Interview with Epicenter Bitcoin

About two weeks ago I was interviewed over at Epicenter Bitcoin.

We covered a number of topics, some of which were previously covered by a few recent guests of the show (such as Robert Sams, Vitalik Buterin and Preston Byrne).

This episode also spawned a number of comments over at Reddit this past week, where I responded to a couple of people.

One clarification I would like to make regarding a specific comment I made on the show.  At around the 53 minute mark I discuss something called “trusted transparency.”  Guy Corem, CEO of Spondoolies Tech (an Israeli-based mining company) reached out to me this morning and explained that there is a misunderstanding and the area he is working on is more akin to an odometer.  I’ll probably write something up later next month as more information becomes public.

Also, the usual caveats: these alone are my opinions and I could be incorrect.

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Cryptoeconomics for beginners and experts alike

This past week Koinify and the Cryptocurrency Research Group (CCRG), a new academic organization, held a 3-day event — the first of its kind called Cryptoeconomicon, an interdisciplinary private event that included a cross section of developers, entrepreneurs, academics and a few investors.  It was purposefully scheduled to coincide with O’Reilly Media’s own “Bitcoin and the Blockchain” conference which took place in the middle of it.

I attended what amounted to four days of seminars, brainstorming and networking sessions.  Below are my summarized thoughts.  Note: these are my opinions alone and do not reflect those of other participants or the companies I work with.  You can view pictures/info of the event: #cryptoecon and @cryptoecon

Rather than going through each session, I will just highlight a few areas that stood out to me and include outside relevant content.

What is cryptoeconomics?

According to Vlad Zamfir, of the Ethereum project, cryptoeconomics as a field might be defined as:

A formal discipline that studies protocols that govern the production, distribution and consumption of goods and services in a decentralized digital economy.  Cryptoeconomics is a practical science that focuses on the design and characterization of these protocols.

Zamfir discussed this at length (slides) and rather than going too in-depth with what he said (again, there should be a video at some point) I wanted to reiterate his main points he gave:

Cryptoeconomic security as information security

  • Mechanisms are really programs
  • They can distribute payoffs
  • The programs have a certain behaviour in the Nash equilibrium case
  • The NE has a cryptoeconomic security
  • We can be assured that a program will run a particular way

He also argues that “cryptoeconomics” should be see as more economics for cryptography rather than cryptography for economics:

  • Economic mechanisms can give guarantees that a program will run in a particular way that cryptography alone can’t provide.
  • Incentives are forward facing, cryptography is a function of already-existing information
  • How do we provide custom cryptoeconomic guarantees?

The last part in relation to his talk that really stuck out to me was on the final day.  In his view (slides) the technical term that should be applied is, “distributed cryptoeconomic consensus” which would assuage concerns from the academic “distributed consensus” community that uses different terminology.  Under this definition, this means:

  • A cryptoeconomic mechanism with the Nash equilibrium of assuring distributed byzantine fault tolerant consensus
  • We should be able to assert and prove the cryptoeconomic assurances of any consensus mechanism
  • Distributed consensus mechanisms can create a pure cryptoeconomy. Even the execution of the mechanisms is has a measurable assurance.

Most interesting comment of the event

I think the most apt comment from the economics discussion came from Steve Waldman, a software developer and trader over at Interfluidity on the first day of the event.

While there will likely be a recording posted on Youtube (at some point), in essence what he said was that in the blockchain space — and specifically the developers in the room — they are creating an enormous amount of supply without looking to see what the corresponding demand is.  That is to say, there is effectively a supply glut of “blockchain tech” in part because few people are asking whether or not this tech actually has any practical consumer demand.  Where are the on-the-ground consumer behavior surveys and reports?

Again, if Bitcoin (the overall concept) is viewed as an economy, country or even a startup, it is imperative that the first question is resolved: what is the market need?  Who are the intended consumers?  So far, despite lots of attention and interest, there has been very little adoption related to blockchains in general.  Perhaps this will change, maybe it is only a temporary mismatch.  Maybe it these are the chicken-egg equivalent to computing languages like Ruby or PHP and eventually supply somehow creates the demand?  Or maybe it suffers from the Kevin Costner platform trap (e.g,. if you build it, will they come?).

To illustrate this contrarian view:

why startups fail

Source: David Norris https://twitter.com/norrisnode/status/561262588466839553

Maybe there is no real market need for these first generation concepts?  Perhaps the network will run out of block rewards (cash incentives) to the miners before these blockchains can gain mainstream traction?  Maybe the current developers are not quite right for the job?

Or maybe, blockchains such as Bitcoin simply get outcompeted in the overall marketplace.  For instance, there are currently 1,586 Payment startups listed on AngelList and 106 P2P Money Transfer startups listed on AngelList.  Most of these will likely burn out of capital and cease to exist, but there are probably at least a dozen or so of each that will (and have) gained traction and are direct competitors to these first generation blockchains.

Perhaps this will change, but then again, maybe the market is more interested in what William Mougayar (who unfortunately was not part of the event) pointed out a few days ago.  Simply put, maybe there is more room to grow in the “Blockchain Neutral Smart Services” and “Non-Blockchain Consensus” quadrants:

Crypto_Tech

We cannot know for certain a priori what market participants will decide.  Perhaps Bitcoin is good enough to do everything its enthusiastic supporter claim it can.

Or maybe, as Patrick Collison, CEO of Stripe, wittily stated in Technology Review:

“Bitcoin is kind of a financial Rorschach test; everyone projects their desired monetary future onto it.”

Now, to be fair, Collison (who was not part of the event) has a horse in the race with Stellar.  Fortunately there was not much emphasis on token prices going to the moon at the Cryptoecon event.  When incentives did come up, it was largely related to how a consensus mechanism can be secure through a self-reinforcing Nash equilibrium.

