking?
Unlock the future of blockchain with liquid staking: Enhance security, retain liquidity, and democratize investments.
Staking is the process of committing resources to a cause or investment while retaining ownership and the potential for gains or losses. In traditional finance, it often means investing with an expectation of rewards, balancing risk against potential returns.
However, blockchain technology has revolutionized these concepts. Decentralized finance (DeFi) has redefined traditional roles like lending and third-party involvement, with staking at the forefront of this transformation.
Liquid staking, a recent innovation in the blockchain sphere, offers a nuanced evolution of staking principles, enhancing security and utility. This article delves into liquid staking, a groundbreaking approach that combines the benefits of staking with improved liquidity and flexibility.
Proof Of Stake
The origins of staking lie in a key innovation in blockchain architecture — the proof-of-stake consensus mechanism.
The consensus mechanism of a blockchain is the system that determines which network participant gets the privilege of adding a block of new data to the permanent chain. A proof-of-work blockchain, such as bitcoin, bestows this privilege on the winner of a computational competition.
This blockchain secures the network by computing power; an opponent attempting to successfully attack such a network (“Bitcoin is backed by the largest computer network in the world, a network orders of magnitude larger than the combined size of the clouds that Amazon, Google, and Microsoft have built over the last 15–20 years.” Ark Invest’s Cathie Wood) would require having over 51% of this power.
In a sufficiently large network, such as bitcoin, having access to this many computational resources has now proven to be a de facto impossibility. And a “successful” attack only lasts for about 10 minutes: so per game theory, the would-be attacker simply counts the cost in advance of sustaining such an attack, and quickly learns that their resources would be better exhausted by simply buying more bitcoin.
Despite the extreme security of a proof-of-work blockchain, this mechanism makes the network inefficient in terms of both energy and output. It requires constantly running an enormous number of computers to secure the network. Proof of stake seeks to address these concerns.
A proof-of-stake blockchain hands out the privilege of adding a block at random to a small group of investors who have committed enough money to support the network. The far fewer participants needed means the network is substantially more efficient than proof-of-work chains.
Participants in a proof-of-stake blockchain commit value to the network by staking the blockchain’s native token. Staking tokens means locking them up in the network so they can’t be used for a set period of time; i.e., investor funds are not typically considered liquid, once staked.
A proof-of-stake chain is secured by the fact that attacking the network would require owning over 51% of all the staked coins. For a sufficiently large blockchain, this would not only be impractically expensive but also destroy the value of the staked tokens, thereby ruining the financial motive for attacking the network in the first place.
Why Stake?
To function, proof-of-stake networks need to convince users to stake their tokens, but users hesitate to do so because of the risks inherent in illiquidity.
Liquidity is the ability to use your assets, it’s the availability of capital to the market. Something is illiquid when it is not exchangeable; low liquidity means something is difficult to exchange, and high liquidity means something easy to exchange. Consider the differences between buried treasure, a house, and stone-cold cash.
When you stake your assets, you give up liquidity by locking the tokens, essentially burying them in the network for a set contracted time. This comes with certain risks that disincentivize participation in the network.
Since these tokens are locked, they can’t be sold in the sudden advent of a substantial price drop, meaning they could be worth far less when later unlocked. Additionally, they can’t be removed if a participant needs their money back, or the network is somehow compromised.
Proof-of-stake chains do not themselves mitigate this risk, but rather they pay users for taking it. The network acts similarly to how old-school bank savings accounts were designed. Today, proof-of-stake chains reward participants staking by paying a percentage back to the holder based on the size of their stake, which allows holders to earn true passive income on their holdings.
The Liquid Staking Revolution
But what if tokens could be staked and receive rewards without making the holder illiquid? It might sound contradictory, but this is the idea behind liquid staking. Liquid staking allows staking participants to remain liquid while still receiving rewards.
Here’s how:
Using a liquid staking protocol, participants deposit the native token they want to stake into the third-party liquid staking platform, instead of staking them directly with the native network. The platform then stakes the tokens themselves and issues a receipt token to the user who deposited funds.
Receipt tokens are redeemable for the native tokens initially deposited in the platform. Holders of these receipt tokens receive a percentage of the rewards that the platform earns by staking the original token directly in the network. The difference is that the user can use the receipt token to trade and participate in DeFI, thereby retaining their liquidity.
Of course, this token isn’t as liquid as the original because the market for the receipt token is significantly smaller. Further, the user pays a percentage of the staking reward to the liquid staking platform. However, for many users, this is a small price to pay for the freedom to benefit from the value of their staked tokens.
What Are The Benefits Of Liquid Staking?
The most obvious reasons investors prefer liquid staking, over traditional methods, follow directly from the ability to retain their liquidity. Receipt assets can be traded, sold, or used in other DeFi applications, providing liquidity while still earning staking rewards.
Some other benefits are less obvious:
- Access for small investors: Some proof-of-stake networks require a large minimum investment for staking. This bars smaller investors from contributing to the network and participating in governance. Through liquid staking, individuals can participate with smaller amounts because these platforms aggregate multiple users’ stakes to meet minimum requirements.
- Democratization: Although governance decisions ultimately lie with the liquid staking platform that manages the pools of staked tokens, these applications often provide mechanisms for its users to participate in voting for the native blockchain. This allows voting power to be distributed among the smaller investors who would otherwise not have any say in network decisions.
- Easy access: Navigating the process of staking cryptocurrency can be a daunting task for even the most technical retail investor. Liquid staking platforms make for user-friendly options for contributing to a favorite proof-of-stake blockchain.
What are the risks of liquid staking?
Blockchain exists to address the risks of centralized control in our financial systems. The risks of liquid staking are founded on foregoing the benefit of blockchain infrastructure’s decentralized nature, and instead locking your tokens into a centralized protocol.
- Smart contract vulnerabilities: Liquid staking protocols run on smart contracts, so a single bug or mistake in the contract can cause users to lose their funds if hackers exploit the vulnerability.
- Platform punishment: If the liquid staking platform acts maliciously against the native staking network, funds can be slashed by the network as a function of enforcing the proof-of-stake protocols.
- Redemption liquidity: The value of the receipt token depends on its ability to be converted to the original token via redemption. However, in some cases, mismanagement or liquidity crunch cripples the redemption process.
- Token Depeging: The trading price of the receipt token can fall below the market price of the underlying token due to a liquidity crunch on exchanges, simple unexpected news, or even the spreading of malicious fear, uncertainty and doubt (FUD) about any given project, or its team.
The Necessity Of Liquid Staking
The core benefits and risks of liquid staking are themselves an extension of the central dynamic at play in staking more generally — the back and forth between centralization and decentralization.
A proof-of-stake network comes with the built-in risks of centralization. It puts power over the network in the hands of a select few whale investors. Liquid staking both exacerbates this risk by pooling investor money into centralized points of control, and it mitigates risks by allowing smaller investors to contribute to the network freely.
This journey — from staking to liquid staking — reflects the broader evolution of blockchain technology as it adapts to overcome the unique challenges of decentralized finance.
What Is Crypto Liquid Restaking?
Unlock the future of blockchain with liquid staking: Enhance security, retain liquidity, and democratize investments.
Staking cryptocurrency is the act of locking tokens in a blockchain network and receiving rewards for the holdings. By locking up capital, staking secures the network of a proof-of-stake blockchain.
Successfully attacking a proof-of-stake network requires owning 51% of all staked tokens. In a sufficiently large network like Ethereum, this is prohibitively expensive — the more capital locked, the more secure the network.
However, due to a loss of liquidity and high minimum commitment requirements, convincing enough people to lock away their money is no easy task.
That’s where liquid restaking comes in, it frees up capital locked in the network while maintaining its security.
But this innovation doesn’t just let loose capital, it opens Pandora’s box and allows network security to spread like wildfire across the entire decentralized ecosystem. Through liquid restaking, decentralized applications can access the security and capital of an underlying network such as Ethereum or Bitcoin.
It all starts with liquid staking protocols and the use cases for LSTs.
Liquid Staking And LSTs
Liquid staking unlocks capital for stakers by allowing them to stake their cryptocurrency without becoming illiquid, meaning they do not lose the ability to use the value of the locked tokens. This seeming contradiction is made possible by third-party liquid staking protocols.
Read more about liquid staking: https://medium.com/@lorenzoprotocol/what-is-liquid-staking-494b25dcf6cd
This blockchain secures the network by computing power; an opponent attempting to successfully attack such a network (“Bitcoin is backed by the largest computer network in the world, a network orders of magnitude larger than the combined size of the clouds that Amazon, Google, and Microsoft have built over the last 15–20 years.” Ark Invest’s Cathie Wood) would require having over 51% of this power.
In a sufficiently large network, such as bitcoin, having access to this many computational resources has now proven to be a de facto impossibility. And a “successful” attack only lasts for about 10 minutes: so per game theory, the would-be attacker simply counts the cost in advance of sustaining such an attack, and quickly learns that their resources would be better exhausted by simply buying more bitcoin.
Despite the extreme security of a proof-of-work blockchain, this mechanism makes the network inefficient in terms of both energy and output. It requires constantly running an enormous number of computers to secure the network. Proof of stake seeks to address these concerns.
A proof-of-stake blockchain hands out the privilege of adding a block at random to a small group of investors who have committed enough money to support the network. The far fewer participants needed means the network is substantially more efficient than proof-of-work chains.
Participants in a proof-of-stake blockchain commit value to the network by staking the blockchain’s native token. Staking tokens means locking them up in the network so they can’t be used for a set period of time; i.e., investor funds are not typically considered liquid, once staked.
A proof-of-stake chain is secured by the fact that attacking the network would require owning over 51% of all the staked coins. For a sufficiently large blockchain, this would not only be impractically expensive but also destroy the value of the staked tokens, thereby ruining the financial motive for attacking the network in the first place.
Why Stake?
To function, proof-of-stake networks need to convince users to stake their tokens, but users hesitate to do so because of the risks inherent in illiquidity.
Liquidity is the ability to use your assets, it’s the availability of capital to the market. Something is illiquid when it is not exchangeable; low liquidity means something is difficult to exchange, and high liquidity means something easy to exchange. Consider the differences between buried treasure, a house, and stone-cold cash.
When you stake your assets, you give up liquidity by locking the tokens, essentially burying them in the network for a set contracted time. This comes with certain risks that disincentivize participation in the network.
Since these tokens are locked, they can’t be sold in the sudden advent of a substantial price drop, meaning they could be worth far less when later unlocked. Additionally, they can’t be removed if a participant needs their money back, or the network is somehow compromised.
Proof-of-stake chains do not themselves mitigate this risk, but rather they pay users for taking it. The network acts similarly to how old-school bank savings accounts were designed. Today, proof-of-stake chains reward participants staking by paying a percentage back to the holder based on the size of their stake, which allows holders to earn true passive income on their holdings.
The Liquid Staking Revolution
But what if tokens could be staked and receive rewards without making the holder illiquid? It might sound contradictory, but this is the idea behind liquid staking. Liquid staking allows staking participants to remain liquid while still receiving rewards.
Here’s how:
Using a liquid staking protocol, participants deposit the native token they want to stake into the third-party liquid staking platform, instead of staking them directly with the native network. The platform then stakes the tokens themselves and issues a receipt token to the user who deposited funds.
Receipt tokens are redeemable for the native tokens initially deposited in the platform. Holders of these receipt tokens receive a percentage of the rewards that the platform earns by staking the original token directly in the network. The difference is that the user can use the receipt token to trade and participate in DeFI, thereby retaining their liquidity.
Of course, this token isn’t as liquid as the original because the market for the receipt token is significantly smaller. Further, the user pays a percentage of the staking reward to the liquid staking platform. However, for many users, this is a small price to pay for the freedom to benefit from the value of their staked tokens.
What Are The Benefits Of Liquid Staking?
The most obvious reasons investors prefer liquid staking, over traditional methods, follow directly from the ability to retain their liquidity. Receipt assets can be traded, sold, or used in other DeFi applications, providing liquidity while still earning staking rewards.
Some other benefits are less obvious:
- Access for small investors: Some proof-of-stake networks require a large minimum investment for staking. This bars smaller investors from contributing to the network and participating in governance. Through liquid staking, individuals can participate with smaller amounts because these platforms aggregate multiple users’ stakes to meet minimum requirements.
- Democratization: Although governance decisions ultimately lie with the liquid staking platform that manages the pools of staked tokens, these applications often provide mechanisms for its users to participate in voting for the native blockchain. This allows voting power to be distributed among the smaller investors who would otherwise not have any say in network decisions.
- Easy access: Navigating the process of staking cryptocurrency can be a daunting task for even the most technical retail investor. Liquid staking platforms make for user-friendly options for contributing to a favorite proof-of-stake blockchain.
What are the risks of liquid staking?
Blockchain exists to address the risks of centralized control in our financial systems. The risks of liquid staking are founded on foregoing the benefit of blockchain infrastructure’s decentralized nature, and instead locking your tokens into a centralized protocol.
- Smart contract vulnerabilities: Liquid staking protocols run on smart contracts, so a single bug or mistake in the contract can cause users to lose their funds if hackers exploit the vulnerability.
- Platform punishment: If the liquid staking platform acts maliciously against the native staking network, funds can be slashed by the network as a function of enforcing the proof-of-stake protocols.
- Redemption liquidity: The value of the receipt token depends on its ability to be converted to the original token via redemption. However, in some cases, mismanagement or liquidity crunch cripples the redemption process.
- Token Depeging: The trading price of the receipt token can fall below the market price of the underlying token due to a liquidity crunch on exchanges, simple unexpected news, or even the spreading of malicious fear, uncertainty and doubt (FUD) about any given project, or its team.
The Necessity Of Liquid Staking
The core benefits and risks of liquid staking are themselves an extension of the central dynamic at play in staking more generally — the back and forth between centralization and decentralization.
A proof-of-stake network comes with the built-in risks of centralization. It puts power over the network in the hands of a select few whale investors. Liquid staking both exacerbates this risk by pooling investor money into centralized points of control, and it mitigates risks by allowing smaller investors to contribute to the network freely.
This journey — from staking to liquid staking — reflects the broader evolution of blockchain technology as it adapts to overcome the unique challenges of decentralized finance.
Bitcoin & The Move Ecosystem: An Overview Of Key Players And Implications
Dive into the groundbreaking convergence of the Move ecosystem and Bitcoin DeFi.
Move is one of the more interesting developments in the cryptocurrency space over the past few years, as it addresses some of the key security issues with digital assets that have been found in previously existing blockchain programming languages.
While Sui and Aptos are the two key Layer 1 cryptocurrency networks that have integrated the Move programming language, there are also rising attempts to bring this technology to the Ethereum and Bitcoin ecosystems. While Ethereum has always tended to quickly adapt any new blockchain technology as it appears, this new Move ecosystem is emerging around the same time as various bitcoin liquidity layers on top of bitcoin, which makes it possible for Bitcoin Finance (BTCFi) to join in on these new capabilities.
So, who are the key players in the Move ecosystem, and how will bitcoin make its way into this emerging area of DeFi? Let’s take a closer look at Move and how it can merge with BTCFi.
What Is Move?
The Move programming language was originally developed by Meta for the Diem (formerly Libra) project. It is built to support secure asset handling in digital transactions. Inspired by Rust, Move offers a resource-based type system where assets behave as unique, non-clonable resources, ensuring that they have a single owner and are protected from duplication, which is a common vulnerability in blockchain environments. With these capabilities, Move addresses many limitations faced by existing blockchain languages, particularly Solidity, which underpins Ethereum and has a number of known security vulnerabilities such as reentrancy attacks.
Although Diem was discontinued due to regulatory pressures, Move’s foundational elements survived and found new life in new cryptocurrency projects like Sui and Aptos. Move also includes an efficient virtual machine, known as MoveVM, which is optimized for high performance, parallel execution, memory management, and compiler optimizations to enhance transaction speeds and throughput. Additionally, it provides modularity and composability, making it a straightforward tool for developers to create, connect, and deploy smart contracts.
Move’s strong type system and formal verification also make it particularly appealing for developers prioritizing asset security. By integrating these features with a modular design, Move empowers developers to create sophisticated decentralized applications on multiple layers of blockchain environments. Additionally, Solidity-based contracts can be deployed alongside Move-based contracts without any modifications, which enables seamless compatibility between the two ecosystems.
Key Existing Projects In The Move Ecosystem
While still somewhat nascent, a number of projects built around the Move programming language have already been deployed, and many others are in the works. These projects include Layer 1 cryptocurrency networks like Sui and Aptos, an Ethereum Layer 2 network called M2, and Sui’s liquidity protocol known as Navi.
Sui
Sui is a Layer 1 blockchain designed for seamless, high-speed digital asset transactions. Initially contributed to by Mysten Labs, whose team members include former Meta engineers from the Diem project, Sui reflects lessons learned from Diem’s development.
The architecture of this cryptocurrency network enables sub-second finality and low transaction costs by processing transactions in parallel. This approach not only improves scalability but also allows Sui to handle complex on-chain assets, as its object-based model, which includes improvements over Move’s original design, supports more dynamic digital asset management. In fact, Sui has extended the Move language into Sui Move, which notably enables new features specifically for NFTs.
Sui’s consensus mechanism is rather complex and uses a combination of delegated proof of stake (DPoS), Byzantine fault tolerance (BFT), and directed acyclic graph (DAG) to make sure all nodes are on the same page with transaction ordering in a way that maximizes low latency and high throughput. The BFT-based protocol consensus is known as Mysticeti and is the main vehicle for consensus generation, while DAG and DPoS are used for specific tasks. The key innovation here is to use a combination of different consensus mechanisms for different needs in order to maximize efficiency.
Since its mainnet launch, Sui has shown notable growth with millions of active accounts and billions of transactions. In particular, the gaming niche has been a key area of focus for this network’s growth.
NAVI
NAVI is the main liquidity protocol on the Sui blockchain, which enables users to borrow assets or provide liquidity in return for yield in a manner similar to the well-known DeFi app Aave.
