Crypto
Examining The Debate Around Bitcoin’s Role in Palestine
This is an opinion editorial by Seth Cantey, an associate professor of politics, and Mohammed Mourtaja, a Palestinian student studying international economics.
A debate is taking shape over whether bitcoin can play a role in Palestinians’ quest for freedom from Israeli occupation. It began a year ago, in September 2021, when Chief Strategy Officer at the Human Rights Foundation Alex Gladstein published “Can Bitcoin be Palestine’s Currency of Freedom?” on Bitcoin Magazine. The argument goes like this: Bitcoin allows users to securely send, receive and store value without reliance on any third party. In doing so, it enhances personal autonomy and serves as a form of resistance to occupation. In Gladstein’s words, “It is a peaceful protest, a digital shield, that could lead to big change.”
One of us authors has spent a lot of time down the bitcoin rabbit hole in recent years. The other, newer to bitcoin but well versed after months of intensive research on the topic, is Palestinian and until recently lived in Gaza. We address concerns about the need for caution and qualification in some of Gladstein’s arguments toward the end of this article, but in general we agree with him that bitcoin has the potential to play an important role in Palestine’s pursuit of freedom.
Not everyone does. Over the past year, knives have come out for this argument. That’s a good thing: More debate is needed on whether and how bitcoin can improve the lives of marginalized people, not less. But the quality of debate matters. Too often, analysts make points that are misinformed, usually a consequence of not putting in the work to understand a place or technology, and sometimes they misdirect readers to score points. A recent article includes both kinds of bad takes and is worthy of a considered response. In our critique below, we highlight the kinds of points that critics are getting wrong and try to model analysis that can be taken seriously by scholars, policymakers, and the general public.
A Critic Takes Aim
In July, Hadas Thier — a writer and activist published in The Nation and Jacobin among other outlets — responded to Gladstein in an article titled “Bitcoin Cannot Free Palestine.” Writing for the Middle East Research and Information Project (MERIP), a non-profit independent research group, Thier acknowledges the “urgent and necessary pursuit of Palestinian financial independence,” which she characterizes as “indisputable.” But she argues that bitcoin should have no role in that pursuit. There is a “yawning chasm between the far-reaching promises made by Gladstein and others and the actual technological capabilities of cryptocurrencies,” she writes. These “faux-humanitarian promises” only offer Palestinians “dangerous economic and political risks.”
Those who have spent time in the space will already smell a problem. The title of Thier’s article refers to the role of bitcoin in Palestine, but she conflates bitcoin with cryptocurrencies throughout. The word “bitcoin” appears more than thirty times in the article, but some version of “crypto” appears just as often. Thier mostly uses crypto as an adjective: crypto adherents, proponents, enthusiasts, cheerleaders, millionaires, projects, assets, wallets, payments, entrepreneurs, transactions, exchanges, etc. Bitcoiners have long been at pains to distinguish between bitcoin and other cryptocurrencies; indeed, this is the raison d’être for the term “altcoin.” Bitcoin is the oldest, most decentralized, most secure and most widely adopted blockchain, one with a known and immutable monetary policy and a fixed supply. These characteristics meaningfully distinguish bitcoin from its competitors. To the extent that any nation-state has expressed even the prospect of adopting a digital currency not backed by a central bank, only one has been considered: bitcoin. In 2021, El Salvador crossed that Rubicon. Earlier this year, the Central African Republic did the same.
Beyond injecting crypto into a conversation about bitcoin’s role in Palestine, much of Thier’s argument rests on criticisms that, she claims, make the asset unsuitable for adoption. Cryptocurrencies, she writes, are characterized by “wild volatility, inbuilt inequalities, environmental consequences and associations with criminal activity.” Assuming for a moment that she means bitcoin specifically (not cryptocurrencies generally), there is some truth in each of these allegations. On balance, though, they are unconvincing. Let’s go through each briefly.
First, it’s no surprise that an asset as small as bitcoin, which trades 24/7 in perhaps the world’s only truly free market, is volatile. But volatility goes both ways. A dozen years ago the price of bitcoin was under $1. Today it’s around $20,000. For the vast majority of the past decade and more, it has been a lucrative investment. While that doesn’t mean the future will look like the past, the word volatility need not be a pejorative. If we are watching the monetization of a new asset, a new money — and that may be exactly what we’re watching — then early adopters will benefit disproportionately. It shouldn’t be a surprise that developing countries, which tend to suffer more in the existing international financial system, are thinking harder about alternatives than developed ones.
