Is Bitcoin really a decentralized autonomous organization?

A friend asked me about the interview I did a couple days ago where I mentioned Roger Ver’s influence as an instance of how Bitcoin is not an example of a DAO.  My usage was not meant to disparage him — in fact, his sobering backstory helps explain his intense passion today.

I have a longer explanation regarding DAOs that will be published in a couple weeks.  In the meantime however, regarding changes to Bitcoin itself, I do think a fork of some kind is possible (not that it will happen) largely due to two different groups that would like to take the protocol different directions.  For example, in the face of the new CoinValidation route that the Foundation began promoting last fall, Roger Ver’s Blockchain.info promoted Shared Coin as a way to work around potential white/black listing.

While it is unclear what direction the Foundation (and hence the protocol as most devs work through them) will ultimately take, the overall tone of regulators at the New York Department of Financial Services hearing this past week was not conducive to individual privacy.  In fact, Benjamin Lawsky, the Superintendent of the Financial Services department stated that, “It’s not worth it to society to allow money laundering and all of the things it facilitates to persist in order to permit 1,000 flowers to bloom on the innovation side.”

I am not sure if Lawsky realizes that Mao originally came up with that phrase or why (to “lure out the snakes from the cave”).  Perhaps projects like Dark Wallet and ZeroCoin will change that equilibrium.

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Outside funding of cryptocurrency and Bitcoin startups

According to CB Insights, VCs spent $74 million across 40 BTC-related deals in 2013,  the two largest rounds were Coinbase ($25m) and Circle ($9m).

Despite the increased media attention, even if these numbers are repeated again this year this may not help boost the poor performance for VC funds as a whole.1 Even with the optimistic outlook many of the VC firms apparently now have, their actual results at ~6% per annum over the past decade have underperformed the Russel 2000.2

Why?  Some VCs not as nimble at feeling out business models with actual revenue generating capabilities as many angel investors are.

Changes over four decades

Consistent with secular theme of ubiquitous adoption of open source software as well as cloud computing that has lowered the cost of developing software and more importantly the costs associated with launching new companies, so too has this trend lowered the threshold for tech investments.  Where previously the funding of start-ups was limited to deep-pocketed professional investors, namely VCs, the deflationary landscape has increasingly enabled greater numbers of individual investors, angels to compete in funding environment.

The new class of angel investors is more astute than the passive and non-tech-savvy high net worth investor of yesteryear.  Increasingly, angel investors today have deep domain experience.  Many have worked in the sector that they are funding, are entrepreneurs and experienced operators themselves and visionary at feeling out new business and innovative trends.  The historical barrier to entry for angel investing is one of risk given the magnitude of investment commitment.  With lower costs of starting businesses, this hurdle is largely gone.  Smart angels with deep operational domain expertise is disruptive to the traditional VC universe.  They may be better attuned and friendlier with terms that are less predatory than the historical VC norm.

This is not to say that VCs will not flourish once again, however as it stands most angels began as entrepreneurs and learned how to generate sales and revenue first hand.  Furthermore, as noted above, over the past decade technological costs that have driven down expenses.  For example, relatively cheap cloud services like github and Compute Engine provide services (CaaS, SaaS and IaaS) that allow many tech start-ups to be leaner than before in terms of what funding they require to cover operating costs.  On top of this are better organized angels who now have an entire ecosystem of choices to fund through such as AngelList, 500 Startups and Y Combinator.  In fact, over the past six months, BitAngels.co have invested $7 million in 12 crypto projects globally.

Another way that cryptocurrency-related startups are being funded through are crowdfunded IPOs.  This includes Mastercoin, which raised $5 million in part by 4,700 bitcoins from “investors.”3  NextCoin (Nxt) and the upcoming Ethereum IPO have also included raising funds through bitcoin transfers.  While I am not necessarily endorsing any of these particular fundraising models, this illustrates how small (and perhaps large) development teams can financially cover costs without seed funding by VCs.

See also: MoneyTree Report from PricewaterhouseCoopers and the every-growing list of funded Bitcoin companies listed on CrunchBase

[Special thanks to DA for his comments and feedback.]

  1. Kauffman Foundation Bashes VCs For Poor Performance, Urges LPs To Take Charge from The Wall Street Journal and Most venture capital funds lose money from CNN|Fortune []
  2. Venture capital kingpin Kleiner Perkins acknowledges weak results from Reuters []
  3. Backed by $5 Million in Funding (4,700 BTC), Mastercoin Is Building a Flexible, New Layer of Money on Bitcoin from MarketWired []
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What is an atomic transaction?

I received an email earlier today asking clarification of the term “atomic transaction.”  Occasionally you may see this used in an article describing a unique advantage that cryptocurrencies such as Bitcoin have.  Angel investor, Ben Davenport, used it in a quote that I published over at CD last week:

“[I]magine the power of being able to make a trustless trade of stock for bitcoin with a stranger, at a distance, with no third party involved. With colored coins, I can construct a single atomic transaction which encodes such an exchange. That, to me, is the most important basic thing that colored coins can enable.”

In short, when exchanging one cryptocoin with another (such as a Bitcoin for a Litecoin or colored coins), either the trade occurs or it does not.  Michael Goldstein explains this concisely over at Lex Cryptographia:

Two parties agree to exchange one cryptocurrency for another, and the transaction is done in such a way that neither side can execute their portion of the trade without releasing funds to the other party. The trade either happens in its entirety, or not at all, which means nobody can walk away empty-handed. The worse possible outcome is that no trade occurs at all and everybody keeps what they had.

The key is the nLockTime function described in Atomic cross-chain trading.  I also recommend looking through the Bitcointalk thread Alt chains and atomic transfers.

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Interview with Amos Meiri and Alex Mizrahi of the Colored Coins project

[Note: below are several questions and answers from core developers with the Colored Coins team.  I previously posted answers from Meni Rosefeld several days ago and last week CoinDesk published an article of mine that quotes both Amos and Alex as well.]

Q: What advantages does CC provide to the current global asset management industry?

Amos Meiri: It is going to be very easy for the asset management industry as a whole to use Colored Coins. For example, some of the first places we are going to have adoption will likely be real-estate and portfolio management. In fact, for any type of asset management it’s going to be simple to issue his own color that represents his goods.  In the real estate industry, someone can issue their apartments using colored coins and have them float on the block chain, or manage time-sharing based on color such as Bitcoin Resort.

Alex Mizrahi: I think just like in case with Bitcoin, it will first be used in some niches, perhaps something obscure. And we’ll see what can grow from it.

Q: What businesses do you think can readily adopt CC once it is released?

Amos Meiri: I’ll say it’s endless but will give you few examples of the first and most simple.  One of the biggest demand today for CC would be the second markets of stocks. Company’s who want to issue their own stocks and use the decentralized exchange, many approach us and waiting for the first release.  Examples are: The tickets and coupon market; FX and derivatives market.

Alex Mizrahi: I see a lot of interest in capital market applications, i.e. companies which were previously listed on so-called “Bitcoin stock exchanges” (btct.co, bitfunder.com) have problems finding a reputable exchange and have distrust towards centralized ones.  Particularly, ActiveMining announced that they will issue their shares in form of colored coins when tech is ready (as one of options), and a lot of users support this.

Q: Would it not be easier to simply do all trade privately at the centralized exchange where it will be more scalable and private?

Amos Meiri: Centralized exchanges definitely have their advantages, but colored coins can be useful for following reasons.  First, users do not need to trust their bitcoins to a centralized exchange.  Companies cannot manipulate ownership records (to commit fraud, for example).  So basically, if somebody gives you an IOU, it isn’t a good idea to leave it with the person who issued it or to affiliated parties.  Another reason is that companies cannot control how its shares are being traded, thus it cannot block trade.   And lastly, there is no need to maintain servers or manage security due to its integration with the blockchain.

