Are there changes in the volume of retail transactions through Bitpay this past year?

A couple days ago I noted that because Bitpay reuses its addresses, it is possible to monitor them and that there hasn’t been much of a growth since May (the last time they announced numbers).

Today a redditor posted some visual analysis and explanation of these same Bitpay addresses.  [Note: I’ve reached out to the user and will update this post if they provide any other information.]  Below is their analysis:

2014-12-04-bitpay-2013-01-01--2014-11-30-num-day

The green line on this graph shows the number of payments per day into the presumed (see below) receiving address of BitPay, from 2013-01-01 to 2014-11-3. Note that the vertical axis uses log scale. The number was about 1000–1500 per day through most of 2014, with a strong weekly pattern. The spike at the right end is Black Friday; there were about 3200 inputs, i.e. about 2x to 3x as many as in a typical day.

2014-12-04-bitpay-2013-01-01--2014-11-30-btc-day

The green line on this graph shows the number of BTC deposited each day into that wallet. This graph is rather strange since the number is practically constant since January 2013, about 500–1000 BTC/day, and shows no weekly pattern. And no Black Friday spike either.

What happens is that there are two kinds of inputs to that wallet, which I will call “retail” and “wholesale” (although I have no idea what the latter are, really). The wholesale inputs are large (often hundreds of BTC) and have been regular in amount since 2013-01. The “retail” ones are much smaller (mostly under 10 BTC, many under 1 BTC), much more numerous, and have increased about 3x from mid-2013 to mid-2014. Hence the first graph above is dominated by the retail inputs, while the second graph basically shows the wholesale ones.

The data for these plots comes from these pages that are claimed to show all transactions into the BitPay receiving wallet since it was created. However, the addresses that make up that “wallet” were inferred from the blockchain by an undisclosed heuristic that is supposed to identify addresses belonging to the same owner.

My guess is that the heuristic simply assumes that two addresses that are inputs to the same transaction must belong to the same owner (since one needs both private keys to sign the transaction) and assigns them to the same “wallet”. If my guess is correct, the heuristic may fail to include in the “Bitpay.com wallet” some addresses that belong to BitPay but were never used together with the identified ones.

However, the volume of BTC that went into that heuristic “wallet” during May/2014 seems to match what BitPay said to process per day in that month (assuming that they picked the best day of May); so it seems that the heuristic wallet is fairly close to the real one.

Updated with more from the same user:

  • BitPay now processes about 1000-1500 “retail” payments per day, averaging less than 1 BTC each;
  • The number of retail transactions processed by BitPay has grown 3x since mid-2013, and has been flat through most of 2014;
  • The amount of BTC processed by BitPay (including “retail” and “wholesale” payments) has been quite constant since Jan/2013, about 500-1000 BTC/day
  • In terms of dollar value, the amount processed by BitPay (including “retail” and “wholesale” payments) has increased a lot from 2013 to 2014, but has fallen 50% or more since February, as the BTC price fell.
  • Black Friday had a modest effect (2x to 3x) on the number of “retail” payments, but had no effect on the total BTC/day (which is dominated by the “wholesale” payments).
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Panel for Blockchain University debut

Tonight I had the pleasure to moderate a panel at the new Blockchain University developer seminar.  Panelists included: Tom Ding from Koinify, Ryan Charles from Reddit, Ryan Smith from Chain and Atif Nazir from Block.io.  Special thanks to Christian Peel, Zaki Manian, Sri Sriram and Robert Schwentker for organizing it.

The basic idea of Blockchain U is to provide hands-on practical knowledge to not only understand the nuts and bolts of what a blockchain is and how it works, but to be able to build apps in this ecosystem (such as a block explorer, wallets and anything that can plug into an API).

Panel starts around 45:20m

I was also quoted in a CoinDesk article a couple days ago that briefly covered the pre-event planning:

If you’re a software developer, even in the Valley, there are few physical locations you can visit to get hands on practice and feedback in building decentralized applications.  Blockchain University is hoping to bridge that chasm, by providing interaction with industry entrepreneurs and developers who are bringing their on-the-ground experiences into an accessible classroom format.

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Eris launches an actual smart contract / decentralized application platform

[Note: this is not an endorsement nor was I compensated for posting the following information]

Preston Byrne (who helped provide feedback and content for GCON) left Norton Rose Fulbright a couple months ago and just announced the launch of Eris Industries.  While details are still forthcoming, it looks like they have managed to beat to market other proposed systems and it uses agnostic tech (not necessarily Bitcoin “rails”), to settle/move contracts on a blockchain.

In an email exchange Byrne explains the Eris system in a nutshell:

I think the key takeaway point – if there is one – is this. It’s sort of like Nick Szabo’s blockchain computer (albeit an Apple 1 version of it). There are no mystical powers to a blockchain – it is a data structure. But you can parameterise the data structure to address pain points where you currently rely on multiple-redundant (hardware and labour) systems to achieve that verification.

Where those pain points are will differ from case-to-case and application-to-application. It’s something that you can’t know in advance – businesses need to do the analysis and come up with proposed deployments, and it’s best for them to do so, as they are far and away in the best position to know how their business is structured and where the humans and hardware need to come out (and then, how to design a system of smart contracts tailored to address it).

That’s why Thelonious is a smart contract-enabled blockchain design, a template to create blockchains, instead of a single one – because developers, not us, are in a way better position to establish what those pain points are and how to address them.

Thus they set the parameters, and we don’t. We just give them the enterprise-compatible, open-ended, smart contract-enabled, and smart contract-controlled framework over which they can drape their particular problem, define it, code it, test it, solve it, and (while still benefiting from the security of public-key cryptography) improve it later thanks to the GenDoug kernel, and without needing to fork the chain.

Our job over the next couple of years is to make sure we keep building the tools that help them achieve that as easily and safely as possible.

Some of their blog posts explaining what the platform and goals are:

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Does spending decrease as purchasing power declines?

ecommerceLast year Peter Coy illustrated what a deflationary economy looks like (such as the Bitcoin economy) and explained how this impacts consumer spending (and lending).  Depending on what peak someone may have bought at, the very reverse happened this year, with prices denominated in bitcoin rising by perhaps as much as 65% (a full analysis should probably also adjust a couple percent to include CPI).  Though, to my knowledge there are no products actually denominated in bitcoin (yet).

So then, did spending habits change over the course of the year?

Not really, users as a whole still preferred to simply hold onto coins either because they had low time preferences with future expectations of large price appreciation and/or they were ‘underwater’ in coin (e.g., they bought at a peak).  Off-chain transactions on Coinbase did not see much of a difference (yet) either.

Economic theory suggests that consumers prefer a medium of exchange with stable purchasing power and in practice that seems to be the case.

For instance, on January 9, 2014 online retailer Overstock.com began accepting bitcoin as payment.  In the first two months it generated $1 million in bitcoin payments and through May the tally had grown to $1.6 million in bitcoin payments.

