Fairweather fans in bitcoinland disowning China

Posted on May 4, 2014 by Tim Swanson

While I am not endorsing bitcoin as an investment (I don’t actually), a vocal minority of English-speaking Bitcoin adopters on reddit and Bitcoin Talk are proverbial bandwagon fans.

In November, when Chinese consumers exploded onto the Bitcoin scene, many commentators cheered them on, welcoming them into the big leagues.

Ever since bitcoin prices peaked in early December (corresponding with the December 5th notice (Chinese) from the PBOC), many of these same armchair commanders / evangelical adopters have thrown all of China under the bus.

For instance, on Friday CoinDesk published a story about FXBTC (a Chinese bitcoin exchange) closing down next week. The very first comment was the following:

The rest of the world would be better to ignore these PBOC reports. Bitcoin will go stronger once that happens.

Throughout each week similar such comments are posted on reddit (here) and Bitcoin Talk (here). The truth is, Chinese consumers created enormous demand that drove up the prices in late November and early December. And the price has fallen measurably since the peak five months ago a peak which corresponded with the first “crack down.”

This may not be something you want to hear as an investor, but it is the truth of the matter. While some claim that Chinese exchanges were fudging their volume and liquidity, extraordinary claims require extraordinary evidence. I wrote an article 4 months ago (that was republished by Business Insider) that discussed several ways to purportedly fake the volume, yet even I do not have a smoking gun (yet). In fact, post-December 5th I think most of the big exchanges (like Huobi and OKCoin) were probably posting real numbers. And in all likelihood, correlation is causation: the PBOC is a force to be reckoned with, they enacted (caused) new regulations and guidance which scared both smart money and Chinese day traders away which correlates with the continual drop in prices.

To compound this issue are enthusiastic Bitcoin advocates in China, especially exchange and merchant developers who spread their own counter-propaganda that is wholly without evidence. The fact of the matter is, there has been a cat and mouse game going on for months now and while exchange operators have found temporary workarounds, the writing is on the wall: Bitcoin exchanges are for the time being persona non grata on the mainland. There may be a few other loopholes and workarounds (which are quickly removed), but to believe otherwise is wishful thinking. No amount of marketing spins or gimmicks like ATMs will likely change that in the short-run.¹

Perhaps these types of inflammatory we-love-you-now-we-hate-you comments only represent a vocal minority, but it is pretty clear that most tokenholics do not care about utilizing a trustless consensus mechanism to empower the underbanked in developing countries such as China.²

Instead of loathing China, the community as a whole should sympathize with the loss of a comrade. I do not expect this to happen though. I briefly mentioned this in my Q/A at Stanford on Monday. The Chinese government is opaque but the worst thing they could do is go all draconian (like blocking websites or arresting entrepreneurs) which they haven’t and egging them on, as endless threads on reddit do, is only hurting the very people Bitcoin was purportedly designed to help.

Will Hong Kong be the saving grace?

Most Chinese operations now have accounts in Hong Kong but they cannot operate as bitcoin businesses; the Hong Kong Monetary Authority (HKMA) has asked Hong Kong banks to report any account related to cryptocurrencies so most of the accounts are usually not open about the true nature of the operations. Some are still openly related to bitcoin but for mining investments (hardware purchases) or merchant investments and there is still pressure on those.

If you only care about the value of the token, the ledger entry, the UTXO, etc. then you are going to need a bigger whale. China was a huge whale. Perhaps in a bit of irony, this summer funds from Wall Street (from bitlicensed firms) could end up driving up the price once again, effectively bailing out some of the reddit bitcoin holders who are now underwater. Cui bono.

[Note: Weiwu Zhang has been posting some interesting analysis over the past few months at a German Bitcoin site. His prediction are not always correct, but it is a fresh perspective that seems more grounded than the typical “invest on hope” mantra.]

Update: Just found out that all of the Bitcoin exchanges in China have pulled out of the upcoming Global Conference in Beijing on May 10th. They are taking the PBOC notification / guidance very seriously and do not want to irk policy makers. So they will not give presentations or show up in any official capacity (their sponsorship continues though — money has already been paid). This is sad news.

Update 2: I have had three different independent confirmations to the first update. The Global Conference website is slow to update the changes to the schedule. This article (Chinese) is apparently the one that asymmetrically influenced the entire segment a week ago. Its message of “don’t irritate the PBOC” went viral with about 30,000 hits (which is probably a decent estimate of how many people actually use bitcoin on-chain in China). The exchanges met later and then decided not to attend in official capacity. The article mentions that the PBOC does not want China to be the largest market (as it has been) and actually mentions an upperbound target of 3000-8000 BTC daily volume for the entire country. The actual number is unimportant, the attitude is. The PBOC (and China) does not want to be a leader but rather as a follower based on the regulations and outcomes from the US and other jurisdictions (like Germany and Canada).

Update 3: the big exchanges just issued a joint statement (Chinese) saying they will adhere to the new PBOC guidance. They did not clearly say what that exactly means and will continue to operate (function as an exchange).

Update 4: CoinDesk just published a new story on the exchanges that pulled out of the conference.

Bitcoin ATMs are likely underutilized globally, many are probably unprofitable too, hence the lack of public boasting by ATM operators. [↩]
The title of the white paper and the first section of the white paper are specifically identify peer-to-peer payments as a way to reduce friction and trust of the traditional banking system. [↩]

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Visualizing sidechains and tabulating the aggregate losses of UTXOs (bitcoins)

Posted on April 29, 2014 by Tim Swanson

Last night I gave a presentation covering the new sidechains “blockchain 2.0” project from Austin Hill and Adam Back. I also covered some of the challenges of information security on the edges of the Bitcoin network.

The talk is based largely on a paper I finished drafting this month called: “Learning from Bitcoin’s past to improve its future” (pdf)

Below is a video of the presentation as well as the corresponding slides. All errors are my own. Many thanks to: Dave Babbitt, Preston Byrne, Hudson Cashdan, Joseph Chow, Petri Kajander, Taariq Lewis, Jonathan Levin, Andrew Miller, Pieter Nooren, John Ratcliff, Robert Sams, Koen Swinkels and Andy Toshi for their feedback and constructive criticism.

Sidechains and Bitcoin security from Tim Swanson

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Quote of the day: depreciating value of exported electronic goods from China

Posted on April 24, 2014 by Tim Swanson

A rail cargo line has been “relaunched” between Europe and China that is one month faster than traveling by sea and costs 20% the price of air cargo.

What is the motivation for restarting this potential time + cost savings? Because:

In a month, the export value of one consignment of electronic products might devalue by about two percent, about several tens of thousands of dollars.

This actually relates to Bitcoin/Litecoin mining as well. Most ASICs today have less than a 6 month profitably window before they need to be dumped or pointed to another profitable altcoin. The sooner you ship a batch, the quicker the receivers can recoup the costs.

See China-Europe railway relaunches from China Daily

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Adding the first GPU farm to the Computer History Museum?

Posted on April 24, 2014 by Tim Swanson

Apropos the previous post about ArtForz’s GPU farm, I exchanged some emails with Stephen Gornick who apparently tweeted about this almost 4 years ago (here and here).

Below is an image of ArtForz’s ArtFarm. Notice how you can visually identify 20 GPUs. At its height he used 24 and it is unclear if these in the image were all 5970s because he mentioned having several others (including several 5770s and a 4870).

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How ArtForz changed the history of Bitcoin mining

Posted on April 20, 2014 by Tim Swanson

[Update: according to Nathaniel Popper’s book, Digital Gold (as well as in The Age of Cryptocurrency), Laszlo Hanycez is the first publicly known individual who actually utilized a GPU to mine bitcoins, two months prior to ArtForz.]

[Note: in conducting research for a new paper (pdf) on Bitcoin, I culled together the following interesting information on the junction between solo mining, GPU mining and pooled mining]

ArtForz is arguably one of the most interesting individuals in Bitcoin in that he abruptly appeared out of nowhere and simultaneously understood an incredible amount of hands-on knowledge about how to tweak mining hardware performance. He did not make his first forum post (assuming it is not a pseudonym) until July 24, 2010, nearly two weeks after Slashdot announced the version 0.3 bitcoind release and a week after his farm (“ArtFarm”) purportedly found its first block. On July 25 he claimed to have generated 1,700 bitcoins in the previous 6 days which translates into 4% marketshare (43,200 total bitcoins mined over six days / 1,700 = 4%). One user estimate the hashrate necessary to do that at 80,000 KHash/s (or the equivalent of 8 quadcore server CPUs). In his very last post on Bitcoin Talk two years ago, he mentioned that his farm comprised of 24 Radeon 5970s. If tweaked properly (which he may have been capable of), these would each net a theoretical maximum 800 Mhash/s creating a farm of 19,200 Mhash/s (an upperbound).