Q: What are the legal ramifications for creating this approach to asset exchange, in particular securities (e.g., stocks, bonds)?

Amos Meiri: I believe that at first stage we are going to see small and online companies using CC might be on the unregulated zone working as second market.  Same as Bitcoins, when the volumes will grow and we will have mass adoption we might have some regulation.  We are trying to understand all of the legal aspects using CODA.

Q: How does CC able to differentiate itself from other endeavors such as Ripple and Open-Transactions?

Alex Mizrahi:  1) Trade of colored coins for bitcoins can be fast as safe: bitcoins are represented with bitcoins, there are no counter-party risk, they don’t need to leave user’s wallets. 2) Colored coin security is very similar to Bitcoin security, and people trust it. 3) Open-Transactions is a centralized solution, and Ripple is often perceived as centralized solution too.

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Interview covering China, smart contracts and trustless asset management

Earlier today I was interviewed by Donald McIntyre at Newfination.  We discussed a number of topics related to cryptocurrencies and trustless asset management including smart contracts and how they can be applied in China (see video below).

My current motivation and interest stems from the lack of clear property rights and contracts in China.  While some jurisdictions are better than others (like Shanghai), no one actually owns property for more than 70 years whereupon it is automatically reverted back to the state.1  In many cases, the actual property may only have a 40 or 50 year lease left because of the different staggered stages of post-Mao liberalization.

Furthermore, at any given time these titles can be revoked or modified by a 3rd party without recourse.  As a consequence, land confiscation is very common and is actually the leading cause for social unrest.  For example, each year approximately 4 million rural Chinese are evicted from their land.2 Why?  Because, according to an HSBC report, local governments generate 70% of their income from land sales much of which are ill-gotten gains for one ore more party (e.g., state owned firms have local leaders evict farmers from land).3  And there is no property tax, not because China is some hyper libertarian utopia but because corrupt officials — some of the same ones that confiscated the land — do not want to reveal their property holdings.

Crypto solutions

In 2004 a report from the OECD found that roughly half of all urban Chinese workers, primarily migrant workers from the provinces participated in the informal sector (this is between 120-150 million people).4 They would benefit if their payroll and compensation was managed by a Decentralized Autonomous Corporation rather than a human laoban (boss) who could change their mind or otherwise abuse the relationship (e.g., change the contract ex post).  For instance, without an urban hukou (household registration) most of these migrant workers are left without any legal recourse in the event that their contracts are tampered or ignored.

Trustless asset management tools built on top of a cryptoledger such as Bitcoin or Ethereum (which are tamper-proof) would empower not just those in the developed world, but also those in the developing world who are more easily marginalized without political guanxi.  Even if trustless asset management networks are not deemed legitimate or valid by the government or a Party apparatus, a decentralized smart contract based system would level the playing field and allow individuals from all walks of life to actually codify and manage scarce goods that they currently own.

While books and volumes could be written on this topic, even if there are stricter capital controls and regulations on cryptocurrencies in China (or elsewhere), that by using a couple different ‘colored’ coin chains (or Ethereum contracts, etc.) Bob from Beijing could still transfer assets worth X amount of money to Anhui Alice instead of X amount of money itself.  This would create a sort of advanced barter system which may not be as efficient in terms of actually using a cryptocurrency as a medium of exchange but it could help those in an informal economy qualify and quantify asset value and clear up some of the confusion around contracts and property ownership.

See also: Chinese property law and Forced evictions in China

  1. See China’s Real Estate Riddle from Patrick Chovanec, You May Own your Apartment, but who Owns the Land Underneath Your Feet? by Thomas Rippel and If Beijing is your landlord, what happens when the lease is up? from China Economic Review []
  2. See China’s Land Grab Epidemic Is Causing More Wukan-Style Protests from The Atlantic and China Tackles Land Grabs, Key Source of Rural Anger from The Wall Street Journal []
  3. See China land price fall threatens local finances from Financial Times and China’s land-seizure problem from Chicago Tribune []
  4. Internal Migration in China and the Effects on Sending Regions from OECD []
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No, there is no (coming) collapse of China’s interbank system

Last week I spoke with Mark DeWeaver (video) and we touched on a number of issues related to China’s financial system but did not cover the liquidity issues that have arisen the past 6-9 months.

As a consequence, I highly recommend reading through this overview from Rhodium Group that does away with hyperbole or exaggeration to explain what is really happening: China’s Interbank Squeeze: Understanding the 2013 Drama and Anticipating 2014

 

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Ethereum and vunerabilities of Turing-complete progamming languages

There have been several Reddit threads and bitcointalk forum posts the past couple days regarding integrating a Turing-complete programming language with a cryptoledger.  Bitcoin currently uses a limited, non-TC language called Script.  The comments, feedback and insights revolve largely around the security risks and vulnerabilities that such a language could do.

If you are interested, I highly recommend reading through these threads right now, the first two include comments from Adam Back, creator of Hashcash which is the proof-of-work used in Bitcoin.

Turing complete language vs non-Turing complete (Ethereum vs Bitcoin)
letstalkbitcoin on committed tx, homomorphic value, fungibility, privacy
Will turing compleastness allow contracts to contain viruses and malware that could affect the network in unforeseen ways?
Adam Back about Ethereum and security risks

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Charlie Lee on Litecoin: “People like choices”

This past weekend there was a large Bitcoin conference held in Miami that attracted many of the major crypto developers, programmers, journalists and userbase for seminars and workshops.

Charlie Lee, creator of Litecoin, gave a very interesting presentation on the history of altcoins from 2010-2011.  He discusses some of motivations for creating an alt coin (such as Litecoin) as well as what unique features a few of them have that differentiates themselves from others.

During the Q/A at the end, someone mentions that Adam Back, the creator of HashCash, purportedly said that the ecosystem should just have one cryptocurrency, Bitcoin.  Otherwise new participants and laymen get confused and turned off when they learn there are hundreds of cryptocoins.

Charlie’s response was that he agreed with this position, that it would be helpful for the development, the marketing and the dispersion of the crypto meme, but that ultimately “people like choices.”  And that if it was not Litecoin that was the 2nd largest, some other token would be.  And thus Bitcoin users should be happy that Litecoin is the 2nd and not some other, like Dogecoin which has no actual development team.

[Note: the first few minutes of the video are missing. The slides are located here.]

Charlie also did an interview last summer with Newfination which covered Litecoin, Bitcoin and Coinbase:

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Mike Hearn discusses autonomous agents at Turing Festival 2013

Decentralized autonomous organizations (DAO), sometimes called decentralized autonomous corporations or autonomous agents have become a hot new topic both in social media and in software engineering, especially as they are interrelated with advances in cryptoledgers/cryptocurrencies.

Vitalik Buterin has written a three-part series (1 2 3) about software-based DAOs over at the Ethereum blog that gives a pretty good overview and capability of what a DAO is able to do.  While many more volumes will be written on this topic, last Mike Hearn gave a brief overview of what hardware applications may look like:

See also: Mike Hearn’s 2012 presentation in London (video) as well as his interview last fall with Newfination (video).

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Interview with Mark DeWeaver, co-founder of Quantrarian Capital Management

Earlier today I had the opportunity to interview a friend, Mark DeWeaver.  Mark is the author of Animal Spirits with Chinese Characteristics and wrote a very kind foreword for my own book.  He worked in China for 9 years and later co-founded Quantrarian Capital Management which is fully invested in the Iraqi Stock Market.