Perhaps a future event could discuss what Meher Roy (who unfortunately was not in attendance either) adroitly summarized and modeled in relation to how actors are betting on crypto-finance platforms:

meher roy table

Source: https://medium.com/@Meher/a-model-to-makes-sense-of-beliefs-and-associated-crypto-finance-platforms-f761a7d782cb

Back to the show

There were a number of startups at the event, probably around a dozen or so.  In my view, the most concise overview was from Sergey Nazarov co-founder of SmartContract.  The interface was clean, the message was clear and “issuance” can be done today.  I’m not necessarily endorsing the stack he’s using, but I think he has clearly talked to end-users for ease of use feedback (note: be sure to consult a lawyer before using any ‘smart contracting’ system, perhaps they are not recognized as actual “contracts” in your jurisdiction).  Also, drones.

It would have been nice to see a little longer debate between StorJ, Maidsafe and Filecoin groups.  I think there was probably a little too much “it just works” handwaving but thought that Juan Binet-Betez from IPFS/Filecoin gave the most thorough blueprint of how his system worked (he also showed a small working demo).

It was not recorded but I think messaging for Augur (a variation of Truthcoin) was pretty poor.  Again, just my opinion but I was vocal about the particular use-case (gambling) proposed as it would simply bring more negative PR to a space smashed with bad PR.  The following day other members of the team discussed other uses including prediction markets for political events (similar to what Intrade did).  I am skeptical that in its current form it will become widely adopted because futures markets, like the CME, already do a relatively competitive job at providing this service for many industries and these decentralized markets could likely just attract marginal, illicit activities as has been the trend so far.  I could be wrong and perhaps they will flourish in emerging markets for those without access to the CME-like institutions.

Things that look less skeptical

  • There were about 10-12 people affiliated with Ethereum at the event, all of them were developers and none of them seemed to push their product as “the one chain to rule them all” (in fact, there was a healthy debate about proof-of-stake / proof-of-work within their contingent).  I’ve been fairly skeptical since last summer when their team looked gigantically bloated (too many cooks in the kitchen) but they seem to have since slimmed down, removing some of the pumpers and focusing on the core tech.  This is not to say they will succeed, but I am slightly less skeptical than I was 3-4 months ago.
  • I also had a chance to sit down with a couple members of the IBM ADEPT ‘Internet of Things’ team.  They held a ~3 hour workshop which was attended by around 20 people.  The session was led by Henning Diedrich (IBM), David Kravitz (IBM) and Patrick Deegan (Open Mustard Seed Project).  Again, even though I’ve paged through the ADEPT whitepaper, I was hesitant to believe that this was little more than marketing on the part of IBM.  But by the time the session was over, I was a little less skeptical.  Perhaps in the future, when more appliances and devices have secure proplets, they could use a method — such as a blockchain/cryptoledger — to securely bid/ask on resources like electricity.  B2B and machine-to-machine ideas were discussed and piggybacked on.  Obviously there are all sorts of funny and sad ways this could end but that is up for Michael Bay to visualize next year.
  • This also intersects with another good comment from Stefan Thomas (CTO of Ripple Labs).  In a nutshell, on a panel during the first day, he thinks there is some confusion and conflation of the terms “automation,” “decentralization,” “smart contracts” and “blockchains.”  That is to say, while blockchains are automated, that is not to mean that it is the only means to achieve automation.  Nor is decentralization necessary for automation to be achieved in every use-case.  Nor are smart contracts the only way to control automated devices.  When the video is posted I’ll be sure to link it here.
  • Ethan Buchman, lead dev for Eris, was both witty and on top of his form, noting that in practice users don’t need a new browser every time they go to a new site, so they shouldn’t need a new client to view a different blockchain.  Let’s keep our eye on Decerver to see how this germinates.
  • Lastly, the two investors that attended the VC panel on Wednesday included Shahin Farshchi from Lux Capital and Pearl Chan of Omidyar Network.  What I liked about them is they weren’t pushing a certain binary viewpoint.  They were both upfront and honest: neither had invested in this space, not because they hated it, but because they were taking their time to see what opportunities actually fit within their mandate.  Perhaps they will at some point.  One joke that Farshchi mentioned was that back when cellular telephony was growing, “everyone and their mom” was selling base station equipment and chips.  Similarly there were over 300 companies creating thin film solar cells before bankruptcies and mergers.  So the type of euphoria we see in the Bitcoin-space is not necessarily unique.

Room for improvement

Perhaps if there is a next event it could include representatives from Blockstream, Bitfury and other Bitcoin-centered projects.  It would be nice to have some perspective from those deeply concerned about with maintaining secure consensus and the Blockstream team has some of the most experienced engineers in this space.  Hearing their views next to what Peter Todd (who attended and had some interesting calculations for the estimated costs to attack a network), could help developers build better tools.  Similarly, developers from Peernova, Square, Stripe, M-Pesa and Western Union would also likely be good resources to provide empirical feedback.

Additional clarity for what a decentralized autonomous organization (DAO) actually is and is not could be spelled out as well.  And how do these intersect with existing legal jurisprudence (can they? as Brett Scott might ask).   For anyone who has read “The Cookie Monster” by Vernor Vinge, both Matt Liston and Vitalik Buterin made some not-entirely-unreasonable points about machine-rights and whether or not machines should trust humans (e.g., humans expect bots to provide truthful information, but can the reverse be expected?  And what happens if a bot, like a DAO, is deemed too successful or broke a law in some jurisdiction — does it get “carted” away in a truck?).

Lastly, I think by the time there is another event, there will hopefully be more clarity for what a “smart contract” is.  One panel I moderated, I tried to get the participants to use the word “banana” instead because the term “banana” is overused and often conflated to mean many things it is legally not.  Primavera De Filippi from the Cryptolaw panel made some good comments too about whether or not “bananas” are actual legally binding contracts; she previously did a workshop with Aaron Wright (also in attendance) at the recent Distributed Networks and the Law event held at Harvard/MIT.  Steve Omohundro also spoke realistically about these scenarios on the final day, where does liability start and stop for developers of DAOs?

[Note: I would like to thank Kieren James-Lubin, Vitalik Buterin, Tom Ding, Sri Sriram for organizing the event, Robert Schwentker for acting as emcee/photographer, and CFLD and Omidyar Network for sponsoring the event including the delicious food.]

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Slicing data: what comprises blockchain transactions?

[Note: a PDF version of this is available]

Over the past month we have seen nominal transaction volume on the Bitcoin network reach several all-time highs. Enthusiasts on social media have proposed any number of theories including a rise in retail payments or commercial volume.

