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| Exploring the transformation of value in the digital age By Michael J. Casey, Chief Content Officer Dec. 17, 2021 If you were forwarded this newsletter and would like to receive it, sign up here. Sponsored by
Last week, Bitcoin’s hash rate returned to its levels of mid-May before China ordered miners to shut down operations and, in doing so, cut the leading cryptocurrency’s network capacity in half. Given that the real-world goods and services economy is currently confronted with intense supply problems – including microchip bottlenecks that impact mining equipment makers – the relocation of 90 TH/s worth of hash power to the U.S. and other countries is a remarkable achievement. This week’s column delves into what it is about Bitcoin’s unique economic design that affords it such adaptability to changes in market conditions.
For this week’s “Money Reimagined” podcast, my co-host Sheila Warren and I explore the budding rivalry between “crypto city” Miami and New York City to be a hub for the industry and its ideas. We spoke about how crypto intersects with urban renewal projects with Miami’s mayor, Francis Suarez, and with Matt Homer, executive in residence at NYCA partners and the former executive deputy superintendent for research and innovation at the New York Department of Financial Services.
Have a listen after you read the newsletter.
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Bitcoin: The Supply Chain That Works Rachel Sun/CoinDesk There’s a cream cheese shortage in New York bagel shops. Used cars are selling for almost as much as new cars. And parents are going to extreme lengths to get their hands on Magic Mixies Cauldrons, the “it” toy of this holiday season.
You’ve heard it ad nauseum: The global economy is beset with supply chain problems. These have contributed – along with central banks’ massive monetary expansion programs – to an inflation outbreak that on Wednesday led the U.S. Federal Reserve to signal a faster-than-expected curbing in monetary expansion.
In essence, global goods markets can’t respond efficiently enough to the disruptions in demand and supply to which the COVID-19 pandemic has contributed. As much as Moose Toys would love to get a Magic Mixies Cauldron into the hands of every child who wants one before Christmas, they can’t crank out or distribute them fast enough.
It’s a reminder that despite just-in-time inventory systems, an abundance of market information, highly automated factories and other advances brought by digitization, physical problems such as the availability of cargo containers, warehouses or willing workers continue to cap producers’ ability to respond quickly to market signals.
Now think about the past year for bitcoin mining. The industry also had two massive shocks to capacity in short succession – both from China – which contributed to periodic inflationary pressures in the form of higher transaction fees.
But the Bitcoin network adjusted rapidly to the changed circumstances, with the network hashrate – a measure of the total number of hash calculations conducted every second – now having fully recovered and while Bitcoin transaction fees are low and stable.
In this column we’ll examine why Bitcoin’s market adjustment mechanisms are more efficient than traditional markets.
Please don’t @ me, crypto critics. This is not a naive “Bitcoin fixes this” essay. I don’t have an answer for fixing global supply chains. I simply think it’s useful to explore how Bitcoin’s design fosters its unique adaptive capacity and how that’s pointing to new ways in which other systems, such as our energy system, can intersect with it.
Off the Charts Off the Charts: Hashrate and Fees As mentioned in the column – and can be seen in our chart this week – there was a surge in transaction fees at the same time that the Bitcoin hashrate suddenly dropped in April of this year. But as mentioned, fees quickly dropped back again as the difficulty adjustment kicked in and, shortly after that, as the hashrate recovered.
Notably, the impact on fees from the May-June exercise in which Chinese provinces imposed permanent shutdowns from mining operations was quite different. At that time, fees kept falling as hashrate fell.
One possible reason for that is that although the hashrate reduction was massive in total size, it was drawn out over six weeks in a steady manner. In that scenario, the difficulty adjustment, which happens on average every two weeks, had a chance to keep up with the somewhat more drawn-out decline.
Another is that other innovations were at this time starting to kick in to reduce transaction fees. Notably, those include the wider user of the Lightning Network, which allows smaller Bitcoin transactions to occur off-chain, reducing block congestion.
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The Conversation Warren Gets Ratio-ed Illustration: Rachel Sun/CoinDesk Sometimes it seems highly inappropriate to call this section “the conversation.” For this week’s review of my chosen Twitter moment, I found it very hard to find anything other than critiques of Sen. Elizabeth Warren, who during a hearing on Tuesday launched this alarmist description of the risks of stablecoins. Now, that might just be proof of Twitter’s curation bias for highly vocal crypto fanatics. Nonetheless, it was noteworthy that Warren’s tweet was “ratio-ed,” meaning it attracted far more replies than both retweets and likes. In fact, subtweeting proved a popular way for the crypto community to express their disdain for Warren’s take. Here’s a characteristically hyperbolic quote tweet from Messari CEO Ryan Selkis: Monetary economist George Selgin focused more on the substance, but also pulled no punches: Others went for the “banking cronies” line, though it’s hard to square the idea of Warren being in bed with bankers given her antagonism toward Wall Street since the ‘07-’08 financial crisis. The question is, will Elizabeth Warren care about these attacks? Unlikely.
Relevant Reads Culture Week If you go to our newly launched Layer 2 by CoinDesk digital magazine, you’ll find a series of great articles and other content attached to Culture Week, the latest in an ongoing series of monthly projects that in one week gather articles, commentary and TV content around a particular theme. The pieces didn’t disappoint. Below is a sampling. In a piece entitled “Why I spent $29 million on a Beeple,” collector Ryan Zurrer outlines the seemingly wild logic behind paying massive amounts of money for a digital art. Hint: It has to do what Ryan sees as the role played by Beeple, aka Mike Winkelmann, in charting society’s march into the unknown future of the metaverse. It contains descriptions of the “campus” from which Beeple is now working on highly intricate multimedia art projects. Irina Kargyaur, head of Metaverse Growth at Unique Network, explores the nascent property market for virtual space in the metaverse and what it might do to the real-world real estate business. Joon Ian Wong, the founding co-president of the Association of Cryptocurrency Journalists and Researchers and a former CoinDesker, is here to tell you that the future of non-fungible tokens (NFTs) lies in, well, fungible tokens. He sees payment and ownership tokens as mechanisms for fractional ownership of NFT properties and as a means to bring liquidity into the market. Will the blockchain finally live up to its longstanding promise to bring dynamism and opportunity to creators of music? Joan Westenberg, an award-winning Australian contemporary writer, designer and creative director, thinks it’s finally about to happen. She writes that “music NFTs are set for an explosive 2022.”
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