[Note: below is chapter 7 to Great Chain of Numbers]
No matter how you might have heard or learned about cryptocurrency, there are different ways to obtain your first tokens. You can mine them, you can buy them through an exchange (e.g., BitStamp, Kraken, BTC-e), or if you are a merchant, you can receive tokens for your wares.
Unfortunately mining Bitcoin profitably currently requires a significant capital investment in single-use ASIC hardware. While you could use a cloud-based hashing service such as Ghash.io or ASICMiner, you will learn very little of how the network actually works. In fact, even with an ASIC, most mining systems currently lack power to select or validate bitcoin transactions themselves; you are merely selling a computing service (hashing) to the mining pools.1 Another lower-cost option is that you could purchase a small USB ASIC miner (e.g., Bi•Fury); however, the problem is that you would need to rely on whatever token amount you generate to appreciate in value in order to pay for the electricity you expend in mining (e.g., if you generate 0.1 BTC that is worth $80 but it cost you $85 in electricity to generate, then you would need to wait for the bitcoin to appreciate; otherwise you are at a net loss).2
Over the past several years, one business model has emerged in the Bitcoin mining industry: preorders. Typically what this entails is sending X amount of bitcoin to an ASIC manufacture who will then use that bitcoin to invest, design, build and ultimately ship an ASIC to you. To maximize inventory, manufacturers create batch orders with wait lists. The farther you are down the list, the longer it takes to receive the machine and hence recoup your initial investment. While you can try your luck in getting the first batch of a new ASIC prior to its release, you are probably more exposed to risks with fewer potential upsides than downsides. Your capital is tied up in a depreciating asset – a machine that unlike a GPU that can be resold to gamers and 3D designers – has progressively lower resale value and has a singular use that may or may not be delivered on time with unknown hashrate performance deltas.3
Or you could be thinking, just like the first people who managed to get an Avalon batch last winter or a new terahash-level CoinTerra machine in January, perhaps you might be lucky enough to get placed high on the list for the upcoming KnC Neptune; but the odds are you will not, especially if you are reading this and have not pre-ordered it.4 One illustration of the risks is the time lapses and project delays involved in Butterfly Labs (BFL) ASIC orders last year. BFL originally announced a variety of different desktop ASIC machines in July 2012 and hundreds of customers subsequently preordered them with bitcoin.5 Yet due to a number of developmental and testing problems shipments were continually delayed over the course of the following year.6 For instance in March 2013, a close friend of mine who is a Bitcoin investor paid 50 bitcoins for four ASIC machines from BFL, each capable of mining at 25 gigahashes/second.7 He received them more than six months later at the end of November. If instead, he had held that 50 bitcoins, he would have been able to sell the tokens for $40,000 – $50,000 on many exchanges.8 Consequently, if you plug that 100 GH/s mining rate into a mining calculator, he will not even be able to mine 1 bitcoin for the next year at the current difficulty rating let alone ever be able to mine the 50 bitcoins it cost to buy them.9 Caveat emptor.
If history is any guide, looking back at the California gold rush (the ‘49ers), the firms that ended up financially solvent were merchants and service companies such as Samuel Brannan, Philip Armour, John Studebaker, Levi Strauss and Wells Fargo.10 Those who also made and sold mining equipment (picks, axes, shovels, sluices) had mixed results. Yet the group of people that typically fared the worst financially was the miners themselves, as they were nearly all exposed to various types of risks (upfront capital costs, land title lawsuits, inclement weather, sickness, landslides and cave-ins) and as a consequence, most ended up bankrupt.11 Yet, if you feel the urge to mine – to better understand the blockchain verification and network – another alternative is to mine an altcoin such as Litecoin or Dogecoin, both of which are Scrypt-based. Scrypt is a different proof-of-work (Bitcoin uses SHA256d) and requires a larger memory pool to utilize which in turn makes it more resistant to the rapid performance increases spurred by ASIC development.12 Thus you can still use a GPU that has resale value and utility beyond mining.