While it has many similarities with Aave, NAVI also comes with additional features and goes beyond what other liquidity protocols have offered in the past. For example, NAVI is designed with advanced features like automatic leverage vaults, which enable users to automate strategies related to their leveraged positions, and “Isolated Market,” which limits the risk associated with newly listed assets. Additionally, it offers dynamic collateralization ratios that move based on market demands.
Aptos
Aptos is another Layer 1 blockchain aimed at delivering high-speed, scalable, and developer-friendly solutions for decentralized applications. Launched on October 12, 2022 by Avery Ching and Mo Shaikh, Aptos is capable of reaching up to 160,000 transactions per second with under one-second finality. Much like Sui, this efficiency stems from the use of the Move programming language.
A key attribute of Aptos is its Parallel Execution Engine (Block-STM), which allows multiple transactions to be processed concurrently and avoids delays caused by single transaction failures. This further increases transaction throughput and reduces latency. Aptos’s consensus mechanism is somewhat similar to Sui’s, using a combination of BFT and proof of stake (PoS); however, Aptos uses traditional PoS as opposed to Sui’s use of DPoS.
Since launch, Aptos has rapidly grown, attracting strong community engagement and significant institutional support, including over $350 million in funding from investors like a16z, FTX Ventures, and Coinbase Ventures.
Cetus
Cetus stands out as the leading DEX in the Move ecosystem, renowned for its concentrated liquidity protocol that enhances trading efficiency while delivering a seamless user experience. By fostering a flexible and robust liquidity network, Cetus accommodates a wide array of assets and use cases. Its permissionless architecture further empowers users, developers, and applications to easily integrate and leverage its protocols.
Key Features include:
- Deep liquidity pools enabling low-slippage trades
- Permissionless architecture for developer flexibility
- Comprehensive support for diverse assets
Movement Labs
Blockchain development firm Movement Labs has raised funding from the likes of Polychain Capital and Aptos Labs to accelerate the integration of Move solutions within Ethereum’s ecosystem. With its Ethereum Layer 2 network known as Movement, Movement Labs aims to enable a theoretical transaction capacity of over 160,000 transactions per second while simultaneously improving smart contract security.
Movement uses its own Move-EVM (MEVM), which allows users from both MoveVM and EVM-based systems to use the Layer 2 network. This feature significantly reduces the risk of attacks such as reentrancy and arithmetic errors, which have plagued many Ethereum-based protocols. The Movement network’s infrastructure will also offer the flexibility to launch custom rollups that are secure and compatible with Ethereum.
Through their specific approach to developing with Move, Movement Labs hopes to merge the massive Ethereum user base with the power of the Move programming language.
Bringing BTCFi To The Move Ecosystem With Lorenzo
Lorenzo Protocol is at the forefront of integrating Bitcoin and BTCFi into the Move ecosystem as the first omnichain Bitcoin liquidity layer within the MoveVM landscape. This innovation allows Bitcoin liquidity to seamlessly flow through the Move ecosystem while leveraging liquid staking solutions to enhance potential returns for Bitcoin holders.
By collaborating with key projects featured in this article, Lorenzo bridges Bitcoin’s history of decentralization and security with Move’s advanced architecture, tailored to meet DeFi’s evolving demands. While Bitcoin remains a cornerstone cryptocurrency, its legacy technology and limited scripting capabilities hinder its application in modern decentralized systems. Lorenzo overcomes these limitations by unlocking Bitcoin’s potential for use in DeFi.
The simultaneous rise of Move-based DeFi platforms and Bitcoin’s integration into this ecosystem, driven by projects like Lorenzo, represents a significant evolution in blockchain technology. Platforms like Sui, Aptos, and Movement are merging Move’s enhanced security features and efficient processing capabilities with Bitcoin’s established market presence.
This convergence showcases how blockchain technology continues to evolve, combining Bitcoin’s reliability with Move’s cutting-edge features to create a more secure, efficient, and interconnected DeFi landscape. As Bitcoin liquidity becomes more accessible and Move’s ecosystem expands, we are likely witnessing the foundation of a more interoperable and widely adopted decentralized financial future.
This union of Bitcoin’s trusted asset status with next-generation blockchain technology could be pivotal in driving mainstream DeFi adoption.
The Top Marketplaces To Buy And Sell Bitcoin Ordinals
5 Ordinals marketplaces stand out as noteworthy options that each Bitcoin participant should be aware of.
Read this blog in Vietnamese, 中文, Russian, Indonesian, ΕΛΛΗΝΙΚΑ, and Türkçe.
Ordinals are the latest treasures of the decentralized digital realm.
Like traditional NFTs, they sit at the nexus of art, finance, and blockchain technology. Also, like traditional NFTs, news coverage has decried either their immense price or their threat to the sanctity of the blockchain industry.
Ordinals are controversial, complicated, and (in some cases) extremely valuable. No wonder crowds are blindly scrambling into whatever marketplace is selling them!
But before the hasty Ordinals investor inputs their information into the first marketplace on Google, they should know the top players and how to differentiate them. Before even this, it’s important to have a refresher on what Ordinals are.
What Are Ordinals?
Most people know Ordinals as NFTs for bitcoin. While this is technically true, the real picture is more complex.
Ordinals are serial numbers assigned to satoshis (the smallest unit of bitcoin) based on when they were mined. The Ordinals protocol inscribes additional data, such as an image or text, to a satoshi using its unique serial number.
Learn more about Ordinals:
https://medium.com/@lorenzoprotocol/the-beginners-guide-to-ordinals-9092e9db9954
This makes the associated satoshi a non-fungible token that is tradable and embedded in the bitcoin blockchain.
Inscribed satoshis are similar to rare coins; their value is no longer dependent solely on being a unit of currency but rather on being a collector’s item in its own right, i.e., possessing numismatic value beyond the minted face price of the coin. In the same vein, they shouldn’t be put in the same wallet as currency to spend because they aren’t meant to be traded equally to any other coin. This is why Ordinals require their own digital wallets; this protects users from perhaps accidentally spending the inscribed sat when they use their bitcoin wallet.
What Is An Ordinals Marketplace?
An Ordinals marketplace is a platform that enables you to trade, inscribe, and discover bitcoin Ordinals.
When Ordinals first appeared in January 2023, early adopters traded the digital artifacts peer-to-peer, primarily using Discord servers. Trading in this way carries a higher risk of being scammed, and access to the right servers is extremely limited. Ordinals marketplaces emerged to meet the demand for secure, seamless trading.
For collectors, Ordinals marketplaces offer an easy way to see new releases, recent sales, and what’s popular. Marketplace teams can also restrict bad actors and scams, making traders feel more confident when trading Ordinals.
For creators, marketplaces offer a streamlined way to enter the Ordinals realm. Creators without a technical background can benefit from straightforward inscription services and development assistance programs offered by major platforms.
Platforms offering development assistance carefully select which artists to showcase and collaborate with. These selected artists can benefit from the enhanced legitimacy and exposure that this brings.
Choosing A Marketplace
Picking the best Ordinals marketplace will largely depend on individual goals. Different marketplaces might be better for creators, collectors, or have a niche community presence.
The following are general criteria to help anyone interested in Ordinals compare marketplaces:
- Popularity: How many users are registered
- Liquidity: How many sales are being made
- Wallet compatibility: How can it connect with the needed wallet
- Security: How robust is the security of the platform
- User experience: How easy the platform is to navigate and use
- Fee structure: How expensive it is to use the platform
Top 5 Ordinals Marketplaces
These are the top five Ordinals marketplaces that every bitcoin participant should be aware of today.
Magic Eden
Magic Eden stands firmly as the largest ordinals marketplace, capturing over 60% of marketplace trading volume according to data from Dune Analytics. This makes it the most liquid marketplace for bitcoin Ordinals.
Magic Eden has brought a myriad of collector-centric features to the Ordinals space, implementing features such as bidding, rarity index, and automatic connection between their secondary marketplace and Launchpad minting platform.
The Launchpad platform provides development support to creators. Magic Eden accepts only 3% of all creator applications, so users can have confidence in the quality of the projects being featured.
Trades are subject to a 2% transaction fee. This is higher than other marketplaces on this list, but it may be worth the cost to users who want to benefit from the marketplace’s liquidity and ease of use.
Compatible with wallets: Magic Eden, Xverse, Unisat, Leather, OKX, Token Pocket
OKX
OKX has a competitive edge as a major international exchange serving users in over 100 countries. It already has the second-highest marketplace volume, and with the growth of such a large exchange, it will likely be onboarding traders at an unmatched pace.
In addition to being a marketplace, the platform features a wallet browser extension and inscription service. Users enjoy low trading fees of 0.060%, and OKX recently launched zero-fee Rune trading.
This makes OKX a fantastic combination of low cost and high liquidity. Additionally, users have access to the security and customer service of a large international exchange.
Unfortunately, U.S.-based users are unable to access the platform due to compliance and regulatory hurdles.
Compatible with wallets: OKX, WalletConnect, Phantom, Unisat, Xverse
Unisat
Unisat is a decentralized marketplace with additional wallet and inscription services. The easy-to-navigate platform makes it simple to discover new collections and stay informed of marketplace trends. Unisat also has a native wallet and a search engine that can query inscriptions within seconds.
Unisat offers 0% marketplace fees for users with over 500 Unisat points. Users who fall short of that number are subject to 0.5% trading fees. Users receive 1 Unisat point per inscription, and OG passholders receive a 20% discount across all marketplaces.
Overall, Unisat is a great platform for users who care about decentralization and low fees. The platform rewards users for participating — getting the most out of the Unisat marketplace requires users to commit time to its use.
Like other decentralized exchanges, Unisat suffers from lower trading volume and next to no customer support.
Compatible with wallets: Unisat, Xverse, Leather, OKX, Bitget, Phantom, Magic Eden, Enkrypt
Gamma.io
Gamma functions as both a marketplace and a no-code launchpad, providing a portal for artists and creators looking to make their mark in the bitcoin space. Gamma provided one of the first inscription services and at one point represented nearly 10% of all network inscriptions.
Collectors can enjoy curated collection drops while creators benefit from the Gamma Partner Program, inscription services, and handy guides to navigating creation in the NFT space.
Gamma is a destination for over 3,000 creators and 45,000 collectors. With over 600,000 items sold, Gamma facilitates fewer transactions than other marketplaces featured on this list. Still, it is well established and holds its own as an art-focused space for creators and collectors on the hunt for something unique.
Compatible with wallets: Leather, Xverse, Unisat
Ordinals Wallet
The Ordinals Wallet is the most popular Ordinals wallet on the market. To date, this wallet reports over $82 million in total trading volume, more than 470,000 wallets opened, the facilitation of over 545,000 successful trades, and more than 875,000 Ordinals Inscriptions created.
Ordinals Wallet includes a marketplace for trading Ordinals. The simple, effective design includes a list of Ordinals collections where users can track statistics like volume, change, and number of owners.
Despite its popularity as a wallet, the trading volume on the native marketplace is less than that of competitors and is more skeletal compared to the robust features of other marketplaces. Nonetheless, Ordinals Wallet stands as one of the oldest and most-respected projects in the Ordinals ecosystem.
Compatible with wallets: Ordinals Wallet, Unisat, OKX, Phantom, Xverse, Leather
Get Started With Ordinals
As Ordinals rise in popularity, the number of Ordinals markets have also grown significantly. Any of the above five Ordinals marketplaces are perfect for exploring the new world of bitcoin Ordinals.
However, it’s important to remember that this industry changes quickly and all the data provided is subject to drastic changes month over month. It’s best to keep up with the data proactively as one investigates marketplaces to interact with; the image below of marketplace trading volumes should be a great example of just how much these marketplaces can change in terms of liquidity in just one year.
Ready to take the next step towards trading Ordinals? Read our Ordinals wallet guide:
https://medium.com/@lorenzoprotocol/the-top-5-bitcoin-ordinals-wallets-4f6078f8b673
How Ordinals Launched The Bitcoin DeFi Boom
The innovation of Ordinals helped usher in a rush of developer activity that has helped spark a DeFi boom native to bitcoin.
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Introduced in January 2023 by developer Casey Rodarmor, Bitcoin Ordinals instantly became one of the most talked about topics in cryptocurrency and related ecosystems.
The innovation of Ordinals, which are akin to NFTs directly onto bitcoin’s blockchain, immediately expanded bitcoin’s utility, changed perceptions of what can be possible on bitcoin, and helped to usher in a rush of developer activity that has helped spark a DeFi boom that’s native to bitcoin.
The Innovation Of Ordinals
Launched amid the depths of a bear market, Ordinals were created to find new ways to utilize bitcoin’s blockchain capacity. They represent a significant step forward in how data can be used on bitcoin. They’re made possible by a 2017 upgrade to bitcoin’s blockchain called Segregated Witness (SegWit), which created ways for users to add additional, non-transaction-related data onto bitcoin blocks.
The concept underpinning Ordinals, known as “inscriptions,” involves inscribing this data (such as images, videos, or other files) onto the smallest units of bitcoin (known as satoshis). Inscribing is the process of putting a piece of data onto the blockchain, where it will remain forever accessible and unchangeable. And each satoshi that’s inscribed becomes a unique entity on bitcoin’s blockchain, similar to non-fungible tokens. These individual satoshis can then accrue value and be traded like any other token. For bitcoin, which largely lacked many use cases beyond payments on its native network, Ordinals serve as a creative way to leverage bitcoin’s capabilities for new use cases, without necessitating any changes to its core protocol.
Initially, many in the bitcoin community questioned the utility of Ordinals, citing concerns over crowding blockspace with non-financial data and the potential for high transaction fees. Since bitcoin was built to serve as a decentralized global currency, some argued, there’s no room for non-financial purposes, they said. But the innovation has proven popular — there are more than 66 million inscriptions.
Collectively, they have a market cap of more than $2.2 billion.
How Ordinals Paved The Way For DeFi On Bitcoin
The introduction of Ordinals quickly opened up a new raft of possibilities for what can be done natively on bitcoin, including NFTs, other programmable assets, and perhaps most importantly, a foundation for DeFi on bitcoin.
Ordinals’ initial launch spurred a wave of original art being “minted” on bitcoin, particularly generative art and games, such as the popular ’90s shooter “DOOM.” The popularity of the Ordinals protocol also helped usher in further innovations for bitcoin, including the experimental BRC-20 token standard that allows for the creation of fungible and programmable tokens natively on bitcoin.
And together, these innovations and the rush of developer and user activity they’ve ushered in, has helped to spark a wave of new applications aimed at underpinning the burgeoning, multi-billion dollar Ordinals economy.
Supporting the Ordinals ecosystem requires an interconnected network of inscription services, wallets, bridges, decentralized exchanges (DEXs), Layer 2s, and other solutions. And within that ecosystem, a host of new bitcoin-native financial use cases have been enabled.
Using a decentralized app (dApp) like Ordinal Hub or Gamma, for example, users can seamlessly mint their own inscriptions in a relatively low-cost, user-friendly manner. With a self-custody wallet like Ordinal Wallet (which also combines as a marketplace), those inscriptions can then be hodl’d, or listed for sale to other collectors. Apps like Emblem Vault have also helped add utility to Ordinals, since when using Emblem Vault, users can “wrap” their Ordinals, receive Ethereum-compatible “representations” of those Ordinals (that are backed by the original Ordinal’s value) and then trade them on non-Ordinals specific marketplaces, enabling cross-chain activity.
The Ordinals ecosystem has even spurred lending protocols, like Liquidium, which help facilitate borrowing or lending against the value of one’s Ordinals. Since its launch last year, Liquidium has facilitated more than 15,000 Ordinals-backed loans, including an $80,000 loan against a rare Ordinal in April 2024. Notably, this loan was taken out against an Ordinal that was wrapped using Emblem Vault and moved onto an Ethereum-based marketplace, highlighting the potential interoperable use cases that Ordinals have opened up for bitcoin.
Off the back of Ordinals-related developments, a plethora of bitcoin DeFi companies have spawned, all dedicated to building products and services on top of bitcoin. Layer 2s, staking protocols, lending/borrowing protocols, and much more have contributed to a boom in bitcoin building.
As a result, the TVL of bitcoin DeFi has grown from under $100 million in TVL when Ordinals launched to over $1 billion at its peak (so far at time of writing).
Where Ordinals Fall Short
While Ordinals might have helped to initiate a new wave of activity on bitcoin, they still some major limitations — most of which are a direct result of the inherent limitations of bitcoin.
Scalability Limitations
Since Ordinals require the embedding of large amounts of data into bitcoin transactions, this can significantly increase the size of individual transactions and more rapidly consume available blockspace, which is already limited. This can also impact bitcoin’s main use case of facilitating financial transactions, since during times of high demand for Ordinals, for example, the network’s processing times for payments or other financial transactions could be slowed down, causing transaction fees to skyrocket.
Technical Hurdles
The Ordinals protocol itself is a huge technical undertaking. Since bitcoin wasn’t designed for the storage of non-financial data, managing and retrieving these large volumes of data like images, text, or games, introduces inefficiencies and complexities for use cases at scale. Additionally, while innovations like BRC-20 tokens, which are built atop the Ordinals protocol, do introduce a level of programmability for bitcoin native assets, bitcoin’s lack of smart-contract compatibility limits the types of interactions that users can have with inscribed assets, compared to assets built atop Ethereum, for example.
Complicated User Experience
While platforms do exist to facilitate the creating, trading, and management of Ordinals, it is often not as seamless as standard bitcoin transactions, especially because of the reliance on external tools. Depending on the UX design or technical capabilities of these tools, as well as the technical understanding of some users, certain types of actions could be inaccessible to less technical or knowledgable users.
What’s Next For Ordinals?
The creation of the Ordinals protocol has already served to expand both real-world use cases for bitcoin, as well as people’s mentalities around what’s even possible for bitcoin.