Yet upon further inspection, there does not appear to be a silver bullet answer.

We know, for example, that these transactions can originate or be comprised of faucet outputs, mining rewards, coin mixing, gambling, movement to ‘change’ addresses and simple wallet shuffling. 1 So with this type of identification problem, how can analysts distinguish the signal from the noise? Or as Peter Todd and others explained last month, for a few hundred dollars a day, it is possible to inflate the transaction volume by an entire order of magnitude.2

For instance, questions have arisen over a series of what some call “long chains.” Last month several commentators on a popular thread on Hacker News identified thousands of small transactions originating from a single source.3 The source was continually sending transactions and paid transaction fees for each of them. The reason this struck many as odd as a rational actor would simply bundle the transactions together to save on transaction fees.

While there are likely different motivations for doing so, one reason for why this was occurring was that the originating source was attempting to delink or otherwise mix and tumble coins to make it difficult to “dox” or identify the originating source. But it could also be a faucet and at one point even pools paid out miners using chained transactions, perhaps some still do.

What does this look like? Below is a chart created by user “FatalLogic” in that thread:

hackernews

Source: Hacker News

The green line identifies the overall transaction volume on the Bitcoin blockchain, whereas the red line follows the rule, the heuristic that removes these “long chains.”

Is there a definition of long chains?

Two weeks ago Blockchain.info published several similar charts excluding “Long Chains.”

According to Jonathan Levin, formerly of Coinometrics:4

Blockchain.info have implemented a heuristic to identify high velocity activity that is probably unrelated to real world commerce. Every day the internal counter resets and counts how many times transaction outputs were spent on the same day. So if a wallet paid someone 1 btc in one transaction output and they then transferred that to cold storage that would be a chain of two. However there are some chains where the chain of spent outputs of a given day exceeds 1000. Each day, on average, the sample size is 144 blocks. Therefore, for chains of more than 144, the chain of transactions involve zero confirmation transactions (i.e., are not relying on the blockchain for their security). In other words, it is a measure of velocity.

These long chains show that there are some parts of the economy that are flipping outputs almost 10 times a block with chains of over 1000 in a day. This may not relate to real world commerce or security processes, probably more likely to be gambling or mixing. In Satoshi Dice often the bettor just takes their winnings and gambles again with everything being done with 0 confirmations. Likewise with mixing there is little need to wait for confirmations and the priority is obscuring the origin of the transaction outputs. Finally this is unlikely to capture a lot of activity run by the centralised services since their objective is fee minimisation.

Furthermore, according to the description on Blockchain.info’s site, “A chart showing the total number of bitcoin transactions per day excluding those part of long chain transaction chains. There are many legitimate reasons to create long transaction chains however they may also be caused by coin mixing or possible attempts to manipulate transaction volume.”

The first chart below is the original unmodified chart of total transactions on the Bitcoin blockchain:5 blockchaininfo unmodified

Using the same Y-o-Y time frame, below is the newly modified chart, using the Blockchain.info heuristic that removes these “chains” longer than 10:6

blockchaininfo modified

As we can tell above, by removing these “long chains” the volume decreases by 3x, yet there does appear to be an upward trend over the past several months.

I spoke with Atif Nazir, the CEO and co-founder of Block.io. In his view:7

The term “longest chain” is vague – it would be misleading to say it is just coin mixing. The volume could be a series of transactions where the user cannot spend to the desired destinations in the same transaction. This could be a limitation of their wallet software’s user interface, or the backend of the software itself.

For instance, if a faucet is built on Block.io, the owner spends coins rapidly, sometimes breaking them into a couple transactions if they are efficient, and at other times into hundreds of transactions that spend unconfirmed change in rapid succession. We have seen chains of unconfirmed spends as long as 1,000 transactions, and they could be longer if blocks are not found.

In general, achieving provable privacy through coin mixing and coin shuffling is hard as long as you stay on the same Blockchain. With the current methods, you can look at a destination address and say, with some certainty, “hey, this guy is the one who stole the Bitstamp coins.”8

In the absence of a definite, no-non-sense way to look at “long chains” of transactions, the safest assumption would be to consider them as unconfirmed chain spends, where the user wants to spend transactions very quickly deliberately or due to their software’s limitation.

Another potential source is even smaller.

For instance, Sidney Zhang, co-founder of HelloBlock has noticed that:9

Another interesting thing is people are sending dust transactions on the network as advertisements for high-yield investment program (HYIP).10

This transaction, 92aa, is an example of an ad (and the message was removed by blockchain.info).11

What they do is they will look for transactions happening on the blockchain, pick a collection of addresses and then send 1 satoshi to them and then they will attach a “public note” on blockchain.info. The message is normally like earn 7% per day at xyz.com. The public note in this case was removed, probably reported as spam

The second, 1cca, is an example of a faucet. If you look at the tag “win free bitcoins every hour!” it is the address for freebitco.in.12

It is unlikely the long chains come directly from consumers because consumers don’t spend money rapidly.

A more likely scenario is it is a ‘shared’ hot wallet operated by a service (e.g., Coinbase, Circle). A possible explanation then emerges – off-chain gambling sites such as Primedice / Moneypot / Betcoin casino and others operate hot wallets.

In terms of scale, very small casinos may receive approximately 30+ deposits a day. A larger casino easily operate with 1000s of deposits a day and hundreds of withdrawals.

One interesting behavior is that, bitcoin gamblers never keep funds in a casino. They tend to deposit, play and then immediately withdraw without leaving funds there overnight. That could create a huge amount of activities from the same hot wallet. Thus creating a large chain.

Last year Ken Shirriff also pointed out a few of the notable pieces of “spam” that permanently reside on the blockchain including images.13

What does this look like altogether?

For additional analysis I reached out to Organ of Corti who plotted out these differences onto two different charts.14

organ weekly transactions

As shown above, these match up with the heuristic used by the original Hacker News post as well as that of Blockchain.info. In Organ’s view:

If long chains of transactions are used by entities of a very different nature to single transactions or short chains of transactions, then we might expect to see differences in transaction rates and transaction rate cycles between the short and long chain groups.