We discussed a number of topics including the “rebalancing” of China’s economic model, the Soviet tech industry during Gorbachev1 , technological innovations with regards to the Great Firewall (GFW) and spent the last 15 minutes discussing cryptocurrencies, smart property, trustless asset management and specifically an article written by Mr. Sheng from the PBOC.2

Other stories mentioned:

  1. See “The Soviet Machine-Building Complex: Perestroyka’s Sputtering Engine” from the Office of Soviet Analysis published by the Directorate of Intelligence []
  2. Mr. Sheng’s article on Bitcoin and cryptocurrencies is “虚拟货币本质上不是货币” []
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Can Robert Wenzel Defeat the Encryption Used by Cryptocurrencies?

 photo NizeLinkedin.png Short answer, no.1 Back to that in a moment.

I am not sure who is doing the vetting process for investor relations at Ripple or Silicon Valley Bank (SVB), but if you are running a crypto-related business be aware that not only is Robert Wenzel (aka Raymond Nize) — the proprietor behind EconomicPolicyJournal — dogmatically anti-cryptocurrency but also not who he says he is.

Why make a blog post about this in the first place?  You may consider this water cooler minutiae and frivolous scuttlebutt, however you are known for whom you associate with.  If you hang out with known con-artists — even if you agree with some of what they say, this reflects poorly on you.  Especially when their entire motivation is not to genuinely learn about your product (crypto), but to merely hype their own investment schemes (e.g., commodities specifically gold).

Sock puppet extraordinaire

Last week I received some trollish comments from “Paul Trombley” (paul.XXXXXX@yahoo.com) regarding a lengthy post on this site (an expose of Nize’s sockpuppets), “Paul” states:

Wow. Utterly fascinating. Wish we could find out where Raymond Nize, et al., grew up and went to school, where he has worked, whom he dated, etc.

In the meantime, I will have to be content with another viewing of Pacific Heights.

A quick google search find four sites that zero in on the possible identity of “Paul”:

Obviously even if I had IP addresses this would not be a smoking gun.  But what are the chances, that a sock puppet posting on the only Nize/Wenzel thread on my site also links to EPJ and discusses many of the same topics in the same tone as Nize/Wenzel does?

Why is this important again?

Because Nize/Wenzel has managed to convince some important cryptocurrency personalities and institutions that he is someone who he is not.  He managed to convince Joseph Salerno that he has 20 years of experience on Wall Street. Where did he work?  His current LinkedIn profile (screenshot 1 2) is completely empty in all but the previous 6 years.  Surely someone with the pedigree he says he has would dutifully link to it and his past associates.

Is this an ad hominem?

No, he is making claims about his past life that are untrue which have in turn built up his credibility as a financial guru.  He has then taken these ill-gotten reputational gains and is now providing investment advice to readers and listeners of his website (which is just one of many websites he has created over the past decade under about 10 different pseudonyms, see Part IV for more).

To top it off, he has a clear anti-cryptocurrency agenda that involves spreading misinformation and/or propaganda.  In nearly every post about Bitcoin or some other aspect of cryptocurrencies he drags it through mud while simultaneously showing his inability to full comprehend how cryptography works.  Hint: if cryptography worked the way he describes it, the entire global financial industry, the diplomatic corps, cloud services and all e-commerce (to name a few) would effectively be unable to securely transmit data.  Trace Mayer did an excellent job pointing this out in the EPJ comments yesterday (SS).  Thereupon Nize notes how in his visits to both Ripple and Silicon Valley Bank he left unconvinced of cryptocurrencies potential (SS).

Strawman made of hand-waving

It is certainly understandable to not be convinced of the merits of a particular asset class, that is not the issue.  Not understanding public-key cryptography and then building bi-weekly cryptostrawman to thwack at, is a problem.  While the math may indeed be confusing to beginners and experts alike, the crypto algorithms used by cryptoledgers like Bitcoin and Litecoin are solid.

In fact, there is an monetary incentive to try and break them and no hacker has thus far been able to.2 If Nize truly believed that this crypto did not work, he could take the alleged holes he claims exist and tap into and forge 12.2 million BTC namespaces/addresses (and 25.1 million LTC).  He needs to show us a broken blockchain to prove his claim, yet has not.  If the pseudonomyous features did not work, then he could name the Top 500 BTC holders, but has not.  Disagree?  Who owns the 268th largest BTC address, the one with 4,719?  If the crypto is bad, did you break into it already?

Perhaps he will come around at some point, but this still does not justify the fraudulent personality that visitors are unaware of (and whom have given goodwill towards).  The lesson for investors doing road shows and presentations: do you due diligence and vetting upfront.3

  1. There are theoretical ways to forge entries in the blockchain, such as a 51% attack, but the crypto in the actual generic wallet most people use is currently not known to be brute-force crackable. []
  2. Nize also has epistimological problems regarding apriori utility and value but that is besides the point. See: The value of cryptocurrencies as well as Economics of Bitcoin by Peter Surda []
  3. As an aside, his Google AdSense has generated, ironically, Bitcoin-related services like Gyft that are displayed on his site — here is a screenshot. []
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Q&A with Meni Rosefeld of Colored Coins

I had an email exchange with Meni Rosefeld who is on the core dev team for Colored Coins.  Below are his answers to my questions (published with his permission):

Q: What advantages does CC provide to the current global asset management industry?

A: The greatest advantage is the removal of barriers of entry. Currently, new businesses wishing to raise capital use cumbersome and inefficient private deals; and those aspiring to be listed in order to allow for the market to valuate them with an efficient mechanism, can only do so with a great expenditure. With colored coins, anyone can easily raise funds in exchange for equity, removing barriers of entry, encouraging innovation and allowing society as a whole to better allocate its resources between ventures.

Q: One criticism of CC is that it still requires centralized servers to issue and track tokens.  If this is the case, would it not be easier to simply do all trade privately at the centralized exchange where it will be more scalable and private?

A: No centralized servers are needed for tracking – this is done in the decentralized network of the host currency (such as Bitcoin). There does need to be an entity issuing each particular colored coin – however, an entity raising funds for a generic purpose is not usually in the business of running an exchange. Without colored coins, they would have to resort to a large 3rd party exchange with all the usual problems of barrier of entry (for both issuers and exchanges) and vendor lock-in. With colored coins, they can outsource the tracking and exchange to the efficient decentralized network. The issuer is only involved when issuing or recalling the coins; investors can then trade the coins between themselves without involving any 3rd party, which has implications for privacy, efficiency, and the kind of advanced transactions one can do.

Q: How does CC able to differentiate itself from other endeavors such as Ripple and Open Transactions?

A: The distinctive feature of colored coins is that it’s integrated into a host blockchain such as Bitcoin. OT and Ripple work very differently from Bitcoin and thus have an adoption curve in both people’s ability to understand the system and the existing hardware, software and business infrastructure. With colored coins built on top of the established currency Bitcoin, it enjoys all of Bitcoin’s known advantages, and will be more easily adopted by users of Bitcoin (who are anyway the ever-growing target market).

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Ethereum’s potential: a cursory look

If you haven’t done so yet, I highly recommend reading Vitalik Buterin’s overview of Ethereum published earlier today.  It is very lofty, seemingly feasible and I don’t detect much hyperbole.  He is clearly aware of the short-comings of all the different 1.0/2.0 projects and is pretty much trying to make this stand out by otherwise fulfilling Newton’s, “standing on the shoulders of giants.”  I’d be interested to see what other project leaders from 2.0 initiatives have to say.

