This is an opinion editorial by Shinobi, a self-taught educator in the Bitcoin space and tech-oriented Bitcoin podcast host.

The Lightning Network as a payment routing network has many similarities with the internet itself. You must be connected to the network, payments are routed from one source node on the network to a destination node just like data packets on the internet and it requires an unbroken connection from the source to destination. It also has one massive difference the requirement for liquidity. On the internet, as long as bandwidth is available (i.e., the pipes are not "clogged"), you can pass an infinite amount of information along a route as long as you have enough time to wait for it to get through. Lightning channels, however, can be depleted, as they require actually moving money from one side of a channel to another in order to route a payment, and eventually they will run out of money on one side and push all of it to the other.

This creates a necessary balancing act between the use of the network in the present to forward payments for individual users and the health of the network in the future regarding its capability of forwarding payments for other users. Each time someone routes a payment through a specific channel, they increase the likelihood that the channel they used will not be able to process payments in the same direction for other users in the future.

In essence, users attempting to adopt strategies en masse to benefit themselves in terms of guaranteeing the delivery of their payment can have negative effects on the overall liquidity distribution of the network and actually lower the likelihood of individual users' payments arriving successfully at the destination. Essentially, whatever strategy is dominantly used by end users to select routes for their payments is going to have systemic effects on the entire network. In the negative sense, i.e., how individual behaviors have degrading effects on the system as a whole this dynamic is known as the price of anarchy.

Rene Pickhardt has been engaging in a line of research to develop heuristics useful for improving the reliability of payment delivery across the Lightning Network. One strategy to achieve the goal that has come out of this research is referred to as Pickhardt payments. Currently the most frequently used strategy across the network is to prioritize route selection based on the lowest fee. This works rather well for small payments, but not so much for larger amounts. Intuitively, the reason should be obvious: such low fee routes are widely used which tends to push liquidity in one direction, leaving less available. The effect this has for other small payments taking the same route is small until approaching depletion, but for larger amounts, the odds of success become lower.

Pickhardt payments work by prioritizing reliability over cheapness, making educated guesses on the probability of a payment succeeding over different potential paths it could take. Just like the dominant, low-fee prioritizing strategy, over time as a node attempts to make payments and sees some fail it will update its assumptions on the probability of payment success and over time refine its accuracy. This should help prevent nodes in swarms always depleting the same channels, because their view of the network in terms of reliability will evolve uniquely over time.

An important part of path selection is considering which direction liquidity is flowing in a channel. Is it balanced both ways? Is it predominantly one direction? In his most recent research looking at the dynamic of the price of anarchy, Pickhardt noted his realization that, based on public gossip data, it may be possible to estimate the rate of drain in channels, how balanced or unbalanced the flow through it is and further improve the reliability of estimations on payment success or failure along certain routes. Estimating this correctly allows you to look at a channel and guess which direction has a high probability of completing a payment and which direction has a low probability.

Another aspect to Pickhardt payments is to optimize for both reliability and low fees. In modeling things to study the price of anarchy dynamics of the Lightning Network, it was discovered that optimizing for both reliability and fees lead to one of the worst externality costs for the network or the highest price of anarchy. This seems to create the greatest rate of channel depletions across the network out of all path selection strategies.

Now these effects don't exist in a vacuum or without counter balances. Routing nodes on the network are also actors that have tools at their disposal and can adopt strategies to optimize the flow control and counterbalance this. Routing nodes can alter fees to disincentivize pushing liquidity to one side of a channel, i.e., if most payments are flowing one direction they can charge higher fees for that and lower fees for going the other way. Nodes can open or close channels, creating new connections to meet higher demand. Nodes can also rebalance channels, pushing liquidity from one channel of theirs out into the network and back into another channel of theirs to alter the liquidity distribution in that channel. Nodes sending payments can also select and utilize different path selection strategies when they observe the current one is leading to frequent payment failures.

