Hedge fund manager Paul Tudor Jones said that bitcoin has “a real problem” because “the entire regulatory apparatus” stands against it, in a CNBC Squawk Box appearance. Further, the notable hedge fund manager’s sentiment toward bitcoin has cooled somewhat since praising bitcoin’s appeal as an inflation hedge in 2020, with Jones now suggesting investors hold cash as the Federal Reserve is better equipped to handle rising prices. Meanwhile, there’s now more than one million individual wallets holding at least 1 BTC, a milestone noted by data firm Glassnode.
Frame Game
The EU’s Council unanimously approved the Markets in Crypto Assets (MiCA) act, becoming the first major jurisdiction in the world with a comprehensive crypto licensing regime. At a high level: The law sets disclosure requirements for crypto “operators” like exchange and wallet providers and imposes reserve standards for stablecoin issuers that want a license to operate in Europe. The 27-nation trading bloc is now also working on reforming its crypto tax policy. In the U.S., on Monday, the Securities and Exchange Commission (SEC) asked a court to reject a petition from crypto exchange Coinbase asking for a new regulatory crypto framework. Last year, Coinbase filed a document calling for tailored rules, an ask the SEC said is based on the “erroneous view” the agency is willing “to engage in rulemaking.”
Extraordinary!
A strange case involving someone who calls themselves an Ethereum co-founder, a supposed attempt by the FBI to obtain dirt on “high-ranking” crypto officials and an initial coin offering (ICO) extortion attempt has been dropped by a New York judge on May 5. U.S. investigators sued Steven Nerayoff over three years ago claiming he and his employee (Michael Hlady, who pleaded guilty) extorted an unnamed Seattle-based crypto startup that hired Nerayoff to guide its ICO in 2017. Nerayoff claimed he was innocent, and that the Department of Justice wanted to use his contacts in crypto to gather intelligence on the industry. In more quotidian news, Polygon co-founder Sandeep Nailwal announced his fellowship program to fund early-stage builders jumping from Web2 to Web3 while Lido, the dominant Ethereum liquid staking service, upgraded to V2 on Monday.
The Takeaway: On Bitcoin
This weekend, a pseudonymous developer known as Punk3700 made cryptocurrency history by launching what he calls the first smart contract written on Bitcoin in a bespoke programming language, Solidity. It’s the type of technical achievement that lately has become more common on the largest and most used blockchain sometimes known for its chelonian development speeds. Solidity, if you need reminding, is the crypto coding standard that Vitalik Buterin invented to run decentralized applications on the largest alternative blockchain, Ethereum.
Punk’s project is also an example of the type of change that’s been rankling many of Bitcoin’s oldest supporters: the Bitcoin maximalists who see other cryptocurrency efforts as a distraction at best and a lead balloon at worst, capable of tanking even Bitcoin’s success. While Bitcoin essentially does one thing really well – mint and authenticate a currency without the backing of the state – Ethereum exists as a virtual computer capable of just about anything (including running the Ponzi-like monetary schemes that have soiled crypto’s reputation). Bitcoiners often want as little to do with Ethereum as possible.
However, about a year after Bitcoin’s latest upgrade called Taproot (which enabled new types of bitcoin transactions), developers have found they could build Ethereum-like programs and systems on Bitcoin. This started off with non-fungible tokens (NFTs), which bitcoiners relabel as “inscriptions,” and has lately grown into a whole corpus of tokens and meme coins. Last week, Punk3700 deployed a version of Uniswap (Ethereum’s largest decentralized crypto exchange) on Bitcoin.
He calls himself a “New bitcoiner,” and together with his team at New Bitcoin City is planning a host of projects looking to reinvent what Bitcoin is used for. This includes a metaverse (Generative), artificial intelligence lab (Perceptrons Square) and an “Ethereum Virtual Machine” or EVM (Trustless Computer), for Bitcoin, which will power all the “sub-projects” of his digital city. “[W]e’re taking a different approach. We prefer to reuse battle-tested technologies (like the EVM), battle-tested programming languages with years of developer community forming (like Solidity), and battle-tested dapps (like Uniswap and MakerDAO),” Punk3700 told CoinDesk.