But it’s likely that Ordinals will be an initial step in a long line of attempts to unlock bitcoin liquidity and expand bitcoin’s utility. Casey Rodarmor, the founder of Ordinals, has already launched his next project, called Runes, which aims to expand on some of the functionalities Ordinals helped create, but in ways that are less technically complex and more scalable.
Why Bitcoin Makes Sense As The Base Layer Of DeFi
Any truly decentralized financial system must have a decentralized monetary system at the base layer, and that's what Bitcoin provides.
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The concept of decentralized finance (DeFi) first rose to prominence during the 2020–2022 cryptocurrency bull market. Built almost entirely on Ethereum at the time, the basic idea was to expand the decentralization and censorship resistance bitcoin enabled for payments and savings to other areas of finance (e.g., borrowing, lending, and trading). While DeFi has been mostly proven out on Ethereum and other blockchains with more expressive smart contracting capabilities, there has been a more recent expansion of interest in bringing these use cases to the bitcoin network.
For many, combining the strongest and most credible cryptocurrency with some of the technical development that has taken place on other networks in the 15+ years since bitcoin was introduced could be the perfect way to build out the next evolution of the DeFi ecosystem.
Let’s dive deeper into why there is so much excitement around bringing DeFi apps to bitcoin.
How Bitcoin Is Different From Other Cryptocurrencies
At the base layer, bitcoin is specifically designed to serve as a global, digitally native, decentralized, and apolitical monetary system that prioritizes and rewards savers more effectively than the current U.S. dollar-dominated financial system. As the first digital asset that requires no permission to use, has a monetary policy that was “set in stone” when the network first launched, enables wealth to be stored as information, and has censorship-resistant payments, bitcoin makes sense as the perfect native money of the internet’s financial system.
No other cryptocurrency, whether focused on payments or other use cases, comes close to bitcoin in terms of the credibility of its monetary policy — enabled by the high degree of decentralization in the system. And it is the credibility of that monetary policy that makes bitcoin the best digitally-based store of value.
Other cryptocurrencies tend to have various centralizing forces and other factors that put the credibility of the monetary policy into question. For example, Elon Musk’s outsized influence over Dogecoin, as indicated by the effect his X posts have on the Dogecoin price, indicates that the cryptocurrency’s monetary policy could be altered if Musk desired to change it. While stablecoins have become a popular medium of exchange in the Web3 space, the reality is these tokens are pegged to fiat currencies (usually the U.S. dollar) and centrally issued with the backing of real-world financial accounts, which makes it unclear if they’ll remain permissionless and censorship-resistant over the long term. Even ether, which is sometimes referred to as the only real competition to bitcoin, has seen its issuance rate altered on several occasions, and discussions have begun regarding another potential change in the near future.
As bitcoin creator Satoshi Nakamoto wrote in the early days of the project, one of the key benefits of the system is that a central bank does not need to be trusted to not debase the currency. This enables long-term clarity and predictability in terms of the monetary supply. With alternative digital assets, the central bank has been replaced by some other third party, as the level of decentralization and widespread adoption achieved by bitcoin has not been replicated. As a recent example, the validators of the Solana network have altered that cryptocurrency’s monetary policy in order to increase their revenue.
Any truly decentralized financial system must have a decentralized monetary system at the base layer, and that’s what bitcoin provides.
Due to its monetary credibility, bitcoin is able to act as the best possible money and collateral for DeFi use cases such as collateral-backed stablecoins and decentralized derivatives trading. As bitcoin continues to become a trusted, reliable store of value in the free market, more financial tools can be built on top of that solid, sturdy foundation.
The Block Size War As A Case Study
Bitcoin’s block size war can be seen as clear supporting evidence for the difficulties associated with changing any rules of the bitcoin network. While the vast majority of large miners, exchanges, and wallet providers pushed for a hard-forking (backwards incompatible) increase to bitcoin’s block size limit, the plan was ultimately abandoned due to a lack of consensus among the underlying userbase. No other cryptocurrency network has successfully withstood this sort of strong-armed social attack on its underlying ruleset.
While soft-forking (backwards compatible) feature additions with widespread consensus take place in bitcoin from time to time, more controversial alterations, such as an increase to the block size limit via a hard fork, or an alteration to bitcoin’s monetary policy, are effectively nonstarters as the incentives are to keep everyone on the same network and only implement changes with clear benefits to pretty much everybody participating in the system, i.e., an overwhelming consensus must occur for any change to take place.
DeFi In Practice, Not In Name Only
Many Layer 1 blockchains other than bitcoin make the mistake of focusing on tech features and mass adoption. These pursuits have the side effect of harming the trustworthiness of the base asset as a store of value through increased centralization and inefficient use of block space. Instead, the features that have been implemented in many of these alternative Layer 1 cryptocurrency networks can simply be added as Bitcoin L2 networks. This allows the base monetary layer to remain stable and trustworthy, while more experimentation can take place on secondary layers.
For example, much of Ethereum’s Layer 1 block space is filled up with transactions involving centrally issued tokens, such as stablecoins and non-fungible tokens (NFTs). This increases costs for those who actually need the level of decentralization offered by a Layer 1 blockchain to transfer a crypto-native asset such as ether. Indeed, much of the activity in the DeFi space today is built around centrally issued stablecoins, which puts into question how much of the DeFi sector is decentralized in name only (DINO). On the bitcoin network, the focus is on the promotion and utility of the bitcoin asset itself as money, especially at the base layer.
Scaling and enabling additional use cases via Layer 2 networks in bitcoin is also quite different from how things work on other cryptocurrency networks. For example, Solana is focused on processing every activity directly on its Layer 1 blockchain, while Ethereum has a rollup-centric roadmap that enables more blockchains to eventually settle back down to its Layer 1 network. With bitcoin, the use of the base blockchain or even Layer 2 blockchains is limited as much as possible. Indeed, various Bitcoin L2 networks do not involve a new blockchain at all. Examples include: the Lightning Network, Ark Protocol, Fedimint, and Mercury Layer.
The general scaling and development philosophy in bitcoin is to interact with the base blockchain as little as possible in order to both preserve decentralization and increase user privacy. While throwing everything onto a blockchain can lower transaction costs and enable more people to onboard onto the system today, this is not seen as a practical solution over the long term due to the negative impact such a plan has on decentralization and privacy. This is a trend seen in alternative Layer 1 cryptocurrency networks more generally.
As mentioned previously, much of the activity in DeFi today is built around centralized stablecoins. While these tokens have undoubtedly helped DeFi grow in its early days, it’s also created a situation where the vast majority of this activity could be outlawed with the strike of a pen.
As indicated by the relatively slow and patient bitcoin development process, the bitcoin network is intended to last more than 100 years and not simply attract investors by jumping on every new crypto-crazed buzzword. Instead, that sort of activity can take place on Bitcoin L2 networks. The aforementioned hard-forking block size increase associated with the block size war would have been the easy way out for scaling the bitcoin network to more users over the short term; however, taking the slow and steady approach of multi-layer scaling allows the network to get both increased capacity and retained decentralization over the long term, while also offering better privacy.
A Note On Tokenization
In addition to a slow and steady approach to development that leads to sturdier DeFi protocols built for the long term, another aspect of bitcoin culture relevant to DeFi is an avoidance of tokenization. It’s basically impossible to keep up with all of the cryptocurrencies and tokens that exist these days, and nearly all of them are useless. Even when looking at the top digital assets ranked by market capitalization, it’s clear that the platforms with expressive smart contracts could be operating as Bitcoin Layer 2 networks without a new “gas” token.
This is not to say that no new tokens need to exist. However, there’s no reason to reinvent the money aspect of a DeFi app when bitcoin is already available and much more liquid and trustworthy than any new cryptocurrency that is going to be created. A digitally native asset that is used for governance or revenue sharing, for example, makes great sense in the bitcoin realm. However, going back to the long-term development approach, it’s also possible these sorts of tokens could eventually be removed from the equation in various bitcoin DeFi protocols. Only time will tell.
Bringing DeFi Capabilities To Bitcoin
Bitcoin’s approach of keeping the base layer decentralized and difficult to change protects the credibility of the underlying bitcoin asset, which allows it to act as the best base money in DeFi. Tech experimentation is then able to take place on secondary layers, which allows bitcoin to get the best of both worlds in terms of stability for bitcoin as an asset and experimentation in terms of new capabilities for that asset.
Additionally, bitcoin users’ slow and steady approach to the development process should lead to DeFi apps and protocols that actually include decentralization, rather than DINO projects involving risky shortcuts. While networks such as Ethereum and Solana have clearly provided some value over the short term, it is now time for Bitcoin Layer 2 networks to bring these capabilities to the world’s most valuable cryptocurrency.
Why DeFi Is Needed For Bitcoin’s Growth
Only through the development of a proper DeFi ecosystem can Bitcoin underpin a global cryptocurrency economy.
Bitcoin’s status as the leading cryptocurrency on the market has long been solidified.
It boasts a more than $1 trillion market cap, has attracted billions of dollars of institutional investment via spot ETFs in the U.S., and its status as an inflation-resistant store of value is driving cryptocurrency adoption in countries worldwide.
But bitcoin’s growth story is far from finished.
That’s because the asset’s full value lies in its potential to serve as an asset that underpins a global, cryptocurrency-based economy. But the only way that’s possible is through building secure pathways that allow bitcoin to be used across the decentralized finance (DeFi) ecosystem.
What if your bitcoin could be enabled for DeFi use cases like algorithmic lending, yield farming, or decentralized insurance policies? Or if you could easily port your bitcoin to other blockchains to use it for trading on decentralized exchanges (DEXs), liquidity pools, or as loan collateral?
In this article, we’ll explore why developing a global ecosystem of such functionalities is essential to bitcoin’s globalization, and what Lorenzo Protocol is doing to help.
How DeFi Can Help Redefine Bitcoin
In its current iteration, bitcoin is largely a passive asset with a primary use case of being “digital gold.”
That’s because bitcoin’s basic scripting language is incompatible with the rest of the digital token economy, including the $100 billion DeFi ecosystem. As a result, most bitcoin that’s owned by investors is simply sitting idle in wallets, without many simple or efficient ways to transact outside of the bitcoin blockchain. But, the creation of secure pathways that allow bitcoin to be integrated with DeFi protocols can transform it from something seen as passive into a more active financial tool with utility, like most other cryptocurrencies.
Bitcoin’s integration with the DeFi ecosystem would unlock a variety of new, bitcoin-based financial services that take advantage of the asset’s massive liquidity, security benefits, and status as the most trusted and popular cryptocurrency on the market. While in the short term, it could be challenging to convince those with a bitcoin “maximalist” mindset about the benefits of making bitcoin compatible with other blockchains or protocols, many are recognizing that in the long term, such innovations will be required if bitcoin is going to truly reach global adoption.
Bitcoin use cases that DeFi can help unlock include:
DEX Trading And Liquidity Pools
Today, much of the trading on decentralized exchanges happens on Ethereum and Solana. But bitcoin, with its $1.3 trillion market cap and more than $20 billion in daily trading volume, is by far the most liquid cryptocurrency on the market.
What if that liquidity could be used on decentralized trading platforms?
Bitcoin’s availability on DEXs would instantly make bitcoin more accessible, especially in regions with restricted access to centralized exchanges, which is where investors primarily need to buy their bitcoin. And integrating bitcoin’s deep liquidity with decentralized trading protocols would instantly help strengthen the DeFi ecosystem.
Utilizing bitcoin’s liquidity in liquidity pools, for example, could allow for more stable liquidity pools and protocols while strengthening their capital efficiency by reducing volatility.
Algorithmic Financial Services
Many investors are attracted to DeFi due to its permissionless nature, which is enabled by the use of smart contracts that automatically execute transactions once certain parameters are hit.
Making bitcoin accessible on DeFi platforms means that bitcoin could be used for a new crop of financial services including algorithmic lending or borrowing, as well as yield farming. Currently, bitcoin’s lack of smart contract compatibility makes this impossible. But if bitcoin existed in smart contract compatible formats, it could be used for more complex transactions like being used as collateral for stablecoin loans, for example, where interest rates adjust based on market demand.
Decentralized Insurance
The DeFi ecosystem’s utility isn’t just around strictly financial applications, like borrowing, trading, or liquidity pooling. Smart contracts and decentralized capital also have the potential to redefine industries like insurance and risk management. The ability to unlock bitcoin’s liquidity to be used as collateral for policies, or to be used as payouts for insurance claims, could reduce the need for centralized intermediaries and lower the cost for many types of insurance.
And bitcoin’s integration into the DeFi ecosystem could also help facilitate the correction of novel insurance products tailored specifically to the cryptocurrency markets, such as wallet insurance, smart contract failure insurance, or other crypto-native risks that can’t easily be covered by traditional insurance firms.
Why Bitcoin Can’t Do It Alone …
Bitcoin is the biggest cryptocurrency.
But it’s not the newest, or most technologically advanced. And due to some of its inherent technical limitations, notably including a lack of smart contract compatibility, unscalable storage capacity, and an insufficient Bitcoin Layer 2 ecosystem, it’s currently impossible to realize bitcoin’s full potential.
- Bitcoin’s lack of smart contract compatibility, for example, precludes it from integrating with existing DeFi protocols, since smart contracts are essential to how every DeFi protocol operates.
- Bitcoin’s storage capacity, which is limited to 1 megabyte (MB) of transaction data per block, is insufficient for any transaction more complex than simple payments. Just 1MB of storage isn’t enough to handle actions like liquidity pooling or token swaps, especially during periods of high demand.
- Some Bitcoin Layer 2’s already exist. But due to bitcoin’s lack of smart contract compatibility many struggle to do their main job of scaling bitcoin, because they have to tackle a wider array of issues introduced by bitcoin’s inherent limitations.
… And How Lorenzo Protocol Is Helping Bitcoin Overcome Its Limitations
Lorenzo Protocol is being built to assist with the creation of a thriving, cross-chain, bitcoin-based DeFi economy. Our approach to scaling bitcoin helps hodlers use their bitcoin as an active financial asset instead of just a passive one while also enhancing security for the cryptocurrency and Web3 ecosystem(s) overall.
For the DeFi ecosystem to help bitcoin unlock its full potential, though, first there need to be secure pathways to converting bitcoin into smart contract-compatible formats.
To help achieve this, our liquid staking protocol allows users to take bitcoin they’ve staked and receive a liquid principle token (LPT) that’s pegged 1:1 to their underlying staked bitcoin. This staking token, stBTC, is smart-contract and EVM-compatible, which means they can be moved to other proof-of-stake blockchains to be staked and help secure those networks, or be used as collateral to participate in yield farming, algorithmic lending, or an array of other DeFi use cases.
We expect billions of dollars worth of bitcoin to be staked in the coming years across protocols. As the staking market grows, we aim to cultivate a cross-chain stBTC DeFi economy built around the token’s utility.
Scaling Beyond Passive Asset Potential
Bitcoin has already managed to grow into a $1 trillion-plus asset class without DeFi. But for bitcoin to truly become the cornerstone asset of the digital token economy, its integration into the DeFi ecosystem is pivotal for unlocking its potential beyond being just a passive asset.
The enabling of bitcoin to be used for DeFi use cases helps broaden bitcoin’s utility, while also serving to strengthen the DeFi and Web3 ecosystems more broadly. Achieving this vision is the greatest bitcoin mission in existence today.
The Beginner’s Guide To Bitcoin Ordinals
Many credit Ordinals for sparking the Bitcoin DeFi boom, but they continue to be controversial among Bitcoiners.
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Bitcoin Ordinals are the latest milestone on the road to bitcoin adoption and the spread of blockchain technology. Ordinals combine the latest innovations in the bitcoin blockchain with the budding world of non-fungible tokens (NFTs).
But what are Ordinals? And why are people buying them? The answer to these two questions is couched in the combination mentioned above.
What Bitcoin Ordinals are is a technical question requiring a nuanced explanation of some of the most recent developments in the bitcoin space, such as the SegWit and Taproot upgrades. These technical enhancements are the necessary components that allow for embedding additional data into a bitcoin transaction. More specifically, it involves associating more data with a single satoshi (the smallest unit of bitcoin)
Why would people buy a single satoshi with a bit of additional data? To understand this, one has to understand why people are buying NFTs. The core ideas motivating the world of NFTs are convincing investors to buy Ordinals: ideas such as rarity, uniqueness, and artistic/historical value.
In short, the Ordinals are sats turned into NFTs: NFTs baked directly into the bitcoin blockchain.
Confusing as it may sound, before learning about the technical details of “what” Ordinals are, it is best to start with the “why” and focus on what makes NFTs valuable.
Why Buy NFTs?
NFTs are non-fungible tokens. Fungibility is the ability for something to be replaced perfectly by another thing. For example, one dollar for another dollar. It doesn’t matter which dollar someone has, as no value or functionality has been lost by exchanging one for another. Bitcoin is fungible in this way, one bitcoin is exactly the same as any other bitcoin.
Something is non-fungible when it can’t be replaced, aka it’s completely unique. Artwork is the best example of this; the Mona Lisa can’t be equivalently exchanged for another artwork, and more so, it can’t even be replaced by an exact replica of the Mona Lisa. The object we keep in the museum is the original, irreplaceable, and unique work of Leonardo Da Vinci. Non-fungible tokens share this property; they are not equivalent to any other tokens.
NFTs are created on a blockchain with a unique identifier for every token. This identifying information is typically connected via metadata to an external piece of media, such as a picture. Creating a token and linking its metadata to something is called minting.
In the NFT space, minting an NFT is seen as owning the associated piece of media. Like owning a famous piece of art, investors rarely hold the art in their homes, but instead, they have a certificate of ownership. An NFT is more like such a certificate than it is like physically possessing the art itself. Regardless, this certificate is sold for the price the piece of art is valued at, NFTs are traded based on the perceived value of the unique item it is connected to.
