Looking at public information for quarterly usage

[Note: the views expressed below are solely my own and do not necessarily represent the views of my employer or any organization I advise.]

It’s the beginning of a new quarter so that means its time to look at the last quarter and find out where public blockchain traction and usage is taking place, or not.  After all, we are continually bombarded by cryptocurrency enthusiasts each day telling us that exponential growth is occurring.  Or as GIF party posters like to say, “It’s Happening!” — so in theory it should be easy to find.

For more background, see previous posts from January and April.



Source: P2SH.info

  • P2SH usage: above are two charts from P2SH.info which illustrates the movement of bitcoins into what most assume are multi-sig wallets of some kind.  There has been a visible increase over the past quarter, with about 200,000 or so more bitcoins moving into P2SH addresses.  Year-on-year, bitcoins held in P2SH addresses has increased from 8% to 13%.
total transactions over time blockstack

Source: Opreturn.org

  • OP_RETURN: above is a line chart from Opreturn.org which illustrates various 3rd party applications that typically use the OP_RETURN field in Bitcoin as a type of datastore (e.g., watermarked tokens).  It is hard to see it on this time scale but the average transactions during Q1 were roughly 1,500-2,500 per day whereas in Q2 it was a bit higher, between 2,500 to 3,500 per day.
percentage of transactions by each protocol opreturn

Source: Opreturn.org

  • Above is another chart looking at the percent of OP_RETURN transactions used by different watermarked token platforms.
  • Compared to Q1, the top 5 have shifted:
    • Blockstack 142,754 transactions (24.9%)
    • Colu 106,489 (18.6%)
    • Open Assets  82,696 (14.4%)
    • Monegraph 54,914 (9.6%)
    • Factom 47,328 (8.3%)
  • While Blockstack (Onename) still rules the roost, Colu has jumped ahead of the other users.  This is slightly interesting because the Colu team has publicly stated it will connect private chains that they are developing, with the Bitcoin network.  The term for this is “anchoring” and there are multiple companies that are doing it, including other Bitcoin/colored coin companies like Colu.  It is probably gimmicky but that’s a topic for a different post.
  • Incidentally the 5 largest OP_RETURN users account in Q2 for 75.8% of all OP_RETURN transactions which is roughly the same as Q1 (76%).
localbitcoins volume

Source: LocalBitcoins.com / Coin Dance

Above is a weekly volume chart denominated in USD beginning from March 2013 for LocalBitcoins.com.  As discussed in previous posts, LocalBitcoins is a site that facilitates the person-to-person transfer of bitcoins to cash and vice versa.

While there is a lot of boasting about how it may be potentially used in developing countries, most of the volume still takes place in developed countries and as shown in other posts, it is commonly used to gain access to illicit channels because there is no KYC, KYCC, or AML involved.  Basically Uber for cash, without any legal identification.

Over the past 6 months, volumes have increased from $10 million and now past $13 million per week. For comparison, most VC-backed exchanges do several multiples more in volume during the same time frame.1


bitcoin volatility 6 months

Source: Btcvol.info

In April, several Bitcoin promoters were crowing about how “stable” Bitcoin was.  Not mentioned: cryptocurrencies can’t simultaneously be stable and also go to the moon.  People that like volatility include: traders, speculators, GIF artisans, pump & dumpers. And people who don’t like volatility: consumers and everyday users.

What articles and reporters should do in the future is actually talk to consumers and everyday users to balance out the hype and euphoria of analysts who do not disclose their holdings (or their firms holdings) of cryptocurrencies.2

As we can see above, volatility measured relative to both USD and EUR hit a five month high this past quarter.  The average user probably would not be very happy about having to hedge that type of volatility, largely because there are few practical ways to do so.  Consumers want boring currencies, not something they have to pay attention to every 10 minutes.

And ether (ETH) was even more volatile during the same time frame: doubling relative to USD during the first half of the quarter then dropping more than 50% from its all-time high by mid-June.

Counterparty all time

Source: Blockscan

Counterparty is a watermarked token platform that, as shown in previous quarters, has hit a plateau and typically just sees a few hundred transactions a day.  Part of this is due to the fact that the core development team has been focused on other commercial opportunities (e.g., building commercial products instead of public goods).3

Another reason is that most of the public interest in “smart contract” prototyping and testing has moved over to Ethereum.

etherscan ethereum transactions

Source: Etherscan

As shown in the chart above, on any given day in Q2 the Ethereum blockchain processed roughly 40,000 transactions.  In Q1 that hovered between 15,000-30,000 transactions.  Note: the large fluctuations in network transactions during the spring may coincide with issues around The DAO (e.g., users were encouraged to actively ‘spam’ the network during one incident).

In addition, according to CoinGecko, Counterparty has lost some popularity — falling to 14th from 10th in its tables from last quarter.  Ethereum remained in 2nd overall.

Another trend observed in the last quarterly review remains constant: Ethereum has significantly more meetups than Counterparty and is 2nd only to Bitcoin in that measure as well.

long chain transactions q2

Source: Organ of Corti — Time period:  January 1, 2014 – June 27, 2016

We’ve discussed “long chain” transactions ad nausem at this point but I have noticed on social media people still talk about the nominal all-time high’s in daily transactions as if it is prima facie evidence that mega super traction is occurring, that everyday users are swarming the Bitcoin network with commercial activity.  Very few (anyone?) digs into what those transactions are.  Perhaps there is genuine growth, but what is the break down?

As we can see from the chart above, while non-long chain transactions have indeed grown over the past quarter, they are still far outpaced by long chain transactions which as discussed in multiple articles, can be comprised of unspendable faucet rewards (dust), gambling bets and a laundry list of other non-commercial activity.

Furthermore, and not to wade into the massive black hole that is the block size debate: even with segwit, there will be an upperbound limit on-chain transactions under the current Core implementation.  As a consequence some have asked if fee pressure would incentivize moving activity off-chain and onto other services and even onto other blockchains.

This may be worth looking into as the block size reaches its max limit in the future.  As far as we can tell right now, it doesn’t appear users are moving over to Litecoin, perhaps they are moving to Ethereum instead?  Or maybe they just pack up and leave the space entirely?


We have looked at wallets here multiple times.  They’re a virtually meaningless metric because of how easy it is to inflate the number.  What researchers want to know is Monthly Active Users (MAU).  To my knowledge no one is willing to publicly discuss their monthly or daily user number.

For instance, two weeks ago Coinbase reached 4 million “users.”  But it is almost certain that they do not actually have 4 million daily or monthly active users.  This number is likely tied to the amount of email-based registrations they have had over the past four years (circa May 12, 2012).

Similarly, Blockchain.info has seen its “users” grow to just over 7.8 million at the time of this writing.  But this is a measure of wallets that have been created on the site, not actual users.

Any other way to gauge usage or traction?

Let’s look in the Google Play Store and Apple App Store.

abra downloads

Source: GoAbra / Google Play

Last October Abra launched its GoAbra app and initially rolled it out in The Philippines.  This past May, when CoinDesk ran a story about the company, I looked in the Google Play Store and it says the app had been downloaded 5,000 times.  Last week, Abra announced it was officially launching its app into the US.  As of this writing, it was still at 5,000 downloads.

“Wait,” you might be thinking to yourself, “Filipinos may prefer the iOS app instead.”

Perhaps that is the case, but according to data as of October 2015, Android has a ~81.4% market share in The Philippines.  Furthermore, the iOS version for some reason doesn’t appear on App Annie.  So it is unlikely that Abra has seen traction that isn’t reflected in these download numbers yet, perhaps it will in the future.

Anything else happening in the stores?

As of this writing, the top 5 Bitcoin wallets in the Google Play Store in order of appearance are:

  • Andreas Schildbach’s Bitcoin Wallet (1 million downloads)
  • Mycelium Bitcoin Wallet (100,000 downloads)
  • Coinbase (500,000 downloads)
  • Blockchain.info (100,000 downloads)
  • Airbitz (10,000 downloads)

The Apple App Store does not publicly state how many times an application has been downloaded.  It does rank apps based on a combination of user ratings and downloads. The top 6 on the iPhone in order of appearance:

  • Coinbase
  • Blockchain.info
  • Sollico (bitWallet)
  • breadwallet
  • Xapo
  • Airbitz

Interestingly however, the order is slightly different in the App Store on an iPad.  The top 6 are:

  • Coinbase
  • Blockchain.info
  • Sollico (bitWallet)
  • breadwallet
  • Airbitz
  • BitPay (Copay)

It may be worth revisiting these again next quarter.  If you want to burn some time, readers may be interested in looking at specific rank and activity via App Annie.


