This post is the anniversary of the Segwit Activation post I published in August 2017 and will provide a recap of the events leading up to SegWit before discussing the year since and the developments we are starting to see as adoption creeps above 50%, including the highly anticipated Lightning Network for transactions and micro-payments… As I have yet to write anything of much note on Litecoin on my blog I will also dedicate this post to Litecoin and its Segwit and Lightning Network potential which spawns the Cross Atomic Swaps that can be constructed on top of both blockchains and currencies, and how this could lead to a melding or symbiosis between both…

Bitcoin Scaling Debate – 2017 In Review

2017 was a watershed year for Bitcoin and brought to a permanent end many tensions and disagreements that had been bubbling and festering under the surface for a few years within the developer, miner, corporate and user communities and to which I dedicated virtually the whole of my writing in the year of 2017 to the Bitcoin Scaling Debate, Segwit Activation Game Theory, and finally confirmation of SegWit thanks to the UASF Libertarians…

As implied in the meaning of the term Scaling Debate, the debate was about how best to scale Bitcoin and its intrinsically and inherently limited and scarce block size and underlying transaction capacity, and as I discussed in my posts the only thing that all Bitcoiners could agree upon was the need to scale Bitcoin and its blockchain for the future… There is no debate to be had about this… The debate is therefore only about the preferred method of scaling and there are only two ways to scale, you can either scale on chain by increasing the block size (the blocks holding the transaction and forming the chain) or you can scale off chain layers immutably tied to the underlying blockchain, and this question of scaling has been with Bitcoin since the beginning… The next question is what are the relative advantages and disadvantages or pros and cons of on chain scaling and off chain scaling, and how does this effect upon Bitcoin and its blockchain? A very important question to ask…

On Chain Scaling – Centralization Of Bitcoin

On chain scaling inherently means increasing the block size which has a knock on effect on the rest of the ecosystem… While increasing the block size increases transaction capacity linearly the trade off is hurting the average user and miner by increasing the costs of running nodes (and validating transactions) and mining, and would lead to a centralization of the means of production for operating Bitcoin, less small users and miners thus subsidizing larger users and miners… Indeed the on chain scaling method with every block increase would mean lesser amount of independent user and miner verification and increasing dependence upon large node operators and miners to validate Bitcoin for them… The end game of a few block increases would be the vast majority of Bitcoin users would be held hostage by a fractional minority of large scale miners and big business node operators, and Bitcoin would be effectively another centralized and top down blockchain and shitcoin, utterly dependent and open to exploitation by a small cartel of miners and service providers who would also be themselves dependent upon bankers and governments and inherently fragile under censorship, arrests, shutdowns or incarceration… On chain scaling is an inherently fragile scaling method and ultimately futile in linearly attempting to keep up with user adoption that would destroy its decentralization and its future… It is because of this obvious and ultimately fatalistic destiny that the more intelligent, libertarian and anti-authoritarian users and developers favoured another scaling method…

Off Chain Scaling – Maintaining Decentralization

Off chain transactions or swaps discussed by Hal Finney in the early years

The only way to maintain the underlying decentralization of both node ownership and mining power is by keeping Bitcoin’s block size as small as possible which allows the maximum amount of users and miners to utilize Bitcoin at the lowest possible hardware and software operating costs… The only method of maintaining decentralization and therefore the future of Bitcoin as an un-censorable and anti-fragile ledger and currency is by keeping the block size as small as possible and using it as the settlement layer and leveraging and constructing off chain scaling layers for payment processing or smart contracts, for the mass adoption of Bitcoin as medium of exchange and unit of account on top of its primary function as store of value, which is another microcosm of the scaling debate between those who value Bitcoin as a store of value and what could be described as an Austrian economic outlook as compared to those who envision Bitcoin as primarily a medium of exchange and/or payment system or what could be described as a Keynesian economic outlook, and which I will discuss in far more detail later…

SegWit Activation – Chronology Of Events

I have already chronicled the events leading up to SegWit in a previous post, so I will repeat it here while starting to bring Litecoin into the discussion as like it or not (for salty anti-Litecoin Bitcoiners) SegWit on Litecoin paved the way for SegWit on Bitcoin and this brave new post SegWit world we are entering…

Recap Of The Last Six Months

In the constant emotion, insanity and general noise in the Bitcoin community everyone could be forgiven for getting sucked in to day to day events while losing the longer term meanings and lessons of the last six months, of which there are quite a few… I will begin with my Bitcoin Scaling Debate post published on April 9th that has predicted many but far from all of what has happened since, however I did predict the game theoretical end point of an User Activated Soft Fork that would force the miners to activate Segwit by Miner Activated Soft Fork, which is exactly what has happened in the last six months… For a brief chronology and timeline of events we start not with Bitcoin but with younger brother Litecoin, and Charlie Lee’s ploy to accelerate Bitcoin scaling by using Litecoin as a template by instigating talk of an User Activated Soft Fork (April 10th) in Litecoin to activate Segregated Witness… As crypto brothers Bitcoin and Litecoin to some extent also share and have connections within mining communities and pools, in my opinion Charlie to his credit brought UASF into public discourse, and lo and behold somewhere out of nowhere was hastily convened a Litecoin roundtable (April 21st) at which it was agreed that SegWit would be activated by Miner Activated Soft Fork by all parties in agreement, which I found quite curious at the time…

As soon as SegWit was activated pretty much without a hitch on Litecoin this lead to a growing movement for the same on the Bitcoin network… One of the biggest advocates and early pioneer within Bitcoin for an UASF was pseudonymous Bitcoin developer shaolinfry (co-author of BIP148 created March 12th) and his reflections of the Litecoin roundtable (April 26th) and the movement grew from there with Luke Dash Jr (another Bitcoin core dev) leading the charge but also many others too numerous to name in bringing the UASF concept to the wider Bitcoin user community over the following months…

In my Bitcoin Kills Banking post and stand alone BIP 148 UASF Game Theorypost (both published June 11th) I predicted that SegWit would activate before August 1st by Miner Activated Soft Fork at a time when things were maybe looking in doubt, with a rising minority of users going UASF full retard but also the mining community maintaining the poker face with threats of all sorts regarding the stalling in activating Segwit, however it has turned out in posterity to be the miners that were really bluffing and exactly as I predicted using simple logical deduction… The only thing I couldn’t foresee at that time was how the mining community would attempt to save face and not make it so blatant who had really capitulated in the Mexican Standoff or how fast they would capitulate, but on June 20th we got both answers when miners agreed overwhelmingly to support the Bitcoin Roundtable or the so-called New York Agreement (May 24th) as a way for miners to signal for a SegWit soft fork, contingent on the further doubling of the blocksize in time to 2 mega bytes, or in short SegWit2x… By a roundabout and convoluted way the miners first signalled for BIP 91 for SegWit on 17th July and by the following week (24th July) we had 100% consensus for the activation of SegWit by BIP141 and thus critically importantly cancelling the BIP 148 UASF being enforced by user nodes… SegWit locked in activation on the 8th August, and we are currently in the two week “grace period” and SegWit should finally be enshrined around August 22nd 2017…

Post SegWit Brave New World

This scaling debate that raged throughout 2017 propagandized and weaponized by both sides eventually culminated with SegWit activation and its many consequences and fallouts which I’ll now discuss individually…

SegWit Activation – Block Size Increase

A little discussed subject at least by the big blockers was that SegWit was a block increase, not in size but by weight… Lesser discussed is that this upgrade changes the way Bitcoin operates and the way the network recognizes limitations and with full backwards compatibility to previous versions of the software… To unpack this some more, for example an user who doesn’t wish to upgrade to SegWit ready software can still operate on the network with a maximum block size of one megabyte (containing roughly seven transactions per second, 4,200 per 10 minute block), while adopters of SegWit ready software will be operating on a network utilizing block weight rather than block size thus allowing a more than doubling of the block capacity as shown below with effective block size (including block weight) now approaching an average of 1.2mb, and considering that SegWit adoption among Bitcoin’s user base and community is still only around 50% one year on, it is possible that the SegWit block weight upgrade will allow up to 2.5mb blocks (and maybe 20 transactions per second, 12,000 per 10 minute block)… SegWit was an ingenious upgrading of Bitcoin’s block size and transaction capability while maintaining the underlying decentralization of node and user base… Bitcoin has the best developers!

