This is an opinion editorial by Andy LeRoy, the founder of Exponential Layers which is a Lightning Network analytics platform and explorer.
This beautiful three bedroom, 1.5 bath house in Charlotte, North Carolina, is a millennial’s dream. Complete with a backyard and a porch for enjoying a coffee, it is in a prime neighborhood just down the street from a brunch spot with an all-day avocado toast special. For just $730,000, it can be all yours.
We all recognize this house is expensive. A $4,000 monthly payment, even after putting $150,000 down, would represent nearly 70% of the median U.S. household income, and this house is about 1.7 times higher than the U.S. median home price of $440,000.
Why Is This House So Expensive?
The house was built in 1938, and its latest available records show its sale history, the earliest being for $88,500 in 1987.
This jump from $88,500 to $730,000 is a 725% increase over 35 years, and reflects a compound annual growth rate (CAGR) of 6.2%. That’s quite an increase. Over the same time the S&P 500 is up 465% at a CAGR of 5.1%, so is it really that big of a jump in comparison?
What about gross domestic product (GDP), the go-to for measuring economic output? GDP is up from $4.7 trillion to $24.8 trillion in nominal terms, another triple-digit increase of 427% over 35 years.
So everything is up … it makes sense, right?
Charlotte’s population has grown from 424,000 to 2.2 million over this same time period — 5% CAGR — and this house is in a great neighborhood, so supply and demand? Plus our economy is more productive, so the rise in price is inevitable?
All of this checks out on paper, except for one metric: energy.
U.S. energy consumption in 1987 was 21,056 TWh of energy, which adjusted for population at the time represents about 87,000 kWh per person. Of this energy consumption, electricity usage was around 11,500 kWh per capita.
Compare that to today — the latest figures in 2022 for the United States show per capita energy consumption of 76,632 kWh, with a slight increase in the amount consumed as electricity at 12,466 kWh per person.
For all of the talk of “walking uphill both ways” in previous generations, it actually turns out that more energy was consumed per capita 35 years ago in the U.S. than it is today.
The Energy Breakdown
There are a number of forms for how energy (and then electricity) is created.
If you ride a bike at a reasonable pace, you will generate 100 watts. Keep this up for 10 hours and you will have generated 1 kWh worth of energy. A load of laundry done with a washer and a dryer will consume around 6 kWh of energy.
If we ignore the monetary denomination of housing prices and just look at the U.S. economy as the output and consumption of energy, we now consume less per capita than we did in 1987.
As we saw in USD prices, this particular house is eight times as expensive, while energy consumption per capita is flat. By this logic, if it took you one month of riding your bike for 10 hours a day to generate the energy to buy the house in 1987, you would now need to ride your bike for eight months to buy the same house. Eight times as much energy for the same product? Better get out that Peloton subscription.
This is a cherry-picked example of one house in a growing city; it has probably been renovated many times and is worth the extra work, especially considering Charlotte’s population and job growth.
Let’s zoom out and look at another example.
The Texas A&M Real Estate Center publishes aggregated rural land prices. From their chart, we can see that an acre of land in Texas in 1987 was $553. That same land in 2021 is now nearly $4,000/acre (an eightfold increase over a 35-year period).
An acre of land, with no improvements, in the middle of nowhere, now requires eight times as much energy output to purchase?!
Land can improve in value with higher population, utility (farming or hunting) or lower tax rates and/or some kind of subsidized incentive. But a 362% price increase after adjusting for U.S. population growth? Texas forever, but something doesn’t add up here.
Is Energy The Correct Metric?
The idea of energy-based money is nothing new. Henry Ford was an early proponent of energy as currency, and as many Bitcoiners and Redditors have pointed out, he was also a believer in reincarnation (H.F. anyone?). The idea of a money denominated in energy terms, kWh for example, held great promise for getting us out of the fiat system.
We intuitively recognize the concept of energy. We either work longer hours or we focus efforts or use better tools to leverage our output, and the abstractions simply go on. The corporate world is full of internal rate of return analysis, resource staffing, budgets and timelines. Earnings reports and financial statements offer the scorecard to the market, which weeds out businesses that do not generate economic value over time.
