Crypto
Bitcoin Aligns Incentives In The Perfect Way
This is an opinion editorial by Conor Chepenik, a bitcoin pleb.
When a nocoiner asks me about Bitcoin, it’s hard not to take a “Michael Saylor breath” and embark on a four-hour conversation about how there is no second best.
My Bitcoin elevator pitch has become better over time, but it’s hard explaining why the world so desperately needs an honest monetary ledger in 30 seconds. Proof-of-work is required to have the glorious experience of going down the Bitcoin rabbit hole. In this piece I attempt to lay out why the incentives of the network are so well thought out at every level.
Humanity has never before had such a fair game. A truly free market ledger that anyone can access, verify and update if they play by the rules. From individuals to small businesses, followed by grid operators and energy companies, and finally nation-states, everyone benefits in the long run by playing fairly with electricity rather than through coercion and violence. While I’m most hopeful that Bitcoin can help empower sovereign individuals, it appears we are entering the point where institutions start stacking sats.
As the network continues to grow in size, Bitcoin will reach a point where every company and nation-state will adopt the technology in some form or fashion, just like they have with TCP/IP. The Bitcoin rabbit hole makes learning fun and teaches people about energy, finance, philosophy, physics, history, game theory, economics, computer science and a bunch of other subjects. At my local Bitcoin meetups in Massachusetts, I’ve heard many similar stories of people starting to study and learn about subjects they otherwise would never have bothered to study. In order to have a good understanding of Bitcoin you must commit hundreds, if not thousands of hours. At which point you are just getting started because “no one has found the bottom of the Bitcoin rabbit hole.” Once you start to grasp what Bitcoin means for humanity, it almost feels like a cheat code for life. An apolitical, censorship-resistant, truly scarce, decentralized ledger that is being adopted by the masses from the ground up. It’s a blessing that the anonymous person or group named Satoshi Nakamoto solved the Byzantine generals problem.
Individuals
Socialism doesn’t work because people are self-interested. I’d love to live in a utopia where everyone cooperates and helps their neighbor. I firmly believe that when you give via your own free will, it is one of the best feelings in the world. However, it does not feel very good to give when you are forced to do so in order to avoid violence. Throughout history, taking away the ability for people to keep the fruits of their labor has always ended poorly. Telling people they must produce for “the greater good” is a recipe for disaster. One example of this is what happened in China between 1959-1961. The country experienced what is now referred to as the Great Famine under Mao Zedong.
“Taking away all means of private food production (in some places even cooking utensils), forcing peasants into mismanaged communes, and continuing food exports were the worst acts of commission. Preferential supply of food to cities and to the ruling elite was the deliberate act of selective provision.” — Vaclav Smil
This is just one example of what happens when the government takes away the ability for its citizens to work on what they themselves deem worthy. It ruins the incentive structure for productive people to work on meaningful tasks. The world is not a utopia no matter how badly socialists want it to be. It is one thing to demonize monopolistic practices because they hinder the free market from operating properly. It is a completely different thing to demonize profit. If people can’t make a profit they won’t spend their time and resources making something of value. That is unless they are forced to do so by the threat of violence. The more coercion is applied, the less value is created because someone working for profit is a lot more motivated than someone working because they are being forced to do so.
One monopolistic practice hindering our modern world today is the monopoly central banks have on fiat currency. By centrally planning interest rates and having the ability to create fiat money without facing an opportunity cost for doing so, the free market becomes corrupted. This leads to distorted price signals and individuals being pushed out on the risk curve.
“Every day that goes by and Bitcoin hasn’t collapsed due to legal or technical problems, that brings new information to the market. It increases the chance of Bitcoin’s eventual success and justifies a higher price.” — Hal Finney
While bitcoin becomes less risky every day it exists, I tip my hat to the individuals who understood its importance before buying bitcoin was a mainstream thing. Before exchanges like Mt. Gox, people were not using fiat currency to buy bitcoin. They were using electricity and computers to mine it, which is what made Bitcoin so special. A new system that is completely outside the traditional one of relying on credit and growth. Many projects that came before Bitcoin failed in the long run, but various ideas from these projects were referenced in Nakamoto’s white paper. Logically, over time, more people will come to the Bitcoin network to protect their purchasing power as long as the network keeps adding blocks of transactions approximately every 10 minutes.
