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Samson Mow on Bitcoin’s Tech and Future Growth | The Investor’s Podcast

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Key Takeaways

  • Node operators and users are the economic might behind Bitcoin; they dictate where Bitcoin goes
    • Miners extend the blockchain and get the block and fee rewards. They get no reward if they disregard the node consensus
  • Bitcoin processes $500K/ sec, compared to $2K/ sec for popular high Transactions Per Second (TPS) altcoins
  • Lightning network is a second layer solution meant for small retail payments and has a theoretical TPS in the millions
  • Bitcoin dominance is a misleading metric, akin to having a nuclear proof fortress surrounded by cardboard boxes
    • That said, expect another alt-coin frenzy as Bitcoin continues appreciating, more so with low liquidity altcoins
  • It’s difficult to run an Ethereum full node so most node operators just use Infura full node as a service. This exposes Ethereum to outages and other centralization risks
    • Additionally, Bitcoin has a defined hard cap of 21 million coins whereas Ethereum has no identifiable hard cap
  • Security tokens democratize capital formation and financing, with 3 drivers accelerating adoption:
    • The technology infrastructure is growing
    • More exchanges and venues support the issuing and trading of tokenized stocks
    • The regulatory environment is now more favorable compared to 2017

Intro

Founding Blockstream

  • Blockstream was founded in 2014 to advance sidechain technology and scale Bitcoin in a privacy-centric way
  • At a time when there was no support of Bitcoin development, Blockstream secured a total funding of $91MM from various investors, including Reid Hoffman

The Fork Wars

  • Bitcoin’s on-chain transaction capacity is limited to 7-10 transactions per second (TPS), compared to over 30K TPS on the Visa or MasterCard networks
    • Under the notion of an upgrade, several prominent developers pushed to hard fork bitcoin and increase the block size
    • However, big blocks require more disk space and powerful hardware, which eventually centralizes the network into server farms
  • Moreover, the ability of a few people to change the code (e.g. bigger blocks) compromises Bitcoin’s main value proposition- it’s immutability
    • There is always a good reason to do something, and it becomes a slippery slope
      • For instance, “There aren’t enough bitcoins for everyone in the world to have 1 full bitcoin”
  • The scaling war culminated in 2017 with major companies (Coinbase, Bitgo, etc..) forming a coalition to support Segwit2X
    • In essence, this was the first attempt to control Bitcoin at the protocol level

Who Controls Bitcoin

  • Node operators and users are the economic might behind Bitcoin; they dictate where bitcoin goes
    • Think of running a bitcoin full node as akin to corporate governance and voting rights in traditional investing
  • Miners provide the service of extending the blockchain and in return, they collect the block and fee rewards, they get no reward if they disregard the node consensus
    • Case in point, miners failing to fork off to maintain a 50 bitcoins block reward after the first halving
  • Around 50% of the hash rate is in China, with rapid global expansion especially in Russia and North America
    • “Mining is not as China-centric as people will make it out to be” – Samson Mow

The Evolution of Money

  • A monetary good starts off as a collectible, becomes a store of value, then a medium of exchange, and finally a unit of account
    • Moreover, a currency can go from a store of value to a medium of exchange, but not the reverse (e.g. hyper-inflating currencies)
  • Bitcoin has no peg to any currency; it stores value better
    • Put simply, the fundamental issue it solves is the race to debase the currency, not payment at Starbucks

Value Transacted on Bitcoin

  • Bitcoin is often misleadingly evaluated based on TPS, with higher TPS altcoins claiming technical superiority
    • However, Samson illustrates how Bitcoin processes $500K per second, compared to $2K/ sec for popular high TPS altcoins
  • The valuable properties of Bitcoin are multiplicative and add up together to put Bitcoin in a league of its own
    • E.g. hash rate, security, value, liquidity, lightning network, liquid network, and satellites