Chapter 2 briefly discussed a milestone in the Bitcoin ecosystem, the exchange of ten thousand bitcoins for a pizza in 2011.13 This is considered the first publicly known transfer of value and thus became the original foundation for fiat exchange.14
Since then, the merchant ecosystem has grown to encompass an estimated 50,000 online vendors. BitPay is one of the largest startups in this segment, providing an electronic payment processing system with bitcoins for online merchants.15 In 2013 it processed more than $100 million in bitcoin transactions and has signed-up more than 20,000 merchants.16 Gyft, a digital and mobile gift-card wallet (who is partnered with BitPay) that accepts bitcoin as a form of payment, allows customers to buy, send, receive, manage and redeem digital gift cards via mobile devices and works at more than 100,000 retail stores.17 On November 27, 2013, Shopify, a large ecommerce platform, announced that its 75,000 merchants now accept bitcoin as payment.18 On January 9, 2014, Overstock.com began accepting bitcoin for payments. On the first day it processed $126,000 in sales with bitcoin and less than two weeks later that amount climbed to more than $500,000.19 Subsequently, on January 23, 2014, TigerDirect announced it would begin accepting bitcoin as a form of payment and within one week processed $500,000 in bitcoin payments.20 On February 27, 2014, Coinbase announced that it not only has over one million consumer wallets – up from a mere 13,000 at the beginning of 2013 – but that more than 25,000 merchants use the Coinbase platform.21
On a nearly daily basis other vendors and merchants independently add bitcoin payments as well. Zynga, the developer behind social games such as Farmville, announced on January 4, 2014, that it would begin accepting bitcoin as payment (via BitPay).22 Previously, on May 9, 2013 HumbleBundle (in partnership with Coinbase) announced that it would begin accepting bitcoin as payment for its game bundles (later expanded to the entire store).23 Another example, during CES 2014, Formlabs, the maker of 3D printers announced that it will now accept Bitcoin payments in its online store.24 And on February 4, 2014 CheapAir.com announced that it would begin accepting bitcoins as payment for hotel stays (it had earlier accepted bitcoins for flight bookings).25
In chapter 3 I introduced, Jon Holmquist who works with Ripple as the Community Liaison, he is also the founder of Bitcoin Black Friday (BBF), the largest e-commerce day for Bitcoin-related purchases, which takes place the day after Thanksgiving filtered through one site. One of the reasons he was motivated to start BBF in the fall of 2012, “I was working with a Bitcoin merchant and we started doing various sales promotions to drum up support from the Bitcoin community yet there was – ironically – no central avenue, nowhere to funnel them to. I also noticed a lot of merchants individually conducting sales promotion campaigns and thought a central launching pad would be a great experiment to show a real empirical case-study of Bitcoin ecommerce in action.”
Holmquist built and the consumers came. In 2012, the first year BBF worked with 60 merchants, 600 in 2013 and they hope to work with 6,000 this year. BitPay alone processed 6,926 bitcoin-based transactions on November 29th last year up from 99 transactions on the same day the year before.26 Yet to Holmquist the big number that often is overlooked is the fact that BBF customers donated over $1 million worth of bitcoins to charity. If this had been done with normal credit card transactions, fees of 5% would have been assessed. Instead that $50,000 in surcharges went to a charity instead of a credit card company. While this event may be an outlier for the ecosystem, for Holmquist “this is just the beginning to enable easier transfer of value to consumers. And this is also an area where entrepreneurs and developers can continue to simplify the process for merchants wanting to support cryptocurrencies by providing turnkey services such as plugins.”27
Perhaps this specific incarnation of virtual money (bitcoin) is a fad and merchants will drop all support for it. If that is the case, switching to another ledger would be relatively simple, as both the front end and back end of existing merchant systems could use other altcoins or altprotocols. Yet these case-studies referenced above serve as empirical examples of how value can be transferred globally, to anyone, safely, reliably and nearly instantaneously without any middlemen or institutions.
Developer, Developers, Developers
One key theme that all the investors and software architects that I spoke with has been that the ecosystem is in continuous need of competent, creative programmers. And because the space is so new, so fast and quickly evolving, the barriers to entry are very low. Thus novice coders with business acumen could potentially find entrepreneurial opportunities in the ever-growing ecosystem.
I spoke with Celso Pitta, the founder of BTCJam.28 Founded in 2013, BTCJam has expanded into 131 countries, with 12,000 users who have provided $5 million in bitcoin-based loans to one another. It has done this by fusing a global P2P payment protocol with a credit score system, matching loaned bitcoins to borrowers. Pitta is originally from Brazil and previously worked with statistical models for the credit card division of Citi. He was motivated to create a P2P lending platform primarily because of the increasingly high interest rates on credit cards in Brazil, some as high as 200% a year.29 In contrast to developed countries where credit is relatively cheap because there is a dearth of credit options in emerging markets such as Brazil, consumers are left with few alternatives.30
According to Pitta, “unless you have access to the FICO credit rating system, it is very difficult to receive a credit line.31 And due to their developing status with a lack of financial institutions and infrastructure, most emerging markets do not have a credit rating system capable of accurately gauging the creditworthiness of borrowers. In contrast, by using an open registration, where a user can submit any pertinent details they want, we have built a statistical engine that can sort through the quality of their data and provide an increasingly accurate rating. Bitcoin is a perfect microlending platform in that its 8 decimalization units provide flexibility for fractionalization and the transmission is both secure and relatively fast. In contrast, with fiat, merchants and lenders not only risk fraudulent chargebacks but expensive fixed costs irrespective of amount lent (e.g., 10% fee on $1 lent). With bitcoin, there is no way for someone to game the system with chargebacks – once the token is sent, it is sent – transactions are irreversible. And while there have been cases of a borrower who is unable to pay back a loan in our system, our fulfillment rate is now at 98% compared to the global average in 92% for P2P lending.”
According to its 2013 report, LexisNexis found that online merchants pay $3.10 for each dollar of fraud losses incurred via the internet (e.g., on top of fraudulent charge-backs, fraud monitoring, and bank fees, the merchant must replace the item(s) that are lost).32 Cryptocurrencies are a solution to this problem as they cannot be recalled once sent or double-spent. Pitta thinks there are other opportunities in this segment for entrepreneurs who want to help enable the unbanked and underbanked. In fact, he has found that borrowers are very motivated to obtain a credit line and as a consequence learn and educate themselves as to what Bitcoin and cryptocurrencies are in order to use them. Yet there are still challenges as well: “The friction between obtaining fiat such as Real (R$) and the regulatory framework which is still a grey area in most countries still create barriers to entry for both parties.”