Second, inbuilt inequality through pre-mines, pre-sales, etc. has been at the heart of nearly all cryptocurrency launches. That was not the case for bitcoin, however, which arguably had the fairest launch of any, and whose creator, as far as we know, has never profited. We recently heard it put this way: Satoshi Nakamoto was a buyer of bitcoin, not a seller. They purchased hardware and electricity to secure the bitcoin network, disappeared and have never touched the block rewards they received. And while it is true that some early investors in bitcoin profited immensely — this is typical of early investors in any successful technology — bitcoin wealth is becoming more evenly distributed over time. That stands in contrast to wealth distribution trends generally. According to recent data from the U.S. Bureau of Economic Analysis, for example, the United States is currently in its “fourth straight decade of rising income and wealth inequality.”
Third, the purported environmental consequences of bitcoin are serious, well known and much discussed. They can also be exaggerated. Anyone who says the protocol’s environmental footprint is insignificant or unimportant is wrong, but often critics begin with the assumption that any energy the protocol uses is wasted. In fact, all monetary systems use energy, including the petrodollar system. Citing data from the University of Cambridge, Lyn Alden notes that the bitcoin network currently accounts for less than 0.1% of global energy consumption. “In the very long run,” she writes, “if Bitcoin is wildly successful and becomes a systemically important asset and payment system used by over a billion people at 10-20x its current market capitalization, it should reach several tenths of one percent of global energy usage.” If it fails, on the other hand, “its energy usage will stagnate and shrink as the block subsidies continue to diminish.” Three questions, then, should be at the center of any discussion about bitcoin and the environment. First, is the energy dedicated to securing the network in pursuit of better money worth the environmental consequences, especially for the large part of humanity that desperately needs better money? Second, how do positive trends in renewable energy adoption within bitcoin mining affect that calculation? Third, could bitcoin meaningfully contribute to climate solutions over time, for example through flare mitigation or the capture of vented methane? We believe the answers to all three questions favor the continued exploration of this technology, including its proof-of-work consensus mechanism.
Finally, it is true that bitcoin has been associated with criminal activity, and that association will never go away entirely. The same can be said for the U.S. dollar. But the FBI isn’t worried about bitcoin. It worries instead about vulnerabilities in smart contracts. Citing data from Chainalysis, a recent public service announcement by the Bureau notes that of $1.3 billion in cryptocurrencies stolen from investors in the first quarter of this year, almost 97% was stolen from DeFi platforms. The percentage of activity on the bitcoin network associated with criminal activity, in contrast, is declining. According to a recent report by former acting CIA director Michael Morel, “The broad generalizations about the use of Bitcoin in illicit finance are significantly overstated.” Indeed, the transparent nature of public blockchains means they can even be useful to law enforcement. In Morel’s words, “Blockchain analysis is a highly effective crime fighting and intelligence gathering tool.”
So Thier’s article seems to have been written without a grasp of differences between key technologies (i.e., bitcoin as a subset of, and not the same as, crypto) and without a sense of known rebuttals to common criticisms of bitcoin. Another kind of problem in her analysis is the straw man argument. On several occasions, Thier cites an interview she conducted with Sara Roy, a senior research scholar at the Center for Middle Eastern Studies at Harvard and an authority on the Palestinian economy. She frames Roy’s comments both as contra-Gladstein’s argument and in support of her own. It may be that Roy doesn’t agree with Gladstein on bitcoin’s role in Palestine, and that she does agree with Thier, but that is impossible to know based on how Roy’s views are presented. Quoting Thier:
“I spoke to Roy about Gladstein’s article. She strenuously disagreed with the notion that ‘cryptocurrency is somehow impervious to the political reality in which Palestinians and Israelis reside’ or that it could ‘give dispossessed Palestinians parity with empowered Israelis, eliminating the gross asymmetries of power between them and granting Palestinians economic sovereignty.’”