The more people who see the impact that fiat currency debasement has on their purchasing power, the more likely they are to look for alternatives to protect said purchasing power. This is what initially attracted me to buy some bitcoin in early 2017. My friend told me about this new form of currency that had appreciated greatly since its inception. I watched the documentary “Banking On Bitcoin,” which I still highly recommend because it helped open my eyes to the fact that money is just a ledger. Unfortunately, I didn’t fully go down the rabbit hole at that time. I spent the first couple of years of my journey looking at my exchange balances as my bitcoin and altcoins multiplied 10 times, only to be depressed when my gains came crashing down after the bull market ended. Like most who are initially attracted to cryptocurrency for the speculation, I obsessed over the fiat price. Doing so caused me to miss the whole point of not having to rely on any counterparties to verify and hold bitcoin. While it sucked losing all the fiat gains I had made, it taught me some very valuable lessons.
“The danger is if people are buying bitcoins in the expectation that the price will go up, and the resulting increased demand is what is driving the price up. That is the definition of a BUBBLE, and as we all know, bubbles burst.” — Hal Finney
As Finney so eloquently pointed out in those early days, when something goes parabolic superfast it will likely crash just as fast. Pain is the best teacher and this was my first hint at why having a low time-preference is so important. It also served as a lesson for myself to focus on Bitcoin, not crypto. I kept an interest in Bitcoin, but it wasn’t until 2020 that I really started digging into the rabbit hole. When I got a stimulus check in the mail for doing nothing, that set off an alarm inside my mind. While free money is always nice, it was obvious that there would be consequences to the United States government handing out cash to its citizens. I didn’t fully understand why at the time. It was annoying me that I couldn’t put my finger on what was wrong so I started down the Bitcoin rabbit hole which led me to Austrian economics and how money actually works. It was both frustrating and enlightening to learn about Bretton Woods, 1971 and why central banks are in a race to debase their currency.
When I learned that most U.S. dollars are held on a server (in an SQL database) at the Federal Reserve, I was shocked. These people can press buttons on a keyboard and print trillions. By granting 12 unelected officials the privilege to centrally plan the cost of borrowing money we have hindered the free market’s ability to effectively tell market participants what the cost of capital is. Fiat is latin for “by decree”; thus, it makes a lot of sense why central bankers will fight tooth and nail to keep the ability to control money. The Fed claims to be an apolitical organization, but as debt levels increase to numbers typically seen during times of war, central bankers are pressured politically to debase their currency. The other option is to default on the debt and that is never politically viable. The silver lining is that more people are waking up because they get frustrated watching their purchasing power decline rapidly in inflationary environments. Being self-interested is not a bad thing. It is what motivates individuals to work hard so they can enjoy the fruits of their labor. Bitcoin optimizes for this, while the Keynesian economic models of ever-expanding credit steal the fruits of people’s labor. No one knows how it ends but over time it makes sense more people would end up saving their “fruits” in the harder money.
Small Businesses
Visa and Mastercard have a combined market capitalization of about $775 billion dollars at the time of this writing. They charge around 3% of retailers’ revenue for their services which eats into the profits or get passed onto consumers of the companies accepting debit and credit cards. While cards make it much easier to transact, many businesses and consumers would be happy to avoid these fees if possible. There is an option of going cash-only for final settlement, but that means missing out on business from younger generations who don’t carry cash. By accepting bitcoin, these companies not only avoid the fees, but they also receive final settlement transactions just like cash. No more waiting 90 days to make sure a credit card doesn’t get charged back. Bitcoin will massively disrupt many financial rails we have today. Many in the Western world might not appreciate what a big deal this is because our financial rails are pretty well established. However, those in less developed countries know perfectly well what a pain it is to have hucksters butting in to take a cut. It won’t be instant, but bitcoin can help wean small businesses off middlemen who are no longer necessary. Bitcoin can also serve as an incredible marketing tool. I’d gladly spend some satoshis at any local small businesses that took bitcoin. Tahinis is a great example of a small business who leveraged bitcoin to get some brand awareness. I’ve never been to Canada, but if I ever go, I’d like to eat at Tahinis so I can use bitcoin to buy shawarma. Bitcoin forms a special bond between people to the point where you literally want to support their business because you know they have taken the orange pill.
