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Blockchain Bites: Bitcoin’s Difficulty Adjustment and More

Bitcoin’s network difficulty adjusted downwards today, making older mining machines profitable once again, while Tokensoft distributed $4 million in tokenized equity to investors and technology firms are calling upon the Department of Defense to invest in the blockchain arms race. Here’s the story:

You’re reading Blockchain Bites, the daily roundup of the most pivotal stories in blockchain and crypto news, and why they’re significant. You can subscribe to this and all of CoinDesk’s newsletters here. 

Top Shelf

Getting Easier
The Bitcoin network just fine-tuned a key parameter to coax back miners who quit after last week’s halving hammered their profits. Bitcoin’s mining difficulty, which measures how hard it is to compete for block rewards, decreased 6% on Wednesday, in the network’s first biweekly difficulty adjustment since the halving meant to keep the block interval at roughly every 10 minutes. This adjustment may lure less efficient miners back into the network.

Tokenized Distribution
Tokensoft, a digital securities platform for enterprises and financial institutions, has used blockchain tech to distribute equity to investors in a $4 million seed round raised in 2018. The investors, including Base10 and e.ventures, Coinbase Ventures and Fidelity affiliate Avon Ventures, received a digital representation of their investments on the Ethereum blockchain using ERC-1404 tokens.

Blockchain Arms Race
The U.S. Department of Defense can’t afford to lose the global military blockchain race to Russia and China, warns a new white paper by Amazon Web Services, IBM, Deloitte and others. “The two superpowers that pose the greatest threat to the U.S. are both heavily investing in both the research and development of blockchain technology,” the briefing said. China’s on the “economic warfare” offensive with its digital currency. Russia is on defense with a lab dedicated to blockchain cyber threat mitigation. For U.S. security interests, blockchain could assist the military in anything from “weapons release” [Ed. note: Just what bitcoin’s founders intended.] to stopping data erasure, as well as bolstering command and control mechanisms.

Elliptic Growth
Crypto sleuthing firm Elliptic has expanded its scope to cover some 97% of digital assets by trading volume – the broadest range of any crime-fighting blockchain analytics service, the company said. Announced Wednesday, Elliptic Navigator adds 87 new crypto assets to the firm’s existing purview. That said, touting just the number of coins covered can be “fairly irrelevant,” said Elliptic co-founder Tom Robinson, because analytics shops could be including many ERC-20 tokens that nobody really uses.

Flawed Code
Keep Network says a flawed code addition forced the shutdown of its bitcoin-backed Ethereum token, tBTC, just two days after it launched. The bug affected the processing of deposit redemptions (when users try to pull bitcoin out of the system), essentially due to the code’s inability to tell different types of bitcoin addresses apart. While the bug and subsequent pause have been a setback for the Thesis team, a new call out has been made to solicit help from code auditors to help track down any further issues.

Iranian Regulation
The Iranian government just made conduits to cryptocurrency markets riskier, and more confusing, than ever before. According to Iranian news outlet ArzDigital, Iran’s parliament published a proposal this week to include cryptocurrency in existing “currency smuggling” and foreign currency exchange regulations. The result of this prospective regulation is Iranian entrepreneurs face a heightened risk of being jailed by local authorities or sanctioned by Americans. 

Coinbase to Comptroller
A former top lawyer at Coinbase is about to take the top job at a major U.S. bank regulator, at least temporarily. Brian Brooks, the first deputy comptroller and chief operating officer in the Office of the Comptroller of the Currency (OCC), is poised to become acting comptroller as his boss, Joseph Otting, is planning an imminent departure.

75 Million Devices
Blockchain e-sports streaming platform THETA.tv will soon be available on Samsung’s flagship Galaxy S20 smartphones shipping to the U.S. THETA.tv runs on the Theta blockchain and pays out a native token to content streamers, and will be included in the Samsung Daily app, extending its potential reach to more than 75 million smartphones and tablets.

Atari Token
Ahead of Atari token’s September launch, the development team has partnered with the Litecoin Foundation to make litecoin an accepted form of payment for the token and across Atari’s “gaming ecosystem.” (The Block)

Opposite Editorial

Staking Will Turn Ethereum Into a Functional Store of Value
Osho Jha argues ether’s current price does not reflect the protocol’s upcoming switch from proof-of-work to proof-of-stake consensus, which would turn the cryptocurrency into a functional store of value. 

PTJ on BTC: Bitcoin Is Now the Macro Big Bet
Byrne Hobart argues that Paul Tudor Jones’ big bet on Bitcoin is a signal to other institutional and traditional investors to view bitcoin as a legitimate hedge against inflationary monetary experiments. “[A]fter careful due diligence, the famous trend-chasing macro investor ultimately treated bitcoin as a value play,” Hobart said. 

Facebook’s Toothless Oversight Board Has Lessons for Blockchain
Cathy Barrera digs into Facebook’s oversight board, which recently announced its founding members, calling the system necessarily flawed and unable to account for the myriad problems the company may generate or find itself dealing with. “Facebook’s inability to create a genuinely independent body with real control over content decisions is an essential lesson for blockchain projects,” Barrera writes. 

Market Intel

$1B in Open Interest
Open interest in options listed on the Panama-based Deribit exchange jumped to a record high of $1 billion. On Tuesday, 101,000 options contracts were open on the most popular exchange. Each option contract on Deribit represents one bitcoin. “The new record is driven by market sentiment, an increased number of diverse global participants on Deribit and the efforts made by our various partners and us to provide a premier quality market at all times with the highest capital efficiency, integrity and connectivity and trading solution,” said Luuk Strijers, Deribit’s chief compliance officer.