This is more than an analogy; in the NFT world, trading these tokens connected to digital media is participating in a collectors market. Such a market values ownership over unique individual items of some historical or creative significance.
What Are Bitcoin Ordinals?
Time for the nitty-gritty of what an Ordinal technically is.
Ordinals are a numbering system applied to satoshis. Like a serial number, each sat has a unique ordinal number associated with it. This number is an individual identifier for each sat based on when it was mined.
In principle, such a numbering system is all that is needed to make sats non-fungible. Every sat is completely unique and identifiable through its individual number.
However, to function like NFTs, the sat has to connect to external media. This is where SegWit and Taproot come in.
Segregated Witness (SegWit)
SegWit was an update to the bitcoin blockchain that “segregated” the witness data (the signature) into a separate section that supported additional arbitrary information. This upgrade means users can store a larger amount of data inside bitcoin’s 1 megabyte blocksize. The introduction of this arbitrary data is what helps enable Ordinals.
Taproot
The Taproot upgrade was built on the foundation SegWit established. Taproot allows multiple signatures to be batched together and validated as one. Along with increasing efficiency and scalability, this further reduced the limits on the amount of arbitrary data that could be included in a bitcoin transaction.
By allowing efficient sizable amounts of arbitrary data in bitcoin transactions, SegWit and Taproot add the missing component needed to make Ordinal-defined satoshis into NFTs. These sats are now completely unique and ready to hold the metadata associated with media, such as text or pictures.
However, it’s important to note that Ordinals do not suddenly make bitcoin non-fungible in general. The Ordinal numbering system is not a part of the bitcoin blockchain; rather, it is a tool to track individual sats and their associated transaction data. The blockchain still treats all sats as any other; the additional data makes no difference to their on-chain functionality.
How Are Ordinals Created?
Creating an Ordinal involves adding the wanted media content to an individual satoshi through a process called inscribing. The inscription of an Ordinal is the information one wants to attach to a particular token; this is the metadata determining the content of the NFT, such as a picture.
To attach such information, a user adds the media file to the witness data of a transaction by sending a single sat to a Taproot-enabled wallet. This might sound simple, but users must identify the sat they wish to send and ensure it isn’t used for the network fee. Remember, the bitcoin blockchain does not natively recognize Ordinals any differently from other sats.
At first, only operators of a full bitcoin node with a special wallet could manipulate sats in this way. Nowadays, there are plenty of tools associated with Ordinal wallets, and there are also marketplaces that streamline the process.
Although Ordinals are units of bitcoin, trading and transferring them is not the same as sending bitcoin or traditional NFTs. Ordinals need to be tracked and held separately from normal bitcoin so they are not mistakenly used in other transactions. This requires specialized Ordinal wallets with specific functionalities to handle Ordinals.
Further, normal NFT marketplaces do not support bitcoin assets. This has spawned a distinctive subsection of NFT marketplaces specializing in selling and promoting Ordinals.
NFTs vs Ordinals
The previous discussion makes it seem that Ordinals are the same as NFTs, but there are some key differences between traditional NFTs that new collectors need to understand.
- On-chain hosting: An inscription is housed directly in the data on the blockchain, unlike traditional NFTs which are usually just links connected to an externally hosted file. This makes inscriptions more secure and permanent because they are directly a part of the decentralized and immutable bitcoin ledger.
- Token type: A traditional NFT is not just an individual unit of a network currency like ether; it is its own type of token traded on the network. In this way, a traditional NFT could never be mistaken for a normal network unit and used for gas fees, etc.
- Scarcity: There will never be more than 21 million bitcoin. This gives a hard cap to the amount of Ordinals that can be created (although an extraordinarily high number). Traditional NFTs, on the other hand, can be minted in unlimited quantities.
- Smart contract support: Ordinals do not support complex smart contract functionalities such as detailed attributes, ownership rights, royalties, and other programmable functionalities that can trigger under specific conditions.
The Controversy
Ordinals bring a major branch of the Web3 industry firmly into the bitcoin ecosystem. It might seem that the bitcoin community would naturally welcome Ordinals with open arms. But any collector under this impression will be surprised at the heated debate and hatred for these new digital artifacts in the bitcoin community.
Bitcoin maximalists and conservatives have pushed back against the advent of Ordinals for clogging the bitcoin blockchain with meaningless transactions. Some even call it an attack on the bitcoin infrastructure.
The debate centers on two points. That the bitcoin network should only be used for financial transactions and that the additional transactions make bitcoin more expensive to use. Without a doubt, Ordinals increase the number of on-chain transactions, which can drive up fees. This only gets worse as Ordinals become more popular and accessible.
Proponents of Ordinals often point out that Layer 2 innovations can make bitcoin more scalable and accommodate Ordinal transactions. Regardless, some bitcoin maximalists feverishly oppose Ordinals and see NFTs broadly as corrupting cryptocurrency’s original mission.
It is the responsibility of the individual investor to decide where they stand on these issues. As the blockchain industry evolves, many solutions to these core problems are sure to emerge. In the meantime, early Ordinal adopters will continue to buy and hold their assets, hoping for untold future value.
The Top 5 Bitcoin Ordinals Wallets
Explore the top 5 Bitcoin Ordinals Web3 wallets, each featuring key differentiators.
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Established bitcoin wallets rarely support the collection of digital artifacts, but the demand for Ordinals continues to skyrocket. Record sales are making news every month, and mainstream investors are just starting to cue into the potential value of these so-called “bitcoin NFTs.”
Many investors are overzealous and immediately start looking for marketplaces to buy Bitcoin Ordinals; they don’t want to miss out on profiting from the very “now” hype. Despite being founded on the bitcoin blockchain, these collectors don’t realize that storing an Ordinal is not quite the same as holding bitcoin, or an NFT.
Holding an Ordinal requires a unique type of wallet, and navigating the landscape of new Ordinal wallets popping up requires a basic understanding of what makes Ordinals distinct before choosing one.
This article is the eager investor’s map and key to the exciting new world of ordinal wallets.
What Are Ordinals And Why Are They Valuable?
Ordinals reference a numbering scheme described in the ordinal protocol. Each satoshi (aka “sat” or “sats,” the smallest unit of bitcoin) is assigned a sequence of ordinal numbers to define the order it was mined, allowing specific identification and tracking of each unique sat.
These ordinal numbers can then be referenced to inscribe data onto a specific sat to create Ordinal Inscriptions. Like NFTs, Ordinals derive their value from their uniqueness, scarcity, and recorded digital proof of ownership. Unlike NFTs, Ordinal’s data is securely stored directly on the bitcoin blockchain.
Outside of unique Ordinal Inscriptions, some sats are deemed valuable if their ordinal numbers prove their rarity regarding key moments in bitcoin history (i.e., the first sat ever created, or the first sat of a new halving epoch). Hence the advent of Runes.
Since the release of the Ordinal protocol in early 2023, Ordinal’s popularity has risen dramatically, with 65 million Ordinals inscribed as of mid-April 2024 (a growth rate of over 2000% in under a year, starting from May 2023).
As Ordinals adoption has grown, the surrounding ecosystem (including Ordinals marketplaces and Ordinals wallets) has also substantially improved. This budding infrastructure provides a simple and secure way to create, trade, collect, and store digital artifacts.
What Is An Ordinals Wallet And How Is It Different?
The purpose of an Ordinals wallet is to manage bitcoin assets and Ordinals assets separately. A person who collects rare coins would not deposit their collection into an online bank account, nor would they use a rare quarter in a vending machine.
The Ordinal’s value hinges on possession of the unique inscribed satoshi, not from the associated fiat currency equivalent, so it is important to store Ordinals outside of one’s regular bitcoin account to avoid it being accidentally transferred during a regular transaction.
Ordinals wallets typically have features to manage both bitcoin assets and Ordinals simultaneously.
They often support broad functionalities such as the creation, viewing, trading, and storage of Ordinals. Further, they implement rigorous security measures, integrate well with other decentralized applications, and allow users to interact directly with the bitcoin blockchain. However, they should not require extensive funds, storage capacity, or technical expertise.
A good ordinal wallet needs to be secure, easy to use, and readily accessible.
The Top 5 Ordinal Wallets
1. Ordinals Wallet
Ordinals Wallet is the most popular Ordinals wallet on the market. Launched on February 16, 2023, the community-funded project was designed to address the limitations of previously released wallets.
At the time of this writing (May 2024) this wallet reports over $82 million in total trading volume, more than 470,000 wallets opened, the facilitation of over 545,000 successful trades, and more than 875,000 Ordinal inscriptions created.
Users can fully manage their digital assets directly within the application, including the ability to view, buy, sell, store, and inscribe Ordinals. This product, similar to most Ordinals wallets, supports bitcoin and Ordinals on a single platform, removing the need to maintain multiple wallets.
The wallet’s user-friendly interface and intuitive layout and design have resulted in positive feedback from both beginners and knowledgeable users. Strong security features, including a non-custodial system, ensure that users always have direct control over their assets via user-created passwords not stored on external servers.
2. Xverse Wallet
The Xverse is an open-source, non-custodial, Web3 bitcoin wallet. Xverse’s primary focus is providing exceptional support for other popular Bitcoin Layer 2 protocols like Ordinals, Lightning Network, and Stacks.
Where the Xverse wallet really shines is in prioritizing user privacy and anonymity. It protects client privacy by not collecting or storing any user data, forgoing know-your-customer (KYC) and anti-money laundering (AML) processes during wallet creation.
Additionally, the wallet encrypts all security keys with user-set passwords on the user’s device, not sharing or storing it elsewhere. Xverse’s open-source code provides full transparency into its security methodology and processes, allowing regular audits by security consultant companies, like Least Authority.
Along with typical wallet features that allow users to browse, purchase, sell, and store their Ordinals, users can create Ordinal inscriptions by uploading an image or text to the app and sending a transaction to the associated address. Xverse relies on its partnership with Gamma, a Bitcoin Ordinal marketplace, to inscribe new Ordinals.
3. Leather Wallet (Formerly Hiro Wallet)
Leather Wallet, formally known as Hiro Wallet, is a non-custodial bitcoin wallet that released Ordinals support features on February 14, 2023. Leather also supports Bitcoin L2 layers like Stacks and has plans to incorporate Lighting Network support soon.
Leather Wallet released its Ordinals support features just ahead of competitor products like Ordinals Wallet and Xverse Wallet, and remains one of the most interconnected Ordinals wallets. It boasts seamless integration with the most popular decentralized Ordinals marketplaces and platforms, providing users with a myriad of options for creating and trading Ordinal inscriptions.
Leather is also a very widely used wallet, reporting 375,000 total downloads, above 100,000 active monthly users, and over 300,000 processed transactions per month.
4. OKX Wallet
OKX Wallet is a decentralized multi-chain wallet built to prioritize user integration into the universe of Web3. As a multi-chain wallet, the focus isn’t just on bitcoin, but instead on providing cross-chain interconnectivity across over 50 blockchains.
OKX Wallet users can also mint and purchase BRC-20 tokens. In 2023 they adopted the BRC20-S standard, an open-source protocol that provides users with the option to stake BRC-20 tokens directly from the platform.
This cements OKX as one of the most versatile Ordinals wallets on the market. OKX Wallet’s security systems also passed an audit conducted by the blockchain security firm SlowMist.
5. MetaMask
MetaMask wallet is a non-custodial multi-chain wallet and browser extension that helps users seamlessly integrate with Web3 dApps. Initially designed as an Ethereum blockchain wallet, MetaMask provides access and support for a wide range of tokens and dApps across the Ethereum network. Metamask is one of the most popular tools in the cryptocurrency space with over 30 million users.
Now, in partnership with Generative XYZ, they have created an easy-to-use interface to interact with and store bitcoin and Ordinals assets — an interconnectivity game changer for users who primarily operate within the Ethereum network. When users connect their existing MetaMask wallet to Generative, a unique signature is generated to create a Bitcoin Taproot key and address.
By sticking with Metamask for Ordinal endeavors, users can rely on the legitimacy of this industry-leading technology while exploring new territory.
The Bottom Line
As Ordinals have risen in popularity, the number of Ordinals wallets has also grown significantly. Any of the five Ordinals wallets listed above more than exceed even skilled users’ expectations in these criteria, with most excelling chiefly in a few key areas.
The main factors to consider when choosing a wallet include:
- Full interoperability with Ordinals assets (view, transfer, buy, sell, store)
- Easy processes for creating new Ordinal inscriptions
- Integration with dApps and Web3
- Robust security features
- Management of a diverse digital asset portfolio from one wallet
- Popularity in the cryptocurrency market
It is up to the reader’s discretion which option best suits their needs.
The Definitive Guide To Bitcoin Runes
Runes is the latest way to issue new tokens on Bitcoin. This is your guide to the protocol.
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The Runes protocol is the latest development in the explosion of new tokenization models that have appeared on top of bitcoin’s base layer over the past year or two.
At a time when mostly useless meme coins are gaining massive attention in the cryptocurrency market, the Runes protocol allows a new way of issuing fungible tokens on bitcoin which offers improvements over the somewhat successful BRC-20 standard. Launched on the fourth bitcoin halving at block 840,000, the Runes protocol led to a massive spike in transaction fees that allowed miners to earn more revenue after the halving of the block reward had occurred, than they were earning prior to the event.
Let’s take a closer look at the Runes protocol on bitcoin and whether it has a chance at standing the test of time as the preferred method for issuing fungible tokens on the world’s most valuable blockchain.
Token Issuance On Bitcoin
Although tokenization did not really come to prominence until the initial coin offering (ICO) bubble on Ethereum in 2017, the reality is the original forms of cryptocurrency token issuance were founded on bitcoin.
The colored coins concept, which was the original form of tokenization on bitcoin, goes back as far as 2012, and a variety of protocols for issuing both fungible and non-fungible tokens (NFTs) on top of bitcoin have developed over the years. Two of the most prominent protocols were Mastercoin (now called Omni) and Counterparty. In fact, Tether USD (USDT), which is by far the largest and most popular stablecoin in the world, was originally issued via Omni.
Despite the long history of tokenization on bitcoin, the world’s most valuable blockchain only began competing with other layer-one cryptocurrency networks in terms of token issuance in earnest last year with the creation of Ordinals. According to Cryptoslam, bitcoin is now a main hub of NFT activity, thanks to this development.
More recently, the BRC-20 token standard was built on top of Ordinals as a way of issuing fungible tokens on bitcoin. Additionally, Taproot Assets and RGB have been developed as additional options for issuing tokens on top of bitcoin and transferring them via the Lightning Network.
While many bitcoin maximalists are against the idea of alternative crypto assets in general, the reality is many people love gambling on small-cap meme coins — even if there’s no true, long-term valuation thesis behind them. Additionally, the most successful form of tokenization, stablecoins, has proven utility as the preferred medium of exchange in the cryptocurrency market. USDT alone currently sits at a roughly $110 billion market cap.
Due to the clear demand for additional tokens found throughout the cryptocurrency space, it makes sense for those who view bitcoin as the cryptocurrency market’s base money to build protocols for tokenization directly on top of the bitcoin network — removing the need for alternative layer-one blockchains for this particular use case.
Enter Bitcoin Runes
The Runes protocol is the latest addition to the ways in which new tokens can be issued on top of bitcoin. This new protocol was developed by Casey Rodarmor, who was also the bitcoin developer behind the Ordinals phenomenon. Compared to BRC-20s, Runes is a much more practical and efficient protocol. This should not come as a shock because BRC-20 is a rather crude protocol that was thrown together quickly as more of a proof-of-concept than anything else.
To be clear, the focus of Runes is on fungible tokens rather than NFTs, although Rodarmor admittedly does not see much value in these kinds of tokens. “I’m highly skeptical of ‘serious’ tokens, but Runes is without a doubt a ‘serious’ token protocol,” Rodarmor posted on X.
The main way Runes offers an improvement in efficiency is by not bloating bitcoin’s set of unspent transaction outputs (UTXOs), as bitcoin’s OP_RETURN functionality is used to store token data more efficiently. Notably, OP_RETURN outputs do not need to be tracked and stored by bitcoin full nodes, as they’re provably unspendable.
According to data from Glassnode, bitcoin’s UTXO set skyrocketed following the launch of the BTC-20 token standard in March 2023. In addition to increasing data storage requirements for bitcoin full nodes, basing BRC-20 tokens on Ordinals also has the side effect of increasing costs for users due to the need for more block space to be used in transactions related to the tokens than is the case with Runes.
Much like Taproot Assets and RGB, Runes can also be transferred over the Lightning Network, which is yet another efficiency gain over BRC-20s. However, unlike Taproot Assets and RGB, Runes does store data related to the tokens directly on the blockchain. That said, Runes does not have its own native token, which is the case with Omni and Counterparty.
How Bitcoin Runes Work Technically
Runes work by sending OP_RETURN transactions on the bitcoin network. An OP_RETURN is a special opcode that allows users to attach up to 80 bytes of additional data to a particular transaction.
The OP_RETURN opcode is used for creating, minting, transferring, and burning tokens in the Runes protocol. These OP_RETURN transactions in the Runes protocol are known as Runestones. Additionally, Runes are stored in specific outputs in the UTXO set.
How Bitcoin Runes Are Created
To create Bitcoin Runes, data must first be embedded into an OP_RETURN transaction. This process is known as etching. Here is the info that can be included in the OP_RETURN transaction associated with the new tokens:
- Rune: This is the name of the token. It can contain between one and 28 characters; however, the only valid characters are capital A-Z and spaces represented by the “•” character. If a name is not chosen, a name will be assigned based on the transaction’s data.
- Divisibility: This is a number that represents the number of decimal places that exists for the token’s divisibility.
- Currency Symbol: This is the official currency symbol for the token that should be displayed following a displayed token amount. The default is “¤”.
- Premine: Creators of Runes can use this field to reserve a specific amount of the token for themselves.
