VYSYN VENTURES Weekly Insights #2

Bitcoin On-Chain Movements, Stratum v2, & Reddit Community Tokens

A mantra of Bitcoin may be “move slow and don’t break things” but the cryptocurrency world nonetheless moves fast.

Over the past week alone, we have seen significant on-chain transactions on the Bitcoin network and Reddit launch two community tokens.

Amid the rapid developments, talented innovators are constantly pushing to make decentralized payment networks more secure, usable, and accessible.

This week's release covers the latest developments on a protocol project to improve the Bitcoin mining technology connecting miners to mining pools.

VYSYN VENTURES also details movements on the Bitcoin blockchain which caught widespread interest and the launch of ERC20 tokens in two Reddit communities.

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Bitcoin On-Chain Movements

The week was packed with exciting on-chain action in the Bitcoin network as coins mined in 2009 were transacted and surges in inflows and outflows from exchanges were followed by a sharp price decline. It was also the 10-year anniversary of an extremely important on-chain movement from 2010.

Bitcoin Pizza Day

On Friday 22nd May 2010, Laszlo Hanyecz successfully negotiated a transaction where someone would buy him pizza for 10,000 Bitcoin. This became the first widely known commercial transaction for Bitcoin and marked a huge milestone in Bitcoin successfully acting as a medium of exchange.

The anniversary of what is known as “Bitcoin Pizza Day” was just one of several significant on-chain movements which took place during the week. Retail investors were spooked during the week when Bitcoin mined in 2009 were transacted for the first time on Wednesday.

Satoshi Holdings?

A narrative quickly surfaced that the coins transacted were the Bitcoin holdings of Satoshi. The transaction was quickly followed by an over 5% sell-off over the following three hours.

Given that the coins moved were mined roughly 37 days after the start of the Bitcoin network, the argument that the coins belong to Satoshi seems credible at first. An analysis by researcher Sergio Demian Lerner suggests that Satoshi may have mined over 1 million BTC.

A movement by an entity with such a significant portion of circulating supply would indeed be a concern. However, deeper analysis highlighted that the funds moved were likely not owned by Satoshi.

Sergio Demian Lerner has previously detailed blocks which he believes to be mined by Satoshi based on a pattern in the extra nonce of blocks mined in the early years of the network. The extra nonce is a data piece that goes into the coinbase transaction of blocks and incrementally increases as long as the Bitcoin software is running.

When the program restarts, the extra nonce is reset to zero. As Satoshi was the dominant miner in the early years, the extra nonce data in blocks mined by Satoshi would increase more rapidly than the extra nonce data of other miners.

The below pattern highlighted by Lerner suggests that the dark blue dots are blocks which are mined by Satoshi whereas the green dots represent blocks appended by other miners. Block 3654 falls outside of the Satoshi pattern and is believed to be mined by another entity.

However, there is no way to decisively prove that the coins were not mined by Satoshi. It’s possible that Satoshi mined on multiple computers. In the case that the coins were sold by Satoshi, we certainly know that there is far more sitting in reserves.

Exchange Inflows & Outflows Surge

According to data from CryptoQuant, inflows of BTC to exchanges reached over 5 thousand on the 18th of May. Exchange inflows can often precede selling pressure as Bitcoin holders move their BTC from personal wallets to exchanges to liquidate into fiat.

Further data from CryptoQuant highlighted that exchange outflows from addresses associated with mining pools spiked 600% on May 20th compared with movements in the previous week. Given that mining pools transact in larger amounts, their transactions are typically executed through OTC markets which can provide better liquidity. Such mining pool outflows can often represent funds moving from exchanges to personal wallets to sell on OTC markets.

Therefore, both the spike in inflows and outflows likely played a role in the sell-off which ensued. Such a narrative is supported by the fact that mining companies will be feeling the pressure after their revenue was cut post-halving. Price declined over 10% within two trading days of the mining pools moving funds.

Braiins Receive Grant from Square Crypto to Spur Stratum v2 Development

It was announced during the week that Square Crypto awarded a grant to Braiins, the company behind Slush Pool. Both Square and Braiins have been working hard to improve the technology stack and security surrounding Bitcoin.

Through their Cash app, Square sold $306 million via Bitcoin sales to their users in Q1. This represents roughly 21.7% of the mined supply over that quarter. 

The demand-supply dynamics for Cash App purchases have adjusted in favour of upward BTC price appreciation since the halving. Assuming demand remains constant, Square will be selling over 40% of the BTC quarterly issuance to users.

