European Union lawmakers have voted to impose strict capital requirements on banks that hold cryptocurrencies
Banks would be allowed to hold 2% of capital in bitcoin, but required to have one euro in capital for every euro in cryptocurrency held - in an effort to “prevent instability in the crypto world from spilling over into the financial system,” according to Markus Ferber, economic spokesperson for the EU parliament's European People’s Party
Lawmakers cite the chaos in the markets seen over the last few months as further evidence that such regulation is necessary
While the European Parliament's Economic and Monetary Affairs Committee voted to approve the measures, in order for them to go fully into effect, they must also be approved by the European Parliament as a whole, and be presented to the national finance ministers meeting in the Council of the European Union
The passed regulation mirrors that suggested by the Bank for International Settlements' Basel Committee, which also suggested the highest possible risk tier weighting for holdings of “unbacked crypto.” Their recommendations placed a 2% limit on tier 1 capital that could be held denominated in unbacked cryptocurrencies
BIS committee recommendation was discussed at last month's BitDevs
Barry Silbert is the founder and CEO of the Digital Currency Group (DCG) conglomerate
Genesis Trading is the OTC trading desk underneath the DCG corporate umbrella
Genesis laid of 30% of staff earlier this month and has since filed for Chapter 11 bankruptcy
It looks like Genesis was taken down due to contagion primarily resulting from the failures of Three Arrows Capital and FTX
Gemini (an exchange run by the Winklevoss twins) is one of many companies affected by Genesis's reckless, over-leveraged lending practices
Their Gemini Earn program was a popular way for their clients to earn yield on crypto assets until payouts were unexpectedly halted by Genesis
It has been a few months since those withdrawals were halted, affecting more than 340,000 Gemini Earn users
Cameron Winklevoss wrote an open letter to the DCG board demanding Barry Silbert's removal, claiming he defrauded Gemini by misrepresenting Genesis's working capital
The firm allegedly marked a 10-year promissory note down as a current asset, which normally “refers to cash, cash equivalents, or other assets that can be exchanged into cash within one year”
On top of this, the SEC recently came forward with charges against both Genesis and Gemini for unregistered securities trading through the Gemini Earn program
What does it all mean?
Parties affected by Genesis are going to be dragged through lengthy bankruptcy proceedings in an attempt to recoup some of their losses and make their own clients whole (or recover whatever scraps are left)
Contagion probably isn't over - Genesis's failure is going to bleed into DCG's other subsidiaries
E.g., Grayscale's GBTC would be at risk if DCG goes under
Some estimate that Grayscale alone holds ~3% of the total BTC supply, and being forced to liquidate that on the market would introduce a lot of sell pressure
The amount of bitcoin owned across all of DCG's subsidiaries is even more substantial
Bitcoin that is held by custodians can be frozen and stolen
Gemini Earn users introduced third-party risk and unnecessary trust when they kept their funds on that platform, which then brazenly lent out those entrusted funds
Besides short-term price volatility, bitcoin that is properly self-custodied in cold storage is entirely unaffected by these incidents
14 years ago today, Satoshi Nakamoto created the first block in the Bitcoin blockchain.
Message engraved in the block: "Chancellor on brink of the second bailout for banks"
The engraving in and of itself serves as an anchor to the physical world, and a testament to Bitcoin’s birthdate –– or, at least, that it couldn’t have possibly been created before Jan 3, 2009, the date the cover was published. But more importantly, and more philosophically, the message establishes a sort of manifesto, from the start. It makes it clear that the system being ignited by that very block takes a stand against the central bank policies enabled by a culture of easy money.
Bitcoin seeks to level the playing field, ensuring property rights to millions worldwide, equally and irrespective of their status, race, religious beliefs, gender or nationality.
Over time, however, more and more Bitcoin-related activity began drifting to centralized institutions, initially for buying and selling, later for custody, and nowadays for a plethora of services unimaginable in the days of Nakamoto. While such a move enabled a greater participation by people around the world, the initial ideals of Bitcoin have started being neglected.
