Moritz Wietersheim – Specter Solutions | Your Keys, Your Bitcoin

Liquid for Bitcoiners (4/4) – Financial Securities Infrastructure

Moritz Wietersheim — Fri, 22 Oct 2021 19:47:37 +0000

Hardcore Bitcoiners are understandably skeptical about Blockstream’s Liquid sidechain. But as the Bitcoin ecosystem grows, we’re going to need more services backed by Bitcoin that Bitcoin itself can’t provide. Liquid is a semi-centralized side chain that — crucially — has no unnecessary shitcoin. This blog series will discuss some of the use cases that are now possible through Specter Hardware and Specter Desktop’s integration with Liquid that might interest Bitcoiners the most.

HyperBitcoinization

In a hyperbitcoinized world, companies and projects will still need to raise capital and to issue shares and bonds. These equity, debt, and financial instruments will need to be managed in ownership registers. Voting processes, dividend and coupon payments will still need to be executed. Additional equity or debt will need to be issued to facilitate further build-out of projects.

This type of structure, operation, and governance can’t be done natively on Bitcoin. Nor should it.

The challenge is that many Bitcoiners suffer from significant post-traumatic stress syndrome due to years of scammy clowncoinery promising to securitize and tokenize everything on a blockchain. We instinctively want to throw our hands in the air and walk away from these conversations.

But there are financial innovations and efficiencies coming. We just can’t allow this new securities infrastructure to be built on a pile of premined, VC-controlled, decentralization theater BS. When bitcoin becomes the premier global store of value within the next decade, we must have the tools in place to raise capital on infrastructure that is firmly rooted in bitcoin.

Citadel Entry Fee: Bitcoin

Over the last few years the discussions around Bitcoin citadel infrastructure projects have developed nicely. Libertarian thinker and entrepreneur Titus Gebel wrote a seminal book about so-called Free Private Cities. It reads like a free open-source manual for citadels.

These advanced special economic zones will be based on a strong individual contract between the citizen and the service provider of said city. This is in stark contrast to the weak social contracts we have now which can be changed quite arbitrarily by the government administration — mostly with the result of decreased quality of service in combination with higher taxes and tighter regulation.

Recently a few projects have sprung up in Honduras, such as Prospera on Roatan Island, Guanaja Hills on Guanaja Island, or Morazan City on the mainland. Rumors are that there are a few other projects in other regions which are in advanced stages of development.

As the sovereign individual thesis continues to play out and our legacy governance systems crumble, these citadel infrastructure projects will prove to be interesting investment opportunities, especially in a late-stage hyperbitcoinization scenario. And they won’t be accepting fiat or any shitcoins. But on the flipside, once you’ve paid your bitcoin-only buy-in fee, how will your ownership stakes be managed? What does shareholder equity in a Bitcoin citadel look like?

Securities on Liquid

The optimal place to raise capital in a hyperbitcoinized world and to manage ownership rights will be on a sidechain that has a high degree of interoperability with the Bitcoin blockchain. When my bitcoin goes into an investment, I’ll want cryptographic assurances that my ownership rights are clear and enforceable. At the moment, the Liquid sidechain looks like a serious contender.

This is all fine in theory. But as I said above, we’ve heard all these promises before. But there is at least one really interesting real-world use case for a security offering on Liquid: The Blockstream Mining Note* (BMN).

* Not financial advice. Not an endorsement. Just some cool stuff we heard Adam Back talk about on a podcast.

Blockstream sells BMNs to fund new bitcoin mining operations. One BMN holds the rights to 2,000 terahash (TH/s) with the bitcoin mined to be paid out when the note reaches maturity after three years. It’s a bit hard to parse Adam Back’s tweet, but he’s pointing out some pretty promising ROI numbers (1.65 BTC earned with 90% of the three-year term still to go).

The notes are tradable securities on the Liquid sidechain and as each note steadily accrues more bitcoin value as it is mined and that yield can be priced in by the market. The notes can even be resold in smaller 0.1 BMN sizes. Whoever holds a BMN slice on its maturity date receives that share of the note’s accumulated bitcoin. Read that again: the note holder receives the mined bitcoin.

All of these assurances, ownership divisibility, and ownership transferability are managed on the Liquid sidechain. Right now. And coming soon in an upcoming Specter release, you’ll even be able to self-custody your BMN using your Specter Hardware wallet and Specter Desktop software.