For comparison US-based peer-to-peer lenders such as Prosper and Lending Club issued $2.4 billion in loans in 2013.33 Why is this important? According to the International Payments Framework Association, through 2010 the average cash flow margin on global transaction services (GTS) was 38%, making it a steady stream of revenue for banks.34 Attractive margins like this makes it an opportune segment for technological disruption and innovation.
In February 2014 I spoke with Joel Dietz, CEO and founder of Evergreen.35 Evergreen is a protocol layer that can connect off-ledger with Bitcoin and was designed with ease of use in mind. The protocol enables developers to build an infrastructure on top to create mobile web apps that natively accept micropayments. With this experience Dietz subsequently sees smart contracts and DAOs as having a big impact in the future. According to him, “I think many of the functions that contract designers (such as attorneys) do today can and will be automated – and that their current jobs will likely be coded away. Contracts are ultimately just code and are the new innovations and apps to this space. In fact, I think a variety of smart contracts will be available for use by the end of the year – easy to use smart contracts with escrow and verification ability. Of course, they will have to build the platform first. But I think they’ll be relatively easy to create because prototype code already exists.”
In his view, decentralized autonomous organizations have “many benefits from a funding standpoint as they enable organizers to simply check off the boxes. Cryptoledgers and multisignature functions provide the auditing and logistical abilities. This is a transparent, straightforward method and is quantifiably better than other crowdfunding techniques. For instance, because of the way the current system is designed, there is no way to engage and reward userbases directly, especially early adopters who contribute content. In the case of Twitter, those who tweeted and convinced their friends and families to use it were not rewarded – rather only the equity holders (the founders and investors) were able to receive compensation. In contrast, crowdequity can engage and incentivize adoption creating an early userbase with rewards for content and marketing. And the easiest, most transparent method to finance crowdequity is with cryptocurrencies managed by a DAO.”
BankToTheFuture is one the first crowdequity platforms in this space and has 10 startups working on Bitcoin-related projects.36
Adam Levine has been working on a project involving Kickstarter coins that provides similar crowdequity functionality rewarding early adopters and users for their support.37 In fact, Levine proposed not only a new cryptographically controlled manner by which companies and organizations can raise funds (via an initial float of brand-specific cryptocoins), but also how in the event that a company falters or fails, a reverse merger can take place utilizing these tokens:
Even after a company has exhausted their potential ideas and abandoned such a coin, the very fact that it is so inexpensive could be its resurrection. Another company could opportunistically buy those very cheap and abandoned shares, then announce they’ll be honoring them for their service or product with the rate of exchange being the characteristic that defines the intrinsic value since they are one and the same.38
On February 17, 2014 a new project in the crowdequity space was unveiled called, Join My IPO (JMI).39 It was developed by Amos Meiri, a Colored Coins team member, and will issue its first coin in the coming months. The core idea is that individuals (backers) can invest in specific people before launching his or her own venture, campaign or career is launched. So for example, entertainers, entrepreneurs and artists can directly raise money through coin issuance to backers (e.g., friends, family, fans). In fact, anyone with an account can issue their own customizable cryptocurrency, offering it to anyone else who has downloaded a Chromawallet (the same wallet used for tracking Colored Coins). Through the JMI website, ‘talent’ can customize what kind of award to give to backers such as quarterly dividends or percentage of income, which can then provide access to wares that the talent creates (e.g., books, CDs, schwag, concert tickets).40 And by doing so, it is expected that celebrities issuing such coins could strengthen the bond with fans. Simultaneously, these tokens can be traded on an exchange, producing real-time signals to investors and backers as to the relative strength and health of a particular talent.
While, Max Keiser, a TV host and Kim Dotcom, an internet entrepreneur have both issued ‘coins’ – MaxCoin and Megacoin respectively, these tokens do not offer much new functionality compared with existing altcoins.41 Yet projects like LTBCoin and Join My IPO will enable users to not only launch a custom token through existing infrastructure, but to redeem these tokens for actual value (e.g., concert tickets, books, dividends).
In terms of credit scores, Nick Szabo has previously described several use-cases for leases and creditor liens whereby after a set of conditions is met (or not met); control is reverted back to the original owner.42 While cryptoledgers and cryptoprotocols currently have the ability to provide pseudonymity (and potentially anonymity through Dark Wallet and ZeroCoin), there may actually be incentives for some users to reveal their public address. That is to say, for credit score purposes (e.g., lending), the more open you are about your transaction history, the more data a potential creditor has to gauge and quantify risk with. Thus, in practice Bob may actually have a publicly traded account that he publicly lists (on business cards, websites) but then he may have several other digital wallets in which he actually stores all transactions, savings and revenue. Szabo observes a similar dichotomy, stating “there’s a big trade-off between privacy and developing a reputation. Long-lived pseudonyms could also be used to develop reputations, but current regulations strongly favor ‘true name’ identity.”43 Thus, while it has become standard operating procedures to use a new random address for each transaction today, in the long-run the incentives to identify at least one of your accounts may outweigh privacy concerns.
