Jack Dorsey’s payment processing company Block is getting into the BTC mining business at precisely the wrong time, while boosting its Cash App product’s support for the struggling Lightning Network.
On Tuesday, Bloomberg reported that Block had tapped Perry Hothi, former chief technology officer for Argo Blockchain PLC, to help spur Block’s BTC mining ambitions. One year ago, when Block was still known as Square, Dorsey tweeted that he was “considering building” a mining system “based on custom silicon and open source for individuals and businesses worldwide.”
Neither Block nor Hothi have commented on the report’s claim that Hothi would advise Block on the design of its new mining rig and its integration with Block’s wallet services, as well as energy management. Block posted several mining-related open positions to LinkedIn last week, while adding former Poolin VP Alejandro De La Torre in August.
In April, Block announced a partnership with BTC developers Blockstream to build a mining facility in Texas that will employ solar- and battery-powered technology courtesy of Elon Musk’s Tesla (NASDAQ: TSLA). The facility was tentatively scheduled to open before year’s end. (Perhaps its launch will embolden the crypto-schizoid Musk to claim even more lucrative carbon credits from the government, which totaled $286 million in Q3, bringing Tesla’s five-year total handout to over $5 billion.)
Block’s timing could be better, as average BTC mining difficulty is currently running at all-time highs, nearly twice the rate from just one year ago. Outfits that previously mined Ethereum found themselves with excess capacity following that network’s recent shift from a proof-of-work to a proof-of-stake consensus mechanism, prompting these miners to turn their brute power in BTC’s direction. Meanwhile, BTC’s fiat value remains rooted in a range that’s a pale shadow of its nearly $70,000 peak in late-2021, meaning smaller rewards for more work.
A rather large chip off the old Block
Block’s share price is currently hovering around the US$60 mark, around $5 higher than Friday’s close, although it remains less than half the $141 value it held when 2022 began. With so much of Block’s value based on the fiat value of BTC, the stock’s recent gains come as the broader ‘crypto’ market enjoyed an unexplained surge this week—or perhaps not so unexplained.
(With both the Coinbase (NASDAQ: COIN) exchange and Michael Saylor’s MicroStrategy (NASDAQ: MSTR)—formerly a business analytic software outfit, now a pseudo-BTC ETF—scheduled to deliver their Q3 reports in the next couple weeks, a temporary artificial spike in the value of BTC might help mask balance sheets bleeding red ink, so print/pump on, Paolo!)
Block will release its Q3 financial report card on November 3. Block lost $36 million on its BTC holdings in Q2 and while Block’s total revenue was down 6% year-on-year to $4.4 billion, revenue would have risen 34% if BTC’s Very Bad Year wasn’t a thing.
BTC’s contribution to Block’s Q2 gross profit was $41 million (-24%), still a rounding error in the $1.47 billion overall figure. Block blamed the BTC downturn on “a decline in consumer demand” amid “broader uncertainty around crypto assets.”
In June, Block attempted to reverse that negative consumer sentiment by introducing ‘Round Ups,’ in which Cash App users could invest their “spare change” into BTC in a bid to make investing seem less “overwhelming” to average Joes and Janes. We eagerly await Block’s next innovation, ‘Shake Downs,’ in which Dorsey simply charges every cryptophobic user a FOMO Fee that is immediately converted to BTC and proffered as yet another sign of BTC’s unchecked popularity, so buy or die, alright?
The Lightning round
This week, Block announced another new scheme to boost interest in BTC by integrating Cash App with the Lightning Network, the purported Layer 2 solution for BTC’s inability to scale to a level that might meet the ‘peer-to-peer electronic cash’ system detailed in Satoshi Nakamoto’s Bitcoin white paper. For those who might be unaware, BTC’s scaling ceiling was hardwired by Bitcoin Core developers, many of whom shared deep ties with Blockstream, which promotes its own version of Lightning.
Previously, Cash App users’ access to Lightning was limited to sending BTC but they now have the option of receiving as well through the use of QR codes. There are a few caveats, including Cash App prohibiting users in New York State from accessing the Lightning option, while users in other states (the option is currently U.S.-only) are limited to $999 in total Lightning transactions per week. Block will now route all BTC-based Cash App transactions through Lightning unless (a) the user specifies otherwise, or (b) the user breaches their weekly $999 limit.
Block is positioning the Lightning option as a way of avoiding BTC’s onerous transaction fees, which routinely exceed the value of most small-scale transactions. Lightning transactions also ‘settle’ more quickly than those on the actual BTC blockchain, which Block admits “could take several hours to process.”
There are also unstated hiccups that might arise by taking one’s transactions off the main BTC network, including the fact that you’re no longer transacting in BTC but using proprietary Blockstream Bucks™, the hard value of which requires a greater leap of faith than the greenback’s ‘In God We Trust’ solvency affirmation. Read on…
Lightning strikes … out
Earlier this month, Lightning’s LND nodes crashed after a developer known as Burak crafted a 998-of-999 multi-sig transaction, which requires authorization by multiple private keys. Ordinarily, only two signatures are required to conduct transactions between Lightning ‘channels.’
Many Lightning users run a BTC node implementation known as BTCD, which shares some wonky code with LND that rejected the block containing the supposedly valid multi-sig transaction and all the blocks that followed. As a result, LND users couldn’t open or close Lightning channels, meaning their transactions couldn’t make it back to the main BTC chain.
A patch was hurriedly issued that restored the normal progression of events, without restoring any confidence that funds on Lightning are ever secure. This lack of faith is borne out by the fact that there are only around 4,500 BTC tokens currently locked up on Lightning, compared with the 19 million or so existing on the main BTC chain.
It didn’t need to be this complicated. Bitcoin SV (BSV) has demonstrated the sense of having a strong, scalable Layer 1 that doesn’t require off-ramps and bridges that (a) offer points of attack to malicious actors and (b) protect the narrow interests of a handful of connected developers.
Speaking of, the coziness between Blockstream and Block isn’t limited to mining or Lightning. The pair also belong to the Crypto Open Patent Alliance (COPA), the allegedly pro-innovation club whose other members include the aforementioned Coinbase, MicroStrategy, as well as Meta, Kraken and a couple dozen more.
Despite COPA’s lofty rhetoric, its only concrete action to date has been to sue Dr. Craig Wright to deny his court-recognized right to claim authorship of the Bitcoin white paper. Even that only serves as a means of attacking BSV, which Wright supports and which threatens redundancy for BTC, Lightning and similarly hobbled blockchain protocols.
Blockstream’s Adam Back has always had a hard-on for Wright, reflecting both Back’s fervent desire to be seen as Satoshi and the fact that, unlike Wright, Back is backing a dead horse in BTC/Lightning. Industry insiders continue to suggest that COPA was an internal Blockstream project until it actually came time to, you know, pay for things, after which Back reached out to his big-bucked buddy Dorsey and the rest is history. (Dorsey must have paid in fiat rather than BTC, because the money actually got where it was supposed to go.)
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