Starting with a visual comparison of the two groups, the most significant difference between the longer and shorter chain groups is variance. This is to be expected since one long chain of transactions increases transactions rates more than a single, unchained transaction.

Does the yellow line at the bottom represent the actual “real” volume? Perhaps, but maybe not.

In addition, Organ put together a spectrogram to analyze this weekly cycle that is visually apparent in all the charts:

organ spectrogram

Another way to look at it is through a spectral density chart, according to him:

Perhaps a more useful test is to check for periodicity in the data. We know from previous work that currently transactions show a daily and a weekly cycle. I’m using Blockchain.info’s data which is daily, so a spectrogram will only reveal a weekly cycle.

The last plot shows the spectrograms for chains longer and shorter than 10, 100, 1000, or 10000. These show a periodicity similar to that for all transactions of one cycle per week.

We can also compare transaction of chains longer and shorter than 10, 100, 1000, or 10000 by calculating the cross correlation function. In each case the maximum correlation is at lag 0 and is much higher than the upper bound of the 99.9 confidence interval, so the periodicity of the transaction rates of each group (chains longer and shorter than 10, 100, 1000, or 10000) are similar to, also suggesting that time of use for shorter and longer chain transactions are similar.

Further, time series decomposition showed the same starting and finishing days of each weekly cycle.

I think that a working week cycle implies that the larger number uses of longer chain transactions are from businesses with a normal working week, and the correlation in the periodicity of the shorter and longer chains of transactions suggests the largest use of both longer and shorter chains of transactions are by entities with a work days and weekends.

Is there anything that explains the increase then?

Other sources

Earlier this month a new game called SaruTobi was approved for inclusion into the iOS store.15 The game tips its users bitcoin on the blockchain (in contrast, ChangeTip does so off-chain). During its debut week, before running out of coins, according to its first public address, SaruTobi sent out more than 5,000 transactions most of which during an 11-hour time period.16 Within its first two weeks it paid out roughly 6.4 bitcoins with more than 50,000 transactions.17

Another continual source of on-chain usage comes from Counterparty, a “2.0” platform that effectively sits on top of the Bitcoin blockchain and uses bitcoins for each counterparty transaction (e.g., it is an embedded consensus mechanism). Below is a visual of the daily transaction volume over the past year:18

counterparty blockscan

Source: Blockscan.com

The variation follows some of the daily (and weekend) patterns we have observed with Bitcoin in general (e.g., less activity on “Sundays”) but at certain days and times there are peak usages of up to 3% of the Bitcoin network.19 One explanation is that Counterparty is a popular platform for issuing tokens during crowdsales. For instance, the double peaks in December are most likely related to the Gems crowdsale, in which 2,633 BTC were exchanged for 38 million “GEMZ” (the native coin of the Gems system).20

As I briefly described last month, over the past year, a BitcoinTalk user, “dexX7” has been parsing other data, usually related to alt platforms such as Counterparty, Mastercoin, Colored coins and proof of existence.21 Recall that these ‘altcoins’ are actually in practice, just watermarked bitcoin transactions. In order to use these platforms, a user has to interact with the Bitcoin network (e.g., they are embedded consensus mechanisms). Below is a chart he recently sent me that dissects this composed parts:22

dexx7 meta transactions

  • Data captured at block height 340,018
  • There were at least 184,155 identifiable meta-transactions
  • There were 57,489,982 transactions in total
  • There were 16,511,696 unspent outputs

This only includes the transactions dexX7 was able to identify. Counterparty, Mastercoin and Chancecoin use almost entirely “bare multisig” scripts as medium to embed and transport data. In contrast, Proof of Existence, Open Assets, Coinspark and Block Sign use OP_RETURN (note: there is still an active discussion between using 40 bytes and 80 bytes).23 Open Assets and Coinspark are a type of colored coin implementation and both Proof of Existence and Block Sign are a type of notary service (previous charts are available in an album view).24

Some other analysis from dexX7:

Almost all Counterparty transactions carry data via bare multisig and there are about 5000 non-multisig Mastercoin transactions. There are furthermore 17620 unclassified, unspent multisig outputs and 6286 unclassified, spent multisig outputs.

Almost all of those unclassified multisig outputs were created by Wikileaks and actually carry some data too.25

Proof of Existence, Open Assets, Coin Spark and Block Sign account for 7363 OP_RETURN transactions. The total number of all OP_RETURN outputs, according to webbtc.com, is close to 11960, so more than 60 % can be mapped to those four.

Another slice of daily and weekly transactional volume comes from pay-to-script-hash, better known as P2SH. This was originally BIP 16 proposed by Gavin Andresen and incorporated into the protocol in 2012 to “let a spender create a pubkey script containing a hash of a second script, the redeem script.”26

p2sh transactions

Source: P2SH.info

This has replaced ‘bare’ multisig as a means for securing bitcoins. While its use and adoption started off very slow, more than 6% of all bitcoins are now stored in this manner including Bitstamp via its recent integration with BitGo:27

What about retail volume?

As has become apparent, it cannot be said that an increase in transaction volume is (probably) due to any one specific variable. Yet, according to a popular narrative, the quadrupling of acceptance by merchants this past year (from ~20,000 to 82,000), may have led to increased spending by consumers and therefore account for the increase.28

Last month, Jorge Stolfi a computer science professor in Brazil analyzed the BitPay addresses (BitPay reuses addresses) based on the Walletexplorer dataset.29 Below is a visual of what BitPay has received over the past two years.stolfi bitpay

According to Stolfi:

The green line on this graph shows the number of BTC deposited each day into that wallet.30 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.

In his analysis Stolfi also noticed two different types of orders processed by BitPay, what he labels “wholesale” versus “retail.” The “wholesale” coins are likely miners selling their block rewards in bulk whereas “retail” is consumer behavior (e.g., buying coffee, food, tickets).

Furthermore, if this wallet heuristic is valid, according to Stolfi:

  • 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).

And what about off-chain retail transactions?

Below is a public chart from Coinbase that visualizes the off-chain activity that takes place on Coinbase’s platform.31

coinbase chart

Source: Coinbase.com

The noticeable pattern of higher activity on weekdays versus the weekend is apparent irrespective of holidays. Consequently, on most days these self-reported numbers comprise between 3-5% of the total transactions on the Bitcoin blockchain.  However, as Jonathan Levin, has pointed out, 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?

