[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.
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%.
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.
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%).
Above is a weekly volume chart denominated in USD beginning from March 2013 for LocalBitcoins.com. As discussed in previousposts, 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
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 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.
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.
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.
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:
Interestingly however, the order is slightly different in the App Store on an iPad. The top 6 are:
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?
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 pivotaway 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.
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. [↩]
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. [↩]
[Note: the views expressed below are solely my own and do not necessarily represent the views of my employer or any organization I advise.]
I have spent the past few weeks in East Asia, primarily in China visiting friends and relatives. Because the connection to the outside world was limited, the upside was that the cacophonous noise of perma cryptocurrency pumpers was relatively muted. I have had a chance to reflect on a number of ideas that are currently being discussed at conferences and on social media.
The first idea is not new or even unique to this blog as other companies, organizations and individuals have proposed a type of digital signature analytics + KYC tracking process for cryptocurrencies. A type of Kimberley Process but for cryptocurrencies.1
For instance, the short lived startup CoinValidation comes to mind as having the first-to-market product but was notably skewered in the media. Yet its modus operandi continues on in about 10 other companies.2
A Formal Kimberley Process
For those unfamiliar with the actual Kimberley Process, it is a scheme enacted in 2003 to certify where diamonds originated from in order to help prevent conflict diamonds from entering into the broader mainstream diamond market.
The general idea behind proving the provenance of diamonds is that by removing “blood diamonds” from the market, it can cut off a source of funding of insurgencies and warlord activity.3
What does this have to do with cryptocurrencies? Isn’t their core competency allowing non-KYC’ed, pseudonymous participants to send bearer assets to one another without having to provide documentation or proof of where those assets came from? Why would anyone be interested in enabling this?
Some may not like it, but a de facto Kimberley Process is already in place.
For instance, in many countries, most of the on-ramps and off-ramps of venture-backed cryptocurrency exchanges are actively monitored by law enforcement, compliance teams and data analytic providers who in turn look at the provenance of these assets as they move across the globe.4
On the fiat side, while many jurisdictions in North America and Western Europe currently require domiciled cryptocurrency exchanges and wallets to enforce KYC and AML compliance requirements, several areas of Asia are less strict because the local governments have not defined or decided what buckets cryptocurrencies fall into.5
There are some other noticeable gaps in this system involving crypto-to-crypto exchanges. Irrespective of regions: implementing harmonized KYC/AML standards on the non-fiat side of exchanges appears to be missing altogether. That is to say that very few, if any, exchange does any kind of KYC/AML on crypto-to-crypto.6
What are some examples of why a Kimberley Process would be helpful to both consumers and compliance teams?
Below are three examples:
(1) During my multi-country travel I learned that there are several regional companies that sell debit cards with pre-loaded amounts of cryptocurrency on them. Allegedly two of of the popular use-cases for these cards is: bribery and money laundering. The example I was provided was that it is logistically easier to move $1 million via a thin stack of debit cards than it is to carry and disperse bags of cash with.7
Attaching uniform KYC and legal identities to each asset would aid compliance teams in monitoring where the flow of funds originated and terminated with cryptocurrencies. And it would help consumers shy away from assets that could be encumbered or were proceeds of crime.
(2) Affinity fraud, specifically housewives (家庭主妇), are common targets of predators. This has been the case for long before the existence of computers let alone cryptocurrencies, but it came up several times in conversations with friends. According to my sources, their acquaintances are repeatedly approached and some actually took part in Ponzi schemes that were presented as wealth management products.
The new twist and fuel to these schemes was that there is some kind of altcoin or even Bitcoin itself were used as payout and/or as rails between parties. We have already seen this with MMM Global — which is still an active user of East Asia’s virtual currency exchanges — but two questionable projects that I was specifically shown were OctaCoin and ShellCoin.8
Note: in January 2016 multiple Chinese governmental bodies issued warnings about MMM Global and other Ponzi schemes.
[Video of MMM Global operations in The Philippines. Is that really Manny Pacqiauo?]
Victims who were not tech savvy and lied to, have no recourse because there is no universal KYC / KYCC / AML process to identify the culprits in these regions. Similarly, when these illicit virtual assets are re-sold to exchanges, customers of those exchanges such as Alice and Bob, may receive potentially encumbered assets that are then resold to others who are unaware of the assets lineage (much like a stolen motorcycle being resold multiple times). This creates a massive lien problem.
But property theft is not a new or unknown problem, why is it worth highlighting for cryptocurrencies?
Many of the original victims in East Asia are not affluent, so these scams have a material impact on their well being. The average working adult in many provinces is still less than $500 per month. Thus not only do they lack a cushion from scams but any price volatility — such as the kind we continue to see in cryptocurrencies as a whole, can wipe out their savings.
(3) Due to continual usage of botnets and stolen electricity — which is still a problem in places like China — the lack of identification from coin generation onward results in a environment in which ‘virgin coins’ sell at a premium because many exchanges don’t investigate where machines are located, who owns them, who paid for the opex and capex of those operations (e.g., documentation of electric bills).9
Unfortunately, the solutions proposed by many cryptocurrency enthusiasts isn’t to create more transparency and identification standards enabling better optics on coin provenance but rather to make it even harder to track assets via proposals like Confidential Transactions.10
Heists, thefts and encumbered coins
I am frequently asked how is it possible to know who received potentially encumbered cryptocurrencies? For amateur sleuths, there is a long forum thread which lists out some of the major heists and thefts that occurred early on in Bitcoinland.
Above is a video recording of a specific coin lineage: transactions that came from the Bitcoinica Theft that ended up in the hands of Michael Marquardt (“theymos”) who is a moderator of /r/bitcoin and owner of Bitcoin Talk.11
Recall that in July 2012, approximately 40,000 bitcoins were stolen from the Bitcoinica exchange.12 Where did those end up? Perhaps we will never know, but several users sued Bitcoinica in August 2012 for compensation from the thefts and hacks.
How are consumer protections handled on public blockchains?
In short, they do not exist by design. Public blockchains intentionally lack any kind of native consumer protections because an overarching goal was to delink off-chain legal identities from the pseudonymous interactions taking place on the network.
Thus, stolen cryptocurrencies often recirculate, even without being mixed and laundered.13
Consequently a fundamental problem for all current cryptocurrencies is that they aren’t exempt from nemo dat and have no real fungibility because they purposefully were not designed to integrate with the legal system (such as UCC 8 and 9).14 Using mixers like SharedCoin and features like Confidential Transactions does not fundamentally solve that legal problem of who actually has legal title to those assets.1516
Why should this matter to the average cryptocurrency enthusiast?
If market prices are being partially driven by predators and Ponzi schemes, wouldn’t it be in the best interest of the community to identity and remove those?17
Perversely the short answer to that is no. If Bob owns a bunch of the a cryptocurrency that is benefiting from this price appreciation, then he may be less than willing to remove the culprits involved of driving the prices upward.
For example, one purported reason Trendon Shavers (“pirateat40”) was not immediately rooted out and was able to last as long as he did — over a year — is that his Ponzi activity (“Bitcoin Savings & Trust”) coincided with an upswing in market prices of bitcoin.18 Recall over time, BS&T raised more than 700,000 bitcoins. Why remove someone whose activity created new demand for bitcoins? 19
But this incentive is short-sighted.
If the end goal of market participants and enthusiasts is to enable a market where the average, non-savvy user can use and trust, then giving them tools for provenance could be empowering. Ironically however, by integrating KYC and provenance into a public blockchain, it removes the core — and very costly — characteristic of pseudonymous, censorship-resistant interaction.
Thus there will likely be push back for implementing a Kimberley Process: doxxing every step of provenance back to genesis (coin generation) with real world identities removes pseudonmity and consequently public blockchains would no longer be censorship-resistant. And if you end up gating all of the on-ramps and off-ramps to a public chain, you end up just creating an overpriced permissioned-on-permissionless platform.
Despite this, Michael Gronager, CEO of Chainalysis, notes that:
Public ledgers are probably here to stay – difficult KYC/AML processes or not. I probably see this as a Nash equilibrium – like in the ideal world all trees would be low and of equal height but there is no path to that otherwise optimal equilibrium. We believe that fighting crime on Blockchains will both build trust and increase their use and value.
One way some market participants are trying to help law enforcement fight crime is through self-regulating organizations (SRO).
For instance, because we have seen time and time again that the market is not removing these bad actors from the market, several companies have created SROs to help stem the tide. However, as of right now, efforts like the US-based “Blockchain Alliance” — a gimmicky name for a group of venture-backed Bitcoin companies — has limited capabilities.20 They have monthly calls to discuss education with one another in the West (e.g., what is coin mixing and how does it work?) but currently lack the teeth to plug the KYC/AML gaps in Asia. Perhaps that will change over time.
And as one source explained: consider this, has any Bitcoin thief been caught? Even when there is decent evidence, we are not aware of a Bitcoin thief that was actually found guilt of stealing bitcoin, yet.21 Thus an open to question to people who argue that cryptocurrencies are great because of transparency: a lot of bitcoin has been stolen, and no one has been found guilty for that crime. Why not?
Process of elimination
Over the past six weeks, there has been very little deep research on why market prices have risen and fallen. Usually it is the same unfounded narratives: emerging market adoption; hedge against inflation; hedge against collapse of country X, Y or Z; hedge against Brexit; etc. But no one provides any actual data, least of all the investors financing the startups that make the claims.
Perhaps the research that has been done on the matter was from Fran Strajnar’s team at BNC. For instance, on June 1st they noted that:
I reached out to Fran and according to him, in early June, “Somebody dropped many many millions ($) across 4 different Chinese Exchanges in a 2 hour period, without moving price – 4 days before the price rise started last week. Because it was over multiple exchanges and these trades were filled, we are digging into it further.”
If there was a standardized Kimberley Process used by all of these exchanges, it would be much easier to tell who is involved in this process and if those funds were based on proceeds of illicit activity.
Furthermore, barring such a Process, we can only speculate why journalists haven’t looked into this story:
(1) many of them do not have reliable contacts in East Asia
(2) those that do have contacts with exchange operators may not be getting the full story due to exchanges lacking KYC / KYCC / AML standards themselves
(3) some reporters and exchange operators own a bunch of cryptocurrencies and thus do not want to draw any negative attention that could diminish their net worth
Third parties such as Wedbush Securities and Needham have also published reports on price action, but these are relatively superficial in their analysis as they lack robust stats needed to fully quantify and explain the behavior we have seen.
Strangely enough, for all the pronouncements at conferences about how public blockchains can be useful for data analysis, very few organizations, trade media or analysts are publishing bonafide stats.
After all, who are the customers of these virtual currency exchanges? Because of reporting requirement we know who uses Nasdaq and ICE, why don’t we know who uses virtual currency exchanges still?
Two months ago I had a chance to speak with Marcus Swanepoel, CEO of BitX, about his experiences in Africa. BitX coordinates with a variety of compliance teams to help block transactions tied to scams and Ponzi schemes. In the past, BitX has managed to help kill off two ponzi schemes and has tried to block MMM Global which has spread to Africa.
Earlier this spring, some MMM users that were blocked by BitX just moved to another competing local exchange that didn’t block such transactions. As a result, over the course of 8 weeks this exchange did more than 3x volume than BitX during same time frame.22 BitX has subsequently regained part of this market share partly due to MMM fading in popularity.
Why is MMM so successful? Users are asked to upload videos onto Youtube of why MMM Global is great and why you should join and are then paid by MMM as a reward. This becomes self-reinforcing in large part because of the unsavvy victims who are targeted.
But MMM isn’t to blame for everything.
For instance, in China there have been a variety of get-rich-quick Ponzi schemes that rose and blew up, such as an ant farm scheme in 2007. And earlier this year, Ezubao, the largest P2P lending platform in China fell apart as a $7.6 billion Ponzi scam.23 No cryptocurrency was involved in either case.
Yet as Emin Gün Sirer pointed out, some of the activities such as The DAO, basically act as a naturally arising Ponzi.
In fact, one allegation over the past couple weeks is that The DAO attacker placed a short of 3,000 bitcoin on Bitfinex prior to attacking The DAO (which was denominated in ether).24 If there was a Kimberley Process in which all traders on all exchanges had to comply with a universal KYC / KYCC / AML standard, it would be much easier to identify the attackers as well as compensate the victims.
Similarly, because ransomware remains a “killer app” of cryptocurrencies such that companies, police stations, hospitals, elementary schools and even universities are now setting up Coinbase accounts and stockpiling cryptocurrencies to pay off hackers. What is the aggregate demand of all of this activity? If it is large, does it impact the market price? And how would a Kimberley Process help provide restitution to the victims of this ransom activity?
A strawman Kimberley Process
How can you or your organization get involved in creating a Kimberley Process for cryptocurrencies?
Right now there is no global, industry standard for “best practices” in mutualizing, implementing, or carrying out KYC / AML provisions for cryptocurrencies.25
In writing this post, several sources suggested the following process to kick-start an effort:
(1) organize an industry-level event(s) which brings together:
(a) AML analytics companies
(b) representatives from regulatory bodies and law enforcement (e.g., FATF, FinCEN)
(c) KYC/AML practitioners
(d) existing market structures and utilities such as SIFMA, ROC, Swift (e.g., KYC registry, LEI)
(e) compliance teams from cryptocurrency exchanges and wallets
(2) at the event(s) propose a list of baseline standards that exchanges and wallets can try to implement and harmonize:
(a) what documentation is required for KYC / KYCC / AML
(b) other financial controls and accountability standards that can assist exchange operators (e.g., remove the ability for an operator to naked short against its own customer base)
(3) tying these standards together with a uniform digital identity management system could be the next step in this process.
On that last point, Fabio Federici, CEO of Skry (formerly Coinalytics), explained:
In general I believe the biggest unsolved problem is still identity and information sharing. Obviously you don’t want all your PII and transaction meta data on a public blockchain, as this information could not only be leveraged by profit seeking organizations, but also malicious actors. So the question becomes what’s the right framework for sharing the right amount of information with only the people that need access to it (maybe even only temporarily).
PII stands for personal identifying information. In theory, Zcash (or something like it) has the potential to solve some of Fabio’s concerns: relevant info can be encoded in the transaction, and only the relevant parties can read it. But this delves into “regulated data” which is a topic for another post.26
Similarly, Ryan Straus, an attorney at Riddell Williams and adjunct professor at Seattle University School of Law explained that:
Identity is central to the legal concept of property. Property systems are information systems: they associate identified entities with identified rights. With the sole exception of real currency, possession or control is not conclusive indicia of ownership.
Factual fungibility simply makes it harder to prove that you have a better claim to a specific thing than the person who now possesses or controls it. The hard part about what you have written about is that it is difficult to avoid conflating KYC (which involves identity of people) and the Kimberley Process (which involves identifying things).
In order to enable participants to share information without being unduly hounded by social media, it was also suggested that the presence of: investors, cryptocurrency press and cryptocurrency lobbying groups should kept to a minimum for the initial phase.
In addition to implementing additional financial controls and external audits, cryptocurrency exchanges and wallets adopting a Kimberley Process would help provide transparency for all market participants.
While it is probably impossible to remove all the bad actors from any system, reducing the amount of shadows they have to hide could provide assurances and reduce risks to market participants of all shapes and sizes.
However, the trade-off of implementing such a Process is that it negates the core utility that public blockchains provide, turning them into expensive permissioned gateways. And if you are permissioning activity from the get-go, you might as well use a permissioned blockchain which are cheaper to manage and operate and also natively bake-in the KYC, KYCC and AML requirements. But that is a topic for another post as well.