Ease of use and simplification was another common theme that investors and developers reiterated. While those with enough technical acumen and computer savvy have become early adopters to cryptocurrencies, the vast majority of the population has difficulties in fully understanding not only how the virtual tokens work but also how to use, secure and store them.
Ease of use and discovery
Sean Percival, a tech-industry veteran who is now a venture partner at 500 Startups, explained to me that “when evaluating new startups in this space, I look at a number of criteria including the novelty of the service as well as the ease-of-use for consumers who will be able to interact with it.44 To both the developer and myself, it may be easy to download and backup digital wallets, but the vast majority of consumers do not have the time or inclination to devote to learning how this new type of bank account should work.”
In particular, Percival is interested in taking away complexity – moving the technical processes into the background making them invisible to users. Because he works hands-on with developers on how to make UX and UI flow easier for consumers, he sees numerous opportunities for businesses to simplify processes such as the sign-up process for a particular service (e.g., online wallets).45 Or in his words, “providing a frictionless funnel that enables consumers to conduct commerce without needing a technical background. When you swipe a credit card at a retail store a consumer does not have to pay attention to all the intermediary steps and that’s the way it should be with cryptocurrencies.” Nick Szabo calls this point-of-sale invisibility, “smart fine print.”46
While neither he nor most of the investors I spoke with are interested in fiat-token exchanges, he is increasingly interested in business solutions to concepts like proof-of-existence (i.e., whether or not a document is in a particular file) or proof-of-storage (i.e., whether or not a computer system has a certain amount of storage available). In his view, “building a team with the right combination of talent, leadership and marketing to build a profitable product that can be shipped in this space is the exception to the rule. New ideas like proof-of-storage motivates everyone to rush to the door, but only a few can get in and accelerate to consumer adoption. As a consequence, an important part of their marketing effort should be focused on user on-boarding and education that builds both trust and a “coolness” factor. You cannot force trust and coolness, once you lose it, it is almost impossible to get back.”
I spoke with Dan Roseman who is the founder of Coinality, a job board where employers and job seekers can connect for job opportunities that pay in cryptocurrencies.47 According to Roseman, “While I was familiar with cryptocurrencies in general, it was not until about April last year that I began to look for actual business development opportunities. I created the platform in September 2013 because I saw an unmet need in the community that other job boards did not have; receiving bitcoin as compensation. Since launching the platform, there are now over 1,600 registered members, with over 1,000 job applications received from job-seekers, and roughly 600 job submissions (openings). While all submitted jobs are vetted by humans, approximately 95% get published and the remaining 5% are usually spam or are irrelevant. Our team also works to find other openings on a variety of other job boards and make sure they are opened on Coinality as well.”
“While I work part-time with Coinbase in customer service, I currently work full-time on building out Coinality to be a real player in this segment. As a consequence I have first-hand experience and direct knowledge of the kind of jobs that businesses and entrepreneurs are looking for. Currently the single biggest demand are for C++ and Python. C++ was the language that Satoshi originally wrote the first Bitcoin wallet in and Python is frequently used by fiat-bitcoin exchanges. There is also a lot of demand for graphic design (logos and website layout) as well as marketing experts to help drive traffic to a site. Thus if you have those skillsets you will likely be able to find a job in this quickly evolving marketplace.”
Roseman pointed out why employers would want to find programmers listed on Coinality. On February 10, 2014, Mt. Gox announced that there was a bug affecting its wallet-system which could potentially enable attackers to double-spend.48 Mt. Gox was one of the largest fiat-exchanges and its announcement caused volatility in the marketplace. Yet the bug it announced (transaction malleability) was not only a known issue, but it had been on Gox’s radar for several years (e.g., its own internal wiki had an entry for it and several core developers had pointed out this issue before).49 The problem was not with Bitcoin itself, but rather Gox’s specific (error-prone) implementation of a wallet. Gox was originally created to handle the trading of a collectible card game called Magic: The Gathering and while the site served its original purpose, as it moved into the cryptocurrency arena its developers were unfamiliar with the needed security toolset to protect against this vulnerability.50 Thus, in Roseman’s view, “companies looking to hire developers with the necessary skillset and awareness of such exploits can be found on our job board, which hopefully will prevent such volatility-induced events in the future.” With outstanding debt of 6.5 billion yen ($63.6 million), on February 28, 2014, Mt. Gox filed for bankruptcy in Japan due in part to its internal accounting mismanagement as well as other technical issues; its creditor’s fate is uncertain.51
I spoke with Kyle Torpey, editor in chief at Cryptocoinsnews and member of the Bitcloud development team.52 Originally announced in January 2014, Bitcloud is an underlying protocol for decentralized applications that require bandwidth and storage. According to Torpey, “the initial idea was to have a ‘cloudcoin’ through a ‘proof-of-bandwidth’ but after some investigation and internal development the economics of trying to use a coin to back a decentralized application rather than a cryptoasset would not work the way it was envisioned. I believe Adam Levine came to the same conclusion for his own internal project LTBCoin at Let’s Talk Bitcoin.53 For instance, as you build more applications, the coin would likely appreciate in value and thus make services on the cloud more expensive due to fixed supply. Similarly it would be hard to balance because early adopters would be rewarded for sitting on tokens instead of using them, causing a “free-rider” problem that exists in Bitcoin and other cryptocurrencies. We have since switched frameworks and will now be an escrow service for bitcoin transactions. That is to say, Bitcloud will be 3rd party, an escrow service for sharing storage space. The way this will be done is through multisig transaction where you have multiple parties (Bob the storage provider, Alice the storage user) and Bitcloud is the 3rd participant, the mediator in multisig transactions.”