Most new cohorts and batches at startup accelerators and incubators usually only stay 3-4 months.  A typical intake may see 10-15 companies each get a little bit of seed funding in exchange for a percentage of the equity.  During the incubation period the startup is usually provided mentorship, legal advice, office space, access to social networks and so forth.  It is common place to hear people of all stripes in Silicon Valley state that 9 out of 10 of these startups will burn out within a couple years — that the incubator relies on one of them having a big exit in order to fund the other duds.4

500 Startups, Boost.VC, Plug and Play, YCombinator and other incubators have added and removed startups from their websites and marketing material based on the traction startups have had.  And cryptocurrency startups are not too different from this circle of life. 5

For instance, at YCombinator, Bitcoin-specific mentions on applications has declined by 61% over the past year.

Based on pubic information, as of this writing, it appears that out of the roughly 100 Bitcoin-related startups that have collectively come and gone through the incubators listed above, just a handful have gone on to raise additional funding and/or purportedly have active users and customers.  Unfortunately, no one has consistently published user numbers, so it is unclear what the connection between funding and growth is as this time.

In fact, in an odd twist, instead of measuring success by monthly active users, customers, or revenue, many Silicon Valley-based companies are measuring success based on how much money they raised.  That’s probably only a good idea if the business model itself is to always be raising.

For example, 21inc regularly boasts at being the “best funded company in Bitcoin” — but has not stated what traction four separate rounds of funding have created.  How many bitcoins did it mine prior to its pivot into consumer hardware?  How many 21 computers were sold?  How many users have installed 21?  And what are its key differences relative to what Jeremy Rubin created in 2014 (Tidbit)?

Again, this is not to single out 21inc, but rather to point out if companies in the public blockchain space were seeing the traction that they generally claim to on social media and conferences — then as discussed in previous posts, they would probably advertise those wins and successes.


With funding comes hiring.  Since it is very difficult to find public numbers, there is another way to gauge how fast companies are growing: who and how many people they are publicly hiring.

The last Bitcoin Job Fair was last held in April 2015.  Of its 20 sponsors, 6 are now dead and ~7 are either zombies and/or have have done major pivots.  It is unclear how many people that were hired during that event still work for the companies they worked for.

Where else can we look?

Launched in 2014, Coinality is a job matching website that connects employers with prospective employees with the idea that they’d be compensated in cryptocurrencies such as bitcoin and dogecoin.  Fun fact: Coinality is one of the few companies I interviewed for Great Chain of Numbers that is still alive today and hasn’t pivoted (not that pivoting in and of itself is a bad thing).

It currently lists 116 jobs, 105 of which were posted in the past 2 months.

A number of VC-backed companies and large enterprises (or head hunters recruiting on their behalf) have listed openings in the past month.  For example: WellsFargo, Blockchain.info, Circle, Fidelity, IBM, KeepKey, itBit, BNYMellon and SAP logos pop up on the first couple pages of listings.

Among the 67 job listed in June, twenty-six of the positions were freelance positions cross-listed on Upwork (formerly known as Elance / oDesk).

Notable startups that are missing altogether: many cryptocurrency-centered companies whose executives are very vocal and active on social media.  Perhaps they use LinkedIn instead?

Other stats

  • According to CoinATMRadar there are now 690 Bitcoin ATMs installed globally.  That is an increase of 78 ATMs since Q1.  That comes to around 0.86 ATM installations per day in Q2 which is a tick higher than Q1 (0.84).
  • Bitwage launched in July 2014 starting out with zero signups and zero payroll.
    • Fast-forward to January 2016: Bitwage had 3,389 cumulative user signups and cumulative payroll volumes of $2,456,916
    • Through June 2016 it has now reached 5,617 cumulative signups and cumulative payroll volumes of $5,130,971
    • While growing a little faster than ATM installations, this is linear not exponential growth.
  • Open Bazaar is a peer-to-peer marketplace that officially launched on April 4, 2016.  It had been in beta throughout the past year.  The VC-backed team operates a companion website called BazaarBay which has a stats page.
    • It may be worth looking at the “New Nodes” and “New Listings” sections over the coming quarters as they are both currently declining.6


It is unclear what the root cause(s) of the volatility were above.  According to social media it can be one of two dozen things ranging from Brexit to the upcoming “halvening.”  Because we have no optics into exchanges and their customer behavior, speculation surrounding the waxing and waning will remain for the foreseeable future.

Based on process of elimination and the stats in this post, the likely answer does not appear to be consumer usage (e.g., average Joe purchasing alpaca socks with bitcoins).  After all, both BitPay and Coinbase have stopped posting consumer-related stats and they are purportedly the largest merchant processors in the ecosystem.

Most importantly, just because market prices increase (or decreases), it cannot be inferred that “mass adoption” is happening or not.  Extraordinary claims requires extraordinary evidence: there should be ample evidence of mass adoption somewhere if it were genuinely happening.

For instance, the price of ether (ETH) has increased 10x over the past 6 months but there is virtually no economy surrounding its young ecosystem.  Mass consumer adoption is not happening as GIF artisans might says.  Rather it is likely all speculation based — which is probably the same for all other cryptocurrencies, including Bitcoin.

About a year ago we began seeing a big noticeable pivot away from cryptocurrencies to non-cryptocurrency-based distributed ledgers.  That was largely fueled by a lack of commercial traction in the space and it doesn’t appear as if any new incentive has arisen to coax those same businesses to come back.  After all, why continue building products that are not monetizable or profitable for a market that remains diminutive?

Let’s look again next quarter to see if that trend changes.


  1. For more granularity see also BNC’s Liquid index. []
  2. Speaking of interest and hype, CB Insights has some new charts based on keyword searches over time. []
  3. Several members of the development team also co-founded Symbiont. []
  4. Many of these incubators are too young to have a track record that proves or disproves this “conventional” wisdom.  See also Venture Capitalists Get Paid Well to Lose Money from HBR. []
  5. For instance, Mirror closed its Series A round 18 months ago, but was removed from Boost’s website because it no longer is involved in Bitcoin-related activities.  Boost currently lists the following companies out of the 50+ Bitcoin-companies it has previously incubated: BlockCypher, BitPagos, Abra, Stampery, Fluent, SnapCard, Verse.  500 Startups has removed a number of startups as well and currently lists the following on its website: HelloBit, Melotic, Coinalytics, BTCJam, Bonafide, CoinPip. []
  6. Since it has only been “launched” for a quarter, it is probably a little unfair to pass judgement at this time.  But that hasn’t stopped me before.  OpenBazaar has a lot of growing pains that its developers are well aware of including UX/UI issues.  But beyond that, it is unclear that the average consumer is actually interested in using peer-to-peer marketplaces + cryptocurrencies versus existing incumbents like Alibaba, Amazon and eBay — all of whom have customer service, EULAs, insurance policies and accept traditional currencies. I had a chance to speak with one of their investors at Consensus in May and do not think their assumptions about network operating costs were remotely accurate.  Furthermore, where is the market research to support their thesis that consumers will leave incumbents for a platform that lacks insurance policies and live customer service?  Note: OB1 developers and investors insist that their reputation management and arbitration system will increase consumer confidence and customer protection. []
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What impact have various investment pools had on Bitcoinland?

queen bitcoinAccording to public announcements, approximately $790 million has been raised by Bitcoin-related companies over the past three years (and really in earnest since the San Jose conference two years ago).

Where did that funding go?  And how did that impact the price of cryptocurrencies?

Below I attempt to break down the numbers to answer both of the questions.

The tl;dr is that there are multiple unseen cost centers that have likely absorbed capital that would have otherwise been more productively deployed elsewhere.  Some of these costs were related to compliance — which many startups assumed would not exist or could be ignored.  Others included denial of service (DOS) and ransomeware which no one besides Bruce Schneier could have predicted or thought of years ago.

In addition, consumer behavior — or as Buck Turgidson would label “the human element” — is not behaving based on the initial assumptions of many entrepreneurs, enthusiasts and VCs.  Whereas 18-24 months ago cryptocurrency-based payment processors proclaimed that consumers would flock to Bitcoin and other altcoins as a payment rail, this has not occurred (yet).1 Stagnant tokens left in cold storage therefore impacts multiple verticals, especially those relying on large aggregates of transaction fees to fund growth as they scale up.


Investing in mining and hashing is effectively taking out a short position on fiat and long on a cryptocurrency, in this case usually USD for BTC.  It is a foreign exchange play as it enables investors to turn fiat into magic internet money without typically needing to abide by foreign exchange regulations or institutional registration requirements.  For instance, a venture capital firm is typically not permitted or allowed to use LP funds on the open market to purchase forex, or in this case cryptocurrencies — but by funding a mining company they effectively fall within a “loophole” (or at least that is how some pitch it).

