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Coin Metrics' State of the Network: Issue 107
Tuesday, June 15th, 2021
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Weekly Research Focus
Bitcoin Becomes Legal Tender
On June 9th the El Salvador congress passed a bill officially making bitcoin (BTC) legal tender. A pivotal moment for bitcoin and crypto at large, El Salvador is now the first country to recognize BTC as a satisfactory form of payment for any form of monetary debt.
Although the announcement came as a surprise, El Salvador is a prime example of a country that can benefit from the adoption of BTC. Located in Central America, El Salvador receives billions of dollars of remittances a year and is ranked in the top ten countries in terms of remittances received from the United States. About one third of El Salvadoran households receive remittances from abroad. Currently remittances are typically sent through money transfer services like Western Union. These traditional money transfers can charge fees of upwards of 20%, and settlement can take anywhere from days to weeks.
El Salvador’s remittance process can be drastically improved by using crypto rails instead of traditional money transfer infrastructure. Services like Strike, which uses the Lightning Network for transfers, can help Salvadorans essentially eliminate transaction fees and provide nearly instantaneous international transactions. Strike launched in El Salvador in March, so the process was already underway before the official announcement. El Salvador is also the home to Bitcoin Beach, a community that built a local economy around BTC.
The Lightning Network, a layer 2 scalability solution for Bitcoin that utilizes off-chain payment channels, has been gaining traction since the beginning of 2021. If usage in El Salvador continues to grow, the Lightning Network is poised to play a big role in helping to scale BTC payments and remittances.
While Strike and other similar services help improve the process of sending remittances, El Salvador’s bitcoin bill makes some crucial improvements for those receiving the remittance payments back home. Notably, the bill allows for taxes and all other legal obligations to be paid in BTC. BTC will also be excluded from capital gains taxes since it will be considered a currency. In a country where 70% of the population does not have a bank account, BTC can serve as a way to conduct basic personal banking.
The bill also mandates that all businesses must accept BTC as a valid form of payment. For businesses that do not want to hold BTC it calls for the creation of a trust at the Banco de Desarrollo de El Salvador to provide a way to instantly convert BTC into USD. The Salvadoran government will be setting up a $150M fund to buy BTC for this purpose.
The U.S. dollar has been El Salvador’s main form of currency since 2001. While the dollar helped bring some stability, it also effectively outsourced El Salvador’s monetary policy to the US. While the United States’ monetary policy is not predictable over the long-term, Bitcoin’s is. And while fiat currencies around the world are threatened with inflation, BTC’s annual inflation is currently less than 2% and will decrease over time.
The amount of newly issued BTC halves every four years and will continue to do so until BTC reaches its maximum supply of 21M. This predictability and transparency can potentially help El Salvador and other countries rebuild their economies with Bitcoin as a foundational piece.
El Salvador’s announcement is already drawing the eyes of other countries who are curious about adopting bitcoin. But it’s also drawing the attention of regulators and governing bodies like The International Monetary Fund (IMF) which said El Salvador’s decision raises “macroeconomic, financial and legal issues.”
There are currently about 18.4M addresses that hold at least 0.001 BTC - an impressive number for a decentralized currency, but still only a small fraction of the world’s population. There will undoubtedly be more pushback and challenges as El Salvador begins to adopt BTC on a larger scale. But if El Salvador’s experiment goes well, this could be a turning point for large-scale BTC adoption around the world.
Network Data Insights
Ethereum (ETH) usage declined over the past week, with an 11.1% drop in daily active addresses (week-over-week). Bitcoin (BTC) active addresses only dropped by 0.7%, although they dropped by 2.5% the previous week compared to a 3.3% increase for ETH. Mining revenue for both chains dropped by over 10% on the week as transaction fees continued to decline. But despite the overall drop in activity BTC’s adjusted transfer value grew by 23.8%, for a daily average of $10.1B.
Bitcoin hash rate (7-day moving average) decreased by about 11% over the last week. This could partially be caused by some Chinese mining operations migrating to new locations. Following recent reports of increased regulation some miners have reportedly temporarily gone offline while they move out of the country and prepare to relocate their operations. But it also could be caused by historical season dips - hash rate typically dips during the transition from the dry to rainy season.
The following chart shows Bitcoin hash rate (30-day moving average) labeled by Sichuanese season. Sichuan has excessive hydropower during the rainy season, so miners will typically relocate there once the rainy season starts. This causes hash rate to temporarily dip as some miners go offline to move, but it bounces back after mining operations get set back up in their new location. The rainy season just started in May (but miners typically move at the end of the month since they pay for rent monthly), so a temporary drop in hash rate is expected.
It’s also important to note that hash rate is not a precise metric - there’s no practical way to directly measure the amount of total hash rate in real time, so instead hash rate is estimated using on-chain data. Block count is one of the main inputs of the estimated hash rate formula, which makes it highly sensitive to fluctuations in block time. Bitcoin blocks are designed to be mined every ten minutes on average but it’s just a target, not a guarantee. In reality the time between blocks fluctuates above and below ten minutes and differs from block to block. This variation introduces some noise into the hash rate calculation.
Hash rate should therefore be viewed as an estimate that has a range of uncertainty. The following chart illustrates this by adding confidence bands around daily hash rate. For a live version of this chart check out the bitcoinkpis daily hash rate chart, and find more info on how it was created here.
Coin Metrics Updates
This week’s updates from the Coin Metrics team:
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