• Digital Assets

    Immutability Drives Bitcoin Amidst Fog of War

    Matthew Sigel, Head of Digital Assets Research


    We analyze immutability and programmability in connection with digital assets and conclude that for diversification, some combination of both is probably ideal.

    “You could introduce programmability – what happens if one of the participants in a transaction puts a restriction on future use of the money? There could be some socially beneficial outcomes from that, preventing activity which is seen to be socially harmful in some way.” - Tom Mutton, director, Fintech, Bank of England1

    “You could think of smart contracts in which the money would be programmed to be released only if something happened. You could think of giving your children pocket money, but programming the money so that it couldn’t be used for sweets.” - Sir Jon Cunliffe, Bank of England deputy Governor2

    “Dear Ontario Superior Court of Justice, Nunchuk is a self-custodial, collaborative-multisig Bitcoin wallet. We are a software provider, not a custodial financial intermediary. Our software is free to use. It allows people to eliminate single points of failures and store bitcoin in the safest way possible while preserving privacy. We do not collect any user identification information beyond email addresses. We also do not hold only any keys. Therefore we cannot freeze our users; assets. We cannot prevent them from being moved. We do not have knowledge of the existence, nature, value and location of our users’ assets; this is by design. Please look up how self-custody and private keys work. When the Canadian dollar becomes worthless, we will be here to serve you too. Sincerely, the Nunchuk Team”3

    “I’ve resisted the crypto trend mainly on a lack of understanding of how it all works. The last week has certainly motivated me to combat that lack of understanding, so I have a bitcoin wallet now.” – Andrew Lawton, Canadian broadcaster & columnist, host “The Andrew Lawton Show; 62k twitter followers"

    Immutability and programmability represent opposite directions on a governance spectrum but each can provide value to stakeholders. On one end of the spectrum: an ounce of gold, unchanged for millennia, flaunts its predictability with a glint from a finger or wrist, its purity easily verified by a high school chemistry student. On the other end, consider a share of common equity in a SPAC: often redeemable for close to $10/share before an M&A deal is struck, but subject to the whims of the sponsor who might pivot plans and bid on a business with a vastly different business model from that originally promised. Good luck to a finance PhD trying to value your one common share! Nevertheless, depending on investor time horizon, risk budget, and return requirements, either model may work. For diversification sake, some combination of both is probably ideal.

    Immutability and programmability tradeoffs apply to digital assets as well. Bitcoin network participants fought a brutal civil war from 2015-2017 which ended with no change to the block size,3 an outcome frustrating to corporate interests but one which cemented Bitcoin’s immutability as one of its core selling points. The release of Taproot in November 2021, a Bitcoin network upgrade that promises to make multi-signature transactions cheaper and less data-intensive, took four years to activate! Expected to accelerate adoption of side chains such as Lightning, Taproot has instead failed so far to ignite much meaningful momentum in “smart” Bitcoin transactions (although the last few weeks are encouraging, as seen in fig. 1, below). With a few notable exceptions, such as El Salvador’s Chivo wallet, Bitcoin remains, in our view, a form of digital gold, with payments success as positive optionality. (For background, Bitcoin’s “script” programming language is not “Turing complete,” which means it does not allow for logical loops. This feature keeps the Bitcoin network free from Denial of Service (DoS) attacks which have plagued other crypto networks. However, it also limits programmability.)

    Fig. 1 – Lightning Network Capacity: Rolling 30-day Change

    Lightning Network Capacity: Rolling 30-day Change

    Source: Glassnode, as of 21 February 2022.

    On the other end of the immutable vs. programmable spectrum are open-source smart contract protocols such as Ethereum (ETH), whose value proposition is more flexible thanks to both technical architecture & more malleable monetary policy. On the architecture point, Ethereum empowers entrepreneurs to run censorship-resistant, always-on apps that can interact with a decentralized computer – the ethereum virtual machine (EVM) – capable of executing logical multi-step transactions on the ledger. In Ethereum, all the EVM action is triggered by such transactions, or by messages such as a balance transfer. Then, under the hood, the EVM uses a set of instructions (called opcodes & bytecodes) to execute the specific tasks. However, since only 2% of the top 1.5 million smart contracts publish their source code, the rest self-attesting relevant bytecodes, smart contract-compatible blockchains, have been more vulnerable to denial of service attacks, re-entrancy scams, RAM exploits and other bad stuff.4 The flexibility of many PoS chains is part of the reason why some regulators have been reluctant to deem them commodities: the code changes, usually to protect an economic interest.