I'm sure people reading right now are thinking something along the lines of, "Who cares, the market will sort it out, Lightning is a market-driven system." Lightning is an almost entirely market-driven system, but it's not that simple when analyzing dynamics like the price of anarchy. Users of the network are not going to be analyzing routing algorithms manually, picking and choosing what to use with each payment; They are going to be using tools and software that automates all of this and hides it in the background. This makes this kind of research important to the overall health of the network. A way needs to be found to enable end users to engage with the network selfishly, prioritizing their own interests, without degrading the performance of the network as a whole.

Modeling how these two dynamics interact, the strategies for sending nodes and mitigation strategies for routing nodes is incredibly important for developing strategies for both classes of users to balance and optimize the overall health of the network and the reliability of payments for individual users. Routing data between different devices is a long-solved problem in computer science, which the Lightning Network builds heavily on but the dynamic of liquidity constraints adds a new facet to the entire field of research around reliably routing information.

The Lightning Network has been a huge success so far in improving the speed and scalability of payments using Bitcoin, but to continue that success at larger scales and a larger load from more users, the interaction of these two different dynamics needs to be thoroughly understood and accounted for. In order for users of the network to adopt successful strategies, those strategies must first be developed, understood and verified.

This is a guest post by Shinobi. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

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Can Bitcoins Lightning Network Overcome The Price Of Anarchy? - Bitcoin Magazine

Despite Bitcoins (BTC) promise of a peer-to-peer world, building a Bitcoin-first business in 2022 still requires third-party intermediaries. Whether its startup capital, using fiat money or simply exploiting fiat payment rails, Bitcoin business means interaction with the legacy financial system.

For the vast majority of Bitcoin-based businesses, this means that they probably need a bank.

Cointelegraph spoke to Bitcoin-only businesses about their experiences working with banks, given that ultimately, Bitcoin gets a lot of bad press in mainstream media. Plus, some of the banking industrys biggest supporters love to bash Bitcoin. Ben Price, founder of the Bitcoin Company, recently shared that the company had lost dozens of dozens of banking partnership opportunities simply because were a Bitcoin company.

Price was a product manager at Visa for years before founding the Bitcoin Company. He told Cointelegraph that the Bitcoin Companys goal is to bring Bitcoin to the whole world because its a real catalyst for improvement in our civilization.

Price grew frustrated while working at Visa not because he was a hardcore Bitcoin maxi but due to slow progress. According to him, projects relating to payments, central bank digital currencies (CBDCs), noncustodial wallets and more were regularly shuttered or mothballed. Plus, the legacy finance systems inner workings came into question. Carman told Cointelegraph:

The Bitcoin Company is part of a new range of Bitcoin neobanks banks that treat Bitcoin as native currency alongside fiat. From The Bitcoin Company in the United States to Xapo in Gibraltar anCoinCorner in the United Kingdom, Bitcoin neobanks are flexing their financial muscles. In short, theyre allowing people to live on a Bitcoin standard and easily interact with the legacy financial system.

Carman explains that Bitcoin neobanks derive from a desire to hyperbitcoinize i.e., spur Bitcoin mass adoption while conceding that only a smaller group of people will adopt Bitcoin as the cypherpunks originally intended. He splits Bitcoin users into two pools: the cypherpunks who prioritize privacy, bury their seed phrases in the yard, mix their coins and run Bitcoin nodes;and the other 95% of people such as his mom and sister, he explains who will likely need access to a Bitcoin neobank. According to Carma

However, why cant banks integrate Bitcoin and capitalize on the new technology and profit from Bitcoins success? Christian Ander, founder of the Swedish Bitcoin exchange BTCX, told Cointelegraph, Many banks have a policy not to engage with or onboard Bitcoin and crypto companies. It doesnt matter if the company complies with regulations or not.

Danny Brewster, CEO of Bitcoin trading platform FastBitcoins, told Cointelegraph that banking Bitcoin-only companies, such as FastBitcoins, have persisted since 2013. However, banks initially didnt want to do Bitcoin business due to a lack of understanding, Brewster told Cointelegraph.

