Evolution of Bitcoin- What Drives it?

This article is for professional Bitcoin developers. We need to keep updating ourselves with the new developments. The changes taking place currently might not have a major effect on the Bitcoin market in the short-run but in the long-run, it’ll have a huge impact.

Two new developments happened in the past week- first, the Bitcoin protocol is getting upgraded, and second, a new funding source for development was announced.

Let’s look at why Bitcoin evolution matters before going into details regarding the developments.

Constant Evolution

The notion of the constantly changing Bitcoin protocol might shock many people involved in the crypto industry. Most crypto enthusiasts believe that the updation of the protocol isn’t sustainable in the long-term. They believe that it’s fundamentally impossible for developers to change the coding. This is a misapprehension that many have regarding the potential and technology of Bitcoin.

What many don’t know is that the Bitcoin protocol that they have been using for the last 10 years has undergone a few changes. In its initial stages, the code had frequent bugs, and the creators, Satoshi Nakamoto, and the team would fix them on the developers’ complaints. There was also another conflict that occurred within the Bitcoin community in 2017. It was regarding the myriad scaling opportunities of Bitcoin. It was then decided that the Bitcoin code will be updated to increase the capacity of each block. The dissenters to this opinion proceeded to form a new crypto token, “Bitcoin Cash”.

There’s also work being done on functional aspects of the code like smoother information exchange and enabling sidechains. Minor bugs and compatibility problems are something that needs constant attention and has to be continually upgraded. Like every other technology, if Bitcoin isn’t frequently updated or maintained, it’ll not be sustainable.

Now, it’s a known fact that Bitcoin’s code is an open-source code which means that anyone can update the system. But these changes have to be implemented which requires consensus from the members of the Bitcoin community. Without a doubt, it isn’t easy to get the approval of everyone in the community. There are thousands of developers and it’s highly unlikely that everyone gives a node to these changes even if they’re meaningful alterations.

Why Incentives Matter

Now, do the developers get paid for developing the Bitcoin code?

In the initial days of Bitcoin, the funding to develop the system came from one source, the Bitcoin Foundation. Now, there are other organizations that they’ve entered the scene, including those that are passionate about Bitcoin. Chaincode Labs, Lightning Labs, and Blockstream are some of the funding companies. There are other companies involved as well, such as BitMEX, Coinbase, Square Crypto, and OKCoin. MIT’s Digital Currency Initiative and Human Rights Foundation are some not-for-profit agencies associated with the development work.

Those backing the development of the Bitcoin code must be people from different communities with diverse opinions. It ensures the code isn’t persuaded by just one set of beliefs. The Brink Initiative is therefore so important as it further ensures the diversity of backers of the Bitcoin network.

Brink has introduced a fascinating funding model. It channelizes the funds to developers from different sources. Initially, the funding came from large investors like John Pfeffer and Wences Casares, founder of crypto wallet, Xapo, crypto platforms such as Gemini, Kraken, and Square Crypto, and the Human Rights Foundation as well.

Such a funding model is more captivating for companies and investors supporting Bitcoin development but there shouldn’t be only specific individuals funding these projects. Brink has also applied so that donations can be tax-free in the US.

Brink is also working towards providing professional training to developers to make sure there’s a continuous flow of individuals who’re committed to the development of the Bitcoin protocol. It’s a huge step taken by the company, one that bodes well for the long-run.

Next Upgrade

There’s another significant news piece from this week that highlights the significance of the underlying system concerning the Taproot upgrade. It’s supposed to enhance privacy specifications and improve the system’s smart contract functionality. The mining pools of the Bitcoin network that represent a huge 54% of the system’s current hash rate have approved the change which is massive for its implementation.

This kind of support is not only important because of the changes Taproot will bring in but it’s also a reflection of the evolution of the asset’s use cases which in itself is highly valuable. So, it’s imminent that the technology gets stronger with every passing year.

To understand the influence of Taproot’s changes on the value of Bitcoin, let’s see what smart contract functionality is.