50% SegWit Adoption, 1.25mb blocks, we have even had over 2mb blocks (H/T Bitmex Research Chart)

SegWit Activation – Upgrading Version Scripts

Another consequence of SegWit is upgrading version scripts which translated into English enhances the flexibility of the underlying code and now makes possible through a soft fork what was previously assumed would have to be accomplished through far more dangerous and hazardous hard forks and possible chain splits… So other upgrades such as increased transaction capabilities and block size/weight upgrades (M.A.S.T or Schnorr signatures) and on chain privacy upgrades (Bullet Proofs, CoinJoin) that would further enhance the fungibility of Bitcoin and therefore its utility and value can now be considered, and while SegWit was a long and arduous two year fight against the FUD of many powerful miners and early adopters and their corporate and media influence, it was the threat of the User Activated Soft Fork and demonstration of user sovereignty over corporate and mining interests that forced their capitulation, and we are in the process of weakening and eventually obsoleting these increasingly malign but now thankfully irrelevant actors… The UASF confirmed, and for anyone paying attention CLARIFIED, the hegemony of Bitcoin’s user base over its mining and corporate elites, and blocked the attempted takeover and centralization of Bitcoin by big business that is the undeniable trend of every other monetary system in history, and so I expect more soft forks and more upgrades from now with less resistance from bad actors and apples who have now mercifully forked off into alternative coins and projects… The defeat of the first generation of Bitcoin oligarchs then and rendering them now, one year on, increasingly irrelevant and fading in influence is one of the most important and positive developments in Bitcoin for a long time…

SegWit And Transaction Malleability Fix – Second Layer Scaling

The reason SegWit was proposed and developed as a Bitcoin upgrade was as a fix for Transaction Malleability and a legacy defect that allowed jamming and spamming the network by malleating the transaction signature or witness, thus by removing the signature out of the block (segregating the witness, SegWit) transaction malleability is entirely solved while also freeing up over half the block size that transaction signatures used to consume, why we have moved from block size to block weight and also why we have been seeing bigger block “sizes”, again just going to highlight the ingenuity and expertise of the Core developer team… The fix to transaction malleability now makes possible the effective deployment of second layer solutions and payment processing layers and smart contract layers with far more flexibility and creativity than could ever be achieved on the Bitcoin main chain, but all this flexibility can now be pegged to and be dependent upon Bitcoin’s underlying ledger and its immutability, which I consider a great leap forward in the evolution of the Bitcoin protocol and makes most of all the altcoins and ICO’s worthless in the next few years, as far more secure and flexible applications will be built on top of Bitcoin by next generation companies and businesses…

SegWit Activation – On Bitcoin And Litecoin

As discussed above SegWit activated on Litecoin first and it was this demonstration by Charlie Lee of the UASF on Litecoin that lead to the UASF and SegWit activation on Bitcoin which means that both can now build the lightning networks and cross atomic swaps that melds them into one, separate and distinct but also inter-connected and symbiotic, two chains or highways connecting through off chain transactions… Litecoin has been called a testing ground or testnet for Bitcoin development and to an extent this is true, but this also means that Litecoin has a continually evolving and improving blockchain and that its development is either on a par with or even ahead of Bitcoin (SegWit being the prime example) then for the foreseeable future I see both blockchains evolving together, both equipped with the developments and developers that is incentivizing each other to stay together, and mutual and complimentary blockchains, the only major difference being Litecoin having 2.5 minute confirmation times (4 x the 10 minute confirmation times of Bitcoin) and therefore four times the transaction capacity and four times the rate of issue of currency (84,000,000 currency cap of Litecoin as opposed to 21,000,000 currency cap for Bitcoin)… This has lead to the gold silver comparison of monetary history, Litecoin being the silver to Bitcoin’s gold, with Bitcoin acting as the more secure store of value with Litecoin acting as the more convenient payment and transaction method, and although the coming development of unlimited off chain transactions could in theory render this on chain scarcity economics void, Litecoin also has the same scope of unlimited off chain transactions that allow it to connect directly and indirectly to Bitcoin… SegWit activation contrary to the argument that it makes Litecoin redundant in my opinion it makes Litecoin more relevant than ever… Time will tell…

Segregated Witness Activated – Development One Year On

One Year Since SegWit Activation – SegWit Adoption (Payments) At 50%

In my Bitcoin Kills Banking Revisited Post of June 2017 I wrote that I expected SegWit activation to prick the bubble in altcoins and ICO’s and that they would become increasingly redundant as the hope and hopium of alternatives to Bitcoin and its scaling woes would evaporate, and like everything I write it is always ridiculously optimistic and premature… For naive and utopian reasons I expected SegWit adoption to only take a few months as the defeated mining and corporate interests would swallow their pride and hubris and work towards the greater good and upgrade their operations on the Bitcoin blockchain to utilize the biggest software upgrade in Bitcoin’s eight year history… Yet I vastly underestimated a few things, I vastly overestimated the skill of the software developers of these increasingly legacy Bitcoin operations who either would not or didn’t have the expertise to upgrade their old code and software to utilize SegWit, I vastly underestimated the stubbornness and intransigence of some of these legacy agents and operators within Bitcoin’s corporate and mining communities in refusing to accept their defeat and refusing to have anything to do with SegWit, we had the launch of Bitcoin Cash (with SegWit crudely chopped out) and the attempted takeover of the Bitcoin brand, with miners, companies, wallet providers and even media operations trying to deceive and fool newbies into conflating Bitcoin with BCash, we had the endless new Bitcoin forks, spamming attacks, outrage over fees and transaction batching, the last year almost has felt like one big distraction from the biggest news in Bitcoin’s history, the SegWit upgrade…

One year on the distractions are fading and the FUD is clearing, Bitcoin Cash is fading along with its price and value as developer spats and self-cannibalism reduces it to irrelevance, the same for the rest of the Bitcoin forks that pumped and have long since dumped… Many of Bitcoin’s former top influencers have steadily lost influence as another positive development of SegWit was clearing out the Augean Stables and the increasingly malign actors seeking to centralize Bitcoin’s future, from now on for newbie users and developers SegWit will be the standard for user and developer as those who adopt SegWit will be working with more efficient and far more scalable technology than those businesses and services that do not upgrade existing technology to SegWit technology… As we are currently seeing one year long on, SegWit adoption is now over 50% and so half of the community has already upgraded their software and the rate will only increase as we move forward, and while a 100% adoption of SegWit may never happen there will still remain the element of competition that forces legacy operators to upgrade to SegWit or otherwise lose out to SegWit ready competitors… Resisting SegWit at this stage is the recipe for obsolescence, but SegWit also attests to the Core developer preference for Soft Fork upgrades over Hard Fork upgrades, in that soft fork upgrades like SegWit do not force legacy nodes and software from upgrading immediately by forking them off on a separate chain, soft forks allow existing software to operate only not as efficiently as new software and thus prompts the gradual upgrading of operations and a far more sympathetic method of upgrading software and hardware…