As discussed in Chapter 4, multisignature transactions involve two or more parties who must submit their digital keys to a certain address within a certain time frame for an action (e.g., releasing funds) to be executed.54
Torpey’s team is simultaneously building the first app that can utilize Bitcloud, “We want to build WeTube, a decentralized Youtube, which lives on top of the protocol and will launch simultaneously with it. I should note though that WeTube is a working title. We need to build Bitcloud first, so what we call WeTube will probably look completely different than what we have right now. The new funding model will work through a concept called Cloudshares, where with each bitcoin transaction a user would get a share in the entire Bitcloud decentralized app (an open API). Again, while the original idea was to use Cloudshares to monetize the entire Bitcloud network, we have decided to move the monetization process to the decentralized applications on top of Bitcloud. So the shares that someone receives for hosting content for WeTube would be shares of WeTube, not shares of Bitcloud. So it is really WeTubeshares, SocialDAshares, etc. For instance, if Bob purchased storage space from Alice he would use bitcoins as the intermediary token. In exchange he would receive a share of Cloudshares which then solves the early adopter “free-rider” problem because many adopters do not provide or generate new value as speculators. Another way to think of is, Cloudshares is like a share in decentralized app which continuously builds the entire network. In our view it is not a good idea to monetize the underlying protocol, because if you had shares in protocol layer then you would have to have dividends. Or in other words, one cannot invest in Bitcloud, only in the decentralized applications built on top of it. Thus Bitcloud is a free protocol, and we are not monetizing that aspect of it. Because that would mean the transactions between those hosting would be more expensive. Now, instead, we are putting the shares into the layer above Bitcloud, which will be divided by specific applications – including possibly a Facebook-like social networking service. As a consequence, apps themselves are not centralized in one system but rather will interact with a protocol, Bitcloud.”
In February 2014 I spoke with Nikos Bentenitis. Bentenitis is the co-founder of CoinSimple, vice-chair of the education committee of the Bitcoin Foundation and also creator of the MasterProtocolEducation.org project that aims to inform the community about the Master Protocol and Mastercoin. CoinSimple was briefly mentioned by Eddy Travia in chapter 6 and in Bentenitis’ words, “CoinSimple makes it extremely easy for e-commerce merchants to accept Bitcoin. With CoinSimple you can use any of the existing payment processors (BitPay, Coinbase, BIPS, GoCoin) and you won’t need any developer to integrate them to your e-commerce store. We have done the development for you and added customer analytics in a simple user interface.”
In terms of what may be the first use-cases of smart contracts working on next-generation platforms, he thinks that it may be, “the issuance of asset-backed cryptocurrencies that can be used to fund projects. For instance, a solar energy park can be funded with the issuance of a user-defined cryptocurrency that guarantees the delivery of a certain amount of electrical power after the park is operational.” Similarly, he thinks the adoption rate of cryptocurrency-related apps will vary from region largely due to existing infrastructure (or lack thereof), “For people who live in the US and the rest of the developed world, there is maybe not much that crypto-currencies can do to become killer apps. But for the rest of the world, simple payments, the ones already supported by the Bitcoin protocol, when introduced in existing devices (cellphones, bank cards) would be the killer app.”
Consequently he also thinks there are untapped areas that have been overlooked, including in education, “There is so much going on in the space and even a motivated investor cannot follow the amazing opportunities that arise daily. I am certainly playing catch-up every day. Educational and research groups in the space, like the ones I am working towards with the University of Texas, the University of Nicosia and the University of Hong Kong might provide a way for investors and entrepreneurs to identify business opportunities faster.”
Bentenitis raises an interesting point regarding educational opportunities in this segment. Just as programming languages and network engineering spawned numerous training programs (CNA, CCNE, MCSE, A+), there will likely be a similar market demand for trainers to provide developers and entrepreneurs with the skills needed to effectively utilize these new platforms. Perhaps your firm can create a certification process for cryptocurrency or smart contract design competency. Similarly, authors and writers may find new audiences through manuscripts published through O’Reilly Media or even ‘Bitcoin 2.0 Platforms for Dummies.’ In addition, Bentenitis noted during our conversation that MOOCs (massive open online courses) such as Udacity and Coursera could be utilized to provide knowledge and training of cryptoprotocols to a global audience.55 As of June 2012 there were approximately 2.4 billion global internet users some of whom may be interested and capable in learning more about this space.
“In some ways this is similar to the Colored Coins project because bitcore works in conjunction with bitcoind [daemon] meaning there is no need to recreate an independent blockchain or validation process yet it enables and gives developers more functionality that does not exist today. Insight57 is a good project to that illustrates how it has real functionality and provides real value to end-users.”