While Square has gone a long way to make Bitcoin more easily accessible to the American public, Braiins have been pushing for changes to make the infrastructure underpinning Bitcoin more secure and robust. One exciting project underway at Braiins is an improvement to the mining protocol which connects miners to mining pools.

The limitations of the current dominant protocol, Stratum, are widely recognized by industry professionals. However, displacing the protocol is a hard feat given the requirements for farms, hardware manufacturers, and mining pools to adopt new infrastructure to support an improved version.

In November, Braiins released the specifications for Stratum v2. The protocol vastly improves upon the design of Stratum and the Braiins team have noted measures to help spur adoption. 

Stratum v2 Design

With Stratum, mining pools send blocks to miners with prefilled transactions. Mining pools take complete control over what transactions are included in each block and what block is built upon. This effectively means that mining pools could decide to censor certain types of transactions or blacklist addresses.

Mining pools also run the full-node meaning that they decide which software upgrades to support. While this point is nuanced and miners can protest if they don’t agree with the upgrade decision of a mining pool, Stratum v2 provides an easy solution to all of the above drawbacks. 

Stratum v2 is designed to give miners the option to run a full-node and choose what transactions go into each block. This will significantly reduce the risk of mining pools successfully colluding to censor transactions or 51% attack the Bitcoin network.

Furthermore, the current Stratum protocol is unauthenticated which leaves hash rate susceptible to BGP hijacking. An attacker who can get in the middle of the connection between miner and mining pool can redirect the hash rate. Stratum v2 is cryptographically authenticated to secure the network against such attacks.

Will Stratum v2 be Adopted?

In terms of pushing adoption of Stratum v2, it is worth noting that Braiins already have a significant presence in the mining industry. Their open-source mining firmware is reportedly already used by hundreds of thousands of miners worldwide and co-CEO Jan Capek has mentioned making Stratum v2 the reference client for that firmware.

Stratum v2 has also been designed to minimize the costs of transferring data across the protocol. By encoding the protocol in binary code, data can be transferred at significantly lower costs. Given that miners operate close to the margin and the extreme competitiveness of the mining industry overall, this will provide a strong incentive to adopt lower-cost infrastructure.

Bitcoin in a Stratum v2 World

It needs to be noted that Stratum v2 is far away from adoption. The specifications have yet to be turned into code and the changes need to be widely accepted by the Bitcoin community before becoming a reality.

Furthermore, the option for miners to select transactions will require a “template distribution interface” to be added to Bitcoin Core. Bitcoin Core is the most widely used Bitcoin software client.

However, a world where Stratum v2 is widely adopted would be a world where Bitcoin looks far more decentralized. As it stands, roughly 4-5 mining pools colluding would be sufficient for an attempted 51% attack on the network.

(Source: Medium.com)

Co-author of Stratum v2 Matt Corallo noted that with an improved protocol, all miners could theoretically connect to one pool. Hash rate distribution could drastically change as illustrated above.

Transitioning to a protocol which is cryptographically authenticated will also significantly improve the security of the network. Attacks to intercept hash rate will be prevented as the data transfers between mining pools and miners become encrypted.

Reddit Launches Two Community Tokens

(Source: Dappradar.com)

Reddit recently announced the launch of ERC20 tokens for two of its communities which each has over 1 million members. The Moon token for the r/CryptoCurrency subreddit and the Bricks tokens for the r/FortNiteBR subreddit will be initially distributed to users based on previous karma accumulated. 

The ERC20 tokens are currently on the Rinkeby testnet but will eventually transition to the Ethereum mainnet. The tokens will initially grant special privileges to holders such as custom emojis or using GIFs in comments. 

50 million tokens will be distributed based on karma to date and another 50 million will be distributed over the first year. Issuance in the following years will decrease until an eventual supply of 250 million tokens is reached in each community.

Once the tokens transition to the Ethereum mainnet, it is expected that they will be listed on decentralized exchanges such as Uniswap where a market value will be assigned. While there are no gas fees when the tokens operate on the testnet, Reddit will cover the Ethereum gas fees when the tokens move to mainnet. 

This is not the first time that a centralized web application has utilized a token native to a decentralized network. But this time is different…

(Source: SimilarWeb)

Reddit can be simply described as a social media behemoth. The website boasts over 1.5 billion monthly visits and if the community tokens are a success, this development will be a serious trust signal to enterprises who are considering adopting the Ethereum network.

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As this newsletter is still in its early stages, we are open to experimenting with format and finding what resonates with readers.

As it stands, we will be focusing on analysing three important developments each Sunday.

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