Getting to the bottom of the numbers

On August 25, 2011 he stated his farm was less than 1% of the total network hashrate. For comparison, during August 2011 the difficulty rating was around 1.8 million thus ignoring the increased hashrate of competitors, this theoretical upperbound setup was capable of generating 8.38 bitcoins per day. Theymos (creator of Bitcoin Talk, moderator at reddit and now “owner” of the Bitcoin Wiki) noted on October 3, 2010 that ArtForz had a system that held roughly 20-30% of the network hashrate. For comparison, user ‘tcatm’ (Nils Schneider) built a system with three Radeon 5870s operating at 983 Mhash/s, announcing it on October 3, 2010. Based on the current difficulty at that time tcatm was generating 749 bitcoins per day (~10% of the network). Schneider later that month went on to build one of the first publicly usable distributed hash farms among other projects.

Theymos also stated that ArtForz was the first person to GPU mine (writing the code himself, which based on his forum posts is very plausible) and in January 2011 explained on the Bitcoin Wiki that ArtForz comprises about 25% of the hashrate. Yet it is unlikely that this system was the one utilized in July 2010. And I will describe how and when it likely was.

According to the Bitcoin difficulty rating, the largest jump ever (300% at block 68544) took place several days after the announcement on Slashdot that version 0.3 of bitcoind was release which brought in a large amount of new adopters and miners. At the time, the network hashrate was roughly 1,300 Mhash/s or an entire order of magnitude less than the capability of ArtForz’s farm. However one clue he provided in December 2010 is that the cards he was using were overclocked 5970s hashing at 625 Mhash/s (20% slower than that upperbound estimate).

If this is the case, then the collective hashrate of his system was 15,000 Mhash/s which at the 12252 difficulty level he cites would generate 1,231 bitcoins per day which is approximately 17% of the network hashrate. If the upperbound is used instead, his hash farm would have generated 1,477 bitcoins per day, roughly 20.5% of the network hashrate. While speculative, based on the jump in difficulty and hashrate between blocks 94572 and 9678 the previous week, if this was his farm coming online, it would have generated 2,241 bitcoins per day, or 31.1% of network hashrate.

Taking this forensics a step further, by looking at IRC logs, on September 23, 2010 ArtForz noted he had around 2 Ghash/s and was targeting 15-20% of the total network hashrate. This was comprised of 2 overclocked Radeon 5970s each generating more than 650 Mhash/s and also 4 Radeon 5770s – based on a difficulty rating of 918 this farm was generating 2,191 bitcoins per day (~30% of network hashrate). On September 28, he mentioned he had ~2.1 Ghash/s and another 850 Mhash/s “on and off” and the following day that the collective power was just over 3 Ghash/s. On December 15, 2010 ArtForz noted on IRC that he had 15.75 Ghash/s which at the current difficulty of 12252 would generate 1,292 bitcoins per day and this farm still used Radeon 5770s.

Or in short, ArtForz figured out months before anyone else, how to not only leverage the capability of GPUs, but write the code and deploy a small scale farm (which was initially powered by a generator). He also later used FPGAs and an sASIC (structured ASIC). This type of economies of scale spurred the hashrate arms race that continues today.

Contrast this with Satoshi Nakamoto who noted early on in December 2009 that, “We should have a gentleman’s agreement to postpone the GPU arms race as long as we can for the good of the network.” Satoshi was thus surprised that these types of systems could be built, stating in October 2010, “Seriously? What hardware is that?” ArtForz’s farm was also discussed by Charles Lee (creator of Litecoin) in February 2013.

While I have learned of his probable location during this time (which is unimportant) two other notable facts about ArtForz:

1) on September 23, 2010 he mentioned he had 26,650 bitcoins all from mining from the previous 9 weeks and that this was left over from a much larger batch; in his words he “sold off about 2/3.” Assuming he began mining on July 18th (based on his forum post stating that) that would make 66 days since his first block which is just over 9 weeks. Based on block rewards that would mean of the 475,200 bitcoins that were mined during that period his own pool (~75,000) represented 15.78%. In contrast, roughly 5,000 people were mining by mid-September (his estimate), typically on laptops and older desktop equipment. The only other publicly known person during this same time frame moving and trading this amount of tokens (and with similar hashrate) was William Pitock (Nenolod).

2) he also tested the limits on a variety of early altcoins such as SolidCoin, i0coin and GeistGeld. Charlie Lee gave a great presentation on the early history of alts back in January at the BTC Miami Conference (video) (slides).

His identity was seemingly retired two years ago and I am not aware of his next project(s). Next however, was the first mining pool, Bitcoin Pooled Mining operated by Marek Palatinus (slush), which began public operations on November 27, 2010. And consolidation and centralization has been happening ever since.

Coda: a few more timeline mysteries solved, looks like a few guesstimates above were very accurate. Tonight someone from the Bitcoin Talk forum sent me a message with a few more details about the numbers regarding the early days of ArtForz’s farm. According to IRC logs, on August 9, 2010, ArtForz notes that, “I’m still limping along at ~ 76000khash/s.”

Four days later he notes the following in IRC:

[13/08/2010 15:07:27] <ArtForz> currently I can do up to ~450000kh/s
[13/08/2010 15:11:13] <ArtForz> cpu? 6 ati HD 5770s at 77-78000kh/s a pop
[13/08/2010 15:13:17] <ArtForz> a 5770 is ~75Mh/s at stock clocks
[13/08/2010 15:15:33] <ArtForz> well, I’d say total hours for the software… about 40 or so, but most of that was optimizing to get another +20% performance or so
[13/08/2010 15:16:42] <ArtForz> the first modified client + opencl miner were about 12h of work
[13/08/2010 15:22:53] <ArtForz> If I sold the BTC I have sitting here right now at $0.04, I’d have made back the initial investment for GPUs, power costs and a few $100 for my time
[13/08/2010 15:24:35] <ArtForz> well, guess what, I’m not really planning on selling any large number of these any time soon

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Decentralized storage on the horizon

Posted on April 17, 2014 by Tim Swanson

In addition to existing projects such as Tor(oken) and FreeNet and future developmental projects like Bitcloud and StorJ, there is a new decentralized system being released in the next few months: MaidSafe.

I have a new piece over at Bitcoin Magazine that discusses some of how it works. Suffice to say, if they can execute on the targets outlined in the article, it could have long-standing ramifications for a plethora of industries (e.g., SaaN providers, ISP margins, start-up costs, Dropbox-style companies, reduced overhead at NGOs/NPOs, etc.).

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None of the Top 500 Bitcoin addresses uses on-chain multisig

Posted on April 14, 2014 by Tim Swanson

Even though m-of-n transactions has been supported since the acceptance of BIP 11 in 2011 and BIP 16 the following year, implementations of multisig has been slow going until recently due to lack of support from wallet software. This will likely change, yet as of today, no address on the Bitcoin Top 500 Rich List uses on-chain multisig (though perhaps some exchanges do in off-chain setups).

BitGo was the first commercial multsig wallet released and Cryptocorp has a neat oracle-based HDM solution to this.

In addition to reading through the relevant threads on StackExchange, be sure to watch James D’Angelo explain how multisig works:

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What is a Merkle tree?

Posted on April 11, 2014 by Tim Swanson

James D’Angelo has an excellent series of tutorials on the inner workings of blockchains and cryptoledgers.

One of my favorites is by far his explanation of what a Merkle tree and Merkle root are, breaking them down step-by-step. He bases his code off a really cool blog post from Ken Shirriff: Bitcoin mining the hard way: the algorithms, protocols, and bytes

[Quick endorsement of Ken, I found several of his posts very helpful and cited a number of them in GCON.]

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Paraphrased notes from Back and Hill interview

Posted on April 9, 2014 by Tim Swanson

Below are some paraphrased notes from the new “blockchain 2.0” interview conducted by Adam B. Levine (editor-in-chief of Let’s Talk Bitcoin) between Adam Back and his business partner Austin Hill.

Be sure to listen to the full interview (and here is my write-up from the previous post as well).