To be fair, there are deeper BMN details that we have not seen for ourselves, so retain some skepticism and do your research. And to put things into perspective from an adoption point of view: Liquid currently stands where Lightning was in 2018. We’re super early. But stay tuned and keep an eye out for Liquid building out serious financial markets infrastructure.

Bitcoin is sucking in monetary premiums like a black hole. Lightning is striking and challenges legacy payment rails. Liquid has an excellent chance to be the securities infrastructure running on the monetary singularity of Bitcoin.

How to get started:

Update to the latest Specter Desktop release v1.7.0
Run a local Elements “Liquid” node (current chain size: ~17GB).
Create a hot wallet for Liquid in Specter Desktop.
Or check out the Liquid supporting hardware wallets: Blockstream Jade or our Specter Hardware Wallet
You can assemble a Specter HWW yourself with off the shelf-components (see shopping list) or buy pre-assembled kits at Seedsigner’s shop or the DIYnodes shop.

Editing and review by Keith Mukai – thank you, Keith!

Liquid for Bitcoiners (3/4) – Working Capital Stability, Remittances & Bitcoin-Backed Loans

Moritz Wietersheim — Thu, 21 Oct 2021 17:31:14 +0000

Working Capital Stability

Before my recent visit to Bitcoin Beach in El Salvador, the price of bitcoin crashed from $60k to $30k. So my hostel didn’t want to accept my bitcoin because they got their working capital balance crushed.

Bitcoin is a great long-term treasury reserve asset but it’s too volatile to operate a small- or medium-sized business with little capital reserve. This is where stablecoins can play an important transitory role by offering short-term stability for working capital. While earnings can be moved to the Bitcoin savings stack.

Stablecoins are often the only digital fiat solution available to the world’s unbanked. Even Strike had to initially launch their El Salvador support with Tether integration because the local banks weren’t ready to integrate with them.

How do you operate a small business with a small working capital base on Bitcoin?

Remittances

Similarly, many migrants use stablecoins to send remittances back home, as I witnessed first-hand with Venezuelans working in Panama. They care little about the superior monetary characteristics of bitcoin.

For now these people just want to support their relatives with $200 of stable value. They’re fine with missing out on potential bitcoin appreciation in exchange for knowing that the value won’t yo-yo up and down. Their family members back home are relying on these funds and any loss in value can create family strife.

Unfortunately sending an Ethereum stablecoin would incur $15+ in gas fees right now. That’s a significant percentage of the total value of these relatively small remittances transactions.

Bitcoin-Backed Loans

Also some people choose to use their bitcoin as loan collateral in order to gain access to fiat funds, stay long Bitcoin and to avoid capital gains taxes. Some turn this fiat loan right around and use it to buy more bitcoin as a leveraged play. Others might need the fiat to pay their bills or to buy assets (e.g. a house).

But any time fiat is involved, government regulations rear their ugly head. So rather than going through the complicated, expensive regulatory hurdles, instead some emerging lending platforms such as HodlHodl arrange peer-to-peer (or better: human-to-human) loans in stablecoins with Bitcoin as collateral.

As we previously discussed in the second post in this series, the stablecoin ecosystem is largely dependent on Ethereum and TRON. For most Bitcoiners this is either somewhat unpleasant or wholly unacceptable. But since Tether is also on the Liquid sidechain, we can have all the benefits of stablecoins without having to wade into and rely on any shitcoin exchanges, MetaMask, etc. It also means that transferring stablecoins can be made much cheaper via Liquid’s low fees and still move fast enough with 2 minutes for confirmation.

In a hyperbitcoinized world we won’t need fiat stablecoins. But right now stablecoins are filling an important use case during transition, albeit imperfectly. Stablecoins on Liquid are a big improvement. It’s totally justified to have some concerns about putting value on a somewhat centralized, federated sidechain like Liquid and into a stablecoin like Tether. Everyone has to weigh their own pros and cons.

But if you need to use stablecoins, it’s worth the time to start learning how USDT works on Liquid and how you can self-custody it. See the second post for info on how to swap into Liquid Tether and how to self-custody it with Specter Desktop.