Our system of capitalism has worked quite well. Thanks to the incredible ingenuity, output and work of everyone in the world, and despite inflation, so many things now have lower prices.
In 1956, the ENIAC computer weighed 27 tons, consumed 150 kW, ran about 100,000 operations per second and cost the equivalent of $6 million today. Today, a new Macbook weighs 3.5lbs, consumes around 40 watts, and cranks out 3.2 billion operations per second — all for $2,000.
Airliners have increased their fuel efficiency at a compound rate of 1.3% between 1968 and 2014.
In many cases, we are getting much more efficient with all of our energy consumption, so things should be getting even more inexpensive?
What’s The Problem?
To be able to have a rich life and so many improvements while using the same energy per capita is a benefit to us all, but how that economic value is measured is susceptible to changing rules.
If we have gotten more efficient with our energy and have better technology, how is it that a piece of rural land costs eight times more? This is where the Federal Reserve’s expanding money supply comes into play. For all of the talk about “transitory inflation,” the Fed (with the help of banks) has managed to expand the M2 money supply by around 680% over the past 35 years.
So while our nominal GDP is up 427%, it hasn’t outpaced money supply growth, and we have already seen that energy consumption per capita is flat over 35 years.
The problem here is what we all can tangibly feel: The output of our work denominated by the energy we put in is worth significantly less over time.
When we as individuals or corporations are unable to preserve the efforts of our energy output, we must continually find ways to preserve our purchasing power through assets like land, commodities and equities. If the pace at which stored energy degrades is faster than innovation and output, we have problems. Physical limits come into play: We can print all the money in the world, but we can’t fake energy production and consumption.
Yes, our energy may be consumed more efficiently — as evidenced earlier by the airplane requiring 45% less fuel for the same trip — thus providing more value to society. If our society has been so efficient, why has debt to GDP risen from 47% in 1987 to 123% today? How is it that we have needed to borrow against the future so much in an environment of increased productivity? At some point this all breaks.
Unlike with fiat or any proof-of-stake altcoins, you cannot fake energy creation. Doing more work in the past does not magically create new work in the future. However, the cover-up in fiat money printing, combined with every U.S. government administration’s propensity to spend, has left us in debt.
Supposedly this is fine, because we can always print our way out of debt. But can we really?
In 2021, the federal government brought in $4.05 trillion in revenue with GDP at $22.4 trillion. It spent $6.82 trillion. The pandemic payments made up $570 billion on top of other category staples such as social security ($1.1 trillion), health ($797 billion) and defense ($755 billion). Interest paid by the government was $352 billion — 5% of total spending (in a pandemic year).
Over time, the government has spent more as a percent of GDP — 32% in 1987 compared to 55% at the height of the pandemic — and now to 34% in 2022. Even after capturing the value hidden in inflation all these years!
In attempts to quell record inflation (9.1% in the latest report), the Fed hiked interest rates to 2.5% in July; an increase of 75 basis points (.75%).
While this may “slow” the economy, it has two negative effects on being able to balance the budget. With a slower economy, they have a lower tax revenue to draw from. The latest 0.75% interest rate increase also adds another approximately $130 billion in interest expense to a budget that already can’t be balanced. This comes in the form of added expense on debt rollover, and this great article from Allan Sloan walks through an estimated calculation.
Using his rollover debt totals of about $7.1 trillion, every 100 basis point increase in the federal funds rate that feeds through to market yields on Treasuries adds another $70 billion to required government spending. If rates ever get up to a 5% range, that puts interest expense (on just current debt) at somewhere close to $500 billion. More than transportation, education, training, employment and social services combined.
The Fed can also continue their attempts for quantitative tightening, but this has the same problem: higher interest rates (and interest expense), and a presumably reduced tax base given economic slowdown.
The last remaining option would be to cut federal spending or increase taxes. With names like the “Inflation Reduction Act,” we already see the government attempting to mask their increased taxation attempts. Other “hidden” taxation attempts will likely come: increasing the age at which you can begin receiving social security benefits, adding additional taxes for “wealthy” people withdrawing from their 401(k) or IRA, putting in carbon taxes under the guise of “ESG” (environmental, social and governance). Things will need to be creative to offset the competing incentives of a surplus and (re)election.
