Flippening of demand

Number of Transactions

Over the past year, an important happening titled “The Flippening” has been observed in the cryptocurrency and cryptotoken sector. One of the key determinants of demand has traditionally been a total volume of a crypto-tokens that have been traded. Nevertheless, consistently Bitcoin’s transaction volume has far surpassed every other crypto token in the market.

Transaction Volume

This transaction volume has often been measured in US dollars and not in terms of the number of Bitcoins.

Number of Transactions

The above plot from shows how the number of transactions on ethereum have far surpassed Bitcoin since Jan 2017.

Does this mean that there is more demand for Ethereum than Bitcoin?

There is no definite answer to this since both coins have different purposes. Bitcoin is considered as the fiat currency in the cryptocurrency world and is supposedly a holder of value. Ethereum is considered as a token that is used to stake business models by means of smart contracts. Ethereum is spent each time a smart contract executes  or some form of transfer happens on the blockchain. Nevertheless considering the fact that there are far more ethereum available (about 106 Million Ether in supply) in supply compared to  Bitcoin (500000 BTC) we  would expect more of ether to be spent.

Additionally the total transaction value of BTC in USD has consistently been atleast twice that of ethereum.

Total Transaction Fees in USD

Another important metric most analysts and industry experts consider to be important is that of total transaction fees. The total transaction fees for Ethereum has since 2019 started surpassing the total transaction fees on the Bitcoin network, indicating the large number of ethereum applications consuming huge amounts of gas for conducting smart contract enabled transactions.  The following graph (again from shows how recent total network transaction fees in USD on ethereum has started surpassing that of Bitcoin.

network transaction fees ethereum


This is happening despite Ethereum’s USD value being 1/50th  of that of Bitcoin.

Does this indicate that Ethereum’s demand is significanly higher than that of Bitcoin? – Where is this demand coming from?

Again this question has no direct answer.  The Ethereum network consists of approximately 100000+ active smart contracts running at any given time. Some of these smart contracts are part of complex applications like the ones in this list:

These programs spend gas (small quantitites of ethereum) for each and every asset transfer of conditional execution of programs in the smart contract. This expenditure creates the demand for ethereum on the network.  The largest such smart contract executing on the network is that of the stable coin Tether which in 2018 migrated off the bitcoin blockchain to the ethereum blockchain. Tether’s value is pegged at 1USD and is the standard of value on most cryptocurrency exchanges around the world including Binance.  Analysts have pointed to the fact that 20% of Ethereum’s transaction demand arises from Tether thereby giving the ethereum network this tremendous demand. 

On the overall though – as the number of ethreum applications increase and as the demand for ether increases this trend of transaction fee flippening will sustain in markets. However, it is yet to be seen if the fee flippening will ever lead to the flippening of value on the ethereum network.


Bitcoin Price Predictions

Bitcoin image

Firstly, the overall sentiment this year has predominantly been that the market is up about 68% till date and down 55% from its peak in January 2018.

This move has wiped out more than 300 billion dollars from the global crypto-markets. Most of this wealth lost  though, has not been created in the Bitcoin market- per se. The ICO’s and altcoins have lost more than they have actually gained.

What do scholars say about bitcoin prices – and predictions?

In a recent paper in Economics letters, Andrew Urquhart (2017) shows the price-clustering property of bitcoin wherein Bitcoin prices always cluster around whole numbers. He reviews several papers, most notably Briere(2015) which shows that Bitcoin offers diversification for investors and his own paper where he shows that the random walk property prevalent in stock markets don’t hold. Again, Balcilar(2015) shows that Bitcoin volume can be a good predictor of prices except when there is a bull or a bear market and volume cannot predict volatility.

There is also a paper by Dwyer(2015) which shows that Bitcoin is more volatile than gold, foreign exchange currencies. More recently there is a seemingly growing set of studies investigating the effect of social media sentiments on bitcoin value  (i.e. Feng Mai, etc… ), crowd sentiment on bitcoin prices, etc.. Exemplar work by Feng Mail et. al show that social media sentiments affect the prices of bitcoin and using two well accepted econometric methods demonstrate the effect of bullish and bearish tweets on future prices of bitcoin.

