Crypto
Next Step To Widespread Bitcoin Adoption: Community Banks
Published
2 years agoon
This is an opinion editorial by Leo Weese, co-founder of the Bitcoin Association of Hong Kong, where he has organized Bitcoin meetups since 2012. Since March 2021 Weese has been technical content lead at Lightning Labs.
Over the years, Bitcoin has continually proven itself as a robust asset with a predictable supply that can be swiftly transferred instantly for a low fee over the Lightning Network.
Despite its inflationary shortcomings, the U.S. dollar remains in strong demand. Having lost 90% of its purchasing power since the 1950s, it remains an attractive store of value and unit of account. In times of small profit margins, living paycheck-to-paycheck in a world where goods, rent and wages are priced in dollars, going 100% into bitcoin is risky.
The world has currently chosen the dollar as the global reserve currency. As long as bitcoin remains highly volatile, it is less attractive than the dollar for businesses and individuals in many circumstances, especially in places where instant conversion is cumbersome and expensive.
Despite its attraction, the U.S. dollar has noticeable downsides in practice. In El Salvador, where only one-third of the population has access to bank accounts, it can be difficult to receive, store, and transact with digital U.S. dollars. In Nigeria or Argentina, official exchange rates are unfavorably set, pushing savers into gray markets. Conflict areas like Ukraine are partially cut off from international settlement systems. Thankfully, Bitcoinizing the dollar with Taro provides an alternative.
Bitcoin Dollars On Taro
Taro is a new protocol for assets on Bitcoin and Lightning proposed in April 2022 by Olaoluwa Osuntokun, CTO of Lightning Labs. The company explained a mechanism through which anybody can mint arbitrary assets on the Bitcoin blockchain and shared their vision for a stablecoin use-case that can be instantly transacted over the Lightning Network and held non-custodially in Lightning nodes and wallets.
Analogous to eurodollars or offshore dollars, we may refer to dollars held on the Bitcoin blockchain as bitcoindollars.
Such bitcoindollars are currently issued by large, often opaque institutions, some of them associated with cryptocurrency exchanges. While the first widely used stablecoin was anchored to the Bitcoin blockchain, stablecoins today often reside on alternative blockchains and are used to enter and exit trading positions in bitcoin or cryptocurrencies, or for settlement in arbitrage trades. In some contexts, they act as savings and payments vehicles.
With the Taro protocol, so-called bitcoindollars can be introduced into a Lightning Network payment channel without additional blockchain footprint. This results in two or more parallel channels, one with BTC and the others with Taro assets, anchored in the same UTXO.
Alongside bitcoindollars in the form of bank deposits or stablecoins, we may also see other types of assets issued on Taro, local fiat currencies foremost. It may appear attractive to issue bonds, vouchers, debt instruments or claims to commodities like oil and gold.
This allows the owner of a Lightning wallet to choose whether to receive payments in BTC or a Taro asset, while issuing a regular Lightning invoice. The payer is not required to hold the same Taro asset, or any Taro asset at all. The payer also at no point knows what asset the payee ultimately opts to hold in their wallet.
This works through edge nodes which “swap” an incoming Bitcoin HTLC (hash time-lock contract) for an outgoing Taro HTLC, or the other way around. These edge notes, like any other routing node in the Lightning Network, charge a routing fee covering capital costs, routing costs and expected volatility. They will agree on their reference rates for such swaps with their peers and might be willing to lock in rates for short invoice expiration windows. This happens instantly and without anyone taking on counterparty risk or custody at any point.
Strengthening Network Effects
Today, we observe strong network effects in payment and settlement systems. We are only willing to accept something as payment that we can easily spend, and so it is no surprise that cryptocurrency exchanges primarily offer only two stablecoins: tether and USDC.
By swapping assets to bitcoin via HTLCs, Taro removes friction and counterparty risk while retaining access to the overall Lightning Network, making it feasible for smaller stablecoins to be used for savings and payments. Concurrently, Taro strengthens the network effects of the Lightning Network by increasing routing activity, creating demand for routing nodes and capital, while bootstrapping the existing liquidity on the network to enable users to not only pay with any asset, but also have the payment routed through Bitcoin.
The Rise Of Community Banks
Inspired by the success of Bitcoin Beach in El Salvador, community banks are beginning to spring up around the world in an attempt to connect remote and underbanked communities to the world of digital finance via the Lightning Network. In some cases, these community banks are attractive because they give access to dollars, while in others they allow people to transact online without friction.
Taro has the potential to significantly reduce the technological and logistical barrier for such community banks to operate, while enabling their community to instantly connect with suppliers, clients and financial services from all over the world.
Step One: Transparent Bank Deposits As Taro Assets
Instead of using internal ledgers to keep track of clients’ deposits and withdrawals, a community bank may opt to issue their own stablecoin for each deposit and destroy it upon redemption for cash or bitcoin. By building the core of their banking infrastructure on open-source and battle-tested software, deposits remain more easily auditable and are difficult to tamper with.
Step Two: Commit Community Bank Deposits Into Lightning Network Channels
By opting for an open protocol, community banks are able to piggyback on existing software infrastructure, such as nodes, wallets, payment processors or liquidity markets. A community bank does not need to develop its own wallet, it can simply open channels with Taro-enabled wallets readily found in the Google and Apple app stores. It does not need to provide merchants with custom-built tools, as long as self-hosted payment processors like BTCPay Server or LNBits are configured to handle Taro assets.
Some community banks may not even open such channels to their customers themselves, or instead rely on non-custodial liquidity markets or Lightning Service Providers to do so.
Step Three: Connect Your Community To The World
Once an individual or business has a channel open to their wallet or node with enough incoming capacity in the Taro asset of their choice, they can invoice others for their work, services or goods. Anybody around the world is able to instantly pay this invoice from their own wallet, have it routed through Bitcoin to the edge node, which swaps the payment amount to the desired destination asset. All of this occurs instantly and without anybody taking custody over the funds.
On the contrary, community bank clients are able to pay any Lightning invoice directly from the dollar balance of their mobile wallet. They don’t need to take on volatility risk or rely on a custodial counterparty beyond the stablecoin issuer: their community bank.
Such a community bank does not need to maintain Lightning nodes themselves. Anybody can act as an edge node to their local or remote community and compete over customers and transaction volume in the same way they might run a Lightning Network routing node today.
Bitcoinization Of The Dollar
The vision of being able to receive any currency or asset, while transacting using the global, open-source and permissionless Bitcoin network is appealing. It will make it easy to digitize, or bitcoinize local dollar reserves, enabling billions to hold the asset of their choice while transacting with it digitally and cheaply. As Taro routes transactions through Bitcoin, it allows for small players in the stablecoin market to benefit from and strengthen the network effects of the Lightning Network.
This provides people access to Bitcoin as a payment network and long-term savings tool without the risk of exposing users to short-term volatility. It greatly increases the number of potential merchants and users on the Lightning Network and establishes bitcoin as the backbone and medium of exchange of a truly global and accessible reserve currency.
This is a guest post by Leo Weese. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.
Crypto
El Salvador Takes First Step To Issue Bitcoin Volcano Bonds
Published
2 years agoon
November 22, 2022
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.
Crypto
How I’ll Talk To Family Members About Bitcoin This Thanksgiving
Published
2 years agoon
November 22, 2022
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.
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.