Before I get to discussing the off chain transactions I will discuss two much neglected laws of monetary history that will give us further insight into how Bitcoin and its off chain layers will likely play out in the future, and is at essence another rendering of the Bitcoin as store of value versus payment system debate, and an important one to elaborate upon…

The Two Monetary Laws Of History – Thier’s Law and Gresham’s Law

The two monetary laws that drive history, of the rise of civilizationa and the collapse of civilizations, are Thier’s Law (The Law Of Sound Currency) and Gresham’s Law (The Law Of Fiat Currency)… Thier’s Law roughly states that it is the best, most purest, most honest currencies that drive the rise of civilizations and it is when governments interfere in the currency and start debasing it or replacing it with Fiat decree for debasing currency, that Gresham’s Law kicks in which roughly states that the honest money is hoarded (store of value) while the corrupt and debased fiat currency is circulated instead (means of payment)… Now these simple monetary laws which in my last three posts I have used to demonstrate the cycles of the rise and fall of the last three thousand years of Western Civilization, can also be discussed in parallel contexts which I will again discuss individually…

Store Of Value vs Payment System

At the heart of Bitcoin’s scaling debate between progressive big blockers and centralizers and conservative small blockers and decentralizers was the argument between Bitcoin principally as a store of value or Bitcoin principally as a payment system, and this debate has leveraged Satoshi’s Bitcoin Whitepaper, his title of “Bitcoin: A Peer-to-Peer Electronic Cash System”, all his BitcoinTalk comments and his known e-mail correspondence, even Satoshi’s Visions have been incanted as proof that Bitcoin is either a store of value or a payment system… Maintaining Bitcoin’s decentralized base prioritized store of value status by a secure, censorship resistant and anti-fragile currency while sacrificing on chain payment processing and transactions, while big blockers propagandized Bitcoin as a payment system and transaction processor blithely unaware or ignorant of Bitcoin’s only real value proposition, as a store of value in a sea of payment systems circulating centralized, corrupt and debased fiat currencies… The world is awash in payment systems and solutions yet what the world is sorely lacking is the means of protecting and enhancing purchasing power, in a world where precious metals and historical monies have been rigged by banks and accounting ledgers, Bitcoin (and crypto) was the premier asset class of 2017 and even at 2018 lows is still a ten bagger in terms of store of value over the last two years… While self evidently there must be a balance of roles between store of value and means of payment (as without a means of payment there is no store of value), for Bitcoin to take over the world and become one of the world’s premier reserve currencies it cannot do it primarily as a payment system (Gresham’s Law) but can only do it by store of value status (Thier’s Law) first… Bitcoin’s store of value status must come before its payment system status as anyone who sold their bitcoins for bcash has by now realized by now, bigger blocks and increased transaction capacity won’t help your currency from devaluing...

Austrian Economics (Productionism) vs Keynesian Economics (Consumerism)

One of the most amusing things I witnessed in the last year in my Twitter timeline was a number of anarcho-capitalists and libertarians rush to defend Bitcoin Jesus Roger Ver and actively promote BCash and lambast Bitcoin as a failed experiment corralled by the Bitcoin Core developer team and Blockstream to destroy Bitcoin’s future, one year on I wonder how many of these poor deluded souls still trust in BCash and the second coming? Whichever way, these so-called anarcho-capitalists and self confessed Austrian Economists were cheering on a payment system (and Keynesian consumption based economics) against a store of value system (and Austrian production based economics), and is one of the more breathtaking examples of cognitive dissonance I’ve seen lately… The history of money as evidenced by Thier’s Law is on the side of Austrian Economics, of production before consumption and of purchasing power over the power of purchasing, while Gresham’s Law is on the side of Keynesian Economics where consumption can be printed out of thin air and where production and purchasing power is openly mocked and even criminalized as monetary hoarding… The ultimate truth is this: you must first produce in order to consume, and you cannot consume what you have not produced… This inherent truth has been turned upside down by a Century of Keynesian Economics when debt became wealth and consumption replaced production but debt based economics is an extend and pretend doctrine increasing credit and consumption from the future (and the unborn) while destroying the underlying productive capital base and demographics in the present, and that doctrine while being increasingly questioned will I believe become discredited the more we move forward, and this will be manifested by the Monetary Laws of History, updated to today as hoard the bitcoin, spend the shitcoin… Civilizations and wealth capture are built upon store of value status, upon Thier’s Law, upon production and wealth capture and lowering time preference in building a capital and labour structure, civilizations have never been built upon payment systems but payment systems have come to dominate inflationary and consumerist civilizations in decline, and under Gresham’s Law when there is no incentive to save only the incentive to consume and perpetually circulate this ever debasing currency… Bitcoin will not dislodge fiat by competing as a payment system but will destroy it with its scarcity and utility in protecting purchasing power, the only thing that no other payment system will ever give you… These Austrians and libertarians enamoured of BCash and the slick facade of Ver and Co, should learn some production economics…

Bitcoin Vs Bitcoin Cash

The third angle of this battle between store of value and means of payment comes manifested within Bitcoin itself, the fight for SegWit, the maintenance of Bitcoin as store of value and the forking off of Roger Ver and Jihan Wu as they spun off “Satoshi’s Vision” into an altcoin that removed SegWit and has since been enlarging its block size even as transactions have been dwindling, but the one cast iron place where you see Thier’s Law and Gresham’s Law play out is in the relative currency values of Bitcoin and Bitcoin Cash, and as Bitcoin Cash was a fork of Bitcoin and those speculators got two sets of coins instead of one, there was the opportunity to either keep both or to sell one for the other… If you were selling Bitcoin then you were betting on the future of Bitcoin Cash, while if you sold Bitcoin Cash you were betting on the future of Bitcoin… One year since the fork, and despite numerous liquidity pumps in illiquid markets Bitcoin Cash is trading at less than a tenth of the value of Bitcoin with interest waning and developer infighting cannibalizing what is left, BCash has removed backward compatibility to all of Bitcoin’s previous software and most of its infrastructure and basically has to start from scratch with zero hopes of catching up, it has destroyed what was left of the credibility of Roger Ver and is contributing to the waning of Bitmain (still the biggest mining corporate within Bitcoin) in a mining space that is now spawning multiple competitors looking for market share in a rapidly evolving post SegWit market…

Bitcoin And Gresham’s Law – Insights From Emerging Markets

Gresham’s Law In Venezuela – Hoard The Bitcoin, Spend The Shitcoin

While Thier’s Law explains that reserve currencies rise on store of value (the clue is in the word RESERVE) it is Gresham’s Law that explains how… Gresham’s Law is basically the law of currencies when there is government mandate on the value of money that drives free market counter-measures against the corruption of fiat money, by adopting other currencies or by hoarding the “good money” and circulating the “bad money”, i.e hoarding (saving) gold or silver coins with high precious metals content and circulating (spending) the gold or silver coins with low precious metals content… However we live in different times and whence currency is fiat by paper or by digits, where you are forced (consciously or unconsciously) into exchanging national bank currencies for income and taxes and loans and mortgages, and when its traditional and historical monetary rivals have been rigged by accounting ledgers and fraud therefore dampening appetites and interest in monetary rivals… And as this fiat currency is by design inflationary it has been designed as a payment system above any pretensions of being a store of value, fiat currencies are “stable” in most Western Countries for now and so they have limited competition that would manifest as the modern equivalent of Gresham’s Law, however outside of the Western financial bubble is the rest of the world, pegged to the Western Dollar and Euro Reserve Currencies and with varying degrees of despotism and central bank currency printing among these, the Dollar shortages that is currently creating the Emerging Market Crisis and currency carnage…