What does this look like?

Listed on the continually updated – though slightly inaccurate – CoinDesk Venture Investment spreadsheet are the following capital raises specific to mining:

  • Spondoolies Tech: $10.5 million
  • Avalon Clones: $3 million (likely clones of the Avalon chip)
  • Bitfury: $40 million (in two public rounds)
  • Hashplex: $0.4 million
  • KnC miner: $29 million (in two public rounds; note that KnC however had a pre-tax loss of $4.4 million last year)
  • Peernova (raised $19 million, however they are no longer in the Bitcoin mining space and didn’t raise the Series A round based on mining products)

Not included are funding from:

  • 21inc: according to Nathaniel Popper it has raised $121 million over at least three rounds (perhaps more) and is now building Tom Sawyer botnet hashing chips — consumers are expected to collectively absorb the operating costs such as electrical and administrative costs thereby painting the proverbial white fence; consumers socialize the costs and 21inc privatizes the gains
  • Bitmain: is the largest independent manufacturer, has taken no VC money to date (fully financed via private sources)
  • CoinTerra: bankrupt, previously raised $2.2 million
  • Hashfast: bankrupt, owed creditors over $40 million, “acquired” by a Venezuelan politico
  • Alidyan: part of CoinLab, now bankrupt, spent $4 million building hashing machines
  • Butterfly Labs: sued by FTC for failure to deliver product to customers, collected between $20 million to $50 million in pre-orders, currently sending some refunds
  • Avalon: successfully pre-sold the first commercially available ASICs (see interview with Yifu Guo from Motherboard); Guo is no longer involved with Avalon and the company is now called Canaan Creative
  • ASICMINER: “Friedcat” is the Chinese businessman who created an immersion mining facility in Hong Kong and custom ASIC chip, allowing those with bitcoin to exchange bitcoins for ASICMINER shares; despite allegations, it is still unclear if he absconded with the funds of a new project called AMHash
  • Gridseed (recently merged to become SFARDS): built both SHA256 and scrypt hashing equipment; in late July 2014 they purportedly owned 20 billion dogecoins (via mining) and as recently as April 2015 still supposedly controlled 60% of the hashrate for dogecoin (the management team led by Li Feng was allegedly under pressure by investors to somehow reverse the bear market)
  • ZeusMiner: shifted from building SHA256 ASICs to scrypt (dogecoin, litecoin, etc.)
  • Genesis Mining, Mega Big Power, RockMiner and a variety of small actors in the manufacturing/proprietary farm/pool business
  • DiscusFish, consistently one of the largest pools, may or may not produce some of their own hardware
  • A smorgasbord of cloudhashing scams that didn’t actually have the actual hardware (e.g., GAW mining)

So of the ~$790 million so far:

  • $82.9 million is comprised by known mining manufacturers
  • plus $121 million from 21inc (but misclassified as “Universal” in the spreadsheet)
  • but cannot include the $19 million from Peernova (this is misreported on the spreadsheet and again, they are no longer in that specific vertical)

This comes to: $203.9 million, or about 25% of the publicly known funding has gone directly into converting one currency (fiat) into another (bitcoins, litecoins, etc.).  How much of the capital has been fully deployed to date is unclear.

bitcoin funding

Data source: CoinDesk

Can this full amount impact the market price of specific cryptocurrencies?  We will try to answer that question later below.

Startup life

There are multiple budgetary components to any startup that are not unique to Bitcoinland.

For instance, irrespective of locale, the cost of living for an employee can typically be broken down into:

  • Housing/Rent
  • Utilities (electricity, gas, internet access)
  • Phone
  • Food and clothing
  • Auto/house/health insurance
  • Discretionary income (entertainment, luxury items, vacations, investments, etc.)

We will come back to these later.

For an entrepreneur in Bitcoinland, in addition to the labor costs above, some of the company-specific costs include:

  • Domain name: a large Bitcoin API company is rumored to have spent $350,000 on a five character dotcom domain; for perspective Roger Ver rents out (domain squats?) Bitcoin.com for roughly $120,000 a year (in 2012 the highest valued domain fetched $2.45 million)
  • Legal fees: some of these are delayed via equity swap deals with law firms, e.g., independent lawyers as well as firms such as Perkins Coie may provide some legal assistance for X% of equity via convertible note; similarly regulatory consultants such as Promontory have done pro bono work to assess the lay of the land for the whole space likely with the goal of converting promising clients into retainers and so forth
  • Office rent/lease/mortgage: co-working spaces are increasingly common for many seed stage companies in order to stay lean and limit the burn rate
  • Utilities and internet access: particularly important for mining farms/pools
  • Attending events: flying to conferences and meetups (which are incidentally, probably one of the few legal, profitable areas for Bitcoin right now; Mediabistro pivoted to focus on this space)
  • Event sponsorships: food and speaker honorariums; e.g., Chain.com was a lead sponsor for the O’Reilly Media Bticoin & Blockchain event, BitPay sponsored the ill-fated, one-and-done Bitbowl (Platinum sponsorship at the NYC InsideBitcoin event was $13,000 and $12,500 for Singapore)
  • Marketing and advertising: user acquisition, lead generation, brand awareness, e.g., Gyft, eGifter, and BitQuick.co purchase many of the ad slots on reddit, various “rebittance” companies purchase ad slots on Facebook, itBit is everywhere on Twitter, ChangeTip attempted to capitalize off of the Nepal earthquake and curates sock puppet spam (BashCo, a reddit moderator now works for ChangeTip)
  • Front-end design: can reach $75,000 to $100,000 and there are now companies such as Humint and Bitsapphire catering to cryptocurrency-related startups
  • Advisory fees to banks: American Banker recently explored the rumors that banks such as SVB charge its clients (such as Coinbase) a monthly “advisory fee” (payola?) which could range $20,000 – $60,000 per month
  • Lobbying special interest groups: a number of Bitcoin-related startups donate to non-profit organizations which in turn pays the salaries for staff at Coin Center, Chamber of Digital Commerce, The Bitcoin Foundation and others in order to influence policy making
  • Board of Directors and Advisors: Larry Summers (Xapo, 21inc), Arthur Levitt (BitPay, Mirror), Sheila Blair (itBit), Gene Sperling (Ripple Labs), and several other VIPs; while some of these relationships are in exchange for equity (0.5%-2%) others may be in the form of cash ($5,000-$10,000 per month) — either way, not free
  • Company outings and vacations: ChangeTip flew out to Argentina, another well-heeled group went to Malta, while others have had traditional typical perks (e.g., company lunches and dinners)
  • Money transmitter licenses: in addition to maintaining a compliance team that regularly submits SARs, it currently costs about $2-4 million to obtain the necessary MSB licenses to operate in all states within the US (recommend readers chat with Faisal Khan and Juan Llanos for more info)
  • Insuring virtual currencies that a company may hold in custody: Xapo, Coinbase, BitGo, Gemini and others now advertise that the holdings (of some kind) are insured by third parties (and purportedly even the FDIC in the case of itBit)
  • Acquiring and maintaining an inventory of cryptocurrencies: many wallets and exchanges need to maintain some kind of ‘hot wallet’ so that customers can quickly transfer their virtual assets.  For instance six days ago the hot wallet at Bitfinex was compromised and a hacker stole 1,459 bitcoins, earlier this year Bitstamp’s hot wallet was hacked and lost 19,000 bitcoins, Coinfloor stated two weeks ago it holds 5,081 bitcoins on behalf of customers and as of this writing Bitreserve states it has $1,716,030 obligations to its customers.  In addition many exchanges run prop desks to trade liquidity with partners (e.g., most VC-funded exchanges have an OTC team that handles large block trades)
  • Customer service and bug bounties: reimbursing customer for problems with R values/RNGs.  For instance, in December 2014, Blockchain.info used untested code in a production environment that cost customers at least 267 bitcoins (and again on May 26, 2015).  In April 2015, reddit user vytah fixed a BitGo integer overflow error that cost a customer 85 bitcoins
  • Denial of service (DOS) vandalism and extortion: commonly happens with mining pools (competing pools threaten to do a denial of service unless a certain amount of bitcoins is paid) — in March 2015 at least five different pools were targeted; also happens with media sites such as when Josh Garza (from Paycoin/GAW mining) allegedly attacked Coinfire to prevent stories regarding scams/fraud from surfacing
  • Ransomeware: as noted last month while this type of malware has existed for several years, CryptoLocker itself stole nearly 42,000 bitcoins in the fall of 2013, thus signaling to market participants that this successful method of attack could be copied.  According to Dell, during a six month time frame last year, “CryptoWall infected more than 625,000 computers worldwide, including 250,000 in the United States. During that time, the gang that operated CryptoWall raked in about $1 million in ransom payments.”  Currently hackers are targeting smaller and more marginal actors.  For instance, two months ago the network for Swedesboro-Woolwich School District in New Jersey was held hostage for a 500 bitcoin ransom.  And the Tewksbury Police Department system in Massachusetts recently became just one of many public organizations that has paid similar ransoms in bitcoin.