Of course Roy disagreed with these notions. Even the most hardened bitcoin maximalist would. Gladstein did not write these things, has not said them and would not agree with them. The suggestion in Thier’s article is that she presented Gladstein’s argument to Roy, who forcefully objected to it. But the relevant quotation is not attributed to Gladstein for good reason; the thoughts aren’t his. This kind of analysis is either an unfortunate attempt to bolster an argument by misdirecting the reader or a gross misunderstanding of what bitcoin advocates believe the currency’s adoption in Palestine could achieve.
A final critique relates to a big topic, one squeezed into just two sentences in Thier’s analysis. “In a best-case scenario,” she writes, “some individuals from the Palestinian middle class — nearly non-existent in Gaza and struggling in the West Bank — could benefit from receiving international payments or remittances in bitcoin. But given the wild volatility in the value of cryptocurrencies, it will more likely harm those taking on the risk.” One of us has direct experience with remittances in Palestine and knows what it’s like to lose money to middlemen — be they banks, governments, or Western Union. A recent World Bank report shows that last year $3.5 billion dollars’ worth of remittances entered the West Bank and Gaza, accounting for 20% of Palestinian GPD. Unemployment in those territories hovers around 16% and 47%, respectively, and GDP per capita in Palestine overall is around $3,600. In other words, this affects everyone. When $1,000 turns into $920 because of transaction fees, or when $100 turns into $92, families and individuals who may earn the equivalent of only a few dollars per day feel those effects acutely. But only after a substantial delay. Transferring fiat to Gaza can take weeks.
Does bitcoin fix this? Maybe, and in the future it certainly could. If someone wants to send bitcoin to Gaza right now, they can do so with a smartphone. Via the Lightning Network, the transaction fee is essentially free. Almost immediately, that bitcoin will land in someone’s wallet on the ground. It can be transferred to Binance and converted to the stablecoin Tether (USDT) before being cashed out for Israeli Shekels at a currency exchange office. All of this can happen quickly — much faster than any fiat transfer — with minimal risk posed by volatility. In the future, if and when a company like Strike is operating in Palestine, fiat-to-fiat transfers across the bitcoin network could become common and replace the need for alternatives entirely.
Before shifting to our own critique of Gladstein’s argument, we want to acknowledge that Thier makes several points that we agree with. First, bitcoin is not a cure-all for the ills of Palestinians or any other people. Second, “The monetary relationship between Israel and the Palestinians reflects a more fundamental asymmetry of power.” Third, “An independent Palestinian economy will not arise magically out of a sovereign currency, digital or otherwise. It can only come about through the capacity to produce and trade goods and services, which has been systematically undermined through the destruction of physical infrastructure and the elimination of a geographical basis on which Palestinian capital accumulation could effectively take place.” These things are true. The question is whether informed bitcoin adoption has the potential to help Palestinians pursue economic freedom. We believe that it does and would encourage Thier to speak with those who have interacted with bitcoin in Palestine, as Gladstein and we have. Unfortunately, no Palestinians were interviewed for her article.
Getting The Debate Back On Track
This topic matters. Over the past dozen years, bitcoin’s market cap has grown exponentially, and the pace of cryptocurrency adoption — a majority or plurality of which has always been bitcoin — has exploded in developing countries in particular. The United Nations Conference on Trade and Development (UNCTAD), which advocates for increased regulation of cryptocurrency to mitigate investment risks in the sector, notes in a recent report that 15 of the top 20 economies globally, in terms of digital currency ownership as a share of the population, are in emerging market and developing countries. In other words, the current global financial system is not working for many of the world’s poor, who are increasingly looking for alternatives.
Topics that matter generate debate, and Gladstein is to be commended for kicking this one off. He is a thoughtful analyst, his arguments hold up well to the criticism articulated in Their’s critique, and his work has attracted attention for good reason. He has also authored a book that explores the use of bitcoin by people throughout the developing world, among other topics, which we believe is well worth reading.
But we also want to sound a note of caution. Often analysts become advocates and, while that is not a problem per se, advocacy can undermine analysis. We have seen some of that in Gladstein’s work. In his book, for example, Gladstein draws on Greek history to paint bitcoin as a kind of Trojan Horse:
“Bitcoin will continue to gain worldwide adoption because of its effectiveness as digital gold, but hidden within the prized Trojan Horse is a remarkable freedom technology. At this point, the reader may think Bitcoin proponents must be saying, ‘Quiet in the back! Keep the noise down. We just need to last a few more hours until midnight, and then we can pop ourselves out of this horse and let the rest of our army into Troy.’ But it is already too late. There is nothing the Trojans can do.”
