Prizmabet

The Protocol: A Quantum Threat to Bitcoin?

Also: An Ethereum dev’s defection to Solana; Polygon’s big proving-system flex; crypto’s most influential

Welcome to The Protocol, CoinDesk’s weekly wrap-up of the most important stories in cryptocurrency tech development. I’m Marc Hochstein, CoinDesk’s deputy editor-in-chief for features, opinion and standards.

In this issue:

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What does Google’s quantum computing chip mean for Bitcoin?
Dev’s defection highlights Ethereum’s growing Solana problem
OrdinalsBot inscribes largest-ever file on Bitcoin blockchain
Polygon touts speed of Plonky3 proving system
Crypto’s most influential techies of 2024

Network News

NEED FOR SPEED: Polygon Labs claims its newest proving system, Plonky3, is the fastest on the market. (Vitalik Buterin, Ethereum’s creator, apparently agrees.) A proving system is at the core of zero-knowledge rollups, and a crucial component for transactions that rely on cryptographic security. It is the main piece of technology that creates proofs that summarize off-chain transactions, which are then sent back to a base blockchain (in this case, Ethereum). “If a zkVM is a car, you could look at the proving system as being the engine, so Plonky3 is kind of what makes everything work,” Brendan Farmer, a co-founder at Polygon, tells CoinDesk’s Margaux Nijkerk. The quicker a proof is generated, the less computing time that must be paid for. “If we improve speed, then we’re improving costs,” Farmer said. “And so what this does is it makes ZK rollup really competitive in terms of costs.” In January 2022, Polygon released its previous proving system, called Plonky2, claiming then that it was the fastest one on the market. Plonky3, the new and improved version that has more flexibility, was released in July.

IN AWE OF THE SIZE OF THIS LAD: Bitcoin inscriptions project OrdinalsBot minted what it says is the largest file ever on the oldest and most valuable blockchain: the last in a collection of 1,500 “Pizza Ninjas.” It’s part of a phenomenon in the Bitcoin development community known as “four meggers,” which are files that take up an entire block on the network. They are called four meggers because they are almost 4 megabytes (MB) big (the maximum size of each block of transactions on Bitcoin). Ordinal collectors consider them valuable due to their visibility on the blockchain. “There’s more than just bragging rights behind wanting to have the largest file on Bitcoin,” said Toby Lewis, co-founder of OrdinalsBot. “Four meggers will be on the Bitcoin blockchain forever and they already hold significant market value.” Bitcoin inscriptions, similar to non-fungible tokens (NFTs) on Ethereum, were made possible by the Ordinals protocol. It allows data to be “inscribed” onto individual satoshis, or “sats” (the smallest unit of BTC at 1/100,000,000 of a full bitcoin), making each one unique and potentially valuable. Read more.

JUMPING SHIP: Ethereum’s place near the top of the crypto market is unquestioned from the perspective of market cap. Beneath the surface – at the product, developer and decision-making levels – the original smart contracts platform continues to take a beating from Solana, one of its closest competitors. Ethereum and its many closely-linked networks are still the most important, influential, and largest platforms for decentralized finance. That lead is beginning to erode, however, with many newcomers to crypto choosing Solana’s speed and low fees. The dynamic was further punctuated Monday with news that longtime Ethereum ecosystem developer Max Resnick was moving into Solana’s orbit, abandoning his job at the developer studio Consensys. “There’s just so much more possibility and potential energy in Solana,” Resnick said in an interview with CoinDesk. He framed the decision as rooted in his own career path, but noted “frustration” with Ethereum’s inability to adapt contributed to the move. Ethereum lacks a streamlined process for making quick changes. Some see that as a point of strength for a decentralized network, while others, like Resnick, see it as a hindrance for long-term success. Read more

MOST INFLUENTIAL: This week, for the tenth time, CoinDesk has selected the people who defined the year in crypto: Our Most Influential list. (Here was the first edition in 2015.) Most Influential highlights personal achievements in the last calendar year. People are chosen for their projects, ideas, leadership, personality, or notoriety. There is a top 10 of the most Most Influential – people we feel had outsize influence or led the most important projects. Then, we profile another 40 people who were only a little less influential. (Certain prominent people in crypto – Vitalik Buterin, say – would naturally be Most Influential every year. But we choose not to feature the same names each time.) Among the tech luminaries we highlighted in this year’s series were Solana’s Lilly Liu, Optimism’s Jin Yang, EigenLayer’s Sreeram Kannan, BitVM’s Robin Linus, Rootstock’s Sergio Lerner, TON’s Steve Yun, NEAR’s IIlia Polosukhin, Akash Network’s Greg Osuri; Bitcoin’s Taproot Wizards founders … and of course, Satoshi Nakamoto, whose secret identity remains a parlor-game topic after all these years. (Writing that last piece was downright cathartic for me.) Find all the profiles here.

