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The Big Bitcoin Bet, Part 2: Big Money to Buy Bitcoin, and Other Bad Ideas

2014 could have been better for Bitcoin. After peaking near $1100 in December 2013, Bitcoin is currently under $250. 2014 was not a good year for Bitcoin.

But that doesn’t mean 2015 has to be the same. And if a slew of recent announcement involving some very big investors are any indication of what to expect, the mainstreaming Bitcoin is about to get a big boost. But that boost could come with a big price too. All those “microtransactions” of as little as 0.000000001 of one bitcoin (BTC) that much of the Bitcoin community hates so much is precisely what these deep pocketed interests are planning on promoting in a big way. And in order to make it all happen, they might have to become some of the biggest bitcoin miners around too. And that means the future of Bitcoin is increasing in the hands of ‘The Man’. Also, the microtransactions might be used to monetize how we access the web. And how the Internet of Things spies on us. It doesn’t actually sound very fun.

So, 2015 could be a big year for Bitcoin the protocol. But Bitcoin the dream – the rebellious currency that overthrows the banks and government in general – 2015 could get weird and just keep getting weirder:

The Wall Street Journal

A Bitcoin Technology Gets Nasdaq Test
Pilot to take place in fledgling Nasdaq Private Market

By Bradley Hope And
Michael J. Casey
May 10, 2015

Nasdaq OMX Group Inc. is testing a new use of the technology that underpins the digital currency bitcoin, in a bid to transform the trading of shares in private companies.

The experiment joins a slew of financial-industry forays into bitcoin-related technology. If the effort is deemed successful, Nasdaq wants to use so-called blockchain technology in its stock market, one of the world’s largest, and potentially shake up systems that have facilitated the trading of financial assets for decades.

“Utilizing the blockchain is a natural digital evolution for managing physical securities,” said Nasdaq Chief Executive Robert Greifeld. He said the technology holds the potential to “benefit not only our clients, but the broader global capital markets.”

Nasdaq will start its pilot project in Nasdaq Private Market, a fledgling marketplace launched in January 2014 to handle pre-IPO trading among private companies. The platform has more than 75 private companies signed up, according to the company.

Private companies typically handle sales and transfers of shares with largely informal systems, including spreadsheets maintained by lawyers who verify transactions by hand. Nasdaq wants to replace that process with a system based on bitcoin’s blockchain technology.

The blockchain ledger is seen by some in the financial industry as the most compelling aspect of bitcoin because it can be used beyond merely buying and selling goods or services with a new currency.

The blockchain is maintained, updated and verified by a vast global network of independently owned computers known as “miners” that collectively work to prove the ledger’s authenticity.

In theory, this decentralized system for verifying information means transactions need no longer be channeled through banks, clearinghouses and other middlemen. Advocates say this “trustless” structure means direct transfers of ownership can occur over the blockchain almost instantaneously without the risk of default or manipulation by an intermediating third party.

One idea is that encrypted, digital representations of share certificates could be inserted into minute bitcoin transactions known as “Satoshis,” facilitating an immediate, verifiable transfer of stock ownership from seller to buyer.

Still, bitcoin-based settlement remains untested in the real world. Regulators worry about the anonymous status of the bitcoin miners that collectively manage the system. It is conceivable that bad actors might one day take over the mining network and destroy the integrity of its verification system, some say.

Also, bitcoin’s underlying software is unable to handle the massive increase in data storage that a Wall Street settlement system would require. While the software could simply be updated, implementation will require consensus among the many, far-flung miners.

Nasdaq Private Market is also a relatively small project for Nasdaq so any changes there aren’t far-reaching. At the same time, the experiment is the latest example of large financial firms exploring the use of the technology.

In recent months, the New York Stock Exchange unit of Intercontinental Exchange Inc. announced an investment in the bitcoin-trading platform Coinbase; Goldman Sachs Group Inc. invested in bitcoin consumer- services company Circle Internet Financial; and big trading firm DRW Holdings LLC said a subsidiary had “begun to experiment with cryptocurrency trading.”

Meanwhile, Digital Asset Holdings, led by former J.P. Morgan Chase & Co. executive Blythe Masters, is, like Nasdaq, developing a blockchain-based system for settling transfers of securities and funds.

Some see the blockchain as a way to attain a long-held securities-industry goal of real-time settlement, shifting the current “T+3” structure, in which the final transfer of funds and securities occurs three days after each trade, to “T+0.”

Real-time settlement has been a goal of regulators and investors alike as it would reduce the risk of counterparty failure and free up billions of dollars of capital that is sidelined during that wait period.

Oliver Bussmann, chief information officer of Swiss bank UBS AG, last year said the blockchain was the biggest disrupting force in the financial sector, meaning its success could potentially have far-reaching ramifications for banks, trading houses and others. His bank has since established a special blockchain lab to study uses of the technology.

Now, the fact that Wall Street is interested in the blockchain technology isn’t surprising. After all, while Bitcoin zealots like to dream that Bitcoin, itself, is going to replace Wall Street, using the Bitcoin protocol for tracking transactions is probably where the future of the blockchain is and that’s exactly what Wall Street appears to have in mind.

According to Bitcoin’s fans, the bitcoins, themselves, hold inherent value. But what Nasdaq and the rest of Wall Street appear to have in mind is an application where the bitcoin transactions have no inherent value at all and merely use the bitcoin transactions to represent the exchange of something a completely unrelated to bitcoins.

So it’s not at all surprising to see Wall Street adopt some sort of blockchain technology. But here’s what’s really interesting in Nasdaq’s blockchain experiment: Nasdaq isn’t going to be using a blockchain of their own to run the stock-trading system. It’s going to use the actual Bitcoin blockchain:

Coin Center
Wall Street is using Bitcoin, not just the blockchain.

Peter Van Valkenburgh
May 12, 2015

Nasdaq has catapulted bitcoin into the headlines again this week, announcing that the world’s second largest exchange will be running a surprisingly forward-thinking pilot program: trading stock shares on a blockchain.

There’s been, however, a nagging question post announcement: what blockchain? Bitcoin’s blockchain? Some new blockchain? More worryingly, many in the press have taken the ill-defined details as an excuse to sing an increasingly common refrain: “I’m not wild about Bitcoin, but I love the blockchain!” I’d like to take a moment to clear up this bitcoin-blockchain confusion in the context of what we know about Nasdaq’s plan thus far, but first, a quick review is in order.

Nasdaq on Chain

We don’t know too many details about what exactly Nasdaq has in the works, but a critical passage in the press release settles the blockchain sans bitcoins question:

Nasdaq will initially leverage the Open Assets Protocol, a colored coin innovation built upon the blockchain.

“Colored coin” means that the amount specified in a particular bitcoin transaction will be representing something beyond the bitcoin amount itself. It’s as if I painted a dime red and passed it around the office saying, “whoever has the dime is allowed to speak at the meeting.” You can do this to a bitcoin by attaching a short message to your bitcoin transaction when you ask that it be written to the blockchain. The message effectively marks or colors the amount in the transaction as something more than just bitcoins.

Now, you could color the coins on some other blockchain, say Dogecoin or Litecoin, but we’re fairly certain that Nasdaq is coloring bitcoins. Michael Casey of the Wall Street Journal, who broke the story, confirmed as much on Twitter:

So in Nasdaq’s case, a normal bitcoin transaction is initiated by the stock trader, the trader includes a short message that says, “this tiny fraction of a bitcoin represents one share of IBM stock,” and some software that Nasdaq builds will track all future transactions involving those fractional, now-colored, bitcoins. Whoever ends up the last recipient in a string of transactions involving those bitcoin fractions is the legal owner of the shares.

So, to be abundantly and perhaps pedantically clear, Nasdaq’s platform will trade shares by trading bitcoins. This is not blockchain-technology standing alone, this is Bitcoin being used by Wall Street. It is technically impossible to use Bitcoin’s blockchain without holding and transacting in bitcoins. In this case, Nasdaq is using Bitcoin’s blockchain, so they are using Bitcoin, not just “the technology behind Bitcoin.”

Keep in mind that the “colored coins” concept was only added to Bitcoin in 2014 with something exactly like trading stocks in mind. So turning Bitcoin into a giant trading platform is part of the long term plan for mainstreaming the use of bitcoin. But as the article above pointed out:


Also, bitcoin’s underlying software is unable to handle the massive increase in data storage that a Wall Street settlement system would require. While the software could simply be updated, implementation will require consensus among the many, far-flung miners.

And that’s what makes this all such a fascinating development for Bitcoin: If Bitcoin goes down the ‘colored’ coins path of development it could require fundamental changes to how Bitcoin operated just to handle the vastly increased number of trades. And in order to do that, the Bitcoin community has to agree to those changes.

With Bitcoin, Everyone is the Boss. Together. Hostile Takeovers are Optional.
As Bitcoin’s chief developer, Gavin Andresen, admitted last October when he proposed a “hard fork” to Bitcoin’s protocol that would increase the size of Bitcoin’s “blocks” (each block records a set of transactions that are permanently added to the “blockchain”) by 50% every year, such a change would not be easy to implement. Not that changing the code is difficult. It’s getting everyone to agree to use it that’s the harder part:

Coindesk
Gavin Andresen Proposes Bitcoin Hard Fork to Address Network Scalability
Stan Higgins | Published on October 8, 2014 at 01:25 BST

Bitcoin Foundation chief scientist Gavin Andresen has proposed increasing the number of transactions allowed on the bitcoin network by raising the maximum block size by 50% per year.

Doing so would require a hard fork and “some risk”, Andresen conceded in a new Bitcoin Foundation blog post, but he concluded that such proposals are necessary for the long-term viability of bitcoin as a global payments system.

Entitled A Scalability Roadmap, the piece builds on Andresen’s past statements regarding how he believes the bitcoin network can be scaled to handle more transactions. While the near-term need to do so may not seem apparent, Andresen wrote, an opportunity to address the bitcoin network’s scalability needs shouldn’t be missed.

Andresen suggested that the bitcoin development community’s consensus-driven decision-making process might result in an alternative solution or even multiple fixes to scalability. Still, he argued that the limit on bitcoin transactions has been identified in the past as a weakness in need of addressing.

Andresen wrote:

“Agreeing on exactly how to accomplish that goal is where people start to disagree – there are lots of possible solutions. Here is my current favorite: roll out a hard fork that increases the maximum block size, and implements a rule to increase that size over time, very similar to the rule that decreases the block reward over time.”

Andresen added that the development community has always intended to raise the block size, but that a long-term scalability fix has yet to take place.

Bigger blocks are better

The bitcoin network is currently experiencing 50,000–80,000 transactions per day. As Andresen noted, however, the data needs being placed on the bitcoin network aren’t huge, making the 1-megabyte block size sufficient for use today.

In the long-term, though, this block size may lead to issues, Andresen wrote, arguing that the need to take action makes sense not only from a practical perspective but also an ideological one.

Andresen said that a hard fork to increase the block size is in line with the spirit of bitcoin, arguing:

“I think the maximum block size must be increased for the same reason the limit of 21 million coins must NEVER be increased: because people were told that the system would scale up to handle lots of transactions, just as they were told that there will only ever be 21 million bitcoins.”

Andresen suggested that the inflection point for the bitcoin block chain may come during a future price upswing, an event that has historically been associated with an increase in the number of bitcoin transactions.

Any fix needs time

Acknowledging the challenges involved, Andresen conceded that the process won’t be easy. However, he said that such work is inevitable, noting:

“Getting there won’t be trivial, because writing solid, secure code takes time and because getting consensus is hard. Fortunately, technological progress marches on, and Nielsen’s Law of Internet Bandwidth and Moore’s Law make scaling up easier as time passes.”

Andresen posited that the 50% annual growth rate he suggested would enable the distributed network to facilitate as many as 400 million transactions per day if implemented now. After 12 years, the bitcoin network’s estimated transaction capacity would reach 56 billion transactions per day, according to Andresen’s initial calculations.

This, Andresen said, would put the bitcoin network in a position to serve as a truly global value exchange system.

As Gavin Andesen, lead Bitcoin developer, points out, an increase in scalability is necessary if Bitcoin is going to become the trading platform of the future, but it’s not going to be easy. Why? Because Bitcoin’s changes are concensus-driven and consensus is hard. Or at least is can be, depending on the nature of the change. In this respect, Bitcoin really is like a herd of lemmings most time because that just makes sense.

But it has the potential to become a herd of cats when the conditions are right. When Gavin Andresen issues a change to Bitcoin’ts protocols, those changes aren’t automatically implemented simply because the lead developer makes them happen. They’re implemented because all of Bitcoin’s users choose to implement them. So the bigger, and potentially more controversial, the changes to Bitcoin’s protocol, the greater the likelihood that it could be a change that a significant minority of Bitcoin users and/or miners choose not to implement. And if that happens, Bitcoin’s blockchain splits in two:

Tradeblock.com
Go Fork Yourself – Life After a Bitcoin Hard Fork
Posted on June 6, 2013

“I assign a 0% probability that we will continue with the present proof of work function. The present proof of work function is not going to survive the year. Period. If there’s one hard prediction I’m going to make it’s going to be that.” – Dan Kaminsky

[youtube=http://youtu.be/si-2niFDgtI?start=2416&w=320&h=240]

Dan Kaminsky’s statement at the bitcoin conference in San Jose proved extremely controversial. While many may find it unlikely that the mining algorithm changin is a certainty, it does raise the question of what would happen to bitcoin if there were a hard forking event in the future.

On March 11th, 2013 there was an accidental hard fork – two separate block chains were created that effectively made alternate transaction timelines. Shortly after the new 0.8 software was introduced, a block was found using the upgraded software that caused the 0.8 block chain to be incompatible with 0.7 software. Two forks were created, one for each bitcoin software version. This was quickly corrected by miners reverting back to 0.7. However, if an intentional hard fork was created there would be no reversion to common software and two separate chains would continue to exist.

For this article, we will be considering hard forks that are not bug fixes or uncontroversial upgrades, but rather changes in the protocol that will be contested by a subset of the bitcoin community. An intentional hard fork would operate in much the same way as the accidental one in March. A new version of the bitcoin software would create an incompatible block chain with older versions, effectively creating separate currencies going forward.

Potential Causes of Hard Forks

1. Changing the Mining Algorithm

As Kaminsky mentioned in the earlier quote, there are alternative options to the proof of work algorithm that will likely receive additional attention in the coming months. His concern was sparked by the high hashrate of current ASICs compared to the rest of the network. In the short term, the overall network hashrate is tiny compared the the ability of a large company or government to produce ASICs and potentially compromise the blockchain. It is possible that a sophisticated adversary could use this temporary vulnerability to create ASICs and attack the network, forcing bitcoin to change its mining algorithm. As Yifu Guo, CEO of Avalon, pointed out it will likely take several years before current ASIC companies catch up to modern manufacturing processes.

[youtube=http://youtu.be/LY1xgGiejIc?start=792&w=320&h=240]

It is likely that miners who have invested significant sums of money in current hardware will not willingly switch to the new block chain, and continue mining on the old one.

2. Change to MAX_BLOCK_SIZE

Bitcoin has a scalability concern that is quickly reaching a head. The current block size limit is 1MB, constraining the network to a maximum average of 7 transactions per second (tps). Visa alone averages 2,000 tps, with a peak rate over 4,000 tps. There are two contradicting schools of thought on how to solve this problem. Either (a) increase the maximum block size, or (b) bring microtransactions off-block-chain. The increase max block size side argues that modern internet connections will have no trouble handling much larger blocks every 10 minutes, and storage space is becoming less of a concern on a daily basis. The off-block-chain side argues that it is unnecessary to record every micro-transaction in the world on the block chain, and there are viable alternatives. Large blocks will be incompatible with anyone using smaller block size software, and will effectively fork the blockchain.

3. An Inflationary Model

It is possible in 50 to 100 years the popularity of bitcoin’s deflationary model may change. This could potentially occur for two reasons:

As block rewards reduce in size, transaction payments may not be sufficient to support the ever-increasing mining costs. This could result in the need to resort to a constant block reward for perpetuity in order to compensate miners appropriately.

Economic philosophy is constantly evolving, and there could be a revelation in economic theory that disproves deflationary models as a viable long-term policy.

Implementation

A hard fork is the result of two separate clients being used which read two separate versions of the block chain. We will name these to chains BTC, the original client version, and BTC-2, the version containing a modified block chain which is unreadable by the original version.

The block chain is a ledger containing a history of every bitcoin transaction. Bitcoin miners group transactions into blocks, and create 10 minute check-points in the transaction history. A hard fork would create 2 separate histories of transactions after the forking event. People owning coins on one chain would have a different transaction history on the other chain. As the two chains are used separately their transaction history will diverge. This effectively makes BTC-2 an alt-coin with the same starting point as BTC.

Impact

Exchanges

After a hard fork event, people holding bitcoins before the event will now have value in two separate currencies, BTC and BTC-2. Exchanges would likely be developed to add liquidity between the two while people trade back and forth in an effort to gain bitcoins on the chain they think more valuable long-term. Each chain would now be its own history of transactions, it would be impossible to reconcile them into a common history. If one chain eventually won, the alt coins would not disappear, however their use would wane and they would eventually become worthless.

Intra-currency exchange rates will develop as the market explores the true value of each chain. Purists will likely trade BTC-2 for BTC, while those believing the new protocol is a necessary improvement will sell their BTC.
Accepting Payments

Any companies currently accepting bitcoin as payment will have to decide if they want to accept both BTC and BTC-2, and post prices in both currencies based on separate exchange rates. This would increase the amount of infrastructure involved in processing payments, with little net gain. An alternative would be for companies to commit to one chain over the other – and a Betamax vs. VCR contest would ensue as companies chose sides until one wins.

Potential for Severe Confidence Degradation

Any hard forks that the bitcoin community is not fully committed to could create irreversible harm to the currency. The value of bitcoin is based on its acceptance, reliability, and security. Undermining these factors can have a devastating effect on market confidence. Hard forks will reduce the network effect that bitcoin has developed over the last 5 years since it will no longer be a unified currency, but rather divided into two contradicting factions. Once a polarizing hard fork occurs, it seems significantly more likely to occur again in the future. Any decisions made which could potentially result in a hard fork must be made with great deliberation, since the potential impacts could be severe.

As the article puts it, “hard forks” that aren’t readily embrace by the Bitcoincommunity could effectively divide Bitcoin resulting in an eventual divide and conquer scenario:


After a hard fork event, people holding bitcoins before the event will now have value in two separate currencies, BTC and BTC-2. Exchanges would likely be developed to add liquidity between the two while people trade back and forth in an effort to gain bitcoins on the chain they think more valuable long-term. Each chain would now be its own history of transactions, it would be impossible to reconcile them into a common history. If one chain eventually won, the alt coins would not disappear, however their use would wane and they would eventually become worthless.

Now, such a forking scenario is also possible for Bitcoin. That’s how it’s designed. But how likely is it that you’ll have a substantial portion of the Bitcoing community collectively decide to ignore the updates and create a showdown between old and new? Sure, the the scenario where a change in the mining algorithm literally eliminates a category of mining hardware (like ASICs) could trigger a rebellion. But are there any other scenarios?

Well, note the proposed change to bring “microtransactions” (transactions involving extremely tiny fractions of a bitcoin) off-block-chain and keep in mind that “colored coins” are basically microtransactions that represent some other form of transaction. Each bitcoin can be broken down into 100 million “satoshis” (the smallest bitcoin unit) and, in theory, a trasaction could consist of a single satoshi (0.00000001 BTC).
Well, as we’ll see below, there’s a lot more than just blockchain bloat from all those microtransactions Nadaq and other Wall Street firms that might be causing headaches in the Bitcoin community. Since “Colored coins”, as opposed to regular bitcoins, represent a trade in something other thay bitcoins, they rely on trust. And when you have a marketplace that relies on trust, you have a marketplace that’s asking for market regulation as was pointed out back in June 2013 when Bitcoin introduced the new 5430 “satoshi” default minimum free transaction size:

Coin Desk
Colored coins paint sophisticated future for Bitcoin
Danny Bradbury (@dannybradbury) | Published on June 14, 2013 at 10:00 BST

Bitcoin is a useful way to exchange money, but what if you could do other things with it? If bitcoiners could use it to issue shares, bonds and IOUs, or even to create alternative currencies atop bitcoins, they could add even more value to this innovative cryptocurrency. Bitcoinx, a community wanting to “democratize finance,” is hoping to facilitate just that, with a concept called “colored coins”.

Colored coins is a concept designed to be layered on top of Bitcoin, creating a new set of information about coins being exchanged. Using colored coins, bitcoins could be “colored” with specific attributes. This effectively turns them into tokens, which can be used to represent anything.

“It’s a distributed asset management infrastructure that leverages the Bitcoin infrastructure, allowing individuals and companies to issue various asset classes,” says Ron Gross, an Israeli programmer and active member of the bitcoin community, who was involved in the early stages of the colored coins project.

“The issued assets can then be traded between users without relying on a central authority. All the relevant advantages of Bitcoin apply (your account cannot be frozen, no middleman, cheap transactions).”

In a whitepaper (still in progress) on the subject, another contributor, Meni Rosenfeld, describes a variety of applications. Colored coins can be used to represent physical assets, such as a house or car. They could stand in for financial instruments such as stocks or bonds, or even interest-bearing assets. How about an IOU? Smartcoins open the way for credit infrastructures built on Bitcoin.

<bThere are challenges for colored coins, however. One came in the form of a patch to the Bitcoin protocol, announced in early April. The “anti-dust” patch, as it has become known, imposed a minimum size on any output in a bitcoin transaction. An output is a unit in a bitcoin transaction that defines the new owner, and the amount of bitcoins that he or she receives. In the new setup, any amount fewer than 5,430 satoshis (0.0000543 bitcoins) is disregarded. The developers made this patch to stop people from stuffing the blockchain with lots of microscopic transactions.

While 5,430 satoshis may seem small, colored coins works best with far more granular transactions than this. The patch was a setback for the project. “Colored coins can still work more-or-less fine even with these drawbacks, but now people say we should redesign (the) coloring scheme,” says Alex Mizrahi, who heads the colored coins project. “There are several proposals, but this is just a major slowdown.”

Note the above: back in April 2013, Bitcoin’s developers issued a patch to the Bitcoin protocol that was explicitly designed to eliminate microtransactions, where were identified as an transaction less than 5,430 “satoshis” (which was subsequently raised to 5,460 satoshis). There are 100,000,000 satoshis per Bitcoin and one satoshi is a the smallest allowable transaction (you can transact in fractions of a bitcoin but not fractions of a satoshi). This patch was done to eliminate “dust” spam. And yet, if Bitcoin is going to embrace microtransactions in the future, 1 satoshi is obviously the transaction amount that users would prefer to use since you’re trying to represent something other than bitcoins in the transaction. So there’s an inherent tension between the “waste” of blockchain bloat caused by a flood of microtransactions and the “waste” of paying more than 1 satoshi for a transaction that doesn’t actually represent an economic transaction in bitcoins. With Bitcoin at $250/BTC, 5430 satoshis = 0.13 pennies. Compared to 0.000025 pennies for one satoshi at the same exchange rate, the potential fight over where to set the default minimum transaction size may not be a trivial deal for the incoming new players like Nasdaq that are planning on very high microtransaction volumes (as we all know from Superman III).

Continuing…


What would it take to get the Bitcoin community using colored coins? Much depends on whether we’re talking about native support at the protocol level, or add-on, “floating” support in bitcoin clients.

Native support will help with the performance of thin clients (client-server versions that don’t store entire copies of the blockchain), says Mizrahi. “I believe it is very unlikely. Bitcoin does not welcome new features, from what I can tell.”

But the creator of another SHA-256 currency – Freicoin – is very interested in a variation on colored coins. It is perhaps no wonder that Mark Friedenbach is enthusiastic about the idea. After all, he wants to rewrite the rules of usury with his currency.

Building a colored coins technology that is binary-compatible with Bitcoin will be problematic, he asserts, because of what he describes as high transaction fees. “We came up with a proposal that achieves everything that people want from colored coins. We will implement those on Freicoin, and then let Freicoin be basically the medium for exchanging credit and IOUs in the same way that Bitcoin is for exchanging hard cash.”

He says that the specification is almost finished, and that he is working to get it peer reviewed. “As soon as we deploy Freicoin assets, we’ll be hitting the scaling of Bitcoin,” says Friedenbach. He’d better prepare himself, then, as he wants his version of colored coins – called Freicoin Assets – out by Christmas.

But Bitcoin could see its own implementation in the form of a floating set of specifications that can be implemented in third-party bitcoin clients, rather than in the protocol itself. The good news is that, unlike some other services such as anonymity, colored coins don’t explicitly need integrating into the protocol, says Tamás Blummer, CEO of Bits Of Proof. His company produces an open-source, enterprise-class Bitcoin server that he says can already propagate colored coins.

“Colored coins is a logical layer above the core Bitcoin protocol,” says Blummer. “I believe that it should not need changes, only extensions.” He aims to have a color-aware wallet by the autumn, and says that a supporting infrastructure for transactions could be reality by the end of the year.

In fact, clients are already available. Mizrahi and his colleagues produced a version of the Armory client capable of handling P2P colored coin transactions in January of this year. Then, realizing that colored coins added a processing burden to an already resource-hungry client, he produced a web-based client instead: WebcoinX.

Part of the problem with implementing colored coins, says Mizrahi, is getting developers to work on it. Gross agrees. “Unlike Bitcoin, a clear path to monetize the colored coin infrastructure hasn’t emerged yet. So, there is relatively little incentive for people for work on colored coin projects,” he says. “As a result, Ripple.com, a direct competitor, has gained significant market share. Ripple.com solves very similar problems to colored coins.”

Like colored coins, Ripple is designed to facilitate credit structures in the world of math-based currencies. But Ripple is based on its own currency, XRP, and is also still currently controlled by a holding company, putting it in direct opposition to the decentralized ethos underpinning Bitcoin.

There are other issues. Any credit-based mechanism in colored coins would have to involve an element of trust. In colored coins, the trust would have to happen “out of band,” using a separate system.

“I believe we’ll see some infrastructure around it. Something like rating agencies, which will audit companies that issue stocks, bonds and currencies based on colored coins,” says Mizrahi. Such third-party systems would verify assets.

“Of course, it is completely decentralized, and potentially such agencies will compete with each other. We are going to offer some support for this on an ‘asset-definition’ level,” he says.

Ratings agencies? Stocks? Bonds? Futures trading? All of this begins to sound suspiciously regulatory, doesn’t it? The Bitcoin community is still in a world of pain thanks to regulatory tensions over issues such as whether an exchange is a money services business. Now, bitcoinX is proposing a decentralized way to create complex financial instruments while dispensing with those pesky anti-money laundering (AML) and know-your-client (KYC) rules.

If colored coins enable people to trade bitcoins as a placeholder for anything, they could land us in a world of trouble with already nervous governments. When bitcoins and stock trading have mixed in the past, things haven’t gone well. Remember the Global Bitcoin Stock Exchange?

“Tensions are unavoidable and will be even more severe here,” agrees Blummer. “I believe that Bitcoin has to work itself up the food chain, first targeting areas like crowd-funding before we attempt to ‘attack’ clearinghouses of stocks.”

“If colored coins enable people to trade bitcoins as a placeholder for anything, they could land us in a world of trouble with already nervous governments. When bitcoins and stock trading have mixed in the past, things haven’t gone well.”

So as we can see, while Wall Street’s embrace of Bitcoin might sound really exciting for the Bitcoin community, it’s also the source of a number of potential headaches involving not just how to handle the conflict between microtransactions and miner payouts but also government regulators.

Now, presumably Nasdaq has the clout to deal with regulators and someone is eventually going to figure out how to make the make this work. But if the “colored coin” revolution takes off, it’s not just going to be Wall Street jumping on board too, hoping to use the offical Bitcoin blockchain and “colored” microtransactions to take advantage of the Bitcoing blockchain. And each new “colored coin” implementation doubles as a new opportunity for regulatory scrutiny. But as just saw, each new form of microtransaction also doubles as a new source of blockchain spam that bitcoin miners don’t like because its just going to keep bloating the blockchain more.

21 Inc: Silicon Valley’s Giving Tree of Free Microtransaction Giving Trees
It all raises a potentially huge question for the future of Bitcoin:
In a fight between the Bitcoin traditionalists that want to see Bitcoin take over the financial world vs the Bitcoin newcomers from place like Wall Street that want to see Bitcoin become a microtransaction “colored coin” trading platform, who’s going to win?

It’s not just relevant for the future of Bitcoin. It’s rather symbolic given that so much of Bitcion’s ethos thus far has been about the little guy fighting The Man and takin down Wall Street. And now that Wall Street is jumping on board the Bitcoin bandwagon, but with a someone different vision than the rest of the Bitcoin community in mind, it’s entirely possible that The Man is going to have to over rule the rest of the Bitcoin community in order to make its vision come to frution.

Part of what makes this all such a compelling question is that there’s no permanent answer. Due to the decentralized consensus-based nature of Bitcoin, the struggle over who controls Bitcoin is never ending. If a new Bitcoing patch with some changes to the Bitcoin protocol is develpoed by its developers, and the vast majority of the users decided to not implement it, that patch would effectively die. Similarly, if someone else (like The Man), developed their own patch that, for instance, got rid or the 5460 Satoshi limit and someone got a majority of the miners to accept that patch that would become the new de facto Bitcoing protocol. That’s how decentralized the system is.

And while, right how, the traditionalist Bitcoin community no doubt vastly outnumbers Wall Street’s clout when it comes to which changes in protocol to adopt and which to accept, keep in mind that Bitcoin’s Wall Street newcomers that want to usher in a “colored coin” revolution of sorts might have some significant Silicon Valley allies that also want to see a microtransaction revolution and they happen to be some of Bitcoin’s biggest boosters. And Comcast wants in. And they’re about to usher in an era of using bitcoin microtransactions to access premium web content in an attempt to “reimagine the transaction confirmation process as a way to onboard consumers” by giving away free gadgets that double as bitcoin mining nodes that are (mostly) working on behalf 21 Inc:

Coin Desk
Inside 21’s Plans to Bring Bitcoin to the Masses
Pete Rizzo (@pete_rizzo_) | Published on May 12, 2015 at 23:40 BST

Secretive bitcoin startup 21 Inc has performed tests illustrating how its technology could enable machine-to-machine bitcoin transactions as part of a company overview created during the fundraising of its latest $75m Series C.

In its pitch, 21 Inc, then still operating under original moniker 21e6, showcased both slides and video that demonstrate how bitcoin could be used to facilitate real-time marketplaces for Internet bandwidth. Using three proxy users, a Vimeo demonstration outlines how a service can parcel out its download capacity through the use of bitcoin payments.

Connected to an account set up in the name of 21 chairman Balaji Srinivasan, the demo illustrates an example whereby three clients participate in such an auction, with their bandwidth speeds changing in real time as bids are placed.

A narrator explains:

“Tomorrow, perhaps it would be possible for clients to send bitcoin to get bandwidth. That is to say, different clients could send bitcoin to the server to indicate their need for that resource.”

An analysis of the blockchain confirms the transactions for clients 1, 2 and 3 were received by bitcoin’s public ledger on 16th October, while an example of the display can be found on a URL registered as cooperative-algorithms.com.

Also included in the overview is an email exchange allegedly taking place between Comcast West Coast strategic development managing director Francisco Varela and 21 CEO Matt Pauker in which the cable giant exec evaluates how its customers could benefit from participating in 21’s bitcoin mining operations.

A representative from Comcast confirmed such talks, but suggested they were “exploratory” in nature and that it has no plans to work with 21 at this time. Comcast boasts 4.4 million customers in 21 states and generated $67bn in revenue in 2014.

Overall, the 80-page overview suggests 21 was, at the time of its apparent fall 2014 preparation, seeking to become one of the bitcoin network’s largest transaction processors, a microtransactions protocol layer for the Internet and a mining pool branded as a social networking platform.

The cornerstone of the strategy as presented would have been the release of consumer products that would turn power from wall sockets into bitcoin through the widespread dissemination of bitcoin mining chips.

When reached for comment, representatives from 21 suggested that information presented was “outdated” and “inaccurate”, and that it did not paint an accurate picture of how the company would ultimately seek to go to market.

“Much of the information is inaccurate, and that which is not grossly inaccurate is long obsolete (especially the numerical figures),” a 21 spokesperson said, declining to elaborate further.

Bitcoin is power

The slides laid out a plan hinging on embedding 21’s custom-made ‘BitSplit’ mining chips into everyday tech products such as USB chargers, PCs, routers, game consoles, phone chargers and direct chipsets at no cost to the hardware producers. The document suggests 21 had a working demo of its BitSplit chip at the time it was prepared.

According to the overview, the BitSplit chip’s key innovation was intended to be a hardcoded bitcoin wallet address that would give the user 25% of mining proceeds, with the remaining 75% going to 21.

Each device would be built with target applications in mind that would then allow consumers to, in theory, spend any bitcoin earned for online content or digital services.

For example, PCs, mobile phone chargers and USB hubs would seek to encourage micropayments in applications, while routers and game consoles would allow users to spend bitcoin for added bandwidth or on in-app purchases.

Given that users would constitute a small portion of the network individually, 21 detailed how it could potentially increase the average payouts for both itself and the owners of consumer products with its technology.

The documents suggest 21 had sought to build 20,000-server, 26-megawatt datacenters to serve as the center of a mining pool that could ensure block rewards.

As an example of the potential power of its pool, 21’s mining operations generated approximately 5,700 BTC in 2013 and 69,000 BTC the following year, according to the document.

By the time its chips were to be embedded into Internet of Things (IoT) devices, 21 projected its cost to produce 1 BTC could be as low as $7.45.

Going social

The documents suggest 21 had been considering a multi-pronged strategy to build out a competitive mining network that also sought to reimagine the transaction confirmation process as a way to onboard consumers.

Without a strong core of industrial bitcoin mining facilities, the document contended, consumer mining with the chips would have been too unprofitable to attract interest.

The documents projected that, should the BitSplit chips seek to process transactions alone, a user would need 34,722 days, or about 93 years, to discover a block. By pooling its resources, however, 21 projected it could reduce the average block time to 200 minutes, or roughly three hours, paying users 0.72 mBTC or about 17 cents per day.

As part of this effort, 21 would also seek to make the activity of mining more user-friendly by auto-enrolling users into its own social network. Named BlockParty, the project was introduced via a visual mock-up of how the social network might look running as a mobile application.

According to the image text, users could keep track of BTC earned daily and view the purchasing habits of friends. In the example, one user is able to use his BTC to skip 15 minutes of commercials on online video service Hulu.

Other updates show friends activating and deactivating devices.

Ties to Intel

Comcast was not the only major company named in the documents.

For example, 21 indicated that it had been processing bitcoin transactions with what it called the “only chip” built at computing giant Intel’s foundry, touting close relationship with US computing giant Intel.

Intel factories, the documents suggested, were responsible for at least two generations of 21 bitcoin mining chips, a 0.57 w/GH 22nm FinFET chip (codenamed CyrusOne) and a 0.22 w/GH 22nm chip (codenamed Brownfield).

Though Intel has so far kept its relationship with 21 quiet, the bitcoin startup took the opposite approach in its company overview, which included a screenshot of an email allegedly from Intel CEO Brian Krzanich. Dated 5th September, the email finds Krzanich informing Pauker and investor Marc Andreessen of his opinion on a proposal to distribute bitcoin mining chips in consumer electronic devices.

Krzanich indicated he would be instructing Intel VP and GM Doug L Davis to evaluate the potential addition of mining chips to Intel products, including desktop PCs, writing:

“I am copying Doug on this note to make an introduction … but trust me I will stay 100% engaged in this and be the godfather of it at Intel.”

Intel’s apparent vote of confidence in the company was detailed in another entry.

“We are taking your suggestion very seriously and if Intel was to ubiquitously apply mining to the majority of our chips, it is a significant event and will impact the landscape,” general manager of the New Business Group at Intel Corporation Jerry R Bautista remarked in an email with Pauker.

Both 21 and Andreesseen Horowitz declined to comment on the nature of any talks with Intel. Intel did not offer a response when reached.

Additional emails included infer the company had reached out to technology companies such as Advanced Micro Devices and Qualcomm to assess their interest in increasing their revenue through the addition of BitSplit-enabled products.

Emails included from Qualcomm’s Andy Oberst indicate that the firm had just approved an investment in 21 at the time of the document’s preparation. AMD declined to comment for this report.

Internet of Value

Once consumers and businesses are set up to receive bitcoin via everyday devices, the documents provide evidence 21 had built technology that intends to serve as the template for how such earnings could be used in microtransactions on the Internet.

In particular, 21 had been working on a process that would allow developers to block users from accessing websites unless funds are sent to a bitcoin address. Notably, the process used the 402 Payment Required error code originally intended for web-based micropayments at the outset of the World Wide Web.

Under this scenario, a client would ask a server to open a connection, and rather than seeing an error when denied, the user would receive a price quote in BTC.

Paid APIs, paid Wi-Fi, priority email and ad-free web browsing, 21 had suggested, were all additional use cases that could be enabled once consumers are able to generate small amounts of bitcoin through its mining products.

21 went on to describe the combined effect of its work in lofty terms that evoked the early Internet, suggesting the launch would mark the beginning of a more widespread uptick in consumer bitcoin adoption.

“The AOL CD of bitcoin,” the document called the strategy. “Give every user a free trial of bitcoin at near-zero marginal cost. A proven model to onboard millions.”

Wow. There’s a lot go digest there. But first, yes, you read that right:


“We are taking your suggestion very seriously and if Intel was to ubiquitously apply mining to the majority of our chips, it is a significant event and will impact the landscape,” general manager of the New Business Group at Intel Corporation Jerry R Bautista remarked in an email with Pauker.

Intel is interested in creating a “significant event” that will “impact the landscape”. And it sounds like they already have since Intel has already designed two generations of 21 Inc’s chips:

For example, 21 indicated that it had been processing bitcoin transactions with what it called the “only chip” built at computing giant Intel’s foundry, touting close relationship with US computing giant Intel.