The analogy continues:
“Many authoritarians, central bankers, and establishmentarians may already realize what is concealed in Bitcoin’s Trojan Horse. There are plenty of modern Laocoöns and Cassandras saying, ‘We need to stop this thing!’ But, just like in the kingdoms of lore, these words will fall on deaf ears. The prize glitters too bright.”
The suggestion here is that bitcoin is inevitable, that the steady march to global adoption and the implications of that — both for “number go up” and “freedom go up” — are already baked into the cake. The truth is that that future is far from certain. Bitcoin continues to face a variety of risks, from the internal to the external to the local. Will a fee market develop over time to replace the block reward that has so far been essential to bitcoin’s security? What of the policymakers and regulators in the U.S. Congress and beyond, not to mention those in Europe, who seem determined to regulate proof-of-work mining out of existence? And in a place like Palestine, where electricity (and thus access to the internet) can be intermittent, and is mostly controlled by Israel, what would bootstrapping a resistance economy based on bitcoin really look like?
One can believe that bitcoin is freedom technology, that adoption will continue and that Palestine (and other places) will benefit from increased adoption over time. One can also believe that the ability to opt into a free and open, censorship-resistant monetary system offers Palestinians something important and in desperately short supply on the ground: dignity. The autonomy of choice in a context of occupation. And one can believe that Palestinian investments into bitcoin today will reap rewards over the long term. As it happens, we believe these things. But to argue that the game is already won, that widespread adoption of bitcoin in Palestine or elsewhere is inevitable, is to encourage uninformed adoption. People who accept and act on that argument are likely to take risks they don’t fully understand.
To his credit, Gladstein has also used more measured language when talking and writing about bitcoin and Palestine. Indeed, his article is framed as a question — “Can Bitcoin Be Palestine’s Currency of Freedom?” — rather than an answer. We agree with his suggestion that the answer could be yes, and hope to work alongside him and others to create the fair and just reality that Palestinians deserve.
This is a guest post by Seth Cantey and Mohammed Mourtaja. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.
El Salvador’s Minister of the Economy Maria Luisa Hayem Brevé submitted a digital assets issuance bill to the country’s legislative assembly, paving the way for the launch of its bitcoin-backed “volcano” bonds.
First announced one year ago today, the pioneering initiative seeks to attract capital and investors to El Salvador. It was revealed at the time the plans to issue $1 billion in bonds on the Liquid Network, a federated Bitcoin sidechain, with the proceedings of the bonds being split between a $500 million direct allocation to bitcoin and an investment of the same amount in building out energy and bitcoin mining infrastructure in the region.
A sidechain is an independent blockchain that runs parallel to another blockchain, allowing for tokens from that blockchain to be used securely in the sidechain while abiding by a different set of rules, performance requirements, and security mechanisms. Liquid is a sidechain of Bitcoin that allows bitcoin to flow between the Liquid and Bitcoin networks with a two-way peg. A representation of bitcoin used in the Liquid network is referred to as L-BTC. Its verifiably equivalent amount of BTC is managed and secured by the network’s members, called functionaries.
“Digital securities law will enable El Salvador to be the financial center of central and south America,” wrote Paolo Ardoino, CTO of cryptocurrency exchange Bitfinex, on Twitter.
Bitfinex is set to be granted a license in order to be able to process and list the bond issuance in El Salvador.
The bonds will pay a 6.5% yield and enable fast-tracked citizenship for investors. The government will share half the additional gains with investors as a Bitcoin Dividend once the original $500 million has been monetized. These dividends will be dispersed annually using Blockstream’s asset management platform.
The act of submitting the bill, which was hinted at earlier this year, kickstarts the first major milestone before the bonds can see the light of day. The next is getting it approved, which is expected to happen before Christmas, a source close to President Nayib Bukele told Bitcoin Magazine. The bill was submitted on November 17 and presented to the country’s Congress today. It is embedded in full below.
This is an opinion editorial by Joakim Book, a Research Fellow at the American Institute for Economic Research, contributor and copy editor for Bitcoin Magazine and a writer on all things money and financial history.
I don’t.
That’s it. That’s the article.
In all sincerity, that is the full message: Just don’t do it. It’s not worth it.