When people talk about building on top of TCP, this is the way to do it, which is the interoperability using existing bitcoins themselves to move them. If I have a bitcoin to buy for small payments like a cup of coffee, I move it into a sidechain that has higher transactions per second and then move the change back into the main Bitcoin network and then put it into a different side chain to invest it a Bitcoin denominated derivative against US dollars or buy electronic shares or something like that. Bitcoin is used as interoperability level moving across the pegs, allows open innovation in a neutral sense without creating a new scarcity race.
Building the infrastructure so these sidechains can take advantage of the global hashrate through merged mining but with some additional extensions. But there are some core services that you do want such as good PKI for the registry, digitally signing for sidechains and new asset issuers, clear disclosure if people can move assets between chains, wallets can tell what properties of the side chains (when you get asset from the side chains, you are aware). We don’t see a justification for a lot of these altcoins switching out the proof of work besides Adam’s contribution with hash cash, it ignores $250 million in ASICs and datacenter that bitcoin is self-funded as a platform for verification. We think trying to bootstrap a new global hashrate infrastructure is kind of pointless. Makes more sense to use what is out there Namecoin has achieved 80-85% of Bitcoin hashrate through merged mining.
It is a preferable approach to these other 2.0 projects because it is an interoperable approach so you can move money around and interoperate between different networks, different side chains. The typical TCP analogy people use here is inaccurate as they just send watermarked bitcoins; with TCP you send users messages point to point, if you send it over the bitcoin network it’s an n-squared broadcast and the things sent on the bitcoin network should be about the minimum amount of data necessary to ensure the bitcoin properties, that the value transfer can be tracked, that smart contracts can be evaluated like multisig and so on. Any data like “this is my email address,” or “this is a receipt,” does not belong on the bitcoin network. That is what the payment protocol is for, point to point to people. [BIP 70 is the payment protocol] I think some of the people building on top of Bitcoin are doing it in a naïve way, which is a disruption to Bitcoin. For example, even Colored Coins which is quite neutral and clean, no digital scarcity race, but has scalability issues because if transaction volume reached a significant volume it could saturate the Bitcoin network. Right now the transactional limit is 7 transactions per second, increasing block size incurs centralization risk because you need a highspeed link, decent bandwidth if it gets too large.
It also breaks with colored coins, Adam showed Austin, David Chaum’s ecash server he had come up with coloring DigiCash coins and watermarking them and even last year he still thought it was the best approach to add extensions but saw that with SPV wallets, Colored Coins don’t work with SPV wallets and we live in a world where mobile wallets are a predominate device so if Bitcoin is going to reach its full potential for interacting with billions of people, Colored Coins just doesn’t work in that scenario because you cannot have a full node on a smartphone. On top of which nobody had contemplated how will this capability of watermarking work? If people color different assets the same color, who is the arbiter (e.g., ‘blue’ for both a share and copyright registration)? So there were ideas but no one had really thought out, with SVP, with some sort of asset registry, whether you do that in a distributed basis like Namecoin does or you that in a centralized PKI signed registry service, need supporting infrastructure to make it work. People got enamored and went off and watermarked a bunch of things. How can we allow for some of the properties of native marking, new asset issuance, extensions to the scripting, build on a neutral platform. The principles from our project: permissionless innovation, decentralize wherever possible, decentralize and distributed.
A lot of people are interested in the potential for user created assets and smart contracts, they see that can be used a lot in the future, trustless escrow. Colored Coins, Mastercoin, Bitshares and Ethereum have come in and add stories, creating networks. Pegging technology is the next step of technological improvement in an interoperable way. Built on top of Bitcoin in a way that does not result in spamming or watermarking bitcoin transactions that makes every transaction a bid/ask, saturating Bitcoin. You don’t need to do that. Sidechain that is pegged to bitcoin, so there is no counterparty risk, no escrow agent holding your bitcoin. Your bitcoin can move between networks which are tied, in that sense they are merged mined. People can do their innovation in interoperable way. Early days in TCP/IP, if every time somebody wanted to make media streaming, webpages, online shopping, each time they make a fork of TCP protocol, made a few changes so it is an incompatible network and said “great we’ve done online shopping,” yet none of these things talk to each other, you have to pull them out and put them back in to achieve anything. So you get network effect by having interoperable systems. So if we have different people working on micropayments, online shares, high frequency trading, to do all these things on different networks that are open networks, preserve the freedom to innovate, fully interoperable and operate with two-way pegs, best of both worlds: freedom to innovate, avoid the silo effect, and we avoid these self-defeating selfish ‘newshares’ that some things get built on top of.
We don’t want to see another Mt. Gox, exchanges have had a high failure rate (theft, incompetence, internal malfeasance). New players are doing security audits, but these are in off-blockchain, trust-me model, holding private keys. We need to extend trustless blockchain into new parts of the ecosystem but you can only do that if the blockchain can scale to have more of every interaction depend on the blockchain. Some exchanges were doing more than 7 transactions per second. There was a practical limit to go off-chain. Creates an IOU situation where someone promises not run away with bitcoins.
Smart contracts off: build infrastructure, services, exchanges, payment processors — build components in a decentralized way, build service in a trustless way (smart contracts). And almost all the system players are not using it. Somewhat an artifact of the transaction limit. Can switch coins using an atomic swap. It is a known property, but not widely used. So an exchange can simply be matching orders and not touch the coins. Remove the need for audit, audit is after-the-fact-reactive. If we had audits every 6 months on Mt. Gox, that doesn’t mean the situation would have been avoided. The point with bitcoin is you have a real-time audit, if someone tries to do something outside of a smart contract, it is a priori prevents this. By architecting these things where you don’t have to trust them, you trade with air-gapped wallets — exchanges just handle order matching.
New model: Exchanges can compete on marketing, building liquidity, volume, customer service, regulatory compliance, making it easier for you to file your taxes, a whole bunch of things they can innovate on. But the basic security model isn’t: trust us with your assets. It is trust us with creating the best market place where you can find the best liquidity and the fastest and best customer service. But you never need trust us with your assets.
We have focused on the last two months on the core science, we gathered a number of the Bitcoin core developers from around the world. Many of whom who hadn’t even met each other. We set up a house in California where they all came and collaborated, some of them lived in the house. Called “The Bitcoin Mansion” – not a mansion. A lot said that this approach was “not possible, we don’t believe in it the ability to do a two-way peg and retain all the properties and build a security wall.” We have now proven that it is, we have gotten sign off and support from a lot of the core developers. But even that change is going to require some time. There is a community at large that needs to understand it, there is a proving period that needs to be there. These guys are incredibly overlooked by ecosystem that depends on them, volunteers who are controlling some of the most important code on the planet, next to the space shuttle. If we have space shuttles and stations blowing up, it can ruin space exploration. If they screw up, they can ruin math-based currencies or set them back incredibly far. So they have to be very judicious and patient in adopting changes.
This creates contention. Whereas you look and see that particular project is cool, but you cannot afford to pay attention to a pet project. Can’t accidentally introduce a bug. It means that innovation on core is slow, because conservative, value preserving, focus on robustness, fixing minor bugs, very careful gradual change. Two way peg, requires moderate high risk change. Bootstrap problem, evaluate the change or set of changes and be sure that it is safe. But once that is done it allows people to do innovation on side-chains, explore new ideas. If ZeroCash wants to do something on a side chain. If in 6 months, they want to increase the block chain, they can do that. If Bitcoin main wants to reduce the block size to increase decentralization. Someone wants to do something, changing contracting language, tagged user assets that are SPV compatible, they can do on another side chain. People with different views on a contracting language can do it on a different sidechain. Frees up the space to allow open innovation very rapidly, without creating risk for Bitcoin main. Security firewall, you can only move bitcoins in that have been moved out. Value does not float against other chains, implemented protocol that fully preserves 21 million supply. Only Bitcoin chain is being mined, the others are repositories where you can move bitcoins into them and back out.
Incentive to mine these: we believe there will be, not disclosing, in discussion with a lot of the large miners and mining pools on making sure they have good incentives and good reasons to merge mine this. And there will be an economic model that supports participation. It won’t be based on mining rewards so obviously that leaves transaction fees but there is a transaction model that is flexible, is market based allow each of these sidechains to have their own innovations, but collectively all of them together can increase the transaction fee revenue for people who merge mining this. From complex systems design and merchant property is that this will actually drive demand for Bitcoin, other interesting assets or contracts that can be written against bitcoin. We have had discussions with some very large financial institutions who are looking at volumes of transactions and contracts and derivatives, futures, options contracts, that are orders of magnitude larger than the entire bitcoin asset base. Huge. When you start looking at embrace or extend the functionality to include part of their asset base, encoding into blockchain technology, you can start to see the demand for bitcoin will far outpace the availability and will ultimately drive up the price of bitcoin.