Intel factories, the documents suggested, were responsible for at least two generations of 21 bitcoin mining chips, a 0.57 w/GH 22nm FinFET chip (codenamed CyrusOne) and a 0.22 w/GH 22nm chip (codenamed Brownfield).

Though Intel has so far kept its relationship with 21 quiet, the bitcoin startup took the opposite approach in its company overview, which included a screenshot of an email allegedly from Intel CEO Brian Krzanich. Dated 5th September, the email finds Krzanich informing Pauker and investor Marc Andreessen of his opinion on a proposal to distribute bitcoin mining chips in consumer electronic devices.

Yes, it certainly looks like Intel’s onboard. Significantly.

But also take note of just how significant 21 Inc is going to become in the Bitcoin mining market as a whole:


The documents suggest 21 had sought to build 20,000-server, 26-megawatt datacenters to serve as the center of a mining pool that could ensure block rewards.

As an example of the potential power of its pool, 21’s mining operations generated approximately 5,700 BTC in 2013 and 69,000 BTC the following year, according to the document.

By the time its chips were to be embedded into Internet of Things (IoT) devices, 21 projected its cost to produce 1 BTC could be as low as $7.45.

Keep in mind that ~1,312,500 bitcoins were “mined” in 2014, so if 21 Inc “mined” ~69,000 bitoins in 2014, 21 Inc won was just over 5 percent of all the bitcoins mined that year.

And what do Intel and Comcast and the rest of 21 Inc’s big name investors have in mind for the future of Bitcoin? Turning 21 Inc’s consumer mining gadgets into a Bitcoin consumer bridge to the masses via a trickle of maybe like ~$0.17/day in Bitcoins (minus electicity costs) that users will be ecouraged to use to buy things like a temporary bandwidth boost. And then there’s the “colored coins” microtransactions for premium web content that 21 Inc and Comcast (and who knows who else at this point) is planning on dishing out.

21 Inc’s Microtransaction Giving Trees Might Need to Take Some of Your Electricity to Keep Giving. Also, Your Info
And in order to do all that, 21 Inc needs to guarantee that it consistently wins mining “rewards” by setting up the giant server farm to do most of the mining work. The consumer devices help with the mining too, but it sounds like they’re mostly just intemded used as some sort of electricity-consuming little Giving Trees of microtransactions and trickles of Bitcoins. A Giving Tree of microtransactions that also collects information about how you use your micotransactions and maybe use your Giving Tree device too. And who knows what else:

FT Alphaville
Meet the company that wants to put a bitcoin miner in your toaster
Izabella Kraminska | Apr 30 16:28

The Manhattan Project-type secrecy surrounding a company called 21 Inc — hitherto known as 21e6 — has been stupendous, even by Silicon Valley standards.

Not that this has stopped cryptocurrency friendly journalists like Michael J. Casey at the WSJ (co-author of the Age of Cryptocurrency) and Coindesk’s Pete Rizzo from propagating 21 Inc’s claims about bitcoin being bigger than Google.

All we do know is that the company, headed by Matthew Pauker, has raised more than $116m worth of venture funding, a record for the sector, and claims to be developing technology that they believe will help to mainstream bitcoin.

Leading investors include Andreessen Horowitz, RRE Ventures, a Chinese PE firm called Yuan Capital and Qualcomm. But, Casey reports, the wider investor list includes everyone from PayPal co-founders Peter Thiel and Max Levchin, to eBay co-founder Jeff Skoll and Dropbox Inc CEO Drew Houston, to Expedia Inc. CEO Dara Khosrowshahi and Zynga Inc co-founder Mark Pincus.

To date, the only worthwhile snippets of info as to what 21 Inc might actually do have come by way of Balaji Srinivasan, Andreessen Horowitz partner and 21’s chairman. At a recent event Srinivasan claimed things like … “payments are now packets. Bitcoin is here to stay” and that Bitcoins are like “tulips you can send anywhere in the world in arbitrary quantities”.

Yes, he actually said that: Bitcoins are like “tulips you can send anywhere in the world in arbitrary quantities”.

According to our knowledgable sources, 21 Inc plans to “onboard” customers by giving many of these devices away for free, proving once and for all that it’s as easy to earn bitcoins as it is to watch Game of Thrones on the telly.

The company is telling people that it is decommoditising Bitcoin by bringing mining to the masses — and if you struggle to understand how that might be a break-even strategy in an environment of sub $250 bitcoin prices, that’s probably because you, unlike 21 Inc, under-estimated the average punter’s capacity to subsidise ASIC mining costs.

For example, there used to be a time when Bitcoin miners seeking to subsidise their energy costs had to clandestinely hack into Joe Public’s computer device to enslave their processing power (and their energy) for their own mining purposes. But with 21 Inc’s model, the assumption seems to be that if you give the punter a free device which provides him with some small utility and a promise of some bitcoin revenue (25 per cent if rumours are true) he’ll be more than happy to majority fund your Bitcoin energy mining costs.

With 75 per cent of the bitcoin revenue left for 21 Inc’s taking, small surprise then that the company anticipates its initial revenue will be impressive when compared to the first two years of zero revenue growth at Google and Facebook. Or, at least, so we understand.

It’s a tempting money back guarantee for a VC in any case — especially if the hardware being provided is guaranteed to be safe, sound and compliant with local consumer protection regulations. Add to that the fact that 21 Inc is allegedly also working with both Intel and Qualcomm on the development of something it calls “split chip” technology for IoT devices, with further strategic partnerships being sought with Facebook, CISCO and IBM and, well, what’s not to like if you’re an investor?

On one hand you’ve got the roll-out of devices that mine Bitcoin at the consumer’s own energy cost. On the other hand you’ve got a company promising to embed Bitcoin ASIC chips into IoT devices that are already connected to the internet that might as well be mining bitcoins at someone else’s energy expense.

If it’s free you’re probably the product

Now, there is, we’d argue, a deep-seated problem with any business model that relies on a perpetual free lunch to maintain its bottom line. Our contacts, for example, note that bitcoin is already trading below 21 Inc’s worst-case projected price scenario, upon which the original business plan was based.

But there’s something broader. 21 Inc claims to be democratising and decommoditising bitcoin but seems to be openly corporatising mining by promising to turn everyone into a poorly paid employee.

As Jaron Lanier, author of Who Owns the Future?, has opined in the past, it is efforts like these that stand to turn Bitcoin into a plutocracy generating machine.

_______________________

What about the “internet of things” potential? There must be something in that?

Well, if IBM’s view on the potential of the blockchain is anything to go by — and IBM is probably amongst the most enthusiastic in the sector about the technology — there are problems even here.

For one thing, consumer behaviours don’t necessarily compliment the servicing needs of bitcoin mining devices. As IBM’s own note on “device democracy reflects” (our emphasis):

While many companies are quick to enter the market for smart, connected devices, they have yet to discover that it is very hard to exit. While consumers replace smartphones and PCs every 18 to 36 months, the expectation is for door locks, LED bulbs and other basic pieces of infrastructure to last for years, even decades, without needing replacement … In the IoT world, the cost of software updates and fixes in products long obsolete and discontinued will weigh on the balance sheets of corporations for decades, often even beyond manufacturer obsolescence.

Namely, those who buy devices for core functions like toasting bread are unlikely to invest in maintaining their secondary functions, especially if they profit only marginally from them, if at all.

The internet economy, however, is famous for having perfected the art of two-sided dealmaking — the sort that allows the true cost of one thing to be offset or disguised by the functionality of another thing. To the minds of technologists and cyberneticists it’s this sort of symbiosis that allows for the formation of a digital “ecosystem”, the holy grail of the digital economy, made up of a perfect co-dependent state wherein positive feedback loops prevail and where almost anyone can have it all.

It’s the discovery of these sorts of ecosystems that has led, over time, to the breakdown of creative content markets. So, whereas prices used to be based on the cost of production, demand and quality of content, they’re now determined by the hidden value of one’s digital footprint to advertisers.

We bring this up because 21 Inc’s efforts seem intent on doing something similar for the world of physical devices.

So, whereas the cost of white goods and devices is still based around their cost of production and their utility, one can imagine the day these costs will be aligned to how easy or difficult it is to groom economic data or rents from devices instead.

The devices may be free, but their true cost will probably be based on the value of the information they allow manufacturers to extract (and add to the system as a whole for efficiency’s sake) by having you and your behaviours linked to your devices, and those devices linked to everyone else’s devices and behaviours as a result.

Indeed, if the IoT is to create a positive two-sided effect of the “ecosystem variety”, it must come at a consumer data or privacy cost. That, in a nutshell, is the faustian pact associated with the rise of the digital economy. A simple case of quid pro quo, which sees the act of sharing information within a network rewarded with additional economic efficiency.

Herein, we think, lies the ultimate flaw with 21 Inc’s plans to encourage growth of the connected machine economy by waiving transaction fees and monetising nodes. The only way the economics can work is if the data carried through the bitcoin network ends up being attached to meaningful information about the identity and behaviours of the nodes (a.k.a. people) themselves.

This, however, contradicts the fundamental raison d’etre of bitcoin, whose value — if any — is linked to the system’s ability to obscure data and maintain privacy in the digital world.

Yet, experts tell us, if and when the pseudonymous but unencrypted data within the blockchain is linked to the real world of fixed devices in people’s homes, it’s likely to get a whole lot less pseudonymous very quickly and provide, ironically, an excellent data-mining resource for almost any corporation, hacker or government.

This is truly nuts. Please! bring on the tech crash.

Once again:


If it’s free you’re probably the product

Now, there is, we’d argue, a deep-seated problem with any business model that relies on a perpetual free lunch to maintain its bottom line. Our contacts, for example, note that bitcoin is already trading below 21 Inc’s worst-case projected price scenario, upon which the original business plan was based.

But there’s something broader. 21 Inc claims to be democratising and decommoditising bitcoin but seems to be openly corporatising mining by promising to turn everyone into a poorly paid employee.

As Jaron Lanier, author of Who Owns the Future?, has opined in the past, it is efforts like these that stand to turn Bitcoin into a plutocracy generating machine.

Herein, we think, lies the ultimate flaw with 21 Inc’s plans to encourage growth of the connected machine economy by waiving transaction fees and monetising nodes. The only way the economics can work is if the data carried through the bitcoin network ends up being attached to meaningful information about the identity and behaviours of the nodes (a.k.a. people) themselves.

This, however, contradicts the fundamental raison d’etre of bitcoin, whose value — if any — is linked to the system’s ability to obscure data and maintain privacy in the digital world.

Yet, experts tell us, if and when the pseudonymous but unencrypted data within the blockchain is linked to the real world of fixed devices in people’s homes, it’s likely to get a whole lot less pseudonymous very quickly and provide, ironically, an excellent data-mining resource for almost any corporation, hacker or government.

Yes, 21 Inc’s little Giving Trees can probably only really work as long as consumers are, in effect, paying rent. Payin rent by giving the devices electricity first which gets used for mining and the devices give 75% of the bitcoin minimg rewards back to 21 Inc and 21 Inc gets to keep all sorts whatever info about you that it collects through the devices and/or your use of the microtransactions. A rentier model that’s being promoted by 21 Inc as a populist way to democratize Bitcoin. A rentier model that could double as a giant paywall of the future. For the Big Boys of Silicon Valley and Big Media, that’s the future of Bitcoin: A pay to play/browse/watch medium for the “colored coin”-paywalled internet of the future:

FT Alphaville
21 Inc and the plan to kill the free internet
Izabella Kaminska | May 19 15:10

Details of the hottest, most secretive bitcoin start-up in Silicon Valley have finally been revealed by chairman and soon-to-be CEO Balaji Srinivasan of 21 Inc in a post on Medium. They are, by and large, exactly what FT Alphaville reported them to be. Cold sharp summary: Bitcoin mining devices in toasters.

Calling this a simple internet of things play, however, would be lazy. To really put the audacity of Srinivasan’s vision into perspective one first has to go back in time to the days of the early internet.

The first thing to understand is that the structure of today’s internet economy owes almost everything to a single bold assumption by the early web pioneers, namely that “information wants to be free!“.

Nowhere is this vision better set out than in the 1982 movie Tron, which tells the story of a bunch of anthropomorphised computer programmers going against the yoke of an oppressive Master Control Programme in “the grid”, a celluloid metaphor for the monopolistic tech corporations of the day.

What is less known about the film is that computer scientist and digital utopian Alan Kay — the founding father of object oriented computing — acted as its key technical consultant, rendering much of the narrative his personal call to digital nerds to rise up and be rid of the evil corporate overlords who constrain the dissemination of information, as much as a Disney-type fable.

And, in the real world, that’s pretty much how the web turned out. Information was set free; industries were Napsterised and the internet economy was transformed into a socialistic system in which data and information roamed free.

Except that, with time, it has become clear that things didn’t work out as intended. Instead of empowering the masses, the proliferation of free data has led to a Wild West free-for-all, where those who have a good understanding of how free information can be commandeered and exploited do exactly that.

Returning to the Tron analogy, destroying the Master Control Programme did not lead to the free society the web idealists envisioned. The old authoritarian powers were simply displaced by newly emergent authorities instead.

By the time the sequel to the Tron movie arrived in 2010, it’s clear the movie producers felt a need to communicate this change of heart as gracefully as possible. And so it was that the movie’s message turned from advocating free information to warning that systems which strive for too much perfection inevitably fail, and that ‘imperfection’ is desirable. In this recasting, the web’s most creative and vulnerable members needed protection if the web were to retain meaning and relevance in the real world.

As Kevin Flynn, chief protagonist and voice of the web pioneers, expresses ignominiously in the film: “I screwed it up, chasing after perfection.”

__________

Back in the real world, decades worth of social conditioning about the merits of free information hasn’t been so easily overturned. Free digital content is pretty much taken for granted, even if there’s no such thing as “free.”

The tech sector has a problem publicly admitting this.

If the sequel to the web, as we know it, is a hierarchal and monetised system, the transition consequently needs to be achieved in the same way that capitalism defeated Soviet communism — namely, by providing a small flavour of what it feels like to be a profiteering capitalist to those who, under the old system, would not have been able to profiteer in the same way.

Which brings us back to the 21 Inc launch and a very obvious fact: Information is not free and Silicon Valley knows it

One of the reasons, we propose, the tech gods of Silicon Valley are so keen on forwarding Bitcoin as a concept is because it ultimately allows them to back-pedal on the original premise that information should be free.

In that regard, 21 Inc arguably plays a critical role in the new Silicon Valley vision for a “paid for” meritocracy on the internet.

When FT Alphaville first outlined 21 Inc’s business model, showing that it planned to ‘democratise’ Bitcoin mining by embedding ASIC mining chips into everyday connected devices like USB rechargers, we noted the economics didn’t seem to make any sense. For one thing, it didn’t seem conceivable that consumers could ever profit from the tiny fractions of bitcoins they were mining, especially after their energy costs were factored in. Secondly, it seemed much more likely the model would see consumers subsidising the energy costs of 21 Inc’s own mining pool.

But the clue to 21’s real intention comes in the second part of Srinivasan’s opening and explanatory paragraph:

After much hard work, we’ve created an embeddable mining chip which we call the BitShare that comes in a variety of form factors. The 21 BitShare can be embedded into an internet-connected device as a standalone chip or integrated into an existing chipset as a block of IP to generate a continuous stream of digital currency for use in a wide variety of applications. You can request a dev kit by signing up on our website to get started.

What this really is, in other words, is a plan to bring a digital metering system to the internet.

And on that note the two following paragraphs are critical to understanding the vision here:

a continuous stream of digital currency for use in a wide variety of applications. At the manufacturer’s discretion, the 21 BitShare chip can be configured to support a variety of different revenue shares for the mined bitcoin. For example, one could build an internet-connected device that shared some portion of mined bitcoin between the user, the retailer, the handset maker, and the carrier?—?thereby reducing costs and/or increasing margins throughout the entire supply chain. And because of the nature of mining as an embarrassingly parallel problem, embedded mining can scale up or down to fit within the power and thermal envelope of virtually any device.

Bitcoin-subsidized devices for the developing world. 21 was built by immigrants, and using our technology to get more people around the world online is important to us. We believe the most significant long-term application of bitcoin may be reducing the upfront cost of internet-connected devices to make them more accessible for the developing world. The success of the iPhone was in nontrivial part due to the carrier subsidy; with embedded bitcoin mining we can in theory extend that model to any internet-enabled device, turning a lump sum upfront cost into a potentially more manageable cost of power over time.

Suddenly, a few of the 21 Inc pitch deck slides, which are circulating online and dare to compare 21 Inc to Google and Facebook, begin to make more sense:

This isn’t about disrupting fiat money, central banks or the existing financial rentier system. It’s about making the internet much more like the financialised real world. Namely, by adding an energy and scarcity cost to digital transfers on the web so that information can’t be as easily exploited as it is today.

Up for grabs, notably, is the marketshare of Google, Facebook and Twitter and their ilk, due to their dependency on free consumer data to drive their advertising-based revenue.

A market mechanism for valuing data and trust?

As it stands today, nobody really has an idea of what their data is worth because there’s no mechanism by which processed or unprocessed data bundles can be valued.

Yet we know for a fact that personal data, especially when processed in aggregate form, does have a value in the open market. If it didn’t, Facebook and Google wouldn’t be the multi-billion dollar organisations that they are today.

But the data market trades much more like highly illiquid OTC commodities than anything akin to an open market exchange. Deals seem to be done bilaterally, on a bespoke and opaque basis. There is no “processed data”-value index. And there is no inspection agent akin to a Platts or an Argus agent setting out the frequency and value of the trades that are taking place.

A benchmark for data value

Anyone who hangs around the Bitcoin faithful long enough will encounter the assertion that bitcoin is superior to fiat currency because it is “backed by maths” — which, of course, is utterly meaningless. It would be much better to say that bitcoin is backed by the sum of human knowledge about maths.

Or alternatively, and much more accurately, that it’s backed by a stock of pre-processed data.

While it’s true that the processed data in question is light on both information (due to so much of it being pseudonymous in nature), there’s no denying the energy it took to create it.

It’s this base energy cost that can now be used as a public benchmark to price more information-intensive data against.

This makes us think the key objective of the high-order bitcoin enthusiasts (as opposed to the financial speculators) is mostly about giving consumers a choice. On the one hand to pay for specially designed web services with spent processing time (and energy) that helps support the public digital commons (which acts as a glue that links up all sorts of different datasets). Or, on the other hand, to pay for open web services directly with personal data on a trust basis.

Either way, once a transparent price is established for the former, it stands to reason a price for the latter can also be equally derived, opening the door to a meritocratic paid-for internet and a market where all personal data has a clear market price.

This, in any case, seems to be the vision Srinivasan is outlining for both 21 Inc and the web when he speaks of “reducing costs and/or increasing margins throughout the entire supply chain”.

The question is, to what degree will factoring in a price for something that was previously free upset the economic balance? And will the average user — especially the one who opts to subscribe to rental contracts for device access — understand the value of their own worth any better in this new paradigm than in the last one?

Note these key points because they really do seem to summarize what 21 Inc, and therefore the biggest names in Silicon Valley and the Big Media, have in mind:


If the sequel to the web, as we know it, is a hierarchal and monetised system, the transition consequently needs to be achieved in the same way that capitalism defeated Soviet communism — namely, by providing a small flavour of what it feels like to be a profiteering capitalist to those who, under the old system, would not have been able to profiteer in the same way

This makes us think the key objective of the high-order bitcoin enthusiasts (as opposed to the financial speculators) is mostly about giving consumers a choice. On the one hand to pay for specially designed web services with spent processing time (and energy) that helps support the public digital commons (which acts as a glue that links up all sorts of different datasets). Or, on the other hand, to pay for open web services directly with personal data on a trust basis.

Either way, once a transparent price is established for the former, it stands to reason a price for the latter can also be equally derived, opening the door to a meritocratic paid-for internet and a market where all personal data has a clear market price.

This, in any case, seems to be the vision Srinivasan is outlining for both 21 Inc and the web when he speaks of “reducing costs and/or increasing margins throughout the entire supply chain”.

The question is, to what degree will factoring in a price for something that was previously free upset the economic balance? And will the average user — especially the one who opts to subscribe to rental contracts for device access — understand the value of their own worth any better in this new paradigm than in the last one?

A new model for hierarchical, monetized web usage just might be what 21 Inc has in mind. A model where microtransaction-based access replaces the prevailing free web model. Consumers could have the option of either paying for that access or obtained it indirectly through a combination of subsidizing 21 Inc’s mining electricity cost and giving up private information. And the developing world appears to be an area where 21 Inc really sees a lot of potential since that’s where so many people won’t be able to afford the upfront cost of these consumer devices.

In other worlds, 21 Inc wants to help the developing world by encouraging a massive waste of electricity that serves no purpose actual purpose. Because that’s what the developing world, and the rest of the world really needs: a bunch of extra energy-hungry consumer electronics that doubles as spyware. And in the process of brining the world the developing world (and poor people everywhere) this wonderful gift of energy-sucking Giving Trees, a new model for a monetized, transactional internet might be born. Whoopie!

Monetize the Internet Via Microtransaction Means Mining Might is a Must
So 21 Inc and its many big name backers clearly have big plans for not just Bitcoin but the internet in general. But it’s important to keep in mind just how critical it is that 21 Inc has massive mining power that guarantees regular mining “rewards” for this scheme to really work. Why? Because that vision is explicitly for these microtransactions to be allowed with just a single satoshi and when Bitcoin issued the patch to the protocol back in April 2013, that patch included a loophole: If minor can include all the microtransactions they want. But it’s optional. So if 21 Inc wants to see its microtransactions included in blockchains without make each one cost 1 satoshi instead of 5460 satoshis, it probably has to get those transactions inserted into the blockchain itself by winning the mining race over and over:

Bitcoin Magazine
Bitcoin Developers Adding $0.007 Minimum Transaction Output Size
by Vitalik Buterin on May 6, 2013

Clarifications:

1. This is NOT a change to the Bitcoin protocol, it is a change to default transaction inclusion and propagation rules. If you can get your transaction to a miner willing to bend these rules, you will get included in the blockchain (although it will be inconvenient for you).
2. There is another justification given for adding a minimum transaction size: many new users end up receiving very small quantities of bitcoin from free bitcoin sites and are unable to spend them because the total amount is less than the minimum transaction fee for sending small amounts. This patch will eliminate this problem.
3. This is actually a softened version of a previous change that would have the 5430 satoshi minimum hardcoded with no option for individual miners to customize it without editing and recompiling source code, and so is already an improvement. Any expressed or implied criticism was directed at the original introduction of the minimum, not this particular patch.

See criticism of this article and my replies (and so on) at http://www.reddit.com/r/Bitcoin/comments/1drnvp/bitcoin_developers_adding_0007_minimum/, and feel free to make your own judgement.

About a week ago, lead Bitcoin developer Gavin Andresen quietly introduced a patch that would add a fairly significant change to the transaction propagation rules: any transaction with any of its outputs less than 5430 satoshis (0.00005430 BTC) would be classified as non-standard, and will not be included or further propagated across the network by default miners. The minimum is a setting that individual miners are free to change (including to zero), and such transactions will remain valid under the rules of the Bitcoin protocol, but with only non-standard miners and miners that bother to change default settings including them in blocks and even passing them along to other nodes it will take much longer for them to get accepted (ie. “confirmed”) by the Bitcoin blockchain.

The main motivation for the patch is the same as that for many of the other rules restricting transaction propagation and inclusion in default miners: to fight “transaction spam”. One of the more problematic aspects of Bitcoin is that every transaction ever made will need to be stored by every fully participating node in the Bitcoin network forever, and already the size of the Bitcoin blockchain is over 7 gigabytes. Thus. there is an understandable desire to attempt to limit transactions that are deemed to be more trouble to store and verify than they’re worth. Some rules, like one added three months ago to make transactions that are over 100,000 bytes in size non-standard, exist to block single transactions that would cause an excessive amount of computing power to process and hard disk space to store. Others serve to discourage features of the Bitcoin protocol that are not well-tested. This one, however, serves a slightly different purpose: to block transactions that are perfectly ordinary in format and size, but which provide an extremely small benefit to the sender.

A substantial portion of Bitcoin transactions will be affected; a chart linked in Gavin’s pull request shows that about 20% of all recent transactions are under the threshold. By far the main user of such small outputs is the popular Bitcoin gambling site SatoshiDice. All bets on SatoshiDice take place directly over the blockchain; the bettor sends any amount of bitcoins between 0.01 and (usually) 500 to one of SatoshiDice’s addresses, if the bet wins, the original bet multiplied by the prize multiplier is sent back, and if the bet loses the bettor would receive 1 satoshi to let them know that they did, in fact, lose the bet, and their transaction was not lost due to some kind of error on the part of SatoshiDice or the Bitcoin network. SatoshiDice is prepared; the site has already increased the size of their “loss notification” transactions from 1 satoshi to 0.00005 BTC.

Also affected will be the colored coins project. The colored coins project’s core idea is to assign additional value to extremely small amounts of bitcoin; one application would be to “tag” ten thousand specific satoshis and then use them to represent shares of a corporation. One single satoshi can be used to represent smart property. Now, in order to achieve the same granularity what could be done with a single satoshi before would now need to be done with a block of 5430. However, in the discussion on this patch on Github, colored coins developer Alex Mizrahi commented: “I don’t think this change will create significant problems for ‘colored coins’. I mean, it’s strange that you’re doing this, but I guess we can live with it.” Although this will increase the expense of creating shares, it will not overshadow all other expenses; each individual colored coins transaction already required a 10,000 satoshi transaction fee in order to get included into the network without unreasonable delay.

In both cases, however, from both the Github discussion and conversations elsewhere it is clear that many core Bitcoin developers have a dim view of both SatoshiDice’s loss notification mechanism and colored coins being in the Bitcoin network. One poster said, “personally I think that a ‘colored coin’ solution lies in alt-chains and using the main BTC block chain is not appropriate for this application”, echoing a commonly held belief that Bitcoin is meant to be used to send payments and not information. Jeff Garzik added in response to another comment, “It is not breaking fundamentals — bitcoin has never ever been a micro-transaction or micro-payment system”.

Where disagreement lies is twofold. First, there is the question of just how small a milli-transaction needs to be before it becomes a micro-transaction. On the one side are Bitcoin developers like Peter Todd, who stated in the Github thread that “We do need better communication of this stuff, and that includes doing things like taking ‘Low or zero processing fees’ off of bitcoin.org and not talking about microtransactions.” The argument in Todd’s favor was already mentioned; restricting as many low-value transactions as possible keeps the size of the Bitcoin blockchain down, mitigating the need for Bitcoin users to move away from “full clients” to “light clients” which do not store the Bitcoin blockchain themselves and instead rely on third-party servers to do much of the legwork. On the other side are those who see low processing fees and smaller minimum transaction sizes as being among Bitcoin’s cardinal features, for which it is even worth it to give up the idea that anyone other than a miner or business will be actually storing the full Bitcoin blockchain. The argument that this group makes is that most users have migrated off the “Satoshi client” maintained by the core developers to “light clients” like Electrum and Blockchain already, and it is a fool’s game to attempt to forestall this trend.

The other question is that of alternative uses of the Bitcoin protocol. The solution used to limit low-value transactions before this move toward an outright ban was transaction fees, and this mechanism had the advantage that, rather than outright banning any particular uses that are deemed “wasteful”, it allows the sender themselves to decide whether or not sending the transaction brings enough benefit to them to be worth the public cost. Here, no such individual judgement is possible, and so in order for a Bitcoin transaction to be deemed “valuable enough” to be allowed into the blockchain it must at least appear to be a substantial transfer of Bitcoin-denominated monetary value. The fact that colored coins users might benefit more from sending single satoshis than some other users benefit by moving around entire bitcoins, while the public storage cost for both types of transactions is the same, is not reflected in this rather blunt style of regulation. The argument used by developers, once again, is that Bitcoin is only intended to be a system for storing and sending money, and other uses belong on alternative blockchains better suited to their individual purposes.

It may well be that a community consensus will emerge that Bitcoin is a network for sending money and nothing but money, and substantial amounts of money too. However, so far no such consensus exists, and these questions remain very much up for debate. Because of its limited scope, and its nature as a modifiable miner setting, this particular patch is not particularly important, but it does highlight the importance of these long-standing issues that still remain unresolved. Exactly what minimum size of transactions should Bitcoin target itself toward, and should it aim for virtually no fees? Is the use of the Bitcoin network to send trivial amounts of information, whether that may be information about ownership in the form of a colored coins transaction or a loss notification from SatoshiDice, something that we want to accept? Exactly what balance we strike with each of these questions is a crucially important decision that will affect the course that Bitcoin will take for decades to come, and it is very important that we as a community have solid communication, and genuine two-way discussion, when these kinds of issues arise.

As we can see, back when Bitcoin’s developers patch Bitcoin in 2013 to limit the transactions to 5430 (now 5460) satoshis, this wasn’t a hard limit on the minimumum size for a bitcoin transaction because individual miners can still add 1 satoshi microtransactions if they choose to do so. They merely have to change the default settings for their mining software. And that means that 21 Inc, or anyone else, is free to process 1 satoshi microtransactions today…as long as it’s 21 Inc consistently wins enough of the mining “rewards” each day to guarantee that its chosen transactions get added to the next “block” in the blockchain.

But as we can also see, when this patch was put into place back in 2013, the issue of whether or not to embrace or discourage microtransactions was still very much an open question within the Bitcoin community. And since the 5460 satoshi restriction (default restriction) is still in place today, it’s pretty clear that the issue has yet to be resolved.

So one of the big questions looming over Bitcoin now is what happens if Wall Street, 21 Inc and the rest of their deep pocketed allies just decide that microtransactions with zero fees are the way of the future, blockchain bloat be damned, and the rest of the Bitcoin community effectively revolts. Or what about any other changes that the Big Boys want to see in the future? Who wins? Keep in mind that the more resources big firms like 21 Inc throw into mining, the more little guys throw in the towel and leave entirely because they can’t compete as the difficulty level in the mining process automatically rises. At some point its only going to be major mining operations that even bother mining because it’s just not feasible for smaller operators. Well, there will also be 21 Inc’s sea of consumer device miners. If 21 Inc continues in its plans to dominate the mining market, it will merely be accelerating an existing trend of a lot fewer small miners and a lot more concentration of mining power. It will mostly be super computing centers at some point if the Bitcoin arms race continues. And 21 Inc wants to be a dominant player in that market and clearly has the resources to do it.

And with just over 4,000 nodes (which are distinct from the mining nodes and instead propagate information across the network) in operation in January of 2015 (down from 10,000 nodes in March 2014), how hard would it be for 21 Inc to overwhelm the rest of the Bitcoin node network? 5,000 USB chargers doubling as miners and nodes would do the trick today. What are the implications of a 21 Inc node takeover in terms of their ability to controls which 3rd part microtransactions get recorded? Or which version of Bitcoin is used in general?

It’s going to be interesting to see what happens if the “old money” (Wall Street and Silicon Valley giants) and the “new money” (Bitcoin ideologues that want to see it replace all other forms of money) actually go to battle because, as we’ve seen, it’s not simply the case that Bitcoin’s mining protocol is set up on a “1 dollar 1 vote” system. The very rules that run Bitcoin (what version of the software and protocol) also sort of follows the same “1 dollar one vote model”, although not quite to the same extent.

Bitcoin miners, but also Bitcoin users, all collectively decide which rules are followed depending on which version of the software everyone collectively decides to use. And while 21 Inc or someone else with deep pockets could potentially create so much mining capacity that they dominate the which version of the Bitcoin protocol is used by most of the miners, it’s not possible to also control which version is used by all of Bitcoin’s users. Except, under 21 Inc’s business model, 21 Inc will presumably also have control over which version of the Bitcoin protocol all its device users use too. So the more devices 21 Inc gives away, the more voting clout 21 Inc has in determining which version of Bitcoin is actually the “official” version on the client side too simply by controlling which versions are run by all of its user devices.

In other words, while Bitcoin is constantly, and absurdly, championed as some sort of populist form of money that will use the power of its decentralized nature to slay the evil banks and fiat currency and return us to a simpler time of with a digital gold-standard, it’s looking increasingly like the Big Money is about to buy Bitcoin using that very same decentralized “one dollar one vote” system that’s been hailed as Bitcoin’s source of populist strength all along. At least in part.

On its own, the potential takeover of Bitcoin by Big Money interests would simply be the latest amusing development another dystopian Libertarian experiment. But when you consider that some of the bigggest names in Silicon Valley and media giants like Comcast appear to be keenly interesting in hooking consumers onto some sort of microtransaction-for-electricity-spent-on-third-part-processing-and-personal-info-collection rentier model for electronic gadets and it’s targetted especially for the developing world where they don’t exactly have electricity to spare, the latest Bitcoin development is a lot less amusing and a lot more, well, like a potential catastrophe. We’re lookin at a business model where stuff is produced and then given away potentially to billions of people that’s specifically designed to have all those devices suck away little bits of electricity in pursuit of victory (mostly 21 Inc’s victory) in the endlessBitcoin global mining arms race resource black hole.

E.T. Phone Home and Have Your Buddies Come Help Us
Keep in mind that the more 21 Inc, Nasdaq and the rest of the big vested interested boost Bitcoin’s value and popularity by pushing it onto consumers for free, the higher Bitcoin’s price goes and the more all the miners can justify in paying for equipment and electricity. And the black hole grows. And the more vampire devices that feed on electricity and info about you that 21 Inc can afford to give away. And the more the internet can become transactional vs free in nature. As far as business plans from hell goes, making an selection of electricity sucky spyware gadgets that fuel a Bitcoin price bubble to fuel their own production and free distribution and trash the internet with some sort of new microtransaction rentier model powered by keeping the electricty vampires plugged in is not a bad candidate.

But if 21 Inc’s plan is going to happen, and more and more financial assets and other types of assets start trying to glom onto Bitcoing, it’s worth reminding ourtselves that it raises the distinct possibility that Bitcoin will end up largely abandoning its original purpose of being the cryptocurrency that ends banking and efeectively turns into a giant “colored coin” trading platform, with bitcoin usage as a currency getting relegated to second tier status. And if that happens, great! Bitcoin as an ownership trading platform is probably going to be far more useful for everyone than its current quest of trying to kill fiat currencies. At least, it could be way more useful if it the mining process wasn’t so wasteful.

And so if Bitcoin comes under effective control of a handfull of big corporations via raw mining power, it’s going to be very interesting to see if Bitcoin’s proof-of-work protocol, which is what causes the endless energy arms race, doesn’t end up getting switch over to something either more eco-friendly or more useful. Because the idea of the biggest corporations in America giving developing world kids energy sucking vampire devices seems rather controversial in the emerging era of global warming heat waves and other mega catastrophes caused by our wasteful energy ways. 21 Inc is like a giant PR disaster just for not just Bitcoin but all the companies involved just waiting to happen. And, who knows, maybe public pressure could result in the emerging Bitcoin plutocracy actually using its future clout with both consumer and mining protocols to change Bitcoin’s validation method into something that isn’t a complete waste. There are options:

Bitcoin Magazine
Primecoin: The Cryptocurrency Whose Mining is Actually Useful
by Vitalik Buterin on July 8, 2013

One of the disadvantages of Bitcoin that its proponents often gloss over is the fact that its mining algorithm has little real-world value. The underlying issue is this: in order to add a new block to the Bitcoin blockchain, a Bitcoin miner must include a “proof of work”, a number which has a property that is hard to find numbers that satisfy, but is efficient to verify. Essentially, a proof of work is a way of proving to the world that the miner spent a certain amount of computational effort generating the block, and is in fact a vital component of Bitcoin’s security – without proof of work, an attacker could easily pretend to be a million Bitcoin nodes at the same time, and in that way seriously compromise Bitcoin’s transaction ordering mechanisms. The canonical attack, the so-called “double spending” fraud, involves sending a payment to a merchant, later sending the same coins back to yourself and then creating a false consensus that the second transaction happened first, thereby depriving the merchant of their money. Proof of work solves the problem by making “pretending to be a million Bitcoin nodes” prohibitively expensive. However, what makes people uncomfortable is that in Bitcoin’s case the work (SHA256 computations has no underlying value; rather, Bitcoin’s proof of work is literally nothing more than burning electricity for its own sake.

It has always been thought that we could do better. Many newbies to Bitcoin immediately suggest that the mining algorithm should have involved SETI@home or folding@home, so that the computations would also help bring humanity closer to curing protein misfolding diseases or finding aliens. The problem is, however, that Bitcoin mining requires one key property that SHA256 does have but SETI@home and folding@home do not: it is efficiently verifiable. Right now, all participants in the SETI and folding networks are volunteers, meaning that they (probably) have no intentions other than the desire to actually help the project’s underlying goal. If these networks become tied to Bitcoin mining, however, participants will be motivated by profit, so there would be an overwhelming incentive for miners not to bother with the actual computations and instead provide fake data that has no value to the networks’ underlying goals but is indistinguishable from a genuine computational output.

Primecoin is the first proof-of-work based cryptocurrency that has come up with any kind of workable solution. The central premise of Primecoin is that, instead of useless SHA256 hashes, the proof of work protocol would require miners to find long chains of prime numbers. There are three specific types of chains that are of interest: Cunningham chains of the first kind, Cunningham chains of the second kind, and “bi-twin” chains. The rule behind a Cunningham chain of the first kind is that each prime in the chain must be one less than twice the previous. The first Cunningham chain of length 5, for example, consists of the following six primes:

1531, 3061, 6121, 12241, 24481

What is the practical utility of finding primes? Well, if the effort that we put into the topic today for its own sake is any indication, there is definitely at least something to it. The Electronic Frontier Foundation is offering $550,000 worth of prizes to the first groups to discover a prime number more than 1 million, 10 million, 100 million and 1 billion digits long. The first two awards have already been claimed. The Great Internet Mersenne Prime Search has been looking for large prime numbers since 1996, and mathematicians in universities around the world are involved. The University of Tennessee at Martin provides a list of reasons why looking for primes is useful; aside from “for the glory!”, searching for primes leads to useful byproducts in other areas of number theory, provides an incentive for computational hardware development and leads to insights in the underlying workings of prime numbers themselves; the prime number theorem, for example, a theorem stating with high precision how often prime numbers are likely to occur at a given size, was first conjectured by looking at the distribution of actual prime numbers. Here, the hope is that if Primecoin takes off people will start looking for much more efficient ways of finding Cunningham and bi-twin chains, potentially leading to mathematical breakthroughs in how these chains work.