You’re not an excited teenager anymore, in desperate need of bragging credits or trying out your newfound wisdom. You’re not a preaching priestess with lost souls to save right before some imminent arrival of the day of reckoning. We have time.
Instead: just leave people alone. Seriously. They came to Thanksgiving dinner to relax and rejoice with family, laugh, tell stories and zone out for a day — not to be ambushed with what to them will sound like a deranged rant in some obscure topic they couldn’t care less about. Even if it’s the monetary system, which nobody understands anyway.
Get real.
If you’re not convinced of this Dale Carnegie-esque social approach, and you still naively think that your meager words in between bites can change anybody’s view on anything, here are some more serious reasons for why you don’t talk to friends and family about Bitcoin the protocol — but most certainly not bitcoin, the asset:
- Your family and friends don’t want to hear it. Move on.
- For op-sec reasons, you don’t want to draw unnecessary attention to the fact that you probably have a decent bitcoin stack. Hopefully, family and close friends should be safe enough to confide in, but people talk and that gossip can only hurt you.
- People find bitcoin interesting only when they’re ready to; everyone gets the price they deserve. Like Gigi says in “21 Lessons:”
“Bitcoin will be understood by you as soon as you are ready, and I also believe that the first fractions of a bitcoin will find you as soon as you are ready to receive them. In essence, everyone will get ₿itcoin at exactly the right time.”
It’s highly unlikely that your uncle or mother-in-law just happens to be at that stage, just when you’re about to sit down for dinner.
- Unless you can claim youth, old age or extreme poverty, there are very few people who genuinely haven’t heard of bitcoin. That means your evangelizing wouldn’t be preaching to lost, ignorant souls ready to be saved but the tired, huddled and jaded masses who could care less about the discovery that will change their societies more than the internal combustion engine, internet and Big Government combined. Big deal.
- What is the case, however, is that everyone in your prospective audience has already had a couple of touchpoints and rejected bitcoin for this or that standard FUD. It’s a scam; seems weird; it’s dead; let’s trust the central bankers, who have our best interest at heart.
No amount of FUD busting changes that impression, because nobody holds uninformed and fringe convictions for rational reasons, reasons that can be flipped by your enthusiastic arguments in-between wiping off cranberry sauce and grabbing another turkey slice. - It really is bad form to talk about money — and bitcoin is the best money there is. Be classy.
Now, I’m not saying to never ever talk about Bitcoin. We love to talk Bitcoin — that’s why we go to meetups, join Twitter Spaces, write, code, run nodes, listen to podcasts, attend conferences. People there get something about this monetary rebellion and have opted in to be part of it. Your unsuspecting family members have not; ambushing them with the wonders of multisig, the magically fast Lightning transactions or how they too really need to get on this hype train, like, yesterday, is unlikely to go down well.
However, if in the post-dinner lull on the porch someone comes to you one-on-one, whisky in hand and of an inquisitive mind, that’s a very different story. That’s personal rather than public, and it’s without the time constraints that so usually trouble us. It involves clarifying questions or doubts for somebody who is both expressively curious about the topic and available for the talk. That’s rare — cherish it, and nurture it.
Last year I wrote something about the proper role of political conversations in social settings. Since November was also election month, it’s appropriate to cite here:
“Politics, I’m starting to believe, best belongs in the closet — rebranded and brought out for the specific occasion. Or perhaps the bedroom, with those you most trust, love, and respect. Not in public, not with strangers, not with friends, and most certainly not with other people in your community. Purge it from your being as much as you possibly could, and refuse to let political issues invade the areas of our lives that we cherish; politics and political disagreements don’t belong there, and our lives are too important to let them be ruled by (mostly contrived) political disagreements.”
If anything, those words seem more true today than they even did then. And I posit to you that the same applies for bitcoin.
Everyone has some sort of impression or opinion of bitcoin — and most of them are plain wrong. But there’s nothing people love more than a savior in white armor, riding in to dispel their errors about some thing they are freshly out of fucks for. Just like politics, nobody really cares.
Leave them alone. They will find bitcoin in their own time, just like all of us did.
This is a guest post by Joakim Book. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
This is an opinion editorial by Federico Tenga, a long time contributor to Bitcoin projects with experience as start-up founder, consultant and educator.