It is still unclear how much of these variables will ultimately absorb the budgets of each startup.  Not everyone is targeted with ransomeware, some startups eschew conferences and others are uninterested in building consumer facing products.  Similarly, some early employees are content with living in a SOHO or communal setting, thus reducing a rent component for someone.

At some point as the industry matures, as companies are acquired or even go bankrupt, we will likely have a better picture of percentages for each of these categories.  It could be the case that as Bitcoin-related custodians and depository institutions grow and merge, they will continue to absorb the costs borne by the traditional financial industry.

Ignoring the cryptocurrency-related challenges (such as securing hot wallets), perhaps several of these entities named above will end up needing to acquire the same licenses and charters as their peers (banks) do and thus could materially impact their balance sheet and growth targets.2  Thus it will be worth revisiting these shifting characteristics again at the end of the year if not sooner.

Converting salaries into bitcoins

bitwageAnother bullet point that is of interest to this conversation yet falls in the cracks between employer labor costs and employee discretionary income are: those individuals who convert part, or all of their salaries into bitcoins.

Most, if not all, Bitcoin-related organizations now offer some method to convert fiat-based salaries into cryptocurrencies.  Bitwage is a startup that provides a conversion service to do so.  Prior to this service (which BitPay also does), some organizations like The Bitcoin Foundation, at one point (perhaps it still does) offered to pay salaries based on a 30-day rolling average of bitcoin-to-fiat.

Another tangential example: one VC-funded Bitcoin company that raised more than $20 million late last summer bought a tranche of bitcoins (then valued at around $1.5 million) to lay aside for employee benefits.  Their employee deal is to hand over some options in future bitcoins so they wanted the bitcoins locked in to handle the employee liability.

In another instance, it is also worth noting that the $30.5 million Blockchain.info round (the largest Series A so far) that was announced in October 2014, was a mixture of bitcoin and USD (primarily USD).

What is the impact on the price of cryptocurrencies if all the employees at these startups converted their salaries into cryptocurrencies?

This has not been analyzed due largely to a lack of public information yet but it bears mentioning that it is likely that most, if not all, employees cannot fully convert their entire salary into cryptocurrencies because, for example, their land lord or utility company likely does not accept it for payment.  Perhaps this will change in the future, until then however: rent, utilities, phone service, food and insurance are probably still largely paid for with fiat.

Recall that each startup also has its own cost structure, some attempt to position themselves as a “just” a software company while others try to compete in the compliance-heavy and saturated exchange/wallet market place.  Thus the types of costs each company has is not uniform.  What this also means is that some portion of the VC funds that have gone into these companies is likely, ultimately kept in fiat and not converted into cryptocurrencies.

But, there is still more to look at.

The on-going Bitcoin crowdsale

Approximately every 10 minutes the Bitcoin network generates 25 bitcoins.  Miners (collectively in the form of mining pools) compete with one another over winning these tokens.  They do this by coordinating with hashing farms which consume large quantities of capital (primarily electricity) to rearrange a few attributes with the goal of finding a target value below a certain threshold.

In a sense, Bitcoin mining is an on-going auction, or crowdsale, to convert one currency for another.  And miners continually bid up to an equilibrium threshold in which the marginal costs of creating a bitcoin equals the market value of a bitcoin (i.e., in the long run it costs a bitcoin to create a bitcoin).34

In theory, over the past two years roughly 2,625,000 bitcoins were created.  In practice the actual amount is about 10% larger due to the fact that blocks are not being created at 10 minute intervals but much quicker, as fast as 7 minutes during October 2013 (as of this writing it is roughly every 8-10 minutes; see Appendix B).  Thus, whereas block reward halvings were expected to take place once every four years, this has accelerated by several months.

The first halvening occurred in late November 2012 and the next one is expected to occur at the end of July or early August 2016.

How does this impact the fiat-denominated price of bitcoin?

If the average weighted fiat value of bitcoin over the past 24 months has been $400 then based on the theoretical growth in money supply approximately $1 billion in bitcoins have been auctioned off to mining pools over the past two years.  Yet because the supply has increased 10% faster than the actual number is probably closer to $1.1 billion.

What does this mean?

This means that the capital spent on mining — primarily a wealth transfer to utility and manufacturing companies — still far outpaces VC investments, especially once mining-related investments are accounted for.  Altogether, once publicly announced mining investments are removed this amounts to $590 million, not $790 million.

Or in other words, since mining pools, farms and hashing participants ultimately have to sell their $1.1 billion in block rewards to pay for land, labor, taxes, equipment and electricity there is a continuous sell-side pressure on bitcoin that even all of the publicly announced VC financing cannot fully absorb even if it were allowed to.  But that does not mean it has not been dampened.  And it is also known that some of the farms and pools have  attempted to hold onto large bitcoin holdings with the expectation that these will appreciate or due to the inability to find reliable OTC partners to liquidate them without slippage.

Based on known figures above, in percentage terms, the acquisition of block rewards via VC mining investment represents about 18.5% of the $1.1 billion rewarded to miners.

While we may not know the exact numbers that venture backed firms, their employers and their investors have spent acquiring tokens, it is likely that the amount is non-negligible and perhaps even has much as several hundred million if not more.

For instance, Tim Draper publicly bought around 32,000 bitcoins last year (from the DPR/Silk Road auction, not freshly mined coins).  While it is unclear where these bitcoins will go, Boost VC (run by his son Adam Draper) is investing an additional 300 bitcoins in each startup that completes demo day (there were 24 startups in the most recent tribe, 21 of which are Bitcoin-related).  Entities like Seedcoin (renamed Coinsilium) have also tried funding startups this way.  This type of fiat conversion into bitcoin could absorb some of the sell-side pressure that comes from seizures, payment processors, miners, ransomeware and scammers liquidating their holdings (see Flow of funds).

There is some added historical precedence to this.  For instance, and as copiously noted in Nathaniel Popper’s new book, between January through March 2013, at least a dozen or so high-net-worth individuals such as Wences Casares, executives at Pantera and the Winklevoss twins collectively bought tens of millions of dollars worth of bitcoin.  The demand of which resulted in a rapid increase in market prices.  On the other hand, a few years from now when we have more data, there may not be a direct causality between outside investment and what effect that had on the price of cryptocurrencies.

Yet, with $1.1 billion in mining rewards virtually popping onto the scene, why is the community still relying on venture capital funding at all?  This native pool of virtual capital created in the past two years alone surely is capable of funding internal improvements and enhancements to the ecosystem?

To be even handed, it is also about having access to the capital (irrespective as to whether it is virtual or fiat-based)..  In practice an individual with an idea is unable to approach miners and ask for capital — many of the pools and farms are not set up or positioned to act as investors and many prefer to remain unknown.  Thus in practice it is probably easier to raise from dedicated firms that advertise the fact that they fund startups (like incubators and accelerators).

A year ago at the May 2014 Amsterdam conference, Robert Sams elaborated on this issue:

There is a different reason for why we maybe should be concerned about the appreciation of the exchange rate because whenever you have an economy where the expected return on the medium of exchange is greater than the expected return of the underlying economy you get this scenario, kind of like what you have in Bitcoin.  Where there is underinvestment in the actual trade in goods and services.  For example, I don’t know exactly how much of bitcoin is being held as “savings” in cold storage wallets but the number is probably around $5 billion or more, many multiples greater than the amount of venture capital investment that has gone into the Bitcoin space.

Wouldn’t it be a lot better if we had an economy, where instead of people hoarding the bitcoin, were buying bitshares and bitbonds.  The savings were actually in investments that went into the economy to fund startups, to pay programmers, to build really cool stuff, instead of just sitting on coin.  I think one of the reasons why that organic endogenous growth and investment in the community isn’t there is because of this deflationary nature of bitcoin.  And instead what we get is our investment coming from the traditional analogue economy, of venture capitalists.  It’s like an economy where the investment is coming from some external country where Silicon Valley becomes like the Bitcoin equivalent of People’s Bank of China.  And I would much prefer to see more organic investment within the cryptocurrency space.  And I think the deflationary nature of bitcoin does discourage that.

It is likely the case that VC funding, and therefore LP funding, is currently propping up both the ecosystem and maybe even the price due to the fact that consumer demand, via transactions remains muted.