Primecoin also adds a number of other innovations on the side:

* Smooth difficulty adjustment – unlike Bitcoin, which adjusts its difficulty to exactly match the target rate of 1 block per 10 minutes every 2016 blocks (roughly two weeks), Primecoin adjusts its difficulty slightly every block, nudging it toward the target rate in an exponential decay pattern. For example, if network hash power (or rather, prime generation power) suddenly doubles, the next block would be 0.02% harder than the previous, increasing the amount of work required per block to 186.5% of the original after one week and 198.2% after two weeks, assuming no further mining power increases take place.
* Very fast confirmations – unlike Bitcoin, where transactions take an average of ten minutes to confirm (eight minutes in practice since the difficulty must constantly catch up to increasing mining power), Primecoin blocks come at a rate of one per minute. This allows secure transactions to be made much more quickly; six confirmations may take fifty minutes in Bitcoin, but they take only six minutes in Primecoin. The underlying mathematics behind why six confirmations is a fairly safe threshold is independent of block confirmation time, so the Primecoin transaction at six confitmations is no less secure (it can be argued that attackers can make double-spending attempts ten times more frequently, but going up to just seven or eight confirmations more than makes up for this).
* Self-adjusting block reward – Bitcoin is known for its controlled currency supply algorithm, which guarantees that only 21 million bitcoins will ever be generated, as well as specifying the rate at which these bitcoins will come out. Primecoin follows a different path. The number of primecoins (XPM) released per block is always equal to 999 divided by the square of the difficulty, a formula which should converge to some maximum if the difficulty increases linearly. Given that Moore’s Law states that computing power increases exponentially, and the effort it takes to find a prime chain is exponential in its length, that is quite likely to hold true.

There are some places where Primecoin missed some serious opportunities for improvement. First of all, the self-adjusting block reward was intended to be a “more natural simulation of gold’s scarcity”. However, in practice it does the exact opposite. The desirable property that gold has is that its supply at least somewhat increases with its value; if the gold price shoots past $5,000, mining opportunities will become profitable that were not profitable before, increasing the rate at which new gold is mined and eventually making the supply go up, partially counteracting the price shock. Here, if the price goes up by a factor of ten, the difficulty will shoot up significantly as well as more miners move in, leading to… a reduction in the Primecoin generation rate. Thus, instead of adding the negative feedback mechanism inherent in gold, Primecoin instead creates a positive feedback mechanism that exacerbates the problem of volatility. Also, Primecoin could have set up its exponential adjustment algorithm to have a much longer period – reaching 86.5% adjustment after two months, for example, instead of a week. This is one innovation that would also at least somewhat stabilize the value of the currency by generating more coins when interest goes up, but unfortunately so far no currency has tried this; Primecoin, despite all of its other improvements, missed the chance to be the first.

All in all, Primecoin presents itself as an extremely interesting experiment; for the first time, we have a currency whose mining algorithm has a secondary value, and at the same time Primecoin, unlike so many other coins before it, actually makes serious attempts to improve on Bitcoin in unrelated aspects. Not taking into account Bitcoin’s massive headstart, Primecoin may well be the first alternative coin to actually be better than Bitcoin, giving the currency the potential for a bright future ahead.

Well there we go! If humanity is dead set on having public ledger systems using proof-of-work contests for digital chits, why not do something like primecoin and make it useful? There’s nothing stopping the Bitcoin community from doing something like that. And if 21 Inc or some other big money cartel takes over Bitcoin’s client and mining networks, who knows, maybe they will. Why not? It will make their horribly wasteful vampire spyware scheme so much less horrible, although it’s still kind of twisted to expect poor people to pay for electronic gadgets with electricity and their privacy.

So some big changes are in store for Bitcoin but, at this point, we really don’t know what those changes are going to be. We just know a lot more growing pains are on the way and the Big Boys like Wall Street, Comcast, Intel, and the rest of 21 Inc’s Silicon Valley investors are intending on imposing a number of them, including vampire spyware-infested microtransaction Giving Trees. Probably. We’ll see. It’s going to be a whole new rentier business model.

And bitcoin paywalls might pop up everywhere, so it’s not just big changes for Bitcoin that are on the agenda. The same forces that are big enough to take over Bitcoin by creating an army of electricity surfs are also big enough to start a whole new trend of bitcoin-based internet microtransactions where users are give a choice of either paying with money or using a vampire Giving Tree (to get the microtransaction chits). The emerging Internet of Things will be given to use freely, with Bitcoin chips and spyware. That’s a crappy trend.

So let’s hope, once the very possible big money takeover of Bitcoin happens, public pressure can get them to fix the proof-of-work system so it’s not a giant energy black hole or if it is that’s actually useful. Then it can drop its hyper-Libertarian roots and just be public ledger for “color coins” or whatever because that’s actually kind of useful. Blood feuds with fiat currencies not so much.

But let’s also no one gives up on the SETI option. After all, it sounded like the primary problem with that scenario was that it didn’t work well with the profit motive or a network of people that all independently contributed “solutions” to the distributed mathematical problems used to search for signals of intelligent life in the cosmic noise. In other words, the hurdle to working on SETI is largely due to a different kind of “selfish mining” attack. Miners want to get paid at all instead of just donating their computational power to SETI freely:


It has always been thought that we could do better. Many newbies to Bitcoin immediately suggest that the mining algorithm should have involved SETI@home or folding@home, so that the computations would also help bring humanity closer to curing protein misfolding diseases or finding aliens. The problem is, however, that Bitcoin mining requires one key property that SHA256 does have but SETI@home and folding@home do not: it is efficiently verifiable. Right now, all participants in the SETI and folding networks are volunteers, meaning that they (probably) have no intentions other than the desire to actually help the project’s underlying goal. If these networks become tied to Bitcoin mining, however, participants will be motivated by profit, so there would be an overwhelming incentive for miners not to bother with the actual computations and instead provide fake data that has no value to the networks’ underlying goals but is indistinguishable from a genuine computational output.

Because we can’t quickly know, mathematically, if a SETI calculation is correct, we can’t use it in a proof-of-work scheme. But if there was a way to make that work, liek if multiple parties were given the same data to crunch and a consensus-based method could work or whatever, then we could actually pat ourselves on the back for a job well done. After all, if humanity continues down the path of having the same giant corporations control more and more of our lives, with privacy now getting traded away for technology because we largely hate the poor and think giving people enough money to buy environmentally sound consumer gadgets that don’t spy on you is somehow morally corrupting, we clearly could use analien intervention. And there’s nothing stopping 21 Inc from creating devices that are dedicated to the SETI project whether it’s tied to generating bitcoins or not. At least it might be contributing towards a chat with E.T.

And 21 Inc’s model could actually be particularly appropriate for “rewarding” people for using devices that are decicated to computing something that can’t be easily validated. Why? Because you wouldn’t have to worry about people flooding the system with spam junk calculations to get the rewards. Users presumably can’t get thier 21 Inc gadgets to generate junk. So they could pay their gadget users by computation time, regardless of whether it was validated. Yay! SETI time! Or protein-folding time! Or whatever other useful scientific public research time! Now all we have to do is get public and private funds to finance all this parallel research-oriented computing and actually further the public good.

But if we do contact E.T. after creating an Internet of Things SETI network, let’s all try to shift the planet towards a demand-driven global economy ASAP, where people get enough to live well by virtue of being alive and that demand, deserved or not, leads to a flourishing economy (not run by a global corporate cartel) free of poverty and oppression and the kind of financial need that might lead to people taking the rentier spyware vampire model version of a gadget instead of the non-scary version of the same thing. The aliens probably aren’t too keen on things like following the 21 Inc philosophy or the concentration of wealth in general (although who knows).

So Wall Street and Silicon Valley and Big Media might be moving into Bitcoin. Out with the old, in with the older. Oh well. But if we could just skip the whole rentier-chip idea that makes manufacturing throw away microchips extra profitable and also take a pass on the new internet micropayment-for-privapcy business model, that would be great. How about those resources get used for more non-rentier gadgets for the poor instead. Yes, the SETI chip devices would be awesome, but any aliens we can contact have presumably already picked up our TV signals, including the new so we’re probably already on the galactic do-not-call list.

Humanity isn’t really ready for SETI. *sigh*

Discussion

26 comments for “The Big Bitcoin Bet, Part 2: Big Money to Buy Bitcoin, and Other Bad Ideas”

  1. The Bitcoin blockchain is about to get a new user: Honduras:

    Reuters
    Honduras to build land title registry using bitcoin technology

    By By Gertrude Chavez-Dreyfuss | Reuters – Fri, May 15, 2015

    By Gertrude Chavez-Dreyfuss

    NEW YORK (Reuters) – Honduras, one of the poorest countries in the Americas, has agreed to use a Texas-based company to build a permanent and secure land title record system using the underlying technology behind bitcoin, a company official said late Thursday.

    Factom, a U.S. blockchain technology company based in Austin, Texas, will provide the service to the government of Honduras, the firm’s president, Peter Kirby, said. The company is doing the project with Epigraph, a title software company that uses blockchain technology, also based in Austin.

    Factom would not reveal the cost of the project. Honduras would become only the second government to use blockchain, which increases transparency in a transaction, to manage government data, after reports that the Isle of Man would test a government-run blockchain project.

    “In the past, Honduras has struggled with land title fraud,” said Kirby. “The country’s database was basically hacked. So bureaucrats could get in there and they could get themselves beachfront properties.”

    Ebal Jair Díaz Lupian, the Honduran government’s chief of staff, did not respond to several attempts from Reuters to contact him via email and telephone.

    By building an immutable title record, backed by blockchain, Honduras can leapfrog systems built in the developed world, Kirby said. He added that this would allow for more secure mortgages, contracts, and mineral rights.

    “This also gives owners of the nearly 60 percent of undocumented land, an incentive to register their property officially.”

    The blockchain is a ledger of all of a digital currency’s transactions and is viewed as bitcoin’s main technological innovation. The technology is evolving beyond the digital currency, though, to applications like title databases and data verification systems.

    Kirby said Factom started negotiations in January. The pilot project should be completed by the end of the year, with the goal of eventually putting all of the government’s land titles on the blockchain, he added.

    Honduras, a country of about 8 million people, has the world’s highest murder rate, fuelling a surge in child migration to the United States. The country’s GDP per capita in 2013 was estimated at $1,577, according to the World Bank, making it one of the poorer countries in the Western hemisphere.

    Well, at least Honduras isn’t planning on replacing its currency with Bitcoins. And who knows, making transfers of ownership of Honduras’s land and mineral rights a potentially publicly available piece of information that could be easily accessed via the blockchain might actually be a useful source of public information now that Honduras is in the process of basically privatizing itself. Anything that can help Hondurans keep an eye on what’s happening to the ownership of their own country would be really helpful right now. Especially where there’s a lot of natural resources.

    Posted by Pterrafractyl | May 26, 2015, 6:26 pm
  2. Here’s the latest reminder that, should Bitcoin “destroy the dollar” and other fiat currencies without fixing its “mining” system so it’s not an unlimited arms race, you better start saving those bitcoins now. You’re going to need them for your electricity bill after Bitcoin destroys the electricity supply too:

    Upstart Business Journal
    Richard Branson’s Block Chain Summit asked to address bitcoin’s massive potential power drain

    Michael del Castillo
    May 27, 2015, 2:14pm EDT

    The UpTake: As Richard Branson and other leaders in the bitcoin industry meet on a private island to discuss the future of the blockchain, an Australian think tank releases numbers that show the frightening potential impact bitcoin could have on the environment..

    Richard Branson this week kicked off the Block Chain Summit, a gathering of leaders in the cryptocurrency community at his private Necker Island.

    Coinciding with the event, Australian sustainability think tank the Long Future Foundation released a tool to calculate the electricity required to mine bitcoin. The numbers are massive, and the Foundation’s creative director, Guy Lane, says something must be done.

    “If bitcoin’s energy consumption isn’t reined in, we’ll end up being crowded out of electricity networks and sitting in the dark,” said Lane in a statement released today. “So long as people can make money from mining bitcoins, people will spend large amounts of money, resources and electricity to acquire them.”

    Massive computers are used to “mine” bitcoin, a process by which the entire bitcoin economy is audited by the very people who use the currency. As the bitcoin ecosystem gets bigger the Bitcurrency Calculator unveiled last week shows how the amount of electricity needed to mine the system could change based different variables such as the future value of a bitcoin, and the price of a kilowatt-hour of electricity.

    The modeling method shows that bitcoin could someday consume 13,000 terawatt hours, or about 60 percent of global electricity produced based on 2012 numbers. To give an idea of what that looks like in the real world, that’s about what it might take to power 1.5 billion homes, according to the statement.

    Branson’s Block Chain Summit kicked off on Necker Island on Monday and ends on May 28. The event is co-hosted by San Francisco-based bitcoin security firm BitFury, which has raised $40 million venture capital and MaiTa Global the so-called “anti-conference” often compared to TED Talks.

    As Branson and his cohort debate the future of the blockchain, the ledger technology behind bitcoin, The Long Future Foundation asked summit delegates in a statement “to seriously address the sustainability issues of this emerging technology.”

    Well, hopefully someone will bring this up with Bitcoin’s many other big name backers too. FWIW.

    Posted by Pterrafractyl | May 29, 2015, 2:40 pm
  3. @Pterrfractyl–

    In the context of “The Coke Brothers,” check out the excellent documentary “Inside Job.” about the 2008 financial crash and what led up to it.

    It is very, very good, featuring considerable footage of Glenn Hubbard, Jeb Bushj’s top financial adviser.

    The discussion of “Sex and Drugs and Financial Trading” is highlighted in the film.

    Best,

    Dave

    Posted by Dave Emory | May 29, 2015, 5:31 pm
  4. @Dave: It’s darkly humorous that, even though you were replying to a “how much coke are these guys snorting?” comment in the Peter Levenda interview about the role of the Nazis in South America and accidentally replied in the post about Bitcoin, the “how much are these guys snorting?” question could certainly apply to the folks at 21 Inc too. Because anyone that wants to create a global network of energy-sucking bitcoin-mining toasters with the developing word in mind as the target audience has got to be on something. And if you had accidentally placed that comment anywhere else on spitfirelist.com, odds are the “how much are they snorting?” question would be just as applicable.

    Of course, the obvious answer to “what drugs is [insert powerful person here] on?” is “power”, a rather strong drug is and of itself. And probably “testosterone”, one of the most powerful drugs you can throw in your body. And then there’s “sleep deprivation”, another potent pill.

    But if the following article is correct and current trends in employment continue, just about anyone with a decent paying job in the future is going to be a hyper-specialist with skills that are in such demand that they’ll be basically compelled to be on some sort of drug just to get by. Specifically, stimulants. Well-paid people in the future are going to need lots an lots of stimulants:

    Fast Company
    The Highest-Paying Jobs Of The Future Will Eat Your Life

    In the future, highly skilled people will be bringing home fatter paychecks, but they’ll rarely be home long enough to spend them.
    By Jay L. Zagorsky

    For a glimpse of the future of work, especially the high-paying kind, look at finance and high-tech companies. Some of the biggest offer high employee salaries combined with lavish perks like free meals at work, luxury shuttle buses for commuters, and extras such as dry cleaning picked up and dropped off at people’s desks. This might look like the fruits of corporate beneficence. In fact, alongside email and other digital technologies, perks like these aim to maximize efficiency and working time, enabling employees to work as many hours as possible without needing to take time off to travel outside for food or errands. While this approach is currently seen as an anomaly, long-term economic trends will force other companies to adopt a similar model—a future of high pay combined with high hours of work.

    Research shows that hours worked began falling during the Great Depression but began rising again in the 1970s. The increase in long hours that started then was initially concentrated among high-wage, highly educated men. Whereas 30 years ago, the best-paid workers in the U.S. were much less likely to work long days than low-paid workers were, by 2006 the relationship had flipped: The best-paid were twice as likely to work long hours as the poorly paid. Today, so many people are working “insane hours” that magazines publish guides on how to cope. “Today, technology means that we’re all available 24/7,” David Solomon, the global co-head of investment banking at Goldman Sachs, told The New Yorker last year. “There are no boundaries, no breaks.”

    Why More Hours?

    Why will companies want to increase hours? It’s all about boosting profits. Most workers consider only their take-home pay when thinking about how much they cost their company. However, a worker’s wage is only one portion of that employee’s total cost. Fringe benefits, training, and the physical space needed to support each worker comprise a large percentage of total costs.

    One example of fringe benefit costs is Social Security, the U.S.’s public pension system. Almost all workers have some of their income taxed by the Social Security program. However, the employee actually pays only half of the Social Security tax; the other half is paid by the employer. If a company pays two people to each work 40 hours a week at $125,000 a year then the company owes the government slightly more than $7,300 for each person.

    However, the Social Security tax applies only on income up to $118,500. Earnings above this level are not taxed by Social Security. If the company were able to combine the two jobs and get just one person to work 80 hours a week at $250,000, it would save about $7,300. Hiring one person for a high-wage, high-hour job boosts the company’s bottom line.

    Moreover, companies experience other cost savings beyond Social Security by hiring one very highly paid person, compared to two people. For skilled workers almost all companies offer health care, dental plans and other benefits like life insurance. Top-of-the-line or Cadillac family medical care plans cost over $27,500 per employee. For every two jobs that are combined the company’s bottom line is boosted by the amount the company would have spent on health, dental, and life insurance plans.

    Why High Pay?

    The case for more jobs having longer hours in the future is simple. But why will companies be forced to pay very high wages? Part of the reason is that, over time, work is growing more specialized.

    The age of the generalist who is a jack-of-all trades is long over. Training for many jobs takes months, if not years. Sometimes this training is paid for by workers. For example, workers often get specialized college degrees or pay out of pocket for advanced training. Sometimes, this training is done by companies. Either way, because of the increasing complexity of work, companies are spending increasing amounts of time on training or on searching for the right candidate to handle the new hyper-specialized world.

    When a company has either invested a lot of effort in training a worker or invested a lot of time in finding a worker with the correct skills, they often don’t want to lose them. A simple way to prevent labor turnover is to ensure they are paid more money than other companies are offering. If a company always pays more money than the competition, there is no monetary advantage for their employees to switch companies. Pay is the bribe that companies use to keep workers motivated and showing up day-in and day-out. As the world becomes more specialized, companies that need that specialized labor will keep raising that bribe to keep workers on board.

    The Impact On People

    With this trend toward long hours and higher pay, what will be the impact on people? Research has identified reduced sleep, increased stress, less happiness, lower productivity, poorer health, and higher chances for injuring yourself and others when the workday expands—implications that can be dangerous in any job, be it specialized or not.

    One recent study showed that lower-income workers who work two jobs sleep less than anyone. But Daniel Hamermesh, a professor of economics at the University of Texas at Austin and the Royal Holloway University of London, analyzed the most recent time-use data from the American Time Use Survey and found that higher-income people slept less than the poor. (He theorizes why the relationship between income and sleep seems so strong: The more you can earn, the more worthwhile it may seem to sacrifice sleep for work.)

    With high salaries, overtired workers may be able to mitigate their exhaustion by hiring low-wage workers in precarious employment situations to clean their homes, cook their food, and do their chores. But the impact on family life and friendships is likely to be detrimental because money can’t buy love.

    A hundred years ago labor organizers campaigned for a radical idea: the 40-hour workweek. We are now moving back in the opposite direction. Some workers now work 80-100 hours per week for high pay as a way to “pay their dues” and earn a senior position in a finance company or a law firm, until they they can achieve the seniority that gives them more leisure time. In the future, well-paid workers will continue to work these crushing hours for many years as companies strive to cut costs by combining jobs. At that point, the “Walking Dead,” won’t be just a television show about zombies but an even more appropriate term to describe masses of highly paid but sleep-deprived workers.

    So what drug will [insert powerful hyper-specialist of the future here] be on? Well, hopefully something better for them than cocaine. But it’s probably going to be something. Although not necessarily drugs.

    Posted by Pterrafractyl | June 1, 2015, 6:05 pm
  5. Look out world. Bitcoin’s backers want to change the world and, most especially, enhance the lives of billions of poor people around the world. Those billions of poor around the world especially need to look out:

    The Wall Street Journal

    BitBeat: Grand Plans for Bitcoin From Necker Island

    By Michael J. Casey
    3:30 pm ET, Jun 2, 2015

    Bitcoin Latest Price: $226.00, up 1.2% (via CoinDesk)
    Crossing Our Desk:

    – One half of BitBeat spent last week moderating discussions at the inaugural Blockchain Summit on Richard Branson’s Caribbean island, Necker Island.

    It was perhaps inevitable that an exclusive event in a tropical idyll, where businessmen hobnob in the presence of one of the world’s richest men, would elicit allegations of elitism from some of quarters of the bitcoin community (as well as the occasional conspiracy theory.) But as the summit progressed, it became clear that the attendees had grander and, arguably, more altruistic aspirations than their critics imagined.

    The group, which the summit web site described as comprising “the greatest minds in digital innovation,” explored multiple projects that would use the blockchain – the core ledger technology underlying bitcoin – to change the lives of billions of people. Whether these succeed remains to be seen, but the scope of the goals discussed was striking.

    A decent amount of non-tech expertise was on hand, reflecting a view that to succeed with real-world implementations, blockchain-based innovations need people with understanding of political, social and cultural realities. Peruvian economist and anti-poverty crusader Hernando de Soto gave presentations on the challenges of titling property for the poor in developing countries, for example, and social media maven Oliver Luckett spoke of how viral content on social media tends to follow patterns found in biology.

    “When accomplished people with diverse background can be placed in an unstructured environment where barriers are stripped away, the interaction that occurs allows the spontaneous and serendipitous mixing of ideas that can reformulate themselves into amazing action plans,” Mr. Tai said.

    As Mr. de Soto explained how people’s property rights in mineral-rich parts of Peru get diluted into communal landholdings and then transferred without adequate compensation to multinational mining companies via a process that he described as an “artisanal blockchain,” attendees hatched plans to inscribe such individuals’ assets into the high-tech, digital-currency blockchain. The idea is that the indelible, public ledger would permanently legitimize these peoples’ personal claims and empower them with a provable deed, a form of legal collateral with which to raise money, take out insurance or, if the bid is high enough, sell their plot of land.

    The concept fits within the “social impact” goals that Brian Forde told the group were key elements of MIT Media Lab’s new Digital Currency Initiative, of which Mr. Forde, a former White House adviser, is the director.

    The same goes for a project described by entrepreneur John Edge, who spoke of his “ID 2020? project, working with international child welfare agencies to create a global, blockchain-based record of digitized birth certificates that help protect children from human-traffickers. Enhancing his pitch: a live Skype video address on the last evening of the summit from actress Lucy Liu, who has directed documentaries on child prostitution to draw attention to the plight of unidentified children.

    Tied to this digital ID idea and to a host of other applications for blockchain technology was the briefing from Patrick Deegan, the Chief Technology Officer of Personal Black Box, on the Open Mustard Seed protocol, a software program of which he is the chief architect and which aims to empower people to develop their own “self-sovereign” digital identities.

    Meanwhile, consultant Paul Brody of Ernst Young spoke of his work at former employer IBM to develop a blockchain-based framework for automated devices and appliances to securely transact with each other in the “Internet of Things” of the future.

    The summit got a glimpse of this interconnected “IoT” world from Bitfury, which demonstrated a light bulb containing a special chip designed to mine bitcoins.

    Such a device could never compete with the super-fast specialized mining machines that firms like BitFury deploy in high-tech, climate-controlled data centers to process transactions and earn bitcoins in return. After all, the company this week rolled out new 28-namometer mining chips that Vice Chairman George Kikvadze says are three times more efficient than the prior generation and predicts these will give the company “significant market share” in this increasingly industrialized industry.

    Still, making money isn’t the point of the light bulb. According to designer Niko Punin, BitFury created it to show what’s possible and use it as an intriguing way to promote the adoption of bitcoin.

    Wow. Ok, that was quite a list of world-changing blockchain-based applications. There was the:
    1. The unveiling of the Bitcoin-mining light bulb. A light bulb that can consume electricity even when it’s off and won’t actually be powerful enough to make you any money but is mostly just intended to introduce people to the Bitcoin. Pretty nifty! And not a bad intro to the Bitcoin mining experience either.

    2. The “ID 2020” plan to put poor children’s birth certificates on the blockchain to prevent human-trafficking. Hey, if it works, good for “ID 2020” and good for Bitcoin (especially considering the role Bitcoin now plays in the human trafficking market). And who knows how many other useful applications for a public birth certificate ledger although it’s going to be really interesting to see how they connect an actual person with their digital birth certificate (will it be encrypted DNA info or something else).

    3. Then there’s the “Personal Black Project” project that will allow you to sequester all of the various bit of web-browsing information (what sites you visited, etc) and then sell that information to marketers. Well, could be worse.

    4. Finally, Hernando de Soto is bringing his “let’s privatize the commons to lift the poor” plan to Bitcoin, touting a scheme that sounds similar to what the government of Honduras is planning with a Bitcoin-based land registry. Except, in the case of Hernando de Soto’s plan, everyone living on public land that no one owns get to privatize their little slice that they live on and then use it as collateral for small business loans or whatever. At that point, the invisible hand of the market that was previously beating them into poverty sudden turns into a helping hand. At least, that’s de Soto’s theory. His theory that’s loved by the Koch brothers and is contradicted by the horrors it has caused when put in practice:

    NSFCorp
    The Extraordinary Pierre Omidyar
    By Mark Ames, and Yasha Levine
    11:51 a.m. November 15, 2013

    “We ought to be looking at business as a force for good.” – Pierre Omidyar

    “Like eBay, Omidyar Network harnesses the power of markets to enable people to tap their true potential.” – Omidyar Network, “Frequently Asked Questions”

    * *

    Update: Glenn Greenwald responds to this piece on Twitter: “The idea that someone would build a pro-business, neoliberal outlet around Scahill, Poitras, Segura, Bates etc is just dumb.” When asked about Omidyar Network’s investment history, he said “I have no idea what you’re talking about there. I don’t speak for Omidyar Networks. You should ask them that.”

    * *

    The world knows very little about the political motivations of Pierre Omidyar, the eBay billionaire who is founding (and funding) a quarter-billion-dollar journalism venture with Glenn Greenwald, Laura Poitras and Jeremy Scahill. What we do know is this: Pierre Omidyar is a very special kind of technology billionaire.

    We know this because America’s sharpest journalism critics have told us.

    In a piece headlined "The Extraordinary Promise of the New Greenwald-Omidyar Venture", The Columbia Journalism Review gushed over the announcement of Omidyar’s project. And just in case their point wasn’t clear, they added the amazing subhead, “Adversarial muckrakers + civic-minded billionaire = a whole new world.”

    Ah yes, the fabled “civic-minded billionaire”—you’ll find him two doors down from the tooth fairy.

    But seriously folks, CJR really, really wants you to know that Omidyar is a breed apart: nothing like the Randian Silicon Valley libertarian we’ve become used to seeing.

    “…billionaires don’t tend to like the kind of authority-questioning journalism that upsets the status quo. Billionaires tend to have a finger in every pie: powerful friends they don’t want annoyed and business interests they don’t want looked at.

    “By hiring Greenwald & Co., Omidyar is making a clear statement that he’s the billionaire exception….It’s like Izzy Stone running into a civic-minded plastics billionaire determined to take I.F. Stone’s Weekly large back in the day.”

    Later, the CJR “UPDATED” the piece with this missing bit of “oops”:

    “(UPDATE: I should disclose that the Omidyar Network helps fund CJR, something I didn’t know until shortly after I published this post.)”

    No biggie. Honest mistake. And anyway, plenty of others rushed to agree with CJR’s assessment. Media critic Jack Shafer at Reuters described Omidyar’s politics and ideology as “close to being a clean slate,” repeatedly praising the journalism venture’s and Omidyar’s “idealism.” The “NewCo” venture with Greenwald “harkens back to the techno-idealism of the 1980s and 1990s, when the first impulse of computer scientists, programmers, and other techies was to change the world, not make more money,” Shafer wrote, ending his piece:

    “As welcome as Omidyar’s money is, his commitment to the investigative form and an open society is what I’m grateful for this afternoon. You can never uphold the correct verdict too often.”

    What all of these orgasmic accounts of Omidyar’s “idealism” have in common is a total absence of skepticism. America’s smartest media minds simply assume that Omidyar is an “exceptional” billionaire, a “civic-minded billionaire” driven by “idealism” rather than by profits. The evidence for this view is Pierre Omidyar’s massive nonprofit venture, Omidyar Network, which has distributed hundreds of millions of dollars to causes all across the world.

    And yet what no one seems able to specify is exactly what ideology Omidyar Network promotes. What does Omidyar’s “idealism” mean in practice, and is it really so different from the non-idealism of other, presumably bad, billionaires? It’s almost as if journalists can’t answer those questions because they haven’t bothered asking them.

    So let’s go ahead and do that now.

    Since its founding in 2004, Omidyar Network has committed nearly $300 million to a range of nonprofit and for-profit “charity” outfits. An examination of the ideas behind the Omidyar Network and of the investments it has made suggests that its founder is anything but a “different” sort of billionaire. Instead, what emerges is almost a caricature of neoliberal ideology, complete with the trail of destruction that ensues when that ideology is put into practice. The generous support of the Omidyar Network goes toward “fighting poverty” through micro-lending, reducing third-world illiteracy rates by privatizing education and protecting human rights by expanding property titles (“private property rights”) into slums and villages across the developing world.

    In short, Omidyar Network’s philanthropy reveals Omidyar as a free-market zealot with an almost mystical faith in the power of “markets” to transform the world, end poverty, and improve lives—one micro-individual at a time.

    All the neoliberal guru cant about solving the world’s poverty problems by unlocking the hidden “micro-entrepreneurial” spirit of every starving Third Worlder is put into practice by Omidyar Network’s investments. Charity without profit motive is considered suspect at best, subject to the laws of unintended consequences; good can only come from markets unleashed, and that translates into an ideology inherently hostile to government, democracy, public politics, redistribution of land and wealth, and anything smacking of social welfare or social justice.

    In literature published by Omidyar Network, the assumption is that technology is an end in itself, that it naturally creates beneficial progress, and that the world’s problems can be solved most effectively with for-profit business solutions.

    The most charitable thing one can say about Omidyar’s nonprofit network is that it reflects all the worst clichés of contemporary neoliberal faith. In reality, it’s much worse than that. In many regions, Omidyar Network investments have helped fund programs that create worsening conditions for the world’s underclass, widening inequalities, enhancing exploitation, pushing millions of people into crippling debt and supporting anti-poverty programs that, in some cases, resulted in mass-suicide by the rural poor.

    * *

    Pierre Omidyar was one of the biggest early backers of the for-profit micro-lending industry. Through Omidyar Network, as well as personal gifts and investments, he has funnelled around $200 million into various micro-lending companies and projects over the past decade, with the goal of establishing an investment-grade microfinance sector that would be plugged into Wall Street and global finance. The neoliberal theory promised to unleash billions of new micro-entrepreneurs; the stark reality is that it saddled untold numbers with crushing debt and despair.

    One of his first major investments into micro-lending came in 2005, when Pierre Omidyar and his wife Pam gave Tufts University, their alma mater, $100 million to create the “Omidyar-Tufts Microfinance Fund,” a managed for-profit fund dedicated to jump-starting the growth of the micro-finance industry. At the time, Tufts announced that Omidyar’s gift was the “largest private allocation of capital to microfinance by an individual or family.”

    With the Tufts fund, Omidyar wanted to go beyond mere charitable donations to specific micro-lending organizations that targeted the developing world’s poorest. At the same time, he wanted to create a whole new environment in which for-profit micro-lending companies could be self-sustaining and generate big enough profits to attract serious global investors.

    This idea was at the core of Omidyar’s vision of philanthropy: he believed that microfinance would eradicate poverty faster and better if it was run on a for-profit basis, and not like a charity.

    “If you want to reach global scale — and we’re talking about hundreds of millions of people who need this — you can’t do it with philanthropy capital. There’s not enough charity capital out there. By connecting with an institutional investor like a university, we would like to increase the level of professional investor involvement in this sector to try to stimulate more commercially viable investment products,” Pierre Omidyar said in an interview at the time. “We ought to be looking at business as a force for good.”

    The idea behind micro-loans is very simple and seductive. It goes something like this: the only thing that prevents the hundreds of millions of people living in extreme poverty from achieving financial success is their lack of access to credit. Give them access to micro-loans—referred to in Silicon Valley as “seed capital”—and these would-be successful business-peasants and illiterate shantytown entrepreneurs would pluck themselves out of the muck by their own homemade sandal straps. Just think of it: hundreds of millions of peasants working as micro-individuals, taking out micro-loans, making micro-rational investments into their micro-businesses, dutifully paying their micro-loan payments on time and working in concert to harness the deregulated power of the markets to collectively lift society out of poverty. It’s a grand neoliberal vision.

    To that end, Omidyar has directed about a third of the Omidyar Network investment fund—or about $100 million—to support the micro-lending industry. The foundation calls this initiative “financial inclusion.”

    Shockingly, micro-loans aren’t all that they’ve cracked up to be. After years of observation and multiple studies, it turns out that the people benefiting most from micro-loans are the big global financial players: hedge funds, banks and the usual Wall Street hucksters. Meanwhile, the majority of the world’s micro-debtors are either no better off or have been sucked into a morass of crippling debt and even deeper poverty, which offers no escape but death.

    Take SKS Microfinance, an Omidyar-backed Indian micro-lender whose predatory lending practices and aggressive collection tactics have caused a rash of suicides across India.

    Omidyar funded SKS through Unitus, a microfinance private equity fund bankrolled by the Omidyar Network to the tune of at least $11.7 million. ON boosted SKS in its promotional materials as a micro-lender that’s “serving the rural poor in India” and that exemplifies a company that’s providing “people with the means to address their needs and improve their lives.”

    In 2010, SKS made headlines and stirred up bitter controversy about the role that profits should play in anti-poverty initiatives when the company went public with an IPO that generated about $358 million, giving SKS a market valuation of more than $1.6 billion. The IPO made millions for its wealthy investors, including the Omidyar-backed Unitus fund, which earned a cool $5 million profit from the SKS IPO, according to the Puget Sound Business Journal.

    Some were bothered, but others saw it as proof that the power of the markets could be harnessed to succeed where traditional charity programs supposedly hadn’t. The New York Times reported:

    “An Indian company with rich American backers is about to raise up to $350 million in a stock offering closely watched by philanthropists around the world, showing that big profits can be made from small helping-hand loans to poor cowherds and basket weavers.”

    Controversy or not, SKS embodied Omidyar’s vision of philanthropy: it was a for-profit corporation that fought poverty while generating lucrative returns for its investors. Here would be proof-positive that the profit motive makes everyone a winner.

    And then reality set in.

    In 2012, it emerged that while the SKS IPO was making millions for its wealthy investors, hundreds of heavily indebted residents of India’s Andhra Pradesh state were driven to despair and suicide by the company’s cruel and aggressive debt-collection practices. The rash of suicides soared right at the peak of a large micro-lending bubble in Andhra Pradesh, in which many of the poor were taking out multiple micro-loans to cover previous loans that they could no longer pay. It was subprime lending fraud taken to the poorest regions of the world, stripping them of what little they had to live on. It got to the point where the Chief Minister of Andrah Pradesh publicly appealed to the state’s youth and young women not to commit suicide, telling them, “Your lives are valuable.”.

    The AP conducted a stunning in-depth investigation of the SKS suicides, and their reporting needs to be quoted at length to understand just how evil this program is. The article begins:

    “First they were stripped of their utensils, furniture, mobile phones, televisions, ration cards and heirloom gold jewelry. Then, some of them drank pesticide. One woman threw herself in a pond. Another jumped into a well with her children.

    “Sometimes, the debt collectors watched nearby.”

    What prompted the AP investigation was the gulf between the reported rash of suicides linked to SKS debt collectors, and SKS’s public statements denying it had knowledge of or any role in the predatory lending abuses. However, the AP got a hold of internal SKS documents that contradicted their public denials:

    “More than 200 poor, debt-ridden residents of Andhra Pradesh killed themselves in late 2010, according to media reports compiled by the government of the south Indian state. The state blamed microfinance companies – which give small loans intended to lift up the very poor – for fueling a frenzy of overindebtedness and then pressuring borrowers so relentlessly that some took their own lives.

    “The companies, including market leader SKS Microfinance, denied it.

    “However, internal documents obtained by The Associated Press, as well as interviews with more than a dozen current and former employees, independent researchers and videotaped testimony from the families of the dead, show top SKS officials had information implicating company employees in some of the suicides.”

    The AP investigation and internal reports showed just how brutal the SKS microfinancing program was, how women were particularly targeted because of their heightened sense of shame and community responsibility—here is the brutal reality of financial capitalism compared to the utopian blather mouthed at Davos conferences, or in the slick pamphlets issued by the Omidyar Network:

    “Both reports said SKS employees had verbally harassed over-indebted borrowers, forced them to pawn valuable items, incited other borrowers to humiliate them and orchestrated sit-ins outside their homes to publicly shame them. In some cases, the SKS staff physically harassed defaulters, according to the report commissioned by the company. Only in death would the debts be forgiven.

    “The videos and reports tell stark stories:

    “One woman drank pesticide and died a day after an SKS loan agent told her to prostitute her daughters to pay off her debt. She had been given 150,000 rupees ($3,000) in loans but only made 600 rupees ($12) a week.

