New trustless Bitcoin price calculation method

New trustless Bitcoin price calculation method

The UTXOracle: A Breakthrough in Blockchain Price Derivation

The blockchain industry is constantly evolving, with new technologies and innovations being introduced regularly. One such breakthrough is the UTXOracle, a simple Python script that utilizes the Bitcoin blockchain to derive an approximate U.S. dollar price. This script takes advantage of an interesting data quirk in Bitcoin transactions to provide an alternative method for price tracking.

Understanding UTXOs and Price Derivation

To comprehend the workings of UTXOracle, it is essential to understand UTXOs (Unspent Transaction Outputs). UTXOs are essentially the building blocks of transactions in the Bitcoin blockchain. When a Bitcoin transaction occurs, the outputs can have specific denominations in BTC or fiat currencies.

The UTXOracle script leverages the fact that a significant percentage (~15%) of Bitcoin transactions create outputs with round denominations in fiat currencies. By parsing this on-chain data, the script can determine a point in time when the fiat price of BTC was a round amount and extrapolate to other points in time. In simpler terms, it finds the intersection of straight lines (representing UTXOs with exact round BTC denominations) and wavy lines (representing UTXOs with round fiat denominations) to derive the price.

Benefits of UTXOracle for Bitcoiners

The immediate benefit of UTXOracle is its usefulness for Bitcoiners who want to harness the decentralization of the blockchain. With UTXOracle, users who run a full node no longer need to rely on third-party exchange price data. Instead, they can track the fiat price average solely with on-chain data. This not only gives new abilities to Bitcoiners but also provides valuable insights for product builders in the industry.

• Alameda Research, allegedly linked to 2021 Bitcoin price plunge.
• Tether buys stake in Bitcoin miner Northern Data, suggesting AI partnership.
• Top Crypto Gainers Today on DEXTools – GOLD, BOMBER, MEMBOT

Insights from the Creator

Steve Jeffress, the creator and developer of UTXOracle, has shed some light on the inspiration behind the project and its potential applications. Steve has been rendering heat maps of the UTXO set for several years and recognized the emergence of the USD price as a clear property of output patterns. He recently developed the UTXOracle script to further explore this relationship.

Regarding the limitations of the accuracy of UTXOracle, Steve mentioned that currently, the script has been tested within a price range of $1,000 to $100,000, starting from July 26th, 2020. Additionally, it relies on the continued occurrence of transactions with round amounts of US dollars. Despite these limitations, Steve is excited to witness the use cases that emerge from UTXOracle. He believes that anything which encourages people to utilize their own nodes and decentralizes the network is a positive step towards improving Bitcoin.

Potential for Manipulation and Expansion

While UTXOracle presents a significant advancement in price derivation, there is always the possibility of manipulation. However, Steve emphasizes that the cost of manipulation would be substantial, which could deter potential manipulators. The use of UTXOracle for contract settlement would require the contracts to be economically feasible even after considering the estimated cost of manipulation.

One potential factor that may distort the accuracy of the model pertains to delayed withdrawals. For instance, if a person purchases $50 of bitcoin on an exchange but waits a week before withdrawing it, the price will be different, resulting in an inaccurate reflection of the round amount in fiat at the time of purchase. This behavior, common during periods of high transaction fees, can introduce distortions in the model. However, an algorithm could be designed to account for such behavior by giving more importance to larger value transfers that occurred in round fiat amounts.

As for further advancements, Steve believes that UTXOracle could be extended or made more accurate by incorporating other on-chain data. However, the trade-offs between simplicity, accuracy, and complexity should be considered. Steve has intentionally prioritized code understandability over efficiency, opting not to import libraries that could enhance performance.

Conclusion

The development of UTXOracle has opened up new possibilities for price derivation within the blockchain industry. By leveraging the Bitcoin blockchain’s data quirk of round fiat denominations, UTXOracle provides Bitcoiners with an alternative method for tracking the fiat price average, independent of third-party exchanges. Although limitations exist, such as price range and data behavior during high fee periods, UTXOracle remains a significant breakthrough in the pursuit of decentralization and improved functionalities within the blockchain ecosystem.

We will continue to update Phone&Auto; if you have any questions or suggestions, please contact us!