According to a new story yesterday, Overstock announced it would likely generate $3 million in bitcoin payments this year (though they do not specify how many bitcoins that is altogether).  This is in contrast to the estimates at the beginning of the year:

The figures are notable given that the e-commerce company had issued a wide range of potential estimates for its first-year bitcoin sales over the course of the year. In March, CEO Patrick Byrne suggested Overstock was on pace to achieve $10m–$15m, or even $20m, in bitcoin sales.

Such estimates were also below the $5m Byrne said Overstock originally anticipated, though on par with those suggested by Overstock chairman of the board Jonathan Johnson in interviews.

Altogether approximately 11,100 customers paid with bitcoin this past year at Overstock — these customers spent an average of $273 in bitcoins.  That means that after the initial power law from the first couple months, roughly $200,000 in bitcoin sales occurred from March onwards, or roughly $6,700 per day.

If bitcoin denominated prices had stayed the same, would that have increased the amount purchased?  Perhaps, but as articulated by both Robert Sams and Yanis Varoufakis, bitcoin stability is perpetually ephemeral and perhaps the only solution is to switch the monocoin ledger and adopt a dual currency ledger design instead (a topic for another day).

Besides a decline in purchasing power, is there anything else that may have caused this?

In chapter 11, pages 181-182 I explored another reason (see this image): demographics.  Most (60%) of the customer base of Overstock are female and as we know empirically, there are very few females that inhabit the Bitcoin ecosystem.  Perhaps this will change in time, so what are other datum in this exhibit?

Specifically, what does Overstock do with these coins?  One redditor looked through the most recent 10-Q filing and found:

At present we do not accept bitcoin payments directly, but use a third party vendor to accept bitcoin payments on our behalf. That third party vendor then immediately converts the bitcoin payments into U.S. dollars so that we receive payment for the product sold at the sales price in U.S. dollars.

[…]

We have also begun accumulating bitcoin in an amount of approximately 10% of the amount of our bitcoin-denominated sales as well as other cryptocurrency.

[…]

We hold cryptocurrency denominated assets such as bitcoin. We currently consider these holdings to be investments and include them with other long-term assets in our Consolidated Balance Sheets. Cryptocurrency denominated assets were $346,000 and zero at September 30, 2014 and December 31, 2013, respectively … Losses on cryptocurrency holdings were $50,000 during the three and nine months ended September 30, 2014. There were no losses on cryptocurrency holdings for the three and nine months ended September 30, 2013.

Or in other words, Overstock.com sells all but 90% of the coins it receives and puts the remaining portion onto its books as an investment, which saw a loss of $50,000 through Q3.  Perhaps this reverses next year if there is another run up in prices.

In addition, the coin sales created (a marginal) sell side pressure on the market through the intermediary, Bitpay, the largest payment processor in this space.

What changes did Bitpay see this year?  In a recent profile they noted that:

BitPay, the largest and oldest bitcoin payment processor with a daily volume of $1 million bitcoin transactions supporting more than 44,000 merchants, stated in an email exchange to CCN that more than 4,400 of their merchants keep all of their settlement in bitcoin, almost 18,000 keep some of their settlement in bitcoin while the remaining 22,000 convert it all to fiat.

While the amount of merchants accepting bitcoin more than quadrupled this year, the amount of retail commercial transactions did not.  Because Bitpay re-uses the addresses for purchases, it is possible to monitor them for inflows.  And over the past 6 months, there has not been a significant change: roughly 2,000 bitcoins in aggregate (+/- 200) are received by Bitpay each day.  In fact, they have been receiving approximately the same $1 million in bitcoin transactions since May. [Note: at current market prices, even 2,200 bitcoins does not equal to $1 million thus a contradiction, which can only be cleared if/when Bitpay releases its methodology]

Because of the ecosystem still lacks a ‘circular flow of income,’ in return Bitpay sells these coins to other inventory providers such as financial institutions, family offices and exchanges (detailed here).  This further creates sell side price pressure and if there is not a corresponding increase in speculative or transactional demand in bitcoins, effectively lowers the purchasing power of a coin.

For instance, last Wednesday, December 10th, Microsoft announced that it had added bitcoin as a payment vehicle for games and apps.  The price rallied 10% in the course of an hour yet subsequently declined to pre-rally prices.  Why?

As analyst Raffael Danielli explained to me, on the one hand, Microsoft under the new CEO — Satya Nadella — seems to push deliberately into areas at the forefront of the tech sector.  Accepting bitcoin is an item on their list that can easily be implemented and subsequently crossed off (e.g., a cheap point in terms of risk / reward due to the usage of an intermediary).

On the other hand, if people are less willing to spend Bitcoin while ‘underwater’ this can lead to more ‘bad’ news regarding a lack of consumer adoption.  For example, one could see a correlation between Xbox One’s less-than-stellar sales and losses against the Playstation 4 (PS4 is outselling 2:1), versus the need to get some kind of PR spark before the Christmas shopping spree.  Similarly Time magazine’s announcement today probably will only produce a temporary marginal increase in bitcoin activity and was likely done with similar motivations (positive PR before holidays) because Time been hit hardest (it’s 2012 sales of single-issue copies declined 27%, the most across the entire industry and it laid off 5% of its workforce in early 2013).

Yet most bitcoin holders are probably not the usual demographic of paper magazine subscribers.  Or as one droll redditor explained:

Venn diagram of people who use bitcoin and people who subscribe to print magazines: OO

Perhaps market participants as a whole see this too or perhaps they recognize that even if there was an upsurge in bitcoin usage to Microsoft product lines (which we can monitor as Microsoft is using Bitpay), those coins will ultimately put sell side pressure because there is no circular flow of income.  And again, without a corresponding amount of speculative or transactional demand, the price of a bitcoin could decline as would its purchasing power.

There is never a dull moment in this space, perhaps 2015 will create new patterns to analyze.

 

[Special thanks to Jop Hartog and Jonathan Levin for their feedback and information this past month]

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Guest presentation with O’Reilly media

About a week ago I gave a guest presentation (webcast) with O’Reilly media regarding the “Continued Existence of Altcoins, Appcoins and Commodity coins.”  For those interested, a short preview is found at, “Bitcoin and blockchain use cases won’t be sexy, but will be essential.”

Note: in order to listen to the webcast archive you have register for the event.

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Article house keeping

I was quoted a couple times in a new Reuters article, “All the rage a year ago, bitcoin sputters as adoption stalls.”

I think it is probably more accurate to say that according to the Bitcoin Distribution Chart, that there are roughly 250,000 to 500,000 ‘individuals’ controlling “wallets” (there really is no such thing as a wallet with respect to the Bitcoin protocol) with more than 1 bitcoin.  The vast majority of the rest are probably categorizable as unclaimed tips, ‘dust’ (originally less than 5460 satoshi, now less than 546 satoshi), purposeful spam for research (taint analysis), etc.