Fees

Another way of looking at whether or not transaction volume is increasing is through the “fees” to miner metric (recall that these are not real “fees” as they are not mandatory yet and may be more akin to “donations”).32 Maybe transaction volume based on the methods above does not fully capture hypothesized growth.

transaction fees organ

Above is a new chart from Organ of Corti which visualizes the transaction fees included with each block over the past 6 years.33 If on-chain retail commerce was increasing, it would likely in turn be paid for via some fee mechanism yet this is not apparent. This is not to say that utility has not increased for certain participants. Volume as a whole has clearly increased as shown by the second image – yet these are users who likely opt to send a fee-less transaction to the mempool (these transactions typically take several hours or perhaps a day to be included within a block).

What is another explanation?

It does illustrate that the other narrative – that fees replacing block rewards – has not yet begun to occur. Maybe it will not.

For instance, last year Robert Sams and Vitalik Buterin highlighted the economic costs that are being overlooked to maintain the infrastructure, that fees would unlikely be able to adequately compensate miners.34 And Dave Hudson independently explored what has actually occurred in practice, providing visualizations of the empirical data that highlights and reinforces their marginalized viewpoint.35

To put it another way, if more users were actively using the blockchain to transmit value, then it would likely be apparent via an aggregate increase in fees.

hudson miner rewards

Source: HashingIt.com

As shown above during a four year time span, miners, the actual labor force of the network, are not seeing the narrative play out as it is supposed to (block reward plus fees to miner). Denominated in bitcoin (the blue line), miners have not seen the increase in fees or revenue that many of the same social media promoters claim will happen. Whether this changes is unknown.

Again, recall the current narrative that in the end, transaction fees will purportedly replace the block reward.36 But the causality is the opposite direction than assumed by most: fees people are willing to pay determine the number of miners. Not the other way around. The takeaway is that simply put, fees may not rise to cover the current block reward amounts. It may be that the block reward falls and miners just drop out and net transaction fees never increase reducing the security of the network but this is a topic for another article.

What does this all mean?

For perspective I spoke with Ernie Teo, a research fellow at the Sim Kee Boon Institute for Financial Economics (which hosted a cryptocurrency conference in November).37 According to his team:

We observe similar trends to what has been mentioned in your article. We see a large increase in the one satoshi (or less) addresses over time. This could also be due to the long chain “spammer” you have described above. A few more things we can note from our upcoming analysis on the distribution of bitcoins over time:

  • 50 coin addresses, these are the only addresses in the very beginning due there being only miners on the network. However we see that this does not fluctuate a lot overtime and it indicates that most miners tend to cash out once they mined.
  • Large increase in number of addresses with less than 1 bitcoin. This indicates more “retail” type buyers.
  • Not much change or fluctuations to the large addresses.

I think it is probably true that not a very large proportion of the transactions are retail transactions. In the long run, it doesn’t help the network. We can only wait for the next big innovative app that can boost retail-type usage.

How else can this be visualized?

John Ratcliff recently published several new charts describing “the State of the Blockchain Address(es)“ in which he delves into token movements and in particular “zombie” addresses (addresses that have not been active in 3 or more years).38 They are illuminating and we both disagree on conclusions that can be drawn from them.

For instance, he updated one chart that I previously described as showing more than 70% of coins have not moved in more than 6 months:39

ratcliff distribution age

Source: John Ratcliff

What does the chart above illustrate? If it is velocity then what the color bands reinforce my explanation from two months ago: that the majority of coin holders that were purchased in the November / December 2013 bubble are now underwater.40 We see the transition over the year, in which these coin holders, rather than spending and realizing a loss, hold on to them throughout the months. Hence, why we likely see another uptick to an “older” band starting in mid-November 2014 – the anniversary of the beginning of the most recent bubble.

This explanation is further reinforced by the demographics of bitcoin holders: mostly middle to upper-middle class residents of developed countries – most of whom have “low time preference” (e.g., speculators) and therefore do not need or want to spend bitcoins immediately because they have other means of payment (e.g., credit cards) and can therefore hold onto their coins longer than someone with “higher time preference” (e.g., less affluent individuals living paycheck to paycheck who in theory would have to continually, immediately spend bitcoins). Another potential explanation is the disposition effect, but this is also a topic for a different article.41

badev chen velocity

The chart above (originally Figure 15) was published this past month by two researchers at the Federal Reserve.42 They independently used a similar methodology that Ratcliff has undertaken. In their view:

Figure 15 examines the degree of activity for the addresses in the network. For each date we partition the volume of addresses with positive balances according to their last activity. For example, the addresses that have transacted in the last week are likely to be frequently used (shown with the strip in the bottom). On the other hand, some of the addresses have not been active in the past 52 weeks. Those are likely to serve saving or investment purposes and much less so for transacting. From Figure 15 we can see that the volume of “investment” addresses (not used in the last year) has been steadily decreasing. Still, however, around 75 percent of the addresses in operation with positive balances have not been used in a transaction in the last four months.

While the rest of their report is illuminating, in their concluding remarks, they also do not see retail transactions as comprising more than a marginal amount of volume:

Broadly speaking, our empirical exercise documents general patterns of Bitcoin usage, and examines the use of Bitcoin for investment and payment purposes. We find that while the number of daily users may have doubled every eight months, the transaction volume is negligible compared to the domestic volume of U.S. payment systems. Our analysis of data from the Bitcoin system further suggests that Bitcoin is still barely used for payments for goods and services. In addition, the patterns of circulations of bitcoins and the dynamics of the bitcoin exchange rate are consistent with low usage of Bitcoin for retail payment transactions. Finally, we provide evidence that the exchange rates between bitcoin and other currencies are not well aligned, which we interpret as a lack of depth of the exchange markets and as costly exchange rather than unexploited arbitrage opportunities.