How do we know this?

The majority of bitcoins, 96% to be precise, stored in Xapo are inert and that a similar amount is likely left inactive in Coinbase (both of whom store investor and venture partner funds as well).   We also know this is the case indirectly via payment processing figures such as BitPay (as shown below), which have effectively plateaued.

In short, because of a dearth of transactional demand, the internet commodity is reliant on speculative demand to fulfill any movement in market prices.  Perhaps this will change in the future with projects such as BitX, Coins.ph and Alliance Commerce which have been gaining genuine traction.

What, as Sams suggests, would it look like to actually fund internal improvements or other projects with this virtual currency instead of relying on the People’s Bank of China, Silicon Valley or other outside entities?  Where, as economist might say, is the circular flow of income?

Crowdfunding altcoins and altchains

What about non-VC funded startups in this overall space?  What are some examples of people attempting to put to work the virtual capital without relying on exogenous sources?

In early January I looked at a number of the “initial coin offering” (ICO/ITO) that have occurred over the previous 18 months.  The list included:

  • Mastercoin raised 4,740 BTC in August 2013
  • NXT raised 21 BTC in November 2013
  • Maidsafe raised 7,368 BTC and “95,000 MSC” / BitAngels ‘loan’ in April 2014
  • Swarm raised 1,252 BTC in June 2014
  • Bitshares AGS raised 5,621 BTC and 415k Protoshares in July 2014
  • Viacoin raised 610 BTC in July 2014
  • Ethereum raised 31,529 BTC in August 2014
  • StorJ raised 910 BTC in August 2014
  • SuperNET raised 1,201 BTC and “4,536 BTC equivalent” in Sept 2014
  • Peertracks (Bitshares music) raised ~1,436 BTC in November 2014
  • Bitbay raised 5,000 BTC in November 2014
  • Ziftr raised around “2,000” BTC (more than $650k) in Dec 2014
  • Gems raised 2,600 BTC in Dec 2014

Since then, there has been at least one other large token sale, through Factom.  Over the past two months it has received 2,278 bitcoins.

Altogether this amounts to 66,566 bitcoins raised by 14 projects in about 21 months.5

This may sound like a lot, and perhaps it is relative to the illiquid altcoins it represents (such as Mastercoin which has been rebranded as Omni), but for perspective the Bitcoin network generates roughly 3,600 bitcoins per day — an on-going token sale that continually absorbs more real-world capital and resources than most of these projects collectively do.

Yet despite this level of external funding, participants still prefer to store and hold and not actually spend due to a variety of reasons including low time preferences and the expectation that token value will increase. Perhaps that will change in the future.

Furthermore, it bears mentioning that crowdsales such as those above, are not circular.  Costs nearly always end up being paid for by selling the received currency (bitcoin mostly) for fiat.  In practice it is less of a circle and usually just an added step: bitcoin wallet -> altcoin crowdsale -> convert to fiat -> pay real-life costs.

While a number of these projects are still less than a year old, where are the scorecards for other cryptocurrency-only projects?  For example, in 2012, administrators at Bitcoin Talk raised nearly 7,000 bitcoins to build a new forum.  What about other projects that are paid for directly with other cryptocurrencies such as those on Lighthouse?

Open questions about the circular flow of LP funding

flow of investment funds in bitcoinland[Note: the image above is a variation of my previous illustration on the movement and source of funds within Bitcoinland]

There are a number of popular predictions percolating on the tubes including Bitcoin investments which are on pace to reach $1 billion by the end of the year.

Perhaps that will take place, however at some point these companies will need to generate some kind of actual non-sock puppet traction and returns to justify their 4x, 5x, even 6x valuations.  If not, then VC funding could decline as they did with cleantech.

How would a decline impact services?

For instance, it is unlikely that more than a handful of non-VC funded companies or individuals are actually paying for API access at platforms such as Chain.com, Gem or BlockCypher (not to pick on them, just an example).  Perhaps this will change in the future.

Yet by looking at the customer list at API companies we notice two things: 1) these customers are similarly VC-funded startups, 2) most of these services have no real traction yet either and are themselves reliant on VC-funded customers.

If and when VC funding dries up this could have a knock-on effect on both of these as the solvency of other virtual currency startups is heavily reliant on a VC-subsidized customer base and the price of bitcoin itself (if it does not dramatically rise by several orders of magnitude then the forex play does not pan out).

Or in other words, what economists would want to see is a circular flow of income yet what we see occurring is a circular flow of VC funding (or rather LP funding).6

If VC funding withdrew it could not only impact the hashrate (as VC funded miners are turned off) it also could impact the fees to miners.  Why?  Because VC funded companies are more likely to send higher fees because they can dig into what amounts to VC subsidies which currently masks some of the dysfunction in the fee system.

In addition, recall that nearly half of BitPay’s volume last year were miners selling block rewards and other people buying IT services (which could be GPU-based mining gear).  If this extends to the rest of the active, non-cold storage Bitcoin economy as a whole, then the miners collectively account for a large portion of the supply and perhaps even the demand of bitcoins (due to keeping tokens on their books as long-term bets on the appreciation of the token).  People in general are excited about the forthcoming halving because it decreases supply and therefore sell-side pressure, but if the mining industry shrinks, its ripples then impact those dependent on its sales such as non-diversified payment processors.



Source: XKCD

Perhaps as the bullish narrative states, increased consumer demand is around the corner and the trends above will drastically change.

In the meantime some startups in this space are still typically trying to evolve along the lines of an early stage social media app: build an MVP, raise a seed, acquire users, rapidly introduce new features, manage a rational head count and steady burn rate for 12 months before raising the next round all while trying to allegedly build Wall Street 2.0.

While the “move fast and break things” mantra may work for certain sectors of the economy, it probably does not work as effectively with finance.  And contrary to the wisdom from some venture capitalists in this space, nearly all the verticals in the Bitcoin-space are attempting to recreate a financial product or service of some kind that is based on the success of the currency being widely adopted/transacted/used.  Forex plays.

What does that mean?

Last November I made a trip to Singapore and heard a Los Angeles-based VC claim that “Bitcoin and Hashcash reinvented economics” and that we could ignore the world of finance and economic gurus.

Perhaps she is right.  But probably not.

Trying to reinvent hospitals without talking to doctors or nurses would be short sighted just as building a car without talking to mechanics and engineers would likely be asking for problems.

Bitcoinland is filled with hundreds of very bright computer scientists and entrepreneurs who are being funded by well-intentioned capitalists with a mandate to take risks and attempt to disrupt incumbents everywhere.  For instance, who would have guessed three or four years ago that conditions in mainland China, when coupled with guanxi in exchange for sweet land and energy deals, would incentivize a cottage industry of pools and farms to set up shop and pump out more than half the network hashrate?7

However, while this topic is beyond the scope of this article, Bitcoin itself does not natively replicate the plethora of financial services or instruments that the real world currently provides; and its current internal monetary system incentivizes users not to actually spend magic internet beans as they would actual currency but rather store them indefinitely.

Instead it has come down to limited partners — pension funds, insurance companies and high-net worth individuals — whom are directly trying to build a new financial ecosystem yet who, as shown in the flow chart above, indirectly end up owning a lot of this economic dead weight in the form of frozen virtual beans.  These tokens, like gold before them, do not provide dividends or interest, they cannot be natively relent without introducing a new trusted third party and thus are unable to generate additional wealth.8

Again, trends can always change, perhaps linear growth will indeed catalyze into exponential curves.  Perhaps rumors of “major deals” between Bitcoin companies and large banks will eventually germinate and DCG or the Argentinian community buys Necker Island with a few satoshis next year.910 Yet so far, about the only two exponential phenomenon we can empirically observe thus far is the usage of the terms “exponential” and “network effect” at conferences and in media.  Just three more to go and we can finally get a bingo.