A few technical concerns I haven’t really seen addressed but I’m sure are being discussed somewhere:

1) Botnets.  While ASICs do create potential long term centralization problems, Botnets will jump all over the ability to use CPUs again to mine.  How can this be prevented/mitigated?  Can it?  Is there a way for Ethereum the org to prevent miners from participating (if so, can it be abused?)?  [Note: I have discussed mining previously in the Litecoin category.]
2) Even though the money supply is mathematically known, I’m not entirely sure the linear money supply will necessarily have the zeroing effect apriori.  It could, and probably will but obviously this is aposteriori.  For perspective, the token supply in LTC and BTC are significantly higher the first decade than Ether is.
3) While Script is not Turing-complete this also prevents viruses from being created and wreaking havoc on the blockchain.  CLL sounds great on paper in terms of robustness and utility, but how do you fight HNWI hackers who want to cause mischief?

Two other points of interest regarding the business side of this project:

1) I do think that eventually someone, somewhere will create a distributed, encrypted dropbox for global use.  How that is incentivized, or rather, how individuals pay for the resources (bandwidth & space) obviously will be another matter altogether.  Bitcloud is one project that is trying to tackle that (through proof-of-bandwidth).  Perhaps, as part of what Mike Hearn described 2 years ago, users will eventually be able to use microtransactions (e.g., 0.01 BTC) to pay random WiFi hotspots to create adhoc mesh networks — distributed encrypted dropboxes could just as easily follow similar paths in terms of payment/compensation.  Shades of Snow Crash and The Diamond Age

2) Even though I am pretty pro-alt coin/chain/ledger/etc. I do think parts of the Humint project are probably not going to work as initially planned in their press releases this week.  Assuming that Cocacolacoin is not part of the Ethereum blockchain but rather uses its own independent blockchain, it’s hard to imagine how to incentivize network hashrate (which creates network security which prevents a 51% attack).  I’m not saying it won’t work apriori, but from a business model it is difficult to believe that Bob the Miner will want to exchange hashrate for Coca-cola swag.  Obviously stranger things have happened, like the recent “success” of meme-related Dogecoin (wow! so cool! much awesome!); I do think not using the term “coin” will be a better marketing strategy as it is too loaded at this point (I prefer token or ducat).  Other obvious uses within the Ethereum blockchain are Frequentfliercoins from Alice Airlines, could probably help prevent and mitigate the risks involved in travel hacking (FYI: United Airlines frequent flier miles were downgraded effective February 1, 2014 due to rampant inflation).

For example, I think Alice Airlines could utilize the “contract” system by using some amount of Ether (0.01), creating a “contract” which defines a set amount of Mileage (which itself will likely have some predefined expatriation dates).  Assuming this is in the future and flyers are using Ether wallets (oh the 19th century irony) and provide the airline with their wallet address, the user will be able to receive the Mileage amount in their wallet (more than likely it will be an embedded URL that sends you to a screen on Airline Alice with the actual amounts + Terms of Service).  This is what colored coins are, but Ethereum seems to be both more elegant as this is native built-in functionality and in terms of transfer speed (3-30 seconds is the stated goal versus 10 minutes for 1 BTC confirmation).  This is subject to change, but just one potential use of the platform.

It will also be interesting to see how Dark Wallet and Zero Coin projects will react to this announcement (Ethereum is currently stating it is not an anonymous solution though through the “contracts” system this can be obfuscated).

Other resources to peruse:

– Ursium has a live update of publicly known tidbits.
– The Ethereum blog has some interesting info, especially about DAOs

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Ethereum: An all-in-one cryptoledger smart property turnkey solution

CoinDesk published a new story about a start-up called Ethereum which is launching in a week.  This project will include a distributed mining network + software development platform.  Here is the technical whitepaper.

Not to oversimplify it but they want to use a different, more ASIC-resistant proof-of-work along the lines of Scrypt (which is used in Dogecoin and Litecoin) and maybe also integrate proof-of-stake as an alternative.  While there may be some merit to PoS, there are not many devs that are fans of it (see a small counter-explanation here) notably Warren Togami (lead dev of Litecoin).

The software development side is quite interesting.  Basically one of the limitations with the current Bitcoin protocol (that will be somewhat rectified in version 0.9) is the lack of native support for “colors.”  That is to say, the token system since the first release four years ago, can represent just one particular asset class — which thus far has been fiat value (perhaps there could potentially be hundreds of different blockchains to represent different colors, but then you would need to build hashrate infrastructure to support the transaction, security, etc.  Possible maybe.).

With a colored token system (e.g., “coloring” a specific amount of a token green or blue to represent a specific asset), anyone can add, trade and track assets through one blockchain (obviously if that blockchain has problems it can be ported and used on another cryptoledger).  Mastercoin and the Colored Coin project are attempting to do something similar (as are Nxt, BitShares, Counterparty and Open Transaction).

It will be cool to see how the community reacts to the crowdfunding effort starting next weekend.  Note: for contrast in approach, here is the Colored Coin overview paper.

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What are smart property and smart contracts?

I have received a number of calls and emails regarding the concept behind smart property and smart contracts which have been in the news this week.  While this topic will eventually fill volumes, if you have some time I recommend reading through these links, all written by Nick Szabo:

Speaking of which, I had a short email exchange with Mr. Szabo today (who to the chagrin of redditors, insists he is not Satoshi) and he is familiar with what is going on in the ecosystem (including projects like Mastercoin and Ethereum and people like Mike Hearn).  So if you have been following his academic output, it is pretty neat to see how his ideas (like “the god protocol“) are coming into fruition through the advent of cryptoledgers and cryptocurrencies.

I also highly recommend his piece: Shelling Out – The Origins of Money

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12 Step Guide: Easiest and fastest way to start mining Scrypt-based tokens for Litecoin and Dogecoin

This past year I have received a lot of emails asking me about how to mine a cryptocurrency.  There are lots of good guides out there for setting up real mining rigs.  I used this consolidated guide last year but I recommend Cryptobadger for all current setups.

But if you really want to just test the waters with a machine you have laying around, I put together a very simple guide involving the least amount of technical prowess.

Step 1: Find, build or borrow a computer with a discrete video card made by either ATI (now AMD) or Nvidia.  Radeon cards perform the best usually by an entire order of magnitude.  Do not use a laptop because it will likely overheat and you may end up causing permanent damage to the machine (the only exception is a gaming laptop with fans/exhaust).

Step 2: Look at the Litecoin mining hardware comparison chart (even though it says Litecoin, you will end up with the same hashrate with Dogecoin or other Scrypt-based cryptocoins).  Make sure to see what parameters and settings your discrete card functions best at.

Step 3: Download the GUIMiner fork for Scrypt-based cryptocurrencies (Litecoin and Dogecoin are the two largest in this space).  Note: the original GUIMiner is designed for Bitcoin and will not work if you point it to a Scrypt-based pool.

Step 4: Look for a pool.  You will unlikely be able to “discover” one of the blocks solo-mining with your own computer at this point, thus virtually everyone connects to a pool (a group of other miners) in which you collectively are rewarded for your share of hashing.  For Dogecoin there are numerous pools, the one I’ve mentioned to my friends is Dogehouse.  For Litecoin there are also many to choose from.  The one I personally used in China was Coinotron.  Note: pay attention to pool fees.  Some of the fees can be relatively high, 5%.  This is likely due to maintenance costs to prevent DDOS attacks from taking down the pool.  Also PSA: if you plan to add a lot of hashrate I recommend joining a P2Pool to help decentralize mining.

Step 5: Sign up for a pool.  When you register at one of the pools, be sure to use a password that only you know for the front-end otherwise someone can log in and modify the remittance address to their own.  Once you have registered, you need to do two things:

1) Create a worker unit with a name like Alice.1 and give it a simple password like X.  It doesn’t matter if someone knows that unit name or password, in fact they could actually point their cards to that address and help you mine, but that is unlikely : )

2) Look at the Getting Started section of the pool website.  There you will find the information about stratum and pool connection info.  You need to insert this information into the appropriate sections on GUIMiner.