    “Another SKS debt collector told a delinquent borrower to drown herself in a pond if she wanted her loan waived. The next day, she did. She left behind four children.

    “One agent blocked a woman from bringing her young son, weak with diarrhea, to the hospital, demanding payment first. Other borrowers, who could not get any new loans until she paid, told her that if she wanted to die, they would bring her pesticide. An SKS staff member was there when she drank the poison. She survived.

    “An 18-year-old girl, pressured until she handed over 150 rupees ($3)—meant for a school examination fee—also drank pesticide. She left a suicide note: ‘Work hard and earn money. Do not take loans.'”

    As a result of the bad press this scandal caused, the Omidyar Network deleted its Unitus investment from its website—nor does Omidyar boast of its investments in SKS Microfinance any longer. Meanwhile, Unitus mysteriously dissolved itself and laid off all of its employees right around the time of the IPO, under a cloud of suspicion that Unitus insiders made huge personal profits from the venture, profits that in theory were supposed to be reinvested into expanding micro-lending for the poor.

    Thus spoke the profit motive.

    Curiously, in the aftermath of the SKS micro-lending scandal, Omidyar Network was dragged into another political scandal in India when it was revealed that Omidyar and the Ford Foundation were placing their own paid researchers onto the staffs of India’s MPs. The program, called Legislative Assistants to MPs (LAMPs), was funded with $1 million from Omidyar Network and $855,000 from the Ford Foundation. It was shut down last year after India’s Ministry of Home Affairs complained about foreign lobbying influencing Indian MPs, and promised to investigate how Omidyar-funded research for India’s parliament may have been “colored” by an agenda.

    But SKS is not the only microfinancing investment gone bad. The biggest and most reputable micro-lenders, including those funded by the Omidyar Network, have come under serious and sustained criticism for predatory interest rates and their aggressive debt-collection techniques.

    Take BRAC, another big beneficiary of Omidyar’s efforts to boost “financial inclusion.”

    Started in the early 1970s as a war relief organization, BRAC has grown into the largest non-governmental organization in the world. It employs over 100,000 people in countries across the globe. While BRAC is known mostly for its micro-lending operation activities, the outfit is a diversified nonprofit business operation. It is involved in education, healthcare and even develops its own hybrid seed varieties. Much of BRAC’s operations are financed by its micro-lending activities.

    Omidyar Network praises BRAC for its work to “empower the poor to improve their own lives,” and has given at least $8 million to help BRAC set up micro-lending banking infrastructure in Liberia and Sierra Leone.

    But BRAC seems to worry more about its own bottom line than it does about the well-being of its impoverished borrowers, the majority of whom are women and who pay an average annual interest rate of 40 percent.

    This twisted sense of priority could be seen after one of the worst cyclones in the history of Bangladesh left thousands dead in 2007, destroying entire villages and towns in its path. In the cyclone’s wake, the Omidyar-funded BRAC micro-lending debt collectors showed up at the disaster zone along with other micro-lenders, and went to work aggressively shaking down borrowers, forcing some victims (mostly women) to go so far as to sell their relief/aid materials, or to take out secondary loans to pay off the first loans.

    According to a study about micro-lenders in the aftermath of Cyclone Sidr:

    “Sidr victims who lost almost everything in the cyclone, experienced pressure and harassment from non­governmental organisations (NGOs) for repayment of microcredit instalments. Such intense pressure led some of the Sidr­affected borrowers to sell out the relief materials they received from different sources. Such pressure for loan recovery came from large organisations such as BRAC, ASA and even the Nobel Prize winning organisation Grameen Bank.

    “Even the most severely affected people are expected to pay back in a weekly basis, with the prevailing interest rate. No system of ‘break’ or ‘holiday’ period is available in the banks’ current charter. No exceptions are made during a time of natural calamity. The harsh rules practised by the microcredit lender organisations led the disaster affected people even selling their relief assistance. Some even had to sell their leftover belongings to pay back their weekly instalments.”

    These tactics may be harsh, but they pay off for micro-lenders. And it’s a lucrative operation: BRAC primarily targets women, offers loans with predatory interest rates and uses traditional values and close village relationships to shame and pressure borrowers into selling and doing whatever they can to make their weekly payments. It works. Loan recovery rates for the industry average between 95 and 98 percent. For BRAC, that rate was a comfy 99.3 percent.

    So do predatory micro-loans really help lift the world’s poorest people out of poverty? Neoliberal ideology says they do — and the Omidyar Network represents one of the purest distillations of that ideology put into practice in the poorest and most vulnerable parts of the world.

    As Cambridge University economics professor Ha-Joon Chang argued, saying of micro-lending:

    “[It] constitutes a powerful institutional and political barrier to sustainable economic and social development, and so also to poverty reduction. Finally, we suggest that continued support for microfinance in international development policy circles cannot be divorced from its supreme serviceability to the neoliberal/globalization agenda.”

    Omidyar Network has followed the same disastrous neoliberal script in other areas of investment, particularly its investments into privatizing public schools in the US and in poor regions of Africa.

    Still think that Pierre Omidyar is a “different” type of billionaire? Still convinced he’s a one-of-a-kind “civic-minded” idealist?

    Then you might want to ask yourself why Omidyar is so smitten by the ideas of an economist known as “The Friedrich Hayek of Latin America.” His name is Hernando de Soto and he’s been adored by everyone from Milton Friedman to Margaret Thatcher to the Koch brothers. Omidyar Network poured millions of nonprofit dollars into subsidizing his ideas, helping put them into practice in poor slums around the developing world.

    In February 2011, the Omidyar Network announced a hefty $4.96 million grant to a Peru-based free-market think tank, the Institute for Liberty & Democracy (ILD).

    Perhaps no single investment by Omidyar more clearly reveals his orthodox neoliberal vision for the world—and what constitutes “civic-mindedness”—than his support for the ILD and its founder and president, Hernando De Soto, whom the ON has tapped to participate in other Omidyar-sponsored events.

    De Soto is a celebrity in the world of neoliberal/libertarian gurus. He and his Institute for Liberty & Democracy are credited with popularizing a free-market version of Third World land reform and turning it into policy in city slums all across the developing world. Whereas “land reform” in countries like Peru—dominated by a tiny handful of landowning families—used to mean land redistribution, Hernando De Soto came up with a counter-idea more amenable to the Haves: give property title to the country’s poor masses, so that they’d have a secure and legal title to their shanties, shacks, and whatever land they might claim to live on or own.

    De Soto’s pitch essentially comes down to this: Give the poor masses a legal “stake” in whatever meager property they live in, and that will “unleash” their inner entrepreneurial spirit and all the national “hidden capital” lying dormant beneath their shanty floors. De Soto claimed that if the poor living in Lima’s vast shantytowns were given legal title ownership over their shacks, they could then use that legal title as collateral to take out microfinance loans, which would then be used to launch their micro-entrepreneurial careers. Newly-created property holders would also have a “stake” in the ruling political and economic system. It’s the sort of cant that makes perfect sense to the Davos set (where De Soto is a star) but that has absolutely zero relevance to problems of entrenched poverty around the world.

    Since the Omidyar Network names “property rights” as one of the five areas of focus, it’s no surprise that Omidyar money would eventually find its way into Hernando De Soto’s free-market ideas mill. In 2011, Omidyar not only gave De Soto $5 million to advance his ideas—he also tapped De Soto to serve as a judge in an Omidyar-sponsored competition for projects focused on improving property rights for the poor. The more you know about Hernando De Soto, the harder it is to see Omidyar’s financial backing as “idealistic” or “civic-minded.”

    For one thing, De Soto is the favorite of the very same billionaire brothers who play villains to Omidyar’s supposed hero—yes, the reviled Koch brothers. In 2004, the libertarian Cato Institute (neé “The Charles Koch Foundation”) awarded Hernando De Soto its biannual "Milton Friedman Prize"—which comes with a hefty $500,000 check—for “empowering the poor” and “advancing the cause of liberty.” De Soto was chosen by a prize jury consisting of such notable humanitarians as former Pinochet labor minister Jose Piñera, Vladimir Putin’s economic advisor Andrei Illarionov, Washington Post neoconservative columnist Anne Applebaum, FedEx CEO Fred Smith, and Milton Friedman’s wife Rosie. Milton was in the audience during the awards ceremony; he heartily approved.

    Indeed, Hernando De Soto is de facto royalty in the world of neoliberal-libertarian gurus—he’s been called “The Friedrich von Hayek of Latin America,” not least because Hayek launched De Soto’s career as a guru more than three decades ago.

    So who is Hernando De Soto, where do his ideas come from, and why might Pierre Omidyar think him deserving of five million dollars — ten times the amount the Koch Brothers awarded him?

    De Soto was born into an elite “white European” family in Peru, who fled into exile in the West following Peru’s 1948 coup—his father was the secretary to the deposed president. Hernando spent most of the next 30 years in Switzerland, getting his education at elite schools, working his way up various international institutions based in Geneva, serving as the president of a Geneva-based copper cartel outfit, the International Council of Copper Exporting Countries, and working as an official in GATT (General Agreement on Trade and Tariffs).

    De Soto didn’t return to live in Peru until the end of the 1970s, to oversee a new gold placer mining company he’d formed with a group of foreign investors. The mining company’s profits suffered due to Peru’s weak property laws and almost non-existent cultural appreciation of property title, especially among the country’s poor masses—De Soto’s investors pulled out of the mining venture after visiting the company’s gold mines and seeing hundreds of peasants panning on the company’s concessions. That experience inspired De Soto to change Peruvians’ political assumptions regarding property rights. Rather than start off by trying to convince them that foreign mining firms should have exclusive rights to gold from traditionally communal Peruvian lands, De Soto came up with a clever end-around idea: giving property title to the masses of Peru’s poor living in the vast shanties and shacks in the slums of Lima and cities beyond. It was a long-term strategy to alter cultural expectations about property and ownership, thereby improving the investment climate for mining companies and other investors. The point was to align the masses’ assumptions about property ownership with those of the banana republic’s handful of rich landowning families.

    In 1979, De Soto organized a conference in Peru’s capital Lima, featuring Milton Friedman and Friedrich von Hayek as speakers and guests. At the time, both Friedman and Hayek were serving as key advisors to General Augusto Pinochet’s “shock therapy” program in nearby Chile, an economic experiment that combined libertarian market policies with concentration camp terror.

    Two years after De Soto’s successful conference in Lima, in 1981, Hayek helped De Soto set up his own free-market think tank in Lima, the “Institute for Liberty and Democracy” (ILD). The ILD became the first of a large international network of right-wing neoliberal think tanks connected to the Mother Ships—Cato Institute, Heritage Foundation, and Britain’s Institute for Economic Affairs, Margaret Thatcher’s go-to think tank. By 1983, De Soto’s Institute was also receiving heavy funding from Reagan’s Cold War front group, the National Endowment for Democracy, which promoted free-market think tanks and programs around the world, and by the end of Reagan decade, De Soto produced his first manifesto, “The Other Path”—a play on the name of Peru’s Maoist guerrilla group, Shining Path, then fighting a bloody war for power. But whereas the Shining Path’s political program called for nationalizing and redistributing property, most of which was in the hands of a few rich families, De Soto’s “Other Path” called for maintaining property distribution as it was, and legalizing its current structure by democratizing property titles, the pieces of paper with the stamps. Everyone would become a micro-oligarch and micro-landowner under this scheme…

    With help and funding from US and international institutions, De Soto quickly became a powerful political force behind the scenes. In 1990, De Soto insinuated himself into the inner circle of newly-elected president Alberto Fujimori, who quickly turned into a brutal dictator, and is currently serving a 25-year prison sentence for crimes against humanity, murder, kidnapping, and illegal wiretapping.

    Under De Soto’s influence, Fujimori’s politics suddenly changed; almost overnight, the populist Keynsian candidate became the free-market authoritarian “Chinochet” he governed as. As Fujimori’s top advisor, Hernando De Soto was the architect of so-called “Fujishock” therapy applied to Peru’s economy. Officially, De Soto served as Fujimori’s drug czar from 1990-1992, an unusual role for an economist given the fact that Peru’s army was fighting a brutal war with Peru’s powerful cocaine drug lords. At the time Peru was the world’s largest cocaine producer; as drug czar, Hernando De Soto therefore positioned himself as the point-man between Peru’s military and security services, America’s DEA and drug czar under the first President Bush, and Peru’s president Alberto Fujimori. It’s the sort of position that you’d want to have if you wanted “deep state” power rather than mere ministerial power.

    During those first two years when De Soto served under Fujimori, human rights abuses were rampant. Fujimori death squads—with names like the “Grupo Colina”—targeted labor unions and government critics and their families. Two of the worst massacres committed under Fujimori’s reign, and for which he was later jailed, took place while De Soto served as his advisor and drug czar.

    The harsh free-market shock-therapy program that De Soto convinced Fujimori to implement resulted in mass misery for Peru. During the two years De Soto served as Fujimori’s advisor, real wages plunged 40%, the poverty rate rose to over 54% of the population, and the percentage of the workforce that was either unemployed or underemployed soared to 87.3%.

    But while the country suffered, De Soto’s Institute for Liberty and Democracy—the outfit that Omidyar gave $5 million to in 2011—thrived: its staff grew to over 100 as funds poured in. A World Bank staffer who worked with the ILD described it as,

    “a kind of school for the country. Most of the important ministers, lawyers, journalists, and economists in Peru are ILD alumni.”

    In 1992, Fujimori orchestrated a constitutional coup, disbanding Peru’s Congress and its courts, and imposing emergency rule-by-decree. It was another variation of the same Pinochet blueprint.

    Just before Fujimori’s coup, De Soto indemnified himself by officially resigning from the cabinet. However in the weeks and months after the coup, De Soto provided crucial PR cover, downplaying the coup to the foreign press. For instance, De Soto told the Los Angeles Times that the public should temper their judgment of Fujimori’s coup:

    “You’ve got to see this as the trial and error of a president who’s trying to find his way.”

    In the New York Times, De Soto spun the coup as willed by the people, the ultimate democratic politics:

    “People are fed up, fed up…[Fujimori] has attacked two hated institutions at just the right time. There is an enormous need to believe in him.”

    Years later, Fujimori’s notorious spy chief Vladimiro Montesinos testified to Peru’s Congress that De Soto helped mastermind the 1992 coup. De Soto denied involvement; but in 2011, two years after Fujimori was jailed for crimes against humanity, De Soto joined the presidential campaign for Keiko Fujimori, the jailed dictator’s daughter and leader of Fujimori’s right-wing party. Keiko Fujimori ran on a platform promising to free her father from prison if she won; De Soto spent much of the campaign red-baiting her opponent as a Communist. That led Peru’s Nobel Prize-winning author Mario Vargas Llosa to denounce De Soto as a "fujimontesenista" with “few democratic credentials.”

    So in the same year that De Soto was trying to put the daughter of Peru’s Pinochet in power and to spring the dictator from prison, Omidyar Network awarded him $5 million.

    It was during Fujimori’s dictatorial emergency rule, from 1992-94, that De Soto rolled out a property-title pilot program in Lima, in which 200,000 households were given formal title. In 1996, Fujimori implemented De Soto’s property-titling program on a national scale, with help from the World Bank and a new government property agency staffed by people from De Soto’s Institute for Liberty and Democracy. By 2000, the magical promise of an explosion in bank credits to all the new micro-property owners never materialized; in fact, there was no noticeable difference in bank lending to the poor whatsoever, whether they had property title or not.

    The World Bank and the project’s neoliberal supporters led by Hernando De Soto were not happy with data showing no uptick in lending, which threatened to unravel the entire happy theory behind property titling as the answer to Third World poverty. De Soto was in the process of peddling the same property-titling program to countries around the world; data was needed to justify the program. So the World Bank funded a new study in Peru in the early 2000s, and discovered something startling: In homes that had formal property titles, the parents in those homes spent up to 40% more time outside of their homes than they did before they were given title. De Soto took that statistic and argued that it was a good thing because it proved giving property title to homeowners made them feel secure enough to leave their shanties and shacks. The assumption was that in the dark days before shanty dwellers had legal titles, they were too scared to leave their shacks lest some other savage steal it from them while they were out shopping.

    No one ever conclusively explained why shanty parents were spending so much more time outside of their homes, but the important thing was that it made everyone forget the utter failure of the property title program’s core promise—that property titles would ignite micro-lending thanks to the collateral of the micro-entrepreneur’s micro-shack as collateral. Thanks to De Soto’s salesmanship and the backing of the world’s neoliberal nomenklatura — Bill Clinton called De Soto "the world’s greatest living economist" and he was praised by everyone from Milton Friedman to Vladimir Putin to Margaret Thatcher. The disappointing results in Peru were ignored, and De Soto’s program was extended to developing countries around the world including Egypt, Cambodia, the Philippines, Indonesia and elsewhere. And in nearly every case, De Soto’s Institute for Liberty and Democracy has taken the lead in advising governments and selling the dream of turning titled slum-dwellers into micro-entrepreneurs.

    The real change brought by De Soto’s property-titling program has ranged from nil to nightmarish.

    In Cambodia, where the World Bank implemented De Soto’s land-titling program in 2001, poor and vulnerable people in the capital Phnom Penh have suffered at the hands of land developers and speculators who’ve used arson, police corruption and violence to forcibly evict roughly 10% of the city’s population from their homes in more valuable districts, relocating them to the city outskirts.

    An article in Slate titled "The De Soto Delusion" described what happened in Cambodia when the land-titling program was first implemented:

    “In the nine months or so leading up to the project kickoff, a devastating series of slum fires and forced evictions purged 23,000 squatters from tracts of untitled land in the heart of Phnom Penh. These squatters were then plopped onto dusty relocation sites several miles outside of the city, where there were no jobs and where the price of commuting to and from central Phnom Penh (about $2 per day) surpassed whatever daily wage they had been earning in town before the fires. Meanwhile, the burned-out inner city land passed immediately to some of the wealthiest property developers in the country.”

    De Soto and his Institute for Liberty and Democracy have advised property-title programs elsewhere too—Haiti, Dominican Republic, Panama, Russia—again with results ranging from nil to bad. Even where it doesn’t lead to mass evictions and violence, it has the effect of shifting a greater tax burden onto the poor, who end up paying more in property taxes, and of forcing them to pony up for costly filing fees to gain title, fees that they often cannot afford. Property title in and of itself—without a whole range of reforms in governance, corruption, education, income, wealth distribution and so on—is clearly no panacea. But it does provide an alternative to programs that give money to the poor and redistribute wealth, and that alone is a good thing, if you’re the type smitten by Hernando De Soto—as Omidyar clearly is.

    Studies of property-titling programs in the slums of Brazil and Manila revealed that it created a new bitterly competitive culture and bifurcation, in which a small handful of titled slum dwellers quickly learn to benefit by turning into micro-slumlords renting out dwellings to lesser slum dwellers, who subsequently find themselves forced to pay monthly fees for their shanty rooms—creating an underclass within the underclass. De Soto has described these slums as “acres of diamonds”—wealth waiting to be unlocked by property titling—and his acolytes even coined a new acronym for slums: “Strategic Low-income Urban Management Systems.”

    All of which begs the obvious question: If De Soto’s property-title program is such a proven failure in case after case, why is it so popular among the world’s political and business elites?

    The answer is rather obvious: It offers a simple, low-cost, technocratic market solution to the problem of global poverty—a complex and costly problem that can only be alleviated by dedicating huge amounts of resources and a very different politics from the one that tells us that markets are god, markets can solve everything. Even before Omidyar committed $5 million to the dark plutocratic “idealism” De Soto represents, he was Tweeting his admiration for De Soto:

    “Brilliant dinner with Hernando de Soto. Property rights underlie and enable everything.”

    Indeed, property rights underlie and enable everything Omidyar wants to hear—but distract and divert from what the targets of those programs might actually need or be asking for.

    “The real change brought by De Soto’s property-titling program has ranged from nil to nightmarish.”
    Well that was rather bone chilling. And now Hernando de Soto is set on merging his vision of micro-financing a shanty town property rights with the magic of bitcoin so that that the world can better enjoy things like “Strategic Low-income Urban Management Systems” in the digital age. Just imagine how much better this would be with Bitcoin to help facilitate the magic of the marketplace:

    Studies of property-titling programs in the slums of Brazil and Manila revealed that it created a new bitterly competitive culture and bifurcation, in which a small handful of titled slum dwellers quickly learn to benefit by turning into micro-slumlords renting out dwellings to lesser slum dwellers, who subsequently find themselves forced to pay monthly fees for their shanty rooms—creating an underclass within the underclass. De Soto has described these slums as “acres of diamonds”—wealth waiting to be unlocked by property titling—and his acolytes even coined a new acronym for slums: “Strategic Low-income Urban Management Systems.”

    Sounds pretty awesome, doesn’t it! And it’s no surprise. Especially when you consider de Soto’s fans:

    For one thing, De Soto is the favorite of the very same billionaire brothers who play villains to Omidyar’s supposed hero—yes, the reviled Koch brothers. In 2004, the libertarian Cato Institute (neé “The Charles Koch Foundation”) awarded Hernando De Soto its biannual "Milton Friedman Prize"—which comes with a hefty $500,000 check—for “empowering the poor” and “advancing the cause of liberty.” De Soto was chosen by a prize jury consisting of such notable humanitarians as former Pinochet labor minister Jose Piñera, Vladimir Putin’s economic advisor Andrei Illarionov, Washington Post neoconservative columnist Anne Applebaum, FedEx CEO Fred Smith, and Milton Friedman’s wife Rosie. Milton was in the audience during the awards ceremony; he heartily approved.

    Indeed, Hernando De Soto is de facto royalty in the world of neoliberal-libertarian gurus—he’s been called “The Friedrich von Hayek of Latin America,” not least because Hayek launched De Soto’s career as a guru more than three decades ago.

    And given de Soto’s initial experiences that led him to his titling-for-the-poor plans, it’s hard not to see great things emerge from that kind of inspiration:

    De Soto didn’t return to live in Peru until the end of the 1970s, to oversee a new gold placer mining company he’d formed with a group of foreign investors. The mining company’s profits suffered due to Peru’s weak property laws and almost non-existent cultural appreciation of property title, especially among the country’s poor masses—De Soto’s investors pulled out of the mining venture after visiting the company’s gold mines and seeing hundreds of peasants panning on the company’s concessions. That experience inspired De Soto to change Peruvians’ political assumptions regarding property rights. Rather than start off by trying to convince them that foreign mining firms should have exclusive rights to gold from traditionally communal Peruvian lands, De Soto came up with a clever end-around idea: giving property title to the masses of Peru’s poor living in the vast shanties and shacks in the slums of Lima and cities beyond. It was a long-term strategy to alter cultural expectations about property and ownership, thereby improving the investment climate for mining companies and other investors. The point was to align the masses’ assumptions about property ownership with those of the banana republic’s handful of rich landowning families.

    Yes, great things are coming to the poorest people in the world: a brand new blockchain-powered land/property-based public marketplace is coming that will unleash the magic of the markets across the developing world. All of the great things we saw above will be available to people everywhere. All they’ll need is a little interner device that helps them get and spend some bitcoins. Just add electricity.

    So that’s coming. All that fun.

    But it’s also worth reminding ourselves that the worst part of Bitcoin isn’t the technology itself, even though the mining/electricity issues are pretty significant. But they’re addressable.

    The key problem with Bitcoin is the far-right economics that is continually promoted along with it that’s the real problem, and once again we see Bitcoin getting used to promote far-right economic theories with a poor track record.
    But there’s no reason Bitcoin couldn’t be turned into a useful public ledger that helps the public create more wealth and value from the commons.

    For instance, a country could use Bitcoin (or any other blockchain) to divide up public land into geographic units that require public oversight to ward off reckless developers. Well, ok, how about having a group, could be a public or private agency, divide up public land into units (x square meters). Then assign to each plot, say, 100 random members of the public that volunteer to “watch” the land. Then use the blockchain to secretly and anonymously keep track of who is watching what plot.

    People could pass the torch to someone else or get reassigned as more people sign up and the assigned plots shrink. And use that as a system that lets society divide the work required by the public at large to watch over the vast swathes of public land that folks like Hernando de Soto want to privatize along with the shanty towns of the world.

    Obviously most people wouldn’t be able to watch a piece of land physically. But they could still watch for news or other sources of information specifically related to their plot of land. And when someone hears bad news about their particular plot of land, broadcast to the world through the blockchain messaging system.

    Who knows, maybe there’s going to be some non-predatory/scammy blockchain technologies that end end up really helping the world take advantage of the power of the marketplace (the “marketplace of ideas” in the case of a distributed publiland watcher system). At least let’s hope so. Because it’s pretty clear that folks Hernando de Soto and his far-right friends are getting ready to help the world’s poor one again, but with bitcoins this time. And as we saw, that’s the kind of “help” that means the world’s poor are going to need all the help they can get.

    Look out world. Bitcoin is coming. And it wants to help.

    Posted by Pterrafractyl | June 3, 2015, 9:34 pm
  6. Here’s a story that’s going to be something to watch: Overstock.com just issued the first SEC-approved bitcoin-based security. You can now buy some of the $500 million in Overstock.com stock that was just issued over the Bitcoin blockchain. And according Overstock.com’s founder Patrick Byrne, this is just the beginning of the blockchain’s takeover of the financial sector:

    Politico
    Bitcoin vs. the SEC
    6/8/15

    Forget money. Bitcoin 2.0 is about to disrupt everything else. Are regulators ready for it?

    By Ben Schreckinger

    A couple of miles from Wall Street, on the Western bank of the Hudson River, sits a vault in Jersey City maintained by the Depository Trust & Clearing Company. You might never have heard of the DTCC, but if you own stock, bonds or a mutual fund, it takes care of something that belongs to you.

    The DTCC is the clearinghouse for U.S. capital markets. Its Jersey City vault contains about a million physical stock and bond certificates, representing some undisclosed portion of the $43 trillion in total assets the organization holds in custody. This is the center of the entire American stock-trading system. Each share has an owner, and – no matter how fast it changes hands – a clearinghouse keeps track of who owns what.

    This year, Patrick Byrne, the CEO of Overstock.com and would-be financial revolutionary, is taking the first steps in a campaign to smash open the vault. Or, really, to eliminate it – and with it, the whole system that makes the vault necessary. On April 1, the Securities and Exchange Commission approved a request by a private stock exchange partnered with Overstock to deal in “digital securities.” On April 24, Byrne filed a Form S-3 with the Securities and Exchange Commission to register $500 million worth of equity in Overstock as the first digital stock, which the agency is currently reviewing. On Friday, the company offered the world’s first-ever digital security, a corporate bond that does not need SEC approval and could be issued in a matter of days.

    Byrne wants to use the technology behind Bitcoin to create a securities market that exists not in any one particular place, but as a collection of data distributed across computers anywhere on Earth, with no need for the DTCC, the New York Stock Exchange or any of the other middlemen who oversee the world’s capital markets.

    This new system, which he calls Medici, after the banking family that ruled over Renaissance-era Florence, would do something no other stock exchange has ever done. It would skip the centralized clearinghouse entirely, and keep track of trading, clearance, and ownership on everyone’s computers at once. It would transform processes that now depend on centralized institutions for trust, and let people instead transact directly with one another.

    By approving these new securities, the SEC has made the federal government’s first foray into regulating Bitcoin 2.0, a technological force on the cusp of sweeping into the mainstream.

    When people talk about the real potential of Bitcoin to transform the financial system, they aren’t talking about a digital currency that may or may not ever really take off. They are talking about what Byrne and other Bitcoin 2.0 entrepreneurs are trying to do.

    The engine that powers Medici is a new technology called the “blockchain” – the complex, novel computer code that made Bitcoin possible. Unlike an exchange or a clearinghouse, the blockchain – invented and published in 2008 by a mysterious cryptographer known only by the pseudonym Satoshi Nakamoto – is completely decentralized.

    The geeks, lawyers and entrepreneurs who spend their days thinking about the blockchain believe that after it’s done with securities markets, it’s poised to disrupt the way we make and enforce contracts, import and export goods, buy and sell digital media, gamble and even vote. They say it will be as revolutionary as the Internet itself, and pose regulatory challenges that are just as far-reaching — not just for FinCen and the SEC, but for Congress, the CFPB, the CFTC, the FTC, the FEC and others. Already, solitary tinkerers and Fortune 100 companies alike are test-driving applications that will demand the attention of many of these agencies.

    “For the first time in human history, we can have peer-to-peer exchange where trust is not an issue,” says Byrne, who predicts Bitcoin 2.0 will put much of Wall Street out of business. “This is going to separate the men from the boys.”

    Ultimately, the blockchain is likely to touch every corner of the federal government. In the very near term, the Bitcoin market itself is beginning to take on new and more sophisticated shapes. Former bankers for Goldman Sachs and Morgan Stanley, among others, are developing futures in the currency and other derivatives that could help stabilize its price. When those hit the market, they’ll fall under the jurisdiction of the CFTC.

    Blockchain-based “smart contracts,” which will be automatically self-enforcing without the need for court intervention, will pose their own sets of challenges. Already, Evan Greebel, one of the securities lawyers handling the Winklevoss Bitcoin ETF, said he knows of efforts afoot to create smart contracts for car leases that will automatically prevent lessees who default on payments from starting their Internet-connected cars. Surely, the CFPB and Elizabeth Warren will have something to say about that. Greebel says such contracts will have implications for the federal bankruptcy code as well.

    He also predicts that import and export registries will soon migrate to the blockchain, a matter for the Federal Trade Commission to oversee. The technology is perfect for keeping track of chains of custody, so say goodbye to your local registry of deeds while you’re at it.

    The National Association of Voter Officials is working with a startup called V Initiative that wants to put American elections on the blockchain and let people vote from their personal devices – a transformation that goes to the heart of government. And IBM’s running its Internet of Things initiative on Ethereum, a new blockchain protocol that’s an alternative to the original Bitcoin blockchain.

    The blockchain’s radical decentralization raises a host of newer and even stranger possibilities – for instance, markets or gambling networks that exist only as the shared interactions of dozens of users, or millions. It is possible that an illegal activity could arise, even a very large one, with no operator to sue, threaten or shut down.

    Because of the immense potential range of applications, the regulatory tone may have to be set by Congress or the White House. Brito of Coin Center points to the 1997 Framework for Global Electronic Commerce, which was created by an interagency task force in the Clinton administration and called for minimal government interference in the Internet, as a model for the blockchain. “You could take it word for word,” he says.

    Byrne, who holds a PhD in philosophy from Stanford and made Overstock the first major retailer to accept Bitcoin last year, is ready for this brave new world. And he doesn’t believe the SEC, or anyone else, could really hold it back if it tried. The last time Byrne tangled with the agency – a stranger-than-fiction crusade over the inner workings of the stock market that involved organized crime, hedge fund billionaire Steve Cohen, and a full-page ad in the Wall Street Journal featuring the Overstock CEO holding Star Wars villain Darth Maul’s head in his hands – he prevailed. Now, he says the new regime at the SEC is more reasonable than the old. He’s confident the SEC will approve his stock filing, marking another baby step in what Byrne calls the “crypto-revolution.”

    As for the later stages of that revolution, in which the blockchain’s most enthusiastic backers predict it will threaten the livelihoods not just of financial middlemen but many government institutions themselves, Byrne says the world as it is should not be taken for granted. “These central institutions didn’t come out of a burning bush.”

    And now you know: the blockchain will take over the world. Or at least the financial securities markets. And much of the federal government. Maybe even create decentralized markets that no one operates and can’t effectively can’t be shut down will pop up. And blockchain-based “smart contracts,” “which will be automatically self-enforcing without the need for court intervention”. At least that’s the dream.

    And, to the credit of Patrick Byrne, none of of these ideas sound nearly as destructive as the general Bitcoin goal of overthrowing fiat currency everywhere and imposing a digital gold standard on us all. So that’s pretty nice for a change. Not that Bryne wouldn’t love to have Bitcoin overthrow fiat currency and impose a digital gold-standard too. He’s sort of the the Bitcoin true-believer prototype:

    Wired
    Meet Patrick Byrne: Bitcoin Messiah, CEO of Overstock, Scourge of Wall Street

    Cade Metzn
    02.10.14 6:30 am.
    Patrick Byrne says the zombie apocalypse is coming, and there’s one thing that can save us: bitcoin.

    He tells me this during a phone call from his car, a black Tesla Model S that’s winding its way through the mountains above Salt Lake City, on its way to Byrne’s home in the Utah ski country. Byrne is the CEO and chairman of Salt Lake’s Overstock.com, one of the world’s largest online retailers with more than $1.3 billion a year in sales, and he’s about to place an enormous bet on bitcoin, the digital currency that exists only on the internet.

    In the estimation of many leading economists, bitcoin is a fatally flawed idea shaped by people who don’t really understand how money works. But Byrne is an unorthodox thinker, a three-time cancer survivor with a PhD in philosophy who’s never been afraid to fight for what the rest of the world sees as complete madness. Though he runs a company that’s publicly traded on Wall Street, he spent much of the last decade accusing Wall Street’s biggest brokers of widespread corruption — not to mention Wall Street hedge funds, analysts, reporters, and government regulators — arguing in the most grandiloquent terms that their greed would eventually bring the country crashing down. It’s no surprise that his maverick career would collide with the equally iconoclastic bitcoin. It’s as if his whole life has been leading to this.

    As he drives to his mountain cabin, Byrne reveals that his company is a week away from accepting payments in bitcoin, and he sees this as a small but important step toward a financial revolution the world so desperately needs. He has long warned that our economy is hurtling toward another massive recession — what he calls the zombie apocalypse — and he believes bitcoin can shelter us from the fallout.

    If the digital currency reaches its true potential, he tells me, it might even avert this apocalypse all-together. “Someday, either zombies walk the Earth or something close to that,” says Byrne, the son of the man who built the GEICO insurance empire, Jack Byrne, and a protege of Warren Buffet, the most successful investor in the history of Wall Street. “Bitcoin is the solution.”

    In recent months, countless others have floated bitcoin as a panacea for the world’s financial ills. But like Marc Andreessen, one of the founding fathers of the web browser, who has also put his weight behind the digital currency, Byrne brings more than highfalutin metaphors to the table. The 51-year-old has proven that, beneath his wonderfully entertaining and often perplexing way of describing the world, he has a knack for seeing where things are going before others do.

    The problem with the modern economy, Byrne says, is that it rests on the whims of our government and our big banks, that each has the power to create money that’s backed by nothing but themselves. Thanks to what’s called fractional reserve banking, a bank can take in $10 in deposits, but then loan out $100. The government can make more dollars at any time, instantly reducing the currency’s value. Eventually, he says, laying down a classic libertarian metaphor, this “magic money tree” will come crashing down.

    But bitcoin is different. It’s like online gold: The supply of the digital currency is controlled by software running across a worldwide network of computers, and its value is decided not by the feds or the big banks, but by the people. “It can make our country more robust,” says Byrne, a disciple of the Austrian school of economics, which holds that our economy should rest on the judgments of individuals, not a central authority. “We want a money that some government mandarin can’t just whisk into existence with a pen stroke.”

    Zombies. Magic money trees. Mandarins. As Byrne admits, it’s a ten-dollar answer to my ten-cent question about his plans for the future of Overstock.com, and although I know the man well, I can’t help but wonder how much of this is just him calling attention to himself. But a week after this phone call, Byrne will make good on his promise, as Overstock becomes the first major online retailer to accept payments in bitcoin, letting you buy everything from patio furniture to smartphone cases with the fledgling digital currency. And the following month, during Overstock’s quarterly earnings call, he will reveal that he has personally converted millions of dollars into bitcoin. The Overstock CEO is placing more than one big bet on an unpredictable future, but Byrne has proven himself prescient before — about the internet and the media as well as the economy.

    It’s only natural that Overstock would be the first big-name company to embrace bitcoin, and you can bet that Byrne is serious about pushing the digital currency into the everyday world. On one level, Overstock is your basic bargain retailer, a company that will sell you just about anything on the cheap. But under the leadership of Byrne — who’s not only a doctor of philosophy but a onetime amateur boxer — this is also a company that’s seven years into a lawsuit that accuses venerable investment banks Goldman Sachs and Merrill Lynch of a “massive, illegal stock market manipulation scheme.”

    At times, his battles with Wall Street have left him a lonely figure, belittled by the establishment. For years, large portions of the financial press questioned his sanity as he so vehemently — and so colorfully — claimed that some of the biggest names on Wall Street were complicit in a scheme to drive Overstock and other companies out of business using a loophole in the stock market. But after the financial crash of 2008, the Securities and Exchange Commission moved to close that very hole. And in the years since, Overstock has established itself as a profitable business, even as Byrne continues his crusade against Wall Street.

    “He’s not just an opinionated jerk, though it sometimes sounds that way,” says Bill Hambrecht, the investment banker who helped Byrne take Overstock public in 2002 using what’s called a Dutch auction, a method that loosens the influence of the big Wall Street banks, preventing them from taking their typically enormous cut of an IPO. “He puts us on a little bit, just to bring attention to the issues. But he has brought attention to them, and though he has made some wrong calculations, he’s hung in there, and he has built a really good business — something I don’t think he’s gotten proper credit for.”

    Adopting bitcoin is the next step along this same road. As Overstock embraces the digital currency, Byrne predicts it will spur other big names to follow its lead, including rival Amazon, and push the world toward a future where bitcoin is a true alternative to the dollar. But, looking further down the road, as he is wont to do, he also believes that the very public, math-driven system that underpins bitcoin can remake Wall Street, eliminating the market loopholes he has railed against for so many years.

    The Sith Lord

    Patrick Byrne calls it his finest moment. In August 2005, during an hour-long conference call, he told an army of investors and reporters that Wall Street was plagued by a campaign to exploit a flaw in the stock settlement system and make millions at the expense of innocent companies, including Overstock, whose share price was in free-fall. The scheme, he said, was driven by a “Miscreants Ball” of players, including hedge funds, financial analysts, government regulators, private detectives, trial lawyers, perhaps the mafia, and even the press itself.