[Acknowledgments: thanks to Pascal Bouvier, Ben Doernberg, Dave Hudson, AL, Jake Smith and Fabio Federici for their feedback]


  1. Or in short, the only real activity that seems to be going on still is day trading and arbing, no real above-board commerce yet. []
  2. It bears mentioning that there has been a lot of bonafide innovation and traction around multisig security.  This includes firms such as BitGo, GreenAddress and CryptoCorp as well as hardware “wallets” such as Ledger, Case and if the definition is slightly stretched, Trezor.  Note: as of this writing that an increasing portion of bitcoins have moved to P2SH. []
  3. There are exceptions to this rule, some farms such as those operated by Bitfury and by independent groups in China have “bumper” coins, their costs are significantly lower than competitors and therefore their profit margins are larger. []
  4. See The myth of a cheaper Bitcoin network: a note about transaction processing, currency conversion and Bitcoinland []
  5. The Bitcoin network creates roughly the same amount of tokens in just under 19 days. []
  6. Perhaps this is part of the “fake it till you make it” strategy and some could be argued that this is needed during the journey across the chasm.  And perhaps the VCs pushing this could be right in the long run.  Everyone likes line charts that go up, even if you or others in your industry are paying to make the line rise. []
  7. See Chapter 5 and Bitcoins: Made in China []
  8. See Can Bitcoin’s internal economy securely grow relative to its outputs? []
  9. In addition to pilots from Tembusu, Eris, Ripple Labs and other distributed ledger groups (which are not Bitcoin related), some notable startups trying to bridge Bitcoin directly and specifically with the world of finance include TeraExchange, SolidX, LedgerX, Mirror, Gemini, Open Assets (which NASDAQ is apparently trialing out), TradeBlock, ChromaWay and Hedgy.  See also No, Bitcoin is not the future of securities settlement by Robert Sams []
  10. For some observations on Argentina see also Can Bitcoin Conquer Argentina? by Nathaniel Popper []
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Panel from Blockchain University Demo Day

A couple weeks ago I moderated a panel at Blockchain University, wrapping up the inaugural cohort.

Panelists included Atif Nazir (co-founder of Block.io), Matthieu Riou (co-founder of BlockCypher) and Greg Slepak (co-founder of okTurtles Foundation).  All three were instructors for the course this past winter.

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Bitcoin / Dogecoin tipping and adoption panel

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

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

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

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Panel for Follow The Coin with Tina Hui and Jackson Palmer

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

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


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


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


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


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


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


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


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


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


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


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


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

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The Continued Existence of Altcoins, Appcoins and Commodity coins

Yesterday I gave a presentation at a Bitcoin Meetup held hosted by Plug and Play Tech Center in Sunnyvale.

I discussed the economic incentives for creating altcoins, appcoins, commodity coins and also covered several bitcoin 2.0 proposals.  The slides and video from the event are viewable below.  Download the deck for other references and citations.

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Gandal & Halaburda paper: Competition in the Crypto-Currency Market

Over the past several months, there have been a near infinite amount of conversations about the continual existence of altcoins — especially as it relates to prices (i.e., rising tide lifts all boats).  Some new preliminary research from Neil Gandal and Hanna Halaburda suggest that cryptocurrencies are not a winner-take-all scenario.  It should be noted that their time scale and usage of a select few exchanges may not be adequate for generalizations yet but some food for thought.

(Paper) (Slides)


We analyze how network effects affect competition in the nascent crypto-currency market. We do so by examining the changes over time in exchange rate data among crypto-currencies. Speci fically, we look at two aspects: (1) competition among different currencies, and (2) competition among exchanges where those currencies are traded. We fou nd that early in the market as Bitcoin becomes more valuable (against the USD), other crypto-currencies become less valuable against Bitcoin. This trend is reversed in the later period. Some of the other crypto-currencies lost most or all of their value. On the other hand, the values of some of the successful currencies increased in price against the USD, and at the faster rate than Bitcoin. The data in the latter period are consistent with the use of crypto-currencies as financial assets (popularized by Bitcoin), and not consistent with \winner-take-all” dynamics. For exchanges, we found little if any evidence of arbitrage opportunities. With no arbitrage opportunities, it is possible for multiple exchanges to coexist in equilibrium despite two-sided network effects.

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Fun fact: Litecoin’s hashrate nearly doubled after Bitcoin’s halvingday

What Dogecoin (of all cryptocurrencies) is highlighting is the huge importance of incentivizing the labor force to stay and continue providing security and utility.  With each halvingday Doge has gone through, this has led an exodus of labor elsewhere, sometimes to competing chains like Litecoin.

Again, a halving day is when the network informs the labor force that they are now receiving a 50% wage cut.

One common refrain that some Bitcoin advocates have stated in the past is that Bitcoin does not have a similar incentives issue.  As I have described in numerous articles and papers, this is false.

For instance, below is data from the Litecoin Hashrate statistics database at Bitinfo Charts.  The numbers expressed represent the collective hashing power of the Litecoin network:

  • 576.8 megahash/s on November 25, 2012
  • 572.62 megahash/s on November 26, 2012
  • 578.92 megahash/s on November 27, 2012
  • 687.47 megahash/s on November 28, 2012
  • ——— Bitcoin Halving Day ————
  • 1.11 gigahash/s on November 29, 2012
  • 1.28 gigahash/s on November 30, 2012
  • 1.14 gigahash/s on December 1, 2012
  • 834.75 megahash/s on December 2, 2012

What we see here is that some marginal miners that were previously hashing on the Bitcoin network left and began providing their labor on a competing network (Litecoin) that was temporarily more profitable to them (or at least, what they may have seen as future profitability relative to their costs).

These were likely GPU-based miners as FPGAs were increasingly being acquired and used by larger Bitcoin mining farms.  Remember, while there were some proprietary ASICs that were developed and used in this time frame, they were not available to the public at-large — the first ASICs that were sold to the public (from Avalon) did not come online till the end of January / beginning of February the following year.

Below are the corresponding dates on the Bitcoin network using the same database:

  • 24.65 terrahash/s on November 25, 2012
  • 26.52 terrahash/s on November 26, 2012
  • 25.29 terrahash/s on November 27, 2012
  • 29.47 terrahash/s on November 28, 2012
  • ——– Bitcoin Halving Day ———
  • 28.2 terrahash/s on November 29, 2012
  • 21.71 terrahash/s on November 30, 2012
  • 28.31 terrahash/s on December 1, 2012
  • 24.19 terrahash/s on December 2, 2012

The chart below is a visual representation of this phenomenon.


I have described the reasons for why this has occurred in the following articles:

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Will colored coin extensibility throw a wrench into the automated information security costs of Bitcoin?

[Note: a version of this appeared at Business Insider.  A PDF is also available of the version below.]

The cost of securing the Bitcoin network for a given length of time is roughly equivalent to the value of the block reward over the same time. In economic terms this reads as MP = MC. In Bitcoin and most of its descendants, the labor force (called miners) are provided a hard-coded wage, a seigniorage subsidy called a block reward roughly every 8-10 minutes in consideration for their providing security and processing transactions. In return, this labor force provides the security in a method called “proof-of-work” – hashing through benign math work until it finds a special number, broadcasting that solution to the network (the other laborers) and, once a block is found, repeating the cycle once again.

Is there an economic flaw of proof-of-work as it relates to security?  For instance, on most cryptocurrency chains the asset value of the chain has to be proportional to the proof-of-work otherwise this could lead to an economic incentive to attack the chain. Compounding this issue are new financial instruments such as metacoins, colored coins and smart contracts that can be exchanged on the same chains and unquestionably increase the enterprise value of the chain, yet which do not proportionally incentivize security beyond the existing seigniorage subsidy.

Economically rational laborers will not spend more than the value of a bitcoin to extract the rents of that bitcoin. Because mining rewards were fixed with the genesis block in 2009 (providing a fixed income on a scheduled time table), and market participants are able to determine the percentage of the overall hashrate at a given time that their mining equipment represents, only relatively simple calculations are required to gauge the potential profitability of their mining activities.

In practice, laborers on the Bitcoin network must account for the capital costs of their hashing equipment, rent for the land, administrative overhead, taxes and increasingly important, the energy costs which can be very specific to their locality, depending on the equipment’s geographic location. All of these costs are tallied against an inelastic wage which can only be attained if the hashing equipment they control is able to outcompete other such miners – it is a zero-sum game. And it can be scaled.

The Hashrate Wars

This subsequent escalation, dubbed a “hashrate war” (the competitive fight for ever increasing hashing equipment) created a technological S-curve that looks similar to the chart below:

hashrate over time

The vertical axis in the chart above is logarithmic and illustrates the hashing rate (showing that it will slow down once ASICs hit fabrication node limitations). The horizontal axis projects two years into the future (see also Bespoke Silicon).

Ignoring all of the various issues related to public goods challenges and game theory (such as “selfish mining”), this system has served the bootstrapping phase with relative ease. If it continues to expand at its current rate, the hardware side could potentially become commoditized in the next 3-4 years whereupon a miner’s competitive advantage will solely lay in energy arbitrage. In fact, Satoshi Nakamoto, the pseudonymous creator of the protocol foresaw this noting in the original FAQ that “When Bitcoins start having real exchange value, the competition for coin creation will drive the price of electricity needed for generating a coin close to the value of the coin.”

Thus the relationship between enterprise value and hashing power has been known for some time.