Step 6: Insert settings.  Again, find out what kind of video card your computer is using and look at the comparison chart (above) to find out what the best settings are for that card.  If you use a Radeon you can use GUIMiner’s drop-down option and it will automatically insert the setting values.  Otherwise you should just Google your video card and type “litecoin mining” or “dogecoin mining” (e.g., Radeon 7950 litecoin mining settings).  It is important to look at the specific brand as some are better than others.  CryptoBadger has a list of the best available to buy (or used).

Step 7: Test the settings.  Once all of the fields are filled in GUIMiner and you have registered at a pool, be sure to click Start on the stratum server.  Then move to the first tab and start the worker unit (GPU).  You will instantly know whether or not the stratum connection is invalid as there will be a warning statement at the bottom with “Not Connected” next to it.  If your card is actually working, you will audibly hear the fans blowing much faster and in the bottom right hand corner of GUIMiner you will see a hashrate (e.g., 600 kh/s).  If you do not see a hashrate, it is not mining.  If the Stratum connection is not working, you will not be credit with valid shares.  In the bottom left of GUIMiner it will say how many shares have been accepted as well as stales/invalid.  You can also check the mining pool interface/dashboard to see how each mining unit is doing.

Step 8: If the system is working, have it run for 5-10 minutes.  See if it crashes.  If it crashes, try to diagnose the reasons why.  Did you try to run other applications at the same time?  You will likely be able to utilize the system for any productive work as the GPU, CPU and system memory are preocuppied solving these “proof-of-work” math problems.  So do not use your main work system.  If your system crashes, you can ask the community websites (like LitecoinTalk) for help in troubleshooting the cause.  In my experience the three most common problems are 1) heat dissipation, 2) power supply & 3) intensity settings are too high.

1) Heat dissipation.  Most beginners do not realize that these GPUs will, at full load and intensity heat up to 70C+.  My own reached over 80C and operated there non-stop for months.  You need a way of dissipating this heat, either by cooling it down within a case (e.g., lots of fans or liquid cooling) or by building an open-air case (like a milk crate).  If you are using more than one GPU you will also likely need a PCI-e riser to allow air flow in your system — if the cards are next to one another they will likely crash due to heat issues.  Here is a how-to guide for installing risers.  If you want to try liquid cooling, you can follow how my friend Silas did it several years ago with Bitcoin.

2) Do not underestimate how much electricity your GPUs will suck up.  If tweaked properly for undervolting (using various software tools like MSI Afterburner and/or Trixx) you can reduce power consumption however if you’re a beginner you will likely need some spare wiggle room.  There are endless threads about the best setup but do not skimp on a good PSU.  A 750W from Corsair will power two Radeon 7950s without a hiccup.  A 600W will likely not (perhaps creating a dangerous environment).  Do not use any molex connectors or converters.  Use a real power supply that has enough native PCI-e connectors to the board.

3) Each card has its crashing point.  Push it too hard with too much heat or fail to give it enough electricity and it will crash.  Another issue, and this involves guess-and-check is to incrementally increase the workload and intensity on the GPU.  So if this is your first time, start at an intensity of 14 and build up from there.  If you start at 20 you will likely crash the system and not be able to know exactly why (e.g., did it get too hot?).  Pay attention to GPU temperature during this time, if it gets past 90C or increases from room-temperature very rapidly, it will likely crash due to heat-related issues.

Step 9: This short guide was to help you just test and start mining with whatever gear you had laying around.  If you want to throw some real money at this endeavor, I recommend looking through CryptoBadger’s site and some of the mining forums out there.  The Radeon 7950 is still probably the best value / hash / watt — but they are no longer made or sold in most countries (the exception is the HIS brand from Taiwan which can still be bought online sometimes).  You can find others on Ebay and Craigslist (or 58.com if you’re in China).

Step 10: Install a remote-login tool such as LogMeIn so you do not have to connect your system permanently to a monitor or keyboard (do not give anyone that log in info).  In most cases you can just leave the rig in a corner of a room near a window and check on it once or twice a day via the remote login.

Step 11: Calculate your hashrate and plug it into a Litecoin difficulty rating calculator.  Then look to see how much it costs in electricity to operate your rig.  Even if you are still generating dogecoin or litecoin each day, your electrical costs may create an unprofitable scenario (unless of course the tokens appreciate and/or the difficulty rating decreases).

Step 12: You have a binary decision making process.  Either turn off the rig (remember, this was supposed to be just a test run) or leave it on.  It can be a fun experiment to show your friends and family how distributed cryptoledgers actually work in terms of infrastructure, but you most likely do not want to bet the farm to build a server farm of these. [Don’t forget to get a Litecoin wallet or Dogecoin wallet to put those mined tokens in]

Coda:

I have written a few other articles on mining before (see here and here).  If you came here looking for Bitcoin mining, you are a couple years too late.  For independent hobbyists, ceteris parebus it is mathematically impossible to profit off of GPU mining for Bitcoin.  You can buy an ASIC but again, those are problematic in that there is a waiting list and you will likely not receive it in time to generate enough BTC to pay for the machine plus electrical costs.  If you want to experiment you can buy a USB ASIC for Bitcoin mining (such as a Bi•Fury) that simply plugs into a USB slot and goes to work (you do need to manage the software, I recommend Bitminter as it is the easiest to setup with.)

Another problem with the ASIC from an investment standpoint is that it is a depreciating capital good.  As the competition for hashrate continues (see this recent Bloomberg cover story) the network difficulty for Bitcoin increases dramatically by 10-30% at each reset (essentially every 2 weeks).  Thus even if you do mine enough BTC and/or it appreciates in value to the point where you pay off the initial capital costs, you will unlikely be able to resell the ASIC to anyone (because why would a buyer want to purchase a product that is no longer profitable in hashrate?).  Thus the only option you then have is to turn the ASIC box on to work on a different SHA256d proof-of-work cryptocurrency.  CoinMarketCap has a list of other altcoins, nearly all of the ones currently listed after #15 are SHA256d-based.

And if you want to try and use CGMiner or cudaMiner (for Nvidia cards) but are not sure how to, I recommend watching this video:


See also:
Should you buy an Alpha Technology ASIC for Litecoin mining?
Why it is impossible to profitably mine bitcoin (BTC) with GPUs — but still quite profitable to mine litecoins (LTC)
Dogecoin faucets list

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Building Smart Property Applications: Colored Coins and Mastercoin

[Note: below is my recent article published on CoinDesk.]

Cryptoledgers such as those utilized in cryptocurrencies like Bitcoin and Litecoin have the ability to be employed in other capacities.  They are not merely one-dimensional, one-trick ponies relegated to simple fiat-only exchanges.

For example, last week Kyle Torpey published an overview of several upcoming projects that utilize the Bitcoin blockchain to provide new features and financial instruments for users globally.  While it is uncertain that any or all will be successful in accomplishing their goals, these new innovations, like Namecoin before it, show that cryptoledgers can be integrated to provide rich functionality beyond the current token system.

For those unfamiliar with Namecoin, it currently acts as a decentralized DNS system that makes domain name censorship difficult, if not impossible.  It was created in 2010 as a modified version of Bitcoin and in 2011 the mining of Namecoins (after block 19200) was effectively merged with Bitcoin through a software update (e.g. pools had to use a new software release).  While Namecoin provides DNS functionality it can also be utilized to be used as a messaging system, torrent tracker and even as a notary (which other cryptocurrencies can do as well).

The next release of Bitcoin currently being developed, version 0.9, will include a number of changes.  In the words of lead developer Gavin Andresen it includes the ability for “developers [to] associate up to 80 bytes of arbitrary data with their transactions by adding an extra “immediately prune-able” zero-valued output.”