    At one point, he went so far as to say that this sweeping campaign was orchestrated by a single mastermind, someone he called the “Sith Lord.” It became known as the “Sith Lord call.”
    Over the previous six months, Byrne had waged an underground battle against those he believed were trying to bury his company and others like it. But the call brought his efforts into the mainstream, and it would define Byrne in the popular press and across the internet for years to come.

    Though Byrne sees the call as his finest moment — a moment when he exposed the dark underbelly of the financial world — much of the press painted it as poppycock. The next day, he appeared in the The New York Post with a UFO flying over his head. And as he pushed back in pointed, clever, and sometimes angry ways — insisting that the press was complicit in the schemes he was fighting, that reporters were too close to the hedge funds and banks they were covering — the heat on him only grew.

    At one point, he accused Fortune reporter Bethany McLean of “giving Goldman traders blowjobs.” And this did not lead to more favorable coverage from Fortune or the rest of the financial media. “Maybe the Sith Lord is actually Patrick Byrne himself — because he has become his own worst enemy,” McLean later wrote in Fortune in Fortune. “Nietzsche said it best: ‘Whoever fights monsters should see to it that in the process he does not become a monster.’” In The New York Times, veteran financial columnist Joe Nocera branded the conference call “loony beyond belief” and described Byrne as a menace who harassed reporters just to silence criticism of his company.

    In the realm of public perception, it was quite a tumble for Byrne. After he launched Overstock in 1999 — using the internet to reinvent the flea market business, selling discount and clearance and, yes, overstock goods on the cheap — he was a golden boy of the dot-com revolution, an executive with a pedigree the financial media couldn’t resist. As a teenager, he would skip school to spend afternoons with Warren Buffet, his “Dutch uncle,” whose Berkshire Hathaway eventually purchased his father’s company. He studied Mandarin at Dartmouth and philosophy at Stanford, and after he finished his PhD, Buffet tapped him to run one of Berkshire’s many companies, a midwestern outfit that made uniforms for policeman, firefighters, and the military. “I was the only goy in the schmata trade,” Byrne remembers. And as the first wave of dot-coms went belly up, his new company used this to its advantage, turning many of those bankrupt dot-coms into suppliers by snapping up their inventory.

    He was also tall and blonde and classically handsome. And he was a three-time cancer survivor. In his twenties, Byrne was diagnosed with testicular cancer, and it metastasized throughout this body. “His mother called me and said: ‘If you want to say goodbye to Pat, this is the weekend. The doctor doesn’t expect him to live much longer,’” remembers Brown University professor Onesimo Almeida, a close friend who first met Byrne in early-’80s China, sitting in the lobby of the Bejing Hotel. “When we went to see him, he was skin and bones and his voice had changed to this high-pitched squeal. He said: ‘I think that I’m turning this around. I’m starting to feel better.’” After Byrne fought back from this low point, the cancer returned twice more, and twice more, he fought back. It was a narrative the press lapped up time and again.

    But after the Sith Lord call, all the praise turned to scorn. In addition to such enormous criticism from Fortune and The Times, he received a constant stream of online vitriol from an army of other news outlets and pundits, including, most notably, a former BusinessWeek reporter named Gary Weiss, who ran a blog that seemed to exist only as a means of belittling the Overstock CEO.

    Short Selling Gets Naked

    Some call it a crusade. Others call it a jihad. But Byrne calls it his mitzvah — a holy mission pursued for the good of mankind. He launched this campaign against many Wall Street practices, but mainly, he took aim at something called “naked short selling.”

    With a short sale, traders borrow shares and then sell them, anticipating a drop in the price. If it does drop, they can buy back the shares and turn a profit. A naked short sale works much the same way — except that traders don’t actually borrow the shares. They sell shares they don’t have, and if this happens in sufficient numbers, it can flood the market with nonexistent shares — “phantom stock” — and actually drive prices down.

    Basically, Byrne was complaining about a flaw in the stock settlement system, the system that controls the delivery of stock from one party to another. Three days after a trade, a seller must deliver the shares to the buyer. But with a naked short sale, this doesn’t happen. Shares are sold but not delivered. Some failures-to-deliver are a natural part of a rapid-fire trading system, but massive failures in a specific stock could indicate an abusive campaign to manipulate prices. “The stock settlement system was a mess,” Byrne says, quoting legendary investor Charlie Munger. “It was like having slop in a nuclear reactor.”

    Byrne’s stance was that hedge funds and banks were exploiting this hole, that regulators and legislators were turning a blind eye to it, and that reporters were ignoring the practice, too, if not actively supporting it.

    Certainly, most of the press discussed naked shorting as some sort of myth created by Byrne and others. But even as his father, the onetime chairman of the Overstock board, came out against his son’s campaign, Byrne kept going, as only he could.

    When BusinessWeek reporter Tim Mullaney sent him a list of questions — questions Byrne characterizes as the “are-you-still-beating-your-wife?” variety — the Overstock CEO promptly published both questions and answers on the web, effectively killing the magazine’s story. He planted someone inside a meeting of the Society of American Business Editors and Writers, recording what was said about him — that he needed to be stopped — and posting that online, too. He created a new company, staffed by his own journalists and web mavens, that would do nothing but fight his crusade, battling the traditional press through a website he called Deep Capture — a nod to Byrne’s claim that regulators had been “captured” by Wall Street, that there was a revolving door between the big banks and the top positions at the SEC.

    “Mark Twain said: ‘Never get in a public fight with someone who buys his ink by the barrel,’” Byrne tells me. “I say: ‘Someone who buys ink by the barrel shouldn’t get in a public fight with a man who buys bandwidth by the gigabyte.’”

    In 2006, when his efforts to expose Wall Street abuses were rebuffed by Senator Richard Shelby, then chairman of US Senate’s banking committee, Byrne went on national radio and called the Senator an “ignorant cracker.” He and his Deep Capture team spent years trying to prove that his biggest critic, former BusinessWeek reporter Gary Weiss, maintained control over the Wikipedia pages that painted such a negative portrait of Byrne and his crusade — and eventually, they succeeded, digging up emails implicating Weiss and forcing his removal from the site. Overstock itself went so far as to file a $3.48 billion lawsuit against Goldman Sachs, Merrill Lynch, and seven other prime Wall Street brokers, claiming they too were complicit in these naked shorting schemes.

    And, then, in the fall of 2008, the market crashed. The fallout would cast Byrne’s crusade in whole new light.

    Beyond Bitcoin

    Once again, Byrne is looking beyond the moment. He argues that bitcoin is an idea that can change more than money. He believes it can change Wall Street too, putting an end to the corruption he has spent so many years fighting. And others agree.

    Bitcoin is a currency, like the dollar or the euro, and it’s a money transmitter, like a credit card network or PayPal. But at the most basic level, the worldwide software system that underpins bitcoin is really just a means of instantly verifying that you’ve sent something to someone else. “It allows for the decentralized proof and transfer of ownership,” says Fred Ehrsam, the co-founder of Coinbase, the outfit that handles bitcoin transactions on behalf of Overstock.

    Because its ledger of funds is completely public, users always know how much money there is and where it is. That’s one of the reasons Byrne is so attracted to it. He knows that, as with gold, the supply is limited. Governments and banks can’t make more of it. But as Ehrsam points out, the bitcoin framework could also be used for things other than money — like stocks.

    “It so happens that the first application of this is payments and money, but it doesn’t have to be,” Ehrsam says. “It could transfer a securities, too.” In other words, it would be feasible to build a bitcoin for the stock market, a system that would quickly, easily, and reliably move securities, a system that would make it clear who owns what at any given time, a system, in other words, that could completely eliminate naked short selling and other schemes like it.

    When I toss that idea at Byrne, he tells me that he’s already thought of it, that it could prevent an entire ecosystem of funds and banks from gaming the market. “It’s like you’re reading my mind,” he says. “You would have an instant, frictionless market, while having the added benefit of wiping out a whole parasitic class of society — that is, the whole financial industry.”

    It’s an outrageous and ridiculously ambitious idea. But it also makes perfect sense, and it just might happen. The bitcoin software is open source, meaning anyone can make a copy and modify it as they see fit. That includes Patrick Byrne.

    Yes, some of the world’s brightest financial minds question whether bitcoin even has a future as a digital currency. That includes no less a name than New York Times columnist and Nobel Prize winning economist Paul Krugman, who says it’s not a reliable store of money, much less a viable way of moving it from place to place. But that doesn’t phase Byrne. He’s been there so many times before, and he typically responds in the same way. “Paul Krugman was great,” Byrne says, “until he went crazy.”

    As we can see, it’s no surprise that Patrick Byrne, son of one of Warren Buffet’s proteges, really doesn’t like the government. Especially when the government start involving itself in things like the money we all use:


    The problem with the modern economy, Byrne says, is that it rests on the whims of our government and our big banks, that each has the power to create money that’s backed by nothing but themselves. Thanks to what’s called fractional reserve banking, a bank can take in $10 in deposits, but then loan out $100. The government can make more dollars at any time, instantly reducing the currency’s value. Eventually, he says, laying down a classic libertarian metaphor, this “magic money tree” will come crashing down.

    But bitcoin is different. It’s like online gold: The supply of the digital currency is controlled by software running across a worldwide network of computers, and its value is decided not by the feds or the big banks, but by the people. “It can make our country more robust,” says Byrne, a disciple of the Austrian school of economics, which holds that our economy should rest on the judgments of individuals, not a central authority. “We want a money that some government mandarin can’t just whisk into existence with a pen stroke.”

    so that’s rather loopy and unhelpful.

    But as we can also see, Patrick Byrne really, really, really hates Wall Street, and in particular activities like “naked short selling”. And if Patrick Byrne wants to wage a war on naked short selling and other forms of Wall Street manipulation and fraud, more power to him.

    So that’s going to be part of the fun that emerges as the blockchain invasion of the financial world takes place: Powerful Libertarians like Patrick Byrne may be trying to sells us all on a new digital gold-standard, but that’s not all they’re doing. They also just might end up “Occupying Wall Street” in a fundamentally new way. And as long as it doesn’t create a regulatory nightmare environment prone to fraud, or maybe even cuts down on fraud, it’s hard to complain if Byrne’s bitcoin scheme ends up burning down Wall Street.

    But that’s of course a catch: switching over to a Bitcoin-based trading scheme could potentially eliminate activities like naked short-selling and all sorts of other nefarious activities. Great! But it’s going to be a lot harder to keep cheering on the Wall Street blockchain revolution if the quasi-anonymous nature of blockchain-based platforms also end up removing the ability of regulators to engage in other sorts of useful regulations, or reverse illicit trades when they’re identified. And since its folks like Patrick Byrne that are leading the digital charge against the Wall Street status quo, it’s hard to see how Patrick Byrne’s blockchain revolution isn’t going to end up being another Libertarian trojan horse given their activist track records.

    And that all raises another question: If the blockchain-ization of securities trading put a crimp in some questionable practices like naked short-selling, but it also facilitated all sorts of other forms of questionable practices (like obscuring ownership or what trades actually took place to dodge capital gains taxes or whatever), would Wall Street actually oppose the embrace of Bitcoin? Is someone with Patrick Byrne’s “reform” agenda really a threat to Wall Street?

    Seeka Alpha
    Patrick Byrne’s Latest Con Game: Occupy Wall Street

    Gary Weiss
    Nov. 14, 2011 9:45 AM ET

    As I pointed out recently in a Street.com column, Occupy Wall Street is faced with the continuing challenge of keeping itself from being exploited, whether by street criminals or crackpots.

    So I guess it is inevitable that the stock market conspiracist, Overstock.com (NASDAQ:OSTK) CEO Patrick Byrne, would descend upon Liberty Plaza, camera crew in tow, as he did the other day.

    Apart from the Young Turks program on Current TV, which obviously didn’t check too carefully into Byrne’s background, the latest publicity stunt drew attention only in the blogosphere. It’s a shame, I think, because this must surely be the most bizarre visitor to glom on to the OWS movement.

    After all, this is a “libertarian who was fond of the economic ideas of Milton Friedman,” a Raw Story blogger noted. In other words, an advocate of soak-the-poor economic policies is….endorsing Occupy Wall Street?

    Hey, if he was genuinely in favor of OWS’s agenda, more power to him. But his aim is not to reform Wall Street or resolve income inequality, but to pursue his tiresome crusade to get Wall Street off the hook for the financial crisis, which Byrne lays at the foot of a nefarious conspiracy of “naked short sellers.”

    Byrne told the Young Turks that “Wall Street had Washington, D.C. ‘by the throat’ and was not allowing the government to properly regulate the financial sector.”

    “‘That core message, which is what I understand to be the core value of ‘Occupy Wall Street,’ is right on the money,’ Byrne noted.”

    However, what OWS is protesting is the real Wall Street, the Wall Street that is responsible for foreclosures and runaway derivatives and economic collaphse, and not the conspiracy theories that Byrne has been promoting for the past six years.

    Indeed, OWS wants business to be regulated, and that runs counter to Byrne’s libertarian philosophy and his business practices. His FUBAR accounting is the subject of a Securities and Exchange Commission investigation and California prosecutors are suing Overstock, seeking $15 million from the company for systematic consumer ripoffs.

    The other OWS core issues don’t exactly work in Byrne’s favor, either.

    He is a member in good standing in the 1%, and favors economic policies, and politicians, that would entrench economic inequality. Where it gets even more interesting concerns the other OWS core issue, which is the influence of money in politics. Byrne is a poster boy for that cause.

    Thanks to the trust fund that he draws from his billionaire father, former GEICO CEO John Byrne, Patrick Byrne is chief source of funding for the school voucher movement, a libertarian, Milton Friedman-backed movement is aimed at tossing public education on the trash heap. When Utah voters rejected school vouchers a few years ago, he said that they had failed an “IQ test.”

    He is the single biggest campaign contributor in Utah, as the Deseret News pointed out in a rare skeptical article on Byrne back in 2006.

    Byrne restricts his contributions to the hard right, and he expects results for his money. Byrne “gave $75,000 to [Jon] Huntsman’s 2004 gubernatorial campaign — by far the most that any individual gave him,” the newspaper reported.

    “Byrne is not only the top individual donor to Huntsman, he even gave more than the Huntsman Corp. (which provided $63,634), or any of the governor’s family members,” said the newspaper.

    Thanks to Byrne’s cash-on-the-barrelhead politics, the Overstock CEO purchased a special session of the Utah legislature to consider some wacky legislation targeting his naked shorting conspiracy theories. But then Huntsman did something unusual for a bought-and-paid-for politician.

    The Byrne-backed bill was so nutty that Huntsman pulled the plug on it. “There are those who believe Overstock has been using the Legislature as a distraction against its own problems. It raises serious questions,” a Utah legislator told the Associated Press.

    Byrne, all class, called the legislator “a squish” and a “yellow belly.” In fact, taking on Byrne, and his bucks, showed considerable fortitude. But most of Byrne’s outrage was aimed at the governor. After all, he paid good money for Huntsman. Double-cross!

    Byrne has been bad-mouthing Huntsman ever since, and that has been reported by the media without a word about the reason for his ire.

    So here we have one of the most noxious examples of the intersection of money and politics, whose past contributions have gone to Swift Boat Veterans for Truth – the smear campaign against John Kerry – and an assortment of far-right pols. After sinking his inherited cash into John McCain’s coffers in 2008, in 2010 he funded the Tea Party Republican senate candidate from Utah, Mike Lee, and congressional candidate Jason Chaffetz, another rising star of the Tea Party.

    Also in 2010 he poured thousands from his trust fund into Orrin Hatch’s political action committee, as well as the campaign coffers of Mitt Romney and the National Republican Senatorial Committee. The latter got $30,400. This year he has endorsed Ron Paul, the furthest off the charts Republican candidate,

    Oh, and I should mention that the latest passion of Byrne’s, apart from Ron Paul, is Carl Wimmer, a congressional candidate in Utah who is slightly to the right of Genghis Khan..

    So why is a far-right Republican-libertarian making nice with Occupy Wall Street? Simple. His aim is to divert OWS away from genuine concerns that don’t exactly work in his favor — income inequality and the role of money in politics — to his nutty anti-naked-shorting campaign.

    Yes, Patrick Byrne, the Wall Street-slayer, is also a far-right nut job with a long history of supporting the Tea Party. Look out Wall Street!

    Stil, it’s possible that Byrne’s foray into blockchained securities will shake things about in a way that clips the big banks’ wings without all the negative spillover effects on the rest of society that we’ve come to expect from the Libertarian approach. Probably not, but who knows.

    So maybe we should wish could good luck to Patrick Byrne in his quest to use blochchain technology to piss off the banksters. Or maybe we shouldn’t wish such luck. It’s not really clear at this point.

    But one thing is clear: If Byrne is planning on making banksters run in fear of the power of Bitcoin technology, he’s going to need a lot of luck.

    Posted by Pterrafractyl | June 9, 2015, 2:36 pm
  7. Here’s an interesting peek into the kind of inner turmoil the Bitcoin world is experiencing as the debate over what to do with the limited size of the blockchain and continues to pit the small-scale miners that could see their investments destroyed from an overly ambitious change to the mining rules vs the big boys like 21 Inc that are going to want a vastly-increased blockchain size (possibly with minimal transaction fees) in order to thrive.

    As the below points out, battle of the blockchain is only getting started and it doesn’t necessarily have to end with one side winning and the other losing. Because if one side just decides to “fork” the Bitcoin protocol with their own version, you might just end up with two competing blockchains and no obvious winner or loser. Just two competing, increasingly bitter blockchains:

    Cryptocoin News
    A Bitcoin Fork Should be Avoided at All Costs

    P. H. Madore
    14/06/2015

    Anywhere you look, there seems to be a consensus that something has to change with the size of the Bitcoin blocks. Words like “scaling” come up a lot, and how we must be able to compete with Visa and MasterCard if everyday people are ever going to take Bitcoin seriously.

    While this may be true, there are extremists on both sides of the issue. There are some who advocate lowering the block size to 400kb, and there are others who believe a fork will be necessary in spite of those opposed. This could be an astronomically bad situation for Bitcoin. If the majority of miners don’t go along with the fork direction, ostensibly Bitcoin-XT, then the new network won’t be near as secure and likely won’t be as fast as the nodes and miners left on the other side of the fork.

    In any team situation, there are going to be people you don’t like working with. That doesn’t mean you leave and start a new project, solely for that reason. Rather, you find a reasonable solution to the problem at hand, one that the element you don’t agree with will eventually accept. As John Light said in my recent CCN podcast, there isn’t really a discussion on whether or not the block size needs to be increased. The question is really how and when.

    Some of the most die-hard folks in opposition of the increase say that the increase could be implemented in “a couple of weeks,” but such a position fails to acknowledge exactly how long a time that a couple of weeks actually is. In trading time, it’s an eternity. If you’ve got a couple of weeks which allow the mainstream and anti-Bitcoin press to say the network has reached its capacity, that there is now irrefutable proof that such a solution can’t work for mass usage, then you’ve also got a pristine situation for something even worse: mass exit strategies being executed by large holdings. A self-eating bear that the value of Bitcoin could likely never recover from.

    And let’s be clear: the fact that such elements raise this as a defense of their position, that such measures could be taken quickly, is also an admission that they should be taken at all. If you agree that block sizes should be increased at some point in the future, then why can you not agree that they should happen sooner than that? Is this some play to appear relevant, or moreover to illustrate dissatisfaction with other facets of the situation? Are you saying no to the developers proposing the increase, rather than saying no to the actual increases? Would this be the same if you were the lead developer, and even your most banal statements were echoed by hundreds of people within hours of making them?

    Scaling is important, but it’s not all that matters. The opposition to block size increases have several valid reasons for their opposition, one being that it will increase the cost to miners of mining. This is a legitimate concern, and there needs to be some evidence that miners will be compensated on the other side of it. We need mining to maintain the security and integrity of Bitcoin. It would not be ideal if only large operations could afford to do mining. It would not be ideal if those coming to Bitcoin for the first time had to wait hours or days for their first transactions to go through.

    At the same time, it would not be ideal if “free transaction” continues to be a refrain used by those promoting Bitcoin. It is not free to move bitcoins as well as it is not free to create them. It is not free to store the block chain, either, though it certainly gets less expensive as time goes on. These considerations need to be given the respect they deserve. The entire community needs to agree that free transactions are nonsense. If you can’t pay a penny to send some money, why then, really, are you sending money? Perhaps the increased costs of a block size increase should hinge on a mandatory increase in transaction fees. If we can now do 100 transactions per second and the mandatory cost of a transaction is a penny or half of a penny, wouldn’t miners be less likely to feel it so negatively? Wouldn’t they be able to compensate and, over time, profit by this?

    The best solution will answer the concerns of everyone at once. This sounds impossible, but it seems that other divided groups manage it everyday. Obstructionists tacticians need to be ostracized. Those who are proven wrong in their position and then simply double up with some theoretical or otherwise unlikely reasoning to return to that position, rather than doing the rational thing, which is to concede it, should be replaced with equally competent people. As Nick Szabo recently said of the whole thing, we need less noise and more science. The science seems to disprove the doomsday predictions of the anti-increase crowd, and also seems to underline that it’s not as dire as the other crowd makes it seem either.

    As we can see, the distributed nature of Bitcoin may make for a great “no one controls Bitcoin, so it’s filled with purity and goodness!” sales pitches, but it also leaves quite a bit of ambiguity over how to best to achieve the necessary steps of upgrading the whole system. And part of the reason its so ambiguous is that a “hard fork”, where one group of miners simply decides to run their own version of the blockchain protocol, is entirely possible due to the “no one runs Bitcoin” nature of the system. Hence the need for op-ed about how bad an idea a “hard fork” would be.

    But, of course, it’s worth keeping in mind that a “hard fork” isn’t necessarily a complete disaster for all involved. For instance, if an entity like 21 Inc that aims to fill the blockchain with microtransactions while also dominating the mining market (without necessarily making most of its money from mining) successfully executes a “hard fork” with a new, bigger blockchain, that doesn’t necessarily kill off the current blockchain. Blockchains follow a protocol, and as long as enough people keep using the old protocol while other switch over to the newer “hard forked” protocol, there’s nothing stopping both blockchains from co-existing from that point forward. And here’s the extra prize: If you own bitcoins, and Bitcoin does a “hard fork” that results in two new competing blockchains you get to “double spend” your old bitcoins. Because when a “hard fork” happens, both sides copy ALL of the existing bitcoin history unless the new blockchain creators hard code a set of account revisions. But assuming that doesn’t happen, any existing bitcoin accounts automatically get copied over to the new blockchain while staying put in the old blockchain.

    So who knows, given the “double-spending” fun and excitement that could ensue, maybe the occasional “hard fork” isn’t going to be such a bad idea for the Bitcoin community. Users might like it. Granted, the miners might not like the changes very much, but there’s a growing number of interested parties that don’t necessarily care about mining and that’s part of what makes the bitcoin “one-dollar-one-vote” system so interesting to watch: at the end of the day, bitcoin, which aims to supplant all other forms of money, is itself controlled by the profit-motives:

    FT Alphaville
    Bitcoin Opec favours 8MB blocksize increase
    Izabella Kaminska

    Jun 16 18:05
    Part of the BitcoinMania series

    Bitcoin wants to grow. Sadly, because the Bitcoin protocol restricts the size of every block mined on the network to 1MB, it can’t scale easily. There’s a limited amount of transactions/data that can be consolidated into every block, which creates something of an artificial scarcity problem.

    Some maintain good old fashioned capitalism can resolve the problem. If there’s a limit, people who want to transact quickly should pay to have their transactions/data prioritised in the chain.

    Miners, especially those having a tough time covering their costs these days, favour this approach. Their view is that the sooner block size is restricted, the sooner the market will be able to find a true value for bitcoin transactions. Also, it’s not healthy for the miner network to depend on speculative inflows forever. True miner revenue would be like giving bitcoin a proper business model. It might also help eliminate blockchain spamming and free-loading.

    As per the net neutrality schism, however, this approach is not favoured by bitcoin idealists who insist transactions should be kept synthetically cheap (cross-subsidised by speculators) to keep people using the network. Nor is it favoured by those corporations whose own business models now depend on the bitcoin blockchain’s costless state. [There are even those who admit the network could become prohibitively expensive if not totally uncompetitive if miners were to charge fees directly to users.]

    This faction consequently wants the block size increased to 20MB, so that transactions don’t get crowded out and can stay free for as long possible.

    Sadly for this group, it’s the miners who have the power because they’re the ones who control the network. Bitcoin may be a consensus system, but it is a consensus system for a small oligopoly of miners (Chinese oligopositic miners in particular) not for users.

    What we do know is that in the not too distant future a Bitcoin mining meeting/election will probably be called and votes will be cast on which way to go. If as the users want the 20MB block-size is approved by the network, the so-called great “forking” of the chain will occur. If not, transactions might start to get pretty expensive pretty quickly.

    And the latest news on the campaign from comes by way of this alleged proclamation by a cartel of Chinese miners.

    Roughly translated (courtesy of this redditor):

    China’s five largest mining pools gathered today at the National Conference Center in Beijing to hold a technical discussion about the ramifications of increasing the max block size on the Bitcoin network. In attendance were F2Pool, BW, BTCChina, Huobi.com, and Antpool. After undergoing deep consideration and discussion, the five pools agree that while the block size does need to be increased, a compromise should be made to increase the network max block size to 8 megabytes. We believe that this is a realistic short term adjustment that remains fair to all miners and node operators worldwide.

    Why upgrade to 8MB but not 20MB?

    1.Chinese internet bandwidth infrastructure is not built out to the same advanced level as those found in other countries.

    2.Chinese outbound bandwidth is restricted; causing increased latency in connections between China & Europe or the US.

    3.Not all Chinese mining pools are ready for the jump to 20MB blocks, and fear that this could cause an orphan rate that is too high.

    The bitcoin miners of China agree that the blocksize must be increased, but we believe that increasing to 8MB first is the most reasonable course of action. We believe that 20MB blocks will cause a high orphan rate for miners, leading to hard forks down the road. If the bitcoin community can come to a consensus to upgrade to 8MB blocks first, we believe that this lays a strong foundation for future discussions around the block size. At present, China’s five largest mining pools account for more than 60% of the network hashrate. Signed, F2Pool, Antpool,BW,BTCChina,Huobi June 12th, 2015 via http://www.8btc.com/blocksize-increase-2

    The above is interesting for three reasons.

    Reason 1: Anacyclosis.

    Reason 2: Chinese miners seemingly do understand that some level of cross subsidisation is necessary if bigger businesses and services are to be bolted onto the blockchain with a view of cultivating user dependence that empowers the miners in the longer run (in the manner of a traditional drug marketeer), but also that they themselves are restricted by China’s own net capacity issue.

    Reason 3: because it’s all so similar to what happens with oil and Opec, and speaks volumes for the actual “democracy” in the system. (Namely, there isn’t any. China — the Saudi Arabia of bitcoin — dominates.)

    So the Chinese mining oligopoly is willing to let the blockchain grow, just not so much that China’s limited internet capacity ends up knocking them out of the mining game. That’s a pretty strong sign that the battle over the bitcoin blockchain might not be so smooth. Why? Well, increasing the size of the blockchain “blocks” from 1MB to 8MB is certainly a step in the right direction. But don’t forget that increasing the blockchain size is just one of the key areas Bitcoin needs to improve if it’s going to take over the world of payment processing. Speeding up the transaction times, which can currently take up to 10 minutes, is another key area. So if the Chinese mining oligarchs are worried about China’s limited network speeds impacting their ability to mine larger blocks, what’s their likely response to proposals to, say, speed up the confirmation times down to a minute?

    That’s all part of what makes Bitcoin such a fascinating experiment: Bitcoin wants to take over the world. Profitably. Using a one-dollar-one-vote system.

    Posted by Pterrafractyl | June 16, 2015, 3:17 pm
  8. Here’s a new bitcoin service that might leave Wall Street grinning with anticipation, but it’s very unclear how the rest of the bitcoin fan base is going to react: The company offering the service, Elliptic, claims to have invented an anti-money-laundering service that can allow banks to know who owns what bitcoin account by scraping the web and darknet for hints about who owns what. And it’s apparently able to identify the bitcoin account owners with stunning accuracy:

    Business Insider
    New bitcoin technology can tell banks where coins come from with incredible accuracy

    Oscar Williams-Grut

    Jun. 18, 2015, 4:33 AM

    Elliptic, a bitcoin analytics and storage startup based in London, thinks it’s just made a huge breakthrough that could make banks way more interested in bitcoin.

    The company has created a sophisticated bit of software that it says can identify where a bitcoin has come from. That’s a big deal for banks, which have a legal obligation to find out where the money they hold is coming from to ensure they’re not holding proceeds of crime.

    Bitcoin isn’t untraceable — every transaction is recorded on a public ledger called the blockchain. But the digital wallets that carry out transactions are anonymous, making it extremely difficult to actually make sense of the data. You could do some digging around and make a guess, but it’s hard and time-consuming.

    That means banks have been wary about holding bitcoin — if they take a bitcoin that’s just been earned selling drugs in a dark web market like Silk Road 2.0, or that has passed through a known money-laundering service, they could end up in huge trouble with regulators.

    Elliptic says its tool, built by 4 PhD holders, can make a hugely accurate guess as to who each wallet belongs to — and it can do so in real-time. Using machine-learning, its software crunches through the web and dark web, skimming references to wallets and other digital clues to build up a picture of the owner.

    Tom Robinson, Elliptic’s cofounder, told Business Insider the tool could be a “game changer for the institutionalisation of bitcoin.” If banks can satisfy anti-money laundering regulation then they can start to think about handling bitcoin. The tool was created after conversations with dozens of lenders.

    Elliptic has today released a visualisation tool showing the flow of bitcoin between entities over the entire six- year history of bitcoin, naming the 250 largest entities where bitcoins are sent to and from.

    In an emailed statement on Thursday, Elliptic’s CEO James Smith said “if digital currency is to take its legitimate place in the enterprise it inevitably must step out of the shadows of the dark web. Our technology allows us to trace historic and real-time flow, and represents the tipping point for enterprise adoption of bitcoin.

    He added: “We have developed this technology not to incriminate nor to pry; but to support businesses’ anti-money laundering obligations. Compliance officers can finally have peace of mind, knowing that they have performed real, defensible diligence to ascertain that their bitcoin holdings are not derived from the proceeds of crime.”

    We’ll find out if Elliptic’s service lives up to the hype, but it’s a reminder that the quest to turn bitcoin into the dominant currency of financial world while maintaining bitcoin’s status as the digital currency of choice for the digital underworld isn’t really going to an option unless money-laundering is basically legalized. Or, rather, unless money-laundering is formally legalized (It’s already basically legalized).

    Posted by Pterrafractyl | June 19, 2015, 10:20 am
  9. For-profit microfinanciers for the global poor had better watch out: they have competition. Sharia-compliant competition. Sharia-compliant microfinance competition that uses Bitcoin for some strange reason:

    CoinTelegraph
    Bitcoin Brings ‘100% Mathematical Certainty’ to Comply With Islamic Law

    Jamie Redman

    2015-06-25 03:33 PM

    CoinTelegraph spoke with Matthew J. Martin on why Bitcoin is better for financial services companies that want to attract Muslim clients and offer “sharia-based” financial products.

    Matthew J. Martin is the founder of the startup Blossom Finance that uses Bitcoin to help Muslims with Islamic financial law. Blossom Finance, is a microfinance firm based in Indonesia. The company collects capital from investors all around the world and forwards the funds to microfinance institutions for investments. After an annual cycle the company distributes profits back to investors.

    With Bitcoin, Martin says “transaction fees are considerably lower” and also offers greater transparency due to its public ledger. By using micro-financiers, Blossom does not break its customers’ religious law of collecting interest.

    CoinTelegraph: How are you building a business using Bitcoin and providing assurance to others that they are not breaking Islamic Law?

    Matthew J. Martin: Blossom uses bitcoin to move money cheaply across borders and to maintain a publicly verifiable ledger of those movements. We also use bitcoin multi-sig wallets for escrow purposes. Unlike existing crowd-sourced microfinance platforms which are essentially a “black box,” bitcoin offers verifiable proof of movement of funds.

    Regarding sharia, it’s important to understand the five key principles of Islamic finance which include:

    No interest (usury)
    No excessive uncertainty (“gharar”)
    No harm to society (alcohol, gambling, pornography, etc…)
    Ownership of underlying assets (no margin trading / no fractional reserve banking)
    Profit and loss sharing

    Our model is quite simple in terms of sharia compliance. We use a structure called Mudaraba, which is universally accepted amongst scholars as the ideal mode of sharia financing. The Mudaraba structure does not carry interest, but rather shares profits and the risk of losses between the investor and the entrepreneur.

    A Mudaraba is a profit-sharing structure where an investor provides capital to an entrepreneur for a project in exchange for a percentage of any profits generated. This structure was used by Prophet Mohamed as an entrepreneur with an investor named Khadija (who later became his wife) to embark on a caravan trading journey and sell the wares in exchange for sharing the profits with Khadija. He later narrated this as an example to his close companions.

    Blossom only invests in sharia compliant businesses, which are not engaged in prohibited activities. Our microfinance partners in Indonesia conduct due diligence on each applicant to verify their business activities.

    One nice aspect of bitcoin is that it ensures ownership of underlying assets with 100% mathematical certainty. Our microfinance partners and beneficiary businesses have the guarantee that the money invested into them is not done on margin or with fractional reserve practice, but rather its existence as a real asset is publicly verifiable using the blockchain.

    CT: Can you give a description of Blossom Finance and how you implement Bitcoin technology?

    MM: Blossom crowd-sources capital and invests it into profitable microfinance in Indonesia using a sharia model. Capital providers are accredited individuals and institutions – we pool their investments into a “fund” and invest the fund via our microfinance partners to help finance small businesses in Indonesia.

    Our microfinance partners in Indonesia act as micro-banks (similar to credit unions in the USA); they manage the retail relationship on the ground and take care of individual underwriting and servicing of the investments. Unlike a P2P model, Blossom’s fund model means investors aren’t exposed to individual risks; even if one ore more businesses operate at a loss, it doesn’t impact the overall profitability of the fund.

    Rates of return average between 7%-12% in 12 months. Investors receive monthly payments of profit as soon as 30 days after investing, and their principal investment is returned after 12 months, which allows it to be re-deployed to finance multiple businesses during its lifetime.

    Blossom uses bitcoin to manage the flow of funds including remittance, escrow services, and foreign exchange. Bitcoin helps us reduce the cost of investing capital overseas and returning it profitable. This ensures more money goes directly towards helping build and grow small businesses rather than service fees just to move money around.

    “[R]etail and crowd-sourced sharia finance has the ability to completely leapfrog conventional financial technology.”

    CT: How did you get converted into Islam and Bitcoin Tech roughly around the same time?

    MM: This was purely a coincidence. I became Muslim maybe half a year or so before hearing about Bitcoin. I was working at Boku, which is a mobile payments company – so financial technology news was something on our radar. I got excited about Bitcoin right from the start, but my initial excitement was more driven by the prospects of bitcoin as a technology.

    It was only later on after learning more about sharia finance that I realized bitcoin is very interesting from the perspective of several of the key principles in Islamic finance including reducing excessive uncertainty and ownership of underlying assets.

    As a whole, retail sharia banking is underdeveloped – and I believe it has the potential to completely leapfrog the conventional banking route and jump straight to digital currency. Much in the same way mobile phones leapfrogged landlines and mobile money leapfrogged conventional banking in Africa, retail and crowd-sourced sharia finance has the ability to completely leapfrog conventional financial technology.

    “[I]n some Muslim majority countries there are virtually no sharia financial products.”

    CT: Can you explain in a short summary how the Islamic laws affect a Muslims business and regarding interest?

    MM: Islam prohibits loans with interest. This means financing from conventional banks is a no-no for Muslim businesses. Islam advocates investment structures, because they encourage viability of the underlying project and risk-sharing.

    Unfortunately sharia finance is not always as available as conventional banking products. For example, in Indonesia (which is 90% Muslim) less than 10% of financial products are sharia. This means there is a lack of access for business owners who want to comply with the sharia. In the US there is almost zero availability of sharia financial products. Even in the Middle East, there are many conventional loan-based products that are mislabeled as sharia and in some Muslim majority countries there are virtually no sharia financial products. I’ve written a comparison of “equity financing” versus “debt financing” on my blog..

    CT: You are now based in Indonesia can you tell us a little about this move?

    MM: Indonesia is the world’s most populous Muslim country, with over 220 Million muslims. Only 80% of Indonesians have a bank account. There’s a huge demand for microfinance, but a lack of deployable capital. We’re helping meet that demand head on by crowdsourcing international capital and investing it into Indonesian small businesses using a sharia model. This means Muslims can get financing for their business in a way compatible with their religion.

    We started in the USA, but the market opportunity in the USA for sharia financial products is quite limited. Financial services are heavily regulated and expensive to launch, so it only makes sense to invest in developing financial services products in markets with mass appeal.

    On a side note, Indonesia is a great place to build a startup. The cost of living is low, and the food is fantastic. I highly recommend more entrepreneurs consider relocating to Indonesia to extend their runway by 3 or 4 times what they’d manage in San Francisco.

    So the rates of return for Blossom’s microfinance investors is about 7%-12% and the principal is returned after 12 months?:


    Rates of return average between 7%-12% in 12 months. Investors receive monthly payments of profit as soon as 30 days after investing, and their principal investment is returned after 12 months, which allows it to be re-deployed to finance multiple businesses during its lifetime.

    That’s quite return for a one year commercial loan to a poor person. But apparently its usury-free, which is a nice very feature compared to some of the other microfinance operations out there if that’s really the case, especially since Blossom takes its own 20% cut on the returns too.

    It will also be interesting to see how attractive bitcoin ends up being as the middle-man “currency” of choice for loans. Because the way Blossom is structure, the investors or loan recipients won’t actual interact with any bitcoins. The bitcoins are used to transmit the investments globally, also also used for managing the escrow services:

    Blossom uses bitcoin to manage the flow of funds including remittance, escrow services, and foreign exchange. Bitcoin helps us reduce the cost of investing capital overseas and returning it profitable. This ensures more money goes directly towards helping build and grow small businesses rather than service fees just to move money around.