At some point, this model breaks. We cannot cut energy production and consumption, cut interest rates to encourage growth and run continued deficits. The numbers don’t add up and eventually no one — individuals, companies or governments — can fake the energy output required to keep pace. We have seen a number of debt-ceiling showdowns over the past decade, but this time seems different, especially with 25% of the world living in countries with 10%-plus inflation.
Money is just a tool for valuing goods and services over time — and has key properties. It doesn’t create “yield” by itself. Only productive assets, which provide positive economic value, can do this. When it all breaks down, whoever holds the productive assets can determine the role of money, provided they have the resources and means to enforce and defend the rules.
But, as all of you are well aware, we finally have an alternative option. Instead of it coming from top-down enforcement, backed by the military, Bitcoin is adopted bottom-up — in the very order that its properties become beneficial to the people and companies providing economic value.
How Bitcoin adoption plays out will be interesting and exciting to watch. Bitcoin is already used worldwide, with a $410 billion market cap, settling some $60 trillion in value.
Now, with the Lightning Network, Bitcoin can be sent peer-to-peer instantaneously, without a central authority. July saw the highest monthly Lightning Network capacity, and every metric is up and to the right for providing a payment layer that offers continued utility and helps clear the medium of exchange hurdle present in the Bitcoin system.
Defining success metrics relies on a whole host of factors, and at Exponential Layers you can take a look at preliminary Lightning Network metrics that give insight into network growth (among other data), as Lightning moves to take the role of Visa’s $10.4 trillion yearly payment volume.
This is a guest post by Andy LeRoy. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.
El Salvador Takes First Step To Issue Bitcoin Volcano Bonds
El Salvador’s Minister of the Economy Maria Luisa Hayem Brevé submitted a digital assets issuance bill to the country’s legislative assembly, paving the way for the launch of its bitcoin-backed “volcano” bonds.
First announced one year ago today, the pioneering initiative seeks to attract capital and investors to El Salvador. It was revealed at the time the plans to issue $1 billion in bonds on the Liquid Network, a federated Bitcoin sidechain, with the proceedings of the bonds being split between a $500 million direct allocation to bitcoin and an investment of the same amount in building out energy and bitcoin mining infrastructure in the region.
A sidechain is an independent blockchain that runs parallel to another blockchain, allowing for tokens from that blockchain to be used securely in the sidechain while abiding by a different set of rules, performance requirements, and security mechanisms. Liquid is a sidechain of Bitcoin that allows bitcoin to flow between the Liquid and Bitcoin networks with a two-way peg. A representation of bitcoin used in the Liquid network is referred to as L-BTC. Its verifiably equivalent amount of BTC is managed and secured by the network’s members, called functionaries.
“Digital securities law will enable El Salvador to be the financial center of central and south America,” wrote Paolo Ardoino, CTO of cryptocurrency exchange Bitfinex, on Twitter.
Bitfinex is set to be granted a license in order to be able to process and list the bond issuance in El Salvador.
The bonds will pay a 6.5% yield and enable fast-tracked citizenship for investors. The government will share half the additional gains with investors as a Bitcoin Dividend once the original $500 million has been monetized. These dividends will be dispersed annually using Blockstream’s asset management platform.
The act of submitting the bill, which was hinted at earlier this year, kickstarts the first major milestone before the bonds can see the light of day. The next is getting it approved, which is expected to happen before Christmas, a source close to President Nayib Bukele told Bitcoin Magazine. The bill was submitted on November 17 and presented to the country’s Congress today. It is embedded in full below.
How I’ll Talk To Family Members About Bitcoin This Thanksgiving
This is an opinion editorial by Joakim Book, a Research Fellow at the American Institute for Economic Research, contributor and copy editor for Bitcoin Magazine and a writer on all things money and financial history.
That’s it. That’s the article.
In all sincerity, that is the full message: Just don’t do it. It’s not worth it.
You’re not an excited teenager anymore, in desperate need of bragging credits or trying out your newfound wisdom. You’re not a preaching priestess with lost souls to save right before some imminent arrival of the day of reckoning. We have time.