What this allows for is a little more space in the output section to provide users the ability to add some new data (such as a distributed contract) to be included via a hash.

Why is this important?

In 2012, Mike Hearn (a Bitcoin developer now on the board of Circle) gave a presentation in London in which he describes other financial instruments and practical business uses that a cryptoledger can provide through the use of “timelock” (technically referred to as nLockTime).  This makes it possible to build ‘smart property’ or contracts that in turn create a distributed digital verification system that bypasses the need for a central repository.   A couple examples Mike gives are the transfer of goods (such as a car) and the execution of a trust fund (through a will), both of which can be conducted without many additional intermediaries.  For example, if a car ignition system is reengineered to connect with a cryptoledger protocol, it could enable car owners to buy and sell vehicles remotely via trusted timestamping.  The execution of a will (e.g. disbursement of a trust fund) is also possible, albeit slightly more complicated in that someone would need to build a system that can scan obituaries for deaths and notify the blockchain of any changes.  In actuality the potential applications can be expanded to anything that involves rights verification such as stocks, titles to houses, digital media as well as the keys to houses and cars.  In fact, this past fall Mike gave another interview describing these potential applications in more detail.

Coloring within the lines

Another potential way to utilize a crypto blockchain to verify wares is through a process being developed called Colored Coins.  In a nutshell this endeavor allows users to “color” a token to represent a specific asset such as a car, home, boat, commodity, shares, bonds – virtually any type of asset (e.g., 0.5 BTC colored green to represent your home).  These tokens can then be exchanged, just like bitcoin tokens, by anyone anywhere.  This enables a decentralized, trustless form of asset management that uses a blockchain as both a ledger and transportation mechanism.

I spoke with Alex Mizrahi, who is leading the development of the Chroma Wallet used by the Colored Coin project.   According to him, “It is going to be very easy for the asset management industry as a whole to use Colored Coins.  For example, some of the first places we are going to have adoption will likely be real-estate and portfolio management.  In fact, for any type of asset management it’s going to be simple to issue his own color that represents his goods.  A portfolio manager can issue one color that represents a portfolio of stocks backed by the real holding and sell it globally.  If he is savvy and his products are good, his colors are going to have demand.  So transferring ownership is very easy, quick and safe — just like bitcoins.  In the real estate industry someone can issue their apartments using colored coins and have them float on the blockchain, or manage time-sharing based on color.”

I also spoke with Amos Meiri, head of dealing at eToro and also a member of the development team for the Colored Coin project.  I specifically asked him if it would be easier to simply conduct all trade privately at the centralized exchange where it will be more scalable and private.  In his view, “Centralized exchanges definitely have their advantages, but colored coins can be useful for following reasons.  First, users do not need to trust their bitcoins to a centralized exchange.  Companies cannot manipulate ownership records (to commit fraud, for example).  So basically, if somebody gives you an IOU, it isn’t a good idea to leave it with the person who issued it or to affiliated parties.  Another reason is that companies cannot control how its shares are being traded, thus it cannot block trade.   And lastly, there is no need to maintain servers or manage security due to its integration with the blockchain.”

While this is obviously easier said than done, as noted above, this idea of using cryptoledgers to manage smart property has inspired and motivated numerous other groups to work on similar efforts.  For example, Counterparty.co was recently launched this month.  Its mysterious, relatively anonymous development team has released similar open-source applications, documents, binaries and tools that allow users and entrepreneurs to build smart property functionality such as derivatives and dividends in a decentralized manner.  And three days ago, Jon Southurst discussed several other groups including Reality Keys which can utilize a crypto protocol to build a predictions market or a way to hedge against currency fluctuations.

Masters of the cryptoverse

This past week I spoke with Taariq Lewis, the founder and CEO of BitcoinBusiness, a Bitcoin Advisory firm and he is also the Smart Property and Business Development Lead of the Mastercoin Project.  Mastercoin is a crowdfunded, non-profit endeavor to create an open-source  distributed exchange protocol for Bitcoin.  The MC project has received more than $3 million in crowdfunding which has been used to pay for bounties, build tools and write documentation all of which is ultimately released open-source.

According to Taariq, “We are on the tip of the iceberg of the democratization of upper level finance and investment management.  One apt analogy is that the current system involves a highly siloed, highly centralized organization reminiscent to the music industry prior to P2P innovations.  We are now approaching the first wave of people being able to distribute financial products to each other on a peer-to-peer basis.  While this obviously has regulatory repercussions such as the SEC and CFTC oversight in the US, there is no ‘Wolf of Wall Street’ in crypto.  In fact, projects like Colored Coin, Counterparty and Mastercoin will create applications that will decentralize stock and bond exchanges allowing individuals and entrepreneurs to build dividend products and distribute the assets without middlemen.”

I also spoke with David Johnston, managing director of BitAngels and a board member at Mastercoin.  In his view, “Cryptocurrencies are more than a payment network, it is more than a new type currency or store of wealth.  It is a whole new platform and is a way for people to now make programmable money and that gives rise to smart contracts.  Now that this money is programmable I can put it into applications, I can create other digital tokens.  That’s what really gets me excited where anyone can build anything.”

The Mastercoin platform is still a work in progress and has gone through several iterations based on community feedback.  It also faces market competition from several others in this space such as Open-Transactions, Invictus (formerly BitShares) and potentially many others that learn of the potential business opportunities.   And as a consequence, it looks like a promising area for Christensen-style innovation.

Outside the dev world

For perspective I had an email exchange with Ryan Orr who is a professor at Stanford University (teaching Global Project Finance and Infrastructure Investment) and chairman at Zanbato.   He noted that, “with the recent wave of regulatory actions, I am personally feeling quite excited about how the “smart property” projects evolve in 2014.   It is starting to feel like smart property could be a much lower path of resistance for the bitcoin protocol as it establishes a “non-monetary” form of use that fulfills a valuable social purpose.  And thus it should not be viewed as a direct threat by regulators who are afraid of losing monopoly control of money. It is the “duality” of purpose of gold, where people can hold it under the auspices of non-monetary purposes, but also hold it for monetary purposes (eg. a hedge against inflation), that makes it so difficult for the governments to totally eliminate it as a form of money (even though the US government did try to do so in 20th Century).  If bitcoin can develop a similar duality, where the ‘smart property’ use makes it legitimate, and then people also can secretly hold it as an uncorrelated hedge against government dysfunction, then that could be pretty interesting.  In sum, it feels like the ‘smart property’ could become the ‘formal, legal, legitimate’ face to the project that can develop independent of how the regulators rule on the use of Bitcoin for monetary purposes.”

In addition, I also spoke with Ben Davenport, an angel investor and a member of the monetization team at Instagram.  While he does not necessarily endorse one specific project, in his view, “colored coin technology allows such centralized assets to be traded in a completely decentralized way.  Every single equity in the world has a central issuer — the company itself. But imagine the power of being able to make a trustless trade of stock for bitcoin with a stranger, at a distance, with no third party involved. With colored coins, I can construct a single atomic transaction which encodes such an exchange. That, to me, is the most important basic thing that colored coins can enable.”

The disruptive potential of smart property for the entire financial industry, not just fiat credit facilities, is enormous.  Charles Stross, the British Scifi author, recently criticized Bitcoin and the cryptocurrency endeavor, wishing that it die a quick death (in fire no less).  While his contentions were fallacious on a number of counts (especially regarding the environmental impact), ironically, he previously predicted seven years ago that near-future scifi authors are still probably missing something disruptively as large as the Internet 20 years ago or the smartphone was this past decade.