Proof of Keys Day, also celebrated on January 3, was started by infamous Trace Mayer, who rallied people to withdraw their bitcoin en masse from centralized exchanges and custodians. The reason? Only by withdrawing their BTC can people ensure companies of the burgeoning industry aren’t taking part on old and established vices like fractional reserve banking.
By holding bitcoin in a wallet you create, you ensure that only you can move the bitcoin held in that wallet. When a third party custodian holds your bitcoin for you, they are the final arbiter over those funds - you have an IOU.
There was a sophisticated attack on Luke's personal server back in November 2022
He was able to find and purge 2-3 remote shell backdoors an attacker had installed on his system - no evidence they were used for anything at the time
On January 1, 2023, Luke announced his PGP key was compromised
Details aren't available for the entire scope of the attack
Seems that attackers laid groundwork for the attack back in November and were able to eventually infect his server with malware that ultimately allowed them to access his PGP key and his local workstation from the hosted server
His bitcoin was stolen from a wallet file stored on the server (presumably encrypted with that PGP key)
Luke is also the primary maintainer of Bitcoin Knots, an alternative bitcoin node and wallet implementation
His PGP key is used to sign new releases of the software
Luke cautioned against downloading or updating to the latest version of Bitcoin Knots signed by his key because it could be a compromised by the attacker
Most average bitcoin hardware wallet users are probably in a more secure position than Luke was for protecting their bitcoin stack
Luke's encrypted wallet was on an internet-connected device
If he had kept the keys entirely offline (like with a hardware wallet), the likelihood of such an attack would be a lot less
He was probably overconfident in the security of his setup
BIP 329 sets a new standard that will make it easy for wallets to allow users to back up various types of wallet labels and import them into other compatible wallets
Craig Raw, developer of Sparrow Wallet, proposed the standard
Before this, there was no defined standard to transfer any labels the user may have applied to the transactions, addresses, public keys, inputs, outputs or xpubs in one wallet to another wallet.
The UTXO model that Bitcoin uses makes these labels particularly valuable as they may indicate the source of funds, whether received externally or as a result of change from a prior transaction.
In both cases, care must be taken when spending to avoid undesirable leaks of private information.
Labels provide valuable guidance in this regard, and have even become mandatory when spending in several Bitcoin wallets.
Allowing users to import and export their labels in a standardized way ensures that they do not experience lock-in to a particular wallet application.
Individual wallet maintainers need to implement support for the new standard
A covenant is a constraint put on how a coin can be spent, above and beyond the traditional requirements of satisfying a one-time unlocking script (e.g., signing a transaction with a private key).
Currently, there is no way to enforce covenants "on-chain" via Bitcoin's internal validation rules, but there are many pending proposals for how Bitcoin's validation rules could be modified to support this functionality.
Generally, these proposals can be divided into 2 categories, each with notable drawbacks:
precomputed: all possible spending and recovery paths for a coin are defined upfront and locked in when the vault is set up
Changing these preset options requires setting up an entirely new covenant
The number of possible vault operations is inherently limited and predefined, ruling out arbitrary partial unvaults and recursive re-vaults
Coin destinations are fixed to a set of keys, and unvaulting must be done through a single, predetermined path. Losing keys that control particular operations in this setup can cause issues when finalizing vault transactions.
Vault operations can't be batched together
general: expanding bitcoin's native scripting capabilities to allow for more flexible/dynamic scripts that could define recursive spending conditions on coins
These scripts would likely need to be incredibly complex and take up a lot of space on-chain
Lots of unknown consequences with this kind of script flexibility and a significant chance that the community might not reach broad consensus on a particular standard/implementation
Vaults
Vaults are an especially useful subset of covenant design that give Bitcoin users operational simplicity during expected use, but heightened security in the event of unauthorized access to private keys.
Vaults were originally defined as a simple covenant that ensured that spending a coin was only allowed after broadcasting an intent to "unvault" and waiting some period. During this delay, the funds could be "clawed back" into a pre-specified recovery path in case the proposed spend was unexpected.
A user could make use of this covenant by spending their coins into a vault and configuring a watchtower process to monitor bitcoin's blockchain. If the watchtower detected an unexpected unvaulting, it could alert the owner or automatically broadcast a transaction that sweeps the funds to safety.