Market Sentiment

That being said the price of bitcoin and other digital assets (cryptocurrency) are highly volatile. Their prices are generally reflected by the demand and supply of the cryptocurrency in question and by user sentiment in markets.

Off late this sentiment has turned bearish on account of  a) Persistent regulatory hurdles – for e.g. over the past year SEC has rejected more than 12 applications for Bitcoin Exchange Traded Funds. b) Lack of international support -many of the largest economies of the world e.g. China, India, etc. prevent fiat to crypto-trade. This leaves out more than 1/3rd of the global citizens from participating in the crypto economy. c) technical challenges in surfacing bad actors – over the past year more than 1000 Initial Coin Offerings or crypto-offerings have  bombed – and the world is still counting the number of fake cryptocurrencies out there- from offering online grocery marketplaces to everything else.

The Promise of the Blockchain

Despite these negatives in the basic trade of crypto-currencies, blockchain has a technology is seeing tremendous innovation and is affecting almost all industries from supply-chain (e.g. IBM-Maersk partnership), to gaming(several new gaming platforms such as Tron, etc. are coming to the fore). Even incumbents such as Facebook, google are building blockchain based teams and recently Facebook has attempted to build a bridge the cryptomarkets with their own Libra cryptocurrency.

Bitcoin vs. S###coin

blockchain image

Recent senate hearing on Libra cryptocurrency

Here is an interesting question raised during a recent Libra cryptocurrency hearing:

Then we have the following follow up:

Consortium controlled cryptocurrency

When a consortium-based non-sovereign entity that has access to a captive network of several billion users proposes to launch a financial instrument which is a digital asset, the proposal leads to several challenges:

  1. A regulatory challenge
  2. The disenfranchisement of existing financial entities like banks, mutual fund investors, etc.
  3. The rather unnerving possibility of seeing use cases of the technology and digital asset completely unseen earlier.
  4. The scary proposition of allowing a large consortium to control money supply in international markets when a sufficiently large population agrees to use it as a mode of payment.

Another followup, discussion about the same:


Amaury Séchet Interview on Epicenter Podcast

Bitcoin cash


Here is the podcast of the week form Epicenter channel. This is a quite interesting interview with Amaury Séchet (Lead developer from BitcoinABC). he’s been working on Bitcoin Cash for a long time, In this Interview, he explains about Bitcoin cash road-map, Future forks and difference between bitcoin and bitcoin cash also added points about block size factors in bitcoin cash. He has also explained his past working experiences on Facebook and his views about Facebook blockchain experiments.

Here is the complete podcast from Epicenter channel.



Here is the some more interesting podcast link for you

  1. Vitalik Buterin Interview on Unchained Live
  2. The Impact Of Central Bank Digital Currencies On The Banking Sector.

Introduction To Bitcoin Lightning Network

Lightning Network

The Bitcoin Lightning Network is a payment protocol that operates on blockchain network. It enables faster bitcoin transactions between participating nodes and has been suggested as an off-chain solution for the bitcoin scalability problem. The Lightning network provides a peer-to-peer framework for creating micropayments of cryptocurrency(bitcoin) through a network of bidirectional payment channels between two nodes by creating a smart contract.

Bitcoin Blockchain Scalability Problem

The main scalability problem in bitcoin blockchain is the number of transactions per second and block size. As per the Lightning Network white paper proposed by Joseph Poon and Thaddeus Dryja, up to 7 transactions per second  can be facilitated with a 1-megabyte block size  limit in bitcoin blockchain. The block size limit is an artificial “hard coded” value for the number of transactions which can be recorded in a particular block. If there are more transactions, they have to be put into further or newer blocks ,as new mining takes place. The block-size limit combined with the mining limitation reduces the throughput of the bitcoin network greatly.

Payment networks like Visa currently enable 45,000 transactions per second  (i.e., about 150 million transactions per day).  If bitcoin has to support 45000 volume transactions, according to some estimates, the block size would have to be set to  8 gigabytes,  since mining is limited to 1 block every ten minutes. It is  physically impossible for the personal computers or mining machines or even nodes to operate with this kind of bandwidth and speed, given the complexities.