In other words, just as rewatching older scifi films that failed to foresee drones and self-driving automobiles seems dated, the portrayal of centrally managed financial products may one day be viewed as an anachronism of our not-so-quaint analog past.  Thus, Stross’ prediction of another unforeseen invention could very well be these smart property applications and digital financial instruments that are managed and transported by the very same cryptoledgers he dreamt of burning.

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SilverFish, a Chinese Scrypt-based ASIC mining company, has vapor-like attributes

[Note: This is a slightly updated version of a post I made on reddit yesterday]

A new ASIC service/product just hit Sina Weibo (though it is not currently trending on Baidu or Weibo). They have announced that their ASIC mining systems for Scrypt will be turned on around June 1, 2014. They estimate that their product is faster than GPU mining in terms of hash / power consumption (~300 kh/s at 5W versus 160W for a Radeon 7850).

SF are accepting pre-sales for shares into this company (similar to ASICMiner business model). For 0.5 BTC you can buy 1 share of stock (until January 20th, today, when it goes up to 0.7 BTC).

Very little is known about the company, there are no personal names (the laoban could be Li Jun, 李钧) or business addresses attached to it. If you create an account and log into the system the share availability fluctuates widely but it is not clear why.  Yesterday it went from 690 to 802 in about 10 minutes and it is currently, as of this writing, at 1022.

According to his Weibo account, the founder of SilverFish is purportedly the same guy who founded a large Chinese BTC and LTC mining pool, F2Pool and another major website yibite.com.1  Both he and the operations are located in Beijing.

According to ifeng.com (a Chinese financial news site), the CEO of Yibite.com is 李钧 (Li Jun).  And according to a comment on reddit, this same mysterious CEO/COO also supposedly worked on Avalon / 阿瓦隆, the first successful ASIC mining machine for BTC.  Perhaps Guo Yifu (郭义夫) may know who if Li Jun is the mysterious CEO/COO since he also works on the Avalon project.

However, until they show a video of the actual chips with screenshots of the hashing results, do your due diligence.  For example, one other comment mentioned the boondoggle that was/is ScriptASIC.org. And another example, a couple weeks ago I wrote an in-depth article about similar credibility and claims issues with the Alpha Tech Scrypt ASIC.  I will update this post if I find anything new.

  1. A reddit comment says it is one of the biggest pools, it may be, at least as the hashrates could collectively be part of P2Pool. However if you look at the hashrate pool comparison charts LTC / BTC, F2Pool is not listed. Thus it is likely part of P2Pool. []
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Smart Property in the news: Counterparty.co

A new project that utilizes a cryptoledger to create decentralized, distributed trustless asset management has been making the rounds: Counterparty.co

It’s legitimate in terms of the codebase and functionality.  Thus it will be very cool to see how other similar projects (Colored Coins, Mastercoin, etc.) germinate as well.  The disruptive potential of these innovations are enormous.

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Evolution of the cloud

Spent several days earlier this week with some brilliant software engineers who not only were domain experts but were very articulate about topics beyond the sci-tech world.  I posted a couple of tweets (here and here).  I’d like to thank Matthew Wilson for arranging the brainstorming sessions as well as Patrick Michaud, Larry Wall, Jonathan Worthington and Ingy for their hard work and creative collaboration.

Some of the topics and projects we discussed:

  • Firebase
  • Hadoop ecosystem
  • CaaS/SaaS/PaaS/IaaS (OpenStack, Docker, CloudFoundry, Stackato)
  • Intentional Software
  • Semantic Web, Programmable Web
  • Git
  • Domain-driven paradigm (Eclipse Xtext/DSLT, OMeta, Colm)
  • Joyent Manta
  • Rackspace ZeroVM
  • Meteor
  • Reactive paradigm
  • Cloud Haskell, Persistent Haskell

For those interested, if you really want to know about the hottest trends and innovations in software, be sure to look at the upcoming FOSDEM conference schedule.

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OpenStack: Reflecting on the FOSS paradigm in a post-Snowden world

This past week I attended a business meeting in Houston involving several leading Perl developers.  During one segment of the meeting we discussed OpenStack as part of a mastermind brainstorming session.  OpenStack is an open source IaaS platform that has a lot of industry wide support, creating a mature product that can compete with Amazon’s EC2.  During this session one participant found and showed the following clip (see below).

In April 2013 (two months before Snowden leaked documents), Nathanael Burton, CIO of the NSA, gave a talk on how the agency adopted OpenStack internally.  He discussed how after seeing some demos of it at various conventions, they brought it into a lab environment in Fort Meade whereupon they quickly were able to scale it for production loads all with minimal staff.  The interesting parts are not so much that open source software is being used by an intelligence agency but rather the euphemisms that are used throughout this presentation (like “external partners”) which then raise questions: were these “external” sources aware of how their databases were being tapped into?

It’s a relatively straight forward presentation yet again there are quotes that make you do a double-take now due to what has been uncovered the past 7 months.

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Cautious odds and ends for the weekend

  • A friend pointed out that The Guardian relinked to my story on Huobi and the CEOs personal bank account.
  • Last week Wired ran a story about BTCChina and the various regulations that are quickly rearranging the marketplace in China.  They quote one of my friends, Scott Freeman, who I interviewed for my book (disclosure: I do not own any equity in any exchange).
  • There is a big discussion now on reddit about Huobi removing the option to deposit fiat through the bank account of the CEO.  My only comment is I have not heard or seen anything about indictments/arrests/etc mentioned in subthreads there.  Thus the rumors on that thread about prosecution/lawsuits are most likely just FUD.
  • On a few other reddit and BTCTalk threads there are comments by people saying how Alibaba-owned sites still have cryptocurrency-related wares available and this somehow disproves the new rule passed down by Taobao.  Again, the new rule (Chinese) won’t go into effect until January 14th.  Furthermore (and this is my own speculation) even if all of the wares listings are not purged immediately, that does not mean you should rely on these ecommerce sites for your business model in the face of such rules.  At best it is a short-term solution, part of the cat-and-mouse game.
  • Tech In Asia has a good year-end summary of events in China regarding Bitcoin noting that “smaller sites such as Bitfash and IWannaBuy still accept Bitcoins, even for payments.”  TIA also does a pretty good job breaking Asian-related cryptocurrency news and hasn’t fallen into permabull mode.

My last comment regarding all of the news is one of caution.  Do your own due diligence before investing in a particular asset.  And remember, despite what a bull (or bear) might contend are blue skies and lollipops, there are many risks that could swing price levels around, quickly.  Caveat emptor.

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Colored Coins and other ‘smart property’ extensions

I am not necessarily endorsing the use of this specific project but Colored Coins (Chrome Wallet) illustrates some of the cool potential features that a crypto protocol like that of Bitcoin (or Litecoin) can be used for.


Kyle Torpey has also written an excellent summary of the major known projects in this piece: Bitcoin 2.0 Explained: Colored Coins Vs Mastercoin Vs Open Transactions Vs Protoshares

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New Taobao rule banning the buying and selling of crypto currencies

Taobao is one of the largest ecommerce platforms in China (it is part of the Alibaba group that also own Tmall).  I have written about it in the past (1 2 3 4) and recommend readers peruse a good piece from The Economist detailing the ecommerce empire that is Alibaba.  In addition, I do not think the analogy that “Taobao is the ebay of China” is entirely accurate — the WSJ has a detailed explanation for why this is a poor analogy (different business model involving ads).

Earlier this week Taobao published a new rule (Chinese) which goes into effect on January 14th.  The new rule bans the buying and selling of bitcoin, litecoin and any other crypto currencies (it actually includes a long list of altcoins).  It also bans the buying and selling of any crypto currency mining tutorial and guide as well as any hardware and software related to mining.

There are a couple threads on reddit that discuss the potential impact for the exchanges and what kind of wiggle room they may have (1 2).