Once someone bring an open network for supporting smart contracts against other assets, that opens up a wider set of transaction types so you would expect the transaction throughput to go up, dollar transaction to go up. Bitcoin is the neutral transactional currency, therefore the amount of bitcoin denominated transactions go up, which puts up the utility value of bitcoin.
You can do different block intervals on a sidechain, counter intuitively, because when you are merged mining with say Namecoin that means some namecoin blocks are not bitcoin blocks. And vice versa so you can have a different target, smaller faster blocks it is possible.
Two members of the team have figured out how to scale to hundreds of thousands of transactions per second while retaining all of the properties of retaining a blockchain security model. And those innovations will have high frequency trading, very high speed liquid markets and exchanges that are using blockchain security model and blockchain trustless infrastructures, but meet the business requirements that are necessary to do high volume. And that is definitely our projects scope to make those platforms available for people who do have, someone who wants to compete with Visa but I can see myself hitting, 20, 30, 40, 50,000 transactions per second. Where am I going to be able to process those and be able to get instantaneous transaction verification without having to wait for the limit of the blockchain. We think it will be possible and trustless security model of the blockchain.
Right now combing our hair, putting on our hats and wearing fancy ties but we are getting ready to announce more details to the project so that those interested can track the project and reveal it including announcing the name, who’s on the team: happening within the next 60-90 days. So a very short term. We are going to be releasing, one of the principles we will be releasing from the cypherpunk days is and one of the founding principles of the project is: “we speak in code.” So we really want our products and our software to speak and so we will be releasing software very quickly that is necessary software that is needed for bootstrapping this type of ecosystem. There are a couple different parts to the existing blockchain to the existing ecosystem that have huge gaping problems that we can deliver immediate value without needing to wait the 12, 18 or 24 months that it might take to get some of these changes to be adopted in Bitcoin core. Some people are aware of these problems but we believe we can deliver immediate value based off that. Get out there, release very useful open-source free-software, some software stacks that other people can adopt into the ecosystem to secure their users accounts, secure parts of the Bitcoin ecosystem that are operating on a trust-me model. We think we can deliver a lot of value by helping them to move to more of a trustless infrastructure. We are going to be investing very heavily in building a team of cryptographers, programmers, working to support some of the volunteers in the Bitcoin core community to provide them resources and allow them to really accelerate some of the things they know need to be done. Most of these guys are volunteers, have day jobs, huge weight on their shoulders: do it because they love the technology and community. Have not received a lot of support. Supporting them, providing more tools, more testers, more documentation resources, travel vouchers so they can meet face to face – some of the things we will be doing.
Some business models rely on the availability and reliability of the Bitcoin network, so following the Linux model they should hire – as they can afford – developers in the community to work on it.
We are a “blockchain 2.0” company, although I personally care for the success of Bitcoin, it is important to distinguish between bitcoin the asset and the blockchain as a programmable distributed trust infrastructure. And we are interested in blockchain 2.0 and blockchain 2.0 using bitcoin as a neutral transactional currency we believe is a great, offers great promise but I want to build a blockchain that could support a nation-state putting its national currency and phasing out paper dollars. And there is a lot of reasons to do that: counterfeiting, utility value, conducting commerce in separate geographic distances. Auditability, trust, whole bunch of potential to reinvent our financial infrastructure to better serve humankind and we have only begun that journey and I’m interested in a platform that is distributed, neutral, has all the principles of and properties of Bitcoin has embedded and imbued in it the principle that “it can’t be evil.” And allows the world to migrate math-based assets and math-based currencies. That is going to take time but we are interested in building that blockchain 2.0 and do that as an extension of the existing blockchain – not running off and building our own alt ecosystem and premining it and watching Adam and I get rich off having the first coins – that is not our intent.
There is no altcoin race with this, using bitcoin purely as a transactional currency. Systemic risk issues: if more of business starts to move their accounting and B2B payments into bitcoin and cryptocurrency issued assets and denominated national currencies, you get the benefits of the zero trust, immediate auditability features so if you are receiving insurance contract from an insurance policy and there are about to exceed their reinsurance limit that would mean your insurance policy would be immediately failing audit and that would mean your policy is invalid. You can start to remove systemic risk from the system and avoid Enron-like situations. Even in the long turn there would need to be iterations of smart contracting before we get those kinds of things. But even in the long run you get a national currency issued where they would have smart contract like an issuance contract that would specify their monetary policy, no more than 2% cost of easing or maybe subject to market metrics and that applies to them. Even if they have the key to issue more coins and some redundant hardware air-gapped key manager, they would be physically unable to bypass the monetary policy rules because the monetary rules are bound into the genesis of the coin and all recipients of the the coin would reject them if they tried to exceed their own monetary policy. So I think if we get to a system like that we have can have real time auditing and agree to societal rules and enforce them a priori rather than finding out 6 months later that somebody has hundreds of billions or trillions of undisclosed assets and then you have an AIG or all of these kinds of cascading failures in the system.
History of Zero Knowledge is not archived, Youtube did not exist. At the time we were very thumb our nose in the face of authority, we were fighting the Edward Snowden type of battles. The NSA and CIA tried to shut us down, we were on 60 Minutes advocating crypto for all and tear down the system. That may not be the best way to interact with these guys: is I’m coming for you, I’m going to burn down your system. The financial services industry, the people we have talked to, have real problems themselves. We talked to a very large buy-side financial institution who literally has hundreds of billions if not trillions of dollars’ worth of assets under management and they said from a pure compliance point of view we don’t understand our risk. We have entire teams holding binders and contracts and asset systems and we are trying to figure out what we own and the risk is and what the underlying asset is, so if we can digitize this and have it be encoded in a way that we can actually we can make representations for compliance reasons for our own risk management, we would welcome you in. Show both governments and financial institutions this is not about wiping them out or destroying their business, this technology is about imbuing the entire ecosystem with verifiability, trust based off distribution and math. And some real good foundation levels where they can reinvent their business and yes, we can drive some competition in the industry. And hopefully some more efficiencies. Just how media companies are adapting to the internet and rebuild their businesses, we want to encourage these people to look for efficiencies. And those that do will be much more like the Netflix of the future versus the Blockbusters of the future. We want to help them rebuild their businesses like Netflix, not like Blockbuster and if they don’t want to adapt they face extinction
Public auditability, typical objection to commercial basis – companies do not want their business model to be public knowledge (profit margin, volume of trade, market movements, if someone is selling a large amount of stock, they like to keep that to themselves and not have that readily to the market) and that tends to present a barrier to public audibility. We have to preserve commercial confidentiality. Homomorphically encrypted values, have the blockchain validate the inputs add up to the outputs without disclosing the values involved, they are encrypted in such a way that addition still works on them. Includes zero knowledge range proof that encrypted value A is less than encrypted value B and use it to prove leverage ratios and things like that. Can do a lot of things to preserve commercial confidentiality but allow for public auditability. So this merely a scope that can preserve that traditional and necessary fragile privacy for individuals and commercial sensitivity for companies but all allowing public audibility
I can see that two parties engaged in a currency swap or whatever instrument, their identities are not apparent to me at the blockchain level but they will have business records saying who they bought it from. There are two networks involved in a transaction, the blockchain broadcast P2P network (byte minimized, scarce resource), you don’t send to that more than you need to insure the correct interpretation of the transaction. Invoice and receipt go to the payment protocol level which is point to point communication between buyer and seller and if one of them is a business they will be keeping records or if you’re an individual they will be keeping their receipts for taxation purposes. I think there will be identity but will keep the parties not broadcast to the peer to peer network. Why is financial privacy wanted? Because some people are paid their salary in bitcoin, so you can figure who this guy is because he bought a pizza in the shop or he paid you back and you see an address – it shouldn’t be reusing addresses. If he was paid a salary and that amount of salary was encrypted, you wouldn’t know how much he was paid and he if paid you personally $10 you wouldn’t know his salary just that he hasn’t exceeded the value of the transaction.
We will be launching a website, with job postings. If people keep track of us on Twitter – @austinhill and @adam3us – keep watch we will be announcing the name of the website and project in the coming month. There will be at least a place holder site with more details and jobs available.

