How one Bitcoin whale mangled the network
For its glassy surface, there are many things we can't see in the depths of the Bitcoin network.
The Bitcoin network is like the ocean. It's full of garbage.
It's also full of sea creatures. Near the surface you have a lot of small fish buzzing around looking for their next meal, but in the deep, dark depths you have the unknown behemoths. We know of their existence from the peculiar combination of old stories passed down over the generations and the latest high-tech analysis.
Rarely, one of these creatures will be caught in a tangled net and dragged to the surface but most of them will just remain as blips on the radar, a waving fin in the distance (could it have been a trick of the light?) or the glimpse of a tentacle in the deep.
Most of what we know about them comes from forensic evidence, and by observing the ripples left by their immense mass.
Since the Bitcoin halving, the sea has been angry.
This week alone we've seen multiple Bitcoin leviathans resurfacing. Sometimes just to take a gulp of air, other times to lob ashore a message in a bottle and in one particular case just to splash around a head-scratching amount of Bitcoin on transaction fees for no apparent reason.
Bitcoin colossal squid
Shortly after the Bitcoin halving, average Bitcoin transaction fees rose to over US$6 as the network struggled to accommodate two new factors.
One was a straightforward drop in hashrate. The halving abruptly made mining extremely unprofitable for a lot of miners, so they switched off their machines causing a quick 30% hashrate drop. So until the mining difficulty readjustment a couple of weeks later there were fewer blocks being produced, which meant more competition for space on the blockchain which meant higher network fees.
The other much more tentacular factor was that of an unknown entity, dubbed Crazy1o1 by the cryptozoologists observing it.
A short discussion with him convinced me to check the case. That seemed like an easy one. God, I didn't know the monster that he was observing. pic.twitter.com/MjFjLGd9RX
— LaurentMT (@LaurentMT) May 24, 2020
Crazy1o1 is believed to consist of a writhing mass of several million Bitcoin addresses that's been constantly moving hundreds of thousands of transactions among itself.
The name comes from the not-so-relevant fact that it's composed of 1-of-1 multisignature addresses (just another type of address here), and the more relevant fact that it may or may not be totally nuts.
Crazy1o1 has been active for over a year now, accumulating hundreds of thousands of unspent transaction outputs (UTXOs).
Although oversimplified, it's good enough for our purposes here to basically think of UTXOs as spare change. Rather than carry around a lot of spare change in your wallet, you'd prefer to consolidate it into larger denomination paper money. The way you do this in Bitcoin is by making a transaction that bundles up and removes a bunch of smaller UTXOs from the sending address, and puts one large UTXO in the receiving address.
This is what Crazy1o1 appears to be doing with itself, while also sending funds to various exchanges. It seems to have a particular taste for Coinbase.
Many of its transactions follow a specific format of one output to a different address and two outputs back into the same address, which basically just helps consolidate all that spare change into larger bills. The outputs are often UTXOs of similar denominations, which suggests that it's some kind of automated UTXO consolidation algorithm at work.
In short, over the last month Crazy1o1 has just been churning through the hundreds of thousands of UTXOs it accumulated over the last year.
Consolidating UTXOs makes sense because it helps reduce the cost of Bitcoin transactions.
Bitcoin transaction fees are calculated per byte, so a more complicated and data-intensive transaction, such as one that's made up of lots of small UTXOs rather than one big UTXO, can be considerably more expensive to send.
It's common practice for large Bitcoin entities to consolidate UTXOs in times of low network activity, because that's when it's cheap to do so and because it helps keep costs to a manageable level in times of high network activity.
But that's also one of the reasons Crazy1o1's movements are so strange. The halving hype and corresponding price movements make it a poor time to consolidate UTXOs, and they also appear to be doing it at higher fees than necessary, which may be driving up network fees across the board.
It should be emphatically noted that none of this is cheap. Crazy1o1 has spent a lot on transaction fees in the process. It's estimated that it spent more than 100 BTC on transaction fees throughout this.
Water, water everywhere, and all the boards did shrink
Below is a loosely annotated picture of the last month of Bitcoin transaction fees. It shows the Bitcoin transactions waiting in the queue. The blue colours are the low-fee transactions waiting in line, while the green, yellow and red are more expensive transactions that get to jump the queue ahead of their cheaper colours. The taller the peaks, the more expensive transactions are getting.
Basically, the wider and taller those spikes get, the more congested and less-usable the Bitcoin network is.
1. Bitcoin prices leap from the $7,000 range to the $9,000 range in late April/early May, so everyone goes wild and the Bitcoin network gets busy. Not entirely relevant, but it's always nice to clearly observe how a sudden price rise impacts the Bitcoin network. Crazy1o1 is active at this point.
2. The halving occurs, and the subsequent decline in hashrate is largely responsible for the mountain of backlogged transactions that crops up afterwards.
3. Crazy1o1 continues doing its thing as the queue gets worked through. During this trough, when overall transaction fees are on the low side, Crazy1o1 appears to be accounting for more than 10% of all Bitcoin miner transaction fees earned.
So, what's Crazy1o1 doing and why? Who knows?
Who can truly fathom the mind of an eldritch Bitcoin wallet network? It's doing something, and it's doing a lot of it. Everything else is just trying to read into the links between exchanges and timing to draw guesswork conclusions.
Water, water everywhere, and not a drop to drink
Only eight colossal squids have ever been caught intact, with the largest weighing about 500kg. However, from analysis of some of the squid beaks that have been found inside sperm whale stomachs, we can be quite sure that the biggest specimens – or at least the biggest ones that whales successfully hunt – get to around 700kg.
Similarly, we mostly only see bits and pieces of the largest Bitcoin leviathans, but we're quite certain that the ones we've found in one piece are on the small side compared to what else is out there.
When Dread Pirate Roberts was run aground, authorities seized 144,000 Bitcoin worth about $28.5 million at the time. It's a good chunk of change, but we know that it's only a part of what he had. Like most colossal Bitcoin squid, Ross Ulbricht kept his funds distributed across an unknown number of different appendages.
Indeed, in late 2018 analysts observed another leviathan moving in Bitcoin waters, gently shifting a billion dollars of cryptocurrency with supposed links to Silk Road. We also don't know who or why. Specimens like that, along with Crazy1o1 and the other lobtailing Bitcoin whales that have been observed since the halving, all go to show that for all its transparency, we still know very little about what's swimming in Bitcoin's depths.
However, we do know that many of these entities can single-handedly have significant impacts on Bitcoin prices (looking at you, PlusToken) or the functionality of the Bitcoin network as in the case of Crazy1o1.
Disclosure: The author holds BNB, BTC at the time of writing.