Bitcoin Undervalued
Bitcoin has witnessed triple-digit percentage gains over the past two months. Yet, a key measure known as the Puell Multiple suggests the currency is still undervalued. Lows in this metric, which currently sits below historic levels, have marked the beginning of fresh bull runs in bitcoin’s price. 

Mining Metrics
Bitcoin became 6% easier to mine Tuesday, a rare dip in Bitcoin’s lifetime in which difficulty has almost always trended upwards. Despite the recent adjustment, the current difficulty is still well over double what it was this time last year – a sign of just how competitive the mining business has become. Yet, according to Coin Metrics data, many formerly unprofitable machines are turning on, including Bitmain’s Antminer S9s, which saw their heyday in 2018. The halving made them less profitable, but the easing in mining difficulty should help to improve margins. 

Exchanging Out
Glassnode data suggests holders are withdrawing Bitcoin out from centralized exchanges. Beginning around March 12, when bitcoin’s price cratered, the market has entered “the largest and most prolonged BTC exchange balance downtrend in bitcoin’s history.” (Decrypt)

The Breakdown

‘Minsky Moments’ and the Financial History of Pandemics
Jamie Catherwood, of quantitative long-equity investment firm O’Shaughnessy Asset Management and Investor Amnesia, joins The Breakdown to discuss historic connections to today’s market meltdown. 

Who Won #CryptoTwitter?

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The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.



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Bitcoin Mining Difficulty Drops by 6% In First Adjustment After Halving

The Bitcoin network just fine-tuned a key parameter to coax back miners who quit after last week’s halving hammered their profits.

More than 20 exahashes per second (EH/s) of computing power – the equivalent of around 1.5 million older-generation mining machines – has been switched off from Bitcoin since the network’s halving.

The 7-day rolling average of Bitcoin’s hash rate has dropped over 20% from around 122 EH/s just prior to the halving on May 11 to now 97 EH/s. The once-in-four-years event reduced miners’ block rewards from 12.5 to 6.25 bitcoin (BTC) per block.

The hash rate drop after the halving has significantly outrun the hashing sprint prior to it. As such, Bitcoin’s mining difficulty, which measures how hard it is to compete for block rewards, decreased 6% to 15.14 Trillion at 2:00 UTC on Wednesday in the network’s first biweekly difficulty adjustment since the halving.

The amount of computing power connected to Bitcoin has been on a roller-coaster ride over the past two weeks.

Bitcoin’s mining difficulty adjusts itself every 2,016 blocks, roughly 14 days, to ensure the average interval between blocks remains at 10 minutes. If a large number of miners are switched off from the network, resulting in a longer-than-10-minute average block interval, the difficulty will decrease to encourage participation.

And Bitcoin’s third halving on May 11 happened exactly at the halfway mark of the previous 2,016-block difficulty cycle.

Read more: Bitcoin Mining Difficulty Nears All-Time High in Final Adjustment Before Halving

“We believe that, as the halving drew closer, miners in China did a sprint run of mining, even with older generation machines, to make most of the last days of the higher block rewards,” said Kevin Zhang, director of blockchain strategies at Greenidge Generation, a New York-based natural gas power plant that mines bitcoin.

Alejandro De La Torre, vice president of the mining pool PoolIn, agreed that miners were switching on to mine as much as possible before the halving.

“That’s why we saw those sky-high hash rate figures,” he said. But as the halving kicked in midway, he said, miners that were marginally profitable had to switch off.

According to miner profitability data tracked by PoolIn and F2Pool, at bitcoin’s current price and difficulty, old generations of miners won’t be profitable with an electricity rate that’s above $0.05 per kilowatt-hour.

Read more: Bitcoin Halving Arrives: Mining Rewards Drop for Third Time in History

Mitigating factors

That said, the drop in mining competition is helpful to those still in the game that have more efficient equipment and cheaper electricity since they can earn a bigger share of the 900 BTC minted every day.

With the difficulty adjustment, De La Torre expects some, but not all, of these miners to switch back on.

“Consider also, the wet season in China is bringing the cost of electricity even lower,” he said.

In a report released May 1, PoolIn estimated that the computing power contributed by miners at the “lower quartile” – older models that compute 0-25 terahashes per second – accounted for 15% to 30% of the network’s total at the time.

“While we expect most of these miners will shut down after the halving, it is likely that some of them have cheap enough electricity to survive in the near future,” the firm said in the report.

Read more: New York Power Plant Sells 30% of Its Bitcoin Mining Hashrate to Institutional Buyers

As the summer rainy season approaches in China, mining farms in the country’s southwestern provinces have been trying to attract customers with electricity rates as low as $0.03 per kilowatt-hour.

Following the halving, the total transaction fees paid to Bitcoin miners have also been on the rise, data shows. Apart from block rewards, miners earn fees that are attached to each transaction on the Bitcoin network.

Total daily network transaction fees have jumped from around 30 BTC at the end of April to over 160 BTC, and now account for roughly 17% of miners’ daily revenue.

“Another interesting observation we made is the significant rise of the transaction fees as a percentage of the block rewards. Yesterday, transaction fees comprised nearly a quarter of Greenidge’s pool payouts,” said Zhang. “With this percentage currently in the range of 15-20%, it remains to be seen how this percentage may change and affect the incentive of miners.”

Read more: BitMEX Is Making Bitcoin Network More Expensive for Everyone, Researcher Finds

Disclosure Read More

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

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