To take Venezuela as a prime example where Maduro’s brand of Authoritarian Socialism has printed so much currency that there are shortages of everything else including water and food, it is the mismanagement of currency that has put the poor Venezuelans suffering under the most progressive of central banks in this perilous position, and so to maintain any of their purchasing power past a few hours they have to immediately sell this currency for other alternatives, and the current two main alternatives in Venezuela is the Dollar or Bitcoin… Gresham’s Law is manifesting in Venezuela as hoarding Dollars or Bitcoin and spending the shitcoin (Bolivar), constantly circulating the depreciating currency while hoarding or taking out of circulation appreciating currency in negative and positive feedback loops for both currencies, Gresham’s Law applies to the Bolivar today while Thier’s Law applies to both the Dollar and to Bitcoin, but as we move forward and the Dollar itself begins to implode as the last fiat currency standing, I also expect Thier’s Law to apply to Bitcoin while Gresham’s Law will eventually apply to USD with the end-point of course of Bitcoin as a reserve currency in and of itself… Bitcoin will not dethrone fiat currencies as payment systems, but as a scarce decentralized and censor resistant store of value outside the control of people such as Maduro… The people of Venezuela desperately desire a currency as a store of value, their national currency is the payment system…

From Store Of Value To Medium Of Exchange – Historical Allegories With Banking

While I have hopefully demonstrated that to succeed and fulfill “Satoshi’s Vision” as a replacement for fiat money Bitcoin has to first scale as a store value while draining national currencies of their value, when Bitcoin has established itself as a store of value and reserve currency par excellence, it is then that it will fully require a payment system and so we have plenty of time to evolve and develop before we get to this point, nevertheless life and exchange is a balance between production and consumption, we only produce and store our production in currency to one day consume at least a part of it and so for Bitcoin to truly scale as a world currency it will need to rival fiat payment systems… There is no quarrel here with big blockers and Bitcoin as payment systems advocates it is merely a quarrel of how to develop these payment systems, and so let us compare Bitcoin’s underlying protocol and currency with the undeniable world reserve currency of history, gold…

Gold was the historical store of value par excellence, tangible, durable, divisible, fungible, portable and exceedingly scarce, however history has also demonstrated the existence of the banking industry as hoarders of gold and issuers of credit, paper tickets originally pegged to underlying pounds and ounces of gold and silver… As much as I’ve described in many posts banking as evil scams to deceive and defraud the human population out of its wealth and property I have also described banking as the industry that scaled gold and silver coins as easier and more cheaply divisible and to extend scale as a convenient and fungible medium of exchange and unit of account… As long as the banker only issued as many paper tickets as he has precious metals in the vaults to back them (let us ignore that this state of affairs never lasted very long in the history of banking), then it is what we would call a full reserve banking system, leveraging off chain transactions and swaps fully backed by the underlying collateral… Welcome the The Lightning Network…

Lightning Network – Basic Definition And Technicals

I am no expert on the technicals of LN and so I will quote as per Wikipedia to provide an introduction:

The Lightning Network is a “second layer” payment protocol that operates on top of a blockchain (most commonly Bitcoin). It theoretically enables fast transactions between participating nodes and has been touted as a solution to the bitcoin scalability problem. It features a peer-to-peer system for making micropayments of digital cryptocurrency through a network of bidirectional payment channels without delegating custody of funds. Lightning Network implementation simplifies atomic swaps.

Normal use of the Lightning Network consists of opening a payment channel by committing a funding transaction to the relevant blockchain, followed by making any number of Lightning transactions that update the tentative distribution of the channel’s funds without broadcasting to the blockchain, optionally followed by closing the payment channel by broadcasting the final version of the transaction to distribute the channel’s funds.

To perform as intended, Lightning Network requires a transaction malleability fix, such as Segregated Witness (SegWit) in Bitcoin.^[1][2]

Lightning Network – History And Development

The Lightning Whitepaper was proposed by Joseph Poon and Tadge Dryja in January of 2016 and can be read in its entirety here, but in essence it is a protocol that runs on top of, and has inter-operability with, Bitcoin… By the end of 2017 the Lightning Protocol had achieved compatibility between the three different companies working on Lightning, namely ACINQ, Blockstream and Lightning Labs and achieved a successful cross-implementation test on Bitcoin mainnet… The year since has been the ironing out of bugs and developing applications, of which most notable currently are eclair (by ACINQ), c-lightning (by Blockstream), lnd (Lightning Labs) and Yalls.org…

Lightning Network – Current Development And Adoption

Total bitcoins pledged in Lightning Channels as of 17th November 2018 – 324 BTC

Lightning Network – Answering Some Questions

There is no doubt controversies and misunderstanding of the Lightning Network and how it interacts with Bitcoin, and to highlight this I will insert a Youtube comment I have received in the aftermath of my interview on Youtube with Smaulgld following the publishing of this post, and I will answer the questions underneath to give some more clarity…

You require a node to be connected to LN, and each node can create multiple channels with other nodes, so it will be expected that channels will vastly outnumber nodes, e.g 1000 nodes each with 10 channels open = 10,000 channels…

Once a channel has been created, the BTC/LTC is locked in that channel, e.g 0.1 btc is pledged in a particular channel, I assume the btc can be increased or decreased without closing or re-opening the channel, but whatever btc is pledged cannot be used anywhere else on the Bitcoin or Lightning Network… Btc pledged can only be redeemed for use elsewhere when a channel is closed and the bitcoin is redeemed to the user node, who can then be redeployed in new channels or redeemed on chain…

LN is compatible with multiple implementations as described above, so a node using a Blockstream application is compatible with a Lightning Labs or ACINQ application…

Lightning Network – Payment Processing Layer

Bitcoin cannot scale as payment processor on its base layer but it most certainly can scale as a payment processor (and much, much more), by taking these transactions off chain and free from the scarcities and necessity of Bitcoin’s fee market… And as with anything else in the world of cryptography and crypto-currencies there is a balance of trade offs between security and flexibility, off chain transactions can scale instant, infinite zero cost transactions and complete anonymity, while on the other hand can never be as secure as transactions on Bitcoin’s underlying blockchain, indeed the mere concept of off chain payment networks is incredible to many (especially those who believe Bitcoin itself is principally a payment system) and is scoffed at and mocked as the invention of the new fractional reserve banking practices that has destroyed the underlying value of gold… And I have no problem at all with this argument, the concept of off chain transactions I think has many parallels and is an excellent analogy to the historical relationship between gold and store of value and banking and bank notes as medium of exchange and unit of account… But here I must point out the intrinsic difference between Gold and Bitcoin as stores of value, gold is a physical and inert commodity that has never had a set of ledgers or an internal transfer system to go along with it, the ledgers and internal transfer systems had to be constructed on top by central counter-parties, i.e banking institutions, while Bitcoin is a digital commodity with its own ledger and internal transfer system that doesn’t require central counter-parties to operate, so the Lightning Network is a protocol layer on top of Bitcoin that is completely pegged to and dependent upon, the underlying blockchain and ledger… So how is it possible to peg the Lightning Network protocol to Bitcoin?

