Crypto
Responding To The Discounting Of Bitcoin And Its Benefits
This is an opinion editorial by Maximilian Brichta, a doctoral student at the University of Southern California currently working on his dissertation, “Vernacular Economics: On The Participatory Culture And Politics of Bitcoin”
Speculative Bubbles, Technobabble And The Ignorant “Enthusiast”: Part One
There is a strand of academic literature that treats Bitcoin’s advocates and investors as ignorant enthusiasts, dupes and ideologues. Notably, each of these scholars fails to engage with texts that come directly out of Bitcoin culture. Instead, their analyses are largely based on second-hand accounts, mainstream news articles and investing forums that conflate bitcoin with other cryptocurrencies. The result is a flattened image of Bitcoiners and overly simplified, sometimes misleading characterizations of Bitcoin’s social world. In this three-part series, I’ll focus on three such texts and offer a framework that I believe would help academics bring much needed nuance to critical analyses of Bitcoin and its culture.
In his article “In Digital We Trust: Bitcoin Discourse, Digital Currencies And Decentralized Network Fetishism,” Jon Baldwin argues that Bitcoin is not a trustless system as Satoshi Nakamoto claimed. Instead, the trust shifts from governments and banks to algorithms and the security of encryption software. He views Bitcoin as just another technology with an overblown promise to decentralize the web and subvert traditional hierarchies in business and culture — a dream that he suggests has largely evaporated in the corporate-captured digital economy. In general, he cautions that Bitcoin is first and foremost software. As such, it is susceptible to the same sort of breaches and bugs that threaten any other software.
Baldwin makes some astute claims about Bitcoin that are important to consider when highlighting its social implications and examining discourse around it. For instance, he argues that “Today’s digital monies can be viewed as forms of language — or more specifically, writing or code — in their own right.” Code is already a form of human expression. Furthermore, the platforms utilizing that code make some types of actions and interactions possible while constraining others. In other words, whatever uses are not rendered impossible by the code remain feasible.
Another key observation is that, when it comes to analyzing how Bitcoin becomes trusted as an investment and technology, there is plenty of noise in the form of “hyperbole, half-truth and excitement.” There are also dizzying conflations between “bitcoin as a currency, bitcoin as a technology, bitcoin as the free market realized, bitcoin as a commodity, bitcoin as investment, cryptocurrency as in bitcoin, cryptocurrency in general, the blockchain as in bitcoin or the blockchain as in general.” Despite the claims that bitcoin will evolve into a safe-haven asset like gold and may eventually function as a widely accepted form of money, many continue to treat it as a risk-on asset. As such, there is no shortage of hype, schadenfreude, seemingly untenable price targets and ecstatic behavior that are characteristic of language around eye-popping bull runs. Furthermore, you can almost guarantee that mainstream media and lay commentators will bungle or ignore the complexity of Bitcoin. Indeed, it becomes difficult to understand the asset and the network behind the discourse, how it differs from altcoins, and what broader implications it may have on our social condition. There is, as Baldwin suggests, plenty of techno-utopian discourse, grandiose prophesying and noise around Bitcoin.
Despite these valuable observations Baldwin makes about Bitcoin discourse overall, there are significant gaps and ill-supported claims throughout this essay. The title of the article, “In Digital We Trust,” suggests an exploration of this shifting notion of trust “from trust in banks or states to trust in algorithms and encryption software.” He substantiates this claim by recounting Bitcoin’s emergence at the heels of the 2008 financial crisis and citing Nakamoto’s rationale for a system of e-cash that does not rely on trust in central banks. Beyond this, Baldwin does not make a compelling case for where that trust shifts. His claims remain speculative and only tell part of the story.
Baldwin fails to take seriously the most grounded understanding of trust he references in his essay, specifically in reference to individuals who use the network. To explore how trust in Bitcoin arises is a matter of discovering how a variety of actors who use the network — investors, transactors, miners, developers — have come to trust it. Baldwin considers this possibility in a footnote reference to Bill Maurer, Taylor Nelms and Lana Swartz’s article on the “Practical Materiality Of Bitcoin.” These authors suggest that, “Trust in the code does not erase entirely the community that bestows it.” To this, Baldwin remarks that it’s “debatable” whether that community still exists after bitcoin’s price plunged approximately 80% following its 2017-2018 bull run. It’s a dismissive remark, to be sure. And to dismiss the actual users of bitcoin is to miss an opportunity to tease out this question about how trust in Bitcoin arises, which is a more complex social process than he leads us to believe.
Elsewhere, Baldwin leaves significant holes open in his argument about this notion of shifted trust. Consider this passage in which Baldwin relates trust to value:
“[W]hat backs up the value the bitcoins seemed to have on paper? Essentially a new form of trust: ‘The primary value of the coins was the expectation that they would be worth more in the future, allowing current holders to cash out for more than they paid’ (Popper, 2015, p. 285). Should the trust and willingness of market participants to exchange fiat currency for bitcoin erode and end then this will result in the potential for permanent and total loss of value of bitcoin. In this sense, bitcoin can be argued to resemble a Ponzi scheme.”