James notes several characteristics for an ideal vault design:
efficient reuse of an existing vault configuration. A single vault scriptPubKey should be able to “receive” multiple deposits and still facilitate efficient administration of the vaulted coins. Batched operations for recovery and unvault should be supported in order to allow managing such a vault efficiently.
partial unvaultings, which would allow users to withdrawal partial vault balances without having to perform the setup ceremony for a new vault.
dynamic unvault targets, or allowing the proposed withdrawal target for a vault to be specified at unvault time rather than when the vault is first created. This would remove the need for a statically-specified, intermediate live wallet during withdrawal that only exists to route unvaulted funds to their desired destination.
dynamic fee management that, like dynamic targets, defers the specification of fee rates and source of fees to unvault time rather than vault creation time.
James's proposal
Establish 2 new opcodes: OP_VAULT and OP_UNVAULT, which have covenant-like characteristics but do not attempt to address the general problem of covenants
This approach has a complete set of desirable features for safer custodial operations, none of the limitations of precomputed vaults, and is more concise and usable than a vault implemented with more general covenant scripting primitives.
The idea is to limit the scope to optimize specifically for the vault use case to get the most functionality out of the least risky implementation
Each OP_VAULT-style vault makes use of a few pieces of essential data:
a recovery path: the destination that vault funds can be swept to at any point prior to the finalization of withdrawal to the unvault target.
an unvault key: used to authorize beginning an unvault process, i.e. the spending of an OP_VAULT into a suitable OP_UNVAULT, which “announces” the intent to unvault and begins the withdrawal lock-in period
an unvault target: an arbitrary target or destination that is specified as a parameter to OP_UNVAULT, and dictates where unvaulted funds go.
The way this proposal is constructed satisfies all of the characteristics James defined in his ideal vault design without the same drawbacks of pre-existing covenant proposals.
Wizardsardine is a development group known for their work on Revault, an advanced and complex self-custody solution targeted toward organizations with an emphasis on protecting against theft.
It attempts to accomplish something similar to a vault covenant without any changes to Bitcoin's consensus model
It uses native Bitcoin scripting functionality to combine high-threshold multisignature, pre-signed transactions, and various restriction policies
Powerful control over how funds are spent in an enterprise-level custody setup, but not really approachable to most people or organizations
At the end of December, they announced Liana, a simpler, lighter self-custody solution that puts the emphasis on protecting against loss without degrading security
Liana is meant to incorporate some of the same design principals as Revault in a much more approachable way - targeting individuals or businesses of any size
"You can think of Liana as your regular Bitcoin wallet, with a plugged recovery mechanism. In a common Bitcoin wallet you receive coins on an address that corresponds to a single public key, yours. That is, a signature for your public key would allow you to spend the coins. For Liana it’s the same, but in addition a signature for a secondary key (the “recovery” key) would also let you spend the coins. But this recovery key is disabled until a configurable amount of time has passed since you received the coins."
They describe a few examples of how this setup can be useful:
Inheritance
You can define when someone can gain access to a particular key
For inheritance, you want some other party to have access to your funds at some point, you may not want them to be able to spend the entirety of your holdings immediately
E.g., get hit by a bus, and your heir can easily recover all your coins after a year
More resilient backups
There's always a tradeoff between backup availability and security - increasing the protection of your backups against theft is always going to come at the expense of a decreased availability of the backup
With Liana, you can control when a backup becomes available - you can have a more secure backup of the primary key and a more accessible backup of the recovery key
Decaying multisig setups (not available in current version)
The threshold of signing keys in a multisig quorum can become more relaxed over time if funds don't move
E.g., a 4-of-4 multisig that degrades into a 3-of-4 after 9 months and a 2-of-6 with specific recovery keys after a year and a half.