Also (and I’m at fault for doing it too), we probably should stop using the word “liquidity” when more accurate words are probably velocity or movement.  Liquidity has a different meaning in the financial markets.

A few other posts I wrote this past fall include:

[Note: I was also quoted earlier this month in Questions Linger as Daily Bitcoin Transactions Pass 100,000 Milestone from CoinDesk and Analysis: Around 70% of Bitcoins Unspent for Six Months or More also from CoinDesk]

 

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Making Lemonade out of Lemons: Squeezing utility from a proof-of-work experiment

Earlier today I gave the following presenation at the R3 Cryptocurrency Round Table in Palo Alto. It covers “Bitcoin 2.0″ ideas including alternative consensus mechanisms, costs of operating decentralized ledgers, use-cases for these new ledgers within existing financial institutions and potential hurdles including disproportional rewards.

[Note: citations and references can be found in the notes of each slide]

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Bitcoin / Dogecoin tipping and adoption panel

Last Saturday I moderated a panel at PubNub for the 1 year ‘Dogeversary’ — the anniversary of Dogecoin.  Panelists included Marshall Hayner, CMO of Block.io and David Dvorak, CTO of DogeTipBot.

Note: I don’t own any dogecoins and actually explained a hashrate vulnerability it had back in May (which they’ve at least temporarily rectified through ‘merged mining’ (AuxPOW) with Litecoin).

Panel starts at 1:33:32 but the sound quality doesn’t (marginally) improve until 1:36:42 (so start there) and ends at 2:17:00.

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The concept of night and day are archaic to a network that never sleeps

I have a couple new articles published over the past few days.

The first one, “The Rise and Rise of Lipservice: Viral Western Union Ad Debunked” is over at CoinTelegraph and deals with the remittance industry.  Note: my original title included just the first 6 words, CT added the remainder including “debunked” which is probably apt.

Why spend time writing about this?  Because it is increasingly clear that keynote speakers in this industry are factually wrong about many things, including the various margins that money service organizations (MSO) like WU have.  For instance, yesterday there was a really good thread on reddit that broke down the erroneous claims from Andreas Antonopoulos regarding the margins that WU and others have, it is wrong by an entire order of magnitude.

The second article is, “Too Many Bitcoins: Making Sense of Exaggerated Inventory Claims” at CoinDesk.  Note: original working title was “Where is the inventory? Making sense of disaggregated inventory pools and financial controls” — I do have to say I like the CD editors choice, it’s much better!

Over the past year as I conducted interviews for my research I would often hear stories of how such and such owned X amount of bitcoins.  In just a six month period it became pretty clear that someone somewhere was embellishing because there just aren’t that many bitcoins around.  This was especially true once you start hearing rumors of the amount of bitcoins that large holders in China claim to have.  Which side of the Pacific is exaggerating more?

A few things were cut in the 2nd article to slim it down a bit and also because it meandered a little.  Here are a few of the items:

  • While an imperfect facsimile a UTXO (unspent transaction output) or bitcoin, is not equivalent to equity.
  • Remember, pre-Artforz, miners and hashers were one and the same, so a DMMS was not a farm or pool back then as it is today.
  • Some of these exchanges started within a niche such as futures speculation. For example, Bitfinex originally shared (mirrored) the Bitstamp order book and later, after growth, established their own thereby allowing their customers to partake in price discovery through the spot market (e.g., providing bids and asks). Others such as Coinbase effectively operate what Coindesk calls “a Universal” — that is as a hosted wallet, merchant processor and exchange — albeit without a users ability to speculate on the bid/ask of a token (in most cases Bitstamp acts as their liquidity provider who in turn receives coins from miners and so on).
  • This year alone, several exchanges have been hacked and/or customer funds were stolen by insiders, including Mintpal, BTER, CoinEx, Coinmarket.io, Neo & Bee (it wasn’t an exchange per se, it collapsed too soon to figure out what they meant, if at all, to do) and most prominently, Mt. Gox.  Despite a spectrum of counterparty risks and the advent of decentralized and multisig trading (eg the Counterparty DEx and Coinffeine), traders, on the whole, still prefer to use centralized exchanges due to their trading speeds (milliseconds instead of 10+ minutes).
  • ~300 ATMs globally

Lastly, a friend of mine, Anton Bolotinsky sent me some additional feedback that may be of interest to some readers:

The statement: “Also, withdrawal time from an exchange is not necessarily related to the price of bitcoin.” Seem to be out of context.

I’d assume it’s about market phenomena – which will move price if people withdraw both btc and fiat positions from exchange. They would either have some very fast cash deposit/withdrawal mechanism to be able to do it daily. Alternatively, at the end of the day, they would convert fiat to btc, and withdraw btc. This would move the price.
If fiat positions are not liquidated, withdrawing only btc, will reduce risk exposure to 50% on average. And will create evening & morning blockchain transactions spike – btc from exchange to wallet, and back. I can’t see anything like this happening.

Another thing that somebody will probably comment: btc exchanges, unlike NYSE, work 24/7, nothing besides trading volumes (maybe) changes. So notion of doing something for night might be archaic:)

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What’s the deal with off-chain transactions?

Based on comments from both reddit and Coindesk, the number one question today seems to be related to off-chain transactions.  Why aren’t these being factored in to the equation? [Note: it bears mentioning that I did discuss this on p. 84, Chapter 4]

There are multiple problems with this perspective, however before delving into that I should point out that in the previous article, I did in fact link to Coinbase’s self-reported off-chain transaction numbers.  They are relatively marginal, on most days comprising less than 5% of the total transactional numbers.  But it is not clear from these numbers alone are or what they refer to: Coinbase user to user, user to merchant, and possible user wallet to user vault?

Below is their chart:

coinbase offchain transactions

What impact does this have on the network?

It actually makes the network insecure in two ways:

1) Users become increasingly dependent on trusted third parties (TTP) on the edges, which defeats the purpose of having a blockchain in the first place (recall that “trusted” appears 11 times in the white paper).  This also opens both consumers and entrepreneurs up to a host of vulnerabilities and abuses that the industry is continually plagued by.

2) As more users leave the actual blockchain and move off onto TTP, less funds (or “fees”) are going to pay miners for actual security, making the entire network more reliant on seigniorage (block rewards) which in the long-run has empirically been a losing battle.

Below is a chart from Blockchain.info that illustrates fees to miners:

total transaction fees two year

Another chart illustrating this data was compiled from data by Jonathan Levin (formerly of Coinometrics) over the same time period:

Notice how fees have actually decreased and are now at a two year low.  This is actually the opposite trend we would want to see and potentially troubling.  In fact, contrary to prudence, instead of floating fees the core developers have “slashed” fees (more accurately called “donations“) by tenfold this past year.  From an economic sustainability point-of-view, this is the diametrically opposite action that should be taking place.  It will make the adjustment period at the next block halving much more painful to consumers as fees have to go up to incentivize miners to stay.