Instead: just leave people alone. Seriously. They came to Thanksgiving dinner to relax and rejoice with family, laugh, tell stories and zone out for a day — not to be ambushed with what to them will sound like a deranged rant in some obscure topic they couldn’t care less about. Even if it’s the monetary system, which nobody understands anyway.
If you’re not convinced of this Dale Carnegie-esque social approach, and you still naively think that your meager words in between bites can change anybody’s view on anything, here are some more serious reasons for why you don’t talk to friends and family about Bitcoin the protocol — but most certainly not bitcoin, the asset:
- Your family and friends don’t want to hear it. Move on.
- For op-sec reasons, you don’t want to draw unnecessary attention to the fact that you probably have a decent bitcoin stack. Hopefully, family and close friends should be safe enough to confide in, but people talk and that gossip can only hurt you.
- People find bitcoin interesting only when they’re ready to; everyone gets the price they deserve. Like Gigi says in “21 Lessons:”
“Bitcoin will be understood by you as soon as you are ready, and I also believe that the first fractions of a bitcoin will find you as soon as you are ready to receive them. In essence, everyone will get ₿itcoin at exactly the right time.”
It’s highly unlikely that your uncle or mother-in-law just happens to be at that stage, just when you’re about to sit down for dinner.
- Unless you can claim youth, old age or extreme poverty, there are very few people who genuinely haven’t heard of bitcoin. That means your evangelizing wouldn’t be preaching to lost, ignorant souls ready to be saved but the tired, huddled and jaded masses who could care less about the discovery that will change their societies more than the internal combustion engine, internet and Big Government combined. Big deal.
- What is the case, however, is that everyone in your prospective audience has already had a couple of touchpoints and rejected bitcoin for this or that standard FUD. It’s a scam; seems weird; it’s dead; let’s trust the central bankers, who have our best interest at heart.
No amount of FUD busting changes that impression, because nobody holds uninformed and fringe convictions for rational reasons, reasons that can be flipped by your enthusiastic arguments in-between wiping off cranberry sauce and grabbing another turkey slice.
- It really is bad form to talk about money — and bitcoin is the best money there is. Be classy.
Now, I’m not saying to never ever talk about Bitcoin. We love to talk Bitcoin — that’s why we go to meetups, join Twitter Spaces, write, code, run nodes, listen to podcasts, attend conferences. People there get something about this monetary rebellion and have opted in to be part of it. Your unsuspecting family members have not; ambushing them with the wonders of multisig, the magically fast Lightning transactions or how they too really need to get on this hype train, like, yesterday, is unlikely to go down well.
However, if in the post-dinner lull on the porch someone comes to you one-on-one, whisky in hand and of an inquisitive mind, that’s a very different story. That’s personal rather than public, and it’s without the time constraints that so usually trouble us. It involves clarifying questions or doubts for somebody who is both expressively curious about the topic and available for the talk. That’s rare — cherish it, and nurture it.
Last year I wrote something about the proper role of political conversations in social settings. Since November was also election month, it’s appropriate to cite here:
“Politics, I’m starting to believe, best belongs in the closet — rebranded and brought out for the specific occasion. Or perhaps the bedroom, with those you most trust, love, and respect. Not in public, not with strangers, not with friends, and most certainly not with other people in your community. Purge it from your being as much as you possibly could, and refuse to let political issues invade the areas of our lives that we cherish; politics and political disagreements don’t belong there, and our lives are too important to let them be ruled by (mostly contrived) political disagreements.”
If anything, those words seem more true today than they even did then. And I posit to you that the same applies for bitcoin.
Everyone has some sort of impression or opinion of bitcoin — and most of them are plain wrong. But there’s nothing people love more than a savior in white armor, riding in to dispel their errors about some thing they are freshly out of fucks for. Just like politics, nobody really cares.
Leave them alone. They will find bitcoin in their own time, just like all of us did.
This is a guest post by Joakim Book. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
RGB Magic: Client-Side Contracts On Bitcoin
This is an opinion editorial by Federico Tenga, a long time contributor to Bitcoin projects with experience as start-up founder, consultant and educator.