Timelocked recovery adds a new dimension to leverage in custody setups
You could previously configure authentication (who holds the keys) and space (where the keys are located) - now you can configure time (when the keys become available for use)
The downside is that timelock-based setups require interaction - you have to routinely move funds to avoid allowing unwanted key access when the timelock runs out
Liana is basically in beta - it's usable today, but the UX isn't prioritized in the initial version
Ordinal theory is the concept of assigning unique, numeric "identities" to individual satoshis and allowing them to be tracked, transferred, and imbued with meaning
Ordinals is an open source project that includes
a BIP describing the ordinal scheme
an index that communicates with a Bitcoin Core node to track the location of all satoshis
a wallet that allows making ordinal-aware transactions
a block explorer for interactive exploration of the blockchain
functionality for inscribing satoshis with digital artifacts
According to this scheme, satoshis are numbered in the order in which they're mined, and transferred from transaction inputs to transaction outputs on a first-in-first-out basis
Arbitrary assets, such as NFTs, security tokens, accounts, or stablecoins can be attached to satoshis using ordinal numbers as stable identifiers
Ordinal theory doesn't require a side chain, a separate token, or any changes to Bitcoin
Some interesting properties of ordinal-based "digital artifacts":
Ordinal inscriptions are always immutable - once created, they can't be modified or destroyed
Inscription content is always on-chain - there is no way for an inscription to refer to off-chain content (the content itself is embedded in the transaction data)
There has been a longstanding debate about what constitutes a "legitimate" bitcoin transaction - i.e., should bitcoin be used solely for financial transactions, or should it act as a secure, distributed data store for app data and other content?
Proponents of using bitcoin only for financial transactions argue that allowing other things on-chain could crowd out financial transactions, making them more difficult to get into limited block space (i.e., it might make bitcoin less usable as money)
Proponents of storing other data on-chain argue that doing so adds demand to the fee market, which ultimately provides more incentive for bitcoin miners to secure the network (more transactions = more fee revenue)
A compromise was met in 2014 with the introduction of OP_RETURN
OP_RETURN allows 80 bytes to be used to embed small, arbitrary information in a transaction
This was a sufficient size to, for example, store hashes linked to an external service but forced these services to use bitcoin block space efficiently. And significantly, the messages stored on OP_RETURN were “prunable,” meaning that while they must be downloaded by every full node, the bitcoin software recognizes them as dead ends (as they are unspendable) and thus don’t need to be held in the memory of a bitcoin node.
The resurgence of this debate centers around the fact that ordinals takes advantage of a design quirk in Taproot (a 2021 bitcoin upgrade) to leverage more bitcoin block space for data storage without using OP_RETURN at all
Taproot relaxed the limits on witness (signature) data sizes in a bitcoin transaction, allowing Ordinals developer Casey Rodarmor to repurpose old opcodes (OP_FALSE, OP_IF, OP_PUSH) into what he describes as “envelopes” to store arbitrary data for NFTs. That wasn’t the intention of the Taproot upgrade, which relaxed this limit on witness data sizes to allow for future bitcoin contract functionality.
In effect, this trick could allow an ordinals transaction to take up almost the entire space in a 4MB block
People are already using this extra space to store images, PDFs, and small videos as ordinal inscriptions on-chain
Considerations
Witness data receives a substantial fee discount compared to data in other parts of the transaction (like inputs, outputs, OP_RETURN values, etc), which means it could be cheaper to inscribe data this way than it is to do a more typical kind of financial transaction
Data in the witness is given a discount for fee per byte because that data is not included in the in-memory UTXO set (which is more expensive for computers than on-chain data)
If ordinal inscriptions become popular, it might accelerate the timeline to consistently full blocks (already an inevitability if bitcoin adoption continues), which implies that base layer fees would increase sooner than anticipated
The fee market will ultimately adjust as needed to accommodate fluctuations in demand for block space, and people competing for that block space will have to find ways to use it more efficiently
Even if each 4MB block were being filled entirely, the impact on chain size is relatively negligible
At that rate, the entire blockchain would reach a size of ~2.5TB by 2032 - commodity hardware should be able to keep up with that pace easily
The 2021 bull market brought a lot of capital into the bitcoin mining industry, which became increasingly institutionalized and intertwined with traditional finance and energy sectors
That's why 2022's bear market hit so hard - most mining profits gained in the bull market were lost
Hashprice hit an all-time low in November
Hashprice, a term coined by Luxor, refers to the expected value of 1 TH/s of hashing power per day. The metric quantifies how much a miner can expect to earn from a specific quantity of hashrate
New-gen ASICs exited the year at all-time low valuations.