Fast forward to 2022, and Despite regulatory clarification and increased scrutiny, the wider crypto market is a mess with the likes of LUNA, 3AC, etc. Brewster explained that due to the Terra implosion and the subsequent crypto contagion, banks are even more risk averse. He said:

Brewster stated that crypto scams, wash trading and the darker side of crypto tarnish Bitcoins reputation: In one case at a bank, 90%+ of all payment fraud cases touched crypto at some point in the flow, it is obvious why as the resulting transaction gives the criminal irreversible funds at the end of the transaction. The constant recurrence is likely to color ones opinion of Bitcoin, he explaine, as Bitcoin and crypto are considered one and the same:

Anders explained that there are many reasons behind banks reticence to onboard Bitcoin businesses, from incompetent Anti-Money Laundering staff and routines regarding Bitcoin and crypto assets to the old money vs. new [money] debate. However, he suggested that its wrong to think that Bitcoin is a threat to bankings core business model. In fact, its not, but central bank digital currency is.

Brewster argued that CBDCs will go the way of every shitcoin partnership that gets announced, suggesting their eventual demise. But if CBDCs are successful, then commercial banks may face some competition from an unlikely source.

Related: Banking uses 56 times more energy than Bitcoin: Valuechain report

Finally, Hal Finney, the first person to mine Bitcoin after Satoshi Nakamoto, predicted the existence of Bitcoin-backed banks in 2010. Finney highlighted scalability issues as the reason for such banks, although the Lightning Network has evolved to allow Bitcoin to process infinitely more transactions. In the meantime, although workarounds exist, Bitcoin-first businesses may be forced to continue partnering with banks.

Plus, Carman conceded that while partnering with banks is a headache, A lot of merchant partners refuse to work with us (i.e., let us sell their gift cards) because we allow users to buy with Bitcoin. [...] So its not all on the banking side. Indeed, while there are some hopeful signs of Bitcoin merchant payment adoption, fiat is king while FUD reigns almighty.

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Bitcoin and the banking system: Slammed doors and legacy flaws - Cointelegraph

Bitcoin (BTC) experienced a 16.5% correction between Aug. 15 and Aug. 19 as it tested the $20,800 support. While the drop is startling, in reality, a $4,050 price difference is relatively insignificant, especially when one accounts for Bitcoin's 72% annualized volatility.

Currently, the S&P 500s volatility stands at 31%, which is significantly lower, yet the index traded down 9.1% between June 8 and June 13. So, comparatively speaking, the index of major U.S.-listed companies faced a more abrupt movement adjusted for the historical risk metric.

At the start of this week, crypto investors' sentiment worsened after weaker conditions in Chinese real estate markets forced the central bank to reduce its five-year loan prime rate on Aug. 21. Moreover, a Goldman Sachs investment bank strategist stated that inflationary pressure would force the U.S. Federal Reserve to further tighten the economy, which negatively impacts the S&P 500.

Regardless of the correlation between stocks and Bitcoin, which is currently running at 80/100, investors tend to seek shelter in the U.S. dollar and inflation-protected bonds when they fear a crisis or market crash. This movement is known as a flight to quality and tends to add selling pressure on all risk markets, including cryptocurrencies.

Despite the bears' best efforts, Bitcoin has not been able to break below the $20,800 support. This movement explains why the $1 billion Bitcoin monthly options expiry on Aug. 26 could benefit bulls despite the recent 16.5% loss in 5 days.

Bitcoin's steep correction after failing to break the $25,000 resistance on Aug. 15 surprised bulls because only 12% of the call (buy) options for the monthly expiry have been placed above $22,000. Thus, Bitcoin bears are better positioned even though they placed fewer bets.

A broader view using the 1.25 call-to-put ratio shows more bullish bets because the call (buy) open interest stands at $560 million against the $450 million put (sell) options. Nevertheless, as Bitcoin currently stands below $22,000, most bullish bets will likely become worthless.

For instance, if Bitcoin's price remains below $22,000 at 8:00 am UTC on Aug. 26, only $34 million worth of these put (sell) options will be available. This difference happens because there is no use in the right to sell Bitcoin below $22,000 if it trades above that level on expiry.

Below are the four most likely scenarios based on the current price action. The number of options contracts available on Aug. 26 for call (bull) and put (bear) instruments varies, depending on the expiry price. The imbalance favoring each side constitutes the theoretical profit:

This crude estimate considers the call options used in bullish bets and the put options exclusively in neutral-to-bearish trades. Even so, this oversimplification disregards more complex investment strategies.