Lightning Networks are essentially smart contract applications that utilize three basic technologies of Bitcoin’s underlying blockchain, multisignature (multisig) technology that distributes trust and risk over multiple decentralized parties as opposed to one centralized counter-party (e.g a bank), CheckLockTimeVerify that anchors Lightning transactions through time stamps to Bitcoin, and CheckSequenceVerify that anchor Lightning through sequences of time to Bitcoin, additionally with HashLockTimeContracts that now allow escrows and charge backs… What these elements contribute to is allowing payment channels and transactions in time, anchored by Bitcoin’s underlying blockchain and prohibiting or rendering mute fractional reserve payments that has plagued the banking industry and its account holders over the last five centuries and instituting a Full Reserve Banking concept with payment channels requiring anchoring transactions on the Bitcoin main chain for both opening and closing payment channels, any payments in between (that could be tens, or hundreds, or thousands) are processed off chain…

Just to clarify the above point what it effectively means is that if there’s only a maximum cap of Bitcoin currency issue of twenty one million (21,000,000) then it means that there can only ever be up to twenty one million bitcoins pledged as collateral for the Lightning Network, at its most successful and far-reaching Lightning could only pledge up to Full Reserve, and as we are here still discussing Lightning’s one major disadvantage that of security, then it is highly unlikely in my opinion as I will discuss more later that Lightning channels will only ever be pledging fractions of Bitcoin’s reserve value, a few percentage points… As Bitcoin is more valuable as a store of value than a payment system then it stands to reason that payment systems will play second fiddle, and so I could see maybe 5% of bitcoins pledged on Lightning, just over a million bitcoins (out of 21 million max cap)… What these 5% of bitcoins elevated to the Lightning Network as payment processing layer can now accomplish, i.e the advantages over Bitcoin’s on chain network, I will discuss next…

The Advantages of Lightning Network – Weaponizing Payments

What SegWit means for Bitcoin (H/T @Beautyon)

The advantages of off chain scaling layers immutably tied and pegged to Bitcoin’s underlying blockchain, is the removal of the scarcity and limits of Bitcoin’s block size, off chain transactions are instantaneous, anonymous, at near zero cost, and which I hope you appreciate makes Bitcoin infinitely more valuable as payment processing and transaction layer, and this is for both transacting parties… Lightning by-passes Bitcoin’s slow, expensive and scarce block size and on chain fee market and it also by-passes Bitcoin’s immutable timestamps and publicly pseudonymous transaction tracking and surveillance, and should be the worst nightmare of government and law enforcement agencies as this market goes completely dark and whose scale and scope it will become impossible for anyone to even gauge… This shadow market will exist and transactions may be in the millions but the only visible timestamps when channels are opened or closed on the blockchain might be in the thousands, this phenomenon cannot be controlled indeed it cannot even be quantified, save by the growth in value and purchasing of Bitcoin’s currency… All of the advantages and benefits and improvements Lightning provides in anonymous, instant and free transactions on an infinitely scalable payment processing layer is remember pegged to the underlying twenty one million currency cap so all the trade and wealth creation within Bitcoin’s self contained ecosystem now weaponized by Lightning is captured in the underlying currency, thus benefiting Bitcoin’s value, price, hodlers, and boosts adoption credentials, media exposure and incentives for nocoiners… It also renders money laundering through Bitcoin virtually anonymous as the currency swaps between Fiat and Bitcoin can now be done off chain with only minimal contact to Bitcoin’s underlying blockchain and its public accounting network, and the same is true for the current dark market illicit trade in drugs and weapons, indeed I imagine the illicit dark markets will be among the first developers and innovators in scaling Lightning and off chain transactions throughout websites and webstores, and so Bitcoin is about to vastly re-scale its effectiveness in the drug trade, weapons trade, and money laundering trade, which will leave government surveillance and law enforcement agencies in the dust, severely reducing prosecutions and confiscated loot to fund their budgets, government taxation, regulation and enforcement will take a colossal hit in revenues and budgets as Bitcoin scales this devouring beast of anonymity that will be of course, impossible to quantify… Some things you will never know…

Lightning’s Killer App – Paying For Your Cup Of Coffee

The long decried fatal flaw of Bitcoin was it’s slow and cumbersome blockchain could never scale to pay for a cup of coffee and dethrone all the myriad other fiat payment systems competing for cups of coffee, however this argument is rendered entirely redundant when discussing Bitcoin in the context of Lightning… You can now pay for a cup of coffee faster (instant confirmation and settlement), for a fraction of the cost of Paypal, banks or merchant processors, and completely anonymously with no on chain record of purchase or receipt or any bank account entry and taxation honeypot, it should also be clear that Lightning suddenly makes Bitcoin a massive threat to PayPal, banks and merchant processors, as Bitcoin’s underlying role as store of value for production increases in value over time, while Lightning now makes consuming in Bitcoin free, instant and anonymous, thus increasing Bitcoin’s utility as a means of payment and unit of account, and you get the best of both worlds… In fact I believe that Lightning will greatly increase the velocity of currency and the rates of transactions on Bitcoin but I will again remind you that there will be no way of knowing or tracking this as it will be completely dark and off chain, and I believe that free fast and private Bitcoin will entice and incentivize merchant adoption as a faster, cheaper and more private alternative to Fiat currencies, and although Bitcoin’s volatile value (priced in Fiat currencies) contributes to boom and bust adoption waves as store of value drives waves of adoption, Lightning now makes Bitcoin infinitely superior to every other payment system out there and so increasing payment processing, transactions and wealth creation and recycling will increase the value of Bitcoin’s currency while stabilizing and minimizing volatility, and will I believe reduce the power of Bitcoin exchanges as the market setters of price… As I have described in past posts the first act of Bitcoin’s genesis was and is as currency speculation or what I consider Store of Value status, you first buy Bitcoin because you are betting on it going more up than down, you don’t have much of an interest in using Bitcoin as a payment system because virtually no-one accepts it, it’s slow, expensive and transparent and so these last nine years the price has been driven by infusions of value and wealth from the Fiat system and through exchanges which largely dictated the value of Bitcoin, whereas with the development and scaling of Lightning and payment processing and medium of exchange status, Bitcoin can increasingly scale into the Second Act of Genesis, that is as a settlement layer for barter or exchange of goods and services, whence production and exchange is increasingly recycled within Bitcoin and with bitcoins and decreasingly in Fiat currencies, driving Thier’s and Gresham’s Laws…

Worth taking the time to familiarize yourself with this chart – inflation rate in orange, rate of issue in blue