Perhaps these trends will change. Maybe, as some claim, retail volume will increase. But as shown above and through Total Output Volume we know what the maximum “purchasing power volume” of transactions is, this has not been a mystery.43

While merchant adoption continues to increase, consumer adoption for retail purchases appears to be flat (as shown by both BitPay and Coinbase numbers). Future analysis may need to look at correlating these trends for brick and mortar merchants. Without regular use at the register and point-of-sale, there are a number of anecdotal stories of retraining and fumbling that will go on with floor employees with respect to accepting bitcoin.44

Perhaps again, this will change in the future (e.g. Impulse),45 but going forward a full traffic analysis such as the type created by Sarah Meiklejohn et al. two years ago would help the industry as a whole determine what consumer behavior looks like with greater accuracy.46 And this is important for a project whose white paper promotes itself as a payment network for online commerce (see section 1).

So what conclusions can be drawn from this?

As noted at the beginning, there does not appear to be one specific variable that explains the recent increases over the past several months. For example, most tipping from services like Bitui in China and ChangeTip internationally, is already done off-chain (e.g., the independent site ‘ChangeTip stats’ describes activity on the company database).47 SaruTobi is too new to account for all but the last few weeks of growth and DarkWallet activity will likely be “long chain” related. Perhaps offline P2P transactions from OpenBazaar should be identified, aggregated and brought into future analysis.48

Future analysis should also look to factor in or filter out activity related to “change” addresses.  For instance, the short-term ‘velocity’ seen in the daily and weekly bands of Ratcliff and Badev & Chen’s charts could be overstated due to coins which do not actually swap hands but are rather “spent” to themselves due to how “change” is handled by the protocol.  Furthermore, as has been described in Dave Hudson’s modeling of block sizes, it cannot be said that an increase in on-chain volume is axiomatically “good.”49

All we can say for now is that there is an increase in usage from multiple sources, but not likely from on-chain retail commerce which has remained flat for about a year.

This is still a dynamic space and perhaps it may be months or even years before we will be able to fully identify all the major contributors to volume changes.

Acknowledgements

Special thanks to dexX7, Raffael Danielli, Michael Dann, Dave Hudson, David Lancashire, TM Lee, Jonathan Levin, Atif Nazir, Organ of Corti, Jorge Stolfi, Ernie Teo and Sidney Zhang for their constructive feedback and time.

End notes

________________________________________________________________________

  1. At its peak in the first quarter of 2013, Satoshi Dice (a gambling service) represented roughly 48% of all transactions on the Bitcoin network. This is visualized by dexX7. []
  2. See Peter Todd’s tweet and Questions Linger as Daily Bitcoin Transactions Pass 100,000 Milestone from CoinDesk []
  3. See the original comment from ‘sanswork’ in thread covering “Bitcoin adoption in 2015” from Hacker News []
  4. Personal correspondence, January 19, 2015 []
  5. Number of transactions per day from Blockchain.info []
  6. Number of transactions excluding chains longer than 10 from Blockchain.info []
  7. Personal correspondence, January 18, 2015. See Block.io []
  8. Analysis: Bitstamp Hacker Almost Stole Additional $1.75 Million from CoinDesk []
  9. Personal correspondence, January 18, 2015. See HelloBlock. []
  10. For a brief overview see High-yield investment program []
  11. The relevant “ad” address can be viewed at https://blockchain.info/tx/92aa4e600f15d8e5353b180010a270d4f173a7226cc6dd3f40bd5a7bd20e0082 []
  12. The faucet address is located at: https://blockchain.info/tx/1cca64709d2b1679a1a64253afe01f41e2b684ef7d9cbce67fedb764c5bc78c6 and its ‘parent’ is the following address: https://blockchain.info/address/175o52E64wHQumzfLFnKrPaukJsvo9pgMb []
  13. Hidden surprises in the Bitcoin blockchain and how they are stored: Nelson Mandela, Wikileaks, photos, and Python software by Ken Shirriff []
  14. Personal correspondence, January 20, 2015. See Organ of Corti. []
  15. Apple Approves iOS Game That Tips Players in Bitcoin from CoinDesk []
  16. SaruTobi’s first address conducted 5,255 transactions: https://blockchain.info/address/17ZgzoQUAiCrCgSieYfGhAvToW9kn6uaLt []
  17. SaruTobi’s second address conducted 6,676 transactions: https://blockchain.info/address/1GumHq1f5XVnxBjnz78uRgJad2nyE5TgjS and then its third and as of this writing, most current address, has done 41,677 transactions: https://blockchain.info/address/3MXxfNZoifLYdS8wJTpvfeDNPt9ZWuMAaN []
  18. See Blockscan Counterparty Transaction History []
  19. See Counterparty CEO tweet and The Composition of Metacoins on the Bitcoin Network by Tim Swanson []
  20. GetGems Token Sale Wrap Up – Thanks x38,135,367! by Tom Kysar []
  21. The Composition of Metacoins on the Bitcoin Network by Tim Swanson []
  22. Personal correspondence, January 21, 2015 []
  23. See the conversation Change the default maximum OP_RETURN size to 80 bytes #5286 at github []
  24. An album overview of select metacoins by dexX7 []
  25. See Hidden surprises in the Bitcoin blockchain and how they are stored: Nelson Mandela, Wikileaks, photos, and Python software by Ken Shirriff and this address containing embedded data: https://blockchain.info/tx/6c53cd987119ef797d5adccd76241247988a0a5ef783572a9972e7371c5fb0cc []
  26. For a brief overview see Pay to script hash and developer guide to Transactions []
  27. The Bitstamp and BitGo Partnership Is a Watershed Moment for Bitcoin from BitGo []
  28. State of Bitcoin 2015: Ecosystem Grows Despite Price Decline from CoinDesk []
  29. See Are there changes in the volume of retail transactions through Bitpay this past year? by Tim Swanson and WalletExplorer.com []
  30. A permanent copy of the image is located on Jorge Stolfi’s site. []
  31. Coinbase charts []
  32. The Collective Action Problem of Mining Fees by Tim Swanson []
  33. January 18th 2015 Block Maker Statistics by Organ of Corti []
  34. See The Marginal Cost of Cryptocurrency and Some Crypto Quibbles with Threadneedle Street by Robert Sams; Vitalik Buterin has discussed this several times on the official Ethereum blog. In addition, I discussed this at length in Chapter 3 in The Anatomy of a Money-like Informational Commodity. []
  35. The Future Of Bitcoin Transaction Fees? by Dave Hudson []
  36. The Collective Action Problem of Mining Fees by Tim Swanson []
  37. Singapore Event Puts Bitcoin on Mainstream Finance Agenda from CoinDesk []
  38. The State of the Blockchain Address(es) by John Ratcliff []
  39. Analysis: Around 70% of Bitcoins Unspent for Six Months or More from CoinDesk []
  40. Approximately 70% of all bitcoins have not moved in 6 or more months by Tim Swanson []
  41. For a brief overview see Disposition Effect []
  42. Bitcoin: Technical Background and Data Analysis by Anton Badev and Matthew Chen []
  43. Total Output Volume from Blockchain.info []
  44. My Amsterdam Letdown and Why Bitcoin’s Real Value May Lie Beyond the First World from CoinTelegraph []
  45. BitPay recently announced its whitepaper on “Inter-Channel Payments” also called “Impulse.” []
  46. A Fistful of Bitcoins by Meiklejohn et. al. []
  47. See Changetip real-time usage stats []
  48. A few statistics are available at BazaarBay []
  49. See 7 Transactions Per Second? Really? and The Myth Of The Megabyte Bitcoin Block by Dave Hudson []
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New presentation over at O’Reilly Media on BINO

