#35 - New Release, Inflation Hedge, Turbo Channels and much more!
⚡ Everything Bitcoin & Finance
It has been a busy past weeks building on LN Markets with:
⚔️ Max deposit doubled to 2 million sats
💯 Max leverage doubled to x100
☂️ New version of LN Markets app on Umbrel
🔐 New API Key authentication scheme
🇪🇸 Spanish version of LN Markets doc
💬 New Discord group
✅ Funding fees every 8 hours instead of 24
📺 Our developer's talk at Adopting Bitcoin is out! In this video, we reveal all the intricacies we have encountered in running a major Lightning Network node.
🤝 And a great addition to the team! Koty was already part of the LN Markets family since the beginning, but we are more than happy to welcome him officially as our new Community Manager.
We also been humbled by the very nice replies to this tweet from Preston Pysh, the founder of The Investor’s Podcast Network:
However, this bullish signal for LN Markets community (+1k followers overnight) turned out to be bearish for Bitcoin: it was down 10% the next day. This is not a first for us: the day after launching the platform, Bitcoin performed a solid -40% 😅
💥 2 new regular sections are coming to the newsletter:
Market update with Arcane Research
Lightning knowledge by our very own Fanis Michalakis
📈 An excellent inflation hedge during covid
Since January 2020, holding bitcoin would have increased your purchasing power by 520%. In a highly inflationary period, isn't this return enough to be called an inflation hedge?
On Friday, the U.S. Bureau of Labor Statistics released the Consumer Price Index (CPI) for November, showing that U.S. inflation hit a 6.8% annualized rate. The bitcoin price didn't increase in the days following the higher-than-expected CPI number release, but this doesn't mean that we should write off bitcoin as an inflation hedge. The CPI is a lagging indicator - measuring inflation that has already occurred. If bitcoin is an inflation hedge, the inflation that has already happened should theoretically be priced into bitcoin by the time the CPI is released.
A higher-than-expected CPI increases the probability that the FED might have to increase tapering. A more hawkish monetary policy is bearish for bitcoin, so if anything, a higher-than-expected CPI should theoretically decrease the price for bitcoin in the short term.
The most straightforward way to judge bitcoin as an inflation hedge is to look at its performance since the beginning of 2020. During this period, characterized by high inflation caused by unprecedented monetary stimulus and supply-chain issues, Bitcoin has delivered a real return of 520%.
During the same period, gold has had a real return of 8%, while the S&P 500 has returned 33% in real terms. Bitcoin's unmatched returns during this highly inflationary period illustrates that bitcoin has indeed been an excellent inflation hedge.
More Arcane Research here!
🤓 What are turbo channels?
Turbo channels have been around since at least 2 years now, but they remain quite largely misunderstood among the community. The purpose of this section is to provide a comprehensive view on this subject.
Turbo channels are basically 0-confirmation channels, which means the channel can be used before the channel opening transaction get mined in a Bitcoin block. Usually, a Lightning channel isn’t considered as usable by both parties before its opening transaction has (typically) 3 confirmations. This is great in regard to security, as it protects users against double-spending attacks, but it has the drawback of adding several tens of minutes between the moment a user opens a channel and the moment they are able to use it.
How it’s done today
Non custodial managed Lightning wallet such as Breez, Muun, Phoenix all use Turbo Channels in various ways. For example, Muun leaves it to the appreciation of the user to decide whether or not they want to use Turbo Channels: the option is activated by default but users can choose to opt out.
Regarding the general flow, the idea is pretty much the same for all implementation:
User sends bitcoins on-chain to wallet provider
Wallet provider publishes a channel opening transaction for the corresponding amount (modulo fees) or more
Both ends of the channel (the wallet provider’s node and the user’s light node) immediately regard the channel as usable even if unconfirmed or with less than three confirmations.
One important thing to note is that the wallet provider is the one actually opening the channel. This means that, by default, the funds in the channel will be on their side in the beginning. But those are the user’s funds, as the user sent them on-chain to the wallet provider.
The wallet provider must therefore push some funds to the user’s side of the channel. The general flow is:
User sends bitcoins on-chain to wallet provider
Wallet provider publishes a channel opening transaction for some amount (at least the amount sent by the user on-chain, but often more)
Wallet provider pushes the amount the user sent in 1. (modulo wallet fees) to the user’s side of the channel
Both ends of the channel (the wallet provider’s node and the user’s light node) immediately regard the channel as usable even if unconfirmed or with less than three confirmations
Because there are some funds on their side of the channel, user can start to send bitcoin on Lightning right away. Usually, the wallet provider opens a channel bigger than the amount sent in 1., which means there are funds on the wallet provider’s side of the channel as well and the user can start receiving payments too.
Regarding the specific details as to how this is processed by wallets and Lightning implementations, today it is up to the wallet provider. The process of specifying (eg writing the specification) how Turbo Channels should work at the protocol level has begun through this Lightning Dev mailing list message.
What are the tradeoffs?
Using Turbo Channels, non custodial managed Lightning wallet can achieve a user experience comparable to the one provided by the custodial ones. Of course, as always, there are tradeoffs regarding trust and security that must be highlighted.
While the channel opening transaction is still unconfirmed, there is nothing on-chain that enforces the existence of the channel. If the wallet provider goes rogue and cancels the transaction in the mempool, the user formally loses all the funds they didn’t send while the channel was open:
if the user didn’t use the channel before the wallet provider cancelled it, then they lose the exact amount they sent on-chain in the beginning
if the user used some part of the funds in the channel (for example, they paid a 50,000 sats invoice to a merchant), then they lose what they sent on-chain minus the 50,000 sats.