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“Blockchain 2.0” with Adam Back and Austin Hill

Posted on April 9, 2014 by Tim Swanson

Some very exciting news is being made public. Adam Levine, editor-in-chief of Let’s Talk Bitcoin (LTB), interviewed Adam Back and Austin Hill for a new endeavor dubbed “blockchain 2.0” — I recommend everyone to listen to this interview.

Below is my write-up I did for LTB (note the copy on LTB is missing the footnotes which I have included below).

Blockchain 2.0 – Let a Thousand Chains Blossom

Adding on-chain utility and extensibility in a scalable way sums up the core ideas of the “2.0” next-generation cryptoledger space. This is a segment that has grown rapidly to include eight announced and funded projects, each vying to create new use-cases utilizing a trustless blockchain or in Ripple’s case, a consensus ledger.

And now we can add one more to the list, an unnamed entrant financed by Austin Hill and articulated by Adam Back. Hill is a well-established tech investor and in addition to other projects, spent almost $4 million in the ‘90s trying to develop and commercial electronic cash and anonymity systems through a company called Zero Knowledge Systems. Back, likewise, is a domain expert, creator of the Hashcash proof-of-work mechanism used with Bitcoin and all other SHA256d-based alt derivatives.

This past week, Adam Levine interviewed the two gentlemen and learned that Hill and Back have created a company that includes several Bitcoin core developers working on a project momentarily dubbed “Blockchain 2.0” (the actual name and website will be released soon).

Some backstory: at one point Back worked for about 4 years with Hill at Zero Knowledge Systems and while Hill was familiar with Bitcoin, it was not until Back approached Hill (who was in retirement) and explained the extensibility merits and use-cases that Hill began to take it seriously. Thereupon, they spent a week in a boardroom, mapping out the business plan and adopted the motto: “can’t be evil.” In, Hill’s words based on his previous experience with Zero Knowledge Systems, “We believe trust is not earned because we’re good guys but trust was based on the protocols, the whitepaper and cryptography – where we were not asking for trust.”

They then rented a home in California for a couple months earlier this year with several other core developers and looked at ways to add new extensions to the existing blockchain – build a company around it – all the while providing backward and forward compatibility with the Bitcoin blockchain. Again, this is not the “typical” alt because instead of creating another series of independent networks it will in will utilize merged mining and atomic transactions to extend the feature set via interoperable sidechains (more on that later).¹

Why is this important? Because as Back noted, the pace of current development on the core protocol is purposefully slow to prevent bugs and vulnerabilities. And according to him these sidechains will allow experimental development to take place without impacting the main codebase, allowing the ecosystem to experience a faster pace of invention, scalability, faster transaction throughput, multi-asset issuance and even extensions to smart contract scripting.

How is this done? According to Back, last December he spoke on Let’s Talk Bitcoin with Andreas Antonopolous and mentioned a one-way peg system, however it turned out to have undesirable limitations.² Greg Maxwell then proposed a two-way pegging method that enables Bitcoin to connect with a sidechain which is a mathematically-controlled peg between Bitcoin main and the other chain network.³ Thus, according to Hill there can be continuous deployment and interaction with sidechains optimized for multiple purposes – that multiple sidechains can compete on features such as having larger block sizes (up from 1MB), which while leads to increased centralization, provides higher transactions per second. And if users feel uncomfortable with the level of centralization, users can unilaterally move tokens from one chain back to Bitcoin main.

So in essence, while there are multiple chains no new bitcoins are created – that protecting the digital scarcity of the finite amount of tokens (ultimately 21 million) is a core point to this project. And that by linking chains they have set Bitcoin up as a “transactional currency for all the innovation and all new assets so you can potentially issue shares in a sidechain, that specializes in smart contracts shares, derivatives, user assets, ultimately backed by bitcoin, pegged to bitcoin,” explained Back.

Why not create start from the beginning, from a fresh slate like several other projects? According to Back, in his view artificial scarcity is “fairer if we use the existing scarcity rates.” And that he is not convinced that some other alts have a strong technical ground to build from as they “start a new scarcity race that creates an interoperability silo […] in order to get into to it you have to swap coins.” Thus, Back sees the extensibility as adding “direct support for issued assets, extended smart contracts, all while using Bitcoin itself as the transactional currency. We feel that is a neutral choice. It is not starting a new currency owned by one company, a project, small group of developers or early speculators.”

In addition, the company identifies itself as a “blockchain” technology company what this means in Hill’s view is:

We are a “blockchain 2.0” company, although I personally care for the success of Bitcoin, it is important to distinguish between bitcoin the asset and the blockchain as a programmable distributed trust infrastructure. And we are interested in blockchain 2.0 and blockchain 2.0 using bitcoin as a neutral transactional currency we believe is a great, offers great promise but I want to build a blockchain that could support a nation-state putting its national currency and phasing out paper dollars.

There are at least 84 uses of a cryptoledger and counting. And Hill’s team sees that bigger picture.

Go where the capital is

Over the past five years between $200 million to $1 billion worth of capital investments in computing hardware in the form of “mining” (or really, “hashing”) has been made, nearly all of which is largely underutilized.⁴ That is to say, the actual utility created over the past five years has been at the edges of the network in off-chain, trusted silos (or as Hill calls it “trust-me” silos). Yet as developmental economics describes – and Bitcoin is in some respects a developing economy – productively utilizing and efficiently reorganizing capital is a necessary condition for growth and continued development.⁵ The Bitcoin network has enormous amounts of capital, but with low usage rates. How to tap into that?

They contacted many of the large mining pools and will attempt to merge mine these new sidechains and thereupon utilize atomic-transactions (which is a proven process used in databases for decades) to move tokens between the chains.

While not necessarily endorsing their project, this is certainly one of the most productive uses of the hashrate deadweight. That is to say, irrespective of how hashrate is being centralized, it is being underutilized as it merely tracks one ledger entry representing one data point (which was intentional day 1). And while it is uncertain as to how the pool operators will react to these changes, if Namecoin is any indication, it is possible to provide new use-cases via sidechains, using the same hardware and thereby mitigating some of the bootstrapping risks of securing a proof-of-work-based network.⁶

Key takeaways based on the interview:

Working with mining pools to discuss further utilization and expansion of merged mining
Merged mining will create sidechains “firewalled” off from Bitcoin main
Two-way pegging via atomic transactions will enable movement between sidechains
Sidechains might not have blocks, will include transaction fees to incentivize miners
Sidechains will be used for experimenting with expanding extensibility features including user-issued assets, smart contracts, HFT, and a plethora of financial instruments
Team made up of several Bitcoin core developers in addition to other cryptographers and programmers
Looking for practical use-cases of blockchain technology such as internal uses at enterprises and institutions, not solely related to bitcoin the cryptocurrency
Launching website soon and some production code within the next 60-90 days

Also, while this type of project will likely be controversial in some corners due to the capital and time invested in alternative platforms, this project provides yet another competitive wrinkle in the ever growing “2.0” space. Thus, it will be interesting to see how they use these methods within a production environment to bring utility back to Bitcoin main.⁷

To learn more about the project, following Hill and Back on Twitter at @austinhill and @adam3us respectively.

Endnotes

How does merged mining work? from StackExchange [↩]
E77 – The Adam Back Interview from Let’s Talk Bitcoin [↩]
The entire discussion dev thread [Bitcoin-development] is there a way to do bitcoin-staging? is a very interesting conversation and at the end Greg Maxwell discusses the potential behind two-way pegging. [↩]
The lower limit is an estimate from Gil Luria at Wedbush Securities, see Following the Money: Trends in Bitcoin Venture Capital Investment by Garrick Hileman. [↩]
See Total factor productivity [↩]
What are Namecoins and .bit domains? from CoinDesk [↩]
Coincidentally, last week I published a paper (PDF) outlining some of the limitations of Bitcoin from a “public goods” perspective; it was by happenstance that Hill and Back’s team independently have answers and solutions to many of these known challenges and hurdles detailed within. [↩]

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Are the rumors true about China banning cryptocurrencies?

Posted on April 4, 2014 by Tim Swanson

Received a few emails the last few days. Here is one response I sent this morning to some friends:

This policy tightening, specifically based on this market-moving story from Caixin last week, comes amidst a larger shift: pressure from SOE incumbents that are concerned with the entire mobile payment / independent payment systems that have been setup over the past 3-4 years. Quartz has a good overview on how the state-owned banks have essentially pressured policy makers into stymieing further growth of alternative services from Alipay & Tenpay. Similarly three weeks ago the PBOC placed a “temporary” ban on payments made by scanning QR codes, mostly likely to protect UnionPay (an SOE) against the competition of Alipay & Tenpay. In fact, this past week Chinese SOE banks posted their weakest annual profit growth, and they like those margins.

With respect to Bitcoin, I doubt it has anything to do with capital controls or flight. Despite the fact that Bitcoin can be used as a vehicle to avoid capital controls, but have not seen any actual numbers on that so I could be wrong (maybe they all use RealityShares). Yet even if it were the case, China is the 2nd largest source for remittances received ($60 billion in 2012), making it unlikely that the trend reversed and somehow China now exports more funds than receives during those 2 years (and I doubt that it is being used for domestic remittances for migrants to the inner provinces either). For perspective, there are common ways to use UnionPay and art auctions to avoid capital controls (those links have interesting stats).

In addition, here is an updated summary of notices the different exchanges in China have received and their responses. In addition, Rui Ma provided info on the most recent CoinDesk news piece on this issue yesterday.