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One reviewer argued that analytics may be superior to KYC. In the event of a compromised account — so goes the argument — analytics can help provide linkage between the flow of funds whereas KYC of compromised accounts would be “illusory.” [↩]
This includes but is not limited to: Chainalysis, Blockseer, Skry, Elliptic, Netki and ScoreChain. [↩]
Incidentally there is a UK-based startup called Everledger which works with insurance companies and tracks a catalogue of diamonds vis-à-vis a blockchain. [↩]
See: Flow of Funds; KYSF; KYSF part 2; and bitcoin movements. To actively monitoring transactions at these entry and exit points, based on anecdotes, up to 20% of all nodes on the Bitcoin network may be managed and operated by these same set of participants as well. [↩]
Note: it bears mentioning that as of this writing, no country has recognized cryptocurrencies as actual legal tender and consequently cryptocurrencies are not exempt from nemo dat. This is important as it means the provenance of the cryptocurrencies actually does matter because those assets could be encumbered. [↩]
I asked around and my sources do not know of a single exchange that does KYC/AML on cryptocurrencies that are directly exchanged for other cryptocurrencies (e.g., Shapeshift). Furthermore, as highlighted in the past, there are gaps in compliance when it comes to certain fiat-to-cryptocurrency exchanges such as BTC-e and LocalBitcoins. [↩]
This is in USD equivalence, usually not in USD itself. [↩]
OctaCoin is interesting in that the operators behind it claim that it is financed from revenue streams of 3 online casinos who purportedly payout users on a regular basis. Note: gambling in China is a bit like golf in China: it’s illegal but everywhere. It is only legal in a few internal jurisdictions such as Hainan and Macau and elsewhere on the mainland only a couple of state-run lotteries are given legal status. [↩]
Note: stealing electricity to mine bitcoins has occurred in other areas of the world too, including in The Netherlands. [↩]
The official motivation for developing Confidential Transactions is to enable more user privacy which then leads to more fungibility. As one source pointed out: “At the end of the day it’s a balance between privacy and security. Basically the story goes ‘just because I don’t what anyone to know what I’m buying, doesn’t mean I’m a drug dealer.'” [↩]
Marquardt also allegedly co-owns both Bitcoin.org and Blockexplorer.com, and co-manages the Bitcoin Wiki. [↩]
The Craig Wright / Satoshi saga is interesting because in a recent interview Craig admittedly used Liberty Reserve which was an illicit exchange based in Costa Rica shut down by the US government. According to the interview he also had ties to Ross Ulbricht, the convicted operator of Silk Road. [↩]
See The Law of Bitcoin, Section 1.5 in the United States chapter from Ryan Straus. There are exceptions, see UCC Article 2 – sale of goods. [↩]
Interestingly, SharedCoin.com (sometimes referred to as Shared Send) used to be a mixer run by Blockchain.info, a venture-backed startup. It was recently shutdown without any notice and the domain now redirects to the CoinJoin wiki entry. They also pulled the SharedCoin github repo and any material that links it back to Blockchain.info. [↩]
One reviewer mentioned that: “Ponzi schemes will always exist and should probably be fought not just in the crypto space but where in other industries too; requiring continuous education. It would be way simpler and more effective to shut down domains owned by MMM than it would to be to do anything else, but here you actually meet the pseudonymity feature of the Internet. Try to do that internationally – it is not easy!” [↩]
Note: this is a similar argument that Rick Falkvinge made three years ago. [↩]
There are probably several dozen advocacy groups and non-profit working groups scattered across the world. Each has different goals. For instance, ACCESS in Singapore works with some regulators in SEA. While others are merely trying to create technical standards. [↩]
Most of the criminals that are convicted are found guilty of money laundering and interaction with illicit trade, not theft of bitcoins themselves. [↩]
Two months ago, the Financial Timesbriefly covered this story and Marcus wrote about some of it in March as well. [↩]
There were some early warning signs for that industry. For instance, according to a Bloomberg story in February 2015: “The value of China’s peer-to-peer lending transactions surged almost 13-fold since 2012 to $41 billion last year, according to Yingcan Group, which tracks the data,” notes Bloomberg. However, 275 of the more than 1,500 lending went bankrupt or had trouble repaying money in 2014, an increase from 76 just a year earlier, according to Yingcan. [↩]
[Disclaimer: The views expressed below are solely my own and do not necessarily represent the views of my employer or any organization I advise.]
William Mougayar is an angel investor who has been investigating the cryptocurrency and broader distributed ledger ecosystem over the past several years.
He recently published a book entitled The Business Blockchain that attempts to look at how enterprises and organizations should view distributed ledgers and specifically, blockchains.
While it is slightly better than “Blockchain Revolution” from the Tapscott’s, it still has multiple errors and unproven conjectures that prevent me from recommending it. For instance, it does not really distinguish one blockchain from another, or the key differences between a distributed ledger and a blockchain.
Note: all transcription errors below are my own. See my other book reviews.
On p. xxii he writes:
“These are necessary but not sufficient conditions or properties; blockchains are also greater than the sum of their parts.”
I agree with this and wrote something very similar two years ago in Chapter 2:
While the underlying mathematics and cryptographic concepts took decades to develop and mature, the technical parts and mechanisms of the ledger (or blockchain) are greater than the sum of the ledger’s parts.
On p. xxiv he writes:
“Just like we cannot double spend digital money anymore (thanks to Satoshi Nakamoto’s invention), we will not be able to double copy or forge official certificates once they are certified on a blockchain.”
There are two problems with this:
Double-spending can and does still occur, each month someone posts on social media how they managed to beat a retailer/merchant that accepted zero-confirmation transactions
Double-spending can and is prevented in centralized architectures today, you don’t need a blockchain to prevent double-spending if you are willing to trust a party
[Note: recommend that future editions should include labeled diagrams/tables/figures]
On p. 11 he writes:
“Solving that problem consists in mitigating any attempts by a small number of unethical Generals who would otherwise become traitors, and lie about coordinating their attack to guarantee victory.”
It could probably be written slightly different: how do you coordinate geographically dispersed actors to solve a problem in which one or more actor could be malicious and attempt to change the plan? See also Lamport et al. explanation.
On p.13 he writes compares a database with a blockchain which he calls a “ledger.”
I don’t think this is an accurate comparison.
For instance, a ledger, as Robert Sams has noted, assumes ties to legal infrastructure. Some blockchains, such as Bitcoin, were intentionally designed not to interface with legal infrastructure, thus they may not necessarily be an actual ledger.
To quote Sams:
I think the confusion comes from thinking of cryptocurrency chains as ledgers at all. A cryptocurrency blockchain is (an attempt at) a decentralised solution to the double spending problem for a digital, extra-legal bearer asset. That’s not a ledger, that’s a log.
That was the point I was trying to make all along when I introduced the permissioned/permissionless terminology! Notice, I never used the phrase “permissionless ledger” — Permissionless’ness is a property of the consensus mechanism.
With a bearer asset, possession of some instrument (a private key in the cryptocurrency world) means ownership of the asset. With a registered asset, ownership is determined by valid entry in a registry mapping an off-chain identity to the asset. The bitcoin blockchain is a public log of proofs of instrument possession by anonymous parties. Calling this a ledger is the same as calling it “bearer asset ledger”, which is an oxymoron, like calling someone a “married bachelor”, because bearer assets by definition do not record their owners in a registry!
This taxonomy that includes the cryptocurrency stuff in our space (“a public blockchain is a permissionless distributed ledger of cryptocurrency”) causes so much pointless discussion.
I should also mention that the DLT space should really should be using the phrase “registry” instead of “ledger”. The latter is about accounts, and it is one ambition too far at the moment to speak of unifying everyone’s accounts on a distributed ledger.
Is this pedantic? Maybe not, as the authors of The Law of Bitcoin also wrestle with the buckets an anarchic cryptocurrency fall under.
On p. 14 he writes about bank accounts:
“In reality, they provided you the illusion of access and activity visibility on it. Every time you want to move money, pay someone or deposit money, the bank is giving you explicit access because you gave them implicit trust over your affairs. But that “access” is also another illusion. It is really an access to a database record that says you have such amount of money. Again, they fooled you by giving you the illusion that you “own” that money.”
This is needless inflammatory. Commercial law and bankruptcy proceedings will determine who owns what and what tranche/seniority your claims fall under. It is unclear what the illusion is.
On p. 14 he writes:
“A user can send money to another, via a special wallet, and the blockchain network does the authentication, validation and transfer, typically within 10 minutes, with or without a cryptocurrency exchange in the middle.”
Which blockchain is he talking about? If it is not digital fiat, how does the cash-in/cash-out work? To my knowledge, no bank has implemented an end-to-end production system with other banks as described above. Perhaps that will change in the future.
On p. 18 he writes:
“Sometimes it is represented by a token, which is another form of related representation of an underlying cryptocurrency.”
This isn’t very well-defined. The reason I went to great lengths in November to explain what a “token” is and isn’t is because of the confusion caused by the initial usage of a cryptographic token, a hardware device from companies like RSA. This is not what a “token” in cryptocurrency usage means. (Note: later on p. 91 he adds a very brief explanation)
On p. 18 he cites Robert Sams who is quoting Nick Szabo, but didn’t provide a source. It is found in Seigniorage Shares.
On p. 18 he also writes:
“As cryptocurrency gains more acceptance and understanding, its future will be less uncertain, resulting in a more stable and gradual adoption curve.”
This is empirically not true and actually misses the crux of Sams’ argument related to expectations.
On p. 20 he writes:
“As of 2016, the Bitcoin blockchain was far from these numbers, hovering at 5-7 TPS, but with prospects of largely exceeding it due to advances in sidechain technology and expected increases in the Bitcoin block size.”
This isn’t quite correct. On a given day over the past year, the average TPS is around 2 TPS and Tradeblock estimates by the end of 2016 that with the current block size it will hover around just over 3 TPS.
What is a sidechain? It is left undefined in that immediate section. One potential definition is that it is a sofa.
On p. 20 he writes:
“Private blockchains are even faster because they have less security requirements, and we are seeing 1,000-10,000 TPS in 2016, going up to 2,000-15,000 TPS in 2017, and potentially an unlimited ceiling beyond 2019.”
This is untrue. “Private blockchains” do not have “less” security requirements, they have different security requirements since they involve known, trusted participants. I am also unaware of any production distributed ledger system that hits 10,000 TPS. Lastly, it is unclear where the “unlimited ceiling” prediction comes from.
On p. 20 he writes:
“In 2014, I made the strong assertion that the blockchain is the new database, and warned developers to get ready to rewrite everything.”
Where did you warn people? Link?
On p. 21 he writes:
“For developers, a blockchain is first and foremost a set of software technologies.”
I would argue that it is first and foremost a network.
On p. 22 he writes:
“The fact that blockchain software is open source is a powerful feature. The more open the core of a blockchain is, the stronger the ecosystem around it will become.”
Some, but not all companies building blockchain-related technology, open source the libraries and tools. Also, this conflates the difference between code and who can validate transactions on the network. A “private blockchain” can be open sourced and secure, but only permit certain entities to validate transactions.
On p. 24 he writes:
“State machines are a good fit for implementing distributed systems that have to be fault-tolerant.”
On p. 25 he writes:
“Bitcoin initiated the Proof-of-Work (POW) consensus method, and it can be regarded as the granddaddy of these algorithms. POW rests on the popular Practical Byzantine Fault Tolerant algorithm that allows transactions to be safely committed according to a given state.”
There are at least two problems with this statement:
The proof-of-work mechanism used in Bitcoin is apocryphally linked to Hashcash from Adam Back; however this does not quite jive with Mougayar’s statement above. Historically, this type of proof-of-work predates Back’s contribution, all the way to 1992. See Pricing via Processing or Combatting Junk Mail by Dwork and Naor
“One of the drawbacks of the Proof-of-Work algorithm is that it is not environmentally friendly, because it requires large amounts of processing power from specialized machines that generate excessive energy.”
This is a design feature: to make it economically costly to change history. It wasn’t that Satoshi conjured up a consensus method to be environmentally friendly, rather it is the hashrate war and attempt to seek rents on seigniorage that incentivizes the expenditure of capital, in this case energy. If the market price of a cryptocurrency such as bitcoin declined, so too would the amount of energy used to secure it.
On p. 29 he writes:
“Reaching consensus is at the heart of a blockchain’s operations. But the blockchain does it in a decentralized way that breaks the old paradigm of centralized consensus, when one central database used to rule transaction validity.”
Which blockchain is he talking about? They are not a commodity, there are several different unique types. Furthermore, distributed consensus is an academic research field that has existed for more than two decades.
On p. 29 he writes:
“A decentralized scheme (which the blockchain is based on) transfers authority and trust to a decentralized network and enables its nodes to continuously and sequentially record their transactions on a public “block,” creating a unique” chain” – the blockchain.”
Mougayar describes the etymology of the word “blockchain” specific to Bitcoin itself.
Note: a block actually is more akin to a “batch” or “bucket” in the sense that transactions are bundled together into a bucket and then propagated. His definition of what a blockchain is is not inclusive enough in this chapter though because it is unclear what decentralization can mean (1 node, 100 nodes, 10,000 nodes?). Also, it is important to note that not all distributed ledgers are blockchains.
On p. 31 he writes:
“Credit card companies charge us 23% in interest, even when the prime rate is only at 1%”
Which credit card companies are charging 23%? Who is being charged this? Also, even if this were the case, how does a blockchain of some kind change that?
On p. 32 he writes:
“Blockchains offer truth and transparency as a base layer. But most trusted institutions do not offer transparency or truth. It will be an interesting encounter.”
This is just a broad sweeping generalization. What does truth and transparency mean here? Which blockchains? Which institutions? Cannot existing institutions build or use some kind of distributed ledger to provide the “truth” and “transparency” that he advocates?
On p. 33 he writes:
“The blockchain challenges the roles of some existing trust players and reassigns some of their responsibilities, sometimes weakening their authority.”
Typo: should be “trusted” not “trust.”
On p. 34 he writes:
“There is a lesson from Airbnb, which has mastered the art of allowing strangers to sleep in your house without fear.”
This is not true, there are many examples of Airbnb houses that have been trashed and vandalized.
On p. 34, just as the Tapscott’s did in their book, Mougayar talks about how Airbnb could use a blockchain for identity and reputation. Sure, but what are the advantages of doing that versus a database or other existing technology?
On p. 37 he writes:
“Enterprises are the ones asking, because the benefits are not necessarily obvious to them. For large companies, the blockchain presented itself as a headache initially. It was something they had not planned for.”
First off, which blockchain? And which enterprises had a headache from it?
On p. 39 he writes: “Prior to the Bitcoin invention…”
He should probably flip that to read “the invention of Bitcoin”
On p. 40 he writes:
“… it did not make sense to have money as a digital asset, because the double-spend (or double-send) problem was not solved yet, which meant that fraud could have dominated.”
This is empirically untrue. Centralized systems prevent double-spending each and every day. There is a double-spending problem when you are using a pseudonymous, decentralized network and it is partially resolved (but not permanently solved) in Bitcoin by making it expensive, but not impossible, to double-spend.
On p. 41 he writes:
“They will be no less revolutionary than the invention of the HTML markup language that allowed information o be openly published and linked on the Web.”
This is a little redundant and should probably be rewritten as “the invention of the hypertext markup language (HTML).”
On p. 43 he writes:
“Smart contracts are ideal for interacting with real-world assets, smart property, Internet of Things (IoT) and financial services instruments.”
Why are smart contracts ideal for that?
On p. 46 he writes: “Time-stamping” and in other areas he writes it without a dash.
On p. 46 he writes:
“And blockchains are typically censorship resistant, due to the decentralized nature of data storage, encryption, and peer controls at the edge of the network.”
Which blockchains? Not all blockchains in the market are censorship resistant. Why and why not?
On p. 48 he mentions “BitIID” – this is a typo for “BitID”
On p. 51 he writes:
“Enter the blockchain and decentralized applications based on it. Their advent brings potential solutions to data security because cryptographically-secured encryption becomes a standard part of blockchain applications, especially pertaining to the data parts. By default, everything is encrypted.”
This is untrue. Bitcoin does not encrypt anything nor does Ethereum. A user could encrypt data first, take a hash of it and then send that hash to a mining pool to be added to a block, but the network itself provides no encryption ability.
On p. 52 he writes:
“Consensus in public blockchains is done publicly, and is theoretically subject to the proverbial Sybil attacks (although it has not happened yet).”
Actually, it has on altcoins. One notable occurrence impacted Feathercoin during June 2013.
On p. 54 he writes:
“The blockchain can help, because too many Web companies centralized and hijacked what could have been a more decentralized set of services.”
This is the same meme in the Tapscott book. There are many reasons for why specific companies and organizations have large users bases but it is hard to see how they hijacked anyone; but that is a different conversation altogether.
On p. 54 he writes:
“We can also think of blockchains as shared infrastructure that is like a utility. If you think about how the current Internet infrastructure is being paid for, we subsidize it by paying monthly fees to Internet service providers. As public blockchains proliferate and we start running millions of smart contacts and verification services on them, we might be also subsidizing their operation, by paying via micro transactions, in the form of transaction fees, smart contract tolls, donation buttons, or pay-per-use schemes.”