To reduce this transaction scalability problem                         

Joseph Poon and Thaddeus Driya proposed a network called lightning network to solve this. The Lightning Network creates a second layer on top of the bitcoin blockchain network which enables micropayment channel option for bitcoin through a network of bidirectional payment channels between two nodes by creating a smart contract(HTLC). Once the transaction is done between two nodes in the micropayment channel,  this transaction will be an off-chain transaction. The channel balance is reflected without broadcasting a transaction on the blockchain. Once everyone starts to create a micropayment channel between nodes this reduces the scalability problem.

Bidirectional payment channel

To initiate this channel the two nodes Alice and Bob should lock some funds to the channel. Once funds are deposited,  Alice and Bob will have full access with security cover, on the network. With the duplex micropayment channel and lightning network,  Alice and Bob can send and receive funds from to each other in a secure mode. By connecting (n) number of micropayment channels, Alice and Bob can make (n) number of payments between different nodes.

HTLC – Hashed Time lock contract

Once the payment channel is set up, Alice and Bob need a contract between sender and receiver.  A smart contract called Hashed Time Lock Contract enables this transaction, that will create an output which is redeemable only by the final recipient. The receiver first generates random data R and hashes the message R using hash(R) to produce H. This information is provided directly by the final recipient to the sender along with his bitcoin address. The sender initiates this fund transaction to the receiver. When the transaction is updated in the micropayment channel, the receiver can redeem the transaction by revealing the random data(R). This will debit the funds from the sender. If the receiver fails to produce random data R within three days then this transaction will be invalid and funds are locked within the contract.

To participate in HTLC the sender and receiver require a message R.

Eg… Let see how Alice and John transfer funds through a multi-hop system.

  1. If Bob can produce to Alice an unknown 20byte random input R. Within three days, then Alice will settle the contract by paying 0.05BTC to Bob.
  2. If Bob has not disclosed the R before three days then this transaction will be invalid. Both parties must not attempt to settle or claim after three days.Bitcoin Lightning Network

Once a channel is setup between Alise and bob, then the same channel can be used in a multi-hop process to send funds to John.

Alise, has an open channel with Bob, and John has an open channel with Smith, and Smith and Bob have a channel together, a payment can be transferred by connecting these different micropayment channels together and this is called Multi-hop transfer.

The Current State of the Bitcoin Lightning Network

Currently Lighting network has more than 3250 nodes as on 17Feb2019  and 25580 active channels on this network. The total bitcoin circulation in this network is 695.907 BTC (2,530,194 Usd).

Active Channels in Lightning Network
Active Channel in Lightning Network

Lighting Network channel
Lighting Network Nodes

Bitcoin capacity across all channels
Bitcoin capacity across all channels

Source –

Applications like ACINQ and Blockstream are working on lightning network development.


Usage of Elliptic Curve Cryptography in the Bitcoin Protocol

Elliptic Curve Cryptography

Elliptic Curve Cryptography

Within the Bitcoin ecosystem, the usage of elliptic curve cryptography is very specific. Bitcoin uses a specific Elliptic Curve Cryptographic Signature Algorithm to create the public-private key pair.

Elliptic Curve Cryptography
Elliptic Curve Cryptography

The standard used is  known as secp256k1  and has a very specific form for a generator function otherwise known as G. The properties of numbers known as fields, etc. are given here.

Elliptic curve cryptography is used in Bitcoin to generate the private-key/public-key combination pair for each participant on the network. The ECDSA algorithm is used as follows:

  1. The public key is a product of a mathematical function which is related to the generating function G,  with some mathematical properties, such as lying on a curve defined by the generating function. The curve has its own mathematical properties such as being symmetric (the name elliptic comes from there), etc..
  2. The properties of the private key and elliptic curve crypto-system are such that one can generate any number of public keys (theoretically infinite) from the exact same private key. For each such public key one can generate a corresponding bitcoin wallet address.
  3. Once the public key is created it can be shared after transformation using a hash function (p2pkH) into a public Bitcoin address.
  4. This address is used later in a series of transactions for storing data pertaining to balances on the Blockchain, as an input in the mining process, etc…
  5. This is further used to ensure a) the rightful owner of funds can spend b) only the right amount of funds from c) the wallet.


  1. Marshalls blog on ECSDA

Smart contract platforms – Part 1

Smart Contract

This past year i.e. 2017 saw the nobel prize in economics go to Hart and Holmstrom for their work on contract theory. An old pre-print version of their thesis on the Theory of contracts is found here.