WHAT DOES GOOGLE’S QUANTUM COMPUTING CHIP MEAN FOR BITCOIN?

Google’s new quantum computing chip could mean bitcoin (BTC) is finished.

That was the sentiment for some on Monday as the internet giant unveiled Willow, a quantum supercomputer that can perform certain computational tasks in just five minutes that would take classical supercomputers an astronomical amount of time—specifically, 10 septillion years (or one followed by 24 zeroes; a trillion trillion).

10,000,000,000,000,000,000,000,000. Such an amount of time is greater than the existence of the entire universe at 13.8 billion years.

In superficial theory, such a powerful computer could mean no passwords are safe, encrypted messages are intercepted, nuclear weapons codes are found out, and almost anything can be unlocked by brute-forcing combinations of numbers and letters.

But it isn’t all doom and gloom yet.

While quantum computing does indeed pose significant threats to current security systems, it’s not a master key to the universe, at least not right now. And there is no looming threat to Bitcoin, either.

Quantum computing leverages the principles of quantum mechanics, using quantum bits or qubits instead of traditional bits. Unlike bits which represent either a 0 or 1, qubits can represent both 0 and 1 simultaneously due to quantum phenomena like superposition and entanglement. This allows quantum computers to perform multiple calculations at once, potentially solving problems that are currently intractable for classical computers. Willow uses 105 qubits and demonstrates an exponential error reduction as the number of qubits increases. This is a critical step towards building a practical, large-scale quantum computer, said Google CEO Sundar Pichai.

Bitcoin uses algorithms like SHA-256 for mining and ECDSA for signatures, which might be vulnerable to quantum decryption. And the short answer is that quantum computers, even advanced ones like Google’s Willow, do not possess the scale or error correction capabilities needed to immediately decrypt widely used encryption methods like RSA, ECC (used in Bitcoin transactions), or AES (used in securing data).

If quantum computers like Willow reach a scale where they can easily factor in large numbers, they could potentially break these encryption schemes, compromising wallet security and transaction integrity. That would require quantum computers with millions or even billions of “qubits” with extremely low error rates, far beyond the current technology.

“Google claims to have demonstrated ‘below threshold’ error correcting capabilities with their latest quantum chip,” said Chris Osborn, founder at Solana ecosystem project Dialect, in a post on X (formerly Twitter). “‘Below threshold’ is industry jargon for turning physical qubits, which are noisy, s*itty quantum bits that are basically useless, into logical qubits, which are multi-qubit abstractions that correct for errors & let you actually perform real computation.” he added.

It takes roughly 5,000 logical qubits “to run Shor’s algorithm to break encryption. In other words, millions of physical qubits are needed to break encryption. Google’s chip today: 105 physical qubits,” Osborn noted.

Until then, cryptocurrencies (and other sectors) have time to develop quantum-resistant algorithms.

CLICK HERE FOR THE FULL ARTICLE BY COINDESK’S SHAURYA MALWA

Money Center

Hole in the wallet

Magic Eden’s $5B Token Airdrop Raises Crypto Wallet Security Questions

Deals and grants

Binance Partners With Circle to Push USDC Stablecoin Adoption Across the Globe
Stablecoin Trading Startup Perena Tries Its Luck on Solana

Happy perp-day

As BitMEX Turns 10, the Market Is Still Thankful for the Perpetual Swap

Regulatory and policy

El Salvador and Argentina Regulators Sign Agreement to Help Develop Crypto Industry

Calendar

Dec. 4-5: India Blockchain Week, Bangalore
Dec. 5-6: Emergence, Prague
Dec. 9-12: Abu Dhabi Finance Week
Dec. 11-12: AI Summit NYC
Dec. 11-14: Taipei Blockchain Week
Jan 9-12, 2025: CES, Las Vegas
Jan. 15-19: World Economic Forum, Davos, Switzerland
January 21-25: WAGMI conference, Miami.
Jan. 24-25: Adopting Bitcoin, Cape Town, South Africa.
Jan. 30-31: PLAN B Forum, San Salvador, El Salvador.
Feb. 1-6: Satoshi Roundtable, Dubai
Feb. 19-20, 2025: ConsensusHK, Hong Kong.
Feb. 23-24: NFT Paris
Feb 23-March 2: ETHDenver
May 14-16: Consensus, Toronto.
March 18-19: Digital Asset Summit, London
May 27-29: Bitcoin 2025, Las Vegas.

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The Fed Pivot is Finally Here

Last week, the Fed cut its federal funds target rate by 50 bps to 5.00% p.a. (upper limit) which could have strong implications for the crypto community, says Andre Dragosh, head of research Europe, CoinShares.