How to get started:

Update to the latest Specter Desktop release v1.7.0
Run a local Elements “Liquid” node (current chain size: ~17GB).
Create a hot wallet for Liquid in Specter Desktop.
Or check out the Liquid supporting hardware wallets: Blockstream Jade or our Specter Hardware Wallet
You can assemble a Specter HWW yourself with off the shelf-components (see shopping list) or buy pre-assembled kits at Seedsigner’s shop or the DIYnodes shop.

Editing and review by Keith Mukai – thank you, Keith!

Liquid for Bitcoiners (1/4) – Confidential Transactions

Moritz Wietersheim — Tue, 19 Oct 2021 11:43:13 +0000

Confidential Transactions

The possibility of having fully private, onchain hidden transactions in Bitcoin has been discussed for years. But don’t expect this to come anytime soon — if ever. The Bitcoin ecosystem is wary of experimentation on the Bitcoin base layer. We need to move slowly and be as careful as possible.

Indeed, as Alex Gladstein recounts in his recent article, “The Quest For Digital Cash” for Bitcoin Magazine, cypherpunk Adam Back early on “realized it would be extremely difficult to implement CT [Confidential Transactions on Bitcoin], as the community understandably prioritized security and audibility over privacy.” So Adam Back and Greg Maxwell teamed up to found Blockstream, in large part to implement confidential transactions on a Bitcoin sidechain. That sidechain is called Liquid and has been running since November 2018.

Confidential assets and transactions on Liquid keep the amount and type of assets transferred visible only to participants in the transaction. Yet they still cryptographically guarantee that no more coins can be spent than are actually available.

Confidential Assets whitepaper. Just a few recognizable names in that list. Probably nothing.

So as coinjoin will continue to be a powerful tool in the privacy-focused Bitcoiner’s arsenal, it’s worth familiarizing yourself with the privacy features of Liquid confidential transactions. You “peg-in” some bitcoin to Liquid and receive an equivalent amount of L-BTC on the Liquid sidechain. Additionally, a growing number of exchanges will let you easily withdraw your bitcoin as L-BTC. You can then send your L-BTC confidentially to any recipient Liquid wallet. These transactions are inexpensive and very fast. The recipient can then deposit the L-BTC into their own Liquid-supported exchange or “peg-out” back to normal onchain bitcoin.

Give it a try in Specter with a small test amount. See what information can and cannot be traced as you move from Bitcoin to Liquid and across confidential transactions. You’re not gaining perfect privacy here, but certainly improved privacy.

Someday, hopefully soon (hint, hint developers!) we’ll see a coinjoin implementation that is built on Liquid confidential transactions. Any amount — of any asset! — go into the mix and whatever comes out would have no deterministic traceable link whatsoever. At this point you maybe would have near-perfect privacy at even a lower cost than current onchain coinjoin implementations.

Privacy best-practices: Coinjoin, Lightning, Liquid

Coinbase and other exchanges know how much bitcoin you bought and on which UTXOs these bitcoin sit. This data is shared with chain surveillance companies that are analyzing onchain transaction paths, selling their services to malicious players. This data will sooner or later leak out or get hacked and will find its way to a darknet market.

For financial privacy, any working capital operations with Bitcoin of a company or an individual should be coinjoined first and then pushed out for payment operations to Lightning and Liquid. For cold storage, bitcoin should be held in an onchain wallet and not on the federated sidechain of Liquid. Lightning channels are for facilitating payments, not storing value. Lightning hot wallets have their private keys always on-line and still need improved hardware backend security. Meanwhile Liquid allows to move high value amounts of Bitcoin with confidential transactions, while keeping keys in air-gapped multisig wallets.

Since the Bitcoin onchain layer will become very busy and quite expensive to operate on, using Lightning and Liquid will not only be necessary for improved privacy, but also from an economic perspective to optimize for an efficient use of the Bitcoin blockchain. Frequent payment transactions will get pushed out to Lightning and Liquid, while onchain transactions will happen for high value hodling, coinjoin, and settlement purposes.

How to get started:

Update to the latest Specter Desktop release v1.7.0
Run a local Elements “Liquid” node (current chain size: ~17GB).
Create a hot wallet for Liquid in Specter Desktop.
Or check out the Liquid supporting hardware wallets: Blockstream Jade or our Specter Hardware Wallet
You can assemble a Specter HWW yourself with off the shelf-components (see shopping list) or buy pre-assembled kits at Seedsigner’s shop or the DIYnodes shop.

Editing and review by Keith Mukai – thank you, Keith!