Standard Kepler
Blockchain Cryptocurrency Research Bitcoin BTC Sidechain Scalability Commodity

Scalability Not Key Driver of BTC’s Value

10/08 – 10/14

Blockchain Cryptocurrency Research Bitcoin BTC Scalability Commodity Currency

WEEKLY RECAP

  • Total market cap. reached $203bn (a 6.6% decrease), and 7 day trading volume slumped 4.2% for top 100 crypto


WEEK AHEAD

  • 17 Oct: The Cboe XBT expiration date for BTC
  • 21 Oct: XRP and XLM participate the Money20/20 USA in Las Vegas


THOUGHTS OF THE WEEK

Bitcoin’s current ability to process 7 transactions per second on average is far from sufficient for purposes of handling real-time transaction processing, and a number of scalability solutions are currently being considered by the sector.

Sidechains, a layer-two scaling technology, can be considered as one such option. A sidechain is a separate blockchain that is attached to the main chain using a two-way peg, and an intermediary serves between the two chains. By handling the bulk of transactions on a sidechain, and only attaching computational results to the main chain, scalability can be improved. However, sidechains are responsible for their own security, and the introduced intermediary should be considered an element of centralization.

Announced by Blockstream this week, ‘Liquid Network’ is a sidechain solution for BTC, with its native token Liquid BTC (L-BTC) being backed by a two-way peg to BTC. L-BTC can be redeemed at any time, and claims to facilitate full settlement of BTC transfers in 2 minutes. L-BTC has so far secured the support of multiple exchanges, most notably Bitfinex, Bitmex, and OKCoin.

Compared to existing BTC scalability solution ‘Lightning Network’, the most distinguishing feature of Liquid Network is its focus on supporting bulk transactions among crypto exchanges and financial institutions. We view the introduction of confidential transactions (CT) as critical in making the solution commercially viable, since sensitive transaction information that can be considered trade secrets are concealed with CT. On the contrary, Lightning Network is built to handle instant and high-volume micro-payments, which is made possible through the elimination of block confirmations and custodian risks.

We question the actual demand for many proposed scalability solutions, with the total sum processed by the well known Lightning Network not exceeding 116 BTC to date.  This may indicate that the BTC community does not in fact prioritize scalability, and BTC’s value is not primarily derived from its role as a currency.

Rather, we believe the value of BTC to be derived from its recognition, and its role in the market as a safe storage of value, similar in nature to commodities such as gold. As demonstrated in our Chart of the Week, large sums of value have been sheltered in BTC during bearish times of dropping total market capitalization.

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