Earlier this summer, L.M. Goodman (creator of the Tezos protocol) noted a similar conundrum:

The race to build more hashing power (by developing ASICs for instance) means that the cost to pull off a 51% attack on the network increases. In this respect, the network is more secure. Note however that the amount of money spent on mining and mining equipment must be approximately equal, in the long run, to the amount of bitcoin paid in transaction fees or created through mining. Given off chain transactions, this could dwindle to very low levels in the future.

As Dave Hudson and others have pointed out (see Chapter 3), this fee has to increase because transactional volume simply is not increasing to the level it needs to in order to replace the block reward.

Meher Roy succinctly summed up this conundrum in a comment earlier today:

The question is how will the low-fee high volume work when off-chain is / will prove to be more convenient?  Any on-chain fee will be out-competed by speed, lower fees and convenience of off-chain transactions. Why exactly are we sure on – chain transactions will rise 10000 fold that it needs to? How exactly does Bitcoin solve this collective action problem?

These are important questions that thus far, everyone seems to punt on.

What about off-chain data from exchanges?  Surely they should be factored into this?

Unless exchanges are willing to publicly share that data, it is difficult to surmise what is taking place in their black boxes (we can have some idea based on public addresses).

But again, this is not a particularly good metric for those who believe lots of commercial trade is taking place.  Off-chain transactions on an exchange are equivalent to forex.  Value transfer, possibly.  Retail commerce, no.

We do in fact know how much Bitpay and other payment processors do in business each day, we know this through the bitcoins they sell each day to liquidity providers.  And altogether this amounts to around 5,000 – 6,000 bitcoins per day.  Although there are some merchants that keep part or all of their bitcoins, the liquidity sales is the most accurate version of retail commerce we can estimate with today.  And that has not changed much over the past six months.

[Special thanks to Dave Babbitt and Jonathan Levin for their constructive feedback]

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Approximately 70% of all bitcoins have not moved in 6 or more months

Back in May I published a blockchain analysis piece on Coindesk that utilized graphs created by John Ratcliff.  Ratcliff published several new charts yesterday that provide a fuller picture of this overall movement.

bitcoin age

The chart above visualizes nearly 6 years of token movements.

Is there a way to isolate the past year and if so, what does the past year look like? That’s what the next chart illustrates:

bitcoin distribution by age

What conclusions can be drawn from these charts?

1) that token movement (velocity) strongly correlates with a rapid increase in market prices (e.g., more velocity during the bull runs, less during price decreases); you can see that in the first chart with large bumps in April 2013 and then again in November 2013
2) because of the large dip in prices over the past year, most tokens are inactive in part because the owners are still “underwater”
3) that monthly liquidity is still only around 10% (more on consumption below)
4) the “tx volume” chart on Blockchain.info is no longer entirely valid due to a combination of the usual mixing and mining rewards but also because of increased advertisement spam (e.g., metadata within OP_RETURN), increase in P2SH and Counterparty tx’s.  Only a full traffic analysis can provide a more accurate breakdown.

What is especially interesting is to see the “overhang” or rather the “underwater” coins that are moving from the 3 months to the 6-12 month band. What this effectively shows is that owners of those UTXOs purchased them during the bubble of November-December 2013 and are still willing to wait and hold onto these coins until the price rebounds.  If there is no upward change in prices then some (or all) of these coins will eventually move into the next band sometime in the spring of 2015.

What other conclusions can be made?

This is a sobering chart for advocates or entrepreneurs within the merchant payment processing vertical.  What this shows is that despite the near quadrupling of merchants that now accept bitcoin as payments (this past year increased from ~20k in January to ~76k through September), on-chain activity has not seen a corresponding increase by consumers.  They are all effectively fighting for the same thin slice of liquid coins, a segment which empirically has not grown. This does not mean that there are no consumers, only that when paired with data from Bitcoin Day’s Destroyed, there probably hasn’t been any real on-chain growth beyond the exceptions in #4 above. Thus on any given day, payment processors (collectively) likely only process 5,000-6,000 bitcoins still. Other additional activity could be taking place off-chain in trusted third parties (like hosted wallets and exchanges such as Coinbase).

Too reuse an analogy from Chapter 14 (p. 224 and 230), that also means that since 3,600 bitcoins are created each day to pay for security, that with this ratio (3,600 : 6,000) every other mall patron is effectively being guarded by a mall cop which in laymens terms means there is massive security overkill still taking place.  This is not a big deal today but when coupled with analysis from Dave Hudson, network transaction fees will have to increase by several orders of magnitude to replace the seigniorage that currently incentivizes miners.  This is best illustrated in the cost per transaction metric on Blockchain.info.

As I mentioned on a panel on Tuesday this collective “hodling” (hoarding) behavior is understandable given the future expectations of price appreciation.  Yet it is probably not a good characteristic for a modern “currency,” for reasons discussed in Chapter 9 and also Why Market Prices Do Not Double With a Block Reward Halving.

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Panel for Follow The Coin with Tina Hui and Jackson Palmer

On Tuesday I was a panelist on a new segment from Follow The Coin, hosted by Tina Hui.  The other panelist was the creator of Dogecoin (among other projects), Jackson Palmer.

Below are transcribed comments I made throughout the recorded portion with the approximate time they were said.

[2:46]

Ditto.  When I first got involved with Bitcoin a few years ago, I was really excited, I did some mining.  I built some machines in China and slowly but surely I kind of became more of a skeptic.  I guess that’s what people know me for.  I wouldn’t say I’m anti-Bitcoin, I think there is a lot of Koolaid that is continually circulated.  I think Jonestown would be very  jealous of the Koolaid in this space.  Right now, the phrase I was talking to Jackson earlier was, you know how people are saying “Be your own bank”?  I’m not saying you can’t be your own bank but what happens in reality is, like “Be your own textile factory” or “be your own data center” — for whatever reason that just doesn’t work out in reality.  I’m not saying it can’t work out in this space but it looks like people prefer to be nannied, prefer to have costumer assurance.  I probably just lost a few friends and followers but that’s how I kind of look at things.  It’s become BINO: Bitcoin in name only.  I have a whole talk on that otherwise.

[4:39]

I’d have to agree for the most part.  For listeners, the use cases I think are interesting with the actual technology are pretty mundane.  I was talking to Everett from Bloomberg, there is this thing called Consolidated Audit Trail.  Back two years ago, the SEC put together something called Rule 613.  The idea was to get all these institutions together in the financial industry to actually track every single transaction.  That seems like a mundane, unsexy thing but at the same time this might be something that a blockchain may be able to do in some capacity because you have people who do not necessarily trust each another, you have a lot of them.  Maybe you don’t need Bitcoin’s blockchain, maybe you can use some kind of other ledger, a proof-of-stake based ledger.  I do think the technology does have some interesting potential but probably not for a lot of the things that are being funded.

