Needham & Company raised its bitcoin price forecast to $848 from $655 in the first half of 2016. The firm has underwritten major offerings, including Google's IPO in 2005, and serves as manager or co-
Needham & Company raised its bitcoin price forecast to $848 from $655 in the first half of 2016. The firm has underwritten major offerings, including Google's IPO in 2005, and serves as manager or co-manager for 775 public offerings overall.
The revised outlook depends on several protocol improvements slated to arrive over the next six to seven months. Segregated Witness, the Lightning Network, sidechains, and privacy upgrades dominate Needham's list of near-term catalysts. The report notes: "We find the outlook very encouraging, and we believe the short- to intermediate-term horizon is among the most exciting Bitcoin has seen."
Bitcoin Core's scaling roadmap covers all four categories, with sidechains as a partial exception. Needham backs the restrained approach Bitcoin Core developers take when approving protocol changes.
Segregated Witness solves three distinct problems. It increases capacity, enables further scalability work, and fixes transaction malleability. Eliminating transaction malleability matters most: it's the prerequisite for launching the Lightning Network on Bitcoin's main chain.
The Lightning Network operates as a second layer atop the base blockchain. Participants open payment channels between each other, settling transactions without broadcasting to the full network. Needham regards this as crucial for scaling Bitcoin to handle millions of users. The report explains: "The enabling factor that allows for dramatically higher throughput on a lightning network relative to the Bitcoin network itself is that it's much easier to scale point-to-point transactions (as on a lightning network or payment channel) than those that need to be broadcast to the entire Bitcoin network."
The system does carry one limitation: using the Lightning Network requires participants to lock capital into channels. The Lightning Network's original authors have disputed this characterization before. Needham concludes the constraint poses a minor inconvenience compared to the gains the system generates.
Bitcoin Core has incorporated Segregated Witness into its codebase. Code to activate the protocol change is expected to arrive in version 0.13.1 by the end of October.
Developers first announced sidechains publicly about two years ago, but none have launched on Bitcoin's main network. Needham views them as engines for innovation on the Bitcoin network. The report draws a parallel: "Sidechains bear some resemblance to 'special economic zones' where a country has established different (relaxed) constraints in order to encourage a particular type of activity or industry while still maintaining a base layer of compatibility with the remainder of the country (the Bitcoin network in this case). The two primary consequences of this 'best of both worlds' technology are an accelerated development cycle and new Bitcoin functionality."
Building network consensus requires time. The report elaborates: "This is particularly important considering how difficult it is to achieve a high degree of network-wide consensus—for instance, if a feature can only be added with 95%+ of the network in agreement, very few features will ever be added."
Privacy enhancements also attract Needham's attention. The firm expresses concern about how Bitcoin's transparent ledger affects fungibility, whether all bitcoins are interchangeable.
"We believe that fungibility will ultimately be critical to Bitcoin retaining its value," according to the report.
Needham lists CoinJoin, Confidential Transactions, TumbleBit, and sidechains as encouraging developments. The report defines the gold standard for privacy this way: "The gold standard for privacy is the ability to be able to withhold as much information as possible (transaction amounts, addresses, etc) but to have the ability to selectively reveal transaction activity and information exclusively to intended parties. We're optimistic that this will eventually be possible in Bitcoin."
This description mirrors what Zcash aims to deliver. Zcash's privacy technology could arrive at Bitcoin via sidechain, Needham suggests.
The report closes with praise for Bitcoin Core's development team. The most recent Bitcoin Core release involved 101 developers from different countries contributing code. Needham contrasts this decentralized approach with Ethereum's recent history. The Ethereum network faced a hard fork attempt after The DAO attack. Needham cites this as a warning about the risks hard forks introduce, and notes that Ethereum's market standing declined afterward. The report mentions Rootstock as a competing platform intending to operate as a Bitcoin sidechain.
"The loose-knit group of developers ('Core') that contribute code to the main Bitcoin reference client have, in our opinion, been prudently 'conservative' with regard to protocol changes," the report states. "Many updates from Core over the past 18+ months have laid the groundwork for second-layer technologies (such as lightning networks and sidechains) to be built on top of Bitcoin while also helping alleviate some short-term scaling pressure (segregated witness + Schnorr signatures could scale Bitcoin throughput by ~2x+ without introducing a hard fork)."
Needham continues: "We see this 'conservatism' as prudent given the high stakes involved (Bitcoin market cap > $9B) and because for Bitcoin to be used as a digital gold and as a payment network users need to be reasonably confident that there won't be potentially jeopardizing changes at the protocol level."
Needham supports efforts to construct a stable base protocol resistant to disruption from problems in higher layers. This positions the firm in an ongoing dispute over whether Bitcoin should expand through on-chain changes or rely on external layers.