I have a new O’Reilly Media presentation up online called: “Moving Beyond Bitcoin (BINO) Beta:Transitioning mindshare from Bitcoin-for-everything monopoly to a competitive consensus-as-a-service marketplace.”

It is largely based on an earlier presentation (older slides) I gave in Singapore in November plus a few more updated slides from my R3 talk last month (slides).

Note: in order to listen and view you need to register (for free).

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How do Bitcoin payment processors work?

Yesterday there was a discussion on a listserve about Brian Kelly’s hypothesis’ regarding bitcoin exchange rates and below is an answer I used to discuss where payment processors fit into the ecosystem.

At their core BitPay is basically a forex company, a broker that matches merchants with liquidity providers.  Microsoft and some 44,000 merchants can convert bitcoins into fiat through them (and/or hold portions or all of the coins they receive too).  Some miners also use them to process BTC to USD.

To do this, they have built an exchange (you can also call a few of their team members to place block orders with), which effectively sorts the bid/asks among other exchanges and OTC providers (such as Buttercoin, Mirror, Xapo, Sator Square Partners, Bitfinex, Coinbase, etc.).  I tried describing some of how this plumbing system works in a article a couple months ago.

While I do not have the full details of other payment processors (like Coinsimple or Bitnet), they likely try to build similar relationships with liquidity providers.  And this is important because all payment processors — or really, forex brokers — are faced with the following three situations during an arbitrary 15 minute window:

1) order from merchant is canceled by payment processor
2) order from merchant is accepted and then sold to inventory partner (such as Buttercoin)
3) order from merchant is accepted but the coin is put on payment processor’s books

Payment processors ultimately want commerce to flow so they do their best to match up partners; so in practice there has to be partner on the other end with the same or greater demand for the coins being sold by the consumer/merchant.

I do not have exact numbers for how often #1 happens though I do understand it happens on a daily basis (again, the 15 minute window is to help lock in a price and the OTC demand from partners such as Coinbase may not be fast enough at times) or how often #3 happens (my understanding is US payment processors typically used to hold coins on their own books prior to the IRS ruling last year but have sold their inventory for tax purposes).  Obviously during a heavily volatile period like yesterday (or even today on the upside), there is a possibility that the coins could get placed on the payment processors’s books due to a lack of bids on the OTC partners side, but none of that is really public knowledge.

The point is however, that there has to be a demand side to absorb the sales of coins coming from merchants and payment processors have built some pretty good systems to handle that (incentivized in large part to limit their exposure to exchange rate volatility).  If these partners were to disappear or the coins they decide to purchase declines in aggregate, payment processors are then left with having to choose #1 or #3.  This doesn’t seem to be the case the last few days, the behavior seems to be on the exchanges themselves and not from merchants.

What does this mean in practice?

The current supply pressure on a daily basis: aside from a couple firms such as BitFury (which according to some sources has around a ~$180 total cost of production), miners as a whole end up having to sell the majority of coins each day (~2,000 – 3,000+ coins) and as a whole, merchants process about 5,000 – 6,000 coins a day.  So this means 10,000 coins x 365 days or 3,650,000 coins.  Thus, to maintain a $300 price with that sell pressure the market needs to have ~$1 billion a year in capital come into this space.  And to maintain a $1,200 price with the same merchant/miner behavior the market would need to have ~$4.4 billion.  Therefore it is likely that payment processors try to reduce the amount of exposure to #3, otherwise the coins would eat up the internal budget and increase the burn rate at these startups.

Note: what BitPay’s volume looks like in practice was recently summarized by analysis from Jorge Stolfi.

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Clarifications and corrections from a computer scientist

[Note: I recently received some feedback on The Anatomy from Jorge Stolfi concerning a few of the passages in the introductory chapter.  Below, reprinted with his permission, are some of his comments and corrections that readers may find helpful and more clarifying than what I originally published.]

In the introduction you say:

Property is a legally recognized right, a relation between actors, with respect to control rights over given contestable, rivalrous resources.14 And with public-private key encryption, individuals can control a specific integer value on a specific address within the blockchain. This “dry” code effectively removes middlemen and valueless transaction costs all while preserving the integrity of the ledger.15 In less metaphysical terms, if the protocol is a cryptocurrency’s “law,” and possession is “ownership,” possession of a private key corresponding to set of transaction (tx) outputs is what constitutes possession.16 In other words, ownership is conflated with possession in the eyes of the Bitcoin protocol.17

I don’t think that the Bitcoin protocol did (or could do) that; property and possession remain quite distinct in its realm, although property is often very difficult to enforce.

As you say, possession is the physical ability to control and use the thing, while property is the legal right to do so. The state decides whether something is your property, and when it passes to someone else. Taking possession of a thing without the state’s agreement — i.e., without becoming its proprietor — constitutes “theft”. In that case the state is supposed to use its power to restore the thing to your possession, and possibly punish the thief.