Ethereum is Centralized

  • It’s difficult to run an Ethereum full node so most node operators just use Infura full node as a service
    • As a result, the Ethereum network is subject to outages and other centralization risks
  • Ethereum Ice Age mechanism was meant to ensure the network transitions to proof-of-stake by stopping all transactions at a certain block height
    • In reality, the deadline was simply delayed and the network hard forked multiple times
    • “Hard fork is basically rebooting the whole network, so it’s not decentralized at all” – Samson Mow
  • Bitcoin has a defined hard cap of 21 million coins. By contrast, Ethereum has no identifiable hard cap

Altcoins don’t Matter

  • Bitcoin dominance is a misleading metric, akin to having a nuclear proof fortress surrounded by cardboard boxes
    • Put Simply, “Bitcoin is the only one that matters” – Samson Mow
  • That said, expect another alt-coin frenzy as Bitcoin continues appreciating, more so with low liquidity altcoins
    • Additionally, many newcomers think of a coin price as cheap without considering the coin supply

The Lightning Network and Scaling Bitcoin

  • Unlike Segwit2X, Segwit upgrade increased block capacity without changing its size. It also fixed a malleability bug and enabled the Lighting Network
  • Lightning network is a second layer solution meant for small retail payments and has a theoretical TPS in the millions
    • Think of it as opening a bar tab, with all transactions recorded and charged at the end of the night, instead of paying every time you have a drink
    • “Basically, anyone selling something that is not very expensive should be able to use Lighting” – Samson Mow
  • Lighting network still has limited capacity and larger payments can face issues. That said, expect increased channel capacity and bigger channel as bitcoin becomes more valuable
    • Keep in mind, Bitcoin holders can earn satoshis by opening channels to users

Liquid Network

  • Blockstream’s Liquid Network is a side chain anchored to the Bitcoin blockchain by a federation, it’s not decentralized
    • However, the federation is geographically and geopolitically dispersed, so it’s more decentralized compared to Ethereum
  • Liquid provides a way to privately move bitcoin quickly with 1 minute block time and full settlement in 2 minutes and to issue assets such as USDt
    • It allows traders and market makers to keep coins off the exchange, to avoid fees on the main chain, and to move between exchanges quickly and privately
  • Unlike most alt projects, Liquid doesn’t have a token, its native currency is Bitcoin
    • The user creates a bitcoin pegging transaction to the liquid wallet, the network then issues the same amount on the liquid side to transact with
    • By contrast, wrapped bitcoins are subject to the risk of token debasement and manipulation
  • The government of Bermuda is using the Liquid network to issue a stimulus token spendable at certain merchants

Future Bitcoin Technologies

  • Security tokens democratize capital formation and financing, with 3 drivers accelerating adoption:
    • The technology infrastructure is growing
      • Second layer and sidechain technologies enable confidential transactions
      • Additionally, you can build a lighting network on top of stable coins and side chains, with enough TPS to service the world
    • More exchanges and venues are supporting issuing and trading tokenized stocks
    • The regulatory environment is now more favorable compared to 2017
      • Lawmakers would rather have regulated trading and funding than have unregistered ICOs
        • Blockstream AMP allows issuing digital assets with flexible rules to comply with changing regulations
  • Simplicity is a low-level smart contracting language that enables smart contracts on Bitcoin (vaults, lending, limit orders, asset-based lending, etc.)
    • However, mainstream adoption is still far away

Blockstream Satellites

  • Blockstream has 6 satellites broadcasting bitcoin’s blockchain with global coverage, here is why
    • To prevent network splits in case of an undersea cable cut and major internet outages, one connected node can keep the whole area in sync
      • This becomes even more vital as the network expands into trading securities and tokens
    • Satellites allow mining in remote areas with no internet connection
  • Blockstream recently updated to satellite version 2.0, which enables the entire blockchain download over satellite connection with no internet

Gaming and Bitcoin

  • Infinite Fleet is an MMO (massive-multiplayer-online) strategy game that runs on a dual token model
    • A security token for raising capital, the game raised $3.1MM and expects $12MM in future funding
    • A utility token as an in-game currency, which players can swap for satoshis when they exit the game
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Notes By Mostafa Khaled

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