Just as web browsers were organically adopted for solving real needs, according to Pair “I think cryptocurrencies in general provide a better accounting system and level of security relative to existing financial systems that could be abused. As a consequence, I think it is just a matter of time before mainstream adoption occurs and that there is not necessarily a “right idea” that will catalyze this. If you look at the direction that cryptography and cryptographic accounting are heading, it will just be a matter of time before something like Bitcoin is adopted industry-wide, it just makes sense. For instance, there is a need for secure international payment systems, especially for Africa and South America and Bitcoin provides this today.”
In terms of next-generation platform, Pair thinks that, “while there are several ambitious projects currently being developed to remove the perceived ‘ugliness’ in the current protocol, I see this endeavor as Betamax versus VHS. VHS won out in the format war despite lower fidelity and it is possible that the new innovations which arise from the ‘2.0’ projects will be adopted and integrated back into Bitcoin. In the past, I’ve worked on several software projects that required a team to simultaneously solve 10 to 12 hard problems, without which the underlying functionality could not be capitalized off on. Thus, unless these teams make substantial progress on all fronts, they may be taking on too many things at one time. In our perspective, “the perfect is the enemy of the good,” that is to say, HTTP is not as elegant as a lot of other projects that were being developed at the same time, but it is now widely used because it worked good enough – and because the other competing teams suffered from trying to make the most elegant, perfect solutions.”
Betamax was a proprietary recording tape standard created by Sony that competed with VHS, a similar yet license-free technology developed by JVC.58 Despite technically superior fidelity specifications, Betamax lost that ‘format war’ as consumer adoption was relegated to small niches. Similarly there are multiple versions and forks of HTTP, some providing better technical specs, but the one that was adopted was considered ‘good enough.’59
In February I spoke with Jesse Powell, founder and CEO of Payward, the parent company of Kraken.60 Kraken is a virtual currency exchange in which users can trade several different cryptocurrencies as well as fiat.61 According to Powell, “projects like Ethereum have some interesting claims and ideas that you cannot do today with other platforms. We have also looked at others like Colored Coins and Mastercoin as well, these are all interesting concepts. However, one of the main advantages of having a central server to trade with is that it enables high-frequency trading (HFT). In addition, one of the reasons that Kraken currently enables trading pairs with Ripple (XRP) is that, it is easier and more robust to issue an asset because the network was built for it.”
While one of the low-hanging fruits of smart contracts is securities trading, it is highly unlikely that a professional trader would use a blockchain directly for an HFT. For example, in most markets, especially the very liquid ones, where latencies are counted by increasingly smaller segments of time, the pace of 1 block per 10 minutes (or even 2.5 minutes) is limiting. Currently the only way to enable this functionality is via an off-chain solution, such as Kraken, which allows users to build functionality around an internal API.62
In February 2014 I spoke with Salvatore Delle Palme, digital strategist at Kraken and founder of Ripple Federation. In terms of immediate business opportunities in this space, in his view, “anything that connects disparate systems is a good idea. There will be a lot of opportunity in improving the interoperability between existing digital currency systems, legacy financial systems, and cryptocurrency 2.0 protocols. Merchant integration will also take on a whole new meaning as the industry progresses. In addition, I wrote an article a while back for Let’s Talk Bitcoin called The Archetypes of Virtual Currencies, where I said something about how popular culture would play a role in the success of some future alternative digital currencies.63 I was actually ridiculed slightly in the comments for that. Fast forward six months and we’ve arrived at Dogecoin. A coin based on a silly Internet meme has the third highest trading volume and the fifth highest market capitalization of the entire ecosystem! Dogecoin proves that popular culture matters, and that there’s room for more proof-of-work coins like Bitcoin or Litecoin. Part of the success of Dogecoin can certainly be attributed to its role as a ‘tipping currency’ with exponentially more units than Bitcoin. It’s more fun than Bitcoin, and fun has value.”
Dogecoin is based on the same codebase as Litecoin, yet its developers took a different approach to marketing – basing it solely around an internet meme – and as a consequence, its popularity measured by a variety of metrics (network hashrate, daily transactions, reddit followers) has surpassed Litecoin.
One of the common themes of the investors, developers and entrepreneurs I spoke with is that of ‘rebooting’ the financial system, plugging it into modern technologies. According to Delle Palme, “it’s taking a while to get the financial system rebooted on the web, but I think things will start accelerating more quickly once this trend is further along. The cryptocurrency layer is being built up nicely, but the social layer is feeble. For example, we appear to be nowhere near being able to send money to a friend or a merchant over Facebook, let alone all of the other social platforms (although PikaPay is doing some interesting things with Bitcoin and Twitter). Eventually, a much higher level of cohesion will be achieved.”
Another area that some investors have mentioned is that a trading platform akin to e-Trade or Scottrade is currently lacking in the cryptocurrency space. Delle Palme sees that, “Kraken’s service is optimized to be a FOREX platform for digital currencies. Although, because we offer sophisticated security options, such as two-factor authentication and master passwords, Kraken is a great place to store digital currency. Furthermore, I believe Kraken was built from the ground up to be immune to issues like transaction malleability. Our developers have been aware of the issue for a long time.” As mentioned previously in Chapter 3, in mid-February, several exchanges – most notably Mt. Gox – were impacted by a known bug called transaction malleability. For balance, Coinbase and Blockchain.info, the two largest web-based wallets were not affected as well.