- Open Mint Terms: The token creator can set terms of an open mint if they’d like to allow the minting of the token supply to be public and open to others. The terms to set for an open mint include mint cap, amount per mint transaction, start block height, end block height, start block offset, and end block offset.
Once a Rune has been etched, it then must be minted based on the terms outlined in the etching to come into existence. To mint Runes, a user must create an OP_RETURN transaction that includes the Rune ID in the Mint field and the associated output to assign the tokens via the Pointer field. The Rune ID is based on the block height and transaction index related to the Rune’s original etching. If an output is not provided in the OP_RETURN, then the Runes will be assigned to the first non-OP_RETURN output in the minting transaction.
As a side note, the Rune field was a major reason for the massive fee spike on the bitcoin network when the Runes protocol originally launched, as users were attempting to outbid each other for the rights to etch Runes with specific, noteworthy names, or especially for the “claim-to-fame factor” of being included in block 840,000
Transferring Bitcoin Runes
The process for transferring Runes is not too dissimilar from creating new Runes in the first place. An OP_RETURN transaction is, again, all that is needed to transfer Runes; however, the data that must be entered into the OP_RETURN field for this type of Runestones message is a little bit different than it is with etching or minting.
The only three pieces of information needed to transfer Runes via Runestones are the Rune ID, the amount to transfer, and the output where the Runes should be transferred. Again, if a destination output is not provided, then the Runes will be assigned to the first non-OP_RETURN output in the associated transaction. In fact, if an output with some Runes associated with it is sent to a new bitcoin address without an associated Runestones message, then the default action is for 100% of the Runes associated with the former output to be assigned to the first non-OP_RETURN output in the transaction.
Burning Bitcoin Runes
There is also a process for burning Runes via Runestones. This is done by choosing a provably unspendable OP_RETURN output as the recipient of the Runes.
Additionally, Runestones with errors in them will burn the associated Runes. These are known as cenotaphs. Malformed etchings will also generate Runes that are unmintable. Cenotaphs can also be used as an upgrade mechanism for the Runes protocol.
Those who wish to dive deeper can read the full Runes specification for the Ord client.
The Future Of Bitcoin Runes And Tokens On Bitcoin
For now, the future of tokenization on bitcoin is rather unclear, as several different, competing protocols are either already live or in development, offering this same functionality. It’s unclear if the Runes protocol will stand the test of time, but it’s clear that there is demand for gambling on these sorts of low-value, meme-based tokens for now. Additionally, the Runes protocol itself could be extended and evolved to enable new use cases.
Over the long term, it may be more efficient for this sort of activity to take place on Bitcoin Layer 2 networks like Lorenzo App Chain. There’s also the potential for these types of tokens to be originally created on bitcoin’s base blockchain before then being ported up to secondary network layers for transfers, as use cases in decentralized finance (DeFi), and other functionality.
That said, the Runes protocol has proven to be another source of increased transaction revenue for miners over the short term, and much more of that kind of activity will be needed over the long term to ensure the viability of the network. When Runes are combined with Ordinals, Bitcoin L2s, and other recent developments, it seems that there will be plenty of activity on bitcoin to incentivize miners to keep the network secure. Whether it’s through Runes or some other protocol, there is a clear demand for alternative cryptocurrency assets built directly on top of bitcoin.
The Definitive Guide To Bitcoin Smart Contracts
Discover the emerging smart contract boom on Bitcoin
Read this blog in Indonesian, Türkçe, हिंदी, and 中文.
While bitcoin was originally launched with a simple focus on becoming a global, peer-to-peer digital cash system, the cryptocurrency landscape has expanded far beyond that initial use case since those early days.
Many of these additional use cases have been developed on alternative blockchains with more expressive scripting languages, such as Ethereum and Solana, as Bitcoin Script is rather limited in terms of overall functionality.
Through the use of smart contracts written in some of the more expressive cryptocurrency scripting languages, alternative blockchains have been able to attract millions of users who are interested in more than watching number go up or making uncensorable transactions.
But what are smart contracts exactly? And why has all of this development taken place outside of the bitcoin network? Is it possible that bitcoin will be able to adopt all of these alternative use cases of blockchain technology? Let’s take a closer look at the growing intersection between bitcoin and smart contracts.
Understanding Smart Contracts
A smart contract is any sort of contract enforced by code rather than the traditional legal system or some other centralized authority. This code is usually deployed on a decentralized, blockchain-based network. Smart contracts were first discussed by well-known cypherpunk Nick Szabo way back in 1994, roughly 20 years before the concept would be popularized by the launch of Ethereum.
Smart contracts can range from the simplest of implementations to high levels of complexity. For example, it could be said that a standard bitcoin transaction is a smart contract. Once a bitcoin user has signed a transaction with their private key, the transfer of that bitcoin to another address is enforced via the blockchain. On the other end of the spectrum, decentralized finance (DeFi) protocols on various blockchain networks can combine a collection of different smart contracts into larger applications such as the creation of synthetic, derivative-based tokens and decentralized exchanges with automated market makers.
It should be noted that the term smart contract has expanded to include practically any use of cryptography in the world of finance over the past decade, as many platforms have used it as more of a buzzword to attract investment than anything else. For example, it could be argued that so-called smart contracts that involve some trusted third party (usually in the form of an oracle) as part of their design are not true smart contracts, as the enforcement of that contract is essentially in the hands of the third party. In other words, the intended outcome of the code execution is not necessarily the final law of the land in those scenarios.
Advantages Of Smart Contracts
So, why would someone use a smart contract on a blockchain rather than a traditional agreement backed by the local legal system? Some of the key potential advantages of smart contracts include:
- No “trusted” third parties: Smart contracts in their truest form do not involve any trusted third parties for dispute resolution. As Szabo once wrote, trusted third parties are security holes, and they can create issues in terms of costs, censorship, and more. This lack of third parties is also the base feature that enables several other advantages of smart contracts.
- Increased transparency: With a smart contract published on a public blockchain, the rules of the contract and how those rules are enforced are free for anyone to verify. This can lead to increased transparency where it does not exist in equivalent systems which do exist in traditional contracts. For example, the entire world can view all of the trades that take place on a decentralized exchange like Uniswap.
- Increased privacy: It may seem like a contradiction for smart contracts to offer both transparency and privacy, but smart contracting systems can be built with different goals in mind. A core philosophy of smart contracts on bitcoin is to leave as little information on the blockchain as possible, which enables a greater degree of privacy for those involved in those contracts. For example, it would be advantageous if blockchain observers were unable to tell if an on-chain bitcoin transaction was a standard payment or the opening of a Lightning Network channel. Additionally, some smart contract designs, such as CoinJoin, are specifically built to improve user privacy.
- Immutability: Once a smart contract has been deployed on a blockchain, it cannot be altered (unless allowed for by the initial design of the smart contract). This allows all parties to know exactly how the rules of the contract will be implemented in all potential outcomes. Of course, it should be noted that smart contracts are only as immutable as the underlying blockchain, as illustrated by the reversal of the hack of the DAO (aka Genesis DAO) on Ethereum via a hard fork back in 2016.
- Increased speed and efficiency: While traditional contracts can involve manual paperwork and legal proceedings, smart contracts can be finalized instantly once the triggers for ultimate resolution have been met.
- Lower costs: Depending on the use case, smart contracts issued on blockchains can offer lower costs than the alternative options. For example, it is oftentimes cheaper to send a transaction via a stablecoin rather than a bank wire. That said, a smart contract will not be a cheaper option in every scenario, as interactions with public, decentralized blockchains can be much more costly than a centralized database. Much like smart contracts themselves, blockchains have become a buzzword-fueled technology that people sometimes turn to out of desire rather than necessity.
- Borderless: Smart contracts are issued on blockchains, which operate on a global, permissionless basis via the internet. This means any two parties from around the world can come to an agreement on the terms of a contract — even if they reside in different jurisdictions which traditionally had not worked well together.
Bitcoin’s Limited Scripting Language
Contrary to popular belief, smart contracts exist on bitcoin today. The reason many people associate smart contracts more with other blockchains such as Ethereum and Solana is that bitcoin’s limited scripting language means there is a limit to what can be accomplished on the base blockchain.
In Ethereum, there is basically no limit to what can be accomplished in terms of writing decentralized applications, as developers can write their smart contracts from scratch. In bitcoin, the primitives for each smart contract are effectively added over time on an as-needed basis after they’ve been proven useful and worth it in terms of security tradeoffs.
For example, the OP_CHECKLOCKTIMEVERIFY (CLTV) and OP_CHECKSEQUENCEVERIFY (CSV) opcodes were added to bitcoin because they could be used as building blocks for the Lightning Network, which was seen as a key scaling breakthrough for bitcoin payments. On the other hand, complex, smart-contracts-based applications such as Uniswap and Maker simply cannot be built on the base bitcoin blockchain today, as the tools needed to develop them do not exist in Bitcoin Script.
It should be noted that the limitations on Bitcoin Script were intentionally implemented by bitcoin creator Satoshi Nakamoto. Bitcoin originally launched with additional opcodes, such as OP_CAT, that are no longer active on the network because Satoshi deactivated them due to security concerns. Some of the issues that bitcoin is able to avoid with this design decision include the prevention of stablecoin issuers from garnering unwanted control over the network and potential issues related to miner extractable value (MEV).
That said, some smart contracts can be written on bitcoin today via various mechanisms. Here are some of the more notable types of smart contracts that can be written with the current form of Bitcoin Script:
- Multisignature addresses: A multisig address is a bitcoin address that, as indicated by the name, requires multiple signatures to send a transaction. For example, a company or organization could require two-of-three executives to sign off on every transaction from the treasury. This is a type of smart contract that exists at the base of many bitcoin applications and enables features such as improved wallet security, federated sidechains, and the Lightning Network.
- Time-locked transactions: Time-locked transactions are used to prevent the spending of some specific bitcoin prior to a certain time in the future. For example, someone could use this type of smart contract to prevent themselves from spending their savings until a later date or preventing a loved one from spending their inheritance until a certain block height. CLTV and CSV are two opcodes that enable this smart contract functionality, in addition to the nLockTime parameter. These opcodes are also key building blocks of the Lightning Network and cross-chain atomic swaps, where cryptographic proofs are used to prove that an off-chain spending commitment has been made.
- Meta protocols for tokens: While token offerings did not really take off until they were implemented by Ethereum, the reality is various meta protocols for issuing alternative assets on top of bitcoin have existed since around 2013. Originally referred to as colored coins, meta protocols for token issuance on bitcoin did not gain much use until the invention of Ordinals and Inscriptions in 2023. That said, Tether USD, which is by far the largest stablecoin in the world by market cap, was originally issued on a bitcoin meta protocol known as Mastercoin (now Omni). Other meta protocols for issuing both fungible and non-fungible tokens (NFTs) on bitcoin include Stamps, RGB, Taproot Assets, Runes, and Counterparty.
- Discreet log contracts (DLCs): DLCs are bitcoin’s answer to the oracle problem for smart contracts, where a third party must be trusted to decide the outcomes of bets between two or more parties. This mechanism enables a large amount of privacy and scalability for these sorts of bets, as the vast majority of data is handled off of the blockchain. Notably, the oracle(s) for the smart contract does not necessarily know the details of the bet. DLCs can be used to create financial derivatives on both the base bitcoin blockchain and the Lightning Network.
It should be noted that multiple bitcoin smart contracts are also sometimes combined to create more advanced, upper-layer protocols. For example, both multisig addresses and time-locked transactions are used to create the Lightning Network.
Bitcoin’s Vision For Private, Efficient Smart Contracts
Despite the reality that bitcoin can be difficult to change at the base protocol layer, several alterations have been made to the network’s consensus rules over time to enable additional smart contract functionality. For example, while multisig addresses are extremely common on the bitcoin network today, they were not available in the original version of the protocol.
In 2021, an improvement known as Taproot was added to bitcoin in an effort to enhance the privacy and efficiency of smart contracts. Indeed, this improvement was a major step forward in terms of the design goal of minimizing the amount of information related to smart contract execution that is forever stored in the bitcoin blockchain. In addition to having an extreme focus on safety and security, bitcoin smart contracts tend to be implemented in an off-chain manner where privacy and scalability can be maximized.
The Taproot upgrade coincided with the addition of Schnorr signatures to bitcoin, which allows multisig transactions to look no different than traditional, single-sig transactions on the blockchain. This means that, for example, an opening or closing of a Lightning Network channel will look the same as a normal on-chain transaction where Bob is simply sending some bitcoin to Alice. This makes it difficult to understand the true meaning behind on-chain interactions by bitcoin users, in addition to lowering the amount of block space that needs to be used through the use of signature aggregation.
Additionally, the use of Merkelized Abstract Syntax Trees (MAST) makes it so that only the executed form of a smart contract is revealed on the blockchain. While there could be a number of potential different outcomes of a particular smart contract, MAST improves privacy and scalability by only publishing the data that is relevant to the end result of smart contract’s execution. However, it should be noted that more data is revealed when there is some sort of off-chain smart contract dispute that needs to be resolved by reverting to the blockchain.
Taproot also made it easier to introduce new opcodes in the future, which could be used as building blocks for more expressive smart contracts. Tapscript was introduced via the Taproot upgrade, which also came with the OP_SUCCESSx opcodes. These are effectively placeholders for future opcodes to be seamlessly added to bitcoin.
With all that said, it should be mentioned that Taproot was the last soft-forking change that was made to bitcoin. It has become more difficult to make these sorts of changes to bitcoin as time has progressed, as the network’s protocol rules slowly move towards ossification. As the bitcoin user base grows and becomes increasingly diverse, it may become even more difficult, if not impractical, to coordinate changes to bitcoin’s scripting language.
Bitcoin Smart Contracts On Secondary Layers
As part of bitcoin developers’ desire to limit interactions with the base blockchain layer, a multi-layer approach to scaling the cryptocurrency to billions of potential users has been thought of as the correct path forward for many years. Notably, Ethereum has also pivoted to this focus on Layer 2 (L2) networks over the past few years.
Much of the financial activity that involves the bitcoin asset does not necessarily need the high degree of decentralization and censorship resistance provided by the base bitcoin blockchain, so it makes sense to let users opt into secondary networks built on top of that base layer via smart contracts.
The most prominent L2 network on bitcoin today is the Lightning Network, which is currently mostly focused on the payments use case. While the Lightning Network itself is built on a number of different bitcoin smart contracts, this L2 does not offer much in terms of enabling additional smart contracting capabilities. However, the Lightning Network does allow smart contracts that exist at bitcoin’s base layer, such as tokenization and DLCs, to operate in a faster and cheaper off-chain environment.
In terms of the expansion of bitcoin’s smart contracting capabilities, most of that activity has taken place on federated sidechains up to this point. Liquid is a sidechain that closely resembles bitcoin itself with a variety of additional features and opcodes. Another sidechain comes in the form of Rootstock, which is compatible with the Ethereum Virtual Machine (EVM), meaning any Ethereum app can be deployed on the sidechain.
While both Liquid and Rootstock have enabled more experimentation when it comes to using bitcoin in smart contracts, adoption of these platforms has been rather minimal. This could be due to a variety of reasons such as a dislike of the federated sidechain security model or the fact that fees on the base bitcoin blockchain are still relatively low in the grand scheme of things. Of course, many smart contracting systems reintroduce some form of counterparty risk anyway, usually in the form of a trusted oracle. Then again, there is also a general preference for simply hodling bitcoin and not reintroducing financial risk among many bitcoin users.
Due to innovations such as Babylon and BitVM, alternative sidechain security models are now possible, which has led to the development of proof of stake (PoS)-based models. It remains to be seen as to whether these new forms of L2 bitcoin networks will be able to gain more traction than previous sidechain iterations, but the level of L2 experimentation is bound to increase in the coming years.
Of course, the case can also be made that other Layer 1 blockchain networks, such as Ethereum and Binance Smart Chain, can also be seen as L2 networks for bitcoin. In fact, the amount of bitcoin that has been ported over to Ethereum via the Wrapped Bitcoin (WBTC) ERC-20 token dwarfs the combined size of Lightning Network, Liquid, and Rootstock. Some networks operate in a gray area between sidechain and alternative cryptocurrency networks, such as Stacks, where a new native cryptocurrency exists alongside a focus on the use of bitcoin as money.
Popular Applications Of Bitcoin Smart Contracts Today
While it’s technically possible to build decentralized applications via smart contracts on bitcoin today, the reality is that there are not many popular examples that can be pointed to as successful projects right now. WBTC is a popular token used in some of the largest and most well-known DeFi projects, such as Uniswap and Aave, but there has yet to be an example of product-market fit when it comes to building these sorts of apps directly on top of bitcoin itself.
That said, there are three notable bright spots to look at when it comes to the use of bitcoin smart contracts to build decentralized applications so far: Sovryn, the Lightning Network, and Ordinals.
Sovryn
Sovryn is the one bitcoin app that enables basically everything one would find in the sorts of apps built on Ethereum. Originally deployed on Rootstock, Sovryn is also expected to be deployed on Build on Bitcoin in the near future. The DeFi app has anything and everything a bitcoin user could want in terms of DeFi activity, including a decentralized exchange, a collateral-backed stablecoin, NFTs, borrowing, lending, a decentralized autonomous organization (DAO), staking, and more.
Sovryn peaked at roughly $160 million of total value locked (TVL) in the protocol back in November 2021, and it has about half of that amount locked in the DeFi app at the time of this writing.
Lightning Network
While the Lightning Network has long been touted as the major L2 development for bitcoin so far, the level of success it has actually achieved up to this point is up for debate. While there are more payments taking place on Lightning Network than many payment-focused altcoins, there are clearly some issues that still need to be worked out. Indeed, many of the most popular and noteworthy Lightning-enabled wallets, such as Wallet of Satoshi and Chivo Wallet, operate in a completely custodial manner.