“The time has come,” stated Fed chairman Jerome Powell back in August at the Jackson Hole central bank symposium. Last week, the Fed cut its federal funds target rate by 50 bps to 5.00% p.a. (upper limit) which was slightly more than markets had priced in before the FOMC meeting. In other words, the Fed positively surprised markets with this rate cut.

It is quite likely that the Fed is just getting started with rate cuts. At the time of writing, the market already expects 3 additional cuts (75 bps) by year-end and another 5 cuts (125 bps) next year through December 2025. The Fed has also telegraphed additional cuts via its latest Summary of Economic Projections (SEP) (aka “dot plot”).

Nonetheless, despite this more-than-expected interest rate reduction of 50 bps, it is quite likely that the Fed still remains “behind the curve.”

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For instance, a standard Taylor rule based on the unemployment rate and core PCE inflation implies that a fed funds target rate of around 3.6% p.a. is already warranted based on the underlying economic and inflationary momentum.

In addition, the latest fund manager survey by Bank of America indicates that monetary policy was still “too restrictive” in September 2024 – in fact, the most restrictive since October 2008 according to this survey.

There still remains an increased risk of a recession as several reliable indicators such as the prominent “Sahm rule” remain triggered.

That being said, our quantitative analyses imply that global growth has become less relevant for the performance of bitcoin while other factors like monetary policy or the US dollar have become more important.

In other words, a US recession might not be as negative as widely anticipated for bitcoin and other cryptoassets. To the contrary, it may lead to even more Fed rate cut expectations and US Dollar weakness which could provide even more tailwind.

With the latest move by the Fed and other major central banks, the global liquidity tide is clearly turning; global money supply has already reached new all-time highs and is accelerating. Expansionary money supply growth periods are usually associated with bitcoin bull runs.

The re-steepening of the US yield curve which tends to be a recessionary indicator is also an indicator for increasing liquidity and therefore bullish for scarce assets like bitcoin.

What is more is that the increase in global liquidity is coinciding with the increasing supply scarcity of bitcoin which has been intensifying since the latest halving in April 2024.

Our analyses have shown that there tends to be a significant lag between the halving event itself and the moment the supply shock starts to become significant, as the supply deficit only tends to accumulate gradually over time.

So, it appears as if there is a perfect confluence between an increase in potential demand via global money supply and a simultaneous reduction in available supply via the halving.

The market has been mired in “chopsolidation” – a choppy consolidating range-bound market – since the latest all-time high in March 2024. This was due to several factors such as government sales of bitcoin, Mt. Gox trustee’s distribution of bitcoins, or the macro capitulation in early August 2024.

In this context, the summer months have generally been one of the worst performing months for bitcoin historically with September being the worst month of the year.

However, Q4 tends to be the best month for bitcoin from a pure performance seasonality perspective and we also expect bitcoin to break out of this chopsolidation in Q4.

It seems as if the wait for a new break-out to the upside is finally over. The Fed pivot may have just delivered the perfect catalyst for that.

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.

Kraken Co-Founder Jesse Powell Under Federal Investigation on Claims of Hacking, Cyberstalking Non-Profit

FBI agents searched Powell’s Los Angeles home as it probes whether he interfered with computer accounts of Verge Center for the Arts. A lawyer for Powell said he’s done “nothing wrong” and unrelated to “his conduct in the cryptocurrency arena.”

Crypto exchange Kraken co-founder Jesse Powell is being investigated by Federal law enforcement on claims that he hacked and cyberstalked a non-profit that he founded, a lawyer for Powell confirmed after a report by The New York Times on Thursday.

The criminal probe is looking into Verge Center for the Arts’ allegations that Powell hindered its computer accounts, obstructing access to emails and other messages, The Times reported, citing three unnamed sources.

The paper reported that agents had searched Powell’s Brentwood home in Los Angeles’ Westside, seizing electronic devices and said that law enforcement from the FBI and the U.S. attorney’s office for the Northern District of California have been investigating Powell since at least the fall.

Powell has not been charged with any crimes. Brandon Fox, a lawyer with Jenner & Block, said in a statement shared with CoinDesk that Verge “provided a one-sided account that did not provide the government with the full picture, showing that Powell “did nothing wrong.” Fox added that the matter is unrelated to “Mr. Powell’s employment or his conduct in the cryptocurrency arena.”

Last month, Powell sued Verge in California Superior Court, claiming that has “owns and has rightful access” to the email accounts and that he remains a Verge board member, Fox said. A lawyer for Verge said the Powell’s claims were unfounded, The Times reported. At the time of publication, Verge had not responded to a CoinDesk request for comment.