A challenge however, presents itself when this seigniorage subsidy is halved, a structural feature of most cryptocurrencies. With Bitcoin, every 4 years (or every 210,000 blocks) the subsidy is reduced by 50%. This is equivalent to the miners – the labor force – being told they would receive a 50% pay cut. While this issue typically remains hidden and muted when token values appreciate and rise, in the long run continual halvings discentivize laborers from providing security and utility to the network. There have been several “cryptocurrencies” whose labor force fled after their profitability period was over – most notably with Auroracoin – and as a consequence the network was left insecure and vulnerable to double-spending attacks (called a 51% attack).

One such popular token that is currently facing this dilemma is Dogecoin, which is losing 20-30% of its security force every 2 months. While there are potential solutions Dogecoin developers could adopt, incorporate or migrate to, because Dogecoin is still relatively young it has the flexibility of moving towards a different security mechanism. This issue has the potential to become systemic – and thus more difficult to address – in other digital currency ecosystems.

dogecoin comparison chart

Are there any other areas of asymmetric, unbalanced security?

Colored coins, metacoins, smart contracts and user-created assets are buzzwords trumpeted by many cryptocurrency enthusiasts this past year. I even wrote a short book about these groundbreaking possibilities. Considerable publicity has been dedicated to new functionality which promises to expand the extensibility of cryptoprotocols to go beyond tracking ledger entries for just one specific blockchain-managed asset (a coin) and allows users to instead “colored” tokens to represent cars, houses, commodities, stocks, bonds and other financial instruments and wares. For example, there are several colored coin projects currently in beta that allow users to take a fraction of a bitcoin, such as 0.001 BTC and “color” it “blue” (or any other arbitrary color) which represents say, a specific make and model of an automobile like a 2010 Camry LE. The user can then transfer that asset, the title of the Camry, along a cryptoledger (such as the Bitcoin network) to other individuals. Instead of having to transfer tens, hundreds or thousands of bitcoins in exchange for a good or service, users can instead exchange and manage entire asset classes in a trustless, relatively decentralized framework.

However, in this model the labor force providing security has no incentive to consume more capital or create additional hashrate just because the market value of colored coins is in excess of the uncolored value (since the value of miners’ new coins will be solely based on uncolored exchange value). Just because social conventions on the edges of the network add value perceptions to the network, based on the current code, miners do not automatically receive any additional value for providing that security.

So we should ask: does this raise the risk of a double-spend? Perhaps, because more hashrate is required for a proof-of-work blockchain with additional color value transactions on the chain. Yet, there is no automatic mechanism to do reward this additional labor leading a (remote) possibility of having to remove some Script’s altogether. Script is the built-in scripting language used for creating and customizing transactions.

The gap between mining value and enterprise value

For instance, assuming this colored coin technology works and is adopted by 1,000 people the following scenario could take place. The total market value of a block reward (currently 25 bitcoins) is roughly $12,500 (or $500 per bitcoin), thus ceteris paribus the labor force is only spending $12,500 every 10 minutes to secure the blockchain (in practice it is a lot more, there are several exceptions). One such exception is the expectation of token value appreciation – that is to say that if Bob the miner believes that a bitcoin’s value is $1000, but the price is currently $500, Bob is still willing to expend up to $1000 for mining each bitcoin, discounted by his internal calculation for the probability that bitcoin will rise to that price. However, if colored coins are adopted and used via the built-in scripting methods, there is potential for a seemingly unlimited amount of assets to be traded on the Bitcoin network. If these several thousand colored coin users add additional value, this creates an incentive for attackers to attack the network through colored coin-based double-spending attacks.

For example, where each of these 10,000 users places the title of a 2010 Camry each valued at $10,000 that would theoretically add $100 million in value that the network is transferring, but for which miners are not being proportionally rewarded or paid to secure those assets. As a consequence, over time as tens of thousands of assets – and functionality – are added to the network, the gap between mining reward value and enterprise value widens which creates a vulnerability, an economic incentive for criminals to use hashrate to attack the network. A rogue attacker could sell an asset and build a competing tree (consensus in Bitcoin is based on whatever is the longest tree of blocks). After a successful 51% attack, the rogue attacker could then broadcast a fake chain built without the corresponding asset, having switched it out thus effectively double-spending. And if the total value that the network is transacting is at least twice as much as bitcoin value is, then there is a financial incentive for rogue participants to attack the network. The impact of a successful attack involves a lot of speculation and will likely fill continue to provide researchers many more volumes of conjecture and modeling.

Money for nothing

This scenario raises the question: what then is the potential divergence in value between bitcoin the currency and bitcoin the network (which can transfer and protect other data)? This issue only presents itself now as, previously, only bitcoins – and no other apps, assets or instruments – existed on the network. This gives rise to a coordination problem because miners would have to also keep track of the color, keep track of the exchanges the color is being traded on, and keep track of the settlement price (if there is such a thing) so that they could adequately gauge market clearing prices and readjust the coinbase reward every 10 minutes.  Again, even if this coordination problem is solved the seigniorage reward does not increase – the current fixed income does not reflect the actual value being transacted on the network.  So colored coins on a fully decentralized network could end up on an undersecured network of their own making with the only solution: recode the block rewards based on the value of the color and this presents a number of technical and social engineering challenges. In some ways this issue is related to the hypothetical economic disconnection between blacklisted and whitelisted tokens (due to Coin Validation) – a blacklisted token would be sold for less than what a whitelisted token would sell for.

A follow-up question that the community will likely debate is: Why wouldn’t the value of a bitcoin increase as items of value are transferred on the blockchain via colored coins or another protocol, such that the miner’s block rewards would adequately compensate the miners? According to Preston Byrne, a securitization attorney in London the answer to this is “that the value of bitcoin used in a colored coin transaction does not need to bear any relationship to the value of the associated asset – the network is being used to transmit information, and that information represents rights, and is the rights – not the token – which are valuable.” If the price of bitcoin does not adequately incentivize the miners, then there will be a difference between value of a bitcoin and the network and then some entity will have to step in to compensate for that difference. Whether collective action is sufficient to provide this compensation is currently unknown but there are coordination problems inherent in this model that would make this difficult.

In contrast, the Ripple protocol, sidechains and perhaps even a proof-of-stake system could probably alleviate at least this specific concern. These alternative consensus mechanisms have one advantage to hash-based proof of work systems like Bitcoin, at least for the transfer of non-crypto value (i.e., colored coins).  For instance, Ripple’s distributed consensus mechanism allows users to exchange assets via gateways without needing to proportionally incentivize the security labor force. This is not necessarily an endorsement of this particular platform, rather it serves as examples of how it is immune to that particular attack vector.

Alternative approaches to network security

I reached out to several experts for their views on this issue. According to Robert Sams, founder of Krtyptonomic and Cryptonomics:

One of the arguments against the double-spend and 51% attacks is that it needs to incorporate the effect a successful attack would have on the exchange rate. As coloured coins represent claims to assets whose value will often have no connection to the exchange rate, it potentially strengthens the attack vector of focusing a double spend on some large-value colour. But then, I’ve always thought the whole double-spend thing could be reduced significantly if both legs of the exchange were represented on a single tx (buyer’s bitcoin and seller’s coloured coin).

The other issue concerns what colour really represents. The idea is that colour acts like a bearer asset, whoever possesses it owns it, just like bitcoin. But this raises the whole blacklisted coin question that you refer to in the paper. Is the issuer of colour (say, a company floating its equity on the blockchain) going to pay dividends to the holder of a coloured coin widely believed to have been acquired through a double-spend? With services like Coin Validation, you ruin fungibility of coins that way, so all coins need to be treated the same (easy to accomplish if, say, the zerocoin protocol were incorporated). But colour? The expectations are different here, I believe.

On a practical level, I just don’t see how psudo-anonymous colour would ever represent anything more than fringe assets. A registry of real identities mapping to the public keys would need to be kept by someone. This is certainly the case if you ever wanted these assets to be recognised by current law.

But in a purely binary world where this is not the case, I would expect that colour issuers would “de-colour” coins it believed were acquired through double-spend, or maybe single bitcoin-vs-colour tx would make that whole attack vector irrelevant anyway. In which case, we’re back to the question of what happens when the colour value of the blockchain greatly exceeds that of the bitcoin monetary base? Who knows, really depends on the details of the colour infrastructure. Could someone sell short the crypto equity market and launch a 51% attack? I guess, but then the attacker is left with a bunch of bitcoin whose value is…

The more interesting question for me is this: what happens to colour “ownership” when the network comes under 51% control? Without a registry mapping real identities to public keys, a psudo-anonymous network of coloured assets on a network controlled by one guy is just junk, no longer represents anything (unless the 51% hasher is benevolent of course). Nobody can make a claim on the colour issuer’s assets. So perhaps this is the real attack vector: a bunch of issuers get together (say, they’re issuers of coloured coin bonds) to launch a 51% attack to extinguish their debts. If the value of that colour is much greater than cost of hashing 51% of the network, that attack vector seems to work.