The relatively low amount of bitcoin that is locked up in the Lightning Network at any one time is often pointed to as proof of its failure when it comes to adoption, but the reality is TVL is not a very useful metric for measuring the success of a payments protocol. Much of the activity in Lightning is currently built around low-value transactions related to Nostr and gaming, and these sorts of use cases do not require much bitcoin to be on the network, especially when considering that the same bitcoin can be reused for multiple payments within intentionally circular economies.
Ordinals And Inscriptions Projects
Based on the temporary spikes in transaction fees that have been found on bitcoin over the past year or so, Ordinals and Inscriptions have garnered a large amount of attention and controversy. While some bitcoin users see Ordinals as a healthy integration of the NFT concept for bitcoin, others see the large amount of block space taken up by Inscriptions as nothing more than spam.
In addition to NFT-esque Ordinals collections, there have also been many meme tokens that have launched via this process. As of April 2024, bitcoin is now the largest blockchain for NFT sales volume, according to CryptoSlam, and the Ordinals concept has been the key driving force behind this phenomenon.
The Future Of Smart Contracts On Bitcoin
It can be extremely difficult to make changes to bitcoin, but there are some developments in the works to bring additional smart contracts to bitcoin via soft forks. Additionally, there are a large number of upper-layer network developments in the works that will work fine with the base bitcoin protocol as it exists today. Improvements will also no doubt be made to the Lightning Network, sidechains, and other bitcoin smart contracting systems that already exist today.
While most smart contract activity takes place on Ethereum and its Layer 2 networks right now (even the activity involving bitcoin), a merger between bitcoin as an asset and smart contracts as a technology could alter this current paradigm over the long term.
Will New Opcodes Be Soft-Forked Into Bitcoin?
The basic rules of the bitcoin network were definitely “set in stone” to some degree when the network originally launched back in January 2009. However, slight alterations to the protocol have been made from time to time via backwards-compatible soft forks. Multisig addresses, smart contracts related to the Lightning Network, Segregated Witness, and Taproot all came to bitcoin via this methodology, and there are a number of proposals floating out there in the ether in terms of new smart contracts that could be added to Bitcoin Script.
Covenants
Bitcoin covenants would allow users to better set conditional rules on how, when, or where some bitcoin can be sent. For example, a covenant may only allow some bitcoin to be spent to some specific addresses after a specific period of time has passed. The ability to effectively enhance control over and add restrictions to bitcoin spending conditions could enable a wide variety of different use cases and improve smart contracting systems that already exist on bitcoin today.
There are several covenant proposals that have been published by various bitcoin developers over the past few years. Some of the most well-known covenant proposals for bitcoin include OP_CHECKTEMPLATEVERIFY (CTV) and OP_CAT, the second of which was available in the original version of bitcoin before it was deactivated by Satoshi. The merits of many different covenant proposals have been debated by bitcoin developers, as there is a desire to get the right balance between increasing programmability without adding too much complexity that could increase bitcoin’s attack surface. Additionally, there are those who say the addition of covenants is simply not worth the security tradeoffs, as there are no proven use cases.
Potential Use Cases Of Covenants
One of the key use cases of covenants that has been discussed for a long time is the concept of vaults, which would offer an extra layer of protection against theft and hacks. The basic idea is that bitcoin held in a certain address can only be spent in a predetermined way that would disincentivize an attacker. For example, it could be required that funds be sent to an intermediary address before being sent to any address of a user’s choosing, with a timelock also being added to that intermediary address to allow the rightful owner of the bitcoin to prevent a theft attempt. Simple versions of vaults are possible on bitcoin today; however, they can be made more efficient and secure if bitcoin were to have covenants.
Covenants could also enable several improvements for existing Layer 2 bitcoin networks such as the Lightning Network and sidechains. In terms of the Lightning Network, covenants could enable improvements, such as channel factories, which allow Lightning users to interact with the base bitcoin blockchain on a less frequent basis, thus lowering total costs. For sidechains, covenants may be useful for improving the security and efficiency of various two-way pegging mechanisms. There also exists the potential for improvements to privacy-focused protocols such as CoinSwap, the development of congestion control, and improvements for other L2 networks that already exist today such as Ark and Mercury Layer.
Drivechains
As previously covered, sidechains already exist on bitcoin; however, current implementations rely on a security model based around a federation of signatories behind a multisig address. There are also proof-of-stake-based models, such as Lorenzo Appchain, coming online, but drivechains would offer a third option where the funds on the sidechain are controlled by the bitcoin miners.
Drivechains are an extremely controversial proposal at this time, but some segments of the bitcoin user base believe that they are the best possible solution to the two-way peg problem and will offer the highest degree of censorship resistance for sidechains. Detractors feel as though drivechains alter the game theory at the base network level by putting large amounts of bitcoin in the collective hands of miners. That said, the end goal here is to enable low-trust bitcoin sidechains for greater levels of experimentation with smart contracts and other use cases.
Notably, a version of drivechains could be implemented today via BitVM; however, it would be made much more secure with the introduction of two Bitcoin Improvement Proposals (BIPs): BIP 300 and BIP 301.
Simplicity
Simplicity is an advanced, high-level scripting language for bitcoin developed by Blockstream that offers formal verification and more expressive smart contracts. Integrating Simplicity into bitcoin has been referred to as a potential “final soft fork” by Blockstream CEO Adam Back, as it could potentially allow the base protocol to ossify.
In a bitcoin world with Simplicity, bitcoin smart contract developments would work more like they do in the Ethereum world, where developers are free to write any smart contract they wish. Simplicity also offers formal verification, meaning smart contracts can be proven to behave exactly as they are intended before they are used, which can limit security issues and bugs. This feature does not exist in Ethereum’s Solidity scripting language, where a large number of error-prone smart contracts have led to billions of dollars worth of losses over the years. The addition of Simplicity to bitcoin would be seen as extremely controversial today, but it is expected to be added to the Liquid sidechain at some point in 2024.
Better Bitcoin Sidechains
Going forward, sidechains will be a key area to watch in terms of smart contract development on bitcoin, as these L2 networks are able to offer much more experimentation. It’s likely that a large number of new sidechain concepts will be tried as bitcoin continues to scale out via a multi-layer approach, and it’s unclear if the majority of activity will take place on federated sidechains, drivechains, or PoS-based models like Lorenzo and Botanix.
The key issue that still has plenty of room for improvement is the two-way peg that enables bitcoin to move back and forth between the base chain and L2 networks. Over a long enough timeline, it’s possible that some sort of system based on zero-knowledge proofs will be the ultimate pegging mechanism for these secondary bitcoin layers.
The Lightning Network Will Continue To Develop And Expand
The Lightning Network is still rather basic when it comes to its feature set; however, that’s bound to change in the near future. Two of the latest developments on the Lightning Network that could lead to greater levels of adoption are Taproot Assets and DLCs. Stablecoins have been a key area of adoption in the cryptocurrency market over the past few years, and the bitcoin ecosystem has missed out on this opportunity ever since on-chain fees rose and Tether USD (USDT) slowly moved to alternative networks.
With Taproot Assets (and other, similar protocols), stablecoins can be issued on bitcoin and sent over the Lightning Network, making it a faster and cheaper alternative to some of the other blockchain networks like Ethereum and Tron. With DLCs, use cases such as dollar-pegged holdings and trust-minimized derivatives can be enabled on Lightning.
As mentioned previously, the addition of a covenants proposal or Simplicity to bitcoin could also help make the Lightning Network become more efficient in terms of its use of the base bitcoin blockchain, and there is still a large amount of work to do in terms of scaling this L2 network to potentially billions of users around the world.
Going forward, it’s possible that the Lightning Network will act more as a glue that allows users to instantaneously swap between various L2 bitcoin networks at basically no cost. That said, the Lightning Network is seen as the L2 that has the fewest trust assumptions in terms of how funds on the network are custodied at the base layer, as Lightning transactions are simply self-custodial bitcoin transactions that have yet to be broadcasted and included in a block.
There are also technologies similar to the Lightning Network that are coming online and could offer alternative options for specific use cases. Fedimint is an ecash system based on federated bitcoin custody (similar to Liquid) that enables anonymous transactions that are fast and cheap. Additionally, Ark is an even newer concept that could solve some of the liquidity and privacy issues found with Lightning.
The Lightning Network still has a number of limitations in its current form and is definitely not a silver bullet in terms of scaling bitcoin to the global population. Instead, it is one of potentially many tools that will allow anyone to use bitcoin while maintaining some degree of decentralization and censorship resistance.
Bitcoin Is Ready For A Smart Contract Boom
The future is now when it comes to smart contracts on bitcoin. There are already a number of tools available to those who wish to deploy smart contracts on top of the world’s most valuable cryptocurrency network, and these tools are bound to become more powerful and secure in the coming years. Thanks to the emergence of Ordinals, BitVM, and other recent breakthroughs, there has never been as much excitement around building decentralized applications on top of bitcoin as there is today.
The idea of building everything around bitcoin rather than splintering the cryptocurrency user base into many different, incompatible systems has existed since at least the release of the original sidechains white paper all the way back in 2014, and now the tools to realize that vision are coming online. There is no reason everything cannot be built on top of bitcoin as the core source of truth and smart contract dispute resolution.
Some bitcoin smart contract projects have been around for a few years now, but there will be an explosion in development activity thanks to platforms like Lorenzo Protocol building out new L2s on top of the world’s most secure blockchain. And since Lorenzo’s appchain is compatible with the EVM, it is easy to port over existing applications and write new smart contracts built specifically for bitcoin.
Appendix: Resources for Further Exploration
- Ark Deep Dive: https://www.arkpill.me/deep-dive
- Babylon Bitcoin Staking White Paper: https://docs.babylonchain.io/assets/files/btc_staking_litepaper-32bfea0c243773f0bfac63e148387aef.pdf
- Bitcoin Optech: https://bitcoinops.org/
- BitVM 2: https://bitvm.org/bitvm2
- Bitcoin Covenants Wiki: https://covenants.info/
- Drivechain: https://www.drivechain.info/
- Lightning Network Documentation: https://docs.lightning.engineering/
- Liquid Documentation: https://docs.blockstream.com/liquid/technical_overview.html
- Lorenzo Protocol Documentation: https://lorenzo-protocol.gitbook.io/lorenzoprotocol
- Ordinal Theory Handbook: https://docs.ordinals.com/
- RGB Documentation: https://rgb.tech/docs/
- Rootstock Documentation: https://dev.rootstock.io/
- Stacks: https://docs.stacks.co/
- Taproot Assets Documentation: https://docs.lightning.engineering/the-lightning-network/taproot-assets
- The DAO: https://gyazo.com/6b875ea63bc2d1241818ee3544ec9420
The Beginner’s Guide To Bitcoin Layer 2s
Layer 2 solutions have emerged to address Bitcoin's challenges, improving the network and generating a booming DeFi sector.
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Although the cryptocurrency industry pioneer, bitcoin has faced challenges in recent years keeping up with the ever-changing world of blockchain. Compared to other blockchains, bitcoin is slow, expensive, and lacking in features like smart contracts that are now underpinning the industry.
Layer 2 (L2) solutions have emerged to address these challenges, bringing upgrades and improvements to the bitcoin network.
Blockchains consist of an execution layer and a consensus layer. The execution layer manages users’ transactional activities, while the consensus layer protects and validates these transactions. Conceptually speaking, the execution layer maintains the blockchain activity while the consensus layer maintains the blockchain’s identity. The structure of an L2 is typically to improve the functionality of the execution layer while being sufficiently connected to the consensus layer.
In short, let the blockchain do more while still being the same blockchain.
Examining L2s requires understanding what capabilities they add this to bitcoin. Because the basic ideas and terms of this technology have alienated many bitcoin enthusiasts, this guide aims to help users grasp Layer 2 solutions by explaining their functionalities and types.
Upgrading Bitcoin
L2s enhance the bitcoin network by removing inherent limitations such as high fees, low speeds, and lack of smart contracts — all qualities which favor an unhackable, uncensorable maximum security model, as well as decentralization — qualities which will not be surrendered by the base layer. Improvements to blockchain execution capabilities are generally described in terms of scalability — the amount of transactions that can be processed on the blockchain in any given time period.
Because “scaling” a blockchain is too broad a descriptor for the variety of functionalities added, this section instead breaks down the main improvements to the execution layer and what this means in terms of what bitcoin can do.
Faster And Cheaper
Due to its transaction fees and block size limitations, bitcoin’s native chain is expensive and slow. These limitations are cited as the main bottleneck inhibiting broad functionality and adoption. Layer 2 solutions, at the most basic level, seek to solve this problem. They try to increase the network’s speed and output while keeping fees as low as possible.
The most obvious use case for making bitcoin faster and cheaper is microtransactions. Microtransactions are the small frequent transactions people make everyday. No one will use bitcoin to buy a coffee or a toothbrush if the transaction fee is half the total cost and takes 30 minutes to be confirmed.
The most popular and oldest layer 2 for bitcoin focuses on exactly this problem. The Lightning Network allows users to conduct micro-transactions with minimal fees and almost instant confirmation times. Reducing the cost and speed of transactions allows for the everyday usage necessary for mass adoption, such as tipping, small purchases, or running a business that accepts bitcoin.
Smart Contracts And DAPPs
Smart contracts are computer programs built on a blockchain that automatically execute a set of rules. The distributed computing power of the underlying blockchains executes a smart contract in a decentralized manner. Smart contracts can be used to make a digital agreement between parties with no third party to authorize the terms. Further, smart contracts are the foundation of decentralized applications (DAPPs). These are computer applications that use the decentralized execution technology in a blockchain to run programs without a centralized third party.
Smart contracts are the essential infrastructure powering the entire decentralized economy, all its platforms, tools, and organizations run on these programs. Bitcoin was not originally designed to support complex smart contracts and their development requires much higher TPS than bitcoin can natively mange. Therefore, things like DeFi and DAOs have traditionally been exclusive to smart contract-compatible blockchains such as Ethereum.
However, Layer 2 solutions can use their increased throughput and additional programmability to add such capabilities to bitcoin. For example, Rootstock and Stacks are layer 2 solutions that support smart contract execution, enabling the development of a decentralized infrastructure on bitcoin.
How Layer 2 Solutions Work
Layer 2 solutions function by transferring some computational execution off the main blockchain while maintaining a connection to the native bitcoin network. The methods for doing this can be broadly categorized into sidechains, state channels, and roll-ups.
Although there is additional nuance to many layer 2 solutions and not all fit perfectly into these categories, such distinctions allow for a general picture of the core types of layer 2s.
Sidechains
Sidechains are independent blockchains that run in parallel to the bitcoin main chain.
Sidechains that have some systematic dependence on the native chain, this dependence is generally seen through a pegging mechanism. Users lock their bitcoin on the main chain, which is then mirrored by minting equivalent assets on the sidechain. This relationship between the blockchains allows users to interact with the sidechain’s unique features (such as smart contracts) while still being anchored to the bitcoin network.
Further, sidechains often have their own consensus mechanisms, such as Proof of Stake or federated consensus, to secure the network independently of the bitcoin main chain. Through these consensus mechanisms, such chains can create their own incentives for participation, such as alternative rewards or their own native tokens.
Notable Side Chains:
- Rootstock: This sidechain introduces smart contract functionality to bitcoin, allowing developers to build dApps and more complex financial instruments.
- Liquid Network: Liquid focuses on fast and confidential transactions, particularly beneficial for exchanges and traders needing quick and private transfers.
- Stacks: Stacks is a blockchain and cryptocurrency for smart contracts, decentralized finance, non-fungible tokens, and dApps.
State Channels
State channels allow participants to conduct multiple transactions off-chain and then record the final state on the bitcoin blockchain. This process significantly reduces the number of transactions that need to be processed on-chain.
State channels maintain a connection to the bitcoin network through multi-sig addresses. With these addresses, multiple parties must sign off on a transaction, ensuring that off-chain transactions are secure and agreed upon by all involved parties. This method provides a secure link to bitcoin by ensuring that off-chain transactions within the state channel can be finalized and enforced when added to the main chain. Additionally, state channels will use security entities like “Watchtowers,” who are users that monitor the network for malicious activity and receive rewards.
The most well-known implementation of state channels for bitcoin is the Lightning Network. Here two parties open a channel by locking a certain amount of bitcoin into a multi-signature address. Once the channel is open, they can conduct unlimited transactions off-chain. Only the final state of the channel is recorded on the bitcoin blockchain network.
Rollups
Rollups work by aggregating multiple transactions into a single batch. Rollups interact with the bitcoin network by periodically committing aggregated transactions to the main chain. This process ensures that the state of the rollup is consistent with the main chain.
There are two main types of rollups: optimistic rollups and zero-knowledge rollups (zk-rollups).
- Optimistic rollups: These are “optimistic” because they assume transactions are valid and only perform a check if a dispute is raised. This approach minimizes immediate computational load but requires a mechanism to handle disputes effectively.
- zero-knowledge rollups These use cryptographic proofs to verify transactions according to minimal information about the transaction. This method retains higher privacy and speed, although it can be more complex and dangerous to implement.
Rollups are just starting to be seen on Ethereum and other blockchains, while implementation with bitcoin is still in the conceptual stage and has yet to be launched outside of research.
Challenges For Layer 2s
Despite the variety of use cases and the serious commitment by most of the bitcoin community, Layer 2 solutions face several challenges.
- Security risks: While Layer 2 solutions aim to enhance security, they also introduce new attack vectors. For instance, rollups must handle potential fraud disputes, and sidechains need to ensure their consensus mechanisms are resistant to attacks.
- Complexity: Implementing and maintaining Layer 2 solutions can be complex. Developers need to ensure seamless integration with the bitcoin network while maintaining usability and security.
- Interoperability: Different Layer 2 solutions often operate independently, which can lead to fragmentation. Ensuring interoperability between various Layer 2 solutions is a significant issue that needs to be addressed to realize the full potential of these technologies.
The Obvious Solution
It is almost universally agreed upon that Layer 2 solutions are needed for bitcoin to reach mass adoption. By enabling microtransactions and smart contracts, they expand bitcoin’s use cases to compete with the latest blockchain movements.