Their theory argues that contracts improve efficiency in transactions by setting rules for transactions, and, mechanisms by which rules are enforced. This basic understanding spawned several debates including ones about the boundaries of firms, and, saw entire industries such as software outsourcing, etc. being created.

Smart contracts build upon this theory by  automating exchanges of value, by validating rules, between two intervening parties for any transaction. Ethereum & Solidity programming have been predominant mechanisms by which contracts are written on software applications.

A unique token mechanism that provides for a global validation of the contract on the Blockchain has created a very unique set of applications. For example Augur is a smart contract based token that rewards participation in prediction markets.

Similarly, GNT is a smart contract based token that rewards individuals who lend their spare computing cycles. There are many more such contracts for automated payment based businesses, media platforms such as TRON, Block-chain software based EOS, Exchange token BNB used for transferring standalone value, etc…

A recent study found that off the top 100 most valuable coins by marketcapitalization, about 90% of them are smart contract based tokens built atop Ethereum.

Ethereum itself supports many forms of contractized tokens:
1.ERC-20 the most popular value holding token.

2.ERC223- a standardized token that validates and corrects problems with ERC 20.

3. ERC721- Digital asset standards on ethereum.

4. ERC827- A modification of ERC20 that allows transfer of value in-conjunction with Data.

A comparison of these different contracting mechanisms can be found here.

In the next few parts of this post we will look at the Waves platform, the Tron Platform and the NEO paltform all of which advance the smart contracts business.

Proof of Work Alternatives (and irrelevance to the future of cryptocurrencies)


Proof of work

Most cryptocurrencies today employ proof-of-work mechanisms; that evolved from Bitcoin’s original mechanism, solving complex hashing problems and consuming a lot of energy.  The current Bitcoin implementation uses SHA-256 . This approach to confirming transactions, after validation (on the nodes) is extremely wasteful for many reasons. Crypto-currency designers and blockchain designers such as Dash have created incentive mechanisms, wherein “node” maintainers who validate transactions also get rewarded, in addition to the miners.  Some economists and a few bitcoin champions have argued that this conversion of energy to “bits and bytes” through hashing is what provides the fungible value to Bitcoin as an asset.

The Bitcoin core-dev team led by luke-jr (one of the highest contributors) to the Bitcoin core code, have proposed algorithms to update the current Proof of work system. This system hasn’t as yet gained approval of the core – team, miners, etc. however, at some time in the critical future, this might take shape.

Issues with Hashing

a) Firstly, solving the hashing problem consumes significant energy, and this consumption increases as the difficulty of the solution increase at regular intervals. By some estimates, the largest miners combinedly surpass power consumption in some of the world’s nation states.

b) Despite spending the energy there is a possibility that all transactions included in the newly mined block can be abandoned for many reasons, one of which includes the race to include only the longest block with the most number of transactions for reward. In Bitcoin this leads to orphaned blocks. In Ethereum, this leads to blocks called uncle-blocks that are not entirely abandoned but are connected with the main blockchain.

c) Thirdly, the rewards for mining reduces over a period of time, and halves every few months. The next day for halving rewards for the bitcoin blockchain. The assumption of most miners is that this reduction in rewards will be offset by the positive growth in USD valuation of the cryptocurrency.

d) Lastly, as the difficulty levels increase, and the rewards from mining reduce,  equipment used for mining would become obsolete.  This creates a marketplace for mining wherein a few specialists with the ability to keep up with the technology changes needed to mine would dominate.

e) To top it all, there are incentive alignment challenges in these markets, wherein the few miners who dominate the mining market would wield enough controlling power (as in network hash rate) to block any new development initiatives by the core development team. These handfuls of miners can pretty much block or allow any change to the protocol layer.

Lastly, this process of earning disproportionate rewards has led to significant investment in the ASIC technology, and the over-demand for GPUs that are used for mining. Almost the entire of GPU inventory sometimes get bought out by miners, leaving very few of them for the gamers.

To solve this problem of extreme wastefulness, and making crypto-currencies more efficient, there is this massive initiative of the ethereum network towards proof of stake. More on this approach later.


