What has been happening around Blockchain Technology and Cryptocurrencies this week? The most relevant local and international developments as well as appealing background reports in a pointed and compact weekly review.
A few weeks ago, El Salvador wrote history. The country promoted Bitcoin as the first nation to a currency equivalent to the US dollar. By adopting the cryptocurrency as an official means of payment, the Central American nation hopes to increase the economic inclusion of its unbanked population (currently around 70%) as well as improve the efficiency of domestic and international payments. The decision by Salvador’s President Nayib Bukele was not without controversy. The International Monetary Fund (IMF) and parts of the Salvadoran population voiced criticism. Undeterred by the objections, the government integrated Bitcoin into the country’s financial infrastructure on September 7 without major complications. From now on, the local population can make payments using the official mobile app. But Bukele is already going a step further. This week, a government advisor revealed that foreign investors will be exempt from tax charges on Bitcoin profits effective immediately. The move is intended to attract more capital from abroad. Whether the “Bitcoin experiment” can actually help the small state to economic recovery remains to be seen.
El Salvador is a demonstrative reminder of what Bitcoin’s vision originally consisted of. If the cryptocurrency wants to achieve the status of an ultimate form of money, the digital asset has to be able to be used directly as a means of payment. However, due to the structure of the network, Bitcoin needs application alternatives detached from the native blockchain. Meanwhile, centralized services such as PayPal and Visa offer hybrid solutions for fast payments with cryptocurrencies. The so-called “Lightning network,” on the other hand, is a multi-tiered, decentralized solution that relies on the Bitcoin blockchain as a settlement layer. The fundamental innovation of Lightning is the use of payment channels. The network, which is detached from the native blockchain, creates a cohesive network of interconnected users. Direct channels allow bitcoins to be transferred to other participants in seconds on a peer-to-peer basis. The slow completion process via the Bitcoin Blockchain is not required.
The structure of blockchain-based decentralized payment networks such as Bitcoin guarantees permissionless access for everyone. Storing and transferring value is possible without involving a third party. The only requirement is a device with an Internet connection. Billions of people without bank accounts thus have a chance to participate in an international financial system. What sounds fascinating, nevertheless, requires a basic level of knowledge. Hardware wallet, private key or seed phrase – these are all terms that need to be understood for the independent safekeeping of cryptocurrencies. Holding your digital assets independently is being your own bank – and consequently also being responsible for their safekeeping. In industrialized countries where financial infrastructure is well-developed, service providers for handling digital assets are already present. Several banks have positioned themselves in this sector. Customers hand over financial sovereignty to the provider in favor of convenience. Does the custody of digital assets by a regulated bank offer a viable alternative?
Crypto exchange operator Coinbase used record-breaking user numbers and massively increasing trading volumes to go public. The stock market debut in mid-April went through with a remarkable valuation of almost $100 billion. Nevertheless, the company’s need for capital does not yet appear to be satisfied. With a $2 billion private placement of senior notes, the exchange operator is looking to raise funds to secure potential mergers, acquisitions and other investments. Most recently, Coinbase experienced a setback from the Securities and Exchange Commission (SEC). The regulator warned the company about launching an interest-bearing product on cryptocurrencies.
In addition: The smart contract platform Ethereum has been suffering from its own success for quite some time. The high usage of the network is causing transaction fees to rise tremendously. Competing blockchains like Solana are trying to address this shortcoming. The structure of a decentralized blockchain-based networks inherently does not allow for faster transaction speeds than centralized applications. The so-called blockchain trilemma circumscribes the technology’s dependence on three inescapable key features. If one of the three characteristics, scalability, security or decentralization, is favored, this necessarily happens at the expense of the other two characteristics. This fact was the downfall of the emerging Solana network. The blockchain fell victim to an attack that led to a transaction overload and subsequently to a complete network outage. The same approach was applied to Ethereum, but the network was able to withstand the attack due to the wider distribution of network operators.
Selected articles in the weekly review:
The South American country is actively pursuing Bitcoin integration into their economy.
An introduction to the Lightning network, the most commonly deployed scaling solution for Bitcoin.
The advantages of crypto custody with a bank compared to self-custody.
The largest US crypto exchange is filling its “war chest.”
The Solana smart contract platform suffered from a network attack.
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