Bitcoin bulls need to push the price above $22,000 on Aug. 26 to balance the scales and avoid a potential $140 million loss. However, Bitcoin bulls had $210 million worth of leverage long futures positions liquidated on Aug. 18, so they are less inclined to push the price higher in the short term.

With that said, the most probable scenario for Aug. 26 is the $22,000-to-$24,000 range providing a balanced outcome between bulls and bears.

If bears show some strength and BTC loses the critical $20,800 support, the $140 million loss in the monthly expiry will be the least of their problems. In addition, the move would invalidate the previous $20,800 low on July 26, effectively breaking a seven-week-long ascending trend.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.

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Heres why holding $20.8K will be critical in this weeks $1B Bitcoin options expiry - Cointelegraph

Bitcoin climbed almost 25% in July, but investors are unlikely to see a repeat of those gains in August. Digital assets continue to trade sideways, and Bitcointhe largest cryptocant seem to break out of the $20,000 to $24,000 range.

With Bitcoin still trading at less than one-third of its all-time high near $69,000, reached in November 2021, optimistic cryptocurrency holders are likely to continue hoping for something that will drive token prices higher. There are at least five trends that investors should be watching, according to Sheena Shah and Kinji Steimetz, analysts at Morgan Stanley.

One trend, the crypto equivalent of quantitative tightening, is the falling availability of stablecoins like Tethers USDT and Circles USDC , the analysts wrote in a note Friday. Stablecoins stand at the heart of the crypto world, forming the foundations of trading and lending activities, and their availability is a key sign of both liquidity in crypto and demand for leverage, or money borrowed to trade.

Changes in the market capitalization of stablecoinsa measure of the amount in circulation since each coin is meant to be worth a dollarcould be a leading indicator of Bitcoin prices, according to Shah and Steimetz. In June, Tethers market cap fell 20% in about a month, while Bitcoin fell 45% over the same period to below $30,000.

This week marked the first time since April that stablecoin market capitalization has stopped falling on a monthly basis, the Morgan Stanley analysts said. This may be a sign that the extreme institutional deleveraging appears to have paused for now.

A widespread halt to deleveraging in crypto could signal that the worst of the recent market turmoil is over, paving the way for institutions and other influential traders to turn bullish on Bitcoin again.

That is why changes in demand for leverage in crypto, similarly indicated by the market cap of stablecoins, is the second trend to keep an eye on. If demand for leverage in crypto rises, prompting people to move dollars into stablecoins, the market caps of stablecoins would likely rise. That could mark a bullish turn because leverage exacerbates prices swings and raises the prospect that gains from solid rallies would be juiced up.

However, there doesnt seem to be huge demand to re-leverage in the crypto world at this moment: decentralised finance (DeFi) platform lending is still down 70% this year, wrote Shah and Steimetz. In our opinion, it will be hard for this crypto cycle to bottom without fiat leverage growing or crypto leverage growing.

The third trend to watch is stablecoins market caps relative to one another, specifically swings in the relationship between the amount of issued USDT and USDC, the most influential stablecoins pegged to the U.S. dollar and the third- and fourth-largest digital tokens.

Typically, the market caps of USDT and USDC move in opposite directionsi.e. traders seem to generally rotate out of one and into anotherand Morgan Stanley sees a link between periods when USDC total value is growing and later gains in Bitcoin prices.

The general trends in USDC market capitalization growth appear to lead growth of Bitcoins price about two months later, the Morgan Stanley team said, noting that of course we cannot use this as a trading signal as the historical relationship is volatile, has outliers (Bitcoin rally in June) and not a long history.

Nevertheless, it is a compelling flag. Tethers market cap fell by $9 billion over the course of a week in early May, to $74 billion from $83 billion, while USDCs market cap jumped to $52 billion from $48 billion over the same period. Two months laterJulysaw Bitcoin notch its best month all year.

Now, this trend looks to be reversing course, with USDCs circulation now down almost $4 billion from its July peak while issuance of USDT has been growing. If the pattern holds, that could be negative for Bitcoin.