The term “smart contracts” predates the invention of the blockchain and Bitcoin itself. Its first mention is in a 1994 article by Nick Szabo, who defined smart contracts as a “computerized transaction protocol that executes the terms of a contract.” While by this definition Bitcoin, thanks to its scripting language, supported smart contracts from the very first block, the term was popularized only later by Ethereum promoters, who twisted the original definition as “code that is redundantly executed by all nodes in a global consensus network”
While delegating code execution to a global consensus network has advantages (e.g. it is easy to deploy unowed contracts, such as the popularly automated market makers), this design has one major flaw: lack of scalability (and privacy). If every node in a network must redundantly run the same code, the amount of code that can actually be executed without excessively increasing the cost of running a node (and thus preserving decentralization) remains scarce, meaning that only a small number of contracts can be executed.
But what if we could design a system where the terms of the contract are executed and validated only by the parties involved, rather than by all members of the network? Let us imagine the example of a company that wants to issue shares. Instead of publishing the issuance contract publicly on a global ledger and using that ledger to track all future transfers of ownership, it could simply issue the shares privately and pass to the buyers the right to further transfer them. Then, the right to transfer ownership can be passed on to each new owner as if it were an amendment to the original issuance contract. In this way, each owner can independently verify that the shares he or she received are genuine by reading the original contract and validating that all the history of amendments that moved the shares conform to the rules set forth in the original contract.
This is actually nothing new, it is indeed the same mechanism that was used to transfer property before public registers became popular. In the U.K., for example, it was not compulsory to register a property when its ownership was transferred until the ‘90s. This means that still today over 15% of land in England and Wales is unregistered. If you are buying an unregistered property, instead of checking on a registry if the seller is the true owner, you would have to verify an unbroken chain of ownership going back at least 15 years (a period considered long enough to assume that the seller has sufficient title to the property). In doing so, you must ensure that any transfer of ownership has been carried out correctly and that any mortgages used for previous transactions have been paid off in full. This model has the advantage of improved privacy over ownership, and you do not have to rely on the maintainer of the public land register. On the other hand, it makes the verification of the seller’s ownership much more complicated for the buyer.
Source: Title deed of unregistered real estate propriety
How can the transfer of unregistered properties be improved? First of all, by making it a digitized process. If there is code that can be run by a computer to verify that all the history of ownership transfers is in compliance with the original contract rules, buying and selling becomes much faster and cheaper.
Secondly, to avoid the risk of the seller double-spending their asset, a system of proof of publication must be implemented. For example, we could implement a rule that every transfer of ownership must be committed on a predefined spot of a well-known newspaper (e.g. put the hash of the transfer of ownership in the upper-right corner of the first page of the New York Times). Since you cannot place the hash of a transfer in the same place twice, this prevents double-spending attempts. However, using a famous newspaper for this purpose has some disadvantages:
- You have to buy a lot of newspapers for the verification process. Not very practical.
- Each contract needs its own space in the newspaper. Not very scalable.
- The newspaper editor can easily censor or, even worse, simulate double-spending by putting a random hash in your slot, making any potential buyer of your asset think it has been sold before, and discouraging them from buying it. Not very trustless.
For these reasons, a better place to post proof of ownership transfers needs to be found. And what better option than the Bitcoin blockchain, an already established trusted public ledger with strong incentives to keep it censorship-resistant and decentralized?
If we use Bitcoin, we should not specify a fixed place in the block where the commitment to transfer ownership must occur (e.g. in the first transaction) because, just like with the editor of the New York Times, the miner could mess with it. A better approach is to place the commitment in a predefined Bitcoin transaction, more specifically in a transaction that originates from an unspent transaction output (UTXO) to which the ownership of the asset to be issued is linked. The link between an asset and a bitcoin UTXO can occur either in the contract that issues the asset or in a subsequent transfer of ownership, each time making the target UTXO the controller of the transferred asset. In this way, we have clearly defined where the obligation to transfer ownership should be (i.e in the Bitcoin transaction originating from a particular UTXO). Anyone running a Bitcoin node can independently verify the commitments and neither the miners nor any other entity are able to censor or interfere with the asset transfer in any way.