Interestingly enough, I was told a couple days ago, in the event that the rumors of the PBOC clamp down on electronic deposits beginning 4/15 are true, one alternative is that Huobi (and others) would allow users to go to their office to deposit directly with them. Bobby Lee from BTC China and others have said the same thing as well. Yet, what’s to prevent Alice from sending funds to some third party “cash delivery service” that then delivers them the cash? And in any case, if the PBOC actually wanted to stop the business, it would be very simple – just (a) block the websites and (b) send in the PSB to close them down.

In any case, I can just imagine nerds with wheel barrows full of RMB lining the sidewalk of corporate offices…

That said, we (the public) probably will not know until we do. Chinese regulators have used this strategy before: release or “leak” some information to test the reaction of the market. If the reactions are severe, they may change the policy. If you believe your investments will be impacted, aside from somehow “getting” some emergency guanxi, the best thing you can do is prepare for a Plan B, likely utilizing Hong Kong.

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Not all Merkel trees are alike

Posted on March 31, 2014 by Tim Swanson

Cryptonerds shake their heads at the pun. Proof-of-Merkel != a Merkle.

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See all OP_RETURNs in the blockchain

Posted on March 24, 2014 by Tim Swanson

Gideon Greenspan recently posted on the Colored Coins dev list:

We developed this to help with debugging. but it might be of wider interest to people here, to see what others are up to:

http://coinsecrets.org/

It shows you all OP_RETURNs in the block chain, hex and ASCII, going back to the first one (block 228596).

Some of the more interesting ones:

http://coinsecrets.org/?to=287731.000001
http://coinsecrets.org/?to=271007.000000
http://coinsecrets.org/?to=268081.000000
http://coinsecrets.org/?to=268060.000002 (rick-rolling)
http://coinsecrets.org/?to=251768.000000
http://coinsecrets.org/?to=228596.000000 (first one ever)

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Cryptocurrency in the news: #14

Posted on March 20, 2014 by Tim Swanson

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

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

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

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

Bitcoin and Namecoin Appear in Draft ICANN Report – U.S. Plans to Relinquish Remaining Control of Internet from Bitcoin Magazine (just a quick note: Namecoin sprang forth from the BitDNS initiative that Satoshi actually discussed a little before disappearing. Thus when people claim “altcoins” are jokes, be sure to point out this little trivia)
Facebook Security Director, Amazon BD Director Join Bitcoin Startup Coinbase from TechCrunch
Bitcoin Core v0.9.0 release overview by Jeff Garzik
Dogecoin just sent $11,000 over Twitter. Instantly. from City A.M.
Gridcoin founder talks revolution in mining from Crypt.LA
Neglected Estonian Manor House to be Turned Into Bitcoin Center from ERR (is it smart to tell everyone you are opening up a bank in an old house? Here are Risto Pietilä’s postings on Bitcointalk)
Ripple Singapore by Tristan Winters (exchanging commodity-backed XRP)
SafeTX from HashTrust (reputation market)
Bitmask an open source application to provide easy and secure encrypted communication
Indonesia to Add Full Bitcoin Exchange as Merchant Network Grows from CoinDesk
Proof of Existence anonymously and securely store an online distributed proof of existence for any document
Why Bitcoin Matters for Bankers from American Banker (check out the nuclear power quote from Andreas Antonopolous)
Experimenting with Bitcoin Business Models from CoinChomp (about 51attack.com, a crypto-clothing store run by Gianni D’Alerta)
TigerDirect Tops $1 Million in Total Bitcoin Sales from CoinDesk
Bitcoin, Meet Darwin: Crypto Currency’s Future from Information Week
Is UCC Article 9 the Achilles Heel of Bitcoin? from Credit Slips
NYDFS Issues Public Order on Virtual Currency Exchanges (all about Bitlicenses in New York)
Robocoin Spreads Its Bitcoin ATMs Further from TechCrunch

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Email use-cases for ‘colored coins’ and DACs

Posted on March 15, 2014 by Tim Swanson

Earlier this week, version 0.0.5 of Chromawallet was released (here’s is Alex’s official announcement) and users have begun testing the creation and sending of colored assets (first on testnet, soon on mainnet). A few adventurous people have sent 0.0008 BTC in fees related to Colored assets (you can look at Blockchain.info for a few here and there).

I received two interesting emails this week, the first is a use-case for Colored Coins from Mark:

I think a good use case is for stocks: so long as it’s for Class A common stock, no dividends, it’s a very uniform asset, already digitally-issued. If Google treasury (the issuer of Google stock) colored a coin, they are the final arbiter of whether a share is a share is a share, and I would trust them as the issuer of the coin. But what about proxies, splits, ugh…

Best, best use case is for foreign stocks to be registered this way: it’s still really cumbersome for a non-Brazilian investor, for example, to buy Petrobras on Brazil’s Bovespa market.

Good question, the potential is there, the technical side works. Whether or not that these kind of companies are willing to try and adopt this method is another matter entirely — as are the legal issues of exchanging a security to different qualified investors (foreign, accredited, etc.). JoinMyIPO, LTBcoin and BankToTheFuture are trying different approaches to this crowdequity opportunity.

DACs

I received an email from Gary who initially talked about alts, but is looking for he sees as long-term opportunities through DACs:

I don’t think its really about the currency, its the underlying technology and how it can be applied to Decentralised Autonomous Corporation, the project that O like that will be the front runner is the Ethereum project, the only problem with me is that how do O create a DAC? I could put it this way, you take a normal business process and convert that process into a DAC, is it possible, I think so. I did post a sort of DAC on the Ethereum forum, in regards to the production of electricity and had some good constructive comments, have a look when you have the time and let me know what you think. I don’t know if you have seen this new development in the US regarding Benefit Corporation:

In April 2010, Maryland became the first U.S. state to pass benefit corporation legislation

Typical major provisions of a benefit corporation are:

Purpose

Shall create general public benefit
Shall have right to name specific public benefit purposes (e.g. 50% profits back to community)
The creation of public benefit is in the best interests of the benefit corporation

Unfortunately I am not a lawyer, so I’m not sure how DACs will be recognized in each jurisdiction. Furthermore, just so that everyone is on the same page: no team has actually unveiled a working DAC/DAO — in fact, there is no real consensus of how to define a DAO/DAC/DACP.

That said, conceivably it is likely a matter of time (months, years?) before someone designs a DAO that can create the functionality that Gary is looking for. If I hear anything about releases, I will definitely write about it. However word of warning: a CAO may actually be more efficient and effective for internal uses (see Subledger.com discussed in Chapter 5), thus I suspect a DAO will not necessarily be the only player in town.

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Goldman Sachs: Bitcoin can create $210 billion in savings for customers and merchants

Posted on March 14, 2014 by Tim Swanson

Yesterday a report from Goldman Sachs was released that identified at least 3 segments in which a cryptocurrency like Bitcoin can reduce costs: retailers, online merchants and remittance. Below is an image of a chart that my friend Tuur Demeester tweeted about:

Overall, while GS found some benefits that Bitcoin brings, it also mentioned several challenges and risks. The takeaway according to TechCrunch is that, “Bitcoin likely can’t work as a currency, but … the ledger-based technology that underlies it could hold promise.”

See also: the report at Scribd and coverage from CoinDesk

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Xapo, a Bitcoin wallet and vault, has officially launched

Posted on March 14, 2014 by Tim Swanson

Wence Casares (who I interviewed for Chapter 2 in GCON) announced today that his team has officially launched Xapo, a Bitcoin wallet and vault. I have tried it out and can attest that the sign-up process is quick and actually works — this is great news for the security side of the ecosystem.

They also announced that Xapo has raised $20 million in funding (first-round) from Benchmark Capital, Fortress Investment Group and Ribbit Captial.

More press coverage: CoinDesk, Fortune, Bloomberg

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What about English in China?

Posted on March 13, 2014 by Tim Swanson

A director of studies (DoS) for a foreign education company in China contacted me today and we discussed the conundrum of college education, specifically English education, in China. I devoted part of chapter 9 in GWON to this segment.

His view was that there are indeed opportunities and reasons for why English learning should be encouraged, that professions that interface with foreigners and foreign companies need to be proficient in English. This is true, but the reality is that there are not that many positions that do this, perhaps just a few million such positions including notably the hospitality industry and IT off-shoring companies. For comparison there are approximately 300 – 390 million English language learners in China and roughly 600,000 – 650,000 foreigners permanently residing in China.¹

This is not to say that students in China should not have the option to learn or should not be encouraged to learn other languages, such as English. Rather this is to say that learning English is no longer an end in itself. It is not a “get rich quick scheme” yet much of the marketing done in the segment continues to promote this view. Whereas 20 years ago being a fluent English speaker or an EFL company, may have been a very profitable profession and sub-industry, today it is quite competitive and very mature with salaries being arbitraged to international labor rates. Instead, learning English is just another tool for high-skilled workers, to interface with their international peers and colleagues. If you do not work in such a position or have such skills in the first place (e.g., semiconductor engineering) but instead interface solely with Chinese colleagues in China, you will likely have no additional monetary incentives for mastering a foreign language.