    And the investor funds will apparently be held in bitcoin escrow until dispersed, which suggests that at least some of the invested funds are going to be subject to not just any currency risk but bitcoin currency risks. Maybe that’s not actually how Blossom will work, but it sounds like bitcoin is going to play a central role as, effectively, Blossom’s “bank” for funds yet to be lent. And Bitcoin is one of the most volatile ‘currencies’ in existence. Yikes.

    Despite all that, if Blossom really does end up taking the usury out of microfinance, good for Blossom. It may not be nearly as appropriate as global grants for the poor, but if it’s really usury-free it will be a big improvement.

    Posted by Pterrafractyl | June 25, 2015, 1:58 pm
  10. Gavin Andresen, Bitcoin’s chief developer, made some big Bitcoin news at the end of May: Andresen announced to the world that, unless the Bitcoin community could come to a consensus on how to increase the size of the blockhain “blocks”, Andresen would abandon development of the current “Core” bitcoin software and lobby everyone to switch over to ‘Bitcoin XT’, an alternative version of the Bitcoin code with much bigger blocks. So the chief developer and advocate of Bitcoin is threatening a “hard fork” showdown unless concensus emerges:

    Coin Telegraph
    Andresen Will Shift Efforts to Bitcoin Fork, If No Consensus Reached on Block Size

    Author Aaron van Wirdum
    2015-05-30 12:57 PM

    In an announcement made on the Bitcoin development mailing list, Bitcoin core developer and Bitcoin Foundation chief scientist Gavin Andresen suggested that, if the development community could reach no consensus on increasing the one-megabyte block size limit, he would shift his efforts from the main Bitcoin implementation (Bitcoin core) to the alternative Bitcoin-Xt implementation.

    Such a move could represent a watershed moment for Bitcoin as a whole, as it would mean that its former lead developer would effectively leave his own project to join a forked version.

    Bitcoin-Xt is a patch placed on top of Bitcoin core and developed by Mike Hearn, developer of Lighthouse and Bitcoinj. While Hearn is a vocal proponent for an increase in the block size limit, Andresen’s contribution to the mailing list does not specify what the new maximum block size on Bitcoin-Xt would be.

    He does indicate that he will not settle for 20-megabyte blocks, as he proposed for Bitcoin core. Instead, Andresen will likely push for an additional automatic increase of the limit, possibly by 40% per year, as he has also previously proposed for Bitcoin core. He wrote:

    “If we can’t come to an agreement soon, then I’ll ask for help reviewing/submitting patches to Mike’s Bitcoin-Xt project that implement a big increase now that grows over time so we may never have to go through all this rancor and debate again.”

    In order to ensure Bitcoin-Xt will gain traction and eventually overtake Bitcoin core, Andresen announced he would lobby influential entities within the Bitcoin ecosystem to adopt Bitcoin-Xt and bigger blocks. These entities would include mining pools, exchanges, payment providers and wallet services. If successful, Andresen would presumably force opponents of the increase to join the network with bigger blocks — or end up isolated on an “old” version of Bitcoin. As Andresen put it:

    “The purpose of that process is to prove to any doubters that they’d better start supporting bigger blocks or they’ll be left behind, and to give them a chance to upgrade before that happens.”

    Note that Andresen had proposed a 20-fold increase in the blockchain block size (from 1 MB to 20 MB) earlier in May, so when he asserts that


    He does indicate that he will not settle for 20-megabyte blocks, as he proposed for Bitcoin core. Instead, Andresen will likely push for an additional automatic increase of the limit, possibly by 40% per year, as he has also previously proposed for Bitcoin core

    Andresen is actually making a pretty interesting threat because at 40% annual growth, the blockchain wouldn’t hit 20 MB for another 9 years, but just keep growing and growing and growing indefinitely after that. So if you’re a miner that doesn’t like the idea of immediately increasing the blockchain 20-fold, a counter offer that would dramatically slow that growth but also cause it to grow indefinitely must be a rather difficult compromise offer/threat to asses.

    Still, that’s just Andresen’s threat of what he would do if no consensus emerged on his proposal to increase the blockchain blocks from 1 MB to 20 MB. Consensus still might emerge. But, of course, if Gavin Andresen felt he had to issue the ‘Bitcoin XT’ threat in the first place, it’s also very possible
    that consensus might not emerge:

    Coin Telegraph
    US vs. China: The 20 MB Miner War That Could Destroy Bitcoin (Op-Ed)

    Author Evander Smart
    2015-06-15 04:35 PM

    The world’s two largest economies; two of the three most populated countries on earth; much more importantly: the world’s two largest Bitcoin mining communities locking horns in a struggle for power and control over the Bitcoin blockchain.

    The Far East versus the West; the United States versus China: a classic battle of global superpowers that may not have a winner, but may take the world’s first global currency down in the digital crossfire.

    Possible implosion

    The issue of Bitcoin block size is coming to a head within a matter of days. Could a battle over block size between Western businesses and Eastern miners leave Bitcoin in danger of self-destruction?

    Mike Hearn, a Bitcoin core developer, says it is highly unlikely, but yes, it is possible. Speaking to Epicenter Bitcoin in episode #82 recently, Hearn laid out the potential scenario for an implosion of Bitcoin, however unlikely.

    The issue lies in the need for block size maintenance to prevent a logjam of transactions within the next year. Bitcoin blockchains can currently only handle seven transactions per second, and at current transaction rates, this will exceed the current 1 MB block size sometime next year. A raise to 20 MB has been proposed by core developers Hearn and Gavin Andresen.

    The problem with the tentative plan of expansion is the overall effect on the mining industry, particularly in China, where reportedly 80% of all global Bitcoin trading volume takes place. Margins are thin after a year of price correction since the Mt. Gox collapse, and the vast majority of major Chinese miners and exchanges are in opposition to a massive increase in block size. The 20-times larger blocks would go from almost full to mostly vacant, causing some short-term issues for miners. Hearn explained:

    “The worst-case scenario is the economic majority is in favor, but the hash-power mining majority is not. That would be a very messy situation for Bitcoin. If the needs of the wider majority diverge from what the miners in China want, who wins? In a worst-case scenario, if the miners and the rest of the Bitcoin community end up in some full-fledged war that would wreck Bitcoin.”

    Worst-case scenario

    Bitcoin miners in China have relatively poor Internet access compared to the U.S., so Western miners and businesses may require more block space than China to run transactional operations. The bulk of Bitcoin businesses reside in the West, and the bulk of bitcoin miners are in China, creating a War-of-the-Worlds scenario.

    This could generate a “fork” in the blockchain, with the 20 MB blocks starting a new chain. Businesses would have to be convinced to follow it and get off the original blockchain that has been in service since 2009. The original blockchain might remain at 1 MB indefinitely.

    Theoretically, the strength behind both chains would leave a fracture within Bitcoin that may never be repaired. With both chains agreeing to disagree, this may cause irreparable long-term damage to the demand and value of the entire protocol. Again, this is a worst-case scenario, but still possible.

    Hearn also states in the interview that a Bitcoin XT update with miner voting rights will be sent out this week. It will allow miners to vote for or against the 20 MB block size increase. Hearn believes a majority of miners and users are in favor, according to his preliminary estimates and discussions with principles, but the voting outcome will confirm the facts. If a clear majority shows for the block increase, he said, it will begin to propagate shortly after that.

    Hearn worked for seven years managing network capacity for Google, before becoming a core developer for Bitcoin, so he has ample experience in this field at the highest level. He mentions speaking to Satoshi Nakamoto about the 1 MB block limit early on in Bitcoin’s development, and says that Nakamoto believed the 1 MB block size was only needed temporarily, not as a long-term governor.

    Given the seasonal influxes of bitcoin transactions during the winter, Bitcoin will be essentially at the maximum network capacity early next year, according to Hearn. At that point, transactions may take hours instead of minutes, and resending of duplicate transactions may exacerbate the logjam effect, if not planned for in advance.

    Increase, but by how much?

    Genesis Mining — with mining farms in Europe, Asia and the U.S. and headquarters in Hong Kong — conducted a poll of their miners on the 20 MB block size issue earlier this month. They found an overwhelming majority, 87%, agreed with the proposed 20 MB block size increase.

    According to Genesis, the disadvantage of bigger blocks is that they will destroy the market for transaction fees. If block space is not scarce, a market for transaction fees will not be established. Thus, the block reward might dwindle in the long run.

    Also, requirements for full nodes will increase, requiring bigger blocks with much more bandwidth, making it harder to run a full node so some short-term issues would be expected.

    Increasing the block size will increase capacity that is currently too low to support a global payment network. Current transaction amounts are not sufficient to support a massive global payment network. Transaction fees would become more expensive, catering only to larger settlements between large, centralized market players.

    Greater block size will also increase the total transaction fees. Allowing many transactions in one block will increase the total amount of fees, which will be a benefit for miners in the long run.

    How was 20 MB decided upon? And is it too much, too soon? Can the same be accomplished with an increase of 8 MB? A 20-fold increase is massive, and, in theory, I can understand the consternation amongst some miners. There is a price for progress, but both sides should work together on a resolution. There has to be a middle ground between the status quo and a 20-fold size increase.

    So it’s the users vs the miners in the great Battle of the Bitcoin Blockchain Bloat. And as we can see, it’s not going to be easy since the Chinese miners dominate the mining sector and 80% of the the bitcoin transactions are reportedly yuan-driven. And note one of the key concerns the miners have regarding the proposed 1MB to 20MB increase in the blockhain ‘blocks’:


    According to Genesis, the disadvantage of bigger blocks is that they will destroy the market for transaction fees. If block space is not scarce, a market for transaction fees will not be established. Thus, the block reward might dwindle in the long run.

    It’s a reflection of tension that’s only going to grow if Bitcoin survives for another couple of decades. Right now, miners are paid some in fees (although most transactions are still free) and mostly in the freshly minted bitcoins that get awarded to the lucky mining pool that “mines” each block. But by 2040, all 12 million bitcoins are going to be mined and at that point mining fees are going to be the only way miners make money. And at that point, the mining community have a financial incentive to keep the blockhains almost big enough but not quite. Why? Because the one of the greatest incentives for paying a mining “fee” (bitcoins allocated to the bitcoin miner by the person sending the bitcoin) is to speed up your bitcoin transaction.

    So unless Bitcoin imposes an automatic fee that everyone has to pay for every transaction, the proposed short-term fix of increasing the blockchain blocks 20-fold, which is vastly more capacity than is currently, represent a business model that potentially undermines the long-term profitability for the entire bitcoin mining sector. In other words, it you’re a Bitcoin miner, you definitely want the blockchain size to increase enough to avoid a complete backlog that causes transactions to take potentially hours to clear, but you only want to increase it just enough to avoid a disaster while still maintaining block space scarcity, something easier said than done as we can see from Bitcoin’s current conundrum and a business model like that may not be possible using the Bitcoin XT code that automatically doubles the block chain size every 2 years.

    Also keep in mind that the size of the blockchain blocks are only one of the variables that are invariably going to be tweaked in the long run. The rate at which each new blockchain is produced, which is currently about 10 minutes per block on average, is also going to have to be sped up if Bitcoin is ever going to have an commercial applications. Who wants to wait 10 minutes at the store for your bitcoin transaction to clear? And so there’s one other obvious way to deal with the blockchain size limit: speed up the transactions. Instead of a 20-fold increase in block size, why not a 20-fold decrease in mining complexity so each transaction only takes 30 seconds? That way, even if the volume of requested transactions exceeds the blockhain, users won’t have to wait too long for their transactions to clear. But, more importantly for the miners, users could more easily be incentivized to pay a “priority send” transaction fee because they could end up have to wait for multiple “blocks” to get processed before their transaction gets cleared. But if they don’t pay a fee, or pay a very low fee, users could still have their transactions cleared in a reasonable amount of time. So by speeding up the block “mining” time, but keeping the blockchains at or near full capacity, Bitcoin’s miners could have in place a structure that encourages higher fees for faster clearances without making transactions in bitcoins painfully slow for the low/no fee transactions.

    But, of course, just as increasing the block size is generating all sorts of Bitcoin community tensions, there are problems with the speed-up approach too. The payments of mined coins would have to be reduced or else all of the bitcoins would probably be mined by 2020. And as transaction speeds accelerate, issues of internet speed could become more acute, at least for countries like China with slower internet speeds, especially if the size of the blockchain also increases. Whenever a new “block” gets “mined”, the whole mining community needs to find out about it ASAP so it to can start “mining” using the latest updated to the blockchain. So if a miner in China takes, say, 5 seconds longer than their US competitor to get the latest block information, that may not be a big deal when the average mining time is 10 minutes. But those 5 seconds could make a big difference if new blocks are getting generated every 30 seconds.

    So as we saw above, Bitcoin’s growing pains just keep growing, in part because there’s no consensus on how to grow. And as we saw also above, if China’s miners don’t agree to the newly propose 20-fold increase in block size, those growing pains could are going to become shrinking pains. And maybe even forking pains, since Gavin Andresen just reiterated his calls for a Bitcoin XT “hard fork” proposal, and it sounds like he’s already decided to dump the Bitcoin Core code and push the Bitcoin XT hard fork on the rest of the Bitcoin community

    Coin Telegraph
    Andresen Proposes Hard Fork Patch for Bitcoin XT; Critics Remain Skeptical
    Author Aaron van Wirdum

    Bitcoin Core developer Gavin Andresen today proposed a hard fork change for Bitcoin XT in order to allow for an increased block size limit on the Bitcoin network. So far, however, it has failed to appease most critics of his previous proposals to increase the block size limit.

    Hard Fork

    It is widely agreed that at some point an increase of the block size limit will be needed to allow the Bitcoin network to handle more than seven transactions per second. The Bitcoin Core development team, however, has so far not been able to reach consensus on the correct timing and strategy to accomplish this.

    Convinced that time for debate is running out, Andresen has therefore elected to shift his efforts to Mike Hearn’s Bitcoin XT, a fork of Bitcoin Core. If Bitcoin XT overtakes Bitcoin Core, Andresen expects to be able to introduce bigger blocks on the network through this fork. He believes this would incentivise Bitcoin Core to adopt bigger blocks as well, or become irrelevant, as the two versions would become incompatible otherwise.

    But while Andresen’s proposal is being widely lauded by Bitcoin’s Reddit community, it hasn’t appeased critics of his previous proposals. Most importantly, Andresen’s decision to opt for a hard fork is regarded as dangerous by several prominent members of Bitcoin’s technical community.

    Bitcoin Core’s lead developer Wladimir “wumpus” van der Laan has recently spoken out against a unilateral hard fork. He believes that it could risk a split of Bitcoin’s blockchain as a result of the incompatibility of Bitcoin Core with Bitcoin XT, and that it could lead to users losing money to double spends in the confusion.

    Perhaps unsurprisingly, the new patch for Bitcoin XT has not swayed Van der Laan’s mind. While he did not elaborate on his concerns specifically when asked by CoinTelegraph, he did indicate that he broadly agreed with Bitcoin.org’s recent policy update. The update reads:

    “Contentious hard forks are bad for Bitcoin. At the very best, a contentious hard fork will leave people who chose the losing side of the fork feeling disenfranchised. At the very worst, it will make bitcoins permanently lose their value. In between are many possible outcomes, but none of them are good.”

    This sentiment was echoed by Blockstream co-founder and hashcash inventor Dr. Adam Back, who has also been a prominent critic of Andresen’s suggested Bitcoin XT fork. Speaking to CoinTelegraph, Back said:

    “Everyone in the developer and technical community is strenuously advising to avoid the unnecessary risk of a unilateral hard fork. These are the very people with the knowledge and expertise we all rely on for the security and ongoing support and maintenance of Bitcoin today — and they are extremely concerned. The best approach for Bitcoin’s continued success is if we work together in a calm, scientific, respectful and constructive way.”

    Peter Todd, one of the first and perhaps most fierce opponents of past block size proposals by Andresen, agreed:

    “I think this hard fork is a huge risk with the potential to both destroy Bitcoin in the medium to long term through centralization, as well as cause significant short-term harm to the network by the rushed and contentious deployment process he suggests.”

    Proposal

    If Andresen does decide to move forward with the hard fork, it will take a while to deploy. First, the proposal will need to be accepted by Bitcoin XT lead developer Mike Hearn. This will probably not be a problem, however, as Hearn is a staunch supporter of a block size increase himself.

    Bitcoin’s block size limit on Bitcoin XT will then increase by January 2016 at the soonest. This will happen after a supermajority of miners run Bitcoin XT instead of Bitcoin Core, and explicitly agree on the block size increase. To be more precise, 750 of 1,000 consecutive mined blocks need to include a message in approval of the change.

    Once an increase of the block size is adopted by the Bitcoin network, and after a grace period of presumably two weeks, the Bitcoin block size limit would first be increased to 8 MB. Effectively, this means that any Bitcoin node that still runs the “old” software at the time when a block bigger than 1 MB is mined would be divorced from the rest of the network. Furthermore, the maximum block size would automatically double every other year for 20 years, until it reaches 8 GB per block in 2036 — at the soonest.

    Explaining these parameters on GitHub, Andresen wrote:

    “The initial size of [8 MB] was chosen after testing the current reference implementation code with larger block sizes and receiving feedback from miners stuck behind bandwidth-constrained networks (in particular, Chinese miners behind the Great Firewall of China). The doubling interval was chosen based on long-term growth trends for CPU power, storage, and Internet bandwidth. The 20-year limit was chosen because exponential growth cannot continue forever.”

    Criticism

    Apart from the suggested hard fork strategy, critics of Andresen’s previous proposals are also not convinced this is the best way forward for Bitcoin itself. Speaking to CoinTelegraph, Todd explained:

    “A genuine proposal would discuss how the change has been tested, and not just on a local machine, as well as what attributes of Bitcoin it is trying to preserve, and how it preserves them. What is the effect on profitability of small miners versus large miners, and under what conditions? What kind of margins are needed against DoS attacks? How do we pay for proof-of-work security against 51% attack in the long run if there isn’t scarcity to drive transaction fees? Gavin has done nearly none of that kind of analysis, and the analysis he has done to date have been found to have significant flaws.”

    Bitcoin XT here we come! Maybe! Bitcoin’s lead developer and chief evangelist appears to have already made the decision, and he also appears to have tweaked the proposal. Instead of making the blockchain growing 40% each year, it would be increased from 1 MB to 8MB in 2016, and then double every two years and then stop growing in 2036 at 8 GB per block. Keep in mind that bitcoin miners stop getting automatic rewards around the year 2040, so end the auto-growth in 2036 could be a nice prize for the miners, but only if bitcoin blocks are filled with 8 GB of trades in 2036. Keep in mind that typical block is about 0.5 MB right now, so bitcoin trading volume would having to increases by about 16,000-fold between now and 2036 for those future miners to still get their desired block size scarcity.

    The Chinese miners have already indicated that they would accept an immediate block size increase to 8 MB, so will Andresen’s latest proposal to increase the block size to 8 MB next year and grow it 1000-fold for the next 20 years going tempt China’s miners into consensus? Nope:

    Coin Telegraph
    Chinese Mining Pools Call for Consensus; Refuse Switch to Bitcoin XT

    2015-06-24 12:44 PM
    Aaron van Wirdum

    Three of China ‘s biggest mining pools – F2Pool, BTCChina Pool and Huobi Pool – maintain that the Bitcoin Core development team should strive for consensus, and will therefore not support a switch to Bitcoin XT. Given Core developer Gavin Andresen’s latest proposal and the current hash-rate distribution on the Bitcoin network, a network wide shift from Bitcoin Core to Bitcoin XT to allow bigger blocks seems infeasible, for now.

    Lacking consensus among Core developers to raise the block size limit, Andresen has recently shifted his efforts to Mike Hearn’s Bitcoin Core fork, Bitcoin XT. In a newly released proposal, Andresen schedules to raise the block size limit on Bitcoin XT from 1 to 8 MB by 2016, after which it should double every other year. Before the change would go into effect, however, 750 of 1,000 consecutive mined blocks would need to include a message by the miner in approval of the change.

    Andresen’s proposal has been received relatively well by the Chinese mining pool operators, who themselves suggested a raise to 8 MB last week. Despite that, however, the proposal seems unlikely to be accepted as part of a unilateral hard fork through Bitcoin XT for now.

    When asked by CoinTelegraph, F2Pool, BTCChina and Huobi Pool – accounting for over 30% of hash-rate – have all indicated not to support a controversial shift from Bitcoin Core to Bitcoin XT.

    Instead of a hard fork to Bitcoin XT in order to allow for bigger blocks, the Chinese mining pools suggest that Andresen continues to seek consensus among other Core developers. This way, a proposal to allow for bigger blocks could be implemented in the main Bitcoin client, without risking a split in Bitcoin’s blockchain.

    F2Pool, which is currently the biggest mining pool on the Bitcoin network with about twenty percent of total hashing power, has made it very clear that a switch to Bitcoin XT is not an option.

    Speaking to CoinTelegraph, F2Pool admin Wang Chun said:

    “We will wait and see what other core developers think of Gavin’s proposal. But we will certainly not switch to the altcoin called ‘Bitcoin’ XT. It could set a very bad precedent if we do that. No matter who you are, you cannot make a new coin and declare it is ‘Bitcoin’ simply because you do not agree with other core developers.”

    BTCChina, which runs one of the biggest Chinese exchanges and accounts for some ten percent of network hash-rate, has previously indicated not to switch to Bitcoin XT either. And while the mining pool did express to like Andresen’s proposed patch, a hard fork without consensus is still considered too big of a risk.

    So there you have it: the closest thing Bitcoin has to a central figure is currently on a collision course with Bitcoin’s biggest miners and, as of now, There’s no indication which side is going to back down, in part because there’s no indication that either side has to back down at all. For all we know, come next year, there could be two Bitcoin blockchains: the Chinese version and the new Bitcoin XT version. And if you’re assuming that all users will choose one blockchain, prompting the other one to whither and die, keep in mind that 80% of the Bitcoin traffic these days comes from Chinese users. So if China’s miners can get China’s users to stick with the current Bitcoin Core software, but Gavin Andresen convinces most of the rest of the world to switch over to Bitcoin XT, we really could see Bitcoin “hard fork” into two separate blockhains that have no reason to spontaneously implode.

    Sure, the combined value of both blockchains could implode as confidence in shaken in the system. At the same time, setting a precedent where a core of powerful interests with a large user base are able to successfully create their own version of the Bitcoin blockchain by simply unilaterally introducing their own “hard fork”, or refusing the “hark fork” the rest of the community wants, and have it survive doesn’t have to be confidence-shattering for everyone.

    Oh what a tangled blockhain we weave.

    Posted by Pterrafractyl | June 26, 2015, 9:47 pm
  11. Vice Motherboard has a new estimate on the amount of electricity used during the “mining” process on average per bitcoin transaction. For every bitcoin transaction, the amount of electricity used in 1.57 households a day is consumed. And not just any households. American households. *gulp* That’s a lot of electricity:

    Vice Motherboard
    Bitcoin Is Unsustainable

    Written by Christopher Malmo
    June 29, 2015 // 11:23 AM EST

    The year is 2018. After a rough Greek exit from the eurozone, economic malaise has spread to Italy, Portugal, Spain, and France. Nervous citizens across Europe look for a way to get their money out as currency traders hammer the weakening euro, banks impose withdrawal limits, and their purchasing power plummets.

    Enter Bitcoin.

    Compared to the euro, the peer-to-peer decentralized electronic currency has now become a relatively stable digital asset. Fiendish buyers trade their euros en masse online for Bitcoin, and soon, depositors worldwide join them. The price of Bitcoin rises, prompting more user adoption by spenders and speculators, and recognition from governments and populations alike.

    The above scenario sounds like a nice piece of prepper-bait from conspiracy site infowars.com. But could (or should) Bitcoin actually take over? Some of the more enthusiastic Bitcoin advocates argue that the currency is ready for prime time—in other words, ready to replace national currencies, or perhaps replace global banking’s creaking clearinghouses. Would this be good for the world?

    From an environmental point of view, it certainly wouldn’t be good news. Unfortunately for Bitcoin advocates, the currency uses too much electricity right now—way too much: According to my calculation, a single Bitcoin transaction uses roughly enough electricity to power 1.57 American households for a day.

    All that energy expenditure has an important purpose: it secures Bitcoin from attacks by speculators, criminals, and other evil-doers by raising the price of the computer power needed to gain control of all transactions on the network. The computers that make up the Bitcoin economy’s backbone are constantly ensuring security and verifiability for the network by solving cryptographic puzzles. This process is called “mining.” Those who participate in this network maintenance are rewarded in Bitcoin, incentivizing them to bulk up their machines so they can mine more efficiently.

    There is potential for Bitcoin to become more efficient by stuffing more transactions into the mining process. But at the end of the day, if Bitcoin sees increased adoption and price and many more useful transactions, power consumption is almost guaranteed to grow.

    Motherboard has previously covered how big Bitcoin mining operations can get. So how much electricity are we talking about?

    Let’s take this Bitcoin mine in China as an example of the scale of today’s operations. It is supposedly running at 6 PH (quadrillion hashes) per second, according to a Chinese Bitcoin company CEO posting in a Bitcoin forum, with the aim to scale up to 12 PH per second. That would give it about 3.3 percent of the total power on the Bitcoin network. Because the Bitcoin network is set up to dole out around 3,600 BTC per day to miners, this mine would rake in about 118.8 BTC per day, or more than $30,000USD at the time of writing. That’s not a bad haul when your electricity costs are among the lowest in the world at 3 to 6 cents per kw/h, about a third of US prices.

    Bitcoin’s power usage per transaction isn’t remotely sustainable as a wholesale replacement for the conventional financial system

    Computer cooling firm Allied Control estimates the total power consumption of the Bitcoin network at 250 to 500 Megawatts. Looking at the total hashrate, which is the number of calculations the network can perform per second, and applying a generous miner efficiency of 0.6 watts per gigahash, we can estimate our own back-of-the-envelope Bitcoin network constant power draw at just under 215 MW, although this figure is always in flux (it’s important to note that many of the variables in my calculation are constantly changing slightly). That’s around enough zap to power 173,000 average American households’ daily electricity usage.

    With about 110,000 transactions per day, that works out to 1.57 households daily usage of electricity per Bitcoin transaction. Yes, every time you buy something in Bitcoin, you could be using as much electricity as 1.57 American families do in a day.

    “The actual figure is likely worse, given that a large number of transactions are exchanges and miners moving bitcoins around and other low-value ‘dust’ transactions,” said Matthew Green, a cryptography expert at Johns Hopkins University. “So each transaction where there’s an exchange of goods or services happening is really representing even more electricity.”

    As climate change becomes a more pressing concern for humanity every day, this huge level of energy use is difficult to justify for a currency wanting to improve on the current arrangement.

    “It appears there are significant challenges to ensuring that Bitcoin’s growth minimizes environmental impacts,” offered Jeremy McDaniels, a financial system sustainability expert with the UNEP. “Energy footprints could be an issue of major scale-up is achieved.”

    There is hope that Bitcoin may be able to reduce its footprint, however.

    One important thing to understand is that the electricity demands of Bitcoin mining won’t scale up linearly with increased usage or transactions. Bitcoin miners use special hardware to guess over and over at solutions to computational problems for each “block,” which records transactions into a permanent ledger. The first problem-solver “wins” the block and the reward: brand new bitcoins.

    Bitcoin can currently handle up to 360,000 transactions per day given current limitations built into the technology, according to Jorge Stolfi, a computer science professor from Campinas University in Brazil, so there’s some headroom left before things bog down.

    It would be possible to bring down the average power cost of each transaction by modifying the underlying Bitcoin protocol, but that’s no easy feat. The Bitcoin community is currently debating a big change that would mean the network could theoretically handle about 7.2 million transactions a day on a comparable level of electricity consumption, according to Stolfi. That would require a majority of the people mining Bitcoin to agree to the change, however.

    Keeping power consumption high in general also makes the network more secure by making it harder for any one entity to gain control. “The right way to think about this is that the energy expenditure provides a level of protection against attacks—it establishes a price floor, currently in the many millions, to launch a 34 percent or 51 percent attack [where an attacker can block transactions and double spend bitcoins as they please],” Emin Gun Sirer, a Cornell professor and blogger at Hacking Distributed, explained in an email.

    However, that same level of security could be maintained while allowing for more transactions, he said, shrinking the cost per transaction.

    All that needs to happen, then, is to expand the userbase so we have more transactions, right?

    Unfortunately for Bitcoin, if user adoption spikes, so will price—and so must power consumption. Bitcoin mining leads to an arms race among miners to grab a slice of the fixed rewards doled out by the network, Stolfi said. The higher the financial rewards, the more miners will invest in powerful equipment to keep up with the competition. The Bitcoin protocol will continue to increase the difficulty of the cryptopuzzles to keep rewards constant, continuing the arms race until the last block is mined.

    The bottom line? Price = energy. “The total revenue of the mining industry is Bitcoin price times BTC revenue in USD/day, independently of anything else; and the electricity consumption, also in USD/day, is some large fraction of that,” concludes Stolfi.

    Green agrees: “Almost everything in Bitcoin is flexible, but that dynamic isn’t. Miners always have the incentive to throw as many hashes [requiring power] at the job as the price dictates.”

    Of course, it wouldn’t be fair to knock Bitcoin’s electricity consumption without comparing it to payment systems most people use today. Let’s take VISA as an example.

    According to Network Computing, the VISA network can process more than 80 billion transactions per year or 2,537 transactions per second, using two mirrored data centers, each capable of running the entire network. The larger data center is currently pulling enough power for 25,000 households’ daily electricity, so we’ll double that to account for VISA’s total draw. In 2013, VISA’s investor reports say the company processed 58.5 billion transactions.

    Working off these (admittedly imperfect) figures, each VISA transaction consumes around 0.0003 household’s daily electricity use. That makes Bitcoin about 5,033 times more energy intensive, per transaction, than VISA, at current usage levels.

    Of course, VISA runs call centers, offices, and a whole lot else on electricity as well, which isn’t counted in this comparison. But those hardly matter due to the extreme difference between the two figures.

    In a rosy 2014 Bitcoin sustainability study, Bitcoin analyst Hass McCook concluded that “Bitcoin has 99.8% fewer [carbon] emissions than the banking system,” which we can treat as a rough proxy for energy use. The study neglects to account for the vast size difference between the Bitcoin economy and the conventional money system, however—the world banking system’s market capitalization in 2010 alone was over 1,989 times bigger than today’s total Bitcoin valuation.

    In light of the above analysis, Bitcoin’s power usage per transaction isn’t remotely sustainable as a wholesale replacement for the conventional financial system. In the future, Bitcoin could massively gain popularity, pile on millions more transactions, and still be unsustainable due to the arms race between miners.

    Note the critical conundrum: the electricity cost per transaction should go down if more and more people make bitcoin transactions, but only if the increased usage doesn’t raise the price of bitcoin enough to incentivize increased proportionately increased “mining”:


    Unfortunately for Bitcoin, if user adoption spikes, so will price—and so must power consumption. Bitcoin mining leads to an arms race among miners to grab a slice of the fixed rewards doled out by the network, Stolfi said. The higher the financial rewards, the more miners will invest in powerful equipment to keep up with the competition. The Bitcoin protocol will continue to increase the difficulty of the cryptopuzzles to keep rewards constant, continuing the arms race until the last block is mined.

    So it sounds like the most viable path to sustainability for Bitcoin involves increasing its popularity without raising the price too much. Although the price suppression might not be very hard to do, dramatically expanding the user base while suppressing the price probably isn’t going to be easy.

    But there is another option: Stop caring about the environment, ignore the concerns about carbon footprints, and just go for the digital gold. Sure, it’s not a good option, but it’s an option.

    Posted by Pterrafractyl | July 1, 2015, 11:01 pm
  12. Here’s an article that gives an example of why Big Finance’s embrace for blockchain is probably going to more about using bitcoins (or blockchains) to represent something of value (and trade it) but not necessarily be something of value (i.e. money, which is what Bitcoin aspires to be):

    Of the 150 “fintech” businesses housed in London-based “fintech” incubator Level39, set up by UBS in 2013, it’s the blockchain technology that excites them the most. And, according to Level39’s boss Eric Van der Kleif, everyone else should be excited too given all of the possible applications for blockchain technologies that could make financial industry even safer for everyone, like making the underlying securities backing things like mortgage backed securities readily transparent to all investors. And banks could use the blockchain for cheaper and faster interbank lending too. They just need to make sure the blockchain doesn’t end up getting used for money-laundering.

    In other words, Bitcoin can make the world of finance safer by making it more transparent due to the public nature of the blockchain. Just as long as it isn’t promoting money-laundering due to its inherent lack of transparency:

    Business Insider Australia
    Bitcoin is the ‘Napster’ of finance — and there’ll be an iTunes

    Oscar Williams-Grut

    Jul. 16, 2015, 6:58 AM

    As boss of Canary Wharf’s Level39, Eric Van der Kleij is one of the most important people in the fintech scene in London — and possibly the world.

    There are over 150 fintech businesses housed in Level39, which despite its name now covers three floors in One Canada Square.

    “People tell us it’s the biggest space of its kind worldwide,” Van der Kleij told Business Insider during a recent visit to Level39, a fintech-dedicated office space. “We’ve not measured so I don’t want to make any claims.”

    Level39 was set up in 2013 by the Canary Wharf Group to encourage a new generation of finance firms to come to the East London office peninsula — financial technology, or fintech, startups.

    “Canary Wharf deserves credit because this is not cheap,” says Van de Kleij. “This is a serious long term investment. But I think it’s a good thing because what we want is one of these companies to turn around and say can you build me my new headquarters in Wood Wharf.”

    Just over 2 years on, the space has broadened out to welcome “smart city” and cybersecurity startups too, as well as opening new space for high growth businesses on Level 42 and 24. The building can now house a startup from being a 2-man operation up to a 20-plus team.

    “They want to eat the banks’ lunch”

    The huge number of startups under Van der Kleij’s nose gives him a good overview of what exactly the fintech world is up to.

    “We find they fit into two camps,” he says. “There’s the camp that wants to help the existing world of financial services to improve, to be more transparent, to provide better customer choice, to lower their costs. And then there are those that want to be the new bank, they want to eat the banks’ lunch. We love both of them.”

    Van der Kleij is very excited about one particular type of new technology — the blockchain, the software that runs bitcoin.
    network_view
    “The real powerful work being done in fintech is blockchain,” he says. “I can tell you now with certainty that every major western bank we’ve spoken to, and some eastern ones, are looking at blockchain technology.”

    The blockchain creates bitcoins, allows transactions to happen, and creates a public record of all transactions, shared across hundreds of computers. Transactions can’t be reversed and are much faster than the current system.

    Banks currently have to interact with each others’ systems when transferring money between accounts. This can be a slow, cumbersome, and a costly exercise, given how old many of the banks’ computer systems are.

    But if a secure, transparent, piece of software could automate these types of interbank transfers, it would be vastly quicker and cheaper. Barclays, UBS and Citi are all exploring how it could be used.

    There are potential applications beyond payments too — Santander says it has 25 use cases for blockchain technology, while BNP Paribas says the technology could make some companies that hold stock "redundant."

    “Very similar dynamics to music”

    Van der Kleij calls blockchain “the real frontier” of finance and likens its evolution out of bitcoin to the rise of peer-to-peer technology out of illegal music-sharing website Napster.

    He says: “In the world of music you had Napster as the unregulated challenger to the establishment. What they did is prove that technology can enable peer-to-peer file sharing to take place without the establishment controlling it. What that industry did is they wisely embraced that technology to reduce their costs and you now have the iTunes Store, Spotify. That transformed the model of music distribution.

    “Who’s the Napster? It is companies involves in open ledger or blockchain technology. Of course its origins came from Bitcoin. Bitcoin is incredibly interesting and very exciting but very challenging for the regulator because of the privacy it affords.

    “The challenge is we don’t want this to become the money launder’s weapon of choice, which is what the regulator is worried about. It has very similar dynamics to the world of music.”

    Level39 residents working on bitcoin and blockchain technologies include CodeStack, BitReserve and Coinjar.

    Van der Kleij is confident that, as with music, blockchain technology will mature and enter the mainstream — we’ll get our iTunes or Spotify of finance. Not only will blockchain adoption make banking faster and cheaper, he also thinks the blockchain has the potential to make banking safer.

    “You know the thing that caused the big problem in the financial crisis?” he asks. “It was these derivative mortgage-backed securities. Cunning people were repackaging different mortgage securities into products. When institutions bought them they had no real way of looking at the underlying assets they were buying because they were so complex. If they were forced to build that on blockchain, an investment manager could press a button and see the truth because of the immutability.

    Note that point about the possible utility in using the blockchain to track the underlying assets that make up asset-backed securities is potentially quite valid and would potentially have been helpful during the US housing bubble. But also note that ratings agencies were giving subprime mortgage-backed securities the same ratings as US Treasuries during the buildup of the US housing bubble anyways, so it’s not actually clear how helpful blockchain audit trails would have been in that ugly chapter in financial history. But hey, if it helps in this area going forward, good for the blockchain. It will be another example of how Bitcoin technology works better when it doesn’t try to be actual money.

    But keep in mind that Level39 was started by UBS, a company that hasn’t exactly demonstrated an unwillingness to misrepresent the contents of the bundled securities they were peddling (they were fined for $744 million in 2013 after pleading guilty to exactly that). So you have to wonder just how much interest UBS has in really going to be in developing an anti-fraud securities-tracking platform.

    And then there’s Level39’s professed money-laundering concerns with its blockchain ambitions. You sort of have to wonder about that too.