In other words, while these new financial instruments could technically be exchanged in a trustless manner, the current protocol cannot automatically incentivize their protection or account for their enterprise value, the equivalent of using a mall security guard to protect Fort Knox. While miners may be able to protect against amateurish shoplifters or even unorganized cat burglars, once organized criminals calculate and realize that one “color” asset is worth the economic effort of attacking the vault they may try to do so.   And because the blockchain is public and color assets could be known to the world-at-large, taking the Fort Knox analogy further, this would be like a mall cop standing in front of the contents of Fort Knox piled up on an open field (or behind a see-through glass vault). It is an attempt to guard the Crown jewels not in a fortress with armed guards, tanks and turrets, but with Paul Blart.

On this point, Jonathan Levin, co-founder of Coinometrics explained that:

We don’t know how much proof of work is enough for the existing system and building financially valuable layers on top do not contribute any economic incentives to secure the network further. These incentives are fixed in terms of Bitcoin – which may lead to an interesting result where people who are dependent on coloured coin implementations hoard bitcoins to attempt to and increase the price of Bitcoin and thus provide incentives to miners.

It should also be noted that the engineers and those promoting extensibility such as colored coins do not see the technology as being limited in this way. If all colored coins can represent is ‘fringe assets’ then the level of interest in them would be minimal. Time will tell whether this is the case. Yet if Bob could decolor assets, in this scenario, an issuer of a colored coin has (inadvertently) granted itself the ability to delegitimize the bearer assets as easily as it created them.  And arguably, decoloring does not offer Bob any added insurance that the coin has been fully redeemed, it is just an extra transaction at the end of the round trip to the issuer. That is an implicit negative for investors and users.  This raises some concerns in the future, if a party had the ability to invalidate Bitcoin accounts based on their own criteria that the miners might gain an influence over the colored coins and may bias various aspects of the economy incentivized through some kind of backchannel payment.  For instance, BitUndo is a new “double spending as a service” project that is trying to do just that, provide a way for users to send transactions to a mining pool in an attempt to reverse transactions something that has created a flurry of reactions in the community. In the end, colored coins ends up being expensive through imposed TX fees, and thus becomes less attractive to issuers and users.

According to Alex Mizrahi, lead developer of Chromawallet a colored coin project:

It is true that currently block subsidy has a significant impact on network’s security, but it is not meant to work this way in the long run.

We’ll go through 5 subsidy halvings in next 20 years, at that point block subsidy will be around 0.78 BTC. Reward miners get from fees is already on that scale (e.g. 0.134 BTC here) even though blocks aren’t full yet.

So transaction fees are going to play bigger role than subsidy. And value of those fees is linked to usefulness of transactions (i.e. value of those transactions) rather than to exchange rate.

Colored coins increase incentive to attack, but they also increase usefulness of transactions, thus it isn’t clear whether they will have negative or positive impact on network security.

A couple other comments: “Script” is not required for colored coins, they work with very plain bitcoin transactions too. The incentive structure for bitcoin mining sucks from security perspective anyway, so I hope we’ll eventually upgrade to a better protocol (e.g. including proof-of-stake) regardless of colored coin woes. And merged-mined sidechains will have even worse problems unless they are ‘hardened’ in some way.

I also contacted Jack Wang, co-founder of Bitfoo, a hosted wallet that was the first to implement proof-of-reserves. In his view:

The security of the network depends on the aggregate hashing power.  In one method of implementation, if Colored Coins could pay just one pool, say Eligius, extra to prioritize their transactions, but Eligius had only, say 25% of the network power, then the rest of the network could collectively decide to exclude the blocks that Eligius mined.  This makes some sense to me since Eligius itself couldn’t secure the network, yet is the only pool extracting the extra value out of Colored Coins.  Colored Coins would need to distribute the extra rents to at least 50% of the network, and unless this lies within one pool then this is a danger to the Bitcoin network, but if it is 2 or more, this requires coordination and introduces potential holdout problems.

A more natural way to implement this would be that colored coins users would pay higher transaction fees on their own so that any and all miners that included those transactions in their blocks would get more fees. But unless those fees are mandated by colored coins, what is the incentive for individual colored coins users to pay extra?

Towards a more functional future

While this is a speculative issue, what is knowable is that the economics behind it are math-based and built into these protocols. What is also known is that some proposed solutions should be easier to implement than others. For instance, Bitcoin developers could fork the code and create a proof-of-stake ledger proposed by Stephen Reed. Alternatively, because this new extensibility could create fungibility issues, a different – and admittedly impractical – solution might be for mining pools to utilize a trusted Oracle data feed to colored coin exchanges and adjust mining rewards accordingly. Perhaps removing scripts entirely and relying on merge-mined sidechains, instead, could alleviate this potential pain point as well.

What is definitely known is that market participants have every incentive to keep miners mining. If fees are floated users will likely pay higher transaction fees if they do not want miners to go elsewhere. While speculative, colored coins users could become the biggest payer of transaction fees, though in practice, most users do not like paying any fee. Over the past several months this is an issue that Mastercoin and Counterparty developers have promoted: pay the miners higher fees for access to these new platforms because miners expect the value of these special transactions to go beyond the excess of bitcoin transactions. Miners could potentially auction block priority to these transactions over regular bitcoin transactions. One pool, Eligius, operated by Luke-Jr is already filtering out specific bitcoin transaction today. In conclusion, the interaction between second-generation blockchain technology and first-generation incentive mechanisms will continue to be thought-provoking. It is certainly an issue to keep one’s eye on in the coming years.

[Note: I would like to thank Preston Byrne, Petri Kajander and Taariq Lewis for their comments; and Joshua Zeidner for bringing this issue to my attention and for his extensive feedback.]

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Digital currency wingmen (and women)

save-FerrisI have a new article up over at CoinDesk discussing some of the challenges facing Dogecoin as it relates to block halving rewards:  What Dogecoin Must Do to Survive

There were some edits and a few things were removed, so for those interested I also have my original copy in (pdf) that has one more option, a chart, plus a few more details and links.  The title of the original is “Dogecoin likely needs a wingman to survive” (it also links to the MemoryCoin “death”).

There are a number of potential solutions and many well-intentioned, motivated people are trying to organize a variety of ways to “Save Doge” happen.

For instance, this is/was a very popular Dogecoin thread from yesterday: Here’s your ASICs and pools — one of the developers has purchased ASICs from gridseed and is giving them to randomly selected people with the stipulation that they turn the hashrate towards dogecoin.

There are four problems with this specific proposal:

  1. It will simply increase the difficulty rate, pushing out other marginal miners who cannot profitably provide security on doge towards other more profitable chains (this  has occurred with Bitcoin in the past as well).
  2. From my reading it does not appear that there is any way to control those who receive the ASICs from pointing the ASICs on to another more profitable chain(s).  Whoever is distributing these would need to do some kind of “lock-in” otherwise this will occur.
  3. The question of who pays electricity is not highlighted or answered in the top of the thread.
  4. Nor is the question of who keeps the coins that are generated.  Are the holders of the coins required to keep them, sell them, trade them?  If they have to pay for electricity, taxes, logistics then they will likely need to liquidate those coins.

What this essentially amounts to is temporarily subsidizing hashrate on the doge network but with several unintended consequences that will likely create more challenges down the road.

Again, I think competition and choice is good.  I do not think (and this is just my opinion) that a monopoly-of-ideas behind just one token is an effective way to promote a new innovation that itself was purportedly designed to compete with other forms of payment.  In an open market, market participants decide and their preferences can change based upon economic conditions.  It impossible to predict what the market will decide a priori thus despite these predictions and trends the market may move in a different direction.

However, this reddit plan above ultimately just sends money to the utility companies, postponing the inevitable by writing checks to an electrical money pit.

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Cryptocurrency in the news: #14

I have been pretty busy this past week on China-related activities, but below are some interesting stories, projects and companies I came across concerning the growing cryptocurrency ecosystem.

Of particular interest is the follow-up piece from Preston Byrne (one of the lawyers who helped me with Chapter 2, hire him, he’s brilliant): Bitcoin and the English legal system, part II

Probably the weirdest article was this one calling for Dogecoin to become the “national” currency of Venice (due to a historical spelling similarity).  If this doesn’t illustrate “jumping the shark,” I don’t know what else can.  But then again, I’m just one market participant.

Thanks to Petri Kajander and Andrew White for several of the links:

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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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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]


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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