First, it is unclear what Baldwin is claiming to be “new” about this form of trust. He seems to be arguing that bitcoin’s value is akin to a collectible that is bare of any non-fungible or useful characteristics. For Baldwin, a bitcoin is “a pure token devoid of any connection to underlying material substance,” a “simulacra without reference to the real.” Devoid of intrinsic value, its price relies on pure speculation within the market. Perhaps this is a new form of trust — market participants must accept that Bitcoin, which at its most basic level is information, is a form of property. How might this affect the nature of trust that participants grant bitcoin? Baldwin does not take his analysis this far. He stops at the unexplored assertion that bitcoin’s value is a mere product of the shared belief that bitcoin will appreciate.
Later in the article, Baldwin considers some of the use cases and disruptive capacities that bitcoin might be able to fulfill but makes it clear that he is not interested in entertaining any of them: “on one hand, there is interesting potential to be explored in Bitcoin and a challenge to established financial power,” and on the other, empty techno-utopian rhetoric and a venture capitalist cash grab. In short: This argument is based on the presupposition that Bitcoin has no value. His tone further suggests that the typical people on the opposing side of this claim are hardly worth taking at their word.
Baldwin’s claim that bitcoin resembles a Ponzi scheme appears to be based on this assumption. Ponzi schemes are a form of investment fraud in which wealth is redistributed from new investors to existing investors. As such, the earnings are illegitimate. The scheme collapses when new investors stop buying in and earlier investors cash out. As with every other time I’ve heard bitcoin called a Ponzi scheme, Baldwin makes no attempt to prove it as such.
When I read commentators calling bitcoin a Ponzi scheme — which usually reads as a cheap skewer rather than a thoughtful critique — I have analytic questions about this comparison: How does bitcoin resemble or differ from a Ponzi scheme? Ponzi schemes are typically organized by a leader. Who fulfills this role? What does that organization look like? Also, Bitcoin is a public ledger with data about every transaction that has taken place on the network. Based on this data, how is wealth distributed? Does it resemble the sort of distributions characteristic of Ponzi schemes? What is the social value of the underlying network regardless of bitcoin’s price? Baldwin asks none of these questions. The reader is asked to take him at his word.
Another term that Baldwin leaves unanalyzed, despite regarding it as a key analytical issue, is this notion of “security.” While the features of the protocol are foundational for making a secure blockchain possible, trust is also distributed to a decentralized crowd of actors. Motivated actors play a tremendous role in the security and viability of Bitcoin as a monetary network. The question Baldwin leaves unconsidered is how the code incentivizes perpetually honest participation in the network and how these economic incentives are at the core of constructing trust. In addition, he notes that folks rely on noisy and turbulent discourse around bitcoin. Ultimately, trust relies on an ongoing narrative process pertaining to the network. For instance, at the time of writing, there was an avid discussion within the Bitcoin community regarding trust around the implementation of a new bitcoin improvement proposal, BIP119.
Here are some key questions underlying this debate: Who is trusted to code Bitcoin upgrades? Who is trusted to authoritatively comment on them within the community? To what level of scrutiny must the community subject proposals to? And can the nodes who validate these upgrades be trusted to understand the change they are making to the protocol? Clearly, the case for shifting trust is far more complicated than Baldwin leads his readers to believe.
The discourse around Bitcoin is featured as a key topic explored in this essay, however Baldwin appears to base these claims off a narrow selection of secondhand sources. In the section titled “Bitcoin Discourse,” the quotes he pulls are mostly hypertext borrowed from David Golumbia’s book “The Politics Of Bitcoin” and Nathanial Popper’s book “Digital Gold.” In fact, the only primary source he cites as Bitcoin discourse is alleged “ideologue” Brian Kelly’s book “The Bitcoin Big Bang.” The rest of the section draws on a selection of cultural and technology critics which he leverages to make claims about this abstracted discourse. While these claims may or may not hold up, the reader is left with a framework for thinking about digital culture and technology in general and not Bitcoin in particular. The lack of attention Baldwin pays to originally-sourced Bitcoin discourse stays apparent throughout the remaining sections.
The section “Bitcoin as right-wing ideology,” begins with the sweeping claim that “Much of the digital economy has right-wing origins, whether these are made explicit or eschewed.” This claim is evinced by a hypertextual reference to Uber’s former CEO Travis Kalanick’s choice of Ayn Rand’s book “The Fountainhead” as the image used for his Twitter avatar. Again, Baldwin fails to back this claim with any direct examples. He then quotes Golumbia’s overstated claim that “Bitcoin and the blockchain technology on which it rests satisfy needs that only make sense in the context of right-wing politics.” It might be fair to say the values afforded by Bitcoin’s underlying technology — anti-censorship, freedom, property rights and unconfiscatability, for example — often make it appealing to right-leaning, libertarian crowds — but there are liberal and even progressive needs that it arguably satisfies. These include access to an alternative monetary system for the financially oppressed, a tool for migrant workers to make low-cost remittances, and a comparative tool for critiquing the “hidden costs” of the U.S. dollar hegemony, as Alex Gladstein demonstrates in his book “Check Your Financial Privilege.” This counterclaim is worth historicizing. The bitcoin narratives of today may differ significantly from those of 2017-2018 when Baldwin was writing this piece. The progressive potential for bitcoin may not have figured prominently in these narratives.