[7:13]

Sure, so I’ll be mean, I’ll say something not nice.  Tipping is a neat idea but in practice what ends up happening a lot and we see this on reddit and LTBCoin and stuff like that, is it incentivizes begging.  So we end up having this magnet to rewarding behavior that you really don’t want to have.  Obviously there are people who do take tipping seriously and put together some good comments and stuff like that.  For example, with LTBCoin.  If you are not familiar with it, Adam Levine had this really cool idea: “hey, how about we reward people who make comments.”  That sounds great, you are part of the message, part of the community.  What ended up happening is that attracted just tons of bots basically, people just spamming.  We see this with reddit too with the different tippers.  Some guy the other day, 2 or 3 days ago said, “hey, I literally made sock puppets to collect as many tips as I could.”  And he collected something like 50,000 satoshi worth, which is not a whole lot but that’s a lot just spending time spamming around to try and get.  It has some interesting ideas, the question is, how do you filter out the froth from legitimate players in this.  And I’m not sure there is a real silver bullet to that.  Maybe it just has to be part of the ecosystem, we’ve lived with it this far maybe it is something we have to soldier on with.

[9:24]

So I’ll be mean again.  There really is no correlation between tipping and then encouraging that behavior in a restaurant.  Most of the literature doesn’t point to the reason why China is stagnating for example isn’t because a lack of tipping in the country.  It’s a cultural thing here in the US, I’m not anti-tipping.  My wife and I tip, maybe on the lower side of scale of things.  I think it is a funny activity that people do and I’m not against it, but I’m not sure it’s providing a good marketing signal to the participants or the people who receive it.

[10:11]

I don’t put tipping addresses for two reasons.  The first one is, actually I talked with Victoria van Eyk at Changetip yesterday, and she said, “Tim, you shouldn’t use this reason.”  But I’ll tell you the first reason why, I don’t want to accept candy from strangers.  I’m not sure where that coin came from, maybe it is a Silk Road coin.  Obviously that is something way down the line, I don’t think anyone is going to bust me for accepting some tip that way.  But I do think we should be judicious against who we receive money from, especially in this era of Alex Green and just the amount of scammers and bad apples in this space you don’t know where that money comes from.  The other, and this is nothing against Changetip, it’s just how it is efficient: it’s all off-blockchain.  The whole purpose of this blockchain space is to provide decentralization, if we’re accepting tips from centralized silos it just reinforces that.  So again, I’m not anti their service, but it kind of defeats the purpose if you have to rely on a centralized service to do all that.

[14:17]

Just like you said, it’s unsexy to build these vigilante services because they become centralized and who are you to decide who is the bad guy and stuff like that.  So you end up recreating the system that we’re in right now, for better and for worse.  There are some tools, if you guys are interested, there is a company called Bitreserve.  They just released their transparency initiative called Reservechain and Reserveledger.  The idea is you use the Merkle root to trace back to make sure all the tx’s are accounted for.  Obviously multisig is one of the few areas I’m not bearish on, it’s legit.  Whether or not you can build an entire company around just multisig, I don’t know, we’ll find out.  Taking that internally for financial controls, segregating.   Even hardware wallets, actually I just tweeted about that the other day.  Hardware wallets seem like they have, I hate to say it, maybe they do have some potential — that’s not sexy again, who wants to carry around a wallet, a smartphone and then a hardware wallet with your private keys.  Maybe that’s something that user behavior will end up changing or maybe it’s not.

[18:04]

So there is this thing called “affinity fraud.”  And just like the name affinity, when you were in school you had affiliations, it’s kind of the same idea.  It happens a lot in Bitcoin because there are so many self-identified libertarians essentially.  So if you pretend to be a libertarian you can — no offense to anyone here — I’m about to lose some more friends here.  They are identifiable targets, it happens in religions, it happens in just about any ‘affinity’ essentially.  It’s not something that can be stopped immediately, there’s going to be bad actors that know they can take advantage of this.  You have to be judicious.  Again, I’m not sure if there is a way you can build a startup, fund it somehow and then go after these guys.  It becomes this public goods issue.  Again, I’m not saying the only solution is a government, but it seems like there is a perverse incentive to not get rid of these actors.  Because what happens is, is especially with thefts and scams is these people need to launder the money and move their money – exit somehow.  And to do so, they end up having to use — it creates demand for these other services.  So in a way, there is a perverse incentive to not get rid of these actors because creates more demand for the underlying currency.  Again, I’m not saying that it is going to stay the way it is, I’m sure I’m going to get a lot of emails saying, “no Tim you are wrong.”  But so far no body has done much to get rid of these guys and maybe there is a reason why, maybe everyone is sort of benefiting from this underlying demand.

[22:29]

I will argue that Satoshi pre-mined.  And I’m not saying that because I hate Satoshi.  Is Satoshi here?  Does anyone know Satoshi?  You can prove it either way by signing.  The reason I argue that is the biggest complaint with pre-mining is you have this allocation that took place before anyone else could particpate, that’s the bottom line.  Satoshi only advertised Bitcoin on one obscure mailing list and then preceded to mine basically for an entire year without advertising it again and without doing any effort at all to do PR.  He could have run a testnet.  He could have done mulligan, “hey, we have these people, it’s been a year now, we’re going to reset it.”  And if you add up all the coins that were basically coinbase free, that were just the coinbase transaction or plus one tx, that is about 4.8 million bitcoins (see p. 163) that were basically handed out for free.  Without any merit.  Again, I’m not saying that you need to confiscate those guys.  But what we’re having today is capacity issues with blocks right now: about 30% to 40% of capacity on any given day.  Dave Hudson has been doing a lot of good research on this.  And so these miners are essentially doing more work today than they were at the beginning.  And they’re not being rewarded any more than they were then.  That’s an issue with the static rewards.  So I would argue that it is essentially a pre-mine, he could have said testnet for the first year and didn’t.

[25:24]

Mine what, Bitcoin?  So home mining, industrial mining?  The only way most people are making money off of Bitcoin is price appreciation.  You mine, you hope that it will increase in value.  But you might as well just buy coins at this point.  The only people who are really making money are Bitfury, a few places in China (see Chapter 5) and this is because they’re able to scale it and benefit off the energy.  This is not to say you can’t possibly do it in maybe certain locations here in the US, like Washington I believe has 3 cents a kilowatt hour.  And they were in the news for setting up some certain sites.  But in general in this day in era, with ASICs it’s very difficult to actually have any margin.  The argument is, ceteris paribus, it should take one bitcoin to actually make one bitcoin just because of the way the difficulty is auto-adjusted every two weeks.  So on the margins there really is no profit except maybe a few different entities that can scale, like Bitfury.