This ties in with the conversation with the DoS because he planned to give a presentation to several college groups about the utility of learning English. I had previously given a presentation last December (video) (slides) and discussed some of the challenges that college students currently face, including a skill-set gap that exists.

For example, according to the Los Angeles Times:

By some accounts, the unemployment rate for Chinese college graduates age 21 to 25 is 16%, nearly four times that of blue-collar workers. An Education Ministry survey of 500 firms found that employers had trimmed the number of jobs available for new hires this year by about 15%. In Beijing, an estimated 98,000 jobs are available for the 229,000 new graduates, a city education committee study found.

“The manufacturing sector is still seeing labor shortages,” said Geoffrey Crothall of China Labour Bulletin, a Hong Kong-based research group. But many college graduates in major cities are ending up taking poorly paid jobs in areas such as telemarketing or real estate sales, he said, “and often these wages are lower than a factory worker in Shenzhen.”

I have written about this skill-set mismatch several times before.² It is currently exacerbated by social promotion within institutions (e.g., degree inflation) and will likely continue into the near future. One of the problems that the company the DoS represents is that the bulk of its operations is still geared towards traditional brick-and-mortar facilities. While it was not mentioned in the conversation, two years ago the company had intended to grow and open several hundred training centers on the mainland. This has not happened for several reasons:

the EFL education tuition is unaffordable to most of the target audience (urban middle-class consumers)
on top of inflation which erodes their purchasing power, a relatively “slow” economy has put pressure on wages of these working adults who have to cut back on services such as EFL education
lack of a visible return-on-investment for most customers (i.e., after taking the courses it does not lead to instant seniority or new career opportunities)

However, there are other areas for businesses to expand, including the online sector, which is expected to grow by leaps and bounds. In fact, TutorGroup (which the DoS does not work for) just closed its Series B round of financing last month, raising $100 million to build out its online language education platform that targets (among others) Chinese seeking to learn English.

According to its write-up of the funding announcement, TechCrunch noted that:

TutorGroup says that it expects the adult English language-learning market within China to grow 25% annually and reach more than $21 billion by 2015. In China alone, the company expects sales to experience a triple-digit annual growth rate in the next few years.

According to Ambient, a competitor:³

China is now the top buying country of digital English language learning products, not only in the Asia region, but in the world, according to a new Ambient Insight report called “The 2013-2018 China Digital English Language Learning Market.” The five-year compound annual growth rate (CAGR) for digital English language learning products in China is 23.6% and revenues will nearly triple over the forecast period. […] Revenues for these products will spike to a breathtaking $931.8 million in 2018, up from the $323.1 million reached in 2013.

Thus, these two data points suggest that there may still be opportunities in the education and training segment, but likely in the online-only space an area that the DoS’ company is trying to rapidly expand (by opening up a new Boston office for freelance instructors).

What does this have to do with English-learning? I suspect that the online segment will likely benefit and recoup the costs of the investment due to the always-on nature of the urban consumer willing to try out one of these new platforms. Yet whether or not the language and educational knowledge transfers over and translates into higher productivity or more proficiency is another matter entirely.

The last example that ties into this is based on a conversation I had last November with a center manager at the same company that the DoS works at. The manager explained that the ayi (阿姨), an “auntie” custodian, at the headquarters office he worked in paid 20,000 RMB (~$3,400) to learn English through the company’s internal program. Less than six months later she was burned out due in part to the unrealistic expectations (i.e., “overpromised and underdelivered”) that is unfortunately the modus operandi that this segment in China still suffers from. This will likely change as the industry continues to mature, yet it would be in the students best interest to hear the challenges — in addition to the opportunities — that a second language can provide.

Tangential coda: in a slight twist, while English tutoring has been a relatively low-barrier to entry position in China, it looks as if Shanghai is now exporting math instructors to England.⁴ The UK is spending $18 million to fly 60 Chinese math teachers (proficient in English communication) to help improve the math abilities and scores of learners in England.⁵

A census was conducted and the results were published 3 years ago, see Almost 600,000 foreigners counted in China from China Daily. Another unsourced estimate is that 80% of the approximately 650,000 foreigners in China work as teachers, see China Average Pay & Salaries For Expats & Foreign Teachers… from Salon [↩]
Are MOOCs a solution for the skillset mismatch? and The market for massive open online courses in China [↩]
China Digital English Language Learning Market Booming from PRNewswire [↩]
See English tutors in China — well-paid, not always qualified from UPI and Shanghai teachers flown in for maths from BBC [↩]
Chinese teachers sent into English schools to boost results from The Telegraph [↩]

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Cryptocurrency in the news: #13

Posted on March 10, 2014 by Tim Swanson

Several links of interest from over the past few days:

Estimating the amount of Bitcoin users in 2013 from reddit (my own estimate in chapter 8 is no more than 10 million and likely 1-2 million)
Bitcoin for Charities from BitPay
Forget Bitcoin vs Fiat, Welcome the Hybrid Economy from CoinDesk
DAOs Are Not Scary, Part 2: Reducing Barriers by Vitalik Buterin
CryptoThrift (online marketplace like BitDazzle)
Egora (another online marketplace)
Bitrated (consumer protection escrow)
South Korea Launches its First Two-Way Bitcoin ATM from CoinDesk
Bitcoin’s so last week, accelerator launches for alt cryptocurrency Ripple from Upstart Business Journal
Bitcoin Transaction Coordinator (an ERP)
Coinvoice (invoice and get paid in BTC or USD)
Formalizing and Securing Relationships on Public Networks by Nick Szabo (I cited it about 10 times in GCON, this is published over at First Monday)

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Footnotes and agnostic ledgers are not for everyone

Posted on March 10, 2014 by Tim Swanson

Judge Richard Posner does not care for footnotes (pdf).

On the other hand, I use them copiously because they allow me to continue the conversation and provide additional references that would otherwise distract the reader from the main body.

Other examples are, Ken Shirriff, who has some excellent info nuggets he places in these articles:

Similarly, “gwern” does a great job using footnotes. In fact one particular piece (which my friend Taariq Lewis recently rehighlighted) stands out in particular: Bitcoin is Worse is Better.

While gwern’s piece is great in-and-of itself, one of the footnotes that I have pondered over the past few months (I’ve probably read the piece 3 times) is footnote #4 which links to one of Satoshi’s first known public emails, stating in November 2008 that he had been working on this project for about the previous 18 months. That he actually built the software first and then wrote the whitepaper to describe it.¹²

The reason this is important in my mind is that I think (and will likely be stoned for saying this) is that Bitcoin itself has probably been misrepresented by various special interest groups. Specifically, individuals that keep pointing to Satoshi’s purported motivation for this — to defuse future financial crisis’ — are likely incorrect. Again, he/she/they built the software first before writing the white paper which describes what was built (hence the reason why the code was in working order when he/she/they released it in January ’09). Thus he did so prior to any of the key events of the financial crisis. Sure he did sign the genesis block with “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks” however it would be a stretch to conclude his exact motivations without him specifically stating them.³ Furthermore, Satoshi only mentions the word “libertarian” once in all of his writings (on the mailing list [here] just a few days after releasing the whitepaper; and not on the forum) and none of his posts were particularly geared towards politics, in fact he seemed to have a desire not to have Bitcoin put in the political hotseat (he specifically asked Wikileaks not to accept bitcoin).⁴ ⁵ And while he did post one comment about economic scarcity, utility and value, it was unrelated to politics.⁶

I briefly touched on this in my own footnote in chapter 5, stating that while the protocol could conceivably track other assets and token values, that it was not initially intended as such from day 1, rather it was intended as a way to create a trustless form of payments, “One of the primary reasons this was the case is because Satoshi Nakamoto intentionally created Bitcoin for that purpose, hence the full name of the paper “A peer-to-peer electronic cash system” – the first section of the whitepaper discusses the problems people have with paying for things online; it was not a manifesto.”⁷

His political and philosophical inclinations are neither here nor there. He could have been a member of any political organization yet Bitcoin itself is just a tool. It would be akin to saying that all databases and accounting ledgers should conform to Republican ideals or Democrat ideals or Socialist ideals. Databases are tools, Bitcoin is a tool. The code is open-sourced and will likely be adopted and used in numerous environments and circumstances that could very well be, non-ideological (e.g., backoffice for financial institutions, medical records for hospitals & HMOs, property title tracking in developing countries). ⁸

Just as very little of Linus’ original codebase still exists in in Linux, 75% of the Bitcoin code is now non-Satoshi based. While the first application of this trustless system that ended up correlated with the protocol, fiat value, there likely will be any number of uses for both a decentralized and centralized cryptoledger and may in fact, end up used inside the very institutions that politically motivated individuals would rather have them not.