A basic understanding of the mechanisms of rollups, sidechains, and state channels, along with their security measures and connectivity to the bitcoin network, is essential for users to navigate emerging projects. Bitcoin Layer 2 solutions represent a crucial evolution in the bitcoin ecosystem, as they allow bitcoin to reclaim its role as the foundation and center of the blockchain industry.
Do Layer 2s Defeat The Bitcoin Commodity Narrative?
L2s reveal a grand narrative for bitcoin, enabling use cases that cement bitcoin's position as a commodity.
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Layer 2 (L2) solutions aim to alleviate the well-known scalability issues of the bitcoin network, but these very issues characterize the prevailing and most widely accepted narrative surrounding bitcoin: that it is a commodity, not a currency.
A commodity is a useful or valuable raw material that can be bought or sold. Bitcoin is often compared to commodities such as gold, the bitcoin community even describes it as “digital gold.” This has highlighted bitcoin’s ability to serve as a superb store of value, but doesn’t help bitcoin’s case for being a viable currency.
L2s not only answer the charge that bitcoin can’t be a global currency, they add functionality to the network that extends its influence far past a payment network. But with that answer comes several questions:
- Can technological advancements force the bitcoin community to change its narrative?
- How can the bitcoin community support this narrative when L2s force them to renege their original reasons for presenting it?
- In what sense is bitcoin a raw material analogous to gold?
- How do layer 2 solutions support or diminish this analogy?
This article aims to answer these questions and more while investigating the economic position of bitcoin post-layer 2s.
Digital Currency To Digital Commodity
The original bitcoin narrative goes as follows: Bitcoin was created as a form of digital currency; its creator intended it to be a decentralized replacement for fiat currency.
This digital money was designed to be scarce and deflationary with a supply forever capped at 21 million via its mining mechanism, which halves the amount of bitcoin created every four years. The miners who secure the network are then paid transaction fees once all the bitcoin is mined. The idea that bitcoin mass adoption implies being used frequently in transactions like a global currency is baked into the protocol structure itself.
Shortly after bitcoin started to gain a following users pointed out some problems with the original vision of bitcoin as a currency. This primarily had to do with problems of scalability and the ability to process a high volume of transactions. A native bitcoin transaction is too slow and costly for everyday transactions such as buying a coffee, yet the definition of currency requires the item to be used as general use money. Unfortunately, the transaction pace and fees are unchangeable features of the native blockchain and, therefore, seem to permanently bottleneck global adoption as a currency.
Instead of giving up on bitcoin, the narrative surrounding its economic position changed to “digital gold.” The idea was that because bitcoin isn’t feasible as a currency, the community should instead treat it as a basic digital object useful for storing value by virtue of its scarcity and immutability. This narrative caught on, and laws even followed suit, with many countries officially classifying bitcoin accordingly as a commodity.
This conversation continues as an important debate within legal regimes as regulations differ surrounding the ownership, sale, and exchange of currencies vs. commodities. The legal definition of bitcoin characterizes how it can be adopted in various countries; a misclassification can stifle or even ban its existence.
How Layer 2 Solutions Challenge The Bitcoin Narrative
A layer 2 solution is a blockchain built on top of or alongside another that extends the functionality of the base chain. Typically, the goal of a layer 2 solution is to make the native blockchain scalable. For Bitcoin, at least at first, this meant making transactions cheaper and faster.
The most popular layer 2 solution to do this is the Lightning Network. The Lightning Network operates by creating payment channels between users. Two parties can open a channel by locking a certain amount of Bitcoin into a multi-signature address. Once the channel is open, they can conduct unlimited transactions off-chain. Only the final state of the channel, once it is closed, is recorded on the Bitcoin blockchain.
By moving small transactions off the main blockchain and settling them after the fact, L2s can make bitcoin transactions nearly instant and fees practically non-existent. Such upgrades force one to reconsider if bitcoin can be a system of money in general use:
Everyday Use
With low cost and fast transactions bitcoin can become viable for everyday transactions such as buying a coffee.
User Growth
As bitcoin becomes more practical for daily transactions, the user base can expand to those previously restricted by fees. This reinstates the possibility of bitcoin as a universal global currency.
Adoption by Businesses
Lower transaction costs and faster settlement times make Bitcoin more attractive to merchants and businesses.
Spending
Now that bitcoin can be used as easily as any other currency, this new functionality promotes spending bitcoin as opposed to holding. This permanently affects the economics of Bitcoin as it implies a circulating supply similar to a currency widely used.
At face value, the advent of bitcoin layer 2s seem to deter its classification as a commodity, the original gripes with bitcoin being widely adopted as a currency are at least in principle defeated. Further, the basic economic dynamics of bitcoin must change with the expectation that it will be changing hands more frequently. The original considerations that led the global community to accept bitcoin as a commodity no longer hold. If the lightning network becomes globally adopted, bitcoins main use will be a general money and it will better fall within the classification of currency.
However, scaling bitcoin past its original limit gave it far more use cases than being used as money. This additional usefulness of bitcoin beyond being simple money forces one to reconsider the way it is defined as a commodity.
Layer 2s Beyond Lighting: An Explosion Of Use Cases
Ironically, the cryptocurrency industry has moved far past “currency.” Elements such as smart contracts, dApps, and NFTs have brought more functionalities to blockchain technology than bitcoin’s creator could have imagined.
As layer 2 solutions use secondary blockchains to extend the functionality of the base chain, it’s natural that bitcoin layer 2 solutions would emerge to give bitcoin the capabilities revered in other blockchains.
Layer 2 solutions such as Stacks and Rootstock built methods to connect smart contract compatible blockchains to the native bitcoin network. The execution of smart contracts on the bitcoin blockchain opens up the world of decentralized infrastructure. Decentralized applications such as DeFi protocols, video games, and social media platforms can now be powered and secured by the bitcoin network.
Furthermore, scaling solutions and other innovations allow for non-fungible tokens (NFTs) to be created and traded on the bitcoin blockchain. This brings the ecosystem of art, collectibles, and other NFT use cases directly onto bitcoin.
A new vision of bitcoin is starting to solidify among followers of these developments. The possibility of the bitcoin blockchain acting as the ultimate foundation for the entire decentralized ecosystem. Through these layer 2 solutions, developers can create any tool or application and access the robust decentralization and security of the bitcoin network.
Bitcoin is by far the most decentralized and secure blockchain network that exists; by building on bitcoin, developers leverage these unmatched properties of the bitcoin network and can apply them to their projects.
The Gold Analogy Revisited
Although bitcoin may be used in the future as a global currency, its expanding functionality due to layer 2 solutions points back to the definition of commodity. Usefulness is a core feature of commodities. Raw materials are useful in a variety of ways, such as art, building materials, food, and stores of value.
If bitcoin was just used as a medium of exchange and a store of value, like general money, it would be more similar to a global digital currency. But layer 2 solutions demand that bitcoin be so much more. The bitcoin network is set to be the foundation for the future of all decentralized infrastructure, a kind of ultimate digital commodity. This can be seen clearer by revisiting the gold analogy.
In the shape of a coin, gold can be used as currency. If put in wiring or as a building material, it can lend its properties to help build physical infrastructure. Seen just as a pretty mineral, it can be made into a piece of art. Gold is a simple material with certain characteristics that allow it to take on many roles.
Similarly, bitcoin can be used as a currency via the lighting network. It can be built into decentralized infrastructure to make it more secure by using programs like Stacks. It can even be minted into an art piece via the ordinal protocol. Here, we can see bitcoin as the ultimate digital material used in various ways in a variety of final products.
The features of the bitcoin network correlate with the properties of materials like gold. The robustness of bitcoin security, the wide reach of the network, and the history of its use are all analogous to mineral properties (shininess, hardness, conductivity, etc.) that make them useful.
In the end, layer 2 solutions challenge but do not defeat the narrative that bitcoin is a digital commodity. Although the bitcoin community is forced to reconsider in what way bitcoin is a commodity, the narrative of bitcoin is stronger for it. Layer 2s reveal an even more grandiose narrative for bitcoin, and the use cases they allow for bolster the case for bitcoin as a commodity more than was previously conceivable.
Comparing bitcoin to gold does bitcoin a disservice; the ultimate usefulness of Bitcoin as a commodity extends far past what gold ever achieved.
Bitcoin’s $600 Billion Layer 2 Opportunity
Layer 2s have the potential to bring global Web3 innovation back to Bitcoin, creating a potential $600B DeFi opportunity.
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Bitcoin has remained the largest cryptocurrency in the market since its inception in January 2009; however, bitcoin is far from the only cryptocurrency in the market. Currently, bitcoin’s dominance of the cryptocurrency market share is measured at just under 55%, and the dominance metric has been on a downward slide since the 95% level it once held, all the way back in 2013.
The bitcoin dominance index (BDI) is far from a perfect measurement of the cryptocurrency market, but it’s undeniable that alternative cryptocurrencies have become more prominent over the years, especially in times of large boom cycles.
That said, recent developments in the Bitcoin Layer 2 network ecosystem could reverse this trend. While cryptocurrency users have opted for alternative networks in search of specific use cases not available on bitcoin in the past, such as enhanced privacy or more expressive smart contracts, the boom in new networks pegged to bitcoin can enable all of these use cases and more on the world’s oldest and most valuable cryptocurrency network.
Layer 2 networks have the potential to bring all of the innovation that has taken place outside of bitcoin back to the world’s first blockchain, a feat that has been theorized for at least ten years. Does this mean the cryptocurrency market’s current total valuation of $2.4 trillion will all be sucked up by bitcoin?
Let’s take a closer look at how this return to bitcoin could happen and how it could affect the bitcoin price going forward.
Bringing The DeFi Market To Bitcoin
When it comes to cryptocurrencies other than bitcoin, the vast majority of the market is built around blockchains with more expressive smart contracting capabilities. Ethereum, which is the second largest cryptocurrency network by its market cap of $408 billion as of this writing, is the most obvious example here. There are also a number of chains that have built off the success of Ethereum by copying the technology and building out networks that are compatible with the Ethereum Virtual Machine (EVM). Some of the most prominent examples of Ethereum copycats include BNB Chain, Avalanche, and Tron. Additionally, Solana has attempted to carve out its own niche with its own development environment and a focus on on-chain scaling. Ethereum itself has taken a similar approach to bitcoin in terms of scaling via a multi-layer approach.
With these blockchains that enable more expressivity in smart contract development, decentralized applications (dApps) have been built that are intended to enable cryptocurrency use cases other than simple payments. Protocols for decentralized exchanges, lending, liquid staking, and more are some of the more prominent examples of dApps that have been built on Ethereum and other, similar chains. Due to the applications that can be used on these cryptocurrency networks, they’re also where stablecoins are generally issued — despite the fact that the largest stablecoin, Tether USD, was originally issued on a meta protocol on top of bitcoin. Non-fungible tokens (NFTs) and meme coins also first rose to prominence on these sorts of blockchains; however, the developments of Ordinals and Runestones has already brought those use cases back to bitcoin.
Decentralized finance (DeFi) has become an enormous aspect of the overall cryptocurrency market, with DeFiLlama estimating the total value locked (TVL) in various protocols at just under $100 billion. However, less than 2% of that TVL is found on bitcoin and its various Layer 2 networks. In fact, most of the DeFi activity that involves bitcoin currently takes place on Ethereum via the wrapped bitcoin (WBTC) ERC-20 token, which involves the backing of a centralized custodian.
Bitcoin Layer 2 Networks For DeFi
While there is some DeFi-related activity found on bitcoin’s base blockchain, the possibilities are rather limited due to the lack of expressive smart contracts at that layer. For this reason, many of the DeFi apps built around bitcoin are likely to be found on L2 networks. Many of these L2s, such as Lorenzo App Chain, are compatible with the EVM and can deploy any DeFi app that has already been deployed on Ethereum.
In some ways, Ethereum itself is already an L2 of sorts for bitcoin due to the level of success achieved by the aforementioned WBTC up to this point. However, there is plenty of room for improvements that can be made via true L2s that can enable more secure two-way peg mechanisms and remove the need for a non-bitcoin cryptocurrency to pay for gas. Indeed, the recent improvements to the two-way peg model based on federated, multisig custody made possible by BitVM were a key catalyst for the recent revival of Bitcoin Layer 2 developments.
This puts into question the need for alternative blockchains at the base layer, especially for those who view bitcoin as the base money of the cryptocurrency market. Additionally, this allows bitcoin’s base, monetary layer to remain sufficiently decentralized and begin to ossify while also extending the capabilities of the cryptocurrency via L2s. After all, it is the credibility of bitcoin’s unwavering monetary policy that differentiates it from other, more centralized cryptocurrencies on the market. This is one of the main reasons it makes sense to use bitcoin as the base layer of a greater DeFi ecosystem.
The Alternative Cryptocurrency Market
Outside of smart contracts, the other major use case for cryptocurrencies outside of bitcoin is payments. There are two main categories of payment-focused cryptocurrencies that offer potential advantages over bitcoin: privacy cryptocurrencies and cryptocurrencies with low transaction fees.
In terms of privacy-focused cryptocurrencies, Monero and Zcash are the two most prominent examples. Notably, the core technologies used in both of these cryptocurrencies were first proposed for bitcoin itself; however, those changes were never made to bitcoin due to the associated tradeoffs in various areas such as scalability and auditability.
While bitcoin’s main on-chain privacy enhancer, CoinJoin, has faced legal attacks in the form of the arrests of the founders of Samourai Wallet and the complete shutdown of Wasabi Wallet, there are a variety of ways to enhance privacy through L2 networks. Ark is a notable L2 payments protocol that also provides a high degree of privacy for its users. Mercury Layer also enables off-chain coin swaps that can provide privacy gains for users. Additionally, Fedimint enables traditional anonymous digital cash via a federated custody model.
In terms of more hypothetical L2s that could enhance bitcoin privacy, there is nothing to stop an anonymous developer from deploying a version of Tornado Cash on any of the EVM-compatible L2s. Additionally, a Zcash drivechain may eventually find its way to the Bitcoin L2 ecosystem. Of course, a privacy-focused proof-of-stake L2 could be launched using Lorenzo’s existing staking liquidity as well.
There have been many cryptocurrencies marketed as cheaper alternatives to bitcoin. Some of the major examples include XRP, dogecoin, bitcoin cash, and litecoin, which account for over $50 billion of the cryptocurrency market when combined. Of course, bitcoin’s answer to this particular use case is the Lightning Network. However, there are still some potential usability issues here, especially when it comes to the need to make a potentially expensive on-chain transaction to open a channel. The aforementioned Ark protocol may eventually turn into an alternative to the Lightning Network, which doesn’t necessitate an on-chain transaction to get started. There’s also the possibility for a sidechain with a large block size limit to develop; however, it’s important to remember that solution comes with tradeoffs in terms of centralization.
While payments-focused cryptocurrencies tend to be a smaller part of the entire cryptocurrency market cap, they’re still an important aspect of bitcoin’s development over the long term, as it evolves from a store of value to also becoming a more prominent medium of exchange.
$600 Billion And Beyond
The current total cryptocurrency market cap of $2.4 trillion can be misleading, as this metric oftentimes includes errors in the form of double counting the same underlying asset in multiple forms (e.g. bitcoin and wrapped bitcoin) or overstated market caps of tokens with highly centralized supply distributions. Additionally, there are some crypto tokens, such as NFTs and meme coins, that bitcoin is inherently unable to replace.
That said, it’s clear that there is a $600 billion or more opportunity for bitcoin here in terms of replacing the most popular DeFi platforms and alternative cryptocurrencies with L2 solutions. After all, just Ethereum and Solana combined are currently worth more than $470 billion.
Of course, the current overall cryptocurrency market cap is also not the limit on how large bitcoin can grow. And centralizing all major crypto use cases around bitcoin as the base currency is a major step on the cryptocurrency’s path towards becoming, as Twitter and Square co-founder Jack Dorsey puts it, the native currency of the internet. Once bitcoin establishes itself as the king of the digital financial realm, it can obtain the necessary liquidity and network effects to then begin to make an impact in the real world.
In other words, before bitcoin can rival gold and the U.S. dollar in any real way, it must first defeat the likes of ETH, XRP, and DOGE. Additionally, access to a more liquid and stable cryptocurrency benefits the DeFi apps themselves, as that cryptocurrency would perform better as collateral for various use cases. It also makes things less mentally taxing for the end user, as they only need to worry about one form of digital money. While stablecoins are the dominant medium of exchange in the crypto market today, their centralized nature makes them subject to restrictions and regulations. In many ways, stablecoins are more of an evolution of the preexisting, fiat currency system rather than a revolution in money and finance from the base layer.
Through the development of various Bitcoin L2s, whether it be the Lightning Network for payments or Lorenzo App Chain for Ethereum-esque DeFi apps, it’s clear that bitcoin has the ability to adopt all cryptocurrency use cases and therefore usurp the vast majority of the cryptocurrency market cap (outside of non-fungible tokens and meme coins). Additionally, further developing bitcoin’s network effects by bringing altcoin liquidity back to the original cryptocurrency will lead to a stronger and more stable native currency for the internet.
The Shared Security Model: How Bitcoin Secures Layer 2 Blockchains
BTC shared security boosts Layer 2 blockchains to enhance scalability, speed, and security across the cryptocurrency ecosystem.
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Bitcoin’s monolithic infrastructure has built a formidable reputation in the cryptocurrency community for its impenetrable security.
Since bitcoin’s launch in 2009, it has proven to be a predictable, resilient, and efficient network for processing electronic peer-to-peer (P2P) payments, just as Satoshi Nakamoto hoped.