    Posted by Pterrafractyl | July 16, 2015, 11:06 am
  13. It’s on! The great Bitcoin block-size debate is heading to a conclusion. A conclusion with an outcome that can’t easily be predicted because the two lead Bitcoin developers just announce that the great Bitcoin XT “fork” (the new version of the new bigger-block-size version of Bitcoin) is going to happen whether the rest of the Bitcoin community agrees or not:

    The Guardian
    Bitcoin’s forked: chief scientist launches alternative proposal for the currency

    The bitcoin wars have begun, as Bitcoin XT squares off against the classic flavour of the cryptocurrency

    Alex Hern

    Monday 17 August 2015 06.57 EDT

    Cryptocurrency bitcoin is facing civil war, with two high-profile developers announcing plans to split the code that underpins the network.

    Known as a “fork”, the new version of bitcoin (dubbed Bitcoin XT) would support more transactions per hour, at the cost of increasing the amount of memory required to hold a full database of all the bitcoin transactions throughout history, known as the blockchain.

    It is backed by Mike Hearn and Gavin Andresen, two of the most senior developers involved in the bitcoin project. Both are involved in the Bitcoin Foundation, the non-profit group that oversees the currency’s development: Hearn is the former chair of the foundation’s law and policy committee, while Andresen is the chief scientist of the foundation.

    In a post on the bitcoin developer mailing list, Hearn said that he felt a fork was the only option for solving the deadlock within the community: “I feel sad that it’s come to this, but there is no other way. The Bitcoin Core project has drifted so far from the principles myself and many others feel are important, that a fork is the only way to fix things.”

    The key difference between Bitcoin XT and the other version of bitcoin, known as Bitcoin Core, is size of the blocks into which transactions get grouped every 10 minutes. Core supports a maximum block size of 1mb, which XT increases to 8mb. Hearn, and the other supporters of XT, argue that that increase is necessary if the currency is to continue growing.

    “As Bitcoin spreads via word of mouth, we will reach the limit of the current system some time next year, or by 2017 at the absolute latest,” Hearn writes. “So it is now time to raise the limit, or remove it entirely.”

    Those who oppose the change do so for a variety of reasons. Some argue that it’s a simple sticking-plaster solution, and that the actual fix should be far more wide-ranging (one such proposal being the “lightning network” upgrade); they worry that removing the most pressing need for an upgrade will also lessen he chance of that wide-ranging fix.

    Others simply oppose changing anything from the initial bitcoin proposal presented by Satoshi Nakamoto in 2009, and argue that any major change should come in the form of a whole new currency, or “alt coin”, rather than an update to bitcoin itself.

    In the short term, Hearn argues that most bitcoin users can safely ignore the debate. Unless they are “mining” – running the software that verifies bitcoin transactions – bitcoin users effectively have no vote in which one of the competing proposals becomes the future of bitcoin, while the software they use to make payments in the currency will likely support the biggest of the two networks.

    “Almost all users run wallets that will just automatically follow whatever the final decision is. It’s not something they need worry about,” he says.

    “Except, of course, in a high-level sense: if they bought bitcoins in the hope that it one day takes off and becomes really big, then they should keep an eye on things. If the big-blocks side doesn’t win out then the chances of going mainstream look much worse, and they may wish to rethink their investment.”

    The worst-case scenario for the currency is that both Bitcoin XT and Bitcoin core continue to exist alongside each other for a long period of time, with neither fully seizing the mantle of the true heir to Nakamoto’s vision. In such a situation, the currency’s uncertain future could prove permanently damaging to its prospects.

    But even if the change goes through relatively quickly, some inattentive users could find themselves out of pocket. Once the block sizes increase (which won’t happen until January 2016, and then only if 75% of the miners have switched to Bitcoin XT), the two versions of bitcoin will be incompatible. Transactions made on one version of bitcoin would not be reflected on the other, essentially rendering null any attempts to spend bitcoin on the “losing” fork after that date.

    “The worst-case scenario for the currency is that both Bitcoin XT and Bitcoin core continue to exist alongside each other for a long period of time, with neither fully seizing the mantle of the true heir to Nakamoto’s vision. In such a situation, the currency’s uncertain future could prove permanently damaging to its prospects.”
    Yes, co-exiting competing Bitcoin “forks” would indeed be a worst-case scenario for Bitcoing, although it’s not the worst worst-case scenario for Bitcoin, which is unfortunate since the worst of the scenarios-of-doom for Bitcoin also happens to be pretty much the best-case for the rest of us.

    So let’s hope Bitcoin users choose their cryptocurrency of choice wisely going forward now that the Great “hard fork” of 2015 is becoming a reality. The future is now.

    Posted by Pterrafractyl | August 17, 2015, 2:21 pm
  14. Well, this was probably inevitable given all the enthusiasm for blochain-based “smart-contract” technologies like Ethereum. Behold Bitnation: A do-it-youself private government technology:

    H+ Magazine
    Interview: Bitcoin Pioneer Susanne Tarkowski Tempelhof on Bitnation and M+
    February 18, 2015 BitCoin, Cryptography, Humanity+, images, Transhumanism

    authors Peter Rothman

    Q1 Susanne, h+ Magazine readers may not be familiar with you or your background. Can you give us a brief history of you, a summary of your background with bitcoin and transhumanism and a short intro to what you are currently doing?

    I grew up in Sweden, my parents where Polish and French immigrants. My father was stateless for many years, which made me question the point of the nation state construct altogether. My passion was politics, and I wanted to make the world more borderless. I started writing about competing non-geographic nations at the age of 20. However, I thought the best way to change things was to work ‘within the system’. Hence to that end, I started working as a contractor for the most powerful government I could find, the US Government. I spent nearly 7 years working as a contractor in various conflict zones, from Afghanistan and Pakistan, to Egypt and Libya — assisting with building and overthrowing governments. However, as time went by, I believed less and less in what the government did, and I started sympathizing more and more with the ‘ungoverned’ societies. The civil war in Libya was quite a wake up call. When I first came to the rebel controlled territories there was de-facto no government at all (the rebel council were about 10 guys hiding out in a basement, and their sole job was to speak with foreign media to gain recognition for the territories), but yet — everything worked amazingly well. Volunteers were doing everything from trash collection to traffic policing, neighborhood watch and cell tower engineering. But as layers of government got added, security deteriorated.

    Around the same time a friend of mine was conducting a study in villages in Southern Afghanistan and South Sudan, measuring the difference between villages with the same socioeconomic and ethnic composition, but different amounts of points of social interaction — like wells, schools, etc. As one would intuitively assume — the study showed that villages with many points of interactions were less prone to violence, than those with few, because even if people – different tribes and ethnicities didn’t get along – just the fact of having to interact on a day to day level over simple things like ‘who should clean the well?’ reduced the level of violence. Fostering collaboration on small, seemingly insignificant tasks also been a common strategy in diplomacy between countries hostile towards each other. Hence, I thought, if we assume this theory to be correct, then wouldn’t Facebook be the biggest experiment for peace in the world ever? The fact of liking someone’s Instagram of their lunch, regardless of political or geographical differences? That would make sense.

    Hence, I went through a brief period of great self-doubt, where I thought what I had done for most of my 20’s was pretty much either not very significant in terms of impact, or even at times straight out harmful — while Zuckerberg, through a computer in a dorm, had done more of a positive impact than I could ever have dreamt of. I felt depressed, because I didn’t know how to impact things without working with the government, but I started spending more time around tech people, travelling to San Francisco, hanging out with the Burning Man crowd, going to libertarian meetups, etc. I had a feeling that the answer where somewhere in the technology sphere. Then, enter Bitcoin. The day I discovered Bitcoin my worldview changed forever — I realized that it was possible to not ‘change things from the inside’ but to actually totally reinvent something, and compete heads on with the current paradigm. It wasn’t impossible. Bitcoin did, and succeeded with it. That inspired me to leave my work as a contractor, and follow my initial dream of creating virtual competing nations. I travelled the world while writing about it, went to various anarchist communities and crypto startups, and then it suddenly dawned on me: why write about it? The blockchain technology — as a distributed public ledger — have all the functions I need to actually start it, without very much investment at all. Hence, I started Bitnation.

    I got into Transhumanism through Biohacking. I operated in a magnet in one of my fingers, to see what it would be like. I posted the photos of the operation on Facebook which got me a lot of attention from the Transhumanist community, so I started to look deeper into all things connected with Transhumanism, and really fell in love with the field. I guess being able to to control your destiny, through cryonics, downloading brains, modifying the body, etc is the ultimate frontier for liberty, once the violent global oligopoly on governance is gone. Immortality!

    Q2 Tell me about Bitnation some more and explain to h+ Magazine readers what it is about. Let’s say I want to start my own transhumanist nation.Can Bitnation help me? I’m also interested in the notion of services that use the blockchain technology but are not properly involved with bitcoin per se. Can you comment?

    If you break Bitnation down to its very essence, it can be described as a peer-to-peer platform with a set of Do-It-Yourself governance (D)Apps (like the Apple app store, as an example), backed by encrypted communication, ID and reputation, and dispute resolution.

    Bitnation is the first ever Virtual Nation which provides actual governance services. Many of those services are based on the Bitcoin blockchain technology – a decentralized public ledger – which we use for all kind of records. From insurance, to dispute resolution, to family contracts like wills and marriages, to education, and more. Later on we’ll also add non-technology powered services, like security and diplomacy.

    There are many metaprotocols on top of the Bitcoin blockchain, that can be used for things like crypto token creation, timestamping, etc. This year – 2015 – I expect smart contracts to really take off. These sounds like simple tools, but they offer such an extraordinary broad range of applications that it’s nothing short of breathtaking.

    Everything Bitnation do is open source, and we encourage people to fork it, and create their own nation. If you would want to start your own transhumanist nation, the easiest way to get us onboard rather than just forking the idea straight out, would be to either work with us for a while, and see what you could make different, to better adapt it to your community, or engage us as partners to help you set it up. Forks are both inevitable, and healthy. I, personally, set out on this path, because I wanted to see a world of thousands or millions of competing borderless governance providers, competing through offering better services, rather than through the threat of violence within imaginary lines called borders. But someone had to be the first to do it, to demonstrate the virtual nation model in practice, and clear the path for others – just like Bitcoin did for cryptocurrency — so that’s what I did.

    Q3 Bitcoin has a long history in the transhumanist world and some of the early adopters were transhumanists and the idea of “cryp” was a frequent topic on the Extropian Email List. Hal Finney was recently cryopreserved and was one of the first owners of bitcoins. as well as an Extropian. Ralph Merkle invented some of the core mathematics (Merkle trees) used in bitcoin and is a transhumanist who also has done a lot of work in nanotechnology. What’s the connection from your perspective between transhumanism and cryptocurrencies? Cryp was envisioned as an anonymous and untraceable method of payment, but bitcoin hasn’t quite gotten us there. What’s next for truly anonymous and untraceable crypto currencies?

    Many questions to answer here at once!

    From my perspective the similarity between the two is twofold: 1. that technology empowers superior innovative solutions than an outdated dinosaur of a centralized administrative structure, and b. that technology inherently defeats things as borders, because it connects people throughout time and space, irrelevant of where they were born, or what laws an irrelevant piece of paper (like a passport) claims they’re subject to. In essence, transhumanism, as well as Bitcoin, recognise that we’re much more than our physical flesh and blood, but that we’re also sensitive, thinking, feeling individuals who may or may not operate within forced upon (geographical) frameworks. That our mind and spirit stands above, and defeats, arbitrary lines in the sand — to a great extent via the beauty of the ever evolving technology freed from bureaucratic red tape.

    Anonymity is important now, as we’re in the strange middle ground between the nation state world, and the post nation state world, where many visionaries still need to keep a low profile. Over time, however, identity and reputation will be more important. Though, lets keep in mind that for various reasons, it will remain essential for a person to be able to have multiple identities at the same time (like if being haunted by a homicidal ex husband or living a double life as gay/ hetero or human/ cyborg) etc. But at the same time, limiting Cybil attacks will also be crucial.

    Another area where crypto meets transhumanism seems to be Basic Income. We have a Bitnation 3rd Party DApp, called basicincome.co developed by the Swedish prodigy Johan Nyberg, using p2p cryptoledgers to create a voluntary basic income system. Zoltan Istvan recently wrote about Transhumanism in VICE where Bitnation was quoted.

    Q6 2015 may be noted as the year transhumanism became political. With a lot of activity around the Transhumanist Parties in the EU and UK recently. What’s your view on transhumanism and politics generally? How can Bitnation help transhumanists who are politically active? How can or should the TP interact with the Pirate Party, Green Party, etc.?

    First of all, from my personal perspective, technology change politics much quicker than politics change politics. Point in case: it’s more efficient to create a better alternative, like Bitcoin, who just outcompetes the old bad system, rather than to get a job at the FED, and try to change politics from the inside.

    If people really do want to interact with the dinosaur political system however, I suppose it can be useful, in a Ron Paul type of way; where they use political channels as platform to spread ideas. It has some merit to it. Concerning what parties to engage with, I’ll always vouch for the pirate party – they’re willing to break norms, and think forward. The green party really varies from one country to another. While I do believe in the importance of preserving the environment, I would never engage with the Green Parties I’ve seen so far, because in my view they’re old left-wing reactionaries who mainly want to back-peddle development. I may be wrong, but that’s what I’ve seen so far. Libertarian parties are sort of an oxymoron, if you come from the anarchist spectrum of it. I don’t personally vote, because I believe it’s immoral to show consent to a geographical monopoly on violence through participating in its illusion of ‘it’s all okay, because we can vote every now and then on who will be our front slave master’. But hey, each to their own.

    “The day I discovered Bitcoin my worldview changed forever — I realized that it was possible to not ‘change things from the inside’ but to actually totally reinvent something, and compete heads on with the current paradigm. It wasn’t impossible. Bitcoin did, and succeeded with it. That inspired me to leave my work as a contractor, and follow my initial dream of creating virtual competing nations.”

    As we can see, the long-held dream of creating one’s own island nation is really aiming low. What you really should be doing if you want to free yourself from the perils of government is develop a system for creating an unlimited number of non-geographic virtual nations, bound together by the glue of digital contract-based services…and eventually non-technology powered services like security and diplomacy:


    Bitnation is the first ever Virtual Nation which provides actual governance services. Many of those services are based on the Bitcoin blockchain technology – a decentralized public ledger – which we use for all kind of records. From insurance, to dispute resolution, to family contracts like wills and marriages, to education, and more. Later on we’ll also add non-technology powered services, like security and diplomacy.

    Hopefully she’ll add digital-contract legal enforcement to the to-do list. It’s a to-do list that’s no doubt pretty long, but as we saw, it can get pretty long too once the violent global oligopoly on governance is gone and the ower of the virtual nation is unleashed. Immortality is great for to-do lists:


    I got into Transhumanism through Biohacking. I operated in a magnet in one of my fingers, to see what it would be like. I posted the photos of the operation on Facebook which got me a lot of attention from the Transhumanist community, so I started to look deeper into all things connected with Transhumanism, and really fell in love with the field. I guess being able to to control your destiny, through cryonics, downloading brains, modifying the body, etc is the ultimate frontier for liberty, once the violent global oligopoly on governance is gone. Immortality!

    Virtual nations with non-technology powered services like security and diplomacy here we come! It’s just a matter of time.

    And credit where credit’s due. The idea of voluntary virtual nations actually sound like a potentially hilarious and fun gimmick with all lots of potential applications for organizing complex volunteering initiatives or other sorts of collective goals that might be difficult for a group of strangers to achieve otherwise.

    But as we’ve seen with the distinction between the cult of Bitcoin, and all the hyper-Libertarian economic and ideological baggage that comes with it, vs the blockchain and univere of potential blockchain applications that have nothing to do with the Libertarian agenda, this Bitnation scheme appears to be suffering from a similar problem. It actually sounds like a fun technology with lots of potentially positive and negative applications (actual cults would probably love it). But instead of being rolled out as a potentially useful self-organization tool that people can use for whatever purpose, the Bitnation technology is being rolled out as some sort of world-changing/paradigm-shifting alternative to government that’s poised to usher in an age of transhumanism and immortality.

    So we’ll see how long it takes before virtual nations have overthrown government. There’s a bit of a ‘chicken and the egg’ dilemma in all this in that its unclear what’s going to get people to flock to the virtual nation before is has fun low-tech features like a legal system with contract enforcement powers. Although that could be addressed if Bitnation finds a chicken:

    International Business Times
    Bitnation and Estonian government start spreading sovereign jurisdiction on the blockchain

    Ian Allison
    By Ian Allison
    November 28, 2015 10:29 GMT

    Bitnation, the decentralised governance project which offers blockchain IDs and Bitcoin debit cards to refugees, has done a deal with Estonia to offer a Public Notary to e-Residents.

    Starting December 1 2015, the blockchain notary service will allow e-residents, regardless of where they live or do business, to notarise their marriages, birth certificates, business contracts and more, on the blockchain.

    The blockchain is a public ledger distributed across hundreds of thousands of computers around the world. The distributed and immutable nature of this public notary makes it more secure than any notary currently offered by traditional nation states.

    The Estonian e-Residency programme is far and away the most advanced of its kind on the planet. This agreement takes that a step further into wholesale decentralisation.

    Bitnation is doing for identity and statehood, what Bitcoin is doing for money. Bitnation CEO and founder Susanne Templehof has said, in reference to the current refugee crisis, that the project seeks to eradicate the most criminal part of our existing legacy systems – borders.

    She told IBTimes in an email: “We have made a deal with Estonia, and the ultimate goal is to gain recognition for Bitnation as a sovereign entity, thus creating a precedent for open source protocol to be considered as sovereign jurisdictions.”

    Bitnation, as the world’s first blockchain powered virtual nation, provides “DIY governance services”, and has received international attention for providing refugee emergency response and world citizenship ID on the blockchain, as well as pioneering marriage, land titles, birth certificates etc.

    On the subject of marriage, Templehof points out that in many countries gay marriage, for example, is illegal: “Blockchain doesn’t give a s**t about that,” she said.

    Estonian e-Residency is an initiative that allows anyone around the world to take advantage of the secure authenticated online identity the Estonian government already offers its 1.3 million residents.

    Kaspar Korjus Estonia’s e-Residency program director, said: “In Estonia we believe that people should be able to freely choose their digital/public services best fit to them, regardless of the geographical area where they were arbitrarily born. We’re truly living in exciting times when nation states and virtual nations compete and collaborate with each other on an international market, to provide better governance services.”

    If a couple get married on the Public Notary, it doesn’t mean they get married in the jurisdiction of Estonia, or in any other nation state jurisdiction. Instead, they get married in the “blockchain jurisdiction”.

    The technology provides a worldwide legally binding proof of existence and integrity of contractual agreements for things like banking, incorporating companies quickly and cheaply, and generally empowering entrepreneurs and citizens around the world.

    “I’m delighted to work with Estonia’s e-Residency program to set a standard practice of competition of governance services on a global market, and to enable others to exercise self-determination and follow Bitnation’s path to sovereignty” she said.

    Note that, while Estonia appears to be providing the ‘chicken’ in Estonia’s ‘chicken and egg’ dilemma, it’s still just a virtual chicken that appears to solely exist within the “blockain jurisdiction”:

    If a couple get married on the Public Notary, it doesn’t mean they get married in the jurisdiction of Estonia, or in any other nation state jurisdiction. Instead, they get married in the “blockchain jurisdiction”.

    Yes, Estonia is using Bitnation to offer notary services within the “blockchain jurisdiction”. And since the “blockchain jurisdiction” doesn’t actually exist except in people’s heads, its entirely unclear what actual service the Estonia government is offering here, but Estonia is offer it nonetheless. Your virtual private island awaits.

    In other news…

    Posted by Pterrafractyl | December 13, 2015, 10:06 pm
  15. It’s 2016, and Bitcoin’s Civil War of 2015 over blockchain block sizes rages on. The participation of one of Bitcoin’s key developers and a backer of “Bitcoin XT” ‘fork’ that’s been largely rejected by the Bitcoin community, however, ended entirely recently when Mike Hearn sold all his Bitcoins and wrote a letter to Medium about why Bitcoin is dead and everyone should move on. Well, here’s a counterpoint article indicating that Bitcoin isn’t quite dead yet, and probably will live on in some form even if Bitcoin itself dies. So the news for Bitcoin could be worse. It’s not dead yet:

    Ars Technica

    Three reasons why Bitcoin isn’t dead yet
    Op-ed: Despite the loss of a key dev (and his pessimistic words), Bitcoin plows ahead.

    by Cyrus Farivar – Jan 26, 2016 6:30am CST

    About a week ago, colleagues were sending me copies of a Medium post ricocheting all over the Internet: a crucial Bitcoin developer, Mike Hearn, was calling it quits. The announcement unsurprisingly spawned media speculation and opinion pieces with headlines like, RIP Bitcoin, it’s time to move on.” Bitcoin’s trading price in US dollars fell by about 10 percent in about 24 hours.

    But take it from an admitted Bitcoin skeptic—the cryptocurrency isn’t anywhere close to being dead. At least, it’s not dying any time soon.

    Hearn is certainly much more knowledgeable about Bitcoin than I am, and he outlines a compelling case for why Bitcoin is in crisis. I hadn’t known, for example, that the blockchain is controlled by a majority of miners based in China where outbound international traffic has high latency. I didn’t realize there’s a huge drag on completing Bitcoin-based transactions. And after reading Hearn’s previous piece arguing in favor of the Bitcoin XT fork, I didn’t realize so many people hated the idea. Users wanted the term banned entirely from a prominent Bitcoin forum.

    I maintain there’s no way the vast majority of people who live in the banked world would prefer to use something that can be frankly so confounding in practice. And all of Hearn’s evidence suggests that Bitcoin, as it stands today, is in serious crisis. But Bitcoin has been pronounced dead nearly 100 times since its inception. As skeptical as I remain, there’s simply no evidence that Bitcoin as we know it is imploding in any discernible way.

    Let’s consider a few facts that indicate Bitcoin isn’t dead:

    * The trading price of Bitcoin has yet to really collapse. Back in 2013, I reported how its price fell by nearly half in just six hours. So while Bitcoin has yet to fully recover from the dip that it sustained several days ago, it’s nowhere near the level of that crash from three years ago. Presumably if there was suddenly a crisis of faith amongst Bitcoiners, there would be a massive selloff.

    * No notable Bitcoin-related investors have pulled out. In fact, they’re doubling down—at least in public statements—about their faith in the cryptocurrency. “There are a number of well-funded companies competing to build valuable businesses on top of this technology,” Fred Wilson, of Union Square Ventures, wrote on his blog recently. “We are invested in at least one of them.” And Barry Silbert, founder and CEO of Digital Currency Group, told CNBC he is “not concerned in the slightest” that Bitcoin is going the way of the dinosaurs.

    * Bitcoin-related corporate deals are continuing unabated. Just a few days ago, Kraken acquired Coinsetter to become one of the largest Bitcoin exchanges worldwide.

    Blockchain gang

    I remain unconvinced that Bitcoin in its present form will continue over the long haul. It remains far too difficult for most people to actually use it, particularly when traditional fiat currencies often do a decent job.

    Ever since I first wrote about Bitcoin in 2011, I found it intriguing largely because of its blockchain idea. This new concept, based on cryptography that raises fundamental questions about the nature of money, is fascinating. And even if Bitcoin does die, this underpinning idea—a distributed, cryptographically based ledger—will likely live on. Apparently China is now doing just that as the country advances its own "answer to Bitcoin.".

    In fact, the International Monetary Fund recently released a paper exploring how the blockchain and virtual currency could be beneficial in theory despite the idea’s inherent risks. As the organization wrote:

    [Virtual currencies, or VCs] offer many potential benefits, including rapidly increasing speed and efficiency in making payments and transfers, and deepening financial inclusion. The distributed ledger technology underlying some VC schemes offers benefits that go well beyond VCs themselves.

    At the same time, VCs pose many risks and threats to financial integrity, consumer protection, tax evasion, exchange control enforcement, and effective financial regulation. While risks to the conduct of monetary policy seem unlikely at this stage given VC’s very small scale, it is possible that risks to financial stability may eventually emerge as new technologies come into more widespread use.

    So today, I continue to feel the same way about Bitcoin as I did when it first surfaced—I’m skeptical but fascinated. Even though I believe the cryptocurrency will continue on, what Georgetown University business professor James Angel told me in 2013 still rings true:

    “It’s play money in the virtual casino; everybody else is trying to outguess each other. Bitcoin has turned into a very large multiplayer online game in which everybody is trying to out speculate each other.”

    “Ever since I first wrote about Bitcoin in 2011, I found it intriguing largely because of its blockchain idea. This new concept, based on cryptography that raises fundamental questions about the nature of money, is fascinating. And even if Bitcoin does die, this underpinning idea—a distributed, cryptographically based ledger—will likely live on. Apparently China is now doing just that as the country advances its own "answer to Bitcoin.".
    Yep, China is considering starting its own digital currency to be used in place of paper money and boost policymakers’ control of the money supply. If successful, the blockchain technology will be used to actually increase government influence over the economy, which is a bit ironic for the underlying technology behind Bitcoin.

    And that’s all part of why the above piece is almost certainly correct about the long-term viability of the blockchain technology vs Bitcoin itself. A public digital ledger is bound to be useful for a variety of applications. It’s Bitcoin’s insistence on being a new superior form of anti-fiat money that’s always been Bitcoin’s biggest hurdle. But variations of the general blockchain idea could be used for all sort of interesting things and will continue to be useful long after Bitcoin’s death if it really does finally implode one day.

    For instance, The head of JP Morgan’s investment bank, Daniel Pinto, was recently commenting on JP Morgan’s recent trial project for loan fund settlements using financial sector blockchain technology developed by Digital Asset Holdings, the company backed by many of the biggest banks in the world. According to Pinto, the financial sector of the future is going to incorporate blockchain technology “in everything related to settlement, and not just loans. While it is still early days, the technology looks very good.” And why not? There are probably plenty of useful applications in the financial sector alone, especially when it comes to tracking financial securities, as opposed to being a currency itself like Bitcoin.

    It’s a reminder that, while Bitcoin’s ongoing XT Civil War might represent an existential crisis of sorts for the Bitcoin monetary revolution that was supposed to overthrow central banking and fiat finance, blockchain technology will probably continue to be incorporated into the financial system, especially as a transaction settlement tool. And then there’s China’s central bank deploying its own version. Blockchain digital analogues of existing currencies, managed by central banks, are probably going to pretty popular with a lot of governments. So there’s probably a blockchain revolution in finance happening, but it’s looking like a revolution by and for the status quo:

    Financial Times

    Blythe Masters and JPMorgan trial blockchain project

    Ben McLannahan in New York
    January 31, 2016 1:25 pm

    JPMorgan Chase has begun a trial project using blockchain as it seeks to lead banking-industry efforts to cut the cost and hassle of trading.

    The move by JPMorgan, the biggest US bank by assets, is among the clearest statements yet of banks’ determination to explore the potential of blockchain, the computer network on which bitcoin sits.

    The bank is collaborating with Digital Asset Holdings, the New York-based start-up run by Blythe Masters, the bank’s former head of commodities. The pair are looking at several applications for the technology, including addressing liquidity mismatches in JPMorgan’s loan funds, which normally let investors take out their money at short notice — even though the underlying assets can require much more time to sell.

    “To sell a loan is a very cumbersome, time-consuming process; settlement can take weeks,” said Daniel Pinto, head of JPMorgan’s investment bank. Exploring alternatives through blockchain “makes all the sense in the world; it’s easier and faster operationally, and you get fewer mistakes”.

    Blockchain has caught the imagination of the financial services industry within the past year, with a host of companies vowing to find ways to use it to reshape many of their daily operations, from upgrading old back-office systems to automatic execution of contracts.

    The technology is essentially a digital public database of events that is continuously maintained and verified in “blocks” of records and shared among various parties. This means payment ledgers can be instantly updated in multiple locations without a single, centralised authority.

    JPMorgan appears to be taking a lead in encouraging broader, industry-wide adoption of blockchain technology — in a similar way to how Goldman Sachs has led a consortium developing Symphony, a communications tool.

    Officials at JPMorgan point to the bank’s involvement with the Linux Foundation’s Open Ledger Project, which said last month that it was aiming to create standards that the entire financial services industry could adopt.

    Mr Pinto said loans were a good place to start trialing blockchain technology, because “the settlement process is complex with lots of manual intervention and multiple parties”.

    A couple of months into the trial, the 52-year-old executive — among the leading candidates to succeed chief executive Jamie Dimon should he step down in the near-term — is pleased with progress.

    “Blockchain will be big in everything related to settlement, and not just loans. While it is still early days, the technology looks very good,” he said.

    Ms Masters noted that efforts to improve the speed of settlement led to “reduced capital requirements, lower operational costs and an improved client experience”. Previously, she had described reducing the costs of financial transactions as “one of the greatest challenges of our time”.

    Last week Digital Asset Holdings announced it had raised more than $50m from a group of 13 financial companies including JPMorgan, Citigroup, Deutsche Börse and the Depository Trust & Clearing Corporation.

    Goldman Sachs is now in discussions to join that latest round of funding, according to people familiar with the situation.

    Autonomous Research, a New York-based financial services boutique, estimates that the global investment banks now spend about $50bn a year on post-trade processes, a figure that could be cut by about one-third with greater use of blockchain-type technologies.

    “Autonomous Research, a New York-based financial services boutique, estimates that the global investment banks now spend about $50bn a year on post-trade processes, a figure that could be cut by about one-third with greater use of blockchain-type technologies.”
    As we can see, the blockchain revolution in finance will indeed take place, regardless of the outcome of the Bitcoin XT Civil War because Bitcoin, itself, is becoming increasingly irrelevant to the larger blockchain revolution in tradition finance. And it’s a revolution that’s going to continue because it’s mostly a revolution in back office transaction settlement costs that could save the existing financial sector billions of dollars a year. Those are the kinds of revolution that you can be pretty sure are going to happen.

    Plus, we might see revolutions like central banks, like the Bank of China, using the blockchain to issue their own digital versions of their currencies which could given them more control over their money supply.

    So, to summarize, the Bitcoin revolution of finance will indeed continue, although it’s really more of a blockchain cost-saving counter-revolution which may or may not involve Bitcoin’s continued existence.

    Posted by Pterrafractyl | January 31, 2016, 11:09 pm
  16. If you’re a Bitcoin enthusiast living in the EU, and one of the reasons for your enthusiasm is the apparent anonymity of bitcoin transactions, it might be time to go on a spending spree:

    Fortune

    Here’s Why Europe Is About to Crack Down on Bitcoin Anonymity

    by David Meyer

    February 3, 2016, 5:21 AM EST

    Because terrorism.

    The EU’s executive body has promised new legislation in the Spring to make sure the exchanges and users of virtual currency platforms such as Bitcoin are identifiable and traceable.

    The reason? Terrorism. The move was announced as part of a raft of measures to make it harder for terrorists and their backers to move around funds and other assets.

    “We want to improve the oversight of the many financial means used by terrorists, from cash and cultural artefacts to virtual currencies and anonymous pre-paid cards, while avoiding unnecessary obstacles to the functioning of payments and financial markets for ordinary, law-abiding citizens,” said European Commission vice president Valdis Dombrovskis.

    What will this mean in practice? The new legislation would force virtual currency platforms to apply more due diligence controls when customers are exchanging virtual for real currencies, by bringing them under the scope of EU anti-money-laundering laws.

    The proposals will be set out in full by mid-year, with the aim of making them law across the EU by the end of 2017.

    Bye-bye Bitcoin anonymity — at least, in theory.

    Many exchanges for Bitcoin and similar virtual currencies operate outside the European Union, putting them out of this legislation’s reach. And once hard cash has been converted into such “cryptocurrencies,” it’s inherently tricky to track the subsequent transactions.

    While this news probably isn’t going to please the Bitcoin community, it’s worth keeping in mind that Bitcoin isn’t actually very anonymous and as blockchain-analysis techniques improve the de-anonymization of large swathes of bitcoin pseudonyms could take place, so if you do go on a spending spree now in advance of these new rules, you’re transactions might get de-anonymized in the future anyways. That may not please the Bitcoin community either.

    Posted by Pterrafractyl | February 4, 2016, 10:48 pm
  17. So Bitcoin is enmeshed in this epic civil war over whether or not to “fork” the Bitcoin protocol to the proposed “Bitcoin XT” version (endless growing blockchain blocks) or stick with “Bitcoin Classic” (double the block size and that’s it for now)? A fork of one type or another is looming and it’s just a matter of which one. It’s basically a civil war over a fork in the road: which Bitcoin “fork” to use next.

    Well, researchers discovered a new potential pitfall associated with every Bitcoin fork in the road, and it’s potentially nasty. Every time one of these “hard forks” happen, there’s the potential for you to “double spend” your coins on the new chain using a process called “tainting” where the new fork’s blockhain get tricked into thinking the same coin from the old blockchain are different coins. That’s quite a complication, not just for the current Bitcoin civil war but for the technology in general. You don’t want every patch for your software to involve a potential double-spending-pocalypse.

    At the same time, this bug has a fascinating relationship to the Bitcoin civil war itself, because the battle over Bitcoin XT vs Bitcoin Classic is really a battle over whether or not to employ an algorithm that automatically increases the size of the Bitcoin blockchain “blocks” indefinitely (the Bitcoin XT approach), or just double the size of the blockchain once, leaving future blockchain size upgrades up to future debates and future forks (the Bitcoin Classic approach). Minimizing forks was always a priority for Bitcoin. It’s just a pain. At the same time, Bitcoin XT, which would involve fewer forks, is also currently losing the battle for Bitcoiner hearts and minds and it’s looking like most miners are sticking with Bitcoin Classic (which entails more forks in the future). But if “tainting” your coins during each “fork” is now a possibility and public knowledge, the path forward that involves fewer of these forks in the road just might become a lot more tempting…especially if the upcoming “hard fork” involves a lot of tainting.

    In other words, the Bitcoin XT side of civil war may have gotten a new weapon in the Bitcoin civil war, but it involves fighting dirty by spending dirty and inducing an existential crisis:

    Forbes
    Double Your Money? Looming ‘Hard Fork’ Uncovers Fatal Bitcoin Flaw

    Jason Bloomberg ,
    Feb 7, 2016 @ 10:18 AM

    Over the last several months, a controversy has been brewing in the world of Bitcoin. The entire Bitcoin infrastructure has a fast approaching hard-coded limit, and as yet the Bitcoin community hasn’t reached a consensus on a solution.

    As the number of Bitcoin transactions increase, this one megabyte ceiling on the block size is now leading to increasingly long transaction backlogs, as the miners (transaction processors) struggle to deal with the impending limit.

    The obvious solution is simply to increase the block size limit – but such a change is easier said than done, because it requires a hard fork of the Bitcoin protocol. (Less drastic soft fork options are also under consideration, but only serve to delay an eventual hard fork.)

    With a hard fork, the revised protocol with the larger block size is essentially incompatible with the older, more limited protocol. As soon as enough miners have switched to the new protocol, then that one becomes the ‘official’ protocol, as those miners will no longer recognize Bitcoin transactions using the old protocol.

    Now that many of Bitcoin’s core developers have rejected Bitcoin XT – one promising hard fork option I covered in a previous article – the most likely contender for fixing the blockchain limit is now Bitcoin Classic. Bitcoin Classic eschews the more strategic (and complicated) approach of Bitcoin XT, instead favoring a simplistic doubling of the block size limit – a simple but short-sighted solution to the problem.

    Updating wallets, however, isn’t the issue. As a likely consensus on Bitcoin Classic approaches, some enterprising Bitcoiners have uncovered a potentially fatal flaw, not just with Bitcoin Classic, but with the hard fork process itself.

    According to a recent discussion in the Bitcoin Reddit forum, it’s possible to double your Bitcoins as miners switch from one protocol to the other. “We’ve never gone through a planned hard fork, so we don’t really know exactly how this will all play out,” warns Reddit commenter sgornick (in keeping with Bitcoin’s Libertarian values, most commenters are anonymous).

    This double-your-money flaw depends upon tricking the system into thinking a particular amount of Bitcoin isn’t the same Bitcoin across the two incompatible transaction systems, a process insiders call tainting. “If you can borrow prior to the hard fork you can then taint those coins with newly mined ClassicCoin and use that to repay the loan,” sgornick continues. “The result is you’ll have satisfied repayment of the loan and you’d still end up with those pre-fork bitcoins you had borrowed.”

    Other Bitcoiners are sounding the warning as well – or perhaps alerting fellow schemers how to game the system. “Even a window of only minutes can and will be used by enterprising types to profit on the hard fork scenario,” explains Reddit commenter Vasyrr.

    Redditors are smart enough to realize, however, that this flaw in the system isn’t necessarily a license to print money. “If there are 5 forks, you will have coins valid on 5 chains, i.e. 5 times the amount of coins. If there are 100 forks, you will have coins valid on 100 chains, etc.,” says Reddit commenter braid_guy. “Whether they have any actual value in real life is another matter.”

    Clearly, if too many people take advantage of this flaw, thus doubling their Bitcoin stake (or worse), then the value of all Bitcoin would promptly collapse – and given that there are about $5.7 billion of Bitcoin in circulation, such a collapse would be monumental. Perhaps some insiders are hoping only a very few will capitalize on the situation, themselves included.

    But even if no one actually duplicates their Bitcoins this way, the mere fact that it’s possible to do so is potentially a fatal flaw for the entire Bitcoin system. To see why this statement is true, consider what would happen if there were a way to simply double the balance in an ordinary bank account via some kind of accounting error or hack.

    In the modern banking system, such one-sided transactions are impossible because the entire banking system enforces double-entry accounting. In other words, if money appears in one place, then it must disappear somewhere else.

    Only sovereign nations can print their own money, and if any nation were to do so without complying with the rules of the global banking system, then its currency would not be exchangeable for any other currency, and furthermore, it would be subject to runaway inflation.

    Placed in this context, the ‘double your money’ hard fork flaw in the Bitcoin system potentially gives anyone the ability to ‘print their own money.’ And even though that potential may never actually be realized, simply the fact that it is possible should disqualify Bitcoin from being treated as a serious cybercurrency contender.