While Punk’s designs may be grander and more sweeping than others’, he is hardly alone in wanting to zap life into the open-source project following the surprising success of ordinals. There’s clearly demand for Bitcoin’s non-monetary uses, and a growing roster of bitcoiners wanting to build. At the same time, this unexpected demand for Bitcoin block space (the amount of data that can fit into a newly-mined block, which people pay for in transaction fees) has caught many flat-footed.
Although an influx in Bitcoin users benefits the network by increasing its security budget, by increasing the amount BTC miners can earn by processing transactions, many take issue with how the network is being used. Some think meme-coins and NFTs are outright scams, while others think the network congestion is harming the type of adoption bitcoin actually needs – by pricing out people looking to send remittances payments or buy small amounts of BTC. Transaction fees spiked above $10 last week, three orders of magnitude larger than the sub $0.01 fees paid at the beginning of the month.
As the in-fighting crescendos, some have predicted this relatively mundane debate could devolve into a bitcoiner civil war. It’s happened before. Known now as the “Blocksize Wars,” the period between 2015 and 2017 was marked by rancor and internal division. What started as an argument nominally about how the network should scale to handle periods of increased transactions was inflamed into a philosophical spectacle over what Bitcoin should be used for and political drama over how the open-source project should be managed.
The two sides were known as Big Blockers and Small Blockers, and they were split over a rather small technical decision: how many megabytes of data a BTC block should handle. Big Blockers wanted to increase the block size to accompany more transactions, lowering fees and making everyday payments more viable. Small Blockers were more conservative, in the way their name suggests as well as in not wanting to make irreversible changes to Bitcoin’s source code. Big blocks would enable more people to use Bitcoin, but would also require a protocol update known as a hard fork (an irreversible, and non-backwards compatible code split).
Worse, the thinking went, bigger blocks would also likely concentrate control of Bitcoin, with someone ultimately having to pay for increased performance if it was not users. While there no CEO of Bitcoin, the network can be thought of as being managed by a distributed cast of users (who pay for transactions and induce demand), miners (who expend actual energy to build Bitcoin’s blockchain) and node operators (who validated this ledger of transactions to ensure everyone is on the same page). Because big blocks were more data-intensive, fewer users would also be able to become miners or validators because fewer would be able to use higher-end hardware Big Blocks would need.
In a reflection of the narcissism of small differences, the in-fighting became a holy war over ecumenical interpretations of Bitcoin. Developers who proposed different Bitcoin implementations received death threats, Bitcoin forums became sites of propaganda and ostracization and, at one point, a sustained denial-of-service (DoS) attack waged against a Bitcoin fork brought down a major Internet Service Provider (ISP) on Long Island, New York. Ultimately, the small blockers won, a victory often described as a win for decentralization.
“I think small blockers won democratically. Of course, a lot of shenanigans happened on r/Bitcoin which affected public opinion, but at the end of the day, the rally cry behind favoring decentralization over TPS [transactions per second] was a real one and it won,” Eric Wall, OG and chief investment officer of hedge fund Arcane Assets, told me. Wall is something of a gadfly in Bitcoin circles, in part because of his support of non-monetary use cases for Bitcoin. While an orthodox Bitcoiner during the Civil War, who ardently supported scaling the network through “layer 2s” rather than larger blocks, Wall has since become somewhat disillusioned with the results.
“The route chosen was a more conservative one. People who were inclined to try out riskier ideas were pushed out. Bitcoin ossified, with Taproot being the only new upgrade to reach the protocol in the following five years,” he said. For years, Wall has been advocating for a spark of ingenuity in Bitcoin, and for its supporters to consider trialing tech developed on networks like Ethereum. He, like many bitcoiners willing to challenge the orthodoxy, has essentially been excommunicated, though he may not see himself as a casualty of war.
Today’s debate over transaction fees and Bitcoin development is different in one key regard: many of the questions over Bitcoin’s technical limitations have already been settled. While the high fees today paid to transact on-chain are a cause for concern for some, and perhaps impetus to build Bitcoin differently, as of yet no one is suggesting a complete overhaul of the blockchain.
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