Many Bitcoin mining stocks fell more than 90%.
North America's leading hosting providers went bankrupt.
Acquisitions and asset sales became a prevailing theme.
Even with last year's market carnage, Bitcoin’s hashrate grew 41% in 2022 (compared to 2021’s 18% growth)
With Bitcoin’s price impaired, miners made significantly less on a USD-basis compared to 2021. Still, the $9.55 billion in revenue is still nearly double the rewards miners reaped each year in 2020, 2019, and 2018
2021’s bull market – and the hashrate blackout caused by China’s Bitcoin mining ban – made the year an extremely profitable time to mine Bitcoin. The average hashprice for the year was $314.61/PH/day and the yearly high was $412.57/PH/day
The USD hashprice high for 2022 of $246.86/PH/day came on January 1, and it was only downhill from there. The average USD hashprice was $123.88/PH/day, and the $55.94/PH/day low for the year was also an all-time low for Bitcoin’s hashprice
The average industrial electricity price in the US in 2022 was $85 per MWh, a 16% increase from 2021. Even after this electricity price inflation, 35 states have lower average industrial electricity rates than the S19 Pro’s current break-even electricity price of $92 per MWh.
Bitcoin mining is still very viable in many US states, particularly considering the opportunities for miners to reduce their ultimate electricity prices by engaging in sophisticated power strategies.
These power strategies can take many forms, but a common theme is that miners exploit the unique low-consequence-interruptibility of the bitcoin mining process by adjusting their electricity consumption based on market signals. (Other high-energy intensive industries, like traditional data centers or industrial manufacturing, cannot power down without disrupting major economic activities).
In 2021, New-gen (S19, M30 series) and mid-gen rigs (S17, M20 series) hit all-time high values amid the market mania. In 2022, the bear market drove these rig tiers to all-time lows. New-gen rigs fell 85% from $101.04/TH to $14.88/TH, mid-gen rigs fell 87% from $76.10/TH to $9.92/TH, and old-gen rigs fell 82% from $26.53/TH to $4.72/TH.
Driven by market incentives, the public miners expanded as quickly as possible in 2022, mostly with hardware that was pre-ordered in 2021
Public miners started the year producing 14% of Bitcoin’s hashrate, and ended the year at 19%. This increase in their share of the global hashrate means that they expanded capacity much faster than the private miners in 2022. The public miners increased their cumulative hashrate by 59% in 2022, compared to the private miners’ 19% hashrate growth.
Miners are continuously hashing block data when trying to "win" the block lottery. The nonce is an extra field that can be repeatedly modified to produce entirely new hashes without changing the actual transaction data in the block.
Miners keep changing the nonce to generate new hashes, ultimately trying to get close enough to the difficulty target.
FTX and other companies controlled by its founder, Sam Bankman-Fried, accounted for about $1 billion of the bank's deposits.
The collapse of FTX sparked a run on Silvergate, forcing the bank to sell assets at a steep loss to cover some $8.1 billion in withdrawals.
Crypto-related deposits plunged 68% in the fourth quarter, the bank said in an early release of some quarterly results.
To satisfy the withdrawals, Silvergate liquidated debt it was holding on its balance sheet.
The $718 million it lost selling the debt far exceeds the bank's total profits since at least 2013.
The bank has laid off 40% of its staff, or about 200 employees, and said it would pare back its businesses.
It shelved a plan to launch its own digital currency, writing off $196 million it spent buying the technology that Facebook had built in its failed attempt to start a crypto-based payments network.
Crypto-related deposits account for some 90% of the bank's total, and it keeps almost all of its deposits in cash or easy-to-sell securities.
El Salvador has announced the passing of its “Digital Asset Issuance” legislation that was proposed last November.
This new law establishes a legal framework around the issuance of digital assets and the broader crypto token classification, which includes every other type of digital asset in the crypto market besides Bitcoin.
This means that there is now a definitive regulatory framework for tokenised securities, altcoins, and businesses that wish to transact or offer services focused on digital assets other than Bitcoin.