This is a very liberal use of the word subsidize. What Mougayar is describing above is actually more of a tax than a charitable donation.
The design behind Bitcoin was intended to make it such that there was a Nash equilibrium model between various actors. That miners would not need to rely on charity to continue to secure the network because as block rewards decline, the fees themselves would in the long run provide enough compensation to pay for their security services.
It could be argued that this will not happen, that fees will not increase to offset the decline in block rewards but that is for a different article.
As an aside, Mougayar’s statement above then intersects with public policy: which blockchains should receive that subsidy or donation? All altcoins too? And who should pay this?
“Blockchains are like a virtual computer somewhere in a distributed cloud that is virtual and does not require server setups. Whoever opens a blockchain node runs the server, but not users or developers.”
This is untrue. The ~6,400 nodes on the Bitcoin network are all servers that require setup and maintenance to run. The same for Ethereum and any other blockchain.
On p. 58 he writes:
“It is almost unimaginable to think that when Satoshi Nakamoto released the code for the first Bitcoin blockchain in 2009, it consisted of just two computers and a token.”
A couple issues:
There is a typo – “first” should be removed (unless there was another Bitcoin network before Bitcoin?)
Timo Hanke and Sergio Lerner have hypothesized that Satoshi probably used multiple computers, perhaps more than a dozen.
On p. 58 he writes:
“One of the primary differences between a public and private blockchain is that public blockchains typically have a generic purpose and are generally cheaper to use, whereas private blockchains have a more specific usage, and they are more expensive to set up because the cost is born by fewer owners.”
This is not true. From a capital and operation expenditure perspective, public blockchains are several orders of magnitude more expensive to own and maintain than a private blockchain. Why? Because there is no proof-of-work involved and therefore private blockchain operators do not need to spend $400 million a year, which is roughly the cost of maintaining the Bitcoin network today.
In contrast, depending on how a private blockchain (or distributed ledger) is set up, it could simply be run by a handful of nodes on several different cloud providers – a marginal cost.
On p. 68 he writes:
“Taken as an extreme case, just about any software application could be rewritten with some blockchain and decentralization flavor into it, but that does not mean it’s a good idea to do so.”
Yes, fully agreed!
On p. 68 he writes:
“By mid-2016, there were approximately 5,000 developers dedicated to writing software for cryptocurrency, Bitcoin or blockchains in general. Perhaps another 20,000 had dabbled with some of that technology, or written front-end applications that connect to a blockchain, one way or the other.”
Mougayar cites his survey of the landscape for this.
I would dispute this though, it’s probably an order of magnitude less.
The only way this number is 5,000 is if you liberally count attendees at meetups or all the various altcoins people have touched over the year, and so forth. Even the headcount of all the VC funded “bitcoin and blockchain” companies is probably not even 5,000 as of May 2016.
On p. 71 he writes:
“Scaling blockchains will not be different than the way we have continued to scale the Internet, conceptually speaking. There are plenty of smart engineers, scientists, researchers, and designers who are up to the challenge and will tackle it.”
This is a little too hand-wavy. One of the top topics that invariably any conversation dovetails into at technical working groups continues to be “how to scale” while keeping privacy requirements and non-functional requirements intact. Perhaps this will be resolved, but it cannot be assumed that it will be.
On p. 72 he writes:
“Large organizations, especially banks, have not been particularly interested in adopting public blockchains for their internal needs, citing potential security issues. The technical argument against the full security of public blockchains can easily be made the minute you introduce a shadow of a doubt on a potential scenario that might wreak havoc with the finality of a transaction. That alone is enough fear to form a deterring factor for staying away from public blockchain, although the argument could be made in favor of their security.”
This is a confusing passage. The bottom line is that public blockchains were not designed with the specific requirements that regulated financial institutions have. If they did, perhaps they would be used. But in order to modify a public blockchain to provide those features and characteristics, it would be akin to turning an aircraft carrier into a submarine. Sure it might be possible, but it would just be easier and safer to build a submarine instead.
Also, why would an organization use a public blockchain for their internal needs? What does that mean?
On p. 78 he writes:
“Targeting Bitcoin primarily, several governments did not feel comfortable with a currency that was not backed by a sovereign country’s institutions.”
Actually, what made law enforcement and regulators uncomfortable was a lack of compliance for existing AML/KYC regulations. The headlines and hearings in 2011-2013 revolved around illicit activities that could be accomplished as there were no tools or ability to link on-chain activity with real world identities.
On p. 87 he writes:
“The reality is that customers are not going to the branch as often (or at all), and they are not licking as many stamps to pay their bills. Meanwhile, FinTech growth is happening: it was a total response to banks’ lack of radical innovation.”
There are a couple issues going on here.
Banks have had to cut back on all spending due to cost cutting efforts as a whole and because their spending has had to go towards building reporting and compliance systems, neither of which has been categorized as “radical innovation.”
Also, to be balanced, manyh of the promises around “fintech” innovation still has yet to germinate due to the fact that many of the startups involved eventually need to incorporate and create the same cost structures that banks previously had to have. See for instance, financial controls in marketplace lending – specifically Lending Club.
On p. 88 he writes:
“If you talk to any banker in the world, they will admit that ApplePay and PayPal are vexing examples of competition that simply eats into their margins, and they could not prevent their onslaught.”
Any banker will say that? While a couple of business lines may change, which banks are being displaced by either of those two services right now?
On p. 89 he writes:
“Blockchains will not signal the end of banks, but innovation must permeate faster than the Internet did in 1995-2000.”
Why? Why must it permeate faster? What does that even mean?
On p. 89 he writes:
“This is a tricky question, because Bitcoin’s philosophy is about decentralization, whereas a bank is everything about centrally managed relationships.”
What does this mean? If anything, the Bitcoin economy is even more concentrated than the global banking world, with only about a dozen exchanges globally that handle virtually all of the trading volume of all cryptocurrencies.
On p. 89 he writes:
“A local cryptocurrency wallet skirts some of the legalities that existing banks and bank look-alikes (cryptocurrency exchanges) need to adhere to, but without breaking any laws. You take “your bank” with you wherever you travel, and as long as that wallet has local onramps and bridges into the non-cryptocurrency terrestrial world, then you have a version of a global bank in your pocket.”
This is untrue. There are many local and international laws that have been and continue to be broken involving money transmission, AML/KYC compliance and taxes. Ignoring those though, fundamentally there are probably more claims on bitcoins – due to encumbrances – than bitcoins themselves. This is a big problem that still hasn’t been dealt with as of May 2016.
On p. 95 he writes:
“The decentralization of banking is here. It just has not been evenly distributed yet.”
This is probably inspired by William Gibson who said: ‘The future is already here — it’s just not very evenly distributed.’
On p. 95 he writes:
“The default state and starting position for innovation is to be permissionless. Consequently, permissioned and private blockchain implementations will have a muted innovation potential. At least in the true sense of the word, not for technical reasons, but for regulatory ones, because these two aspect are tie together.”
This is not a priori true, how can he claim this? Empirically we know that permissioned blockchains are designed for different environments than something like Bitcoin. How can he measure the amount of potential “innovation” either one has?
On p. 95 he writes:
“We are seeing the first such case unfold within the financial services sector, that seems to be embracing the blockchain fully; but they are embracing it according to their own interpretation of it, which is to make it live within the regulatory constraints they have to live with. What they are really talking about is “applying innovation,” and not creating it. So, the end-result will be a dialed down version of innovation.”
This is effectively an ad hominem attack on those working with regulated institutions who do not have the luxury of being able to ignore laws and regulations in multiple jurisdictions. There are large fines and even jail time for ignoring or failing to comply with certain regulations.
On p. 95 he writes:
“That is a fact, and I am calling this situation the “Being Regulated Dilemma,” a pun on the innovator’s dilemma. Like the innovator’s dilemma, regulated companies have a tough time extricating themselves from the current regulations they have to operate within. So, when they see technology, all they can do is to implement it within the satisfaction zones of regulators. Despite the blockchain’s revolutionary prognosis, the banks cannot outdo themselves, so they risk only guiding the blockchain to live within their constrained, regulated world.”
“It is a lot easier to start innovating outside the regulatory boxes, both figuratively and explicitly. Few banks will do this because it is more difficult.”
“Simon Taylor, head of the blockchain innovation group at Barclays, sums it up: “I do not disagree the best use cases will be outside regulated financial services. Much like the best users of cloud and big data are not the incumbent blue chip organizations. Still their curioisity is valuable for funding and driving forward the entire space.” I strongly agree; there is hope some banks will contribute to the innovation potential of the blockchain in significant ways as they mature their understanding and experiences with this next technology.
An ending note to banks is that radical innovation can be a competitive advantage, but only if it is seen that way. Otherwise innovation will be dialed down to fit their own reality, which is typically painted in restrictive colors.
It would be useful to see banks succeed with the blockchain, but they need to push themselves further in terms of understanding what the blockchain can do. They need to figure out how they will serve their customers better, and not just how they will serve themselves better. Banks should innovate more by dreaming up use cases that we have not though about yet, preferably in the non-obvious category.
The fundamental problem with his statement is this: banks are heavily regulated, they cannot simply ignore the regulations because someone says they should. If they fail to maintain compliance, they can be fined.
But that doesn’t mean they cannot still be innovative, or that the technology they are investigating now isn’t useful or helpful to their business lines.
In effect, this statement is divorced from the reality that regulated financial institutions operate in. [Note: some of his content such as the diagram originated from his blog post]
On p. 102 he writes:
“Banks will be required to apply rigorous thinking to flush out their plans and positions vis-à-vis each one of these major blockchain parameters. They cannot ignore what happens when their core is being threatened.”
While this could be true, it is an over generalization: what type of business lines at banks are being threatened? What part of “their” core is under attack?
On p. 103 he writes:
“More than 200 regulatory bodies exist in 150 countries, and many of them have been eyeing the blockchain and pondering regulatory updates pertaining to it.”
Surely that is a typo, there are probably 200 regulatory bodies alone in the US itself.
On p. 105 he writes:
“Banks will need to decide if they see the blockchain as a series of Band-Aids, or if they are willing to find the new patches of opportunity. That is why I have been advocating that they should embrace (or buy) the new cryptocurrency exchanges, not because these enable Bitcoin trades, but because they are a new generation of financial networks that has figured out how to transfer assets, financial instruments, or digital assets swiftly and reliably, in essence circumventing the network towers and expense bridges that the current financial services industry relies upon.”
This is a confusing passage.
Nearly all of the popular cryptocurrency exchanges in developed countries require KYC/AML compliance in order for users to cash-in and out of their fiat holdings. How do cryptocurrency exchanges provide any utility to banks who are already used to transferring and trading foreign exchange?
In terms of percentages, cryptocurrency exchanges are still very easy to compromise versus banks; what utility do banks obtain by acquiring exchanges with poor financial controls?
And, in order to fund their internal operations, cryptocurrency exchanges invariably end up with the same type of cost structures regulated financial institutions have; the advantage that they once had effectively involved non-compliance – that is where some of the cost savings was. And banks cannot simply ignore regulations because people on social media want them to; these cryptocurrency sites require money to operate, hence the reason why many of them charge transaction fees on all withdrawals and some trades.
On p. 115 he mentions La’Zooz and Maidsafe, neither of which – after several years of development, actually work. Perhaps that changes in the future.
On p.118 he writes:
“There is another potential application of DIY Government 2.0. Suppose a country’s real government is failing, concerned citizens could create a shadow blockchain governance that is more fair, decentralized and accountable. There are at least 50 failed, fragile, or corrupt states that could benefit from an improve blockchain governance.”
Perhaps this is true, that there could be utility gain from some kind of blockchain. But this misses a larger challenge: many of these same countries lack private property rights, the rule of law and speedy courts.
On p. 119 he writes about healthcare use cases:
“Carrying a secure wallet with our full electronic medical record in it, or our stored DNA, and allowing its access, in case of emergency.”
What advantage do customers gain from carrying this around in a secure wallet? Perhaps they do, but it isn’t clear in this chapter.
On p. 126-127 he makes the case for organizations to have a “blockchain czar” but an alternative way to pitch this without all the pomp is simply to have someone be tasked with becoming a subject-matter expert on the topic.
On p. 131 he writes:
“Transactions are actually recorded in sequential data blocks (hence the word blockchain), so there is a historical, append-only log of these transaction that is continuously maintained and updated. A fallacy is that the blockchain is a distributed ledger.”
It is not a fallacy.
On p. 149 he writes: “What happened to the Web being a public good?”
Costs. Websites have real costs. Content on those websites have real costs. And so forth. Public goods are hard to sustain because no one wants to pay for them but everyone wants to use them. Eventually commercial entities found a way to build and maintain websites that did not involve external subsidization.
On p. 150 he writes:
“Indeed, not only was the Web hijacked with too many central choke points, regulators supposedly continue to centralize controls in order to lower risk, whereas the opposite should be done.”
This conflicts with the “Internet is decentralized” meme that was discussed throughout the book. So if aspects of the Internet are regulated, and Mougayar disagrees with those regulations, doesn’t this come down to disagreements over public policy?
On p. 153 he writes:
“Money is a form of value. But not all value is money. We could argue that value has higher hierarchy than money. In the digital realm, a cryptocurrency is the perfect digital money. The blockchain is a perfect exchange platform for digital value, and it rides on the Internet, the largest connected network on the planet.”
Why are cryptocurrencies perfect? Perhaps they are, but it is not discussed here.
On p. 153 he also talks about the “programmability” of cryptocurrencies but doesn’t mention that if fiat currencies were digitally issued by central banks, they too could have the same programmable abilities.
On p. 160 he predicts:
“There will be dozens of commonly used, global virtual currencies that will be considered mainstream, and their total market value will exceed $5 trillion, and represent 5% of the world’s $100 trillion economy in 2025.”
Perhaps that occurs, but why? And are virtual currencies now different than digital currencies? Or are they the same? None of these questions are really addressed.
This book is quick read but unfortunately is weighed down by many opinions that are not supported by evidence and consequently, very few practical applications for enterprises are explained in detail.
For regulated businesses such as financial institutions, there are several questions that need to be answered such as: what are the specific cost savings for using or integrating with some kind of blockchain? What are the specific new business lines that could be created? And unfortunately the first edition of this book did not answer these types of questions. Let us look again at a future version.
[Disclaimer: The views expressed below are solely my own and do not necessarily represent the views of my employer or any organization I advise.]
A couple weeks ago I joked that while containment is impossible, it would be nice to know who patient-zero was for using the term “blockchain” without an article preceding it. The mystery of who exactly removed the “a” before “blockchain” is probably residing on the same island that Yeti, Sasquatch, and the New England Patriot’s equipment team are now located.
Don and Alex Tapscott, a Canada-based father-son duo, co-authored a new book entitled Blockchain Revolution that not only suffers from this grammatical faux pas but has several dozen errors and unproven assertions which are detailed in this review.
Below is a chapter-by-chapter look into a book that should have baked in the oven for a bit more time.
Note: all transcription errors are my own. See my other book reviews.
On p. 5 the authors write:
“A decade later in 2009, the global financial industry crashed. Perhaps propitiously, a pseudonymous person or persons named Satoshi Nakamoto outlined a new protocol for a peer-to-peer electronic cash system using a cryptocurrency called bitcoin.”
Ignoring the current drama surrounding Craig Wright — the Australian who claims to be Satoshi — during the initialthreads on Metzdowd, Satoshi mentioned he had been working on this project for 18 months prior; roughly mid-2007. So it was more coincidental timing than intentional.
And much like other books on the same topic, the authors do not clarify that there are more than one type of blockchain in existence and that some are a type of distributed ledger.
For instance, on p. 6 they write:
“At its most basic, it is an open source code: anyone can download it for free, run it, and use it to develop new tools for managing transactions online.”
With the ‘it’ being a ‘blockchain.’ The problem with this grammatical issue is that we know empirically that there many different types of distributed ledgers and blockchains currently under development and not all of them are open sourced. Nor does being open source automagically qualify something as a blockchain.
On p. 6 they write:
“However, the most important and far-reaching blockchains are based on Satoshi’s bitcoin model.”