Energy Companies And Grid Operators
Energy companies and grid operators also have a massive incentive to adopt a bitcoin strategy. Rather than just having one buyer on the grid that demands more energy during the day than at night, the grid could have a second buyer who is willing to consume energy 24/7, 365 days/year. Bitcoin miners can monetize energy that would otherwise go to waste. There is the up-front cost of buying an ASIC and having the technical whereabouts to maintain and run said ASIC. This means more jobs for the talented individuals who understand how to do so. More talented workers creating value means more energy efficient grids. It amazes me how much fear, uncertainty and doubt gets spread about Bitcoin’s energy usage, when the reality is Bitcoin can stabilize grids and make the capital put up to build green energy infrastructure much less risky.
If you wanted to build a massive hydro plant in a rural area before there was Bitcoin, it would be very hard to raise the capital. Investors would not want to put up their money for a power plant that did not have buyers for the power being generated. With Bitcoin, the investors can rest assured there is always a buyer for that power. While I think there will be a point when miners just keep the bitcoin, they can also sell them for fiat at any point in time. Unlike traditional markets, bitcoin never stops trading. Since fiat depreciates over time, the most efficient miners will be able to hold and accumulate their bitcoin, while the less efficient miners will have to sell for money that is constantly being debased by the money printer. The best companies will thrive over the long run, while the inefficient operators will have to adapt or die. It is the free market doing its job.
The more I learn about how grids operate, the more apparent it becomes that bitcoin can help usher in an abundant energy future where energy prices aren’t going parabolic because of poor decisions made by central planners who are printing money at unheard-of rates. The whole green energy and environmental, social and governance (ESG) narrative is an antihuman farce meant to hide the disaster that the central banks have created. These greeniacs claim that CO2 is going to suffocate the world, but this chart in Alex Epstein’s “Fossil Future” shows why more fossil fuel use is needed.
Energy is the base layer of society. Without reliable and reasonably priced energy, things will get ugly fast. Just look at what happened to Sri Lanka who had one of the highest ESG ratings in the world before their economy collapsed. Every example of hyperinflation stems from irresponsible monetary policy. Calling currency debasement “quantitative easing” doesn’t change the fact that it results in more money chasing the same number of goods. People joke that Bitcoiners are psychopaths who can’t stop talking about magic internet money, but the truth is we just want others to take the orange pill so we can stop suffering from the central planners. Bitcoin Maximalists have a reputation of being mean online for calling out bad actors, but almost every Bitcoiner I’ve met in person turns out to be one of the most genuine, kind and intelligent people I meet. In person, I’ve seen that Bitcoiners are willing to help onboard as many people as they can because we all strongly believe Bitcoin is the best way to achieve a pro-human future where we have an abundance of food, energy and choice.
In my opinion, helping people understand that bitcoin is the life raft is one of the most noble things a person can do. History has shown that the free market will ultimately end up with one form of money winning out. Before bitcoin that was gold and then we ended up with fiat to keep up with the speed of commerce. Now that we have bitcoin, I believe fiat will continue to rapidly lose its purchasing power as more people and businesses realize that bitcoin can’t be debased by a single entity.
Nation-States
This one is a double-edged sword. I want as many individual people to adopt bitcoin before the nation-states start accumulating. I’m hopeful that the nation-states who do end up adopting bitcoin will be able to utilize its fiat price appreciation to create a more abundant society for the individuals that live there. At the time of writing, two countries have adopted bitcoin as legal tender. According to the World Population Review’s prosperity index, El Salvador ranks 98 and the Central African Republic ranks 165 out of 167 countries. Neither of these countries is in the top 50% of prosperous nation-states and they were the first to adopt bitcoin. I believe this trend will continue since the most prosperous countries have much more to lose by not being able to “decree” what happens with their country’s money. Before bitcoin, El Salvador was a dollarized economy. Now they allow both USD and BTC to operate as legal tender. The Central African Republic had the CFA franc as its currency. According to Wikipedia:
“Critics point out that the currency is controlled by the French treasury, and in turn African countries channel more money to France than they receive in aid and have no sovereignty over their monetary policies.”
It is encouraging to see nation-states that are at the mercy of foreign central banks adopt bitcoin to get around these monopolies. I imagine at some point the richest nation-states will be forced to adopt bitcoin if their currency is hyperinflated because it will be the only viable way to trade with other countries. These wealthy nations will fight for as long as they can to keep control of their monopoly on fiat currency. It is the poorer nations who don’t have complete sovereignty over their money that will look to bitcoin to protect their purchasing power because they have the least to lose.