    Ethereum’s governance is also more programmable than Bitcoin’s in the sense that Ethereum was already reborn once in 2017 with a hard fork, after hackers drained 3.63M ETH (then worth $55M, now worth ~$11B) from its original decentralized autonomous organization (DAO) via a re-entrancy attack.5 ETH core developers led by Vitalik Buterin rallied support around a further dis-inflationary adjustment to monetary policy in 2021 with the London Fork. In all, ETH’s source code has seen major upgrades on average twice per year since 2015 to bolster network functionality and security,6 vs. Bitcoin’s more presidential cadence. One might argue that Ethereum, competing against for-profit banking, payments and web 2.0 entities, needs such agility to prosper. Bitcoin, on the other hand, competing rather inertly against a Fiat architecture which inflation reveals over time as regressive & subject to political influence, gains advantage through its immutability.

    Amidst news of a potential Russia/Ukraine war, in the 30 days ending February 21, 2022, Bitcoin outperformed Ethereum by 600bps, an index of smart contract protocols by 1000bps, and an index of DeFi exchanges by 1900bps.7 Perhaps the price action, along with gold’s recent outperformance, reveals the relative value of immutability. Amidst dysfunctional political polarization, the regulatory tail risk of financial de-platforming and the continued fog of possible war, read the quotes at the top of this piece again. The Bank of England, China’s CCP, Nigeria with their CBDC, now Canada – all are, for now, imagining digital money as a surveillance tool. But when Canada, attempting to shut off the flow of funds to protesting truckers, tried to freeze the bank accounts and digital wallets of 146 separate crypto wallets tied to Canada’s “Freedom Convoy”, the Nunchuk self-custody Bitcoin wallet (and others) told the Ontario Supreme Court to pound sand, while the CEO of Kraken told customers “do not store your coins on a centralized/regulated exchange.”8 At this point in the Bitcoin adoption curve (fig. 2, below), there may be no bad PR for self-custody, an issue this analyst expects to be resolved in the U.S. Supreme Court in coming years.

    Fig. 2 – Internet in 2003 vs. Bitcoin in 2022

    Internet in 2003 vs. Bitcoin in 2022

    Source: Glassnode, Internet Stats Live, as of 31 January 2022.

    Returning to the more programmable proof-of-stake chains who have been gaining market share from Ethereum for much of the past year: it appears those market share gains have peaked (fig 3, below). Indeed, the last month’s token returns reflect that observation, with Ethereum is up 1% vs. Cardano (ADA), Solana (SOL), Terra (LUNA), Polkadot (DOT), Fantom (FTM) and Algorand (ALGO) all down between 11% and 32%. Based on total value locked (TVL) trends alone (fig. 4, below), an investor might buy Avalanche (AVAX) & FTM and take relative profits from ETH & Binance (BNB). VanEck’s “smart contract leaders” strategy currently holds a modest overweight in Ethereum relative to the MVIS CryptoCompare Smart Contract Leaders index benchmark.

    Fig. 3 – DeFi TVL Share by Chain

    DeFi TVL Share by Chain

    Source: DefiLlama as of 21 February 2022.

    Fig. 4 – Total Value Locked (TVL) Trends

    Total Value Locked (TVL) Trends

    Source: DefiLlama as of 21 February 2022. TVL gap refers to difference between TVL value change & token value change.

    Incidentally, with hacks and code errors mentioned above continuing to impact programmable smart contract platforms, we believe that the “bug bounty” industry to grow to institutional size. Already, $150M worth of outstanding rewards safeguards $100B in user funds, according to the leading bounty platform Immunefi, with several multi-million dollar rewards paid in the last few months.9

    Largest current bug bounties paid in Web3, last 6 months:9

    • 29 October 2021 – Polygon, $2m, bytecode vulnerability
    • 5 December 2021 – Polygon, $2.2m, unknown origin
    • 12 February 2022 – Optimism, $2m, opcode-related software bug
    • 21 February 2022 – Coinbase, $250k, “flaw discovered in trading interface”

    Current bug bounty programs (by size):9

    • Wormhole ($10m)
    • MakerDao ($10m)
    • Olympus ($3.3m) 
    • Astroport ($3m)
    • The Graph ($3m)

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    The underlying Index is the exclusive property of MV Index Solutions GmbH, which has contracted with CryptoCompare Data Limited to maintain and calculate the Index. CryptoCompare Data Limited uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards the MV Index Solutions GmbH, CryptoCompare Data Limited has no obligation to point out errors in the Index to third parties.

    1“Bank of England tells ministers to intervene on digital currency ‘programming’” – The Telegraph 21 June 2021.


    3The Blocksize Wars by Jonathan Bier, 2021.

    4A “re-enrtancy” hack changes the state of the smart contract during its section. The Ethereum DAO attack was the result of re-entrancy. Source: InsurAce.Io “How to protect against smart contract hacks” 1 June 2021.

    5Out of the Ether by Matthew Liesing, 2021.


    7/MVIS, Bloomberg as of 21 February 2022.

    8Twitter accounts of Nunchuk and Kraken CEO.

    9Immunefi, Tom’s Hardware, Coinbase blog, Coindesk.com, VanEck research.

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  • Authored by

    Matthew Sigel
    Head of Digital Assets Research