Ultimately, however, the macroeconomic picture is what matters, according to Morgan Stanley. While Bitcoin and its peers should, in theory, be uncorrelated to mainstream finance, they have shown to be largely linked to other risk-sensitive bets, like tech stocks. A lot of the gains for tech stocks, and crypto, in recent years can be put at the feet of loose central-bank policy that has injected liquidity into global markets.

Since 2013, Bitcoins market capitalization growth has generally tracked the growth of global fiat M2 money supply. When central banks eased and injected liquidity, that liquidity ended up in risk assets, including crypto, the analysts said. We expect [Bitcoins] correlation with the equity markets to remain high.

Expectations of future money supply growth, which is a function of the size of the Federal Reserves balance sheet and interest rates, are likely to be the most dominant force on Bitcoin prices, according to Morgan Stanley.

Near term crypto markets therefore will place most trading focus on inflation expectations and market pricing for rate hikes, said Shah and Steimetz.

The central bank has tightened monetary policy aggressively and raised interest rates as it battles the highest inflation in four decadesa pathway it isnt expected to veer from until 2023 at the earliest. That is why inflation and the Feds monetary policy plans are the fourth and fifth factors investors should watch for Bitcoins next move.

The coming days could bring more clarity for the market.

The Feds preferred measure of inflation is due Friday in the form of Julys core personal-consumption expenditures index. Also on Friday, Fed Chair Jerome Powell is due to speak at the Jackson Hole economic conference, which is likely to be key for clarifying investors expectations around Fed policy.

These events will no doubt be one of the most important short-term catalysts for crypto in the week ahead, to say nothing of expectations for inflation and rates in the months to come. Just as in stocks, crypto investors cant fight the Fed.

Write to Jack Denton at jack.denton@dowjones.com

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Bitcoins Next Move: 5 Things to Watch - Barron's

One of bitcoins main selling points has been the fact that its return has often put it ahead of the inflation rate. Due to this, it has gained notoriety as the digital gold as a good portion of the community put forward that the digital asset is a better inflation hedge than any asset. However, not every single proponent of bitcoin believes that bitcoin is an inflation hedge, at least not yet. One of those is the CEO of Skybridge Capital, Anthony Scaramuccci. Heres what he thinks.

Now, bitcoin has grown tremendously since being launched over a decade ago. It is why it is impressive that the digital asset is being compared to counterparts that have been around for much longer. One of those is gold, which has previously proven to be the inflation hedge of choice for investors.

However, with BTCs increasing popularity, it has been able to register as a potential inflation hedge. But despite so many believing that the digital asset qualifies as a good inflation hedge, Anthony Scaramucci does not believe so, and it mainly comes down to the adoption of the cryptocurrency,

Scaramucci explained during an interview with CNBCs Squawk Box that while bitcoin has the potential to be an inflation hedge, it is nowhere near being one. According to the CEO, it is because the number of BTC wallets is still lower than 1 billion.

Presently, there are about 300 million bitcoin wallets, but Scaramucci says that until BTC wallets are above the 1 billion mark, they cannot be considered an inflation hedge.

Having been around for only about 13 years at this point, bitcoin is still no doubt a very young asset. Add in the fact that it is a digital asset, and the cryptocurrency gets another added layer of uncertainty around it. And this immaturity is one thing that Scaramucci points to.

He explained that one thing that goes against BTC being an inflation hedge is its immaturity as a technical asset. However, this does not completely dismiss the cryptocurrency when it comes to its potential.

The limited supply of bitcoin has been a big pull for investors, and even Scaramucci has pointed to this as one of the key arguments for BTC, which he believes, given enough time, will come to rival and even beat gold, which is thousands of years old, mainly because bitcoin can be easily moved and easily stored.

Presently, it is said that less than 5% of the worlds population holds bitcoin. ARK Invest CEO has previously said in the past that if 5% of institutional money were to be moved into bitcoin, the digital asset is likely to reach as high as $500,000.

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Heres How Many Wallets Is Needed For Bitcoin To Be An Inflation Hedge | Bitcoinist.com - Bitcoinist