Lightning And Hodlers – An Improved Method Of Consuming

Mirroring the above struggle between centralized gateways from Fiat (exchanges) and accepting Bitcoin for production directly and individually, in the first decade of Bitcoin’s store of value stage the most convenient way to own Bitcoin was setting up an account with and exchange such as Coinbase and buying it there more than accepting Bitcoin directly, and to be clear exchanges had a pronounced advantage over accepting directly because they were the central repositories for the bitcoins sold by Bitcoin miners and therefore dominated over direct acceptance as the main method for hoarding bitcoin, however a decade later we are now nearing the effective end of Bitcoin liquidity issuance, one half of Bitcoin’s total currency issue of 21,000,000, or 10,500,000 were issued from 2009 to 2012 until Bitcoin’s first currency halvening, another 5,250,000 were issued between 2012 and the second currency halvening of 2016, and between then and the next currency halvening in 2020 there will be 2,625,000 bitcoins issued, so in the first twelve years of Bitcoin over 18,000,000 of the 21,000,000 will already have been issued, it should become apparent that with less than 3,000,000 coins to ever be issued again over the next century and more, that exchanges will play far less of a role in driving Bitcoin prices as increasing scarcities of coins coming from miners to be redistributed to newbie users will dwindle and diminish, and thus focus should switch from miner created and centralized exchanges to the owners of more than eighty percent of the bitcoins already issued, individual and private users of the past and present… While various estimates have been given that around five million bitcoins (and 20% of the total currency) are lost or forgotten as the limited architecture and infrastructure for storing bitcoin had to be created from scratch and contributed to many mistakes and in many cases the forgetting of a password, of the thirteen million that are left they are either in exchanges (and at risk of being hacked) or they are in cold storage (either on software wallets or hardware wallets)… It is this class of owner that will now dictate and will drive Bitcoin’s value and adoption, specifically what they do with the bitcoins they have hoarded and in many cases has made them extremely wealthy people…

If you found and hodl’d Bitcoin eight years ago, you can afford to retire

These owners of over half of Bitcoin’s issue who have purchased in the past will now or eventually be looking to consume or sell at least some of their bitcoins, and they really have two choices, they can sell for fiat through exchanges or they can sell for goods and services and peer to peer barter… Converting back into fiat currency on exchanges, and outside of decentralized exchanges like Bisq whose transactions are peer to peer, centralized exchanges have stringent KYC/AML (Know Your Customer / Anti Money Laundering) requirements that tie your bitcoins to your identity, which opens you up to money laundering charges and taxation shakedowns (as many Coinbase users have found out) and is why many are unwilling to ever cash out into Fiat currencies… The other method is by consuming Bitcoin peer to peer and for goods and services, and likely in small or medium size purchases (hundreds to thousands of $), and I suspect that many hodlers would prefer this method and are just awaiting the infrastructure and adoption that will inevitably increase over time in continuing adoption waves, the bull market around Bitcoin’s 2016 halvening took it from around $500 to a peak of $20,000 at the end of 2017 and it is now seemingly forming a bottom around the $6,000 level in anticipation of and for the aftermath of the Bitcoin Halvening of 2020 that will drive a new bull market in currency that will enrich hodlers further, will incentivize new user and merchant adoption and hopefully with further development in Lightning applications making user wallets, website plug ins and payment processing solutions that scale to new users and merchants now wanting to accept Bitcoin far more efficiently and frictionless through Lightning… This shift from centralized fiat exchanges to exchanging peer to peer for goods and services deprives both fiat of wealth and also recycles wealth within Bitcoin, again a reason I believe that Lightning and its leveraging of Bitcoin as means of exchange will be hugely bullish to Bitcoin value and currency purchasing power and its store of value properties…

Lightning Network – Small Payments And The Newbies New Introduction To Bitcoin

There are a confluence of factors I believe that will contribute to a shift from miner issue toward user consumption, the dwindling liquidity issue by miners, the increasing desire of hodlers to evade fiat gateways, surveillance and taxation and consume within the Bitcoin ecosystem, the Bitcoin halving of 2020, and a rapidly collapsing fiat currency system as we will likely be mired in the next banking crisis, will power the next bull market in the currency that leads to a wave of consumption and new wave of adoption of newbies now using the weaponized Lightning applications and advantages, I think that your average newbie will shift from accumulating Bitcoin through fiat exchanges to accepting Bitcoin as a means of payment faster cheaper and completely anonymous, and so your average newbie’s Bitcoin journey will increasingly start with accepting donations or for small purchases of goods or services rendered, either on the internet or brick and mortar premises… A simple sticker in the window and a Lightning wallet on your smartphone would allow any merchant or business owner to accept Bitcoin, payment processing applications will be built for website plug ins and e-commerce web stores, and then you simply wait for your Bitcoin sales to begin… In a delicious sort of irony while the fight for SegWit was the fight for Store of Value over Payment System, the Means of Payment layer that SegWit has enabled in Lightning will be the principle method of newbies getting into Bitcoin and a more convenient, secure and anonymous way of accumulating bitcoins than legacy fiat exchanges… Lightning as well as vapourizing credit and debit cards, banks, PayPal and payment processors, will in my opinion start vapourizing the inconvenient, insecure, and completely surveilled first generation Fiat to Bitcoin exchanges for retail at least, if not institutional (Wall Street) purchases…

Lightning And Micro Transactions – Directly Monetizing Internet Content Creators

This is even further out in the future but its implications are literally world changing, and that is the transition of the internet from monetizing content through advertising, click bait and spam (page views) to monetizing content by peer to peer micro-transactions… The adpocalypse and the collapse of ad revenues for the internet’s many content creators who depended upon them from 2016 onwards (especially after Trump’s election) was a deliberate attempt to impoverish the mass of content providers and media websites for the benefit of the tech corporations and their revenues, the two in chief being Google and Facebook which have in the last few years cornered more than 60% of internet ad revenues in 2017, two companies!!! Thus multinational corporations suck the wealth and content creation value from the advertising that was previously given to the content creators through advertising… So currently under the dying fiat payment systems and the self-cannibalizing death spiral of both the advertising revenue model and Big Tech (which sooner or later will be regulated and/or broken up with Anti Trust laws), and as money, tech companies and advertising are inter-connected and will all fall together, then there opens up the possibilities of a new internet, new digital currencies, and a new revenue model for the internet based upon micropayments and peer to peer tipping for content creation…

I would deem MaidSafe to be the more advanced of the internet projects and is nearing main net launch that remakes the internet as a cloud based distributed internet with all the information stored on individual computer hard drives and memory that you loan to the network, and in return you get paid in SafeCoin the native currency of the Maidsafe Network, all your information and communication is completely encrypted and anonymous at all times, and would be a great leap forward in obsoleting the first generation internet infrastructure of the Millitary Industrial Complex and Silicon Valley tech oligarchies… And MaidSafe is only one of a number of competing projects seeking to decentralize and anti-fragilize what the Military and Governments created…

In terms of digital currency we now have Bitcoin until recently a cumbersome and inconvenient payment solution but now with Lightning and the possibility to literally stream money instantly, free and anonymously, then this in turn makes micro payments and tipping as the new revenue model of the internet economic and convenient on a global and epic scale… Lightning applications such as website plug ins and donation addresses now means that artists, writers, developers, musicians, youtubers, content creators of all manner can accept thousands or hundreds of thousands or millions of individual and micro donations totalling in sum a living or perhaps even a retirement, free from fees, taxes and surveillance, and will become I believe the most popular method for newbies to accept Bitcoin further decentralizing bitcoin ownership in smaller amounts to more and more users… This tipping or donation based revenue model is peer to peer, cannot be skimmed and centralized by technology companies to their own coffers, and most importantly promotes merit and content over click bait for eye balls, chops down fraud and spam, and very possibly will eliminate the internet advertisement industry… The Brave Browser and its attendant BAT token would is also an excellent example of this tipping based internet revenue model… This will be a massive shift for the internet which I expect to play out in the next decade, but dependent on the meltdown of fiat currencies, advertising and the tech oligopoly, possibly much sooner…