It is impossible to say either way, perhaps Darkwallet, Zerocoin and Darkcoin will be the killer-apps that bring in billions of users or maybe nationally mined cryptocurrencies (like proto examples such as Auroracoin or Mazacoin) will become more widely used.⁹ Either way, early adopters in this new segment are incredibly creative, innovative and passionate — I have been very fortunate to correspond with many of them over the past several months. Yet my doubts as to whether these projects will succeed are unimportant because the wallets of market participants collectively will decide what will succeed and what will be purged. Thus, don’t rule out anything, including the footnotes.

He mentions the 2007 timeframe also in the forum, see these three posts: Re: Questions about Bitcoin, Transactions and Scripts: DUP HASH160 … EQUALVERIFY CHECKSIG and Re: MSVC build & SHA-256 [↩]
He states early in the mailing list that he did it backwards, writing code first then writing the white paper, see the last comment on November 9th, Re: Bitcoin P2P e-cash paper [↩]
This is based on a real article from The Times, Chancellor Alistair Darling on brink of second bailout for banks [↩]
He specifically stated that “I make this appeal to WikiLeaks not to try to use Bitcoin. Bitcoin is a small beta community in its infancy. You would not stand to get more than pocket change, and the heat you would bring would likely destroy us at this stage.” See Re: Wikileaks contact info? and Re: PC World Article on Bitcoin [↩]
He did have one semi-political statement regarding censorship on November 9th, Re: Bitcoin P2P e-cash paper [↩]
See Re: Bitcoin does NOT violate Mises’ Regression Theorem [↩]
This is in footnote 57 in chapter 5. Be sure to also read Mike Hearn’s germane comment at github. [↩]
Satoshi did prefer public domain works over other proprietary licenses. He designed and released the original logo/icons to the public domain. He also posted several comments about releasing code under either an MIT license or public domain, see for example: Re: Switch to GPL [↩]
See As Auroracoin “Airdrop” Approaches, What Does It Mean When A Nation Adopts A Cryptocurrency? from TechCrunch and Lakota Indian Promotes New Digital Currency, Mazacoin from The Wall Street Journal [↩]

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Cryptocurrency in the news: #12

Posted on March 7, 2014 by Tim Swanson

A few links over the last couple of days:

Empowered Law, a law firms that provides services regarding:
Bitcoin Transaction Coordinator, claims to be the first fully integrated ERP solution for Bitcoin Transactions
SatoshiLegal, “we craft articles regarding the legal challenges of digital cash & decentralized systems with the goal of encouraging you to find out more and participate in this innovative economy.”
“A small amount of side channel can go a long way” — how to use side-channel attacks to extract the private key
Japan’s Government Has No Plans To Regulate Bitcoin Transactions After Mt. Gox’s Demise from TechCrunch
Usability of crypto software by Mike Hearn
Why you think the PKI sucks… but can’t do any better by Mike Hearn
bcflick – using TPM’s and Trusted Computing to strengthen Bitcoin wallets by Hal Finney

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Let a thousand agnostic cryptoledgers blossom?

Posted on March 7, 2014 by Tim Swanson

While it may be controversial to suggest in some circles, but cryptoledgers are agnostic tools. And due to their open-source availability, they can likely be used internally by an assortment of organizations, companies and institutions — big or small, for-profit and not-for-profit.

London-based Preston Byrne, a securitization attorney that helped me extensively in Chapter 2 of GCON, has an upcoming article discussing the use of distributed and decentralized blockchains — and cryptoledgers in general — in governments and corporations. This is something he previously discussed in the book and while it could be controversial to some, if history is a guide, just like the internet itself and operating systems before it, there were many early adopters who had differing ideological goals.

Yet how the Bitcoin ledger operates mechanically is for all intents and purposes ideologically agnostic. There are many productive business and organizational use-cases that could adopt and utilize one, but not necessarily need all of the functionality. Put another way, it would be like saying that for the theory of database or journaling file system design to survive, each design has to include features that further a specific ideology such as anonymizing transactions. Perhaps Zerocoin or Darkcoin will fill certain niches for specific groups, but there are many other uses for a cryptoledger that do not necessarily need to have certain anonymizing or decentralization features. In fact, these particular functions may add a lot of computational and capital overhead and will likely be stripped out by an IT team trying to adopt a cryptoledger at a financial institution trying to automate the backoffice or an HMO trying to adopt a ledger for a medical records database.

Again, some of these ideas are discussed by a few different sources in the book, with scenarios using “pre-mined” proof-of-stake or Ripple-like systems (that require a bare minimum of computational resources to maintain). Proof-of-work would not likely be as energy efficient, plus the block times of the original Bitcoin protocol could be too slow for internal applications.

Since the source code is released for many of these platforms, time will tell; in the meantime I point you to Byrne’s latest post: Bitcoin and the English legal system, part I

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Proof-of-Gox and Recoverycoins

Posted on March 5, 2014 by Tim Swanson

Yesterday I had the pleasure to moderate a panel discussing Goxcoin on LTB episode #89. Participants included Adam B. Levine who is the editor-in-chief of Let’s Talk Bitcoin! as well the chief visionary officer to the Humint project (and who wrote the foreword to GCON). David Johnston is the managing director of BitAngels, the first angel investment network focused on digital-currency startups, and a board member at the Mastercoin Foundation (I also interviewed him for GCON and included his insights in Chapter 3). And the final panelist was Pete Earle, who is a multi-decade veteran of the financial trading sector as well as an economics writer (the article that sticks out most to me was incidentally his piece on mudflation).

It’s a very thought provoking conversation as it raises real-world use-cases for using cryptoprotocols (such as Bitcoin and Mastercoin) in a more effective, efficient, secure and transparent manner than existing models and frameworks.

Developers can find out more information about the Master protocol white paper.

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Another Brick in the Wall: Link Edition #57

Posted on March 5, 2014 by Tim Swanson

Catching up with a couple non-crypto Chinese-related news that was on a hiatus since last December.

China to test new smog-busting drone to help clear polluted skies from SCMP
No space for fledgling brands at China’s mega online malls from China Economic Review
Adverse Lifestyle Leads to an Annual Excess of 2 Million Deaths in China from PLOS One
特邀学者Tim Swanson前来我院讲学 from Shanghai University of Sport

That last link is probably best viewable in Chrome, it is a write-up of my presentation I gave in December (see the video & slides below):

Futureproofing your English with Technology: Getting the most return-on-investment in an automated world from TIm Swanson

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Cryptocurrency in the news: #11

Posted on March 5, 2014 by Tim Swanson

Continuing from where I left off in May, some interesting articles that were sent to me and that I bumped into:

Real bills doctrine and The Theory of Free Banking: Money Supply under Competitive Note Issue by George Selgin
Ethereum Namecoin contract explained (video) by Joel Dietz
Goxcoin – a proposal by Humint and the Mastercoin Foundation to bridge BTC on Gox with the real world
Ripple: A Primer (pdf) and Ripple Gateways (pdf)
Overstock.com CEO: More Bitcoin Transactions Than We Expected from The Wall Street Journal

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Great Wall of Numbers

Business Opportunities and Challenges in Emerging Markets

Fairweather fans in bitcoinland disowning China

Visualizing sidechains and tabulating the aggregate losses of UTXOs (bitcoins)

Quote of the day: depreciating value of exported electronic goods from China

Adding the first GPU farm to the Computer History Museum?

How ArtForz changed the history of Bitcoin mining

Decentralized storage on the horizon

None of the Top 500 Bitcoin addresses uses on-chain multisig

What is a Merkle tree?

Paraphrased notes from Back and Hill interview

“Blockchain 2.0” with Adam Back and Austin Hill

Are the rumors true about China banning cryptocurrencies?

Not all Merkel trees are alike

See all OP_RETURNs in the blockchain

Cryptocurrency in the news: #14

Email use-cases for ‘colored coins’ and DACs

Goldman Sachs: Bitcoin can create $210 billion in savings for customers and merchants

Xapo, a Bitcoin wallet and vault, has officially launched

What about English in China?

Cryptocurrency in the news: #13

Footnotes and agnostic ledgers are not for everyone

Cryptocurrency in the news: #12

Let a thousand agnostic cryptoledgers blossom?

Proof-of-Gox and Recoverycoins

Another Brick in the Wall: Link Edition #57

Cryptocurrency in the news: #11