The term “smart contracts” predates the invention of the blockchain and Bitcoin itself. Its first mention is in a 1994 article by Nick Szabo, who defined smart contracts as a “computerized transaction protocol that executes the terms of a contract.” While by this definition Bitcoin, thanks to its scripting language, supported smart contracts from the very first block, the term was popularized only later by Ethereum promoters, who twisted the original definition as “code that is redundantly executed by all nodes in a global consensus network”
While delegating code execution to a global consensus network has advantages (e.g. it is easy to deploy unowed contracts, such as the popularly automated market makers), this design has one major flaw: lack of scalability (and privacy). If every node in a network must redundantly run the same code, the amount of code that can actually be executed without excessively increasing the cost of running a node (and thus preserving decentralization) remains scarce, meaning that only a small number of contracts can be executed.
But what if we could design a system where the terms of the contract are executed and validated only by the parties involved, rather than by all members of the network? Let us imagine the example of a company that wants to issue shares. Instead of publishing the issuance contract publicly on a global ledger and using that ledger to track all future transfers of ownership, it could simply issue the shares privately and pass to the buyers the right to further transfer them. Then, the right to transfer ownership can be passed on to each new owner as if it were an amendment to the original issuance contract. In this way, each owner can independently verify that the shares he or she received are genuine by reading the original contract and validating that all the history of amendments that moved the shares conform to the rules set forth in the original contract.
This is actually nothing new, it is indeed the same mechanism that was used to transfer property before public registers became popular. In the U.K., for example, it was not compulsory to register a property when its ownership was transferred until the ‘90s. This means that still today over 15% of land in England and Wales is unregistered. If you are buying an unregistered property, instead of checking on a registry if the seller is the true owner, you would have to verify an unbroken chain of ownership going back at least 15 years (a period considered long enough to assume that the seller has sufficient title to the property). In doing so, you must ensure that any transfer of ownership has been carried out correctly and that any mortgages used for previous transactions have been paid off in full. This model has the advantage of improved privacy over ownership, and you do not have to rely on the maintainer of the public land register. On the other hand, it makes the verification of the seller’s ownership much more complicated for the buyer.
How can the transfer of unregistered properties be improved? First of all, by making it a digitized process. If there is code that can be run by a computer to verify that all the history of ownership transfers is in compliance with the original contract rules, buying and selling becomes much faster and cheaper.
Secondly, to avoid the risk of the seller double-spending their asset, a system of proof of publication must be implemented. For example, we could implement a rule that every transfer of ownership must be committed on a predefined spot of a well-known newspaper (e.g. put the hash of the transfer of ownership in the upper-right corner of the first page of the New York Times). Since you cannot place the hash of a transfer in the same place twice, this prevents double-spending attempts. However, using a famous newspaper for this purpose has some disadvantages:
- You have to buy a lot of newspapers for the verification process. Not very practical.
- Each contract needs its own space in the newspaper. Not very scalable.
- The newspaper editor can easily censor or, even worse, simulate double-spending by putting a random hash in your slot, making any potential buyer of your asset think it has been sold before, and discouraging them from buying it. Not very trustless.
For these reasons, a better place to post proof of ownership transfers needs to be found. And what better option than the Bitcoin blockchain, an already established trusted public ledger with strong incentives to keep it censorship-resistant and decentralized?
If we use Bitcoin, we should not specify a fixed place in the block where the commitment to transfer ownership must occur (e.g. in the first transaction) because, just like with the editor of the New York Times, the miner could mess with it. A better approach is to place the commitment in a predefined Bitcoin transaction, more specifically in a transaction that originates from an unspent transaction output (UTXO) to which the ownership of the asset to be issued is linked. The link between an asset and a bitcoin UTXO can occur either in the contract that issues the asset or in a subsequent transfer of ownership, each time making the target UTXO the controller of the transferred asset. In this way, we have clearly defined where the obligation to transfer ownership should be (i.e in the Bitcoin transaction originating from a particular UTXO). Anyone running a Bitcoin node can independently verify the commitments and neither the miners nor any other entity are able to censor or interfere with the asset transfer in any way.
Since on the Bitcoin blockchain we only publish a commitment of an ownership transfer, not the content of the transfer itself, the seller needs a dedicated communication channel to provide the buyer with all the proofs that the ownership transfer is valid. This could be done in a number of ways, potentially even by printing out the proofs and shipping them with a carrier pigeon, which, while a bit impractical, would still do the job. But the best option to avoid the censorship and privacy violations is establish a direct peer-to-peer encrypted communication, which compared to the pigeons also has the advantage of being easy to integrate with a software to verify the proofs received from the counterparty.