    “Placed in this context, the ‘double your money’ hard fork flaw in the Bitcoin system potentially gives anyone the ability to ‘print their own money.’ And even though that potential may never actually be realized, simply the fact that it is possible should disqualify Bitcoin from being treated as a serious cybercurrency contender.”
    Could tainted self-replicating Bitcoin make forking, and therefore updating, the Bitcoin protocol an increasingly precarious undertaking? Well, if it’s as easy as it sounds to pull this off, that does appear to be a bit of an existential threat:


    Updating wallets, however, isn’t the issue. As a likely consensus on Bitcoin Classic approaches, some enterprising Bitcoiners have uncovered a potentially fatal flaw, not just with Bitcoin Classic, but with the hard fork process itself.

    According to a recent discussion in the Bitcoin Reddit forum, it’s possible to double your Bitcoins as miners switch from one protocol to the other. “We’ve never gone through a planned hard fork, so we don’t really know exactly how this will all play out,” warns Reddit commenter sgornick (in keeping with Bitcoin’s Libertarian values, most commenters are anonymous).

    This double-your-money flaw depends upon tricking the system into thinking a particular amount of Bitcoin isn’t the same Bitcoin across the two incompatible transaction systems, a process insiders call tainting. “If you can borrow prior to the hard fork you can then taint those coins with newly mined ClassicCoin and use that to repay the loan,” sgornick continues. “The result is you’ll have satisfied repayment of the loan and you’d still end up with those pre-fork bitcoins you had borrowed.”

    Other Bitcoiners are sounding the warning as well – or perhaps alerting fellow schemers how to game the system. “Even a window of only minutes can and will be used by enterprising types to profit on the hard fork scenario,” explains Reddit commenter Vasyrr.

    At the same time, Bitcoin XT’s endlessly growing blockchain blocks sure are going to look extra appealing if the future forks the Bitcoin Classic fork will require can be avoided entirely.

    Since Bitcoin XT is probably a big step in the direction that Bitcoin needs to go, where it’s less about being money and more about allowing a massive number of microtransactions using tiny fractions of bitcoins, who knows, maybe this potentially fatal flaw will put Bitcoin on a more viable path forward.

    Posted by Pterrafractyl | February 7, 2016, 9:46 pm
  18. One of the interesting aspects of the Bitcoin experiment was always going to be what happens when all 21 million Bitcoins are finally “mined” and the financing of the Bitcoin “mining” was going to have to be handled exclusively by charging fees instead of how it works today with the winning miners receiving freshly minted bitcoins with new “block”. The closer we got to the year 2040, the fewer bitcoins there are remaining and the the smaller the payout for each mined block and that means a bigger role for the transaction fees. But 2040 that transaction fee-only phase of the Bitcoin experiment wasn’t supposed to happen for a while. That’s part of what makes the big fight over the Bitcoin “Classic” vs “Core” protocols so fascinating: if the “Core” protocol wins out, which means no blockchain growth at all, the lack of adequate blockchain space is going to force miners to pick and choose which transactions they process next. And that means transaction fees for miners could become a new ubiquitous reality for the Bitcoin community. Whether or not it’s a good idea to introduce ubiquitous mining fees so early in the Bitcoin experiment, since the mining community is also dominated by two mining pools in China and those mining pools back Bitcoin “Core”, it’s looking like the version of Bitcoin that’s going to soon include ubiquitous transaction fees is the only version of Bitcoin that’s going to matter:

    CBC.ca
    Bitcoin feud over expansion threatens to destabilize currency
    Developer’s departure and proposal for rival system has revived doomsday predictions about bitcoin’s future

    By Anik See, Kazi Stastna, CBC News Posted: Feb 21, 2016 5:00 AM ET Last Updated: Feb 21, 2016 5:00 AM ET

    Bitcoin, the cryptocurrency that has earned legions of fans and has often been touted as the future of money, is in danger of having no future at all.

    A rift within the peer-to-peer network of users and software developers that operate the bitcoin system has prompted one of its senior developers and most ardent proponents, Mike Hearn, to sell all his bitcoin and pull out of the existing network, which is run on a consensus basis and not overseen by any central authority.

    “[Bitcoin] has failed because the community has failed,” Hearn wrote in a Jan. 14 blog post explaining his departure. “What was meant to be a new, decentralised form of money that lacked ‘systemically important institutions’ and ‘too big to fail’ has become something even worse: a system completely controlled by just a handful of people.”

    The crux of the disagreement within the bitcoin community is whether to increase the size of the blocks of data that make up the backbone of bitcoin so that the system could process more transactions at a faster rate. A 1 MB cap on the size of the blocks is hardwired into the bitcoin protocol that was created in 2009.

    Allowing fewer transactions per second keeps the system safer, but it limits its overall capacity and, critics say, leads to congestion, transaction delays and cancellations as the network runs out of capacity and gets unreliable.

    Duelling bitcoin versions

    In August 2015, Hearn and another senior developer, Gavin Andresen, proposed an alternative version of bitcoin called Bitcoin XT that allows more transactions per second. Since then, other versions have sprung up, including Bitcoin Classic and Bitcoin Unlimited.

    Switching to Bitcoin XT would require the approval of 75 per cent of the network’s so-called miners, the superusers who run the computing hardware that generates bitcoin and keeps track of transactions.

    Some of those users fear that increasing transaction volume would threaten bitcoin’s decentralized model and result in only larger, possibly corporate, users being able to afford to mine bitcoins.

    But Hearn and other critics of the existing system allege that control of bitcoin is already centralized. Currently, Hearn says, more than half the processing power is controlled by just two miners in China, which gives them disproportionate control over the bitcoin ecosystem and a disproportionate share of the bitcoin payments that miners get for running the algorithms on which the system operates.

    “At a recent conference, over 95 per cent of hashing power was controlled by a handful of guys sitting on a single stage. The miners are not allowing the block chain to grow,” Hearn wrote.

    He and Andresen set the 75 per cent threshold for switching to the XT system so that the expansion couldn’t go forward without a large majority and so that a single, large mining pool could not have de facto veto power over expanding the system.

    A bitcoin fast lane

    Izabella Kaminska, who blogs about bitcoin for the Financial Times, says most miners don’t support an overall increase in block size but favour a two-tier system that would charge a premium for faster processing of transactions.

    “Once the [block size] limit is reached, miners will have to choose which transactions to include and which to dump,” Kaminska said. “Naturally, only fees will help guarantee inclusion — something which stands to make the system really expensive really quickly.”

    Kaminska says those fees could end up being higher than those charged by banks.

    “I don’t think [Hearn’s] project (Bitcoin XT) would have helped one bit even if adopted. Hearn wanted to stage an intervention, [but] someone still has to pay for the increased traffic.”

    Some say the biggest danger of the current dispute is that it results in two rival systems whose currencies are incompatible, which would destabilize and devalue the currency and undermine the public’s trust in bitcoin as a legitimate currency. Others, however, think that a so-called fork within the bitcoin network could lead to innovation and, ultimately, strengthen the virtual coin.

    “Unlike a real political vote, there is no jurisdiction being fought over,” said Kaminska. “Which is why the most likely outcome will be an evolutionary-style fragmentation … with both sides turning against each other in a bid to prove they are the better system.”

    On Feb. 11, a group of some of the biggest players in bitcoin issued a statement calling for consensus on the block size issue. The group agreed that the block size needs to increase but argued that it shouldn’t happen through what it called a “contentious hard-fork,” such as XT or Classic, which would split bitcoin into two incompatible systems.

    “The deployment of hard-forks without widespread consensus is dangerous and has the potential to cause trust and monetary losses,” the statement said. “We strongly encourage all bitcoin contributors to come together and resolve their differences to collaborate on the scaling roadmap.”

    “Bitcoin’s most-pressing challenges are external rather than internal,” said Garrick Hileman, an economic historian at the University of Cambridge and the London School of Economics.

    “Mike’s high-profile departure, and the sharp drop in bitcoin’s price following the announcement, appears to have galvanized the bitcoin community into coming together to resolve, at least temporarily, the block-size debate.”

    But Hileman stressed that the existing ideological differences over bitcoin’s future direction aren’t going away and will “undoubtedly resurface when the next big decision point arises.”

    “Bitcoin is not static,” he said. “It will need to be ‘reprogrammed’ periodically to survive, and it is unrealistic to expect that everyone will always be pleased with how bitcoin evolves.”

    “At a recent conference, over 95 per cent of hashing power was controlled by a handful of guys sitting on a single stage. The miners are not allowing the block chain to grow.”
    The Bitcoin democracy of miners has spoken. And they want a bitcoin fast lane. Paid for with tolls:


    A bitcoin fast lane

    Izabella Kaminska, who blogs about bitcoin for the Financial Times, says most miners don’t support an overall increase in block size but favour a two-tier system that would charge a premium for faster processing of transactions.

    “Once the [block size] limit is reached, miners will have to choose which transactions to include and which to dump,” Kaminska said. “Naturally, only fees will help guarantee inclusion — something which stands to make the system really expensive really quickly.”

    Kaminska says those fees could end up being higher than those charged by banks.

    “I don’t think [Hearn’s] project (Bitcoin XT) would have helped one bit even if adopted. Hearn wanted to stage an intervention, [but] someone still has to pay for the increased traffic.”

    It was always just a matter of time before transaction fees became the dominant reward incentivizing the mining. That’s how Bitcoin is supposed to work for the rest of time once it matures. 21 million bitcoins in circulation and no more mining rewards. Just fees. How that transition to a fee-dominated mining model will impact the Bitcoin community is unknown at this point, but finding that out is an inevitability if Bitcoin is going to persist. It just wasn’t supposed to happen until closer to 2040 but could happen soon thanks to Bitcoin’s current mining oligopoly.

    So it would appear that Bitcoin might be “growing up” ahead of schedule by stunting its blockchain block size. Unless there’s a revolution in composition of the mining sector or users organize the switch to one of the rival Bitcoin hard forks. And who knows, if the miners jack up the transaction fees too much and users start demanding lower fees, a hard fork to a Bitcoin alternative could happen, especially for micro-transactions where a large volume of low-value transactions are all that’s desired. And don’t forget the developing world, where transactions fees could seriously impede Bitcoin adoption. But who knows, now that the miner’s are fully in control and transitioning towards a higher-profit Bitcoin model, we might see a transition to a rival currency that doesn’t deal with Bitcoin’s deflationary bitcoin cap. As a wise Doge once said, So potential. Much future.

    Posted by Pterrafractyl | February 21, 2016, 11:51 pm
  19. Check it out: Someone may have discovered a new way to attack Bitcoin. At least that the speculation after Bitcoin ground to a halt and transactions began taking an hour or more to clear. Although that’s just one angle of speculation. Another angle is that someone might simply be sending coins to themselves over and over and over, in which case this isn’t an attack so much as a basic flaw in Bitcoin’s design. And then there’s the possibility that Bitcoin ground to a halt because it’s simply hitting the limits of its blockchain “block” size, an issue at the heart of Bitcoin’s current existential crisis. Whatever the cause for the recent slowdown in Bitcoin transactions, it hasn’t been the best time to make a time-sensitive Bitcoin purchase:

    Vice Motherboard

    Is Bitcoin Under Attack?

    Written by Jordan Pearson
    Staff Writer (Canada)

    March 1, 2016 // 05:03 PM EST

    On Monday, the Bitcoin world had a meltdown as the cryptocurrency’s network started to slow down seemingly without explanation, leaving people’s transactions in digital limbo.

    Now, it looks like at least part of the reason for the slowdown might be a concentrated attack on Bitcoin by unknown actors.

    The issue is that the digital “blocks” that contain every Bitcoin transaction are being filled up. Transactions are put into blocks by Bitcoin users, who are incentivized in part by fees that people attach to their transactions. Transactions aren’t complete until they’re put into blocks, or “confirmed.” But with near-full blocks, there’s more competition for space inside them, and so miners logically seek out the transactions with a decent reward attached before those that don’t—meaning those who are willing to pay more in fees will get their transactions confirmed first.

    Transactions without a reward are thus left to languish in what’s known as the “memory pool,” which is stored on every computer running Bitcoin software. When that memory pool fills up, the whole system slows down, and that’s exactly what’s happening right now. The question now is why.

    According to longtime Bitcoin developer Jeff Garzik, someone might actually be taking advantage of fuller blocks with an attack that artificially pushes the system over the edge.

    “There is an uptick in correlated transactions in the lower fee strata,” Garzik wrote me in an email. “This would seem to imply that a single wallet or set of wallets is potentially sending the same coins over and over, to themselves. This may be innocent transaction activity, coin ‘tumbling,’ or an unknown actor paying transaction fees to load the bitcoin network with traffic.”

    On Tuesday, chief information officer of Bitcoin company BitFury Alex Petrov retweeted a tweet calling attention to a Bitcoin address he believes is sending coins to itself and referring to them as “loops.” It is “malicious spam,” he also tweeted.

    Block size has been on an upward trend for a very long time, however, and so has the number of transactions going through the network on any given day. This has led to some users and developers to describe the current situation as Bitcoin’s “new normal,” and a detriment to average people using the cryptocurrency. After all, when you use cash, you don’t have to pay an extra cent or two for the privilege.

    Currently, nobody has claimed responsibility for any attack on Bitcoin either on Reddit or on forums like BitcoinTalk, unlike nearly every other attack in recent memory, lending credence to the assumption that the slowdown is due to people using bitcoin exactly as they should.

    Garzik said the data science team for his bitcoin startup Bloq are monitoring the situation. But for now, bitcoin users are reporting transactions taking hours upon hours to be confirmed—that is, to complete—and requiring high transaction fees in order to have their transactions included in a block.

    Attack or not, the result is the same: being a bitcoin user has got to be really fucking annoying today.

    “Currently, nobody has claimed responsibility for any attack on Bitcoin either on Reddit or on forums like BitcoinTalk, unlike nearly every other attack in recent memory, lending credence to the assumption that the slowdown is due to people using bitcoin exactly as they should.
    Yep, given the mystery over what’s causing the slowdown, the idea that this was a malicious attack is sort of the best case scenario. Because otherwise it means that random users, like those that decide to ‘loop’ their bitcoins to themselves for whatever reason, can basically grind the system to a halt. It’s a chilling possibility that highlights one of the interesting quirks of Bitcoin: for all the claims about how decentralized the management of system is, it’s hard to ignore how incredibly centralized the actual blockchain is since it’s one giant ledger where every single transaction is endlessly shared. Plus, it’s possible that a single random user can slow down the entire Bitcoin economy. Bitcoin is both radically decentralized and radically centralized.

    Of course, as the article noted, it may not be coordinated attack or an individual ‘looping’ the blockchain to a crawl. Instead, it could simply be a convergence of all the various factors that have been pointing towards Bitcoin hitting a transaction-clearance wall for some time now. After all, Gavin Andresen, the Bitcoin developer behind the ill-fated “Bitcoin XT” push that would have significantly increased the Bitcoin “block” sizes (thus reducing the amount of unprocessed transactions that “pool” up), predicted last year that Bitcoin would start grinding to a halt due to unresolved transactions at some point early this year:

    The MIT Technology Review

    The Looming Problem That Could Kill Bitcoin

    The man who took over stewardship of Bitcoin from its mysterious inventor says the currency is in serious trouble.

    by Tom Simonite August 28, 2015

    The way things are going, the digital currency Bitcoin will start to malfunction early next year. Transactions will become increasingly delayed, and the system of money now worth $3.3 billion will begin to die as its flakiness drives people away. So says Gavin Andresen, who in 2010 was designated chief caretaker of the code that powers Bitcoin by its shadowy creator. Andresen held the role of “core maintainer” during most of Bitcoin’s improbable rise; he stepped down last year but still remains heavily involved with the currency (see “The Man Who Really Built Bitcoin”).

    Andresen’s gloomy prediction stems from the fact that Bitcoin can’t process more than seven transactions a second. That’s a tiny volume compared to the tens of thousands per second that payment systems like Visa can handle—and a limit he expects to start crippling Bitcoin early in 2016. It stems from the maximum size of the “blocks” that are added to the digital ledger of Bitcoin transactions, the blockchain, by people dubbed miners who run software that confirms Bitcoin transactions and creates new Bitcoin (see “What Bitcoin Is and Why It Matters”).

    Andresen’s proposed solution triggered an uproar among people who use or work with Bitcoin when he introduced it two weeks ago. Rather than continuing to work with the developers who maintain Bitcoin’s code, Andresen released his solution in the form of an alternative version of the Bitcoin software called BitcoinXT and urged the community to switch over. If 75 percent of miners have adopted his fix after January 11, 2016, it will trigger a two-week grace period and then allow a “fork” of the blockchain with higher capacity. Critics consider that to be a reckless toying with Bitcoin’s future; Andresen, who now works on Bitcoin with the support of MIT’s Media Lab, says it is necessary to prevent the currency from strangling itself. He spoke with MIT Technology Review’s San Francisco bureau chief, Tom Simonite.

    How serious is the problem of Bitcoin’s limited transaction rate?

    It is urgent. Looking at the transaction volume on the Bitcoin network, we need to address it within the next four or five months. As we get closer and closer to the limit, bad things start to happen. Networks close to capacity get congested and unreliable. If you want reliability, you’ll have to start paying higher and higher fees on transactions, and there will be a point where fees get high enough that people stop using Bitcoin.

    Do you think that consensus can be reached?.

    It’s pretty clear that the maximum blocksize is going to increase. I don’t know exactly how or exactly when. I don’t think it’s clear yet that my proposal will generate enough consensus among miners and the other ecosystem players.

    What will happen if nothing is done?

    Transactions will get unreliable and it’ll get worse and worse over time. My fear is there’ll be no critical event that causes people to react—Bitcoin just kind of has a long slow death. I’m trying to set off alarm bells for ‘You know, guys, if we don’t do this, Bitcoin will be dead in four years.’ It’s not easy to sell that, especially when there’s so much controversy.

    “The way things are going, the digital currency Bitcoin will start to malfunction early next year. Transactions will become increasingly delayed, and the system of money now worth $3.3 billion will begin to die as its flakiness drives people away. So says Gavin Andresen, who in 2010 was designated chief caretaker of the code that powers Bitcoin by its shadowy creator.”
    Credit to Gavin Andresen, he called this. At least assuming the current mystery slowdowns are due to what Gavin predicted last year: that Bitcoin’s 1 MB “block” size was scheduled to start hitting its limit early this year.

    And if Gavin is correct, it’s looking like 2016 may be the year bitcoin users have to start paying more and more bitcoins in order to transfer their bitcoins. At least if they don’t want to wait an hour or more for their transactions to clear:


    It is urgent. Looking at the transaction volume on the Bitcoin network, we need to address it within the next four or five months. As we get closer and closer to the limit, bad things start to happen. Networks close to capacity get congested and unreliable. If you want reliability, you’ll have to start paying higher and higher fees on transactions, and there will be a point where fees get high enough that people stop using Bitcoin.

    So now that it’s looking possible that Bitcoin is starting to grind to a halt, it’s going to be very interesting to see what, if any, consensus decision to the Bitcoin community can rally around in order to increase transaction volumes. It’ll be especially interesting since, according to some recent research, Bitcoin can’t significantly increase its transaction clearance times unless it significantly increases the concentration of mining too:

    The MIT Technology Review
    Technical Roadblock Might Shatter Bitcoin Dreams

    A study of the system that powers Bitcoin concludes that it cannot become widely used without a major redesign.

    by Tom Simonite February 16, 2016

    The total value of the digital currency Bitcoin is over $5 billion, reflecting how some people think it will one day become widely useful. But a new analysis of the software that powers the currency concludes that Bitcoin needs a complete redesign if it is to support more than the paltry number of transactions that take place today.

    That suggests that the people, companies, and investors who are banking on the currency becoming widely used must overcome fundamental technical challenges that currently have no known solutions, not just the economic and cultural issues associated with a currency independent of any government.

    The findings, from a large group of researchers mostly affiliated with Cornell University, also offer a new perspective on an acrimonious debate that has recently riven the world of Bitcoin (see “The Looming Problem That Could Kill Bitcoin”).

    Factions in the community are arguing over proposals to adjust Bitcoin’s software so it can handle more than a measly seven transactions a second across the whole world. Yet no tweak to Bitcoin could allow transactions at a scale close to that of conventional payment processors such as Visa without compromising the digital currency’s decentralized design, says Ari Juels, a cryptographer and professor at the Jacobs Technion-Cornell Institute at Cornell Tech, and a coauthor of the study. Visa’s system processes 2,000 transactions per second on average and can handle up to 56,000 transactions per second, the company says.

    “The current debate is missing the forest for the trees,” says Juels. “We have to think in terms of a fundamental redesign if we’re going to see robust scaling in Bitcoin.” Juels worked on the new study with 11 other researchers from Cornell, the University of California, Berkeley, the University of Maryland, the Swiss Federal Institute of Technology Zurich, and the National University of Singapore. The group’s analysis is being presented in a position paper at the Financial Cryptography and Data Security conference in Barbados later this month.

    Bitcoin was invented by a person or persons using the name Satoshi Nakamoto, who released the software online in 2009. The currency is powered by a network of computers around the world belonging to a disparate group of companies and individuals without any central authority. The Bitcoin software’s use of cryptography allows that decentralized network to function as a reliable system to process and validate transactions.

    Bitcoin’s capacity limit comes from the way transactions are recorded in batches known as “blocks.” Every 10 minutes a new block is added to the digital ledger maintained by the computers in the Bitcoin network, but those blocks have a maximum size of one megabyte, enough for only seven transactions a second at best. Gavin Andresen, who for nearly four years led work on Bitcoin’s software, said last week that the limit is already troubling Bitcoin, with transactions sometimes becoming delayed. “I think it’s a very urgent problem,” he said.

    The Bitcoin community is fighting over how best to increase the size of blocks added to the currency’s ledger, with two leading proposals aiming to effectively double it in one way or another. But when Juels and colleagues measured how the network currently performs, they concluded that the strategy of tweaking Nakamoto’s design can’t go much further without compromising the decentralization claimed to be so crucial to the system. The way data moves around the Bitcoin network is too inefficient.

    The researchers estimate that Bitcoin’s current design could bear at most only about 27 transactions per second, using a block size of four megabytes, without forcing a significant cut in the number of computers powering the currency, making it more centralized. There is general agreement in the Bitcoin community that the system must remain decentralized to prevent the possibility of any company or government controlling the currency.

    “That’s still a fairly limited throughput,” says Emin Gün Sirer, an associate professor at Cornell who worked on the study. “If you compare it to what a big network like Visa is capable of [or] these imagined futures where computers are paying each other, it’s nowhere in the same vicinity.”

    Some people believe that Bitcoin can be useful without operating at vast scale, for example functioning as a gold-like asset generally held for long periods. But some of the biggest Bitcoin companies are built on the idea that Bitcoin will come to support a very large transaction volume.

    Brian Armstrong, CEO and cofounder of Coinbase, which helps people buy, sell, and use Bitcoins and has raised over $100 million, says he believes the currency will become widely used as a means of payment, particularly in the developing world.

    A company called 21 Inc has raised $121 million from investors, including the networking company Cisco, and says that very small “microtransactions” paid in Bitcoin will become an economic backbone used by people and companies to pay for services and goods such as Wi-Fi, data analysis, or music.

    New technology is needed to scale up Bitcoin and support all the use cases imagined for the currency, but the right factors are in place to see it invented, he says. “There’s strong interest from academia, lots of new technology coming in the next 18 months, and a lot of funding coming to the industry,” says Back.

    “The researchers estimate that Bitcoin’s current design could bear at most only about 27 transactions per second, using a block size of four megabytes, without forcing a significant cut in the number of computers powering the currency, making it more centralized. There is general agreement in the Bitcoin community that the system must remain decentralized to prevent the possibility of any company or government controlling the currency.”
    Think about how dire this research is for the Bitcoin idealists: According to the researchers, simply increasing the “block” sizes isn’t a viable means of adequately scaling Bitcoin’s transaction volumes. The only way to achieve that is for Bitcoin’s “mining” system, which is a core element of Bitcoin’s pitch as a “decentralized” monetary system, to get completely overhaul in a manner that makes mining significantly more centralized. Uh oh:


    The Bitcoin community is fighting over how best to increase the size of blocks added to the currency’s ledger, with two leading proposals aiming to effectively double it in one way or another. But when Juels and colleagues measured how the network currently performs, they concluded that the strategy of tweaking Nakamoto’s design can’t go much further without compromising the decentralization claimed to be so crucial to the system. The way data moves around the Bitcoin network is too inefficient.

    But while the libertarian Bitcoin activists might be rather nonplussed at this conclusion, the big Bitcoin’s “miners” probably won’t mind! And it’s hard to see how why companies like “21 Inc.” would mind a centralization of mining either. After all, 21 Inc is backed by a number of large corporations and dedicated to the vision of Bitcoin generating vast volumes of tiny low-fee “microtransactions” and a vast mining network of bitcoin-mining devices controlled by 21 Inc. Does 21 Inc care if Bitcoin’s mining component needs to become more centralized? It’s hard to see why they wouldn’t embrace that model.

    Who knows, it’s possible that this research might actually unite the big mining pools based in China, who have been the most resistant to increasing blockchain “blocks” over fears that this would decrease their transaction fees and create a bandwidth barrier to the transmission of new blocks, and the corporate entities like 21 Inc, who view Bitcoin as a future platform for low-fee “microtransactions”. According to the researchers, you might still be able to get profitable mining along side a vast sea of low-fee microtransactions, but only if Bitcoin’s mining sector is overhauled and significantly centralized. What’s not to love? Oh yeah, the Bitcoin ideal of having a monetary system run by no one might have to be significantly compromised. That’s not what to love if you’re a Bitcoin idealist.

    So, whether or not the recent slowdown was due to an over attack, random users ‘looping’, or Gavin Andresen’s predicted “slow death”, it’s looking increasingly like either the libertarian dream of a hyper-decentralized Bitcoin not controlled by “the Man” dies or Bitcoin itself enters into a slow death-spirals as the system chokes on its own inadequate transaction clearance abilities.

    Of course, there is another option: Bitcoin, or some Bitcoin offshoot, could end up centralizing mining, but in a decentralized manner. How so? Set up the concentrated mining system required for the large volume required for Bitcoin’s “microtransaction” future, and then ensure that the actual companies doing the mining publicly owned and operated and use their mining “profits” for the public good. Heck, you could even have actual countries set of official mining companies. Sure, the existing mining community and companies like 21 Inc might not be super enthusiastic about democratizing Bitcoin, but if the mining firms were public entities owned it would certainly add to the populist allure Bitcoin always strives to achieve.

    So how about democracy as means of threading the Bitcoin needle? Dump the whole private mining competition, which is just a giant energy sink, and replace it with eco-friendly publicly owned mining firms that are simply there to process transactions while covering the computational costs, and not generate a profit. Sure, such a system would in effect be official money managed by all the participating governments, which would be one of the biggest transnational headaches you could imagine.

    But what if it was just a system for processing microtransactions? There’s no reason that would limit commerce. The bitcoins would be like Chuck E. Cheese tokens you buy with real money for transactions but that would still be very real commerce. It wouldn’t involve Bitcoin as an actual currency but who cares? Oh yeah, all the people that currently own bitcoins care. Especially the Bitcoin oligarchs.

    Still, Public Bitcoin is something worth pondering now that Bitcoin’s recent transaction slowdown is looking like a possible start of its death throes. Public Bitcoin would basically be a public good and part of the “commons”: a giant transnational public ledger, co-administered by the participating governments. Whether or not you could ever get governments to create such a system, it could be a fun mental exercise for the Bitcoin community. Especially given the circumstances. Why not at least consider it? Oh, right. Democracy. It’s definitely not part of the Bitcoin populist heart and soul.

    Posted by Pterrafractyl | March 1, 2016, 10:03 pm
  20. As Bitcoin’s block size identity crisis continues to aggravate its transaction clearance-time crisis, a new potential identity crisis is emerging: Bitcoin’s identity as a market-based technology. This is includes the unregulated market dynamics of how bitcoins are traded, the market-based fees that help prioritize those transactions, but also Bitcoin’s “market” based government where no one is truly in charge and all changes to the system are done voluntarily and by consensus. Yes, Bitcoin has been in reality been largely developed by the same group of people led by Gavin Andresen for almost its entire existence until recently, but that system required a lack of dissension and factionalism if there’s one thing that define’s the Bitcoin community these days it’s dissension and factionalism. The great Bitcoin “Core” vs “Classic” debate over block sizes that’s gripped the Bitcoin community has finally made Bitcoin’s “market” government act like a market, with lots of different groups representing different parts of the Bitcoin ecosystem battling it out for the most users to follow their path to Bitcoin’s future.

    How is this new identity market-based crisis emerging? Well, as the article below points out, because Bitcoin’s market-based model of governance can’t deal a situation where there exists a vast split in the community, there now exist two major competing forms of Bitcoin (“Core” and “Classic”), and the dominant “Core” faction isn’t willing to increasing the block size, resulting a significant increase in the fees people are willing to pay for their transactions to clear. That’s part of the market-based regulation for Bitcoin: if things slow down, people pay more for their transactions to clear and that will increased the incentive of the Bitcoin network to grow and be able to take on larger and larger transaction volumes, reducing fees. The ‘ol market at work. Or at least how it’s works in theory.

    But, of course, that market dynamic will have no chance of working if a higher transaction volume isn’t ever allowed and as we’re learning now, there’s a big part of the Bitcoin governance “market” (mostly the miners making fees) who don’t want to see the higher transaction block volumes allowed via larger block sizes. Why? Because the lower the allowed volume, the higher the profit-per-transaction. That’s also part of the market-based identity of Bitcoin. Just a rather complicating one. And a rather profitable one for Bitcoin’s miners but not for all the Bitcoin services that make their profits from transaction volume. So we have a sort of marketplace of dueling, intertwined profit-avenues all playing a role in how the Bitcoin experiment unfolds.

    And what’s the result of this wonderful marketplace of profit-avenues? Well, in response to the backlog of unprocessed transactions, transaction fees are rising significantly. And so are transaction clearance times. And there’s no common consensus for a path forward in sight, although there appears to be growing calls for a coup of sorts against the Bitcoin “core” developers and for competing development teams to step forward and replace them. So, at this point, Bitcoin is relying on the marketplace of ideas to disentangle the Gordian Knot of dueling, intertwined profit-avenues and create a common consensus on how to move forward. This is probably when a democracy of sorts would be helpful, but since that’s not available, good luck Bitcoin!

    International Business Times

    Blockchain Complaints Hit Record Level As Bitcoin Transaction Times Grow And Fees Rise

    By David Gilbert
    On 03/08/16 AT 5:54 AM

    The CEO of the world’s most visited bitcoin-related website, which also offers the most popular bitcoin wallet service, said the increased pressure on the cryptocurrency network has led to a record level of complaints by its customers. And, he has called on the bitcoin community to work together to fix the problem.

    Blockchain.info’s CEO Peter Smith has revealed that during the first week of March it received more complaints than it did for the whole month of February — and that was after complaints in February rose 110 percent compared to January, having risen just 14 percent from December to January.

    The reason for the huge spike in complaints is that the bitcoin network is creaking, unable to process transactions quickly that is in turn putting pressure on consumer-facing businesses. The constraints of the blockchain technology, which underpins the bitcoin, make it difficult for the network to handle the level of transactions currently on the network, leading to higher fees and longer wait times.

    “In short, transactions took longer despite average fees rising significantly, and the price fell,” Smith said. “Simply put, bitcoin users paid more for less value. Higher fees did not result in faster transactions, just a lengthy backlog.”

    The current transaction delay problem stems from the fact that the blocks are limited in size to 1 megabyte, which means just seven transactions per second can be recorded. To put this in context, Visa says its payment system processes 2,000 transactions per second on average and can handle up to 56,000 transactions per second if needed.

    Smith’s comments come in the wake of a wider debate dominating the bitcoin industry at the moment with two conflicting sides seeing different paths for the future development of bitcoin. The first group is known as Bitcoin Core, the network’s volunteer developers who want to change the way the signatures are stored on the blockchain rather than increase the size of the blocks.

    The other is known as Bitcoin Classic, a group comprised of developers and enthusiasts, of which Smith is a proponent, who propose the adoption of an alternative blockchain (incompatible with the original) that would increase the block size to 2 MB, a move it believes would increase user adoption.

    At an industry retreat last month in Hong Kong, Smith and other bitcoin developers and startups debated the state of the network and while Smith said he was pleased with the tone of general discussions, other aspects of the meet-up were not so encouraging.

    “It became clear that large parts of the industry no longer share the same vision nor are they likely to pragmatically compromise to avert what I view as serious risk of running out rocket fuel before we get the ship to orbit,” Smith said.

    As part of the current crisis within bitcoin, members of the Bitcoin Core group have alleged that the network has been overwhelmed because certain groups were purposefully spamming the network with low-value transactions that miners were unlikely to accept and verify on their blocks, thereby artificially inflating the list of unprocessed transactions.

    However, Smith said this is not the case. “During this latest deterioration in network conditions, there simply was no room for low-fee or dust transactions, nor has there been conclusive evidence of a widespread attack on the network,” he said.

    Smith’s comments echoed those of Brian Armstrong, CEO of bitcoin exchange service Coinbase, who said Friday that the Core developers posed a “systemic risk” to the future of the bitcoin network. Armstrong’s solution is the creation of a “new team” to lead bitcoin development, which would be “welcoming of new developers to the community, willing to make reasonable trade offs, and a team that will help the protocol continue to scale.”

    “In short, transactions took longer despite average fees rising significantly, and the price fell,” Smith said. “Simply put, bitcoin users paid more for less value. Higher fees did not result in faster transactions, just a lengthy backlog.”
    That seems worthy of an identity crisis: Bitcoin is so decentralized in how it operates that it can’t come together to fix a situation that’s causing basic market dynamics to break down for Bitcoin. Plus, the Bitcoin “Core” team, representing the “miners” who don’t want larger block sizes and won’t mind higher profits, side is claiming the whole crisis is artificially created:


    As part of the current crisis within bitcoin, members of the Bitcoin Core group have alleged that the network has been overwhelmed because certain groups were purposefully spamming the network with low-value transactions that miners were unlikely to accept and verify on their blocks, thereby artificially inflating the list of unprocessed transactions.

    Keep in mind that spamming is just something Bitcoin is going to have to figure out how to deal with which would necessitate a model that allows for a rapid growth in the block sizes and blockchain as a whole. Although one alternative is for transaction fees to get so expensive that spamming becomes unfeasible. And keeping the total blockchain size down by limiting it to relatively expensive transactions is a totally viable vision for the future of Bitcoin if it’s a vision that can be turned into a sustainable reality. But it’s also a mutually exclusive vision from the one where Bitcoin includes a vast number of cheap microtransactions. And to some extent, what we’re seeing right now is a a battle over those two mutually exclusive visions. It’s definitely one of those situations where a democracy would be useful.

    The selection a new development is also one of those pro-democracy situations:


    Smith’s comments echoed those of Brian Armstrong, CEO of bitcoin exchange service Coinbase, who said Friday that the Core developers posed a “systemic risk” to the future of the bitcoin network. Armstrong’s solution is the creation of a “new team” to lead bitcoin development, which would be “welcoming of new developers to the community, willing to make reasonable trade offs, and a team that will help the protocol continue to scale.”

    Replacing the “core” development team with another unelected development “core” team is definitely another one of those situations where some sort of democratic solution would be highly useful. If only a democratic solution was available. Oh, that’s right, Estonia is creating its own international Blockchain jurisdiction that anyone can join using the “Bitnation” blockchain government software. So Bitcoin could hold elections, but it would have to create a jurisdiction of sorts. So, hey, why not do that to resolve this whole thing? Set up a blockchain jurisdiction like Estonia did and then let anyone join and vote. It would presumably mostly just be Bitcoin users voting. If there’s some sort of way to validate people’s ids so they don’t vote more than once that could be fair and kind of fun and probably drive usage. And it really would help deal with critical issues like block size growth that are only going to continue threatening to fragment the whole thing.

    Could democracy fix Bitcoin? Who knows, but it would be pretty ironic if that happened. And improbable.

    Posted by Pterrafractyl | March 8, 2016, 11:44 pm
  21. One of the interesting contradictory quirks of the Bitcoin phenomena has always been the way the project cast itself as “public good” beyond any state control while simultaneously embracing an ideology that views public goods as a kind of collectivist coercive evil that Bitcoin can help destroy. After all, Bitcoin is intended to overthrow and replace government control over monetary systems because government, as a concept, is evil.

    And it’s that quirk of Bitcoin that’s one of the big reasons Bitcoin’s current crisis is so ironically fascinating: Bitcoin’s current “block size crisis” due, in large part, to the fact that Bitcoin has no formal means of governing itself as part of its ideological embrace of . But if there’s one key public good that’s going to be left behind from Bitcoin if it does end up imploding from all this, it will be the good that comes from demonstrating to the public why there are indeed some socioeconomic situations where an “the market” can’t replace politics. As Henry Farrell puts it below, “rather than overcoming conventional politics, bitcoin is succumbing to it”:

    Financial Times

    The bitcoin magic is losing its Midas touch

    The currency’s advocates are right: money is a confidence trick, a form of frozen desire, writes Henry Farrell

    Henry Farrell
    March 9, 2016 7:27 pm

    Bitcoin, the decentralised, mainly digital currency that is neither issued nor guaranteed by central banks, has always seemed like a magic trick. Rather than spinning straw into gold it transforms wasted computing power into money that people will actually accept as payment.

    Radical libertarians have desperately wanted to believe in it because they hope it can resolve the following dilemma. They prefer markets to politics and they violently distrust states. But modern states in effect have a monopoly over the currencies that markets need in order to work.

    Bitcoin, if it became broadly accepted, would challenge states’ dominance of the economy. It is designed to prevent monopoly by states or other entities, building a new currency based on shared information and making it hard for any entity to gain control. Politics disappears and a combination of technology and cryptographic proofs is conjured up in its place.

    Unfortunately, the magic is wearing off. Some of the technological innovations associated with bitcoin will stick around. The political project will not. Rather than overcoming conventional politics, bitcoin is succumbing to