As noted above, Kraken operates as an exchange of multiple different cryptocurrencies, including XRP, the token unique to the Ripple network. Long-term Delle Palme thinks that, “Ripple has a lot of advantages. The biggest one for me has simply been that they actually have a robust product that works. This is why I worked to bolster their community. I knew that Ripple would be successful at achieving some important things the rest of the Bitcoin community was unlikely to easily achieve, such as a distributed exchange (e.g. the Ripple system has a distributed exchange built-in) and smart contracts. XRP is fueling the growth of a great company, and Ripple offers liquidity and innovation. I suspect they will continue to gain support from open source communities and entrepreneurs around the world and eventually do amazing things.” He is also looking into the potential of Ethereum as way to “marry a cryptographic asset to an original work of art, and support the value of this asset via social consensus. In general, altcoins allow for experimentation within the crypto-mining community. I think Ethereum will become the standard for altchain experimentation and provide many new uses-cases, such as an ‘artcoin.’”64 In addition to Namecoin, Bitcoin, Ripple (XRP), Litecoin, and Ven (XVN), Kraken recently added support for Dogecoin.
- This is a paraphrase from Jeff Garzik, a Bitcoin developer. Furthermore, decentralized pools like P2Pool would help alleviate some of that concern, yet there are financial incentives for “hashers” to use larger pools that create imbalances that are discussed in Hashers are not miners, and Bitcoin network doesn’t need them. [↩]
- An example is Bi•Fury from Crypto Store. In terms of electricity, this has always been an issue even as far back as 2011, see Bitcoin Mining Update: Power Usage Costs Across the United States from PC Perspective [↩]
- Other questions that need to be answered about new ASIC announcements: Has it passed verification process? Has it been taped out? What about maskmaking? See: Automate and Control the Functional-Verification Process from Chip Design, Interview: Adnan Hamid Addresses Trends In Chip Verification from Electronic Design and Chip verification made easy by Laurent Fournier [↩]
- See Engineering the Bitcoin Gold Rush: An Interview with Yifu Guo, Creator of the First Purpose-Built Miner from Motherboard, That Swedish Bitcoin Mining Company Has Sold $28 Million-Worth Of Its New Mining Hardware from Business Insider and CoinTerra Ships First Terahash Bitcoin Mining Rig from CoinDesk [↩]
- Butterfly Labs Announces Next Generation ASIC Lineup from PRWeb [↩]
- BFL ASIC Status from Butterfly Labs and Butterfly Labs Shipping Still A Year Behind, Broken Promises from igotbitcoin [↩]
- Personal correspondence, November 30, 2013 [↩]
- Martin Meissner recently brought a lawsuit against BFL over a similar issue, for failure to deliver on two 1,500 GH/s miners he paid $62,598 for which he allegedly never received. See Butterfly Labs Faces $5m Lawsuit Over Unfulfilled Order from Coindesk [↩]
- Difficulty rating for Bitcoin adjusts every 2016 blocks or roughly every 2 weeks. See Bitcoin mining profitability calculator [↩]
- Contrary to popular myth Sears & Roebucks did not exist at this time and in fact was founded much later in its modern form in 1893. It was Richard Sears’ father, James who went to California during the gold rush and failed to “strike it rich.” [↩]
- Or ‘fragile’ as Nassim Taleb would likely classify their predicament (as opposed to anti-fragile); (video). [↩]
- I have written several articles on how to build and use Scrypt-based mining systems, see: 12 Step Guide: Easiest and fastest way to start mining Scrypt-based tokens for Litecoin and Dogecoin and Should you buy an Alpha Technology ASIC for Litecoin mining? [↩]
- This Pizza Cost $750,000 from Motherboard [↩]
- Shelling Out — The Origins of Money by Nick Szabo [↩]
- BitPay also includes functionality that allows users to synch and import bitcoin sales into Quickbooks. Another example of integration and adoption was in March 2013, Expensify added support for Bitcoin payment which allows companies to reimburse international workers with bitcoin. See Import your Bitcoin Sales into Quickbooks from BitPay and Expensify Now Offers Support For Bitcoin, An Alternative To PayPal For International Contractors from TechCrunch [↩]
- BitPay Exceeds $100,000,000 in Bitcoin Transactions Processed from BitPay and BitPay Announces Bitcoin Payroll API from BusinessWire [↩]
- Gyft doubled its accepted locations in six months during 2013. See Gyft Launches Rewards Platform to Give Consumers Up to 3% Back on Gift Card Purchases from PRNewswire and Gyft Opens Bitcoin Acceptance to 50,000 Merchant Locations from PaymentsSource [↩]
- Shopify Merchants Can Now Accept Bitcoin from Shopify from Shopify [↩]
- In First Day With Bitcoin, Overstock Does $126,000 in Sales from Wired and Here Is What Bitcoin Users Are Buying On Overstock.com from Forbes [↩]
- Tiger Direct Processes $500,000 in Bitcoin Payments from Josic [↩]
- A Major Coinbase Milestone: 1 Million Consumer Wallets from Coinbase [↩]