The following two sections “Decentralization And Its Discontents,” and “Network Fetishism,” suffer from the same grounding issues as the section about Bitcoin discourse. This first section is peripherally about Bitcoin and more directly a critique of decentralization and the internet as a system influenced by “a cheap, and therefore weak,” network design. He claims that decentralization is not exactly a solution to the insecurity of a centralized node; “Instead, the threat simply changes locations.” “The threat[s]” in this case are computer viruses that he suggests could potentially disturb any network. Notably, none of this critique is Bitcoin-specific, which brings the reader to an intellectual dead-end of dismissing a whole system without understanding its parts.
Baldwin rounds the section out by recounting a story of a Bitcoin exchange that got hacked, which consequently crashed bitcoin’s price. It is unclear how this is supposed to support his argument. An exchange is a centralized business that is not built on or representative of the Bitcoin network. While there have been no hacks on the bitcoin network itself, there have been several high-profile hacks of exchanges, which have proven to be centralized honeypots for hackers. While Bitcoin has not faced viruses, there have been two bugs — one that was discovered in 2010 and another in 2018. Both made it possible to exploit the protocol and mint new coins in addition to the capped supply. Both were patched without much network disturbance.
In the “Network Fetishism” section, Baldwin casts suspicion on the utopianism around decentralized networks and seeks to highlight their inherent “poverty.” Specifically, he problematizes the new age trend of finding value in immaterial things like software as opposed to things with concrete materiality. Incredulity toward this shift appears to be a core motivation of this article. Once again, Bitcoin only peripherally figures into his argument. The one Bitcoin-specific claim he makes is that the network uses a potentially “unsustainable” amount of power. He nearly copies and pastes Golumbia’s words to make this point:
Golumbia: “The amount of power consumed by blockchain operations is large enough that it has suggested to some that Bitcoin itself is “unsustainable” (Malmo 2015).”
Baldwin: “It is the case that the amount of power consumed by blockchain operations is so large that it has been suggested that bitcoin itself is “unsustainable” (Malmo in Golumbia, 2016).”
He goes on to suggest, “The materiality of the network, and the exploitative relations inherent in such materiality, are a blind spot in network fetishism.” It is unclear in both Golumbia and Baldwin’s texts exactly what is meant by this. A fair reading would be that they are referring to the environmental impact of Bitcoin mining. They suggest the idealized benefits of the network blind its proponents to its real negative impact. In essence, this argument is similar to his suggestion that the “cyberpunks and crypto-anarchists” who influenced the development of Bitcoin “seem to accept, often without even appearing to realize it, the far-right, libertarian/anarcho-capitalist definition of government.” In both cases, proponents of networks are apparently unable to see the drawback of their utopian beliefs. Drawbacks are rhetorically deflected or left under-considered.
Baldwin suggests that “network fetishism” is blind to the power of influential nodes to control the network. He backs up this claim with another sentence from Golumbia that relies heavily on the original language and does not clearly attribute the hypertext:
Golumbia: “…in part because the system is exposed to the ‘51 percent problem’: if one entity controls more than 51 percent of the mining operations at any one time (something which was at one point unthinkable, but which now has happened at least once), it could, at least theoretically, “change the rules of Bitcoin at any time. (Felten 2014; also see Otar 2015)”
Baldwin: “This also makes the bitcoin system exposed to the ’51 percent problem’: if one node or cluster of nodes owns more than 51 percent of the mining operations it could, at least theoretically, “change the rules of Bitcoin at any time. (Golumbia, 2016, p.43)”
Furthermore, he argues that “The promise of decentralization has not been kept and network fetishism has concealed the fact that certain nodes function as centralized power bases.” He infers this argument based on a claim by Golumbia that Bitcoin development was highly contentious within the community and it was heavily influenced by “the two individuals with full access to the Bitcoin code,” (Golumbia 85). For one, the story he is referring to was over a dispute between one camp of Bitcoiners wanting to change Bitcoin’s underlying protocol and another wanting to keep it the same. Each side had a figurehead. But mind you, Bitcoin is open-source code. The repositories of improvement proposals are hosted on the web for anyone to access. He correctly highlights that there are still competing motivations within the Bitcoin community that represent pockets of greater influence. Jonathan Bier chronicles this dispute in his book “The Blocksize War,” in which he demonstrates how Bitcoin resisted a significant protocol change despite influential figures in the community ardently pushing for it.
Overall, Baldwin poses some key questions about the nature of trust among a range of Bitcoin participants and how hyperbolic discourse around bitcoin may function. His outlook on Bitcoin is clearly pessimistic and he suggests its best days were likely behind it. Clearly, he leaves many gaps to be explored and propositions to be reconsidered. At best, Baldwin offers a framework to test out on concrete examples of Bitcoin discourse. Furthermore, several of his key claims were based on critical arguments about the internet and digital culture more broadly without clearly demonstrating how they apply to Bitcoin specifically.
This is a guest post by Maximilian Brichta. 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.