The new digital asset regulatory framework would also establish a Bitcoin Fund Management Agency, which provides oversight and administration for public offerings of digital assets issued by the state of El Salvador and its institutions.
The Volcano Bond, which is more accurately described as Volcano Token, is a digital token which would help El Salvador to raise capital to pay down its sovereign debt, direct funds towards the creation of Bitcoin mining infrastructure, and fund the construction of “Bitcoin City”.
El Salvador’s Volcano Token is targeted to raise $1B and would be backed by the proceeds generated from its geothermal Bitcoin mining operation, which harnesses energy from the nation’s active volcanoes.
Brazilian President Jair Bolsonaro on Thursday morning signed a bill into law that establishes a complete regulatory framework for the trading and use of bitcoin in the country, according to the federal government’s official journal (DOU).
As previously reported, the new rules recognize bitcoin as a digital representation of value that can be used as a means of payment and as an investment asset in the South American nation.
The new law, which goes into effect in mid-July, does not make bitcoin or any cryptocurrency a legal tender in the country.
The expectation is that the Central Bank of Brazil (BCB) will be in charge when bitcoin is used as payment, while the country’s securities and exchange commission (CVM) will be the watchdog when it is used as an investment asset.
The greater regulatory clarity given by the legislation encourages businesses to explore the burgeoning payment method more closely.
At its peak, Kazakhstan was the second-largest Bitcoin mining nation on earth (~18.3% of the global hash rate in late 2021)
Kazakh authorities began putting pressure on miners in 3 waves:
A raid where equipment from 13 illegal mining farms was seized. The operations were estimated to be using over 200 megawatts (MW) of power.
A follow-up raid on remaining known illegal mining activities which seized assets from a further 106 mining operations.
The regulated curtailment of mining. Bitcoin mining can now only legally occur at the off-peak hours of midnight to 8:00 a.m. and on weekends: a reduction from 168 mining hours per week to only 64 mining hours per week.
According to the author, even at the most bullish upper threshold, Kazakhstan now represents at best 6.4% of global hash rate.
Impact on global bitcoin mining energy mix
Kazakhstan's energy demand is fueled ~87.6% by fossil fuels
Less mining there means a higher clean energy mix for the Bitcoin network as a whole
Because Kazakhstan uses so much coal (a much heavier greenhouse-gas emitter than natural gas) the difference to emissions is even more significant.
At 18.3% of total hash rate, Bitcoin emissions would've been 36 metric tons of carbon dioxide equivalent C(MTCO2e).
But at current hashing levels, emissions are only 32.4 MtCO2e.
That's a 10% reduction in emissions.
The result is that the miner exodus from Kazakhstan flipped the network to become a majority clean-energy user.
According to the author's model, the Bitcoin network uses 4.7% more clean energy now than it did even just a year ago. The factors that have led to this are:
The exodus from Kazakhstan
The migration of Marathon’s remaining coal-based mining onto renewable supply
Continued migration toward mostly renewable-based, off-grid mining
This trend shows no sign of abating. Based on the trendline, the network is set to use 4% more clean energy every year for the next three years.
This might be the fastest transition rate to renewables of any industry in the world.
One of the largest bitcoin mining companies in the U.S. has filed for Chapter 11 bankruptcy protection
"The filing of these cases was necessitated by a decline in the Company's operating performance and liquidity suffering from the prolonged decrease in the price of bitcoin, the increase in electricity costs necessary to power the Company's data centers, and the failure by certain of its hosting customers to honor their payment obligations," per the statement. "In response to these factors, the Company has actively taken steps to decrease monthly costs, delay construction expenses, reduce and delay capital expenditures and increase hosting profitability."
"During this process and upon emergence, the Company will continue to operate its existing self-mining and hosting operations, which remain significantly cash flow positive on a debt-free basis," per the statement. "The Company remains dedicated to providing hosting services and self-mining in its state-of-the-art data centers."
Inquisition is a software fork of Bitcoin Core designed to be used on the default signet for testing proposed soft forks and other significant protocol changes
Version includes support for BIP 118 (ANYPREVOUT) and BIP 119 (CHECKTEMPLATEVERIFY) on regtest and signet