Powell co-founded the Sacramento-based Verge in 2007, but the organization removed him from its board in 2022, saying that he had violated Verge’s “guiding principles,” The Times reported.

In a statement shared with CoinDesk, a Kraken spokesperson said the exchange was aware of the civil dispute, investigation and search warrants.

“The US Attorney has advised us that Kraken is not a part of the investigation in any way, and the investigation does not concern Jesse’s affiliation with Kraken,” the spokesperson said.

Indian Authorities Asked to Restore Crypto Exchanges’ Access to UPI #prizmabet

An Indian crypto exchange and a policy firm have separately asked the government to let crypto firms access the national Unified Payments Interface (UPI) after it was ostensibly suspended in 2022.

India’s government and central bank have received proposals asking to restore access of the Unified Payments Interface (UPI), a widely popular real-time payment system, to the crypto industry, several sources familiar with the matter have told CoinDesk.

Two proposals have already been made. A third proposal will be made “in the coming few weeks” by India’s newly formed crypto policy advocacy group, the Bharat Web3 Association (BWA), one individual familiar with the decision told CoinDesk.

The proposals, while not coordinated, appear to be the first major push by India’s crypto stakeholders to seek policy changes that govern the burgeoning industry since it suffered a series of blows in the form of harsh taxes, a crypto winter, and a “shadow ban.” The shadow ban saw Indian payment processors cut off banking access to crypto exchanges. UPI services were ostensibly suspended around the same time last year.

Since the pandemic, UPI adoption in India has rapidly increased with approximately 74 billion UPI transactions worth $1.5 trillion conducted in 2022. UPI allows citizens to pay for groceries and other goods using a QR code linked to their bank account. The system is used nationwide because merchants aren’t charged any fee for accepting UPI payments.

How Indian exchanges lost UPI access

The trigger for the payment rail crisis appeared to be Coinbase’s launch in India. On April 7, 2022, Coinbase launched its India operations with executives touting how easy it would be to trade on the company app with payments being processed by UPI. Hours after the event, the National Payments Corporation of India (NPCI) – the entity that governs UPI – tweeted to clarify that it was “not aware of any crypto exchange using UPI.” The NPCI is under the aegis of the nation’s central bank, the Reserve Bank of India (RBI).

One proposal to restore UPI access was made by an Indian crypto exchange that asked not to be identified because the matter hasn’t been made public. “We have submitted a representation with the NPCI, seeking the removal of restrictions on use of UPI services,” the crypto exchange said in a statement shared with CoinDesk.

The proposal was made shortly after India added crypto to anti-money laundering rules (PMLA or Prevention of Money Laundering Act), making crypto exchanges, non-fungible token (NFT) marketplaces and custody service wallet providers legally responsible for monitoring suspicious financial activities in March 2023. The jury on what this meant for India was divided. Legal experts said this gave teeth to the regulators overseeing the industry for the first time. At the same time, advocates of the crypto industry said this gave “more legitimacy” to the sector because “adding crypto to anti-money laundering rules is some semblance of regulation,” a senior industry participant said Monday.

“Our submission highlights that VDA (Virtual Digital Assets) service providers are now covered as ’reporting entities’ under the PMLA and are also registered with the FIU (Financial Intelligence Unit). We believe that these guardrails go a long way in helping secure VDA transactions and arresting malfeasance, if any,” the same crypto exchange’s statement said.

The second proposal, made in tranches over the past few weeks – both before and after India added crypto to anti-money laundering rules to different authorities – came from public policy advisory firm Black Dot, its founder Mandar Kagade told CoinDesk. The firm has previously collaborated with the Indian government. CoinDesk has seen an email from the Finance Ministry acknowledging Black Dot’s proposal and other emails confirming the firm sent the proposal to entities like the NPCI, the RBI and Jayant Sinha, the chairperson for the Standing Committee on Finance.

What Black Dot’s proposal contains

Black Dot’s proposal argues that UPI’s seamless user experience encourages transactions to remain onshore providing a visibility trail for regulators and law enforcement. Citing the Economic Times, it said 80% of digital asset transactions may be conducted on a peer-to-peer basis since the closure of UPI access. The proposal also says “arbitrarily denying a class of investors from accessing instruments of their choice via UPI when another group of investors has access to their choice (e.g., IPO) may also violate Article 14 (equality before the law).”

The proposal asks NCPI to group crypto exchanges based on how they meet agreed norms among banks.

It’s unclear whether authorities will restore UPI access to crypto exchanges but doing so would lend credibility to the space while making it much easier for retailers to start or continue trading on crypto exchanges.

CoinDesk has reached out to the Finance Ministry, RBI, NPCI and BWA for comment.

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Edited by Nikhilesh De and Sandali Handagama.