“Ownership”, “owner”, “own” are sometimes used for possession, but usually they refer to property. I will use them with the latter sense only.

Knowing the private key to a blockchain address gives possession of the bitcoins stored there, but not ownership. The general rules of property still apply: to become owner, you must create some coins with materials, equipment and labor that you own, discover some that have no owner, or receive them from their previous owner, with his agreement; all with many other conditions and exclusions, taxes, etc.. Thus the notions of property and possession are quite distinct even for bitcoin.

The US government has acted on this distinction already, e.g. by seizing the Silk Road bitcoins, prosecuting Trendon Shavers for “misappropriating” bitcoins of clients with his Ponzi scheme, and accusing Butterfly Labs of pocketing bitcoins that they mined using customer equipment.

All crypto assets are essentially bearer assets. To own it is to possess the key.

Even with bearer assets the notions of property and possession are distinct; one can be prosecuted for the theft (taking posession) of bearer bonds or cash that are someone else’s property. Bitcoin, like cash, only makes it more difficult to prove to the state that a theft occurred, and to catch the thief; but that does not mean that property has been reduced to possession.

In the early years of bitcoin, one could perhaps have believed that bitcoins would be outside the scope of the concept of property — like inventions and songs used to be, until the recent transformation of copyright and patents into “intellectual property”. However, even before the legal cases above, Mt GOX and many other cases made the community recognize the concept of “bitcoin theft” — and therefore the notion of property distinct from possession.

The shift from bearer, to registered, to dematerialized, and back to bearer assets is like civilization going full circle, as the institution of property evolved from legal right (possession of property) to the registered form (technical ability to control) that predominates in developed countries today.

I don’t think that the shift from material to dematerialized assets implied the weakening of the concept of property. On the contrary, dematerialized assets became possible only after society invented the concept of property. In fact, dematerialized assets are simply the rights of property of other things, as recorded in some “official” registry recognized by the state, and only as long as those records are changed in ways admitted by the state.

Private blockchain keys are like the keys to a car, in the sense that the person who has the keys in hand can take possession of the car. But the keys do not define the property of the car, which is determined by car documents and records issued and kept by the state.

Complementing the analogy: the blockchain protocol is therefore not the analog of the car ownership documents and records, but more like the door lock mechanism: a blind device that will only give possession of the car to whoever has the proper key, and thus usually makes theft more difficult; but it does not define property. In fact, the door lock sometimes may even hamper the restitution of the car to its rightful owner. And replacement of the door lock (analog of moving bitcoins to another address), by the owner or by a thieff, has no effect on the car’s ownership.

A bit further down from that section:

by building a blockchain tree (called a “parent”) [ … ] These blockchain trees are simultaneously built and elongated by each machine based on previously known validated trees, an ever growing blockchain.

There may be some confusion here perhaps. A Merkle tree is a very general concept: it is a set of data records (or “blocks”), where each record contains, among other information, a cryptographic signature of the contents of some other record, its “parent”. These signatures tie the records in such a way that, if one wants to change the contents of one record, one must recompute all the signatures contained in all the records that are downstream of it. It is called a “tree” because a record may be the parent of two or more other records, thus a fork of the tree.

The Bitcoin blockchain is a special case of a Merkle tree. It forks only “accidentally”, and when it does one of the branches of the fork is usually very short, quickly dies, and becomes completely irrelevant. Thus it is a basically a linear chain (a Merkle chain) or records, rather than a bushy tree.

There have been proposals to change the Bitcoin protocol to use a “bushy” Merkle tree instead of a linear chain. That would make some operations much faster and less wasteful of bandwidth and memory. However, there is so much software out there which depends on the current structure, that such a radical change is highly unlikely to be implemented.

Bushy Merkle trees have been proposed also for other uses, e.g. as a way for exchanges and similar places to demonstrate that they have all the bitcoins that they are supposed to have. But those uses are not part of the Bitcoin protocol.

The blockchain only forks when (1) some bug is found in the protocol, that requires discarding all blocks since the first bad block, and replacing them with a new set of blocks, starting at that point, re-processing all transactions again if possible. Or, (2) when two miners succeed in mining the block N+1 nearly at the same time, and each broadcasts his version of that block without seeing (or acknowledging) the other. Then all the miners may choose either version as the parent for their block N+2. Thus the two branches may grow independently for a while, but at some point one of them will get defintely longer, and then all miners will have to continue extending that branch. At that point the shortest branch will become irrelevant and the blockchain will again become a linear chain.

So, maybe you want to avoid mentioning Merkle trees at this point, and pretend that the blockchain is just a chain that grows orderly, one block at a time. Those accidental branchings are relevant later, for the discussion of double spending and other possible faults/attacks.

Further down:

By January 2014, the computational power of the network reached 200 petaflops, roughly 800 times the collective power of the top 500 supercomputers on the globe.25

Perhaps it would be better to say something like:

“The proof-of-work computation essentially consists of performing a large number of relatively expensive operations, called ‘hashes’. The computing power of the Bitcoin network (or of any Bitcoin mining equipment) is therefore measured in ‘hashes per second’ (H/s). By January 2014, the computational power of the network reached 200 petahashes (200’000 trillion hashes) per second. By comparison, the top 500 supercomputers in the world could perform only about 120 trillion floating-point operations per second (teraflops).”

This too is somewhat garbled:

To prevent forging or double-spending by a rogue mining system, these systems are continually communicating with each other over the internet and whichever machine has the longest tree of blocks is considered the valid one through pre-defined “consensus.” That is to say, all mining machines have or will obtain (through peer-to-peer communication) a copy of the longest chain and any other shorter chain is ignored as invalid and thus discarded

I would just write something like:

“The computers that comprise the Bitcoin network are constantly communicating in peer-to-peer fashion, sharing their known versions of the blockchain and checking each other’s work. The nodes strive to reach a consensus — which is defined as the longest version of the blockchain where each block contains only valid transactions and the correct signature of the previous block. Any side branches that are not part of the longest chain are ignored (and their blocks are called ‘orphans’).

As of this writing, the height of the longest chain has just over 311,000 blocks.

Rather: “As of this writing, the length (or, in bitcoin jargon, the ‘height’) of the consensus chain was over 311,000 blocks.

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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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