The Bitcoin protocol isn’t complicated and performs simple functions efficiently. On the other hand, the Ethereum system is quite complex, even though it’s able to execute a wide range of decentralized applications and smart contracts.

Undoubtedly, Ethereum is more flexible than Bitcoin in its code. Bitcoin can’t match it but some enhancements in the network could improve its usability as a store of value. For example, Bitcoin can be used more effectively as collateral if the accountability of ownership is installed in the system.

Developers can also look to improve its utility as a medium of exchange. A new type of authentication signature has been proposed that can make layer 2 transactions more efficient and cost-effective. Taproot is looking to add more features that focus on providing more privacy to users by masking the form of transaction.

Bitcoin Protocol

What’s Ahead for the Bitcoin Protocol?

Most people, who’re just generally investing in the digital asset, don’t know that the protocol needs to be updated constantly. The more the system is worked on, the more it’s clean and efficient.

And, it’s even more significant that the developers making these changes belong to different incentives and backgrounds so that the technology remains consistent with people of different ideologies.

It’s extremely touching to see that people from different backgrounds come together for the “common good” because their profitability is not confirmed. It’s quite mature for investors and developers to understand that they’ve to sustain a system that has answers to all requirements.

Why are the Indices going up when it actually shouldn’t?

There’s one thing that surprises everyone: why are the indices such as Nasdaq, S&P 500, and FTSE 100 gaining when the economic climate is gloomy?

The European Central Bank, Federal Reserve, and International Monetary Fund (IMF) have all cautioned that the worsening coronavirus situation can give shocks to the market. And given the current daily case count, it’s inevitable. Even though the progress with the vaccine is hopeful news, there are issues with efficacy rate calculations and logistics. Fair to say, this market recovery may only be for the short-term. There are other factors as well that could delay the recovery, such as a tough Brexit, which would hurt Europe and the UK.

But it doesn’t mean that the indices won’t be rising if there’s good news, it definitely will. And, if there’s bad news, the government is supposed to help the markets recover.

Another commodity, Gold, one of the safest bets in the market, has defied most forecasts. It slumped to its lowest value since July as shareholders decided that it’s a great time to move into high-risk assets and bet on the economic recovery of the market.

Bitcoin trades as a risk asset and with gold too. It continued to rise, as it crossed the $20,000 mark for the first time, ever. The price of Bitcoin had never touched the landmark before. 

Time to Serve

President-elect of the United States, Joe Biden proposed to nominate delegate Janet Yellen, the former Federal Reserve Chairman as the head of the U.S. Treasury. He may also nominate Gary Gensler as the Deputy Treasury Secretary. Previously, Gensler was the Commodity Futures Trading Commission’s Chairman.

The appointments of these two prominent financial experts will affect the cryptocurrency industry as the U.S. Treasury is responsible for framing the U.S. financial regulators on the crypto assets. In the past, Yellen had expressed her opinions on Bitcoins. She has said that though she is not a cryptocurrency enthusiast, still she supports blockchains and acknowledges the importance of digital currency.

On the other hand, Gensler is a prominent cryptocurrency expert and, on many occasions, expressed his ideas publicly. He was vocal before the Congress about blockchain and cryptocurrencies several times and expressed that the to-be-launched crypto, Libra, has all the requirements of becoming a security under the United States law. Joe Biden’s financial oversight transition team that consists of cryptocurrency and blockchain masters is also headed by Gensler. This team comprises four other experts in this field, Simon Johnson, Chris Bummer, Lev Menand, and Mehrsa Baradaran.

Simon Johnson, renowned economist and professor, MIT Sloan School of Management, Cambridge, Massachusetts taught a course on cryptocurrencies. He guided a team researching blockchains and co-authored a paper about the far-reaching influence of the fast-developing blockchain technology on the financial world.

Faculty Director of Georgetown University’s Institute of International Economic Law and a notable law professor, Chris Bummer has hosted many Fintech Beat podcasts and also authored a book on crypto assets. He was nominated by President Obama as the Commissioner of the CFTC, but the nomination was called back after the results of the 2016 elections. Bummer has also appeared and testified before the United States Congress regarding the Libra project.

