Bitcoin — Update II

29.04.2019

TL;DR. Ecology:8 (8). Technology:9 (9). Decentralization:8 (8). Valuation:9 (9). Rating:9/10 (9/10)

Six months have passed since the second BD Ratings article on Bitcoin was published. Here is how all the predictions have turned out so far.

The price has dropped further, causing both earlier ratings to currently be misses. Let's proceed with detailing some of what has happened in the Bitcoin space these last months.

On the 6th of November, 2018, Bitcoin Core 0.17.0.1 was released. This minor version only included a fix for a bug affecting macOS users. On the 25th of December, 0.17.1 was released, including various bugfixes, performance improvements and updated translations. At time of writing, the major 0.18 release is nearing completion and will include a number of new and updated RPCs, some GUI changes, more bug fixes and more performance improvements. The release also switches Random Number Generator from OpenSLL to Bitcoin Core's own implementation.

As for the different Lightning Network node implementations, things have progressed as well. The MIT DCI client has had no new version releases, and the GitHub activity for that project seems to be very low. Lightning Labs' lnd client boasts considerably higher commit activity, and has had three releases - the latest being 0.6.0 beta. lnd 0.5.1 beta included better robustness and speed for the Neutrino light client backend. The changes in 0.6.0 are almost too numerous to list, but among them were the usual bug fixes and performance optimizations, and the progressing automation of channel creation and management with the development of the so called Autopilot system. Lastly with concerns to the lnd client, the Lightning Desktop App was finally released as an alpha. It utilizes the Neutrino light client technology and works on multiple operating systems. The app is currently being developed for Android and iOS as well, where users will be able to interact with the Lightning Network without having to run a resource-heavy Bitcoin full node.

Commit activity for the c-lightning node implementation also remains high. c-lightning 0.6.2 was released on October 26, 2018, and 0.6.3 was released a couple of months later, on January 11th. The latest c-lightning version is 0.7.0 and was released 1st of March, 2019. If BD Ratings understands correctly, the implementation works only on Linux, and with accompanying Bitcoin Core full node.

Ecology

On-chain activity is currently at the highest level since December 2017 or January 2018 when transaction fees cost tens of dollars. The network processes around 400 000 transactions per day, which apparently has not affected average transaction fees much at all - at least when comparing to earlier high-throughput periods. One of the reasons for this is the increasing use of SegWit addresses which causes each mined Bitcoin block to be able to contain more transactions in total. The fact that there are still at least some transaction fees is good from the perspective of someone like BD Ratings, that tries to get a crude estimate on economic activity. Relatively expensive transactions crowd out 'spam' as only bitcoin users that really want to utilize the network pay the price to do so. With this in mind, analysts can more confidently judge these 400 000 transactions to reflect real economic activity, and so it looks like Bitcoin is still one of, if not the, most used cryptocurrency in existence. The Ethereum network currently processes around 700 000 transactions per day, but at the same time average transaction fees are much lower.

At least two different Lightning Network clients are actively being developed by a considerable number of people. BD Ratings has brought this up before and will iterate: the continued expansion of Bitcoin's second layer solution is something positive for the whole ecosystem. The Lightning Network can facilitate Bitcoin usecases that are not feasible anymore with expensive on-chain transactions. Applying micro-transactions directly on the underlying blockchain would quickly fill up any empty block space and consequently bloat the shared transaction ledger that all full nodes have to carry. As people already can tap in to the Lightning Network (soon through smartphone apps with lean back-ends), total usage ought to increase going forward. Evidence of this happening has been seen on node visualizers. The increased usage will also test the technical feasibility of the second layer network - something that has been routinely criticized.

Neither Bitcoin Cash nor Bitcoin SV are anywhere near in competing with Bitcoin when it comes to being established as the main cryptocurrency value protocol on the market. As long as Bitcoin's blockchain remains secure and decentralized, while more people battle test the different clients for both layers, Bitcoin will continue to solidify its 'protocolness' - a prerequisite for a truly diverse ecology.

Grade: 8

Reasons: Still high on-chain activity when compared to other cryptocurrencies.

Technology

Commit activity for the widely used Bitcoin Core client remains high. BD Ratings sees no indication that the development process has strayed from its strong security-focus as added features almost always seem to concern just that. It should be obvious by now that even with major new client version, large protocol changes are generally nowhere to be seen as that would have been both controversial and possibly dangerous from a long-term security perspective. With many altcoins, BD Ratings has seen blockchain re-sets, blockchain migrations, sudden change of consensus mechanisms, changes in the issuance schedule etc. With Bitcoin, new client versions rarely come anywhere near such changes, but rather focus on incremental security and performance improvements instead.

Contributing to all this development are a huge number of Bitcoin developers. Certain Lightning Network clients also see a considerable number of people helping out. No known, serious bugs have affected the network during this period.

Grade: 9

Reasons: No considerable changes since last review.

Decentralization

BD Ratings has seen no integrity deterioration with regards to Bitcoin 'governance' (for lack of a better word) in the form of how developers use the BIP process. It is however essential for Bitcoin stakeholders to always be on guard against individuals or groups trying to co-opt this governance vehicle. The prior refusal of many code contributors to implement a blocksize increase is not an example of such co-opting, but any endorsement or lack of concern with regards to censorship might very well increase the likelihood of such threats in the future.

The mining pool hashrate distribution currently looks healthy, with no pool anywhere near 50%. It has to be said however that hashrate can hide in preparation for 51%-attacks, either as part of the 'unknown' hashrate, but also in some public mining pools. Following certain 51% attacks against smaller cryptocurrencies, it is still clear that these smaller protocols that share Proof-of-Work mining algorithms with larger protocols and at the same time are not merged-mined, are the ones truly vulnerable. They always are at risk of seeing external hashpower temporarily point at them for a lucrative attack. As Bitcoin is the largest SHA256 cryptocurrency protocol, there is most likely not enough external hashpower to use for a conventional attack. Any future threat would probably rather consist of colluding pools or new entities that may have figured out how to severely beat other ASIC producers by some type of hardware enhancement.

Related to the above discussion; on April 8th, 2019, the People's Bank of China issued a statement that the country's cryptocurrency mining industry was wasteful and should be eliminated. Upon hearing this news, some drew the conclusion that it was obviously bad for Bitcoin. BD Ratings has the opposite opinion, that this geographically shifting mining equilibrium is a good thing. After all, the goal of using PoW is to achieve decentralized consensus, not to achieve as high total hashrate as possible. By pressuring large mining firms to take some of their hardware out from China, Bitcoin mining ought to immediately get slightly more decentralized since China prior to this has contained a majority of all hashrate. CoinShares released an extensive mining report in November 2018, which confirmed that most mining was conducted in China back then.

Grade: 8

Reasons: No considerable changes since last review. Possible mining decentralization.

Valuation

Bitcoin is at time of writing valued to around USD 93B, or over USD 100B if near future supply flows are included as well. It is the highest valued cryptocurrency in existence. Since the sound fundamentals are more or less unchanged from where they stood six months ago, the Valuation rating stands as well. Total valuation is still only a small fraction of the total valuation of gold, and the similarities between the two decentralized value protocols make for an apt comparison. As long as Bitcoin keeps having a strong security focus, and all properties under the broad decentralization umbrella can be kept polished, value will continue to flow to the Bitcoin protocol while its annual stock-to-flow ratio soon doubles.

Grade: 9

Reasons: Slight price decline despite exceptional fundamentals.