That’s an opinion that the authors really don’t back up with facts later on.
In addition, on the same page they make the “encryption” error that also plagues books in this space: the Bitcoin blockchain does not use encryption.
For example, on page 6 they write:
“And the blockchain is encrypted: it uses heavy-duty encryption involving public and private keys (rather like the two-key system to access a safety deposit box) to maintain virtual security.”
Incorrect. Bitcoin employs a couple different cryptographic processes, but it doesn’t use encryption. Furthermore, the example of a ‘two-key system’ actually illustrates multisig, not public-private key pairs.
On p. 8 they write:
“Bankers love the idea of secure, frictionless, and instant transactions, but some flinch at the idea of openness, decentralization and new forms of currency. The financial services industry has already rebranded and privatized blockchain technology, referring to it as distributed ledger technology, in an attempt to reconcile the best of bitcoin — security, speed, and cost — with an entirely closed system that requires a bank or financial institution’s permission to use.”
There is a lot of assumptions in here:
(1) it is unclear which “bankers” they are speaking about, is it every person who works at a bank?
(2) the term ‘openness’ is not very well defined, does that mean that people at banks do not want to have cryptographically proven provenance?
In addition, in order for something to be privatized it must have been public at first. Claiming that the “blockchain” toolkit of ideas and libraries was privatized away from Bitcoin is misleading. The moving pieces of Bitcoin itself are comprised of no less than 6 discrete elements that previously existed in the cryptography and distributed systems communities.
The Bitcoin network itself is not being privatized by financial institutions. In fact, if anything, empirically Bitcoin itself is being carved away by entities and efforts largely financed by venture capital — but that is a topic for another article. Furthermore, research into distributed computing and distributed consensus techniques long predates Bitcoin itself, by more than a decade.
Lastly, and this is why it helps to clearly define words at the beginning of a book, it is important to note that some blockchains are a type of distributed ledger but not all distributed ledgers are blockchains.
On page 9 they write that:
“In 2014 and 2015 alone more than $1 billion of venture capital flooded into the emerging blockchain ecosystem, and the rate of investment is almost doubling annually.”
This is only true if you conflate cryptocurrency systems with non-cryptocurrency systems. The two are separate and have completely different business models. See my December presentation for more details about the divergence.
On p. 9 they write:
“A 2013 study showed that 937 people owned half of all bitcoin, although that is changing today.”
First off, this is a typo because the original article the authors cite, actually says the number is 927 not 937. And the ‘study’ showed that about half of all bitcoins resided on addresses controlled by 937 on-chain entities. Addresses does not mean individuals. It is likely that some of these addresses (or rather, UTXOs) are controlled and operated by early adopters (like Roger Ver) as well as exchanges (like Bitstamp and Coinbase).
Furthermore, it is unclear from the rest of the book how that concentration of wealth is changing — where is that data?
On p. 18 they write about Airbnb, but with a blockchain. It is unclear from their explanation what the technical advantage is of using a blockchain versus a database or other existing technology.
On p. 20 they write:
“Abra and other companies are building payment networks using the blockchain. Abra’s goal is to turn every one of its users into a teller. The whole process — from the funds leaving one country to their arriving in another — takes an hour rather than a week and costs 2 percent versus 7 percent or higher. Abra wants its payment network to outnumber all physical ATMs in the world. It took Western Union 150 years to get to 500,000 agents worldwide. Abra will have that many tellers in its first years.”
There are at least 3 problems with this statement:
the authors conflate a blockchain with all blockchains; empirically there is no “the” blockchain
Abra’s sales pitch relies on the ability to convince regulators that the company itself just make software and doesn’t participate in money transmission or movement of financial products (which it does by hedging)
Fast forward to May 2016 and according to the Google Play Store and Abra has only been downloaded about 5,000 times.
Perhaps it will eventually reach 500,000 and even displace Western Union, but the authors’ predictions that this will occur in one year is probably not going to happen at the current rate.
Furthermore, on p. 186 they write that “Abra takes a 25-basis-point fee on conversion.”
Will this require a payment processing license in each jurisdiction the conversion takes place?
On page 24 they write:
“Other critics point to the massive amount of energy consumed to reach consensus in just the bitcoin network: What happens when thousands or perhaps millions of interconnected blockchains are each processing billions of transactions a day? Are the incentives great enough for people to participate and behave safely over time, and not try to overpower the network? Is blockchain technology the worst job killer ever?”
There are multiple problems with this statement:
on a proof-of-work blockchain, the amount of energy consumed is notconnected with the amount of transactions being processed. Miners consume energy to generate proofs-of-work irrespective of the number of transactions waiting in the memory pool. Transaction processing itself is handled by a different entity entirely called a block maker or mining pool.
as of May 2016, it is unclear why there would be millions of interconnected proof-of-work blockchains. There are perhaps a couple hundred altcoins, at least 100 of which are dead, but privately run blockchains do not need to use proof-of-work — thus the question surrounding incentives is a non sequitur.
while blockchains however defined may displace workers of some kind at some point, the authors never really zero in on what “job killing” blockchains actually do?
On p. 25 they write:
“The blockchain and cryptocurrencies, particularly bitcoin, already have massive momentum, but we’re not predicting whether or not all this will succeed, and if it does, how fast it will occur.”
Nowhere do the authors actually cite empirical data showing traction. If there was indeed massive momentum, we should be able to see that from data somewhere, but so far that is not happening. Perhaps that changes in the future.
The closing paragraph of Chapter 1 states that:
“Everyone should stop fighting it and take the right steps to get on board. Let’s harness this force not for the immediate benefit of the few but for the lasting benefit of the many.”
Who is fighting what? They are presumably talking about a blockchain, but which one? And why should people stop what they are doing to get on board with something that is ill-defined?
On p. 30 they write that:
“Satoshi leveraged an existing distributed peer-to-peer network and a bit of clever cryptography to create a consensus mechanism that could solve the double-spend problem as well as, if not better than, a trusted third party.”
The word “trust” or variation thereof appears 11 times in the main body of the original Satoshi whitepaper. Routing around trusted third parties was the aim of the project as this would then allow for pseudonymous interaction. That was in October 2008.
What we empirically see in 2016 though is an increasingly doxxed environment in which it could be argued that ‘trusted’ parties could do the same job — movement of payments — in a less expensive manner. But that is a topic for another article.
On p. 33 they write:
“So important are the processes of mining — assembling a block of transactions, spending some resource, solving the problem, reaching consensus, maintaining a copy of the full ledger — that some have called the bitcoin blockchain a public utility like the Internet, a utility that requires public support. Paul Brody of Ernst & Young thinks that all our appliances should donate their processing power to upkeep of a blockchain: “Your lawnmower or dishwasher is going to come with a CPU that is probably a thousand times more powerful than it actually needs, and so why not have it mine? Not for the purpose of making you money, but to maintain your share of the blockchain,” he said. Regardless of the consensus mechanism, the blockchain ensures integrity through clever code rather than through human beings who choose to do the right thing.”
Let’s dissect this:
the process of mining, as we have looked at before, involves a division of labor between the entities that generate proofs-of-work – colloquially referred to as miners, and those that package transactions into blocks, called blockmakers. Miners themselves do not actually maintain a copy of a blockchain, pools do.
while public blockchains like Bitcoin are a ‘public good,’ it doesn’t follow how or why anyone should be compelled to subsidize them, at least the reasons why are not revealed to readers.
the only reason proof-of-work was used for Bitcoin is because it was a way to prevent Sybil attacks on the network because participants were unknown and untrusted. Why should a washing machine vendor integrate an expensive chip to do calculations that do not help in the washing process? See Appendix B for why they shouldn’t.
because proof-of-work is used in a public blockchain and public blockchains are a public good, how does anyone actually have a “share” of a blockchain? What does that legally mean?
On p. 34 they write:
“The blockchain resides everywhere. Volunteers maintain it by keeping their copy of the blockchain up to date and lending their spare computer processing units for mining. No backdoor dealing.”
There are multiple problems with this:
to some degree entities that run a fully validating node could be seen as volunteering for a charity, but most do not lend spare computer cycles because they do not have the proper equipment to do so (ASIC hardware)
to my knowledge, none of the professional mining farms that exist have stated they are donating or lending their mining power; instead they calculate the costs to generate proofs-of-work versus what the market value of a bitcoin is worth and entering and exiting the market based on the result.
this is a contentious issue, but because of the concentration and centralization of both mining and development work, there have been multiple non-public events in which mining pools, mining farms and developers get together to discuss roadmaps and policy. Is that backdoor dealing?
On p. 35 they write:
“Nothing passes through a central third party; nothing is stored on a central server.”
This may have been true a few years ago, but only superficially true today. Most mining pools connect to the Bitcoin Relay Network, a centralized network that allows miners to propagate blocks faster than they would if they used the decentralized network itself to do so (it lowers the amount of orphan blocks).
On p. 37 they write:
“The paradox of these consensus schemes is that by acting in one’s self-interest, one is serving the peer-to-peer (P2P) network, and that in turn affects one’s reputation as a member of the economic set.”
Regarding cryptocurrencies, there is currently no built-in mechanism for tracking or maintaining reputation on their internal P2P network. There are projects like OpenBazaar which are trying to do this, but an on-chain Bitcoin user does not have a reputation because there is no linkage real world identity (on purpose).
On p. 38 they write:
“Trolls need not apply”
Counterfactually, there are many trolls in the overall blockchain-related world, especially on social media in part because there is no identity system that links pseudonymous entities to real world, legal identities.
On p. 39 the authors list a number of high profile data breaches and identity thefts that took place over the past year, but do not mention the amount of breaches and thefts that take place in the cryptocurrency world each year.
On p. 41 they write:
“Past schemes failed because they lacked incentive, and people never appreciated privacy as incentive enough to secure those systems,” Andreas Antonopoulos said. The bitcoin blockchain solves nearly all these problem by providing the incentive for wide adoption of PKI for all transaction of value, not only through the use of bitcoin but also in the shared bitcoin protocols. We needn’t worry about weak firewalls, thieving employees, or insurance hackers. If we’re both using bitcoin, if we can store and exchange bitcoin securely, then we can store and exchange highly confidential information and digital assets securely on the blockchain.”
There are multiple problems with this statement:
it is overly broad and sweeping to say that every past PKI system has not only failed, but that they all failed because of incentives; neither is empirically true
Bitcoin does not solve for connecting real world legal identities that still will exist with our without the existence of Bitcoin
there are many other ways to securely transmit information and digital assets that does not involve the use of Bitcoin; and the Bitcoin ecosystem itself is still plagued by thieving employees and hackers
On p. 41 they write:
“Hill, who works with cryptographer Adam Back at Blockstream, expressed concern over cryptocurrencies that don’t use proof of work. “I don’t think proof of stake ultimately works. To me, it’s a system where the rich get richer, where people who have tokens get to decide what the consensus is, whereas proof of works ultimately is a system rooted in physics. I really like that because it’s very similar to the system for gold.”
There are multiple problems with this as well:
people that own bitcoins typically try to decide what the social consensus of Bitcoin is — by holding conferences and meetings in order to decide what the roadmap should or should not be and who should and should not be administrators
the debate over whether or not a gold-based economy is good or not is a topic that is probably settled, but either way, it is probably irrelevant to creating Sybil resistance.
On p. 42 they write:
“Satoshi installed no identity requirement for the network layer itself, meaning that no one had to provide a name, e-mail address, or any other personal data in order to download and use the bitcoin software. The blockchain doesn’t need to know who anybody is.”
The authors again conflate the Bitcoin blockchain with all blockchains in general:
there are projects underway that integrate a legal identity and KYC-layer into customized distributed ledgers including one literally called KYC-Chain (not an endorsement)
empirically public blockchains like Bitcoin have trended towards being able to trace and track asset movement back to legal entities; there are a decreasing amount of non-KYC’ed methods to enter and exit the network
On p. 43 they write:
“The blockchain offers a platform for doing some very flexible forms of selective and anonymous attestation. Austin Hill likened it to the Internet. “A TCP/IP address is not identified to a public ID. The network layer itself doesn’t know. Anyone can join the Internet, get an IP address, and start sending and receiving packets freely around the world. As a society, we’ve seen an incredible benefit allowing that level of pseudonymity… Bitcoin operates almost exactly like this. The network itself does not enforce identity. That’s a good thing for society and for proper network design.”
This is problematic in a few areas:
it is empirically untrue that anyone can just “join the Internet” because the Internet is just an amalgamation of intranets (ISPs) that connect to one another via peering agreements. These ISPs can and do obtain KYC information and routinely kick people off for violating terms of service. ISPs also work with law enforcement to link IP addresses with legal identities; in fact on the next page the authors note that as well.
in order to use the Bitcoin network a user must obtain bitcoins somehow, almost always — as of 2016 — through some KYC’ed manner. Furthermore, there are multiple projects to integrate identity into distributed ledger networks today. Perhaps they won’t be adopted, but regulated institutions are looking for ways to streamline the KYC/AML process and baking in identity is something many of them are looking at.
On p. 44 they write:
“So governments can subpoena ISPs and exchanges for this type of user data. But they can’t subpoena the blockchain.”
That is not quite true. There are about 10 companies that provide data analytics to law enforcement in order to track down illicit activity involving cryptocurrencies all the way to coin generation itself.
Furthermore, companies like Coinbase and Circle are routinely subpoenaed by law enforcement. So while the network itself cannot be physically subpoenaed, there are many other entities in the ecosystem that can be.
On p. 46 they write:
“Combined with PKI, the blockchain not only prevents a double spend but also confirms ownership of every coin in circulation, and each transaction is immutable and irrevocable.”
The public-private key technology being used in Bitcoin does not confirm ownership, only control. Ownership implies property rights and a legal system, neither of which currently exist in the anarchic world of Bitcoin.
Furthermore, while it is not currently possible to reverse the hashes (hence the immutability characteristic), blocks can and have been reorganized which makes the Bitcoin blockchain itself revocable.
On p. 47 they write:
“No central authority or third party can revoke it, no one can override the consensus of the network. That’s a new concept in both law and finance. The bitcoin system provides a very high degree of certainty as to the outcome of a contract.”
This is empirically untrue: CLS and national real-time gross settlement (RTGS) systems are typically non-reversible. And the usage of the word contract here implies some legal standing, which does not exist in Bitcoin; there is currently no bridge between contracts issued on a public blockchain with that of real world.
On p. 50 they write:
“That was part of Satoshi’s vision. He understood that, for people in developing economies, the situation was worse. When corrupt or incompetent bureaucrats in failed states need funding to run the government, their central banks and treasuries simply print more currency and then profit from the difference between the cost of manufacturing and the face value of the currency. That’s seigniorage. The increase in the money supply debases the currency.”
First off, they provide no evidence that Satoshi was actually concerned about developing countries and their residents. In addition, they mix up the difference between seigniorage and inflation – they are not the same thing.
In fact, to illustrate with Bitcoin: seigniorage is the marginal value of a bitcoin versus the marginal cost of creating that bitcoin. As a consequence, miners effectively bid up such that in the long run the cost equals the value; although some miners have larger margins than others. In contrast, the increase in the money supply (inflation) for Bitcoin tapers off every four years. The inflation or deflation rate is fully independent of the seigniorage.
On p. 56 they quote Erik Vorhees who says:
“It is faster to mail an anvil to China than it is to send money through the banking system to China. That’s crazy! Money is already digital, it’s not like they’re shipping palletes of cash when you do a wire.”
This is empirically untrue, according to SaveOnSend.com a user could send $1,000 from the US to China in 24 hours using TransFast. In addition:
today most money in developed countries is electronic, not digital; there is no central bank digital cash yet
if new distributed ledgers are built connecting financial institutions, not only could cross-border payments be done during the same day, but it could also involve actual digital cash
On p. 59 they write:
“Other blockchain networks are even faster, and new innovations such as the Bitcoin Lightning Network, aim to dramatically scale the capacity of the bitcoin blockchain while dropping settlement and clearing times to a fraction of a second.”
This is problematic in that it is never defined what clearing and settlement means. And, the Bitcoin network can only — at most — provide some type of probabilistic settlement for bitcoins and no other asset.
On p. 67 they write:
“Private blockchains also prevent the network effects that enable a technology to scale rapidly. Intentionally limiting certain freedoms by creating new rules can inhibit neutrality. Finally, with no open value innovation, the technology is more likely to stagnate and become vulnerable.”