[27:22]

So many questions.  So to give you an idea, the Gini coefficient in Bitcoin is 0.88 (see p. 129), perfect number 1.0 is unequal.  I’m not some kind of egalitarian marching in the street.  But a 0.00 is just the opposite, basically it’s perfectly even distribution.  Bitcoin basically has a Gini coefficient higher than North Korea.  I’m not saying that’s a good thing or bad thing, it kind of disincentivizes some people to join because they think they can no longer participate in the “get rich quick.”  The whole asymptote itself was just one “get rich quick” idea.  Again, I’m not saying it was a scam, I’m not saying that at all.  As far as the hording versus the savings.  So people get this often confused: the protocol itself does not have any mechanism to actually save.  It is simply a lockbox.  So it is essentially a digital mattress.  There is nothing wrong with that.  If you just want to hold onto it.  But there is no mechanism to take that money within the protocol and lend it out.  And what we’re seeing is we can build out lending platform, through like BTCJam.  So as a result you have, if you actually look at liquidity, on any given month you have about 10% of all mined tokens ever are actually liquid (see Chapter 12).  You have about 90% of tokens that haven’t moved for over a month and about 50% that haven’t moved in more than 6 months.  And this is because there is nothing built into the protocol to actually put these into active, lending purposes or any of these other financial instruments.  So that kind of creates a stagnant economy.  Well you wouldn’t call it a currency.  Like you’d call that some kind of commodity.  There is no velocity of gold even though it’s legal.  You just kind of bury it.  Again, I’m not against if you guys want to hold coin.  That’s the rational thing to do.  The rational thing is, if you believe it is going to appreciate in value you hold onto it.  Everyone thinks it’s going to go to the moon.  Everyone is actually [acting] rational.  So it’s not actually being used as a currency, it’s being used as a commodity and that makes sense because everyone thinks it’s going to raise and appreciate.

[29:52]

It’s hard to know how much money laundering has occurred.  I mean unless you can identify ever single transaction and know what the intent was, you don’t know how much.  Again, I’m not saying that this doesn’t take place with fiat.  Everyone’s always saying fiat is number 1.  We have the ability with a blockchain to actually monitor this stuff.  And actually it defeats the whole purpose if you have to identify everybody along the way because then it adds all this costs and stuff like that.  So it’s this weird paradox.  [Question: So you’re actually pro-bitcoin?]  I’m on the fence with the technology.

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Quotes about cryptocurrency in Singapore

I was asked to provide some comments related to the SKBI conference last week in Singapore.  Below are my full quotes that were lightly edited for two different publications.

Singapore Event Puts Bitcoin on Mainstream Finance Agenda from Coindesk:

“One of the discussions throughout the conference was related to bitcoin as a commodity, currency and potentially emerging asset class.  While this is ultimately an empirical issue, the market so far — based on blockchain behavior — suggests that it could be some form of commodity.  As to whether or not it can go the distance and become an entrenched asset class is another issue altogether largely due to the tendency for all proof-of-work based blockchains to ultimately “self-destruct” due to block rewards.   Perhaps this will change and bitcoin will somehow be the exception to Ray Dillinger’s rules but it may be the case that its monetary policy cannot incentivize the labor force to stick around long enough to make bitcoin a viable asset class.”

Singapore Crypto Conference Brings Together Academia, Businesses and Regulators from CoinTelegraph:

“The Singapore conference was unique in that it provided a well-balanced cross-section of academics, business professionals, decision makers at governmental organizations and entrepreneurs within the industry.  As a result, the sobering conversations that took place focused more around actual opportunities and challenges in the community today rather than the typical scifi cheerleading that is divorced from the reality that companies in this space face.”

Videos and other media should be up in the next week or so.

Bonus: some of my thoughts as to why transactional volume has increased despite a lack of corresponding increase in BDD and miner fee volume: Markets Weekly: Bitcoin Rises Amid Dark Markets Crackdown from Coindesk.

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Moving Beyond BINO Beta

Last week I participated in a couple panels at the inaugural CAIA-SKBI Cryptocurrency Conference 2014 hosted at Singapore Management University.

Below are the slides of the presentation I did at a closed-door session on November 5th.  Citations and references can be found in the notes of each slide.

Abstract:

With nearly six years of empirical data and use-cases behind the Nakamoto consensus method the community has observed that a cryptocurrency economy behaves differently than originally envisioned and intended.  What has arisen from these half-a-decade of physical interactions is a nearly complete rollback of the primary attributes embodied within the first of these Nakamoto consensus protocols, Bitcoin – to the point where it may best to refer to it as Bitcoin-in-name-only (BINO).  Consequently there are two other challenges within this existing BINO framework: (1) the diametrically opposed forces of speculative demand versus transactional demand; (2) decoupling coins from the ledger altogether.  This presentation discusses several proposed solutions to the challenges currently being devised by a multitude of teams.

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Reading the tea leaves and Magic 8 ball

[Last week CoinTelegraph sent me a couple questions for an article that has not appeared (I will link to it if it does).  Below are the responses I provided.]

Q: “What can be inferred from the decline in Bitcoin price and market cap in the course of 2014? There are two downward trends, separated by a level period and slight uptick.”

A: I probably wouldn’t call it a “market cap” (due in part to Jonathan Levin’s cogent post) and in my view, an analysis of the self-reported bitcoin price is difficult because of the lack of transparency in the underlying trusted third parties.  Perhaps something like a Consolidated Audit Trail or “proof of non-collusion” will become the norm as the industry professionalizes but until then this space will likely be vulnerable to a bevy of manipulations which may be causing these types of trends (e.g., purportedly like Willy Bot did last year).  Furthermore, because bitcoin’s supply is based on a fixed, limited issuance the only way to reflect changes in demand is through it’s price.  Thus, the fluctuations this past year are based on a myriad of factors some of which are difficult to measure like perceived regulatory/solvency risk and future law enforcement activity.  And because it is still very illiquid, sudden shocks are absorbed / reflected through volatility.  Consequently I do not think the market price is a reflection of the value of bitcoin as a transactional medium but almost entirely a function of speculative demand.  This past May, Robert Sams spoke on this duality as did Yanis Varoufakis in a new book.

Q: “Bitcoin’s technical foundations have been stated as insufficient to support wide-scale adoption by Mike Hearn. Do you think price volatility could be directly influenced in future by improvements or failures in this area?”