If you are a nation-state and you can’t create your own money to fund government spending, you are much more likely to invest in a truly scarce currency than another nation-state that can create more of its own currency out of thin air. While El Salvador might not be in the green in terms of where they bought bitcoin on the spot market, they have made up for it with the massive boost in tourism and interest in their country. Personally, I would love the opportunity to visit El Salvador and use bitcoin to buy stuff. El Salvador will likely continue to experience a massive influx of tourism as more Bitcoiners, like myself, start to plan trips there so they can use this new form of money. The cyber hornets don’t mess around and as more countries notice the impact bitcoin can have on their local economies, the logical conclusion is to adopt it as legal tender and attract tourists to bolster their economy.
Conclusion
It might get messy. Rich nations, the World Bank and The International Monetary Fund aren’t just going to toss up their hands and go, “Well, it was fun controlling fiat while it lasted.” Just look at the U.S. who passed the Inflation Reduction Act, which includes hiring and arming an additional 87,000 IRS agents. The United States is planning on printing money out of thin air so they can pay citizens to do this.
It is quite ironic that the nation which was created because we demanded no taxation without representation is doubling down on its tax force.
The people in power will fight tooth and nail to protect their interests and hinder bitcoin’s adoption. Top-down controls can only go so far. Individuals, companies and nation-states are all self-interested. No one likes a parasite when they are the one dealing with the consequences that are draining their resources, time and value. Over a long enough time horizon, it seems bitcoin will bleed these parasites dry as they lash out and try to impose top-down controls across the world. The truth can only be hidden so long; it always comes out in the end. Bitcoin can fix energy, monopolistic central banks, credit-based systems and massive surveillance states. It can help disincentivize violence because if someone stores their private keys in their head, no one can steal that bitcoin. They can kill the person who holds the keys, but if they were not able to torture those private keys out of the victim’s head, that just results in a donation to the rest of the network since that person’s bitcoin will never be moved.
If enough people adopt bitcoin and use solid safety practices, powerful entities stand to gain more by cooperating with these sovereign individuals rather than killing them. I don’t want it to get messy and I truly believe the best way to avoid conflict is by getting more people to take the orange pill and showing them how to run a node. Individuals, companies and nation-states theoretically no longer need banks to transact.
As a U.S citizen, I hate to see America in disarray. Ray Dalio makes some excellent and terrifying points about the state of our republic in his book “The Changing World Order.” The U.S is a declining empire at this point and China is on the rise. This chart from Dalio really helped me understand what it means to have world reserve currency status.
The Netherlands had reserve currency status and lost it to the British, who lost it to the United States. Now it looks like China is getting ready to gain world reserve currency status over the U.S. There is little hope of reversing the trend of USD no longer being a global reserve currency. While losing reserve status is never a fun experience, the U.S could benefit greatly from having bitcoin as a neutral world reserve currency rather than the Chinese yuan. Having a central bank digital currency (CBDC) as the reserve currency would serve as the ultimate tool for central planners to corrupt the free market and wreak havoc on value creation. As a country, China has a deep, rich history and a nation full of hardworking people. However, their massive surveillance state and CBDCs are not something that will ever fly in a free country. It is up to the masses to say “enough!” and opt out.
Future generations deserve a better world than one where the government can turn off access to its citizens’ money with the flick of a switch. These past two years have been absolutely insane. We are seeing people get their bank accounts frozen because they donated to a peaceful protest put on by truckers in Canada. We are seeing an attack on farmers across the globe to meet antihuman ESG agendas that will destroy countries in the same way it did Sri Lanka. We are even seeing the greatest nation on the planet come after its own citizens by devaluing their currency at unprecedented levels, hiring more IRS agents and raising taxes during a recession. All of this is what is at stake if the masses don’t wake up and peacefully opt out from these corrupt regimes with bitcoin.
All we have to do is use an old computer or a Raspberry Pi and run Bitcoin Core. Now, it is that easy to transact with anyone in a peer-to-peer manner and verify that only 21 million bitcoin will ever be created. It brings a warm, tingly feeling to my heart thinking about the freedom, prosperity and abundance bitcoin can bring to the world.
“Abundance in money creates scarcity everywhere else, and scarcity in money creates abundance.” — Jeff Booth
Once the masses understand this, they will understand why the phrase “Fix the money; Fix the world,” is the embodiment of the Bitcoin ethos.
This is a guest post by Conor Chepenik. 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.