Lev Menand, a law professor at Columbia University is one of the first people to conceptualize the digital dollar. He has vast experience in this area as he has served as an economist at the bank supervision group of the Federal Reserve Bank, New York, and as a senior adviser to the Deputy Secretary, Treasury in 2015-16. Menand has helped the House of Representatives with a provision that detailed the digital dollar in the disaster relief bills.

Mehrsa Baradaran, Professor, Irvine School of Law, University of California, has specialized in banking law. He testified at the House Financial Committee’s hearing on the regulatory framework of the digital currency and a Senate Banking Committee’s hearing on the effects of digital currencies on financial incorporation.

This Committee, composed of cryptocurrency experts and representatives of the U.S. digital currency regulators is expected to formulate innovative regulations on cryptocurrencies and blockchains. The team is likely to consider innovative ideas to overcome the financial barriers faced by the blockchain-based cryptocurrencies, introduce some regulatory clarifications, and inspire investments in the crypto assets.

Meanwhile, a recent statement from the United States Treasury Secretary Steve Mnuchin may reverse the positive cryptocurrency market sentiments. It seems that some oppressive regulations could be introduced before the end of this year. In a book authored by former National Security Adviser, John Bolton, it has been revealed that President Trump has ordered the US Treasury Secretary to go after Bitcoins and introduce some new requirements to be followed by the cryptocurrencies.

Brian Armstrong, CEO of the popular Crypto exchange Coinbase tweeted that according to the rumor mill Treasury would rush out regulations to control the use of self-hosted cryptocurrency wallets. In that case, before the transition, a new set of regulations may curb the digital currency market. The activities of the cryptocurrency users in the U.S. will be restricted and they may be forced to go offshore for availing of the services. The advantages of decentralized applications of cryptocurrencies may be compromised and the U.S.’s role as a financial innovator may be weakened.

Chain Links

Now, when the price of Bitcoin slumped last week as the markets got closed for the Thanksgiving holidays, many people said that institutional investors may start to pull out their money. But all were proven wrong by Bitcoin as it touched stratostrophic levels and there are signs that the investments are at an all-time high.

  • As per a couple of D-form filings, the Bitcoin trust fund of Galaxy Digital, in their first year, raised $58.7 million. Out of it, $55 streamed into an institution-based fund source.
  • The largest investment manager in the world, the Fixed Income CIO of BlackRock, last week on CNBC said that gold could be replaced by Bitcoin in the future as it’s more efficient and functional.
  • Recently, an investment report of JPMorgan stated it’s because of the shrinking role of momentum traders like CTAs (Commodity Trading Advisors) in the market, as compared to institutional investors that the price of Bitcoin hasn’t been able to revert to its mean price.
  • According to most analysts, all of the tradings happened during US hours.
  • The last three Grayscale Investments 8K filings show total accredited investments to be more than $823 million.
  • The chart shared by Zerohedge depicted that Deutsche Bank contains Bitcoins in its asset products.
  • The CEO of the crypto exchange Luno, Marcus Swanepoel reported that the trading volumes from Nigeria, South Africa, Indonesia, and Malaysia have tripled in the last month. It shows that Bitcoin is expanding in regions that were remote to it earlier.
  • In another speculation, the CEO of Pantera Capital, Dan Morehead stated that PayPal is buying 70% of the new Bitcoin supply on the behalf of its customers and it’s the reason Bitcoin is on this rally.
  • Even the PayPal CEO, Dan Schulman believes that the utility of Bitcoin will eventually replace other physical assets as he gave his statement to CNBC. PayPal has invested a lot of money in Bitcoin and also guaranteed users that they will be able to use cryptos to pay for 28 million businesses from next year.
  • There’s also news of a new Bitcoin mining industry being formed in North America that has access to regulatory stability, lower costs, energy, and capital markets. Access to capital markets improves the chances of more investments for network sustenance. It also encourages the diversification of mining pools.

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