“Bitcoin is backed by the largest computer network in the world, a network orders of magnitude larger than the combined size of the clouds that Amazon, Google, and Microsoft have built over the last 15–20 years.” — Cathie D Wood, Founder of ARK Invest
However, as bitcoin’s popularity grew, scalability issues became increasingly pressing concerns for the nascent blockchain. To galvanize its own extreme security standards, the bitcoin protocol forfeited flexibility in favor of decentralization, which makes adapting to changing circumstances, and onboarding billions of users, much more challenging.
To address these scalability challenges, Layer 2 blockchains (L2s) have begun building on top of bitcoin’s core architecture and offering much more enhanced services to users. Rather than competing with bitcoin’s base layer (as “alt” coins attempt), all of these L2s rely on bitcoin’s design to secure their operations, forming one of the most unique — and potentially most disruptive — symbiotic relationships in the cryptocurrency space.
Thanks to “shared security” with bitcoin’s blockchain, a new generation of L2s is poised to supercharge bitcoin’s growth and create a new ecosystem of decentralized finance (DeFi) built on bitcoin’s blockchain.
What Is “Shared Security” On Bitcoin?
The concept of “shared security” in the cryptocurrency industry refers to using an established blockchain, like bitcoin, as the basis for building secondary add-on projects. Rather than creating separate, self-sovereign blockchains with distinct features and functionalities, L2s leverage the security standards of a Layer 1 network, dramatically reducing their development time, resource expenditure, and technical requirements.
In the case of bitcoin, new decentralized projects settle transactions on bitcoin’s payment ledger, which also means they inherit the decentralization, size, and legacy of bitcoin’s proof-of-work (PoW) mining algorithm. Since L2s fall back on the bitcoin blockchain, they have greater freedom to create more innovative and scalable solutions for their users.
How Are L2s Using Shared Security On Bitcoin?
Each L2 has distinct technical specifications, but these protocols conduct all of their transaction processing and data storage off of the bitcoin blockchain (aka “off-chain”) to provide a faster and cheaper alternative to the bitcoin base chain. The “shared security” aspect kicks in whenever L2s interact with bitcoin’s blockchain to finalize transaction data or resolve disputes. Periodically, L2s send transaction information to the bitcoin mainnet for final processing, giving these secondary networks enhanced legitimacy.
For example, some bitcoin L2s include “anchoring” protocols, in which nodes regularly compile a list of transactions and attach a cryptographically verifiable hash function before submitting them to the bitcoin blockchain. It’s also common for L2s to use snapshots or “rollup” solutions — including Zero-Knowledge Succinct Non-Interactive Argument (ZK-SNARKs) or optimistic rollups — to provide irrefutable data on transactions to the main blockchain. ZK-SNARKs involve creating “validity proofs” by solving advanced computational problems off-chain and attaching them to the transaction data, whereas optimistic rollups assume all incoming transactions are valid and allow nodes to dispute information before final approval.
As an example, the Lightning Network (LN) operates as a fast and low-fee L2 using the bitcoin protocol. When users open an account on the LN, they create an off-chain “state channel” with other LN participants, and they’re free to send their bitcoin as an IOU to other users throughout the L2. Whenever LN users want to redeem the bitcoin in their account, they close their state channel and settle their transaction history on bitcoin’s official, i.e., Layer 1, final payment ledger. Even though LN traders have to pay bitcoin network fees to open and close their LN accounts, they’re free to send bitcoin as many times as they want within the LN to enjoy fast and virtually feeless transfers.
What Are The Benefits Of Bitcoin Shared Security?
Although the name “shared security” emphasizes the secure foundation bitcoin provides for L2s, that doesn’t mean the bitcoin base layer isn’t benefiting from this arrangement. Rather than leeching off of bitcoin’s software design, L2s play a massive role in scaling bitcoin’s operations and introducing more use cases for the world’s largest cryptocurrency.
Strong Foundational Layer Security
Shared security opens the doors for up-and-coming decentralized projects to take advantage of the oldest and largest PoW blockchain. Not only does this foster development on innovative and emerging Web3 projects, it provides bitcoin with a way to offer its high security standards to global developers. The more L2s that build using bitcoin as their base layer, the greater bitcoin’s reputation grows as the “ground floor” for all Web3 security, potentially providing the foundation for future activity in sectors like DeFi, GameFi, and non-fungible token (NFT) trading.
Scalability, Speed, And Efficiency
L2s have the power to process far more transactions off-chain and to batch data using cryptographic hash functions and rollups. Plus, since these L2s take some of the transactional burden off of bitcoin’s shoulders, they naturally reduce congestion on bitcoin’s main chain, further decreasing the risk of network congestion and bottlenecks. By spreading cryptocurrency transactions throughout multiple L2s, bitcoin boosts its transaction throughput, translating to a more enjoyable user experience with lower odds of slow transfer speeds or high fees.
Liquidity In DeFi
Another benefit of linking L2s to bitcoin through shared security is that these secondary applications help seamlessly connect bitcoin to the wider world of Web3. Specifically, L2s open the possibility of using bitcoin in DeFi applications, including decentralized borrowing, liquidity pools on decentralized exchanges, and liquid staking. The more interconnected L2 protocols become — and the more convenient they make the transfer experience — the easier time traders have using bitcoin as the basis for their DeFi activities.
With the introduction of liquid re-staking services like the Lorenzo Protocol, it’s also possible to use bitcoin to create liquid staking derivatives (LSDs) and participate in DeFi yield opportunities. The transferability, interoperability, and tokenization features offered on L2s help make bitcoin a premier DeFi asset, thus driving more liquidity into Web3 protocols.
Innovation
L2s let bitcoin take care of the processes required to secure a decentralized network, which allows developers to free up their imaginations to ponder what else is possible in Web3. Beyond DeFi, L2 programmers have already begun exploring wild use cases on top of bitcoin, including preserving classic Nintendo video games on-chain and creating a fiat-denominated stablecoin with bitcoin as the basis. Bitcoin’s high security standards allow a fresh wave of developers and cryptographers to use this blockchain as their starting base when exploring the outer reaches of decentralized technology.
Using Bitcoin’s Shared Security For Superior Scalability
With shared security, bitcoin “shares” many of its intangible value propositions (i.e., its longevity, trustworthiness, and battle-tested resilience) with the broader cryptocurrency community. At the same time, the L2s relying on these attractive traits boost bitcoin’s potential by effectively distributing transactions, improving network efficiency, and expanding the use cases for bitcoin.
These numerous benefits make bitcoin shared security the ultimate “win-win” in cryptocurrency. L2s enjoy the increased safety of bitcoin’s blockchain, and bitcoin enjoys an enhanced efficiency while expanding its reach into Web3. Even in these early stages of development, it’s safe to say shared security will play a pivotal role in realizing a more fully bitcoin-based digital economy in the near future.
Breaking Down Blockchains: Monolithic Vs Modular Cryptocurrencies
Explore the distinctions between monolithic and modular blockchains in cryptocurrency.
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When bitcoin launched in 2009, it set the standard for software development in the cryptocurrency sector. Following the bitcoin protocol’s historic precedent, succeeding generations of cryptographers relied heavily on this blockchain’s monolithic framework when crafting their Web3 projects. However, as usage ramped up on the bitcoin network, cryptographers began to notice undesirable features of the monolithic model — particularly bitcoin’s inability to effectively scale to meet increasing user demand.
To address the scalability concerns on the bitcoin blockchain, some programmers began designing their cryptocurrencies using a more flexible “modular” tech stack. Although modular blockchains aren’t always “better” than bitcoin’s traditional monolithic architecture, they offer a viable strategy to handle increased user adoption.
So, how do monolithic and modular blockchains compare, and what benefits and drawbacks does each bring to the cryptocurrency ecosystem? Let’s take a closer look at the intricacies of these software models, and how they both play a role in bitcoin’s current evolution.
Defining Monolithic And Modular Blockchains
Monolithic and modular blockchains perform the same essential functions — including peer-to-peer (P2P) payment processing and distributed data storage — but they go about their decentralized duties differently. In a monolithic blockchain like bitcoin, all the chain’s features occur within one cohesive and interdependent codebase. From transaction processing to consensus mechanisms to data storage, the nodes on a monolithic blockchain take care of all these responsibilities on one layer.
The distinguishing feature of modular blockchains is that these networks split the tasks a chain has to complete into distinct software segments (or “modules”). Although all the modules on a modular blockchain are in constant communication, nodes are only responsible for keeping tabs on their sliver of network activity. By breaking up a cryptocurrency’s architecture into separate units, modular blockchains create a more efficient assembly line model, making it simpler to upgrade operations for maximum scalability.
Benefits And Risks Of Monolithic Versus Modular Architectures
Since modular blockchains are inherently more adaptable than their monolithic predecessors, it’s common to view them as an “upgrade” in cryptocurrency history. While modularity offers unique value propositions for many Web3 programmers — especially in terms of scalability — that doesn’t mean they’re inherently “better” than the monolithic model. Each software framework has significant benefits and tradeoffs that developers will consider before deciding how to build their projects.
Security
Due to the monolithic model’s longevity in the cryptocurrency market, it’s more widely trusted and battle-tested than newer modular chains. Many developers feel the integrated design of monolithic blockchains makes them more impenetrable than modular blockchains since potential hackers need to break into the blockchain’s entire system rather than target isolated modules. Modular blockchains also have to rely on intricate inter-layer communication protocols — often using self-executing programs like smart contracts — to successfully transmit data without a third party, which adds another potential weak point.
On the other hand, programmers in favor of modular blockchains argue the deliberate separation between layers minimizes the impact of a hypothetical security breach. If an attacker managed to corrupt one module in a cryptocurrency’s blockchain, this issue is more self-contained, making it easier to patch the problem without disrupting the entire network. By contrast, a successful attack on a monolithic blockchain would have an immediate ripple effect on the whole network’s operations. So, even though it’s typically more challenging to break into a monolithic blockchain, these networks are more susceptible to extreme and potentially irrecoverable disruptions.
Scalability
Monolithic blockchains (especially bitcoin) prioritize security and decentralization over scalability, while modular blockchains were designed with scalability as a priority. Separating functions through multiple modules helps avoid data congestion, translating to speedier transaction throughput and lower fees. Modular blockchains are also more adaptable to change since it’s easier for developers to implement upgrades on specific problem areas without requiring a complete network overhaul.
Interoperability
Another aspect of a modular blockchain’s superior scalability is its enhanced cross-chain communication (aka interoperability). The coding standards on modular blockchains aren’t as rigid and self-contained as they have to be for monolithic blockchains to work, which opens the possibility of linking to other decentralized networks in Web3.
For example, the Lorenzo Liquid Bitcoin Staking Protocol supports liquid bitcoin re-staking on native Layer 2s and Ethereum decentralized apps (dApps) thanks to compatibility with the Ethereum Virtual Machine (EVM). The relaxed technical standards within the modular framework make it easier to connect dApps and cryptocurrencies from multiple networks rather than restricting network activity to one blockchain ecosystem.
Development And Maintenance
Monolithic blockchains aren’t always “easier” to code than modular models, but they tend to be simpler for programmers to conceptualize and deploy since everything is within one framework. With modular blockchains, developers have to consider numerous moving parts and intricate inter-chain communication systems, which often hampers the initial development phase.
However, once a modular blockchain goes live, the more fragmented architecture makes it easier for developers to update and adapt these chains. Because monolithic blockchains are intertwined, they take considerable time, effort, and coordination even when making minor protocol updates, making ongoing development, governance, and maintenance more challenging.
The Best Of Both Blockchains?
Shared security erases the monolithic versus modular split: Rather than scrapping the monolithic model, there are ways to avoid radical network shifts and still take advantage of the modular framework’s scalability. Thanks to the concept of “shared security,” new modular blockchain projects can link their protocols directly to an established monolithic chain like bitcoin and immediately take advantage of its decentralization, size, and reputation.
Layer 2s (L2s) using shared security on bitcoin finalize all of their transaction data on the base layer, but they process transactions off-chain for superior scalability. This unique software arrangement cuts down on development time for L2s, instantly raises security standards, and helps expand Layer 1 cryptocurrencies like bitcoin throughout Web3.
Mixing Monolithic And Modular For Bitcoin’s Future Success
Every blockchain developer has different opinions on the merits and risks of modular versus monolithic designs, but there’s usually no simple choice between these design options. There are, however, undeniable tradeoffs when choosing one blockchain framework over the other.
Traditionally, monolithic blockchains have a higher safety reputation, while modular blockchains are better known for their scalability. Picking the “best” blockchain infrastructure always depends on the specific goals a cryptocurrency project wants to accomplish.
While the monolithic model continues to work for processing secure payments on bitcoin’s core infrastructure, the Lorenzo Protocol believes modular models will play an important role in the next stage of the cryptocurrency industry’s growth. Specifically, shared security with modular L2s provides a way to infuse the benefits of these blockchain architectures, helping to establish bitcoin’s monolithic model as “the” foundation for Web3 security, and broadening bitcoin’s utility in decentralized finance (DeFi).
The shared security between monolithic and modular blockchains accentuates the positives of both models, making secure scalability a possibility for the bitcoin network.
Scaling Bitcoin: Layer 2 Solutions and Beyond
Discover Lightning Network, sidechains, and innovative Lorenzo Protocol's L2-as-a-Service for enhanced transaction efficiency.
While bitcoin is an extremely powerful tool in terms of enabling complete self-sovereignty over one’s wealth, the high degree of decentralization in the system creates issues for the blockchain in terms of scalability.
In order for the bitcoin network to retain all of the properties that make bitcoin both valuable and useful, such as its unwavering monetary policy and censorship-resistant transactions, the barrier for anyone to participate in securing the bitcoin network by running a full node must remain low. It is the ability for each user to operate a full node that removes the need to trust other parties on the network.
To keep the costs associated with operating a full node low, the capacity of each new block of transactions is constrained. This decreases the amount of data each node must process and store, thus lowering the costs of operating those nodes.
Due to this limitation on transaction capacity, it has long been thought that bitcoin should scale in a multilayer manner where users can opt into upper-layer protocols for specific types of transactions that do not need to be held in a decentralized database for the rest of eternity. In other words, there’s no reason to broadcast a drink order at a local coffee shop on a costly, heavily decentralized blockchain, morning after morning.
By creating Layer 2 solutions for bitcoin, the on-chain footprint of each user can be limited. This enables a greater level of activity on the bitcoin network overall while also keeping transaction costs at a manageable level. Additionally, these Layer 2 networks can be used to test new, cutting-edge features, such as more expressive smart contracts or improved privacy, without altering the base bitcoin protocol.
With all this in mind, let’s take a look at the Layer 2 solutions that exist today, how Lorenzo Protocol offers something different, and how bitcoin scaling may evolve going forward.
Examples of Layer 2 Scaling Solutions Today
The most prominent example of a Layer 2 bitcoin scaling solution today is the Lightning Network. This second-layer payments protocol effectively enables the caching of bitcoin transactions in a manner similar to a bar tab. Instead of making an on-chain transaction for every bitcoin payment, a network of presigned bitcoin transactions is used to track who owes what to each user. When users no longer wish to transact with each other, they can settle their balances on the base bitcoin blockchain with these presigned transactions, similarly also to settling a hotel bill’s incidentals all at once after checking out.
Another Layer 2 bitcoin scaling solution is sidechains. These are alternative blockchains that use bitcoin as their native token rather than some new cryptocurrency asset. Sidechain users are able to transfer their bitcoin from the main bitcoin blockchain to these new blockchains to gain access to alternative features and rulesets. The idea is to enable the sorts of use cases found on alternative blockchains, such as Ethereum or Monero, without the need for the creation of an entirely new asset or token.
Liquid Network and Rootstock are two sidechains that are live today; however, they have seen limited adoption. Currently, these Layer 2 solutions necessitate the backing of a multisig federation at the base bitcoin blockchain layer to control the funds on the sidechain, but there are a number of improvements in development, such as enhancements made possible by BitVM, to further decentralize these systems. It should be noted that many people would dispute whether the current, federated version of sidechains should be classified as a true Layer 2 solution.
Other Layer 2 solutions deserving honorable mentions that have not yet gained much traction include Fedimint and Statechains. Additionally, there are Layer 2 networks built on bitcoin that also have their own native tokens, such as Stacks.
Lorenzo Protocol’s Bitcoin Layer-2-as-a-Service
Lorenzo Protocol is one way to improve the sidechain concept. Instead of using a group of permissioned functionaries, as is the case with Liquid and Rootstock, Lorenzo Protocol creates a new bitcoin Layer-2-as-a-service based on proof of stake (PoS). This allows the system to be more of a base layer for a variety of different upper-layer bitcoin protocols rather than a standalone Layer 2 network.
Lorenzo Protocol is effectively an intermediary step between the base bitcoin blockchain and various Layer 2 systems that takes care of technical tasks such as settlement, consensus, and a two-way peg with bitcoin. Notably, the Layer 2 solutions built on top of Lorenzo Protocol all share the same staking liquidity and act as different blockchain modules built on top of that shared staking liquidity. With this design architecture, users are able to create new, modular bitcoin Layer 2 networks at the click of a button.
Additionally, the use of PoS has two key benefits over the federated model used today. For one, a PoS system is less permissioned, as anyone with access to the relevant cryptocurrency asset — in this case bitcoin — is able to participate. On top of that, the use of PoS instead of a federation of known entities can improve the privacy of the validators in the system, thus improving censorship resistance.
The Future of Bitcoin Scaling
While a few bitcoin Layer 2 solutions already exist, it’s clear that the space is about to explode with new experiments and activity in 2024. This is an area any cryptocurrency investor must track closely, as a new layer built on bitcoin could potentially remove the need for certain alternative assets created for specific use cases.
Much of the innovation that has taken place over the past few years is now coming back to bitcoin, as exemplified by the inscriptions phenomenon. Additionally, various soft fork proposals in bitcoin, especially in the area of covenants, should be watched closely, as these could further enhance the security and efficiency of Layer 2 systems.
Lorenzo Protocol intends to enable and enhance much of this new Layer 2 activity through its use of bitcoin shared security and improvements to the federated sidechain model.