A: Both Gavin Andresen and the Blockstream team have independently discussed some of the technical limitations this past week, reaffirming the challenges that Mike Hearn described on several occasions this past year.  They have all also proposed potential solutions to these solutions, some involving soft forks, hard forks and even closer partnerships between mining farms, pools and developers.  Fundamentally however I do not think that Bitcoin’s blockchain will be able to serve the vast majority of use cases that it’s proponents claim it will for a couple of intractable reasons.  The first is because of the physics of decentralization; it is a matter of spatial topology (distance, length and redundancies) not materials science.  Thus the more dense, the less lag which favors centralization.  This past summer Murat Demirbas briefly wrote about this: Distributed is not necessarily more scalable than centralized.  The other is costs to maintain (nominal) trustless decentralization though the proof-of-work mechanism.  As I have written about several times, contrary to the traditional narrative, there are in fact no mandatory fees to utilize the blockchain and/or its Sybil-protection scheme.  The direct fees users believe they are paying are better defined as donations, as fees are something that are mandatory.  Consequently, the way to calculate how much proof-of-work costs is through a metric that Blockchain.info has visualized over the past years and which has hovered around $20-$30 per transaction.  That is not a competitive price relative to other payment systems and will likely relegate Bitcoin to certain niches.  I also think we will see other alternative consensus mechanisms come into production-level environments, creating a type of “consensus-as-a-service” (CaaS) of which a proof-of-work-based blockchain, such as Bitcoin, represents one part of that spectrum.

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Bullet points about fundraising for Bitcoin startups

I was looking through my email archive today and came across an email related to Bitcoin startups that I sent to a friend back in July.  Most of the points are still relevant today.

Bitcoin Startups! These Are The Trends We See by Adam Draper

  • Through the first half of 2014, an estimated $240 million in funding has gone into the cryptocurrency space, up from $74 million last year — most of which has gone into exchanges and wallet companies.
  • Number of Mining applications has stayed flat
  • Gambling started strong but has wavered

A Few Reasons Your Bitcoin Startup Might Fail by Sean Percival

  • Bad Branding, do not use “bit,” “block” or “coin” in your name — often that it’s causing consumer (and investor) confusion
  • Solving Problems Too Far Downfield — it’s certainly possible to be too early on many business ideas, especially if your idea is going to take immediate scale to be sustainable
  • Your Office Is An Airport — conference overload, travelling too much and not building the product and business; all that money you spend on travel is money you’re not spending on your company
  • IPO Schemes and Fundraising Fails — we’ve seen a few new approaches to fundraising, including IPO schemes that leverage crypto technology in some way. I would say this is the biggest red flag that the business or idea is doomed to fail
  • Your best plan of action is to launch an MVP (minimum viable product), raise an advisory round of $100K–$500K, and be able to sustain yourself for the next 12–18 months.

False Positives, False Negatives, and Reading Decks in Advance by Charles Hudson

  • at SoftTech we invest primarily in seed stage companies – we are investing in the team and the opportunity, not just what’s in the presentation.
  • reading decks in advance creates more false negatives than it saves false positives
  • Poorly conceived idea – I find that a simple paragraph gives me enough context to figure out whether the basic market opportunity and company idea sounds interesting. If the paragraph is well-written and compelling, I find the deck tends to be so as well. When I struggle to get the big idea from the intro paragraph, I’ll usually just sent a follow-up email to ask more. Still beats looking at slides.
  • Decks do not communicate personal connection and energy – I find that even the most well-crafted deck or presentation does not tell me anything about how I’ll feel when the entrepreneur or team comes in to present. I value the opportunity to get a sense for the energy and personality of the team when they present live.

Why did Investor X not look through the entire deck, the info is right there in font 8 on slide 27?!?!

Put simply due to time constraints this may not be possible.  I don’t have the link, but I recall Jeremy Liew at Lightspeed Venture Partners says he looks through 150 presentations/decks (not including executive summaries) for each investment.  In my own anecdotal experience, based on pitches I have seen over the past year I would probably say to keep it simple to get the point across in less than 15 slides because many investors do not have the time to look through every detail on the first round of a pitch (some, as Charles suggested above, may not even look at it at all).

Startups going through accelerators and incubators such as Plug and Play and 500 Startups may only have as little as 3 minutes to pitch during Demo Day.  So unfortunately for geeks, you would likely need to remove all the techno mumbo jumbo even if your company is say, an analytics startup.  Talk to your mentors to find out more on catering your marketing message.

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Fintech in the news #2

A few links of interest this past week:

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Blockstream’s sidechain’s is announced

I just finished reading through the new sidechains paper (pdf).  The team has clearly been thinking of clever solutions to a multitude of challenges.

Below are my first thoughts which could change as more information is released and/or code is implemented.

The biggest issue they did not address (so far) is how to incentivize mining after block reward halvings, though that probably was not their intent.  Also, and again this is just day one, but it is also unclear if the IP will be released as open source and if someone could use that code to create Blockstream 2, 3, etc.?

My comments below each block quote:

Because the miners do not form an identifiable set, they cannot have discretion over the rules determining transaction validity. Therefore, Bitcoin’s rules must be determined at the start of its history, and new valid transaction forms cannot be added except with the agreement of every network participant.

Even with such an agreement, changes are difficult to deploy because they
require all participants to implement and execute the new rules in exactly the same way, including edge cases and unexpected interactions with other features.

How can this be done in a trustless manner? Mining was supposed to be anonymous.  If they are identifiable by good actors, then they’re also identifiable by bad actors and not-so-good actors.

One problem is infrastructure fragmentation: because each altchain uses its own technology stack, effort is frequently duplicated and lost. Because of this, and because implementers of altchains may fail to clear the very high barrier of security-specific domain knowledge in Bitcoin[Poe14c], security problems are often duplicated across altchains while their fixes are not. Substantial resources must be spent finding or building the expertise to review novel distributed cryptosystems, but when they are not, security weaknesses are often invisible until they are exploited. As a result, we have seen a volatile, unnavigable environment develop, where the most visible projects may be the least technically sound. As an analogy, imagine an Internet where every website used its own TCP implementation, advertising its customised checksum and packet splicing algorithms to end users. This would not be a viable environment, and neither is the current environment of altchains.

Non sequitur.  The same complaint could be leveled at German carmakers versus American carmakers with the fragmentation in something like unit of measurement (meters vs Imperial).  The auto industry did not collapse because of fragmentation.

In addition, there is fragmentation within Bitcoin itself, with different pools relaying different types of transactions (or censoring others).  A couple days ago Dominic Williams pointed this out (in a different email), that there are different payment processors and different wallets that are incompatible (you can send money between them, but you can’t open one wallet with another).

A second problem is that such altchains, like Bitcoin, typically have their own native cryptocurrency, or altcoin, with a floating price. To access the altchain, users must use a market to obtain this currency, exposing them to the high risk and volatility associated with new currencies. Further, the requirement to independently solve the problems of initial distribution and valuation, while at the same time contending with adverse network effects and a crowded market, discourages technical innovation while at the same time encouraging market games. This is dangerous not only
to those directly participating in these systems, but also to the cryptocurrency industry as a whole. If the field is seen as too risky by the public, adoption may be hampered, or cryptocurrencies might be deserted entirely (voluntarily or legislatively).

Why are floating prices considered a bad thing?  Besides, the issues in this paragraph are exactly the same problem bitcoin faces each day and a solution to risks/volatility is not addressed in this white paper.  See Ferdinando Ametrano’s paper as well as Robert Sams’ upcoming draft on Seigniorage Shares.