Again, while the word “voucher” is not mentioned, this new policy probably will not help the recently created voucher workaround that BTCChina just implemented.  Thus the cat-and-mouse game continues.

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Why are exchanges in China still allowed to operate?

I am asked this question frequently and currently I cannot give you a non-speculative answer.

My guesses are thusly:

1) That policy makers, despite knowing Bitcoin/Litecoin has the ability to bypass capital controls would still like to see if there are other potential “legitimate” uses for it.  Remember, this is a developing country that is trying to turn Shanghai into a real international financial center (pdf) through initiatives like the new Free Trade Zone.   So for example, maybe they have been briefed on the ‘smart property’ features of the crypto protocols (e.g.,  secure time-stampingproving ownership of tangible propertydecentralized DNS and new ways to sign contracts).  I doubt this is the case though.

Or:

2) Instead of being relegated to a paltry few options such as owning multiple apartments and/or sometimes sketchy wealth management products (WMPs) perhaps they would like to permit residents to diversify and try out new financial instruments.  And as happenstance cryptocurrencies are seen as a new alternative asset class.  While the PBOC officially stated that private ownership and public participation are okay for now, they do not seem to view cryptos as meeting their criteria as a “legitimate” asset class, withholding their stamp of approval.12

Remember, because of strict capital controls [pdf], PRC nationals cannot transfer more than $50,000 in foreign currency abroad each year, the domestic banking system has a very large captive consumer base from which to essentially extract rents from (e.g., no need to innovate as the market is essentially walled off from outside competition).  Again, these limitations are expected to change over the next decade, though officials and analysts have been saying that since at least 2008 when I first arrived in China.3

Or:

3) Perhaps I am an incorrect in my assessment of the PBOC which has been based on the stern comments from Sheng Songcheng, head official of investigation and statistics at the PBOC (see his recent essay “虚拟货币本质上不是货币” as well as my commentary here).  In contrast, my friend over at Aha Moments wrote this past week:

Of course, to a certain extent this merely reflects the general laissez-faire approach which characterizes the Chinese government’s approach to private wealth, an aspect of Chinese reality which understandably attracts little coverage in countries with more voracious governments. The reality on the ground is in fact almost unimaginable to younger inhabitants of, say, the United States or Western Europe. Not only is there is no capital gains tax in China, but C2C bank transfers are for the most part instantaneous and unlimited. I can send 50000 yuan to my buddy in Xinjiang and he will have it in seconds, all for a token transmission fee. You can also walk into any bank in China with the equivalent of one million euro in cash and deposit it with no questions asked. Simply put, the government’s policy is to leave people and their money alone. While they do endeavor to tax some income at the source, for the most part that’s about as far as they go.

Aha does have a valid point in terms of the C2C transfers, it was always easy for me to transmit this specific type of transaction nearly instantaneously (assuming you are using ebanking or an ATM — face-to-face service is still quite slow and tedious).  So perhaps there is a liberalizing strain within the PBOC policy making that has remained in the background regarding cryptocurrencies.  I don’t buy that though either.4

Or:

4) That policy makers are biding their time to see what, if any, international consensus is built around the regulation and management of exchanges.  There is no global standard yet, Singapore’s government is taking a hands off approach towards cryptocurrency right now whereas Denmark plans to regulate and oversee its use.  In the US, all fiat exchanges have shut down with the exception of Coinbase and that is because its founders had previous business relationships with Silicon Valley Bank (the partner bank).5 And even with this exception, Coinbase technically is not an exchange per se, but rather receives its coins through other sources like Bitstamp.net.

I think this is the most likely, as regulators can put a squeeze on the industry as a whole, forcing artificial consolidation and/or bankruptcies quickly.6 Then the PBOC and other peer organs will only have to worry about a handful or participants instead of 20+.  We already see the verification process being rolled out as customers at large exchanges such as BTCChina and OKCoin require national ID names and numbers in order to register and conduct transactions.  This will likely allow the PBOC and other departments to track capital flows to specific individuals.

A sell signal?

Yesterday the Financial Times published a report detailing the Chinese regulatory environment for cryptocurrencies.  It reconfirmed what I discussed a couple weeks ago, that fiat deposits at several exchanges, notably Huobi, are being transmitted through the CEOs personal account.

What struck me however was how several entrepreneurs went on record with FT, using their own identities to explain how they were bypassing regulations and/or finding loopholes.  Of course the inner libertarian in me cheers for a liberalized, self-organized world but a couple of their viewpoints seemed naive, short-sighted and wishful thinking.  And will likely end bad for them.  In fact, yesterday I was corresponding with Vijay Boyapati (who incidentally is the same person who convinced me of the long-term merits of cryptocurrencies and their protocols) and he asked me about the recent rise in price levels and if had to do with liquidity from China.

Here was my response:

I do think that the added liquidity (or at least the appearance of liquidity, who knows how deep it is on the Chinese exchanges) is helping buoy the price levels.  I don’t think it will last on the Chinese side, especially with articles like that from the FT.  PBOC staff read that newspaper, those comments are just going to make the officials want to close all the loopholes even more — at least that’s my guess.

24 hours later and the price for BTC token has dropped from ~5800 RMB to 4900 RMB and LTC token from 180 RMB to 145 RMB.  Who knows why, perhaps it will jump back up to those heights again tomorrow.  Self-reported volume on OKCoin and Huobi are still roughly the same as they have been the last few days.  Perhaps it is just the typical volatility.7

Yet the longer term issue still remains unresolved for several of these exchanges named in the FT piece: how to legally keep fiat liquidity flowing in both directions.  Are investors at exchanges prepared for the possibility of yet another December panic sale or hedged against a possible lower liquidity environment?  What about the personal liability issues that someone like Li Lin is now potentially facing in the event that a future audit takes place?  Perhaps now is the time to contact a risk management attorney to see if there other upsides (or downsides) to this nebulous guidance.8

  1. Getting an official seal, or chop, is very important for tax purposes in China.  See Chinese Chops Or Seals from About.com and What is a Chinese “Chop” or Seal? from Yahoo! []
  2. For more specifics and commentary about the PBOC notice on December 5th readers are encouraged to view: China’s Statement on Bitcoin is Open to Interpretation from CoinDesk and Despite panic, China’s regulation of Bitcoin leaves room for optimism from Tech In Asia []
  3. HNWI and financially savvy individuals can bypass some of these regulations by sending RMB-denominated funds through Hong Kong.  See This issue was directly discussed in Getting Money Out Of China. That’s Illegal. from ChinaLawBlog and In Reversal, Cash Leaks Out of China from The Wall Street Journal []
  4. This current stance by the PBOC seems to have taken many by surprise.  For example, back in October 2013 Bobby Lee was interviewed on a local station called International Channel Shanghai (video).  At the 12:38 minute mark Bobby says: “I hope personally to see more government regulation on bitcoin to clarify what businesses can and cannot do with bitcoin, to clarify how individuals can and cannot buy and sell bitcoins.”  Again, I have not spoken with him, but I doubt what he had in mind was what the PBOC and other organs announced/enforced last month regarding banning 3rd party payment processors. []
  5. See Regulatory risks, challenges and opportunities of cryptocurrencies in China and elsewhere []
  6. This is all speculative but there may still be time for new market entrants to enter the industry and merge/acquire with competitors. []
  7. One new story that came out today is that Taobao has a new rule (Chinese) that will ban the buying and selling of crypto coins.  Thus it will purportedly impact vouchers such as those being offered by BTCChina. []
  8. I do not know if law firm Harris & Moure has any particular advice on these issues at this time, but Dan Harris publishes a popular site: China Law Blog that discusses many legal issues regarding the mainland. []
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