This model just described for client-side validated contracts and ownership transfers is exactly what has been implemented with the RGB protocol. With RGB, it is possible to create a contract that defines rights, assigns them to one or more existing bitcoin UTXO and specifies how their ownership can be transferred. The contract can be created starting from a template, called a “schema,” in which the creator of the contract only adjusts the parameters and ownership rights, as is done with traditional legal contracts. Currently, there are two types of schemas in RGB: one for issuing fungible tokens (RGB20) and a second for issuing collectibles (RGB21), but in the future, more schemas can be developed by anyone in a permissionless fashion without requiring changes at the protocol level.
To use a more practical example, an issuer of fungible assets (e.g. company shares, stablecoins, etc.) can use the RGB20 schema template and create a contract defining how many tokens it will issue, the name of the asset and some additional metadata associated with it. It can then define which bitcoin UTXO has the right to transfer ownership of the created tokens and assign other rights to other UTXOs, such as the right to make a secondary issuance or to renominate the asset. Each client receiving tokens created by this contract will be able to verify the content of the Genesis contract and validate that any transfer of ownership in the history of the token received has complied with the rules set out therein.
So what can we do with RGB in practice today? First and foremost, it enables the issuance and the transfer of tokenized assets with better scalability and privacy compared to any existing alternative. On the privacy side, RGB benefits from the fact that all transfer-related data is kept client-side, so a blockchain observer cannot extract any information about the user’s financial activities (it is not even possible to distinguish a bitcoin transaction containing an RGB commitment from a regular one), moreover, the receiver shares with the sender only blinded UTXO (i. e. the hash of the concatenation between the UTXO in which she wish to receive the assets and a random number) instead of the UTXO itself, so it is not possible for the payer to monitor future activities of the receiver. To further increase the privacy of users, RGB also adopts the bulletproof cryptographic mechanism to hide the amounts in the history of asset transfers, so that even future owners of assets have an obfuscated view of the financial behavior of previous holders.
In terms of scalability, RGB offers some advantages as well. First of all, most of the data is kept off-chain, as the blockchain is only used as a commitment layer, reducing the fees that need to be paid and meaning that each client only validates the transfers it is interested in instead of all the activity of a global network. Since an RGB transfer still requires a Bitcoin transaction, the fee saving may seem minimal, but when you start introducing transaction batching they can quickly become massive. Indeed, it is possible to transfer all the tokens (or, more generally, “rights”) associated with a UTXO towards an arbitrary amount of recipients with a single commitment in a single bitcoin transaction. Let’s assume you are a service provider making payouts to several users at once. With RGB, you can commit in a single Bitcoin transaction thousands of transfers to thousands of users requesting different types of assets, making the marginal cost of each single payout absolutely negligible.
Another fee-saving mechanism for issuers of low value assets is that in RGB the issuance of an asset does not require paying fees. This happens because the creation of an issuance contract does not need to be committed on the blockchain. A contract simply defines to which already existing UTXO the newly issued assets will be allocated to. So if you are an artist interested in creating collectible tokens, you can issue as many as you want for free and then only pay the bitcoin transaction fee when a buyer shows up and requests the token to be assigned to their UTXO.
Furthermore, because RGB is built on top of bitcoin transactions, it is also compatible with the Lightning Network. While it is not yet implemented at the time of writing, it will be possible to create asset-specific Lightning channels and route payments through them, similar to how it works with normal Lightning transactions.
RGB is a groundbreaking innovation that opens up to new use cases using a completely new paradigm, but which tools are available to use it? If you want to experiment with the core of the technology itself, you should directly try out the RGB node. If you want to build applications on top of RGB without having to deep dive into the complexity of the protocol, you can use the rgb-lib library, which provides a simple interface for developers. If you just want to try to issue and transfer assets, you can play with Iris Wallet for Android, whose code is also open source on GitHub. If you just want to learn more about RGB you can check out this list of resources.
This is a guest post by Federico Tenga. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.