Why Lightning Boosts Bitcoin – Less On Chain Transactions

Not only does Lightning cut out Bitcoin’s on chain friction, incentivizes bitcoin adoption as means of payment as well as store of value, and scales small scale consumption purchases and micro transactions for internet content creations, Lightning also benefits Bitcoin by removing all these low value transactions off its limited and scarce block size and thus leverages this small payment layer away from scarcity and the traditional on chain fee market… So let’s play around with this concept and see how much leverage is possible with Lightning… As I have said Lightning is not as secure as Bitcoin’s underlying chain and so I would expect only small amounts of bitcoin to be pledged in these channels and for Lightning to be extensively used for e-commerce, small purchases and micro tipping, so let us say that 1% of the whole cap of 21,000,000 bitcoins were pledged on the Lightning Network (210,000 btc) and on the other hand that LN payments both sent and received comprised 90% of total Bitcoin transactions, then with only one percent of capacity could reduce Bitcoin on chain transactions by 90% (as only a fraction of LN transactions would ever need to be timestamped on the chain), which would wipe out 90% of its congestion and fee market, saving block space and transaction capacity for store of value and infrequent settlement purposes, while wiping out all publicity and surveillance capabilities of 90% of Bitcoin’s economy… When you start to imagine scaling on this level you start to understand that the scaling Bitcoin as medium of exchange can accomplish so much more on derivative but fully collateralized layers such as the Lightning Network than it would ever be to attempt to increase the underlying blockchain that would eventually destroy the project… Bitcoin is now not just the best store of value asset class of the last decade, it will now also become by far the best, cheapest and most convenient method of trade and commerce, blowing away payment processors, banks and credit cards…

Lightning And Hodling – Medium of Exchange To Store of Value

I have argued that the inherent supremacy of LN as medium of exchange and payment processing layer and that this in future will be the most convenient, cheapest and most private way of getting into Bitcoin for newbies, then this also invites the question of whether Lightning and off chain transactions make on chain transactions and Bitcoin’s store of value status mute or even redundant… If my above example of LN processing 90% of Bitcoin transactions were ever to be realized, then realize that the first contact that Bitcoin newbies would get would be off chain transactions and if LN were to establish iron clad security and trust in the network, there would be less of a reason for newbies to convert from LN to Bitcoin’s main chain if they were ever to, there is here the argument that LN could make on chain transactions virtually obsolete as everyone could choose to stay permanently off chain with only really inconvenience and publicity in ever transacting on chain… While I can understand this argument I also argue that Bitcoin is primarily (especially when fully Lightning capable) a store of value and the increase in currency value would incentivize if not force users to convert off chain value into on chain value most obviously for security reasons… For example, imagine transacting one bitcoin worth of goods and services on LN and that it had a value today of $6500, then imagine in two years that one bitcoin had soared to a value of $100,000, then it should be apparent that the security arrangements for securing value would be drastically different… While you could leave $6500 in value on LN with few to any worries, when your smart phone wallet now contains $100,000 you will have to start thinking about improving the security of your accumulating wealth… The only way of improving security would be to redeem your off chain coins onto the chain from whence they could be transferred to a hardware wallet for off line cold storage, and so this store of value function I believe will in fact lead over time to the reduction of total bitcoins pledged on LN even while LN transactions of the total network increase… It is possible that after the initial adoption curve of LN where I discussed earlier 1% of total bitcoins were pledged as collateral (210,000 btc) while processing 90% of transctions, over time total bitcoins pledged I would expect to be constantly diminishing down from 210,000 while transactions could climb 99% of the total, I expect after the initial adoption spikes and collateral pledges into LN for users to be persistently declining because the increasing value of the currency incentivizes the storing off chain of pent up production, which self evidently increases Bitcoin’s overall security (less bitcoins pledged on LN) while increasing flexibility (LN processing 90% of transactions off chain)…

Bitcoin And Litecoin And Lightning – Off Chain Transactions

As I have stressed previously because of SegWit Activation on both Litecoin and Bitcoin then Lightning is possible and is actively being developed on Litecoin as well as Bitcoin then both become inter-changeable in all of my discussion of Lightning, the mind bending scalability that Lightning gives Bitcoin it also gives Litecoin, and as there is a certain crossover of developers and development between Bitcoin and Litecoin (SegWit being the prime example) then off chain transactions can scale both blockchains to near infinity, but offers even more than this since now both blockchains have scaled second layer networks and off chain transactions, you can transact between blockchains which opens up a completely new can of magic beans…

Cross Chain Atomic Swaps – Connecting Bitcoin And Litecoin

A Cross Chain Atomic Swap is a pretty good descriptor of what is simply a currency swap between two blockchains, the near infinite flexibility and complexity that the Lightning smart contract layer can leverage can be applied between Bitcoin and Litecoin so imagine this: you have bitcoin on the main chain that you pledge in a Bitcoin Lightning Wallet which you then use to connect by a Cross Chain Atomic Swap to a Litecoin Lightning Wallet from which you can then redeem the pledge as on chain Litecoins, and vice versa of course… You can now through off chain swaps mix your coins between two distinct blockchains while they do not ever actually connect which you can also do anonymously with no way of identifying the laundered coins other than a random public address on Bitcoin or Litecoin’s public ledger, with no centralized exchanges, middlemen, and therefore completely uncontrollable… Cross Atomic Swaps are the greatest money laundering tool and distributes risk and anonymity over two blockchains rather than one which doubles the problems for Government Surveillance and Enforcement in that they now have to surveil two chains in lieu of one while also being completely unaware of all off chain activity and currency swaps that will be completely dark, Bitcoin and Litecoin at this point are completely melded, not on the base layer where both blockchains are distinct but on derivative layers where they are for all intents and purposes the same asset… And in my opinion it vastly scales Bitcoin’s base layer because Litecoin (and its 4x transaction capacity over Bitcoin) is now virtually inter-changeable and is a collective 4x scaling up of the base layer layer through the derivatives, indeed these derivatives bring up the interesting question with regards to the future of Litecoin adoption and especially the ratio of litecoin to bitcoin which is 4:1 on the chains, but off the chains and on fiat exchanges where the value is currently derived the ratio trades at 122:1 but there are many reasons for this including Litecoin being two years younger and with only a fraction the developer capacity and listed on far less Fiat exchanges than Bitcoin and therefore only has the fraction of the liquidity which is reflected in the ratio… But these are the early years and Lightning Networks and Cross Atomic Swaps have only barely begun at a time where neither Bitcoin or Litecoin are seen as much of a solution to anything and more a currency speculation vehicle for most of the general public, and it will only be through deflation, currency appreciation and store of value properties and of course Thier’s Law that Bitcoin and Litecoin will likely be revealed to the masses as the barter ledgers and currencies for peer to peer voluntary exchange that they are, and by then the Lightning Networks and Swaps will be far more developed and advanced in scaling the payment processing layer and instant, free and anonymous accounting for production and consumption of your goods and services… So the question is, in a world where Bitcoin is a mainstream medium of exchange which could only achieve this through second layer networks then would it stretch the realms of credulity that users would also use Litecoin as a faster and cheaper on chain transaction ledger than Bitcoin?