- Games Giant Zynga Starts Playing With Bitcoin from CoinDesk [↩]
- See Humble Bundle now accepting Bitcoin using Coinbase bitcoin merchant tools from Coinbase [↩]
- Formlabs releases PreForm 1.0 and begins accepting Bitcoin payments from The Verge. I f you would prefer someone else print your 3D wares, individuals can patronize CryptoPrinting. [↩]
- 200,000 Hotels Now Accept Bitcoin Through Online Travel Agency CheapAir from CoinDesk [↩]
- BitPay Drives Explosive Growth in Bitcoin Commerce from BusinessWire [↩]
- Even if a company is not necessarily interested in becoming involved within the cryptocurrency community, it is relatively easy and straightforward for a merchant to accept bitcoin as a payment option. In less than 15 minutes a merchant could download a plugin from Coinbase or BitPay and the transactions will move seamlessly through the store. [↩]
- BTCJam [↩]
- Credit-card debt may threaten Brazil’s boom from Bloomberg Businessweek [↩]
- While credit would likely still be cheaper in developed countries, because interest rates are centrally planned by various institutions, this creates distortions in time-preferences for market participants (e.g., zero-interest rate policies encourage the usage of capital instead of the accumulation of capital; risk is subsidized by one or more parties). See The Theory of Money and Credit by Ludwig von Mises [↩]
- FICO is an acronym for Fair, Isaac and Company. In 1989 this firm created a rating system that is used by the largest credit reporting bureaus (e.g., Experian, Equifax and TransUnion). [↩]
- 2013 LexisNexis True Cost of Fraud Study [↩]
- US P2P Lenders Issue $2.4 Billion in Loans in 2013 from Lean Academy [↩]
- Bitcoin is far more than a currency for speculators from Financial Times and Riding the wave of global transaction services and payment systems from IPFA pgs. 11-12 [↩]
- Evr.gr [↩]
- See BankToTheFuture.com and Equity Crowdfunding – Building The Bitcoin Infrastructure from IamSatoshi [↩]
- See Kickstarter Coins and LTBCoin by Adam Levine. In some ways, this is also a cryptographically controlled process to subsume penny-stocks and over-the-counter instruments. Other hypothesized tokens include ‘couch surfing coins’ and tokens representing digital assets in games such as EVE Online and World of Warcraft. [↩]
- Ibid [↩]
- Join My IPO [↩]
- FrostWire, a company that makes BitTorrent software, recently integrated Bitcoin, Litecoin and Dogecoin into their software. Users can directly donate and support content creators. See Bitcoin Donations Now Integrated into BitTorrent Client from TorrentFreak [↩]
- MaxCoin and Megacoin [↩]
- The Idea of Smart Contracts by Nick Szabo [↩]
- Personal correspondence, January 24, 2014 [↩]
- I interviewed him on February 6, 2014. See also ‘500 Startups’ Recruits Ex-MySpace VP to Mentor Bitcoin Businesses from CoinDesk [↩]
- UX means ‘user experience’ and UI means ‘user interface.’ [↩]
- Smart Contracts by Nick Szabo [↩]
- Coinality and 12 Days of Bitcoin: Get Paid in Bitcoin from Bloomberg [↩]
- Is this “transaction malleability” really an issue? from StackExchange [↩]
- Contrary to Mt. Gox’s Statement, Bitcoin is not at fault by Gavin Andresen and Mt. Gox Blames Bitcoin – Core Developer Greg Maxwell Responds from Cryptocoinsnews [↩]
- Bitcoin Exchanges Under ‘Massive and Concerted Attack’ from CoinDesk [↩]
- The story is likely more complex and details are still forthcoming. See Unilateral Statement Regarding Mt. Gox from an Insider by Jesse Powell, Inside Japan’s Bitcoin Heist from The Daily Beast, Mt. Gox Exchange Files for Bankruptcy from Bloomberg, Mt. Gox files for bankruptcy, blames hackers for losses from Reuters and The programming error that cost Mt Gox 2609 bitcoins by Ken Shirriff [↩]
- The development team has published a public wiki describing the specifications and functionality. See Bitcloud Project [↩]
- Adam Levine has been working on an interesting side project involving reputational callable tokens. See Kickstarter Coins and LTBCoin [↩]
- A recent public example of multisignature transaction is from the Bitcause initiative to provide humanitarian aid to Ukrainians. The three key holders are Edan Yago, Ron Gross and Elizabeth Ploshay. See Bitcause and Only Bitcoin can reach them! [↩]
- In addition to Udacity and Coursera, readers may be interested in projects like Khan Academy, CodeAcademy and Duolingo. [↩]
- Introducing Bitcore from BitPay [↩]
- Insight.bitcore.io [↩]
- The Betamax vs VHS Format War from Media College [↩]
- HTTP 2.0 is currently in the standardization phase at this time. [↩]
- Kraken [↩]
- Once a user has been authorized, one of the unique features of Kraken is that they can eventually conduct leveraged and margin trading. [↩]
- While the latency and logistical issues are being discussed, the Open-Transactions (OT) project attempting a different approach to HFT through the ability to create ‘centralization’ via federated servers and ‘voting pools’ – essentially there would be off-chain exit nodes that transfer to HFT clusters. [↩]
- The Archetypes of Virtual Currency by Salvatore Delle Palme [↩]
- The Ephemeral Artcoin by Salvatore Delle Palme [↩]