In the “best case scenario”, the user sent all their local balance before the wallet provider’s attack and are short nothing, except Bitcoin mining fees for the on-chain transaction and the wallet provider’s processing fees.
Once the channel opening transaction has 1 confirmation, it is much harder for the wallet provider to execute the same attack, as it would require a reorganization of the blockchain (short: reorg). A reorg of depth 1 is still quite feasible (and even happens spontaneously) but any double spend occurring would be detected and scrutinized by the Bitcoin network’s constituents.
That’s where reputation comes in play. Any attempt from the wallet provider to fool the user would require the publication of a Bitcoin transaction. Even when replacing a transaction in the mempool, even if the original transaction isn’t mined yet, it is known to a large portion of the network. Therefore, the wallet’s provider malice can’t go unnoticed, especially if the user complains on a public space where benevolent bitcoiners can hear them. Sure, the user’s funds are gone, but so is the wallet provider’s reputation. A reputation any of the aforementioned non custodial wallet providers has spent years to build.
See the full post here.
🎙️Boots on the ground in El Salvador
Arnold Hubach is one of our very first users! He was one of the first to write on LN Markets for the Dutch community and since then has kept giving us precious feedback on the development of the platform. We were very happy to meet him IRL at Adopting Bitcoin and when we learnt that he had been in El Salvador a couple of weeks educating local people with MiPrimerBitcoin association, we seized the opportunity to know more!
Hey Arnold, could you share with us how you got into Bitcoin and what has been your journey so far?
Arnold: My journey regarding Bitcoin is very typical: from a start with altcoins and trading in 2016 up to Bitcoin-only and hodling in 2021. I got involved in the space with some fellow classmates and we dove into all different projects. The rabbithole brought me to the best place: the rabbithole about the unique monetary and freedom aspects of Bitcoin, which are superior compared to the buzzwords like 'smart contracts, DeFi and NFT's'. And I think it's a journey that everyone eventually will walk. Along that way, I started copy writing and blogging.
Now I'm a full-time Bitcoin educator, freelancer and cheerleader, with a predilection for the Lightning Network.
You have spent quite some time in El Salvador. What do you think of Bitcoin adoption in the country? Any ideas for improvement?
Arnold: In total I've been 8 weeks in El Salvador and the best word to summarize it with is: 'hopeful'.
It’s far from perfect and a lot can be improved, but I’ve seen a lot of hopeful things going on.
We haven't arrived at the destination yet, and we’re far from it actually, but it’s going in the right direction. For example: if you spoke about Bitcoin at Legal Tender Day in September, it became a political talk right away. But this changed: it's much easier to talk with the locals about it all. Or the fact that merchants that already started to accept bitcoin are ‘learning by doing’, and also instruct others on how to use it.
But... there are many (many and many) things to be improved. Both from a technical perspective, as well as regarding education.
So far, Chivo is doing well in onboarding people, but there are lots of problems. Getting sats into the government wallet seems easy, but taking them out is hard. As well as the Lightning-integration, which is kind of a hidden feature in the app. Also, the locals don't fully understand the core values of Bitcoin (yet). For them bitcoin = chivo and the inventor = Bukele, and things like that. Topics like self-custody and scarcity are not well-known.
Could you tell us more about Mi Primer Bitcoin and the educational you are doing with the association?
Arnold: I'm involved in the first crypto-native NGO of the country called MyFirstBitcoin (which is the translation of MiPrimerBitcoin) as a teacher. We try to fill the gap by educating the locals about the missing aspects of the Bitcoin philosophy, like the differences between custodials apps like Chivo and other wallets like Muun or Phoenix. Also regarding more generic topics: what is Bitcoin, what advantages does it have and topics like that.
We have a core team of ~10 persons, which is being taught to become 'Bitcoin teachers'. My task is to share my knowledge with these core members of the team, so they are able to spread the word on the ground. They go into the community to teach fellow El Salvadorans.
In November we taught ~300 students, which all received $10 in sats per person (only sent to their non-custodial wallets), funded by donations that we received so far.
What could be the key driver drive the next wave of Bitcoin adoption?
Arnold: It's hard to say.. but being in El Salvador I became aware of the importance of static invoices (BOLT12) in remote areas: a 1-single-QR-code based standard for both on-chain and LN-payments. But zooming out a bit more, I think that the biggest shift will happen on macro-economical levels. Now Bitcoin entered the bond market and inflation in the US and urozone reached a decades-old record (not even talking about countries like Turkey), I think that Bitcoin will become more and more a necessity instead of an alternative. We must be sure that Bitcoin (and Lightning) are ready for that, both on a technological and educational level.
🎅🏻 Santa is early this year. Great initiative from our friends at Arcane Research: learn, prove, and earn up to 10 million sats in prizes!
🤝 Andres (left on the pic) is a gem 💎. He managed the SBW booth in Adopting Bitcoin, and he turned out the be hilarious and very sweet. He speaks perfect English and is bored at his fiat job, so if you have any job opportunity which could fit Andres’ profile, please contact us!
🧡 Kiveclair is a Bitcoin-based educational and development project launched in Goma, in the Democratic Republic of the Congo. Goma is a 2 million people city which suffered partial destruction following an eruption of the nearby Nyiragongo in May 2021. The lava flow destroyed the homes of many residents who had to take refuge in camps.
Inspired by Bitcoin Beach in El Salvador, Kiveclair aims to promote Bitcoin Lightning Network to facilitate financial inclusion, with the first beneficiaries of aid being among these victims.
Kiveclair is just launching a crowdfund to help more people. Feel free to dig in, reach out to the team and donate here 🙏
🔮 How to better conclude this edition than with the wise words of Elizabeth Stark?
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