I see many Bitcoin maximalists in my Twitter timelines who ridicule Litecoin as “just another shitcoin” that will be vapourized by Lightning Networks as second layer solutions will eliminate the need for any other blockchain, what I have not seen any further discussion on by these “thought leaders” is that the same is true for Litecoin in that it can now connect through second layer solutions directly to Bitcoin with derivatives, so I would suggest that far from killing Litecoin SegWit on Bitcoin AND Litecoin will actually tie both together, and provides incentives for newbies to accept both Bitcoin and Litecoin mirroring the twin currencies of history in gold and silver… And even in a world where 90% or even 99% of transactions on both Bitcoin and Litecoin are off chain, there is left the 10% or 1% of on chain transactions that are still subject to block confirmation times, fees, scarcity and competition for block space that underpin the whole derivative network, even then there will be incessant and increasing claims for on chain transactions and block space that I have spent this post telling you is inherently limited, what Litecoin connected derivatives allows is utilizing Litecoin’s on chain transactions, a 4x scaling of transaction capacity and cheaper fees which I doubt could ever by achieved solely with Bitcoin’s block capacity… Whatever further improvements in the efficient use of Bitcoin’s blocksize (such as aggregated signatures or Schnorr and M.A.S.T) I doubt they would ever get close to what Lightning and Litecoin now add in on chain scale, any further on chain improvements to Bitcoin I would expect also be instituted on Litecoin as development moves in lock step on both… Maybe Bitcoin absolutists can delude themselves that Bitcoin and Litecoin have nothing in common and that Litecoin is “just another shitcoin”, I think many of them will be surprised…

The Economics Of Scarcity – Bitcoin Litecoin Ratio

As I described above while the scarcity ratio of LTC/BTC is 4:1 the ratio out there in the rigged land of Fiat exchanges is at 122:1 that mirrors the silver to gold ratio which under scarcity economics would be anywhere from 8:1 to 16:1 but on rigged Fiat exchanges trades at over 80:1, the common denominator between the economics of scarcity and the economics of today is Fiat money, i.e unlimited credit creation that distorts everything it touches, in this case alternative currencies both of the past and of the future… We live in a transition period where central bankers shitcoin printing has reached epic proportions and with the next financial crisis now on our doorstep once again, the next recession will force the next iteration of Zero Interest Rate Policy and Negative Interest Rate Policy and the further flooding of the world with moar Quantitative Easing which I expect to unleash the next bull market in alternative currencies, precious metals and crypto-currencies as the economics of abundance (and central banks) further degrade against the economics of scarcity, (Gold, Silver, Bitcoin, Litecoin)… Fast forward past this potentially catastrophic transition period, and to when precious metals and crypto-currencies and intrinsic scarcity have destroyed the monopoly of central banks and the economics of fraudulent abundance, then scarcity will apply to precious metals as I discussed at length in my Gold and The Blockchain posts, and scarcity ratios between currencies will in my opinion more reflect reality and the scarcity of issue…

To take Bitcoin and Litecoin as I have argued in this post Lightning and Cross Atomic Swaps makes them virtually inter-changeable with one another to an extent beyond any other crypto-currencies, then in my opinion it should stand to reason that the Litecoin to Bitcoin ratio will more reflect the reality of the 4:1 stock and flow which means the current 122:1 price ratio will have to collapse at some point, which I would expect as Lightning and Cross Atomic cuts out centralized exchange between blockchains and when exchange is inter-changeable… The one thing that differs between the stock and flow ratios of precious metals and crypto-currencies (at least for Bitcoin and Litecoin) are the currency halvenings that occur every four years on Bitcoin AND Litecoin which could further complicate scarcity ratios and economics at least temporarily… As I have said Litecoin was launched two years later than Bitcoin and so currency halvenings are not in sync, for example Litecoin’s second currency halvening is scheduled for the 7th August 2019 (in 10 months time) while Bitcoin’s third currency halvening is set to occur on 22nd May 2020 (in 18 months time), so for an eight month period of 2019 and into 2020 the Litecoin to Bitcoin issue ratio drops from 4:1 to 2:1 which you would intuitively expect to lead to an increase in the value of Litecoin against Bitcoin, or alternatively stated a reduction in the 122:1 fiat price ratio between LTC and BTC… While I do trade the BTC/LTC ratio and am bullish on Litecoin in 2019 as compared to Bitcoin, I am also well aware of the head start Bitcoin has on Fiat exchanges and in the world of abundance and rigging and so this liquidity tightening may not have much or any effect on the 122:1 current price ratio this time round, but as we move forward and as the fiat currency apparatus corrupts and fragments further and as Lightning Networks and Cross Atomic Swaps start leveraging Bitcoin and Litecoin as inter-changeable mediums of exchange and mass adoptable gateways for waves upon waves of newbies, as scarcity economics gains against the economics of abundance, then I will expect the LTC/BTC ratio to compress… This discussion of the effect of the economics of scarcity and of the currency halvening mismatch between Litecoin and Bitcoin I suspect will matter far more and be far more pronounced in the Halvenings of 2023-2024…

Conclusion

I dedicated my writing of 2017 to the battle for SegWit because I realized early on it was the fight for a decentralized future, of the fight for the maintenance of the scarcity of the underlying block size for miner and user decentralization, and by engineering the brilliant upgrades that took payment processing and the literal streaming of instant, free, anonymous, and mind bending complexity afforded by moving transactions off chain, and from intrinsic scarcity to near infinite abundance… Now SegWit is a reality, transaction malleability is remedied, and Bitcoin AND Litecoin’s infrastructure has upgraded to handle the Lightning Protocol, and with SegWit adoption on Bitcoin’s base chain now over 50% one year later, the next few years will see the deployment of LN and Cross Atomic Swaps between Bitcoin and Litecoin that will in effect bound both together, incentivizing the adoption of both and will give Bitcoin a roughly 4 x base layer scaling upgrade option in the short medium and longer term… Further blocksize upgrades and efficiencies will I argue be implemented the same on Litecoin and so I consider their futures inter-linked…

These off chain payment processing layers will likely progress and hum around to near zero publicity in the background but make no mistake this layer is the killer app for Bitcoin (And Litecoin) and the long term killer of payment processing competition, Paypal, credit cards, payment processors, banks… The achilles heel’ of Bitcoin as primary store of value vehicle was limited with costly and slow transactions capabilities and would be impossible to ever compete with established fiat payment processors, however Bitcoin’s store of value vehicle with a payment processing layer working on top is the one thing that will out compete the current payment processors on inflating and degrading Fiat money… Bitcoin has supremacy as a store of value and going forward will first compete with before completely obliterating the payment processing companies of fiat, so in my opinion it is merely the question of when rather than if Bitcoin and Litecoin dethrone fiat currencies, the speculation left is when and how?

I believe that the next credit crunch and crisis is already baked in the cake and that the Federal Reserve interest rate hikes coupled with Quantitative Tightening at the long end will raise the cost of capital for bonds and stocks, and is squeezing the decade long carry trades with Europe, China, Japan and Emerging Markets, in short the cost of debt is increasing in a world saturated by debt that will lead to the next financial and the next possible terminal iterations of ZIRP and QE, the infinite money printing that leads to loss of trust in fiat, the crack up boom as described by Ludwig von Mises, and hyperinflation of fiat currency (see Venezuela)… It is this environment of fiat instability that precious metals and crypto-currencies were made for, but it is the Fiat money system as the trusted accounting and currency system of the general public that will dictate how these alternative and distinct currency ecosystems will interact and this is at the exchange level, for both precious metals and crypto-currencies…  My next post will elaborate and deal exclusively with fiat exchanges and developments in the crypto-currency space and will be the third update on my Bitcoin Kills Banking and Bitcoin Kills Banking Revisited Post, to be entitled Bitcoin Kills Banking Redux: Exchanging And Exchanges…

Bitcoin Donations Gratefully Received:

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Postscript: Audio podcast for this post.