Our proposed solution is to transfer assets by providing proofs of possession in the transferring transactions themselves, avoiding the need for nodes to track the sending chain. On a high level, when moving assets from one blockchain to another, we create a transaction on the first blockchain locking the assets, then create a transaction on the second blockchain whose inputs contain a cryptographic proof that the lock was done correctly. These inputs are tagged with an asset type, e.g. the genesis hash of its originating blockchain.

This has me thinking about token history and fungibility.  Perhaps it could be argued that moving these coins to a sidechain is an act of “mixing.”  Are atomic swaps a form of mixing?

Also, if the proof-of-burn effectively means “deposits” (from one chain to another) and value transfer is taking place, is this impacted by regulations such as 12 U.S. Code § 1831t – Depository institutions lacking Federal deposit insurance

This is true for almost all aspects of Bitcoin: a user running a full node will never accept a transaction that is directly or indirectly the result of counterfeiting or spending without proving possession. However, trustless operation is not possible for preventing double spending, as there is no way to distinguish between two conflicting but otherwise valid transactions. Instead of relying on a centralised trusted party or parties to take on this arbitration function like Bitcoin’s predecessors, Bitcoin reduces the trust required — but does not remove it — by using a DMMS and economic incentives.

It is still unclear what the additional economic incentives will be in the Blockstream/sidechains model.  Is it just the fees in section 6.1, such as the clever time-shifting mentioned later on?

This gives a boost in security, since now even a 51% attacker cannot falsely move coins from the parent chain to the sidechain. However, it comes at the expense of forcing sidechain validators to track the parent chain, and also implies that reorganisations on the parent chain may cause reorganisations on the sidechain. We do not explore this possibility in detail here, as issues surrounding reorganisations result in a significant expansion in complexity.

What are the costs of running and maintaining this validator?

No reaction. The result is that the sidechain is a “fractional reserve” of the assets it is storing from other chains. This may be acceptable for tiny amounts which are believed to be less than the number of lost sidechain coins, or if an insurer promises to make good on missing assets. However, beyond some threshold, a “bank run” of withdrawals from the sidechain is likely, which would leave somebody holding the bag in the end. Indirect damage could include widespread loss of faith in sidechains, and the expense to the parent chain to process a sudden rush of transactions.

Who determines insurance of a blockchain?  Will FDIC or similar bodies have jurisdictional grounds as described in the above USC citation (not a joke, Blockstream founders are not anonymous nor most large farm & pool operators)?

As miners provide work for more blockchains, more resources are needed to track and validate them all. Miners that provide work for a subset of blockchains are compensated less than those which provide work for every possible blockchain. Smaller-scale miners may be unable to afford the full costs to mine every blockchain, and could thus be put at a disadvantage compared to larger, established miners who are able to claim greater compensation from a larger set of blockchains.

We note however that it is possible for miners to delegate validation and transaction selection of any subset of the blockchains that they provide work for. Choosing to delegate authority enables miners to avoid almost all of the additional resource requirements, or provide work for blockchains that they are still in the process of validating. However such delegation comes at the cost of centralising validation and transaction selection for the blockchain, even if the work generation itself remains distributed. Miners might also choose instead to not provide work for blockchains that they are still in the process of validating, thus voluntarily giving up some compensation in 360 exchange for increased validation decentralisation.

How can that be done trustlessly?  How does that deal with the issues Dave Hudson talked about with respect to IHPP in general?  Until IHPP is changed or modified, Hudson’s models will remain valid.

By using a sidechain which carries bitcoins rather than a completely new currency, one can avoid the thorny problems of initial distribution and market vulnerability, as well as barriers to adoption for new users, who no longer need to locate a trustworthy marketplace or invest in mining hardware to obtain altcoin assets.

This doesn’t seem to be addressing several other reasons for why alts exist: who will pay independent developers wanting to build on sidechains? What about non-SHA-based hardware (like scrypt or X11)?  What is to prevent someone from forking “sidechains” code and creating a similar business?

An alternate mechanism for achieving block rewards on the sidechain is demurrage, an idea pioneered for digital currency by Freicoin (http://freico.in). In a demurring cryptocurrency, all unspent outputs lose value over time, with the lost value being recollected by miners. This keeps the currency supply stable while still rewarding miners. It may be better aligned with user interests than inflation because loss to demurrage is enacted uniformly everywhere and instantaneously, unlike inflation; it also mitigates the possibility of long-unspent “lost” coins being reanimated at their current valuation and shocking the economy, which is a perceived risk in Bitcoin. Demurrage creates incentives to increase monetary velocity and lower interest rates, which are considered (e.g. by Freicoin advocates and other supporters of Silvio Gesell’s theory of interest[Ges16]) to be socially beneficial. In pegged sidechains, demurrage allows miners to be paid in existing already valued currency.

I am not sure Freicoin is a particularly good example here because in practice few participants want an asset to always lose value (what investors actively demand demurrage?).  Maybe this is reflected in its lack of adoption (thus far).  Perhaps that will change, perhaps Freicoin will grow over the course of the next few years. But this also touches on the issue of whether or not these “coins” are commodities or a currency in the first place (I have argued they are informational commodities).

The point about reanimation is an interesting one (and good) because of the uncertainties of “zombie” coins (as John Ratcliff calls them) that jump back onto the market.

Also, while the experimentation use-cases in section 5.1.1 seem to have some active demand (as measured by crowdsales and hype this past year) they could also (IANAL) lead to legal issues that these 2.0 projects are having with respect to unregistered securities (see the SEC with its Howey test).  This is a legally risky area as discussed by these lawyers.  Also, if users can create digital tokens pegged to real world assets — if these are non-deliverable, does this turn that chain into a large “bucket shop“?

Co-signed SPV proofs. Introducing signers who must sign off on valid SPV proofs, watching for false proofs. This results in a direct tradeoff between centralisation and security against a high-hashpower attack. There is a wide spectrum of trade-offs available in this area: signers may be required only for high-value transfers; they may be required only when sidechain hashpower is too small a percentage of Bitcoin’s; etc. Further discussion about the usefulness of this kind of trade-off is covered in Appendix A.

Who will maintain these?  No Free Lunch.

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Fintech in the news #1

I am retiring the previous list name “Cryptocurrency in the news” because I think that fintech (financial technology) is a more accurate, all encompassing term for this space.  There are other possible names like “dapps” (decentralized applications) however I prefer fintech because decentralization may not be what the market chooses as an end game.

Some links of interest:

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Traffic analysis from Sarah Meiklejohn

Sarah Meiklejohn is a researcher now at UCL.  She is probably best known for her authorship of one of the best research papers in the digital currency space: A Fistful of Bitcoins: Characterizing Payments Among. Men with No Names.

She recently gave a presentation covering this paper (which admittedly has older data) and talks about some of the new privacy projects like CoinJoin which she says had a noticeable impact on a heuristic used in the study.  The Q/A session at the end also has some good comments.

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