DAICOs can protect against ICO gaming


ICO market

The initial coin offer market mode of raising capital has given rise to a hype-cycle in funding, that is competing with the market dominance of private equity. However, ICOs that have the ability to raise capital internationally (and not just in the home country). This market is Kickstarter on steroids with little governmental oversight.

Recent statistics studying ICOs and their effectiveness shows that less than 10% of the ICOs have functional market-ready products. Forget profitability or revenue growth for a project, just the basic Beta product launch itself would take several years after the ICO. To prevent, 1990’s repeat of the dot-com boom-bust, the Ethereum ecosystem is slowly adopting what is known as the DAICO. This is one of the most brilliant innovations in smart contracts, that is just beginning to take shape.

Game theoretic security protection

The DAICO implements game-theoretic security protections for all involved players in the market.

1) The token (or contract) that the team is selling is limited (or capped) prior to the end of sale. Sales can be conducted using either individual limits or through KYC based investment mechanisms. The US allows accredited investors to partake a sale.

2) Each contract has a time-limited withdrawal rate wherein the team conducting the token sale can choose to withdraw capital through a sale of ethereum in public markets.

3) Each holder of the token can vote to either a) increase the team’s withdrawal rate or b) to self-destruct the contract to withdraw capital from the token by means of a voting based consensus.

What this effectively does is as follows: It provides leverage to the team raising capital, through a monthly budget. It also provides the ability for investors to choose to either allow the team to continue to use the budget, increase it or reduce it, or to withdraw funds based on their visibility.

ICO protection against gaming

That being said, game theoretically, it is possible for the ICOs to be held or controlled by one entity with >51% voting rights, similar to what is happening in some of today’s top public company boards. DAICO’s can be set up so as to perpetually suspend such a possibility, which will increase both the capital and quantity raised. DAICO’s can prevent the team from swerving away from the goal, and, finally in case of a 51% attack on withdrawal the honest development team can create another token sale invalidating the rights of the first attacker. The DAICO mechanism provides proof of a malicious attack (>51%) or collusion on the contract.


The role of crypto-tokens



Crypto-tokens are very important for the crypto-ecosystem. In addition to embodying an equity-like function, crypto-tokens also embody the following for the underlying business:
1) governance model – the model which dictates how many tokens are issued, and who decides the rules for business other than the founding team.
2) security model – the issuance of securities (or shares) of the underlying business based on rules for holding/selling/divesting/etc.
3) the revenue model  – the underlying mechanism by which the firm issuing the token earns revenues.
4) reward model – wherein participants on the network rewarded commensurate to their participation on the network

However, crypto-tokens are treated by many technologists and regulators as pure securities or financial instruments, that are akin to shares or bonds. Recently Facebook and Google decided to ban advertising for any new crypto-tokens that were issued, on account of too many tokens promising only “security” related functionality, without any functional revenue or governance model.

The fundamental difference between crypto-tokens and securities is that, though shares/bonds and other financial instruments can be encoded (or embodied) in a crypto-token, through smart contracts written atop ethereum (or other platforms), crypto-tokens can also embody a lot more. For example, they can indicate the true worth of the network as measured by storage available from all users ( e.g. as in FileCoin).

Initial Coin Offers

Whenever a new token is created, firms that create these tokens have to start seeding the network so as to generate a critical mass for the adoption of the token. Once the critical mass of adopters is reached, any token will automatically see increased subscriptions from regular retail users or other stake holders. All of this adoption process has been modeled according to the Bass model of diffusion of technology. What is new here is the process of creating the early adopters on token-based networks.

Airdropping is the new smart contract mechanism wherein networks of users are acquired by any new business. Fundamentally, users who subscribe to airdropping disclose their wallet addresses (bitcoin or ethereum) on a cloud-based exchange to the firm. In exchange for this wallet address, firms gift (airdrop) the new token into the user’s corresponding cloud exchange wallet address. Air-dropping has many functionalities:
1) Firstly, ensuring that the subscriber is aware of the coin technology and risks associated with it, and are genuine users and not bots.

2) Ensuring that subscribers are on particular cloud exchanges – This brings increased adoption to that particular cloud exchange.

3) Seeding the network for usage so as to kickstart the initial governance model for the underlying platform.