Not all private blockchains or distributed ledgers are the same, nor do they all have the same terms of service. The common theme has to do with knowing all the participants involved in a transaction (KYC/KYCC) and only certain known entities can validate a transaction.
Furthermore, the authors do not provide any supporting evidence for why this technology will stagnate or become vulnerable.
On p. 70 they write:
“The financial utility of the future could be a walled and well-groomed garden, harvested by a cabal of influential stakeholders, or it could be an organic and spacious ecosystem, where people’s economic fortunes grow wherever there is light. The debate rages on, but if the experience of the first generation of the Internet has taught us anything, it’s that open systems scale more easily than closed ones.”
The authors do not really define what open and closed means here. Fulfilling KYC requirements through terms of service at ISPs and governance structures like ICANN did not prevent the Internet from coming into existence. It is possible to have vibrant innovation on top of platforms that require linkage to legal identification.
On p. 72 the authors quote Stephen Pair stating:
“Not only can you issue these assets on the blockchain, but you can create systems where I can have an instantaneous atomic transaction where I might have Apple stock in my wallet and I want to buy something or you. But you want dollars. With this platform I can enter a single atomic transaction (i.e., all or none) and use my Apple stock to send you dollars.”
This is currently not possible with Bitcoin without changing the legal system. Furthermore:
this is probably not safe to do with Bitcoin due to how colored coin schemes distort the mining incentive scheme
from a technological point of view, there is nothing inherently unique about Bitcoin that would enable this type of atomic swapping that several other technology platforms could do as well
On p. 73 they write:
“Not so easy. Banks, despite their enthusiasms for blockchain, have been wary of these companies, arguing blockchain businesses are “high-risk” merchants.”
Once again this shows how the authors conflate “blockchain” with “Bitcoin.” The passage they spoke about Circle, a custodian of bitcoins that has tried to find banks to partner with for exchanging fiat to bitcoins and vice versa. This is money transfer. This type of activity is different than what a “blockchain” company does, most of whom aren’t exchanging cryptocurrencies.
On p. 74 they write:
“Third, new rules such as Sarbanes-Oxley have done little to curb accounting fraud. If anything, the growing complexity of companies, more multifaceted transactions, and the speed of modern commerce create new ways to hide wrongdoing.”
This may be true, but what are the stats or examples of people violating Sarbanes-Oxley, and how do “blockchains” help with this specifically?
On p. 78 they write:
“The blockchain returns power to shareholders. Imagine that a token representing a claim on an asset, a “bitshare,” could come with a vote or many votes, each colored to a particular corporate decision. People could vote their proxies instantly from anywhere, thereby making the voting process for major corporate actions more response, more inclusive, and less subject to manipulation.”
First off, which blockchain? And how does a specific blockchain provide that kind of power that couldn’t otherwise be done with existing non-blockchain technology?
On p. 80 they quote Marc Andreessen who says:
“PayPal can do a real-time credit score in milliseconds, based on your eBay purchase history — and it turns out that’s a better source of information than the stuff used to generate your FICO score.”
But what if you do not use eBay? And why do you need a blockchain to track or generate a credit rating?
On p. 81:
“This model has proven to work. BTCjam is a peer-to-peer lending platform that uses reputation as the basis for extending credit.”
BTCjam appears to have plateaued. They currently have a low churn rate on the available loans and they exited the US market 2 months ago.
On p. 83 they write:
“The blockchain IPO takes the concept further. Now, companies can raise funds “on the blockchain” by issuing tokens, or cryptosecurities, of some value in the company. They can represent equity, bonds, or, in the case of Augur, market-maker seats on the platform, granting owners the right to decide which prediction markets the company will open.”
From a technical perspective this may be possible, but from a legal and regulatory perspective, it may not be yet. Overstock has been given permission by the SEC to experiment with issuance.
On p. 86 they write:
“Bitcoin cannot have bail-ins, bank holidays, currency controls, balance freezes, withdrawal limits, banking hours,” said Andreas Antonopoulos.
That’s not quite true. Miners can and will continue to meet at their own goals and they have the power to hard fork to change any of these policies including arbitrarily increasing or decreasing the issuance as well as changing fees for faster inclusion. They also have the ability to censor transactions altogether and potentially — if the social value on the network increases — “hold up” transactions altogether.
Also, this doesn’t count the subsidies that miners receive from the utilities.
On p. 98 they write:
“To this last characteristic, Antonopoulos notes: “If there is enough financial incentive to preserve this blockchain into the future, the possibility of it existing for tens, hundreds, or even thousands of years cannot be discounted.”
It can arguably be discounted. What evidence is presented to back up the claim that any infrastructure will last for hundreds of years?
On p. 100 they write:
“And just imagine how the Uniform Commercial Code might look on the blockchain.”
Does this mean actually embedding the code as text onto a blockchain? Or does this mean modifying the UCC to incorporate the design characteristics of a specific blockchain?
On p. 102 they write:
“What interests Andreas about the blockchain is that we can execute this financial obligation in a decentralized technological environment with a built-in settlement system. “That’s really cool,” he said, “because I could actually pay you for the pen right now, you would see the money instantly, you would put the pen in the mail, and I could get a verification of that. It’s much more likely that we can do business.”
I assume that they are talking about the Bitcoin blockchain:
there is no on-chain settlement of fiat currencies, which is the actual money people are settling with on the edges of the network
since it is not fiat currency, it does not settle instantly. In fact, users still have a counterparty risk involving delivery of the pen versus the payment.
if a central bank issued a digital currency, then there could be on-chain settlement of cash.
On p. 103 they write:
“If partners spends more time up front determining the terms of an agreement, the monitoring, enforcement, and settlement costs drop significantly, perhaps to zero. Further, settlement can occur in real time, possibly in microseconds throughout the day depending on that deal.”
The DTCC published a white paper in January that explains they can already do near real-time settlement, but T+3 exists due to laws and other market structures.
On p. 105 they write that:
“Multisig authentication is growing in popularity. A start-up called Hedgy is using multisig technology to create futures contracts: parties agree on a price of bitcoin that will be traded in the future, only ever exchanging the price difference.”
As an aside, Hedgy is now dead. Also, there are other ways to illustrate multisig utility as a financial control to prevent abuse.
On p. 106 they wrote that:
“The trouble is that, in recent business history, many hierarchies have not been effective, to the point of ridicule. Exhibit A is The Dilbert Principle, most likely one of the best-selling management books of all time, by Scott Adams. Here’s Dilbert on blockchain technology from a recent cartoon…”
The problem is that the cartoon they are citing (above) was actually a parody created by Ken Tindell last year.
The original Scott Adam’s cartoon was poking fun of databases and is from November 17, 1995.
On p. 115 they write:
“But the providers of rooms receive only part of the value they create. International payments go through Western Union, which takes $10 of every transaction and big foreign exchange off the top.”
Western Union does not have a monopoly on international payments, in fact, in many popular corridors they have less than 25% of market share. In addition, Western Union does not take a flat $10 off every transaction. You can test this out by going to their price estimator. For instance, sending $1,000 from the US to a bank account in China will cost $8.
On p. 117 they write about a fictional blockchain-based Airbnb called bAirbnb:
“You and the owner have now saved most of the 15 percent Airbnb fee. Settlements are assured and instant. There are no foreign exchange fees for international contracts. You need not worry about stolen identity. Local governments in oppressive regimes cannot subpoena bAirbnb for all its rental history data. This is the real sharing-of-value economy; both customers and service providers are the winner.”
The problem with their statement is that cash settlements, unless it is digital fiat, is not settled instantly. Identities can still be stolen on the edges (from exchanges). And, governments can still issue subpoenas and work with data analytics companies to track provenance and history.
On p. 119 they write:
“Along comes blockchain technology. Anyone can upload a program onto this platform and leave it to self-execute with a strong cryptoeconomical guarantee that the program will continue to perform securely as it was intended.”
While that may have been the case when these cryptocurrency systems first launched, in order to acquire ether (for Ethereum) or bitcoin, users must typically exchange fiat first. And in doing so, they usually dox themselves through the KYC requirements at exchanges.
On p.123-124 they write about a ‘Weather decentralized application’ but do not discuss how its infrastructure is maintained let alone the Q-o-S.
On p.127 they write:
“Using tokens, companies such as ConsenSys have already issued shares in their firms, staging public offerings without regulatory oversight.”
The legality of this is not mentioned.
On p. 128 they write:
“Could there be a self-propagating criminal or terrorist organizations? Andreas Antonopolous is not concerned. He believes that the network will manages such dangers. “Make this technology available to seven and a half billion people, 7.499 billion of those will use it for good and that good can deliver enormous benefit to society.”
How does he know this? Furthermore, the Bitcoin network itself is already available to hundreds of millions, but many have chosen not to use it. Why is this not factored into the prediction?
On p.131 they write:
“What if Wikipedia went on the blockchain — call it Blockpedia.”
The total article text of English Wikipedia is currently around 12 gigabytes. If it is a public blockchain, then how would this fit on the actual blockchain itself? Why not upload the English version onto the current Bitcoin blockchain as an experiment? What utility is gained?
From p. 129-144 they imagine seven ideas that are pitched as business ideas, but in most instances it is unclear what the value proposition that a blockchain provides over existing technology.
On p. 148 they write that:
“The Internet of Things cannot function without blockchain payment networks, where bitcoin is the universal transactional language.”
What does that mean? Does that mean that there are multiple blockchains and that somehow bitcoin transactions control other blockchains too?
On p. 152 they write:
“Last is the overarching challenge of centralized database technology — it can’t handle trillions of real-time transactions without tremendous costs.”
What are those costs? And what specifically prevents databases from doing so?
On p. 153 they write:
“Other examples are a music service, or an autonomous vehicle,” noted Dino Mark Angaritis, founder of Smartwallet, “each second that the music is playing or the car is driving it’s taking a fraction of a penny out of my balance. I don’t have a large payment up front and pay only for what I use. The provider runs no risk of nonpayment. You can’t do these things with a traditional payment networks because the fees are too high for sending fractions of a penny off your credit card.”
Depositing first and having a card-on-file are types of solutions that currently exist. “Microtipping” doesn’t really work for a number of reasons including the fact that consumers do not like to nickel and dime themselves. This is one of the reasons that ChangeTip had difficulties growing.
Furthermore, the tangential market of machine-to-machine payments may not need a cryptocurrency for two reasons:
M2M payments could utilize existing electronic payment systems via pre-paid and card-on-file solutions
The friction of moving into and out of fiat to enter into the cryptocurrency market is an unnecessary leg, especially if and when central bank digital currency is issued.
On pages 156-169 nearly all of the examples could use a database as a solution, it is unclear what value a blockchain could provide in most cases. Furthermore, on p. 159 they discuss documentation and record keeping but don’t discuss how these records tie into current legal infrastructure.
On p. 172 they write:
“We’re talking billions of new customers, entrepreneurs, and owners of assets, on the ground and ready to be deployed. Remember, blockchain transactions can be tiny, fractions of pennies, and cost very little complete.”
Maybe some transactions on some blockchains cost fractions of pennies, but currently not Bitcoin transactions.
On p.177 they write that “David Birch, a cryptographer and blockchain theorist, summed it up: “Identity is the new money.”
“Financing a company is easier as you can access equity and debt capital on a global scale, and if you’re using a common denominator — like bitcoin — you need not worry about exchange rates and conversation rates.”
Unless everyone is using one currency, this is untrue.
On p.185 they write:
“Sending one bitcoin takes about 500 bits, or roughly one one-thousandth the data consumption of one second of video Skype!”
But users still need to cash out on the other side which requires different infrastructure than Skype, namely money transmitter licenses and bank accounts.
On p. 192 they write that:
“Second, it can mean better protection of women and children. Through smart contracts, funds can be donated into escrow accounts, accessible only by women, say, for accessing food, feminine products, health care, and other essentials.”
How can a smart contract itself detect what gender the user is?
On p.194 they write:
“In jurisdictions like Honduras where trust is low in public institutions and property rights systems are weak, the bitcoin blockchain could help to restore confidence and rebuild reputation.”
How does Bitcoin do that? What are the specific ways it can?
On p. 202 they write:
“People can register their copyrights, organize their meetings, and exchange messages privately and anonymously on the blockchain.”
Which blockchain does this? There are external services like Ascribe.io that purportedly let creators take a hash of a document (such as a patent) and store it into a blockchain. But the blockchain itself doesn’t have that feature.
On p.214 they write:
“But surely a more collaborative model of democracy — perhaps one of that rewards participation such as the mining function — could encourage citizens’ engagement and learning about issues, while at the same time invigorating the public sector with the keen reasoning the nation can collectively offer.”
On p. 255 they mention that Greek citizens during 2015 would’ve bought more bitcoins if they had better access to ATMs and exchanges. But this is not true, empirically people typically try to acquire USD because it is more universal and liquid. Perhaps that changes in the future, but not at this time.
On p. 260 they write:
“The cost for having no central authority is the cost of that energy,” said Eric Jennings, CEO of Filament, an industrial wireless sensor network. That’s one side of the argument. The energy is what it is, and it’s comparable to the cost incurred in securing fiat currency.”
Where is the citation? The reason the costs of securing the Bitcoin network are currently around $400 million a year is because that is roughly the amount of capital and energy expended by miners to secure a network in which validators are unknown and untrusted. If you know who the participants are, the costs of securing a network drop by several orders of magnitude.
On p. 261 they write about the BitFury Group, a large mining company:
“Its founder and CEO, Valery Vavilov, argued the view that machines and mining operations overall will continue to get more energy efficient and environmentally friendly.”
Actually what happens is that while the ASIC chips themselves become more energy efficient, miners in practice will simply add more equipment and maintain roughly the same energy costs as a whole. That is to say, if a new chip is 2x as efficient as before, miners typically just double the acquisition of equipment — maintaining the same amount of energy consumption, while doubling the hashrate. There is no “environmental friendliness” in proof-of-work blockchains due to the Red Queen Effect.
On p. 274 they write:
“There will be many attempts to control the network,” said Keonne Rodriguez of Blockchain. “Big companies and governments will be devoted to breaking down privacy. The National Security Agency must be actively analyzing data coming through the blockchain even now.”
With thousands of copies being replicated around the world, it’s unclear who actually is storing it, perhaps intelligence agencies are. We do know that at least 10 companies are assisting compliance teams and law enforcement in tracking the provenance of cryptocurrency movements.
On p. 282 they write:
“Indeed, Mike Hearn, a prominent bitcoin core developer, caused a quite a stir in January 2015 when he wrote a farewell letter to the industry foretelling bitcoin’s imminent demise.”
“Licensed exchanges, such as Gemini, have gained ground perhaps because their institutional clientele know they’re now as regulated as banks.”
Actually, Gemini hasn’t gained ground and remains relatively flat over the past ~5 months. Even adding ether to their list of assets didn’t move the dial.
Overall the book was published a little too early as there hasn’t been much real traction in the entire ecosystem.
The content and perspective is currently skewed towards telling the cryptocurrency narrative and seemingly downplays the important role that institutions and enterprises have played over the past year in the wider distributed ledger ecosystem.
If you are looking for just one book to read on the topic, I would pass on this and wait for a future edition to rectify the issues detailed above. See my other book reviews.
Three years since the current wave began and $1 billion later, cryptocurrency / public blockchain ecosystem is experiencing such a level of “fast growth” that no one is able to publish any real usage numbers.1
Sarcasm aside, despite copious amounts of news coverage, interviews and conferences, very few VC-backed cryptocurrency-related startups are divulging any non-gamable numbers.
I had hoped to do a regular quarterly update (see previous January post regarding usage numbers) but there just isn’t much public data to go on. In fact, there is less data today than 3 months ago.
For instance, at some point in the past couple of months, Coinbase removed its wallet transaction volume chart from its chart site. This coincides with a public announcement made in February that ‘Coinbase is not a wallet.’ As Brian Armstrong, CEO of Coinbase stated:
Over the next year or so, you’ll see the Coinbase brand shift from being a hybrid wallet/exchange to focusing on purely being a retail and institutional exchange. It will take some time to update, but the transition will happen.
Interestingly, this somewhat conflicts with another statement made in a Forbespiece this past week covering Coinbase and Blockchain.info, stating:
Currently, 80% of Coinbase’s customers buy bitcoin as an investment, and 20% transact with it, though that balance is currently shifting more toward transactions.
Perhaps transaction volume overall is increasing, but if so, why remove the wallet transaction volume chart? Or is it solely related to transaction volume on the exchange?
The same Forbes article also mentioned another specific aggregate number:
“Startups play a pretty integral role in the sense that we represent most of the end. If you look at users of Bitcoin on the network, most of them are represented by one of the major Bitcoin companies,” says Peter Smith, chief executive of Blockchain, adding that five or six companies, including Coinbase and Blockchain, represent about 80% of transaction volume on the network. Numerous startups are also using Bitcoin to enable their users to more easily send remittances, cross-border payments and peer-to-peer payments, as well as make mobile in-app purchases.
Maybe this is true, maybe there are 5 or 6 companies that represent the lionshare of volume on the Bitcoin network itself. If so, we should be able to see that.
This is a simplified, color coded version of a tool that Chainalysis provides to its customers such as compliance teams at exchanges. The thickness of a band accurately represents the volume of that corridor, it is drawn to scale. The names of certain entities are redacted.
The image is based on data for the first quarter of 2016 and is an update to the chart I published in an article back in January.
Based on the chart above, there are in fact 5-6 organizations that represent 80% of the volume; both Coinbase and Blockchain.info are among them (Blockchain.info also operates SharedCoin).
In fact, Chainalysis recently updated their methodology and found that Coinbase transactions represent every 6th or 7th transaction on the Bitcoin blockchain. 2 This specific area of data science is continuously undergoing refinement and should be looked at once again in the coming months.
The same Forbes article says that Coinbase has 3.5 million users and Blockchain.info has 6.5 million wallet holders.
But as we have looked at before, what does that even mean? Few companies publicly define what a user or wallet actually represents. I have looked at this twice in the past:
The bottom line is that “monthly active users” (MAU) — which is one of the standard methods for measuring real growth (and success) of an application, is still largely unreported by any cryptocurrency-related company that has raised a Series A or higher.3
Other public data
Where can we find data that is still be published and could reflect usage numbers of public blockchains?
According to CoinATMRadar, the ‘number of Bitcoin ATMs installed by Bitcoin machine type’ increased from 536 at the beginning of January to 612 at the end of March. This comes to roughly 0.84 ATMs installed per day or a rate slightly higher than the past 2 years (it is on pace for 308.2 installations altogether this year compared with 275 per year for 2014 and 2015).
In terms of market prices, there were some relatively big swings in volatility (about $100 from peak to trough) in the first quarter due in part to the continued block size debate which still remains unresolved.9
Some venture funding bounced back from the dearth in Q4 2015.
According to the venture capital aggregation at CoinDesk there was $148 million of publicly announced rounds for both Bitcoin-related and Blockchain-related startups spread among 14 deals in Q1 2016. Though two investments alone (DAH and Blockstream) accounted for more than two-thirds of that funding tranche.
However, the list is probably not complete as two investments into Kraken’s Japanese subsidiary were for undisclosed amounts (first from SBI in January and then by Money Partners Group in March). Similarly, Ripple also received capital from SBI in January (for a reported 3 billion yen or ~$25 million).
In addition, last week, CB Insights (a venture tracking firm) held a webinar that covered the “Bitcoin / Blockchain” ecosystem (deck) (recording).
While providing a good general overview, I think it lacks a number of recent developments in the overall “Blockchain” capital markets world.10
For instance, Tradeblock recently launched Axoni (a private / permissioned blockchain) and Peernova isn’t really a “Blockchain” company now. 11 The webinar is a little outdated on the cryptocurrency side of things too. For example, Mirror is completely out of the ecosystem altogether, 21inc is basically a software company at this point, Buttercoin is bankrupt and Blockscore shouldn’t be included in either bucket.
I would be remiss to not include Counterparty, a platform has effectively plateaued (see image above) and has now been eclipsed by Ethereum based on multiple measurements including transaction growth (which actually may be eventually be gamed via “long chains” just like some Bitcoin transactions are).
Ignoring the liquidity and market cap sections (basically all cryptocurrencies are illiquid and easily manipulable) there is a marked difference in terms of terms of social media engagement and interest between the two platforms. For example, in terms of public interest, one measure that could be added to the Coingecko list is the amount of organized Meetup’s: Ethereum has roughly a hundred globally and Counterparty has about 10.
As an aside, I attended two Ethereum meetup’s last month: one hosted by Coinbase in San Francisco and another one hosted by IFTF in Palo Alto. Both were well-attended with roughly 120 people showing up for the latter.
[Note: I do not own, control or hold any cryptocurrency nor do I have any trading position on them either.]
Why is no one actively publishing numbers?
It could be the case that some of the startups feel that any user / usage number is commercially important and therefore treat it like a trade secret.
Is there really less transparency in this market compared to other tech markets?
Maybe, maybe not. What about public markets?
Last spring, Blizzard Entertainment announced it would no longer publish World of Warcraft subscription numbers. This was done because of the continual decline in subscriptions (more than halving from its 12 million peak). Similarly, last fall, Microsoft said it would no longer publish Xbox One unit sales and would instead share Xbox Live usership. ((Disclosure: I own an Xbox One)) At the time this move was seen as a way to downplay the growing gap in sales between Sony’s PS4 and the Xbox One.
An exception to this rule is Zynga — the mobile / social gaming company — which has seen continual drop offs in monthly active users for over three years, but still publishes numbers. 12
Back to the public blockchain sphere: why would 40+ companies that have closed a Series A or higher as a whole decide not to publish user / usage numbers in a market that claims to always be growing by leaps and bounds?
One of the problems appears to be that when you raise a lot of money, $50+ million for B2C applications your charts are expected to look a bit like other high-growth companies.
For instance, above is a two-year chart displaying two types of users: daily active and paid for Slack. With 3.5x daily user growth over the past year, Slack announced last week that it has closed its new round, raising $200 million at $3.8 billion post-money valuation. About a third of its daily users which are paid users, a relatively high conversion rate.
Obviously social media commenters will point out that “cryptocurrencies” are not the same thing as communication tools, but the point remains that eventually the aspirations of investors will re-calibrate with the actual growth trajectories of a platform. And as of right now, based on public data it is unclear where that traction is in the cryptocurrency world — perhaps it does exist somewhere but no one is publicly revealing those stats.
It bears mentioning, based on anecdotes there are several cryptocurrency-related startups that have gained relatively large customer bases in certain corridors focused on cross-border payments and remittances involving The Philippines.13 There are also several cash-flow positive companies in this space that have flown under the radar. On the flipside, based on similar anecdotes, multi-level marketing scams like MMM Global also have seen continued traction.14
Where is the growth, where are the numbers? Those are the two questions that continue to drive blog posts on this site. Perhaps startups in the public blockchain ecosystem will be more forthcoming later this year as more capital is deployed. We will try to revisit this topic once more information is publicly available.
It will also be interesting to see how many more cryptocurrency-related companies rebrand or pivot into the “private blockchain” sphere without actually changing how they interact with cryptocurrencies. Thus, my older October post on the Great Pivot should be revisited at some point as well. In addition, if “private blockchain” platforms are eventually flipped on into production mode, they may begin to yield usage numbers worth looking at in a year or so.
And according to other data science companies I have spoken to in the recent past, several confirm this as well. [↩]
A notable exception was in December 2015 when BitPay provided a transaction chart to Forbes. Additionally, BitGo has published numbers from time to time. And while it hasn’t raised a Series A, Blockstack is also fairly open about its userbase. [↩]
Blockstack.org is not the same thing as Blockstack.io — two different groups. [↩]
Flavien Charlon, creator of Open Assets, also maintains Openchain. [↩]
Monegraph is a platform for managing digital artwork. [↩]
During its crowdsale last year, Factom sold about 4.4 million factoid (tokens) for 2,278 bitcoins. [↩]
CoinSciences, the team behind Coinspark, also has another product called MultiChain. [↩]
One interesting stat they mentioned was in terms of ratios: in 2015 there was about $15 billion invested in “fintech” overall and about $450 million in the entire umbrella of “cryptocurrency / blockchain” ecosystem. That amounts to about 3%. [↩]
Peernova has transitioned from being a Bitcoin mining company to creating “Blockchain-inspired” tools for other industries. [↩]
Over the past several months there has been a crescendo of pronouncements by several cryptocurrency enthusiasts, entrepreneurs and investors claiming that public blockchains, such as Bitcoin and Ethereum, are an acceptable settlement mechanism and layer for financial instruments. Their vision is often coupled with some type of sidechain or watermarked token such as a colored coin.
The problem with these claims and purported technical wizardry is that they ignore the commercial, legal and regulatory requirements and laws surrounding the need for definitive settlement finality.
For instance, the motivation behind the European Commission’s Directive 98/26/EC was:
“[T]o minimize systemic risk by ensuring that any payment deemed final according to the system rules is indeed final and irreversible, even in the event of insolvency proceedings.
“Without definitive finality, the insolvency of one participant could undo transactions deemed settled and open up a host of credit and liquidity issues for the other participants in the payment system. This results in systemic risk and undermines confidence in all the payments processed by the system.
“Thus, by ensuring definitive settlement, the concept of finality fosters trust in the system and reduces systemic risk. This makes it one of the most important concepts in payments and one that is applied to all clearing and settlement systems, including settlement and high-value payment system Target2 and bulk SEPA clearing system STEP2.”
While many cryptocurrency proponents like to pat themselves on the back for thinking that “immutability” is a characteristic unique to public blockchains, this is untrue. Strong one-way cryptographic hashing (usually via SHA 256) provides immutability to any data that is hashed by it: If Bob changes even one bit of a transaction, its hash changes and Alice knows it has been changed.
What about proof-of-work?
Proof-of-work, utilized by many public blockchains, provides a way to vote on the ordering and inclusion of transactions in a block, in a world where you do not know who is doing the voting. If you know who is doing the voting, then you do not need proof-of-work.
Consequently, with proof-of-work-based chains such as Bitcoin, there is no way to model and predict the future level of their security, or “settlement,” as it is directly proportional to the future value of the token, which is unknowable.
Thus, if the market value of a native token (such as a bitcoin or ether) increases or decreases, so too does the amount of work generated by miners who compete to receive the networks seigniorage and expend or contract capital outlays in proportion to the tokens marginal value. This then leaves open the distinct possibility that, under certain economic conditions, Byzantine actors can and will successfully create block reorgs without legal recourse.
In particular, this means miners can remove a transaction from the history such that a payment you thought had been made is suddenly unmade.
In addition, with public blockchains, miners (or rather mining pools) have full discretion on the ordering and reordering of transactions. While mining pools cannot reverse one-way hashes such as a public key (immutable on any blockchain), they can make it so that any transaction, irrespective of its value, can be censored, blocked or reordered.
To be clear, by reordered, we mean that in the event two conflicting transactions are eligible for block inclusion (e.g., a payment to Bob and a double-spend of the same coins to Alice), the payment to Bob could be mined and then, at any point in the future, replaced by the payment to Alice instead.
In Bitcoin and Ethereum (as well as many others), mining pools have full discretion of organizing and reorganizing blocks, including previous blocks. While there is an economic cost to this type of rewriting of history, there are also tradeoffs in creating censorship-resistant systems such as Bitcoin.
One of the tradeoffs is that entire epochs of value can be removed or reorganized without recourse, as public blockchains were purposefully designed around the notion of securing pseudonymous consensus.
Pseudonymous consensus is a key characteristic that cannot be removed without destroying the core utility of a public blockchain: censorship-resistance. So, as long as Bitcoin miners have full discretion over the transaction validation process, there is always a risk of a reorg.
What if you remove censorship-resistance by vetting the miners and creating “trusted mining”?
If you remove censorship-resistance (pseudonymous consensus) but still utilize proof-of-work, you no longer have a public blockchain, but rather a very expensive hash-generating gossip network.
While this type of quasi-anarchic system may be useful to the original cypherpunk userbase, it is not a desirable attribute for regulated financial institutions that have spent decades removing risks from the settlement process.
Ignoring for the moment the legal and regulatory structures surrounding the clearing and settlement of financial instruments, in our modern world all participants recognize that, from a commercial perspective alone, it makes sense to have definitive – not probabilistic – settlement finality. Because of how the mining process works – miners can reorganize history (and have) – a public blockchain by design cannot definitively guarantee settlement finality.
Markets do not like uncertainty, and consequently mitigating and removing systemic risks has been a key driver by all global settlement platforms for very good apolitical reasons.
Public blockchains may be alluring because of how they are often marketed – as a solution to every problem – but they are not a viable solution for organizations seeking to provide certainty in an uncertain world, and they are currently not a reliable option for the clearing and settling of financial instruments.
There are solutions being built to solve this problem that do not rely on public blockchains for settlement. For example, private and consortium blockchains are specifically being designed to provide users definitive legal settlement finality, among other requirements, because this certainty is necessary for adoption by regulators and regulated financial institutions.
For context, over the past 18 months banks have looked at more than 150 proof-of-concepts and pilots and rejected nearly all of them. Not because they are anti-cryptocurrency, but because public blockchains were not purposefully built around the requirements of financial institutions. So why would they integrate a system that does not provide them utility?
Yet if researchers empirically observe that the failure risks associated with various public blockchains is within an accepted risk profile – in certain niche use-cases – it may be the case that some institutions will consider conducting additional proof-of-concepts on them.
The tradeoffs in designing public blockchains and permissioned ledgers are real. For instance, it is self-defeating to build a network that is both censorship-resistant from traditional legal infrastructure and simultaneously compliant with legal settlement requirements. Yet both types of networks will continue to coexist, and the vibrant communities surrounding the two respective spaces will learn from one another.
And if the goal for fintech startups is to create a new commercial rail for securing many different types of financial instruments, then shipping products that actually satiate the needs of market participants is arguably more important than trying to tie everything back into a pseudonymous network that intentionally lacks the characteristics that institutional customers currently need.
In a nutshell: despite recent efforts to modify public blockchains such as Bitcoin to secure off-chain registered assets via colored coins and metacoins, due how they are designed, public blockchains are unable to provide secure legal settlement finality of off-chain assets for regulated institutions trading in global financial markets.
The initial idea behind this topic started about 18 months ago with conversations from Robert Sams, Jonathan Levin and several others that culminated into an article.
The issue surrounding top-heaviness (as described in the original article) is of particular importance today as watermarked token platforms — if widely adopted — may create new systemic risks due to a distortion of block reorg / double-spending incentives. And because of how increasingly popular watermarked projects have recently become it seemed useful to revisit the topic in depth.
What is the takeaway for organizations looking to use watermarked tokens?
The security specifications and transaction validation process on networks such as the Bitcoin blockchain, via proof-of-work, were devised to protect unknown and untrusted participants that trade and interact in a specific environment.
Banks and other institutions trading financial products do so with known and trusted entities and operate within the existing settlement framework of global financial markets, with highly complex and rigorous regulations and obligations. This environment has different security assumptions, goals and tradeoffs that are in some cases opposite to the designs assumptions of public blockchains.
Due to their probabilistic nature, platforms built on top of public blockchains cannot provide definitive settlement finality of off-chain assets. By design they are not able to control products other than the endogenous cryptocurrencies they were designed to support. There may be other types of solutions, such as newer shared ledger technology that could provide legal settlement finality, but that is a topic for another paper.
This is a very important issue that has been seemingly glossed over despite millions of VC funding into companies attempting to (re)leverage public blockchains. Hopefully this paper will help spur additional research into the security of watermarking-related initiatives.
I would like to thank Christian Decker, at ETH Zurich, for providing helpful feedback — I believe he is the only academic to actually mention that there may be challenges related to colored coins in a peer-reviewed paper. I would like to thank Ernie Teo, at SKBI, for creating the game theory model related to the hold-up problem. I would like to thank Arthur Breitman and his wife Kathleen for providing clarity to this topic. Many thanks to Ayoub Naciri, Antony Lewis, Vitalik Buterin, Mike Hearn, Ian Grigg and Dave Hudson for also taking the time to discuss some of the top-heavy challenges that watermarking creates. Thanks to the attorneys that looked over portions of the paper including (but not limited to) Jacob Farber, Ryan Straus, Amor Sexton and Peter Jensen-Haxel; as well as additional legal advice from Juan Llanos and Jared Marx. Lastly, many thanks for the team at R3 including Jo Lang, Todd McDonald, Raja Ramachandran and Richard Brown for providing constructive feedback.
[Note: the following views were originally included in a new paper but needed to be removed for space and flow considerations]
While most academic literature has thus far narrowly focused under the assumption that proof-of-work miners such as those used in Bitcoin will behave according to a “goodwill” expectation, as explored in this paper, there may be incentives that creative attackers could look to exploit.
Is there another way of framing this issue as it relates to watermarked tokens such as colored coins and metacoins?
Below are comments from several thought-leaders working within the industry.
When it comes to cryptocurrency, as with any other situation, an attacker has to balance the cost of attacking the network with the benefit of doing so. If an attacker spends the minimum amount required to 51% attack bitcoin, say $500 million, then the attacker needs to either be able to short $500 million or more worth of BTC for the attack to be worth it, or needs to double spend $500 million or more worth of BTC and receive some irreversible benefit and not get caught (or not have consequences for getting caught), all while taking into consideration the loss of future revenues from mining honestly. When you bring meta-coins into the equation, things get even murkier; the cost is less dependent on the price of bitcoin or future mining revenues, and depends more on the asset being attacked, whether it’s a stock sale or company merger that’s being prevented, or USD tokens being double-spent.
There’s no easy answer, but based on the economics of the situation, and depending on the asset in question, it doesn’t seem wise to put more value on chain than the market cap of BTC itself (as a rough benchmark – probably not that exact number, but something close to it).
Not a single study has been publicly published looking at this disproportionalism yet it is regularly touted at conferences and social media as a realistic, secure, legal possibility.
According to Vitalik Buterin, creator of Ethereum:2
There are actually two important points here from an economics perspective. The first is that when you are securing $1 billion on value on a system with a cryptoeconomic security margin that is very small, that opens the door to a number of financial attacks:
Short the underlying asset on another exchange, then break the system
Short or long some asset at ultrahigh leverage, essentially making a coin-flip bet with a huge amount of money that it will go 0.1% in one direction before the other. If the bet pays off, great. If it does not pay off, double spend.
Join in and take up 60%+ of the hashrate without anyone noticing. Then, front-run everyone. Suppose that person A sends an order “I am willing to buy one unit of X for at most $31”, and person B sends an order “I am willing to sell one unit of X for at least $30”. As a front-runner, you would create an order “I am willing to sell one unit of X for at least $30.999” and “I am willing to buy one unit of X for at most $30.001”, get each order matched with the corresponding order, and earn $0.998 risk-free profit. There are also of course more exotic attacks.
In fact, I could see miners even without any attacks taking place front-running as many markets as they can; the ability to do this may well change the equilibrium market price of mining to the point where the system will, quite ironically, be “secure” without needing to pay high transaction fees or have an expensive underlying currency.
The second is that assets on a chain are in “competition” with each other: network security is a public good, and if that public good is paid for by inflation of one currency (which in my opinion, in a single-currency-chain environment, is economically optimal) then the other currencies will gain market share; if the protocol tries to tax all currencies, then someone will create a funky meta-protocol that “evades taxes by definition”: think colored coins where all demurrage is ignored by definition of the colored coin protocol. Hence, we’ll see chains secured by the combination of transaction fee revenue and miner front running.
Unsolved economics question: would it be a good thing or a bad thing if markets could secure themselves against miner frontruns? May be good because it makes exchanges more efficient, or bad because it removes a source of revenue and reduces chain security.
Cryptoeconomics is a nascent academic field studying the confluence of economics, cryptography, game theory and finance.3
Piotr Piasecki, a software developer and independent analyst explained:4
If a malicious miner sees a big buy order coming into the market that would move the price significantly, they can engage in front running – the buy order could be pushed to the back of the queue or even left out until the next block, while the miner buys up all of the current stock and re-lists it at a higher price to turn a profit. Alternatively, when they see there is a high market pressure coming in, especially in systems that are inefficient by design, they can buy the orders up one by one by using their power to include any number of their own transactions into a block for free, and similarly re-list them for people to buy up.
Or in other words, because miners have the ability to order transactions in a block this creates an opportunity to front run. If publicly traded equities are tracked as a type of colored coin on a public blockchain, miners could order transaction in such a way as to put certain on-chain transactions, or trades in this case, to execute before others.
Robert Sams, co-founder of Clearmatics, previously looked at the bearer versus registered asset challenge:5
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 pseudo-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 a 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 pseudo-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.
On this point, Jonathan Levin, co-founder of Chainalysis previously explained that:6
We don’t know how much proof of work is enough for the existing system and building financially valuable layers on top does 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.
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Personal correspondence, August 10, 2015. Bitseed is a startup that builds plug-and-play full nodes for the Bitcoin network. [↩]
A couple hours ago I gave the following presentation to Infosys / Finacle in Mysore, India with the Blockchain University team. All views and opinions are my own and do not represent those of either organization.
This past week Koinify and the Cryptocurrency Research Group (CCRG), a new academic organization, held a 3-day event — the first of its kind called Cryptoeconomicon, an interdisciplinary private event that included a cross section of developers, entrepreneurs, academics and a few investors. It was purposefully scheduled to coincide with O’Reilly Media’s own “Bitcoin and the Blockchain” conference which took place in the middle of it.
I attended what amounted to four days of seminars, brainstorming and networking sessions. Below are my summarized thoughts. Note: these are my opinions alone and do not reflect those of other participants or the companies I work with. You can view pictures/info of the event: #cryptoecon and @cryptoecon
Rather than going through each session, I will just highlight a few areas that stood out to me and include outside relevant content.
What is cryptoeconomics?
According to Vlad Zamfir, of the Ethereum project, cryptoeconomics as a field might be defined as:
A formal discipline that studies protocols that govern the production, distribution and consumption of goods and services in a decentralized digital economy. Cryptoeconomics is a practical science that focuses on the design and characterization of these protocols.
Zamfir discussed this at length (slides) (video) and rather than going too in-depth with what he said I wanted to reiterate his main points he gave:
Cryptoeconomic security as information security
Mechanisms are really programs
They can distribute payoffs
The programs have a certain behaviour in the Nash equilibrium case
The NE has a cryptoeconomic security
We can be assured that a program will run a particular way
He also argues that “cryptoeconomics” should be see as more economics for cryptography rather than cryptography for economics:
Economic mechanisms can give guarantees that a program will run in a particular way that cryptography alone can’t provide.
Incentives are forward facing, cryptography is a function of already-existing information
How do we provide custom cryptoeconomic guarantees?
The last part in relation to his talk that really stuck out to me was on the final day. In his view (slides) the technical term that should be applied is, “distributed cryptoeconomic consensus” which would assuage concerns from the academic “distributed consensus” community that uses different terminology. Under this definition, this means:
A cryptoeconomic mechanism with the Nash equilibrium of assuring distributed byzantine fault tolerant consensus
We should be able to assert and prove the cryptoeconomic assurances of any consensus mechanism
Distributed consensus mechanisms can create a pure cryptoeconomy. Even the execution of the mechanisms is has a measurable assurance.
Most interesting comment of the event
I think the most apt comment from the economics discussion came from Steve Waldman, a software developer and trader over at Interfluidity on the first day of the event.
While there will likely be a recording posted on Youtube (video), in essence what he said was that in the blockchain space — and specifically the developers in the room — they are creating an enormous amount of supply without looking to see what the corresponding demand is. That is to say, there is effectively a supply glut of “blockchain tech” in part because few people are asking whether or not this tech actually has any practical consumer demand. Where are the on-the-ground consumer behavior surveys and reports?
Again, if Bitcoin (the overall concept) is viewed as an economy, country or even a startup, it is imperative that the first question is resolved: what is the market need? Who are the intended consumers? So far, despite lots of attention and interest, there has been very little adoption related to blockchains in general. Perhaps this will change, maybe it is only a temporary mismatch. Maybe it these are the chicken-egg equivalent to computing languages like Ruby or PHP and eventually supply somehow creates the demand? Or maybe it suffers from the Kevin Costner platform trap (e.g,. if you build it, will they come?).
To illustrate this contrarian view:
Source: David Norris https://twitter.com/norrisnode/status/561262588466839553
Maybe there is no real market need for these first generation concepts? Perhaps the network will run out of block rewards (cash incentives) to the miners before these blockchains can gain mainstream traction? Maybe the current developers are not quite right for the job?
Or maybe, blockchains such as Bitcoin simply get outcompeted in the overall marketplace. For instance, there are currently 1,586 Payment startups listed on AngelList and 106 P2P Money Transfer startups listed on AngelList. Most of these will likely burn out of capital and cease to exist, but there are probably at least a dozen or so of each that will (and have) gained traction and are direct competitors to these first generation blockchains.
Perhaps this will change, but then again, maybe the market is more interested in what William Mougayar (who unfortunately was not part of the event) pointed out a few days ago. Simply put, maybe there is more room to grow in the “Blockchain Neutral Smart Services” and “Non-Blockchain Consensus” quadrants:
We cannot know for certain a priori what market participants will decide. Perhaps Bitcoin is good enough to do everything its enthusiastic supporter claim it can.
Or maybe, as Patrick Collison, CEO of Stripe, wittily stated in Technology Review:
“Bitcoin is kind of a financial Rorschach test; everyone projects their desired monetary future onto it.”
Now, to be fair, Collison (who was not part of the event) has a horse in the race with Stellar. Fortunately there was not much emphasis on token prices going to the moon at the Cryptoecon event. When incentives did come up, it was largely related to how a consensus mechanism can be secure through a self-reinforcing Nash equilibrium.
Perhaps a future event could discuss what Meher Roy (who unfortunately was not in attendance either) adroitly summarized and modeled in relation to how actors are betting on crypto-finance platforms:
There were a number of startups at the event, probably around a dozen or so. In my view, the most concise overview was from Sergey Nazarov co-founder of SmartContract. The interface was clean, the message was clear and “issuance” can be done today. I’m not necessarily endorsing the stack he’s using, but I think he has clearly talked to end-users for ease of use feedback (note: be sure to consult a lawyer before using any ‘smart contracting’ system, perhaps they are not recognized as actual “contracts” in your jurisdiction). Also, drones.
It would have been nice to see a little longer debate between StorJ, Maidsafe and Filecoin groups. I think there was probably a little too much “it just works” handwaving but thought that Juan Binet-Betez from IPFS/Filecoin gave the most thorough blueprint of how his system worked (he also showed a small working demo).
It was not recorded but I think messaging for Augur (a variation of Truthcoin) was pretty poor. Again, just my opinion but I was vocal about the particular use-case (gambling) proposed as it would simply bring more negative PR to a space smashed with bad PR. The following day other members of the team discussed other uses including prediction markets for political events (similar to what Intrade did). I am skeptical that in its current form it will become widely adopted because futures markets, like the CME, already do a relatively competitive job at providing this service for many industries and these decentralized markets could likely just attract marginal, illicit activities as has been the trend so far. I could be wrong and perhaps they will flourish in emerging markets for those without access to the CME-like institutions.
Things that look less skeptical
There were about 10-12 people affiliated with Ethereum at the event, all of them were developers and none of them seemed to push their product as “the one chain to rule them all” (in fact, there was a healthy debate about proof-of-stake / proof-of-work within their contingent). I’ve been fairly skeptical since last summer when their team looked gigantically bloated (too many cooks in the kitchen) but they seem to have since slimmed down, removing some of the pumpers and focusing on the core tech. This is not to say they will succeed, but I am slightly less skeptical than I was 3-4 months ago.
I also had a chance to sit down with a couple members of the IBM ADEPT ‘Internet of Things’ team. They held a ~3 hour workshop which was attended by around 20 people. The session was led by Henning Diedrich (IBM), David Kravitz (IBM) and Patrick Deegan (Open Mustard Seed Project). Again, even though I’ve paged through the ADEPT whitepaper, I was hesitant to believe that this was little more than marketing on the part of IBM. But by the time the session was over, I was a little less skeptical. Perhaps in the future, when more appliances and devices have secure proplets, they could use a method — such as a blockchain/cryptoledger — to securely bid/ask on resources like electricity. B2B and machine-to-machine ideas were discussed and piggybacked on. Obviously there are all sorts of funny and sad ways this could end but that is up for Michael Bay to visualize next year.
This also intersects with another good comment from Stefan Thomas (CTO of Ripple Labs). In a nutshell, on a panel during the first day, he thinks there is some confusion and conflation of the terms “automation,” “decentralization,” “smart contracts” and “blockchains.” That is to say, while blockchains are automated, that is not to mean that it is the only means to achieve automation. Nor is decentralization necessary for automation to be achieved in every use-case. Nor are smart contracts the only way to control automated devices. When the video is posted I’ll be sure to link it (video).
Ethan Buchman, lead dev for Eris, was both witty and on top of his form, noting that in practice users don’t need a new browser every time they go to a new site, so they shouldn’t need a new client to view a different blockchain. Let’s keep our eye on Decerver to see how this germinates.
Lastly, the two investors that attended the VC panel on Wednesday included Shahin Farshchi from Lux Capital and Pearl Chan of Omidyar Network. What I liked about them is they weren’t pushing a certain binary viewpoint. They were both upfront and honest: neither had invested in this space, not because they hated it, but because they were taking their time to see what opportunities actually fit within their mandate. Perhaps they will at some point. One joke that Farshchi mentioned was that back when cellular telephony was growing, “everyone and their mom” was selling base station equipment and chips. Similarly there were over 300 companies creating thin film solar cells before bankruptcies and mergers. So the type of euphoria we see in the Bitcoin-space is not necessarily unique.
Room for improvement
Perhaps if there is a next event it could include representatives from Blockstream, Bitfury and other Bitcoin-centered projects. It would be nice to have some perspective from those deeply concerned about with maintaining secure consensus and the Blockstream team has some of the most experienced engineers in this space. Hearing their views next to what Peter Todd (who attended and had some interesting calculations for the estimated costs to attack a network), could help developers build better tools. Similarly, developers from Peernova, Square, Stripe, M-Pesa and Western Union would also likely be good resources to provide empirical feedback.
Additional clarity for what a decentralized autonomous organization (DAO) actually is and is not could be spelled out as well. And how do these intersect with existing legal jurisprudence (can they? as Brett Scott might ask). For anyone who has read “The Cookie Monster” by Vernor Vinge, both Matt Liston and Vitalik Buterin made some not-entirely-unreasonable points about machine-rights and whether or not machines should trust humans (e.g., humans expect bots to provide truthful information, but can the reverse be expected? And what happens if a bot, like a DAO, is deemed too successful or broke a law in some jurisdiction — does it get “carted” away in a truck?).
Lastly, I think by the time there is another event, there will hopefully be more clarity for what a “smart contract” is. One panel I moderated, I tried to get the participants to use the word “banana” instead because the term “banana” is overused and often conflated to mean many things it is legally not. Primavera De Filippi from the Cryptolaw panel made some good comments too about whether or not “bananas” are actual legally binding contracts; she previously did a workshop with Aaron Wright (also in attendance) at the recent Distributed Networks and the Law event held at Harvard/MIT. Steve Omohundro also spoke realistically about these scenarios on the final day, where does liability start and stop for developers of DAOs?
[Note: I would like to thank Kieren James-Lubin, Vitalik Buterin, Tom Ding, Sri Sriram for organizing the event, Robert Schwentker for acting as emcee/photographer, and CFLD and Omidyar Network for sponsoring the event including the delicious food.]
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.
Below are some transcribed notes of my own statements.
Introduction starting at 09:06:
Hey guys, great to be here. Thanks for the invite, thanks for organizing this. So I’m here because you guys needed another white guy from Europe or something like that (that’s a joke). So the definition I have of smart contracts, I have written a couple books in this space, and the definition I use is a smart contract is “a proposed tool to automate human interactions: it is a computer protocol – an algorithm – that can self-execute, self-enforce, self-verify, and self-constrain the performance of a contract.” I think I got most of that definition from Nick Szabo’s work. For those of you who are familiar with him, look up some of his past writings. I think that the primary work he is known for is the paper, “Formalizing and Securing Relationships on Public Networks.” And he is basically considered the [intellectual] grandfather of this space. I’m here basically to provide education and maybe some trolling.