Since on the Bitcoin blockchain we only publish a commitment of an ownership transfer, not the content of the transfer itself, the seller needs a dedicated communication channel to provide the buyer with all the proofs that the ownership transfer is valid. This could be done in a number of ways, potentially even by printing out the proofs and shipping them with a carrier pigeon, which, while a bit impractical, would still do the job. But the best option to avoid the censorship and privacy violations is establish a direct peer-to-peer encrypted communication, which compared to the pigeons also has the advantage of being easy to integrate with a software to verify the proofs received from the counterparty.
This model just described for client-side validated contracts and ownership transfers is exactly what has been implemented with the RGB protocol. With RGB, it is possible to create a contract that defines rights, assigns them to one or more existing bitcoin UTXO and specifies how their ownership can be transferred. The contract can be created starting from a template, called a “schema,” in which the creator of the contract only adjusts the parameters and ownership rights, as is done with traditional legal contracts. Currently, there are two types of schemas in RGB: one for issuing fungible tokens (RGB20) and a second for issuing collectibles (RGB21), but in the future, more schemas can be developed by anyone in a permissionless fashion without requiring changes at the protocol level.
To use a more practical example, an issuer of fungible assets (e.g. company shares, stablecoins, etc.) can use the RGB20 schema template and create a contract defining how many tokens it will issue, the name of the asset and some additional metadata associated with it. It can then define which bitcoin UTXO has the right to transfer ownership of the created tokens and assign other rights to other UTXOs, such as the right to make a secondary issuance or to renominate the asset. Each client receiving tokens created by this contract will be able to verify the content of the Genesis contract and validate that any transfer of ownership in the history of the token received has complied with the rules set out therein.
So what can we do with RGB in practice today? First and foremost, it enables the issuance and the transfer of tokenized assets with better scalability and privacy compared to any existing alternative. On the privacy side, RGB benefits from the fact that all transfer-related data is kept client-side, so a blockchain observer cannot extract any information about the user’s financial activities (it is not even possible to distinguish a bitcoin transaction containing an RGB commitment from a regular one), moreover, the receiver shares with the sender only blinded UTXO (i. e. the hash of the concatenation between the UTXO in which she wish to receive the assets and a random number) instead of the UTXO itself, so it is not possible for the payer to monitor future activities of the receiver. To further increase the privacy of users, RGB also adopts the bulletproof cryptographic mechanism to hide the amounts in the history of asset transfers, so that even future owners of assets have an obfuscated view of the financial behavior of previous holders.
In terms of scalability, RGB offers some advantages as well. First of all, most of the data is kept off-chain, as the blockchain is only used as a commitment layer, reducing the fees that need to be paid and meaning that each client only validates the transfers it is interested in instead of all the activity of a global network. Since an RGB transfer still requires a Bitcoin transaction, the fee saving may seem minimal, but when you start introducing transaction batching they can quickly become massive. Indeed, it is possible to transfer all the tokens (or, more generally, “rights”) associated with a UTXO towards an arbitrary amount of recipients with a single commitment in a single bitcoin transaction. Let’s assume you are a service provider making payouts to several users at once. With RGB, you can commit in a single Bitcoin transaction thousands of transfers to thousands of users requesting different types of assets, making the marginal cost of each single payout absolutely negligible.
Another fee-saving mechanism for issuers of low value assets is that in RGB the issuance of an asset does not require paying fees. This happens because the creation of an issuance contract does not need to be committed on the blockchain. A contract simply defines to which already existing UTXO the newly issued assets will be allocated to. So if you are an artist interested in creating collectible tokens, you can issue as many as you want for free and then only pay the bitcoin transaction fee when a buyer shows up and requests the token to be assigned to their UTXO.
Furthermore, because RGB is built on top of bitcoin transactions, it is also compatible with the Lightning Network. While it is not yet implemented at the time of writing, it will be possible to create asset-specific Lightning channels and route payments through them, similar to how it works with normal Lightning transactions.
Conclusion
RGB is a groundbreaking innovation that opens up to new use cases using a completely new paradigm, but which tools are available to use it? If you want to experiment with the core of the technology itself, you should directly try out the RGB node. If you want to build applications on top of RGB without having to deep dive into the complexity of the protocol, you can use the rgb-lib library, which provides a simple interface for developers. If you just want to try to issue and transfer assets, you can play with Iris Wallet for Android, whose code is also open source on GitHub. If you just want to learn more about RGB you can check out this list of resources.
This is a guest post by Federico Tenga. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