From 22:02 -> 24:15
I think I see eye-to-eye with Adam here. Basically the idea of how we have a system that is open to interpretation, you do have reversibility, you do have nebulousness. These are things that Nick Szabo actually discussed in an article of his called “Wet code and dry” back in 2008. If you look back at some of the earlier works of these “cypherpunks” back in the ’90s, they talked about some of these core issues that Oleg talked about in terms of being able to mitigate these trusted parties. In fact, if you look at the Bitcoin whitepaper alone, the first section has the word “reverse” or “reversibility” around 5 times and the word “trust” or “trusted” appears 11 times in the body of the work. This was something that whoever created Bitcoin was really interested in trying to mitigate the need for any kind of centralized or third party involved in the process of transactions to reduce the mediation costs and so forth.
But I suppose my biggest criticism in this space, it is not pointed to anyone here in particular, is how we have a lot of “cryptocurrency cosplay.” Like Mary Sue Bitcoin. I’m not sure if you guys are familiar with who Mary Sue is: she is this archetype who is this kind of idealized type of super hero in a sense. So what happens with Bitcoin and smart contracts is that you have this “Golden Age” [of Comics] where you had the limited ideas of what it could do. Like Superman for example, when he first came out he could only jump over a building and later he was pushed to be able to fly because it looks better in a cartoon. You have only a limited amount of space [time] and it takes too long to jump across the map. So that’s kind of what I see with Bitcoin and smart contracts. We can talk about that a little bit later, just how they have evolved to encompass these attributes that they’re probably not particularly good at. Not because of lack of trying but just because of the mechanisms of how they work in terms of incentives for running mining equipment and so on. So, again we can talk about that later but I think Adam and Oleg have already mentioned the things that are pretty important at this point.
40:18 -> 41:43
I’m the token cynic, huh? So actually before I say anything, I would like to mention to the audience other projects that you might be interested in looking at: BitHalo; NotaryChains is a new project that encompasses some of these ideas of Proof of Existence created by Manuel Araoz, he is the one who did POE. NotaryChains is a new project I think that sits on top of Mastercoin. The issue that people should consider is that proof of existence/proof of signature: these are just really hi-tech forms of certification. Whether or not they’re smart contracts I guess is a matter of debate.
There is another project: Pebble, Hyperledger, Tezos, Tendermint, Nimblecoin. With Dogethereum their project is called Eris which apparently is the first DAO ever. A DAO for the audience is a decentralized autonomous organization, it’s a thing apparently. SKUChain is a start-up in Palo Alto, I talk about them in chapter 16. They have this interesting idea of what they call a PurchaseChain which is a real use-case for kind of updating the process from getting a Letter of Credit to a Bill of Lading and trying to cut out time and mediation costs in that process. There are a few others in stealth mode. So I really don’t have a whole lot to add with cynicism at this point, we can go on and come back to me in a little bit.
59:41 -> 1:02:35
The go to deficiency guy, huh? They’re not really saying anything particularly controversial, these things are fundamentally — at least from an engineering perspective — could be done. The problem though I think runs into is what Richard Boase discussed in — if listeners are interested — he went to Kenya and he did a podcast a few weeks ago on Let’s Talk Bitcoin #133. I really recommend people listen to it. In it he basically talks about all of these real world issues that run into this idealized system that the developers are building. And as a result, he ended up seeing all of these adoption hurdles, whether it was education or for example tablets: people were taking these tablets with bitcoin, and they could just simply resell it on a market, the tablet itself was worth more than they make in a year basically; significant more money. He talked about a few issues like P2P giving, lending and charity and how that doesn’t probably work like we think it does.
I guess the biggest issue that is facing this space, if you want issues, is just the cost benefit analysis of running these systems. There is a cost somewhere to run this stuff on many different servers, there is different ways to come up with consensus for this: for example, Ripple, Stellar, Hyperledger, they’re all using consensus ledgers which require a lot less capital expenditures. But when you end up building something that requires some kind of mining process itself, that costs money. So I think fundamentally in the long-run it won’t be so much what it can do but what can it economically do.
So when you hear this mantra of let’s decentralize everything, sure that’s fine and dandy but that’s kind of like Solutionism: a solution looking for a problem. Let’s decentralize my hair — proof of follicle — there is a certain reductio ad absurdum which you come to with this decentralization. Do you want to actually make something that people are actually going to use in a way that is cheaper than an existing system or we just going to make it and throw it out there and think they’re going to use it because we designed [wanted] it that way. So I think education is going to be an issue and there are some people doing that right now: Primavera De Fiillipi, she’s over at Harvard’s Berkman Center — she’s got something called the Common Accord program. And also Mike Hearn; listeners if you’re interested he’s made about 7 or 8 use-cases using the existing Bitcoin blockchain including assurance contracts — not insurance contracts — assurance contracts. And he’s got a program called Lighthouse which hopes to build this onto the actual chain itself. So there are things to keep in mind, I’m sure I’ll get yelled at in a minute here.
1:23:58 -> 1:28:10
Anyone listening to this wanting to get involved with smart contracts: hire a lawyer, that’s my immediate advice. I will preface by saying I don’t necessarily agree with policies that exist and so on; I don’t personally like the status quo but there is no reason to be a martyr for some crusade led by guys in IRC, in their little caves and stuff like that. That’s not towards anyone here in this particular chat but you see this a lot with “we’re going to destroy The Fed” or “destroy the state” and the reality is that’s probably not going to happen. But not because of lack of trying but because that’s not how reality works.
Cases right now are for example: DPR, Shavers with the SEC, Shrem now with the federal government, Karpeles [Mt. Gox] went bankrupt. What’s ended up happening is in 2009, with Bitcoin for example, you started with a system that obviated the need of having trusted third parties but as users started adopting it you ended up having scams, stolen coins, people losing coins so you ended up having an organic growth of people wanting to have insurance or some way to mediate these transactions or some way to make these things more efficient. And I think that it will probably happen — since we’re guessing, this is speculative — I think that this will kind of happen with smart contracts too. That’s not to say smart contracts will fail or anything like that. I’m just saying that there will probably just be a few niche cases initially especially since we don’t have much today, aside I guess from Bitcoin — if you want to call it a smart contract.
What has ironically happened, is that we have created — in order to get rid of the middlemen it looks like you’ve got to reintroduce middlemen. I’m not saying it will always be the case. In empirical counter-factual it looks like that’s where things are heading and again obviously not everyone will agree with me on that and they’ll call me a shill and so on. But that’s kind of where I see things heading.
I have a whole chapter in a book, chapter 17. I interviewed 4 or 5 lawyers including Pamela [Morgan] of different reasons why this could take place. For example, accredited investor — for those who are unfamiliar just look up ‘accredited investor.’ If you’re in the US, in order to buy certain securities that are public, you need to have gone through certain procedure to be considered a ‘sophisticated investor.’ This is one of the reasons why people do crowdsales outside of the US — Ethereum — because you don’t want to have to interact with the current legal system in the US. The reason I mention that is because you end up opening yourselves to lawsuit because chains — like SWARM — cannot necessarily indemnify users. That’s legal terminology for being able to protect your users from lawsuits from third parties; they just do not have the money, the revenue to support that kind of legal defense. Unlicensed practice of law (UPL) is another issue. If you end up putting up contracts on a network one of the issues could be, at least in the US, are bar associations. Bar associations want to protect their monopoly so they go after people who practice law without a license. I’m not saying it will happen but it could happen.
My point with this is, users, anyone listening to this should definitely do your due diligence, do your education. If you plan to get involved with this space either as an investor or developer or so on, definitely at least talk to a lawyer that has some inkling of of an idea [on this]. The ones I recommend, in addition to Pamela here are: Ryan Straus, he is a Seattle-based attorney with Riddell Williams; Austin Brister and James Duchenne they’re with a program called Satoshi Legal; and then Preston Byrne, who’s out in London and he’s with Norton Rose Fulbright.
1:52:20 -> 1:54:43
Guys look, I understand that sounds cool in theory and it’s great to have everything in the background, but the reason you have to see these “shrink wrapped” EULAs [end user license agreements] and TOSs [terms of service] is because people were hiding stuff inside those agreements. So if you hide what’s actually taking place in the contract you end up making someone liable for something they might not actually agree to. So I’m not sure, I think it’s completely debatable at this point. If we’re trying to be transparent, then you’re going to have to be transparent with the terms of agreement.
I should point out by the way, check out Mintchalk.com, it’s run by guys named James and Aaron in Palo Alto, they’re doing contract building. ACTUS is a program from the Stevens Institute, they’re trying to come with codified language for contracts. Mark S. Miller, he’s got a program over at Google, he does something with e-rights.
I mention all of this because, we already have a form of “polycentric law” if you will in terms of internationally with 200 different jurisdictions vying for basically jurisdiction arbitrage. Ireland and the Netherlands have a tax agreement that Facebook, Google, Pfizer they take advantage of. It’s this Double Irish With a Dutch Sandwich. In fact my own corporation is incorporated in Delaware because of the legal arbitrage [opportunities]. Obviously smart contracts might add some sort of new wrinkle to that, but people who are listening to this, don’t expect to be living in some Galt’s Gulch tomorrow or something like that.
For example, when you have something that is stolen, there is something called Coinprism which is a colored coin project. They can issue dividends on stock. The cool thing with that is, “hey, you get to decentralize that.” The double-edged side of that is if that when that get’s stolen: people steal stuff like bitcoins and so forth, what happens to the performance of that dividend? If the company continues paying that dividend in knowing that the person had been stolen from: if somebody stole from me and I tell the company, “hey, it was stolen” and they continue paying, then I can sue them for continuing to pay a thief. If they stop paying then it defeats the purpose of decentralization because anonymity is given up, identity has taken place. Obviously this moves into another area called “nemo dat” it’s another legal term talking about what can be returned to the rightful owner, that’s where the term “bona fide” comes from. Anyways, I wanted to get that out there. Be wary of disappearing EULAs, those have a purpose because people were being sued for hiding stuff in there.
2:10:05 -> 2:12:23
So I think everybody and all these projects are well-intentioned and have noble goals but they’re probably over-hyped in the short-run, just like the Segway was. It eventually leads to some kind of burnout, or over-promise and under-delivering. I’m not saying this will happen, I’m just saying it could happen. I actually think the immediate future will be relatively mundane, such as wills and trusts kind of like Pamela was talking about.
One particular program is in Kenya there is something called Wagenitech which is run by Robin Nyaosi and he is wanting to help farmers move, manage and track produce to market to bypass the middleman. That doesn’t seem like something really “sexy,” that doesn’t seem like the “Singularity” kind of thing that everyone likes to talk about. But that is needed for maybe that particular area and I think we might see more of that along with PurchaseChain, NotaryChains, some of these things that we already do with a lot of the paperwork.
Again, blockchains and distributed ledgers are pretty good at certain things, but not everything. It has real limitations that vocal adopters on the subreddit of Bitcoin like to project their own philosophical views onto it and I think that it does it a very big disservice to this technology long-term. For example, LEGO’s can be used to make a car but you wouldn’t want to go driving around in one. A laptop could be used as a paper weight but it’s not particularly cost effective to do that. And so what I think we’ll end up running into a tautology with smart contracts, it’s going to be used by people who need to use them. Just like bitcoin is. So what we’re going to have is a divergence between what can happen, this “Superman” version of Bitcoin and smart contracts, versus the actual reality.
So for example, people say it’s [Bitcoin] going to end war. You had the War of Spanish Succession, there was a Battle of Denain, a quarter million people fought that in 1712 and it was gold-based [financed by specie]. Everyone that says bitcoin is going to destroy fiat, if the state exists as it does today there’s always going to be these institutions and types of aggression. I do think smart contracts do add collateral and arbitration competition and it does take away the problem of having trust in the system itself, but the edges are the kryptonite. And always will be. So we need to focus on education and creating solutions to real actual problems today with the actual technology and not just some hypothetical “Type 2” civilization where we are using [harvesting] the Sun for all of our energy.
Earlier tonight I gave a presentation at Hacker Dojo with the Ethereum project. I would like to thank Chris Peel and Joel Dietz for organizing it. Below is a video and accompanying slide deck. In addition to the footnotes in the PPT, I recommend looking at the wiki on smart contracts and Nick Szabo’s writings (123).
Also, some quotes regarding synthetic assets in Szabos’ work:
Citation 1: “Another area that might be considered in smart contract terms is synthetic assets. These new securities are formed by combining securities (such as bonds) and derivatives (options and futures) in a wide variety of ways.”
Citation 2: “Creating synthetic assets or combinations that mimic the financial functionality of some other contract while avoiding its legal limitations”
Citation 3: “Reference to Perry H. Beaumont, Fixed Income Synthetic Assets”
A week ago, Let’s Talk Bitcoinsat down with three developers Charles Hoskinson (Ethereum), David Johnston (Mastercoin) and Daniel Larimer (Invictus/Bitshares). Well worth your time as it covers all the hot topics in this space today: smart contract, smart property, DAX (decentralized autonomous corporation/organization/application/etc.). Lot’s of great quotes, insights and vision.
Earlier today I was interviewed by Donald McIntyre at Newfination. We discussed a number of topics related to cryptocurrencies and trustless asset management including smart contracts and how they can be applied in China (see video below).
My current motivation and interest stems from the lack of clear property rights and contracts in China. While some jurisdictions are better than others (like Shanghai), no one actually owns property for more than 70 years whereupon it is automatically reverted back to the state.1 In many cases, the actual property may only have a 40 or 50 year lease left because of the different staggered stages of post-Mao liberalization.
Furthermore, at any given time these titles can be revoked or modified by a 3rd party without recourse. As a consequence, land confiscation is very common and is actually the leading cause for social unrest. For example, each year approximately 4 million rural Chinese are evicted from their land.2 Why? Because, according to an HSBC report, local governments generate 70% of their income from land sales much of which are ill-gotten gains for one ore more party (e.g., state owned firms have local leaders evict farmers from land).3 And there is no property tax, not because China is some hyper libertarian utopia but because corrupt officials — some of the same ones that confiscated the land — do not want to reveal their property holdings.
Potential cryptocurrency-related solutions
In 2004 a report from the OECD found that roughly half of all urban Chinese workers, primarily migrant workers from the provinces participated in the informal sector (this is between 120-150 million people).4 Could they benefit if their payroll and compensation was managed by a Decentralized Autonomous Corporation rather than a human laoban (boss) who could change their mind or otherwise abuse the relationship (e.g., change the contract ex post)? For instance, without an urban hukou (household registration) most of these migrant workers are left without any legal recourse in the event that their contracts are tampered or ignored.
‘Trustless asset management’ tools built on top of a cryptoledger such as Bitcoin or Ethereum (which are tamper-evident) could empower not just those in the developed world, but also those in the developing world who are more easily marginalized without political guanxi. Even if trustless asset management networks are not deemed legitimate or valid by the government or a Party apparatus, the goals of several decentralized smart contract based systems being developed could level the playing field and allow individuals from all walks of life to actually codify and manage scarce goods that they currently own.
While books and volumes could be written on this topic, one view is that even if there are stricter capital controls and regulations on cryptocurrencies in China (or elsewhere), that by using a couple different ‘colored’ coin chains (or Ethereum contracts, etc.) Bob from Beijing could still transfer assets worth X amount of money to Anhui Alice instead of X amount of money itself. This according to the promoters, could create a sort of advanced barter system which may not be as efficient in terms of actually using a cryptocurrency as a medium of exchange but it could help those in an informal economy qualify and quantify asset value and clear up some of the confusion around contracts and property ownership.
There have been several Reddit threads and bitcointalk forum posts the past couple days regarding integrating a Turing-complete programming language with a cryptoledger. Bitcoin currently uses a limited, non-TC language called Script. The comments, feedback and insights revolve largely around the security risks and vulnerabilities that such a language could do.
If you are interested, I highly recommend reading through these threads right now, the first two include comments from Adam Back, creator of Hashcash which is the proof-of-work used in Bitcoin.
Decentralized autonomous organizations (DAO), sometimes called decentralized autonomous corporations or autonomous agents have become a hot new topic both in social media and in software engineering, especially as they are interrelated with advances in cryptoledgers/cryptocurrencies.
Vitalik Buterin has written a three-part series (123) about software-based DAOs over at the Ethereum blog that gives a pretty good overview and capability of what a DAO is able to do. While many more volumes will be written on this topic, last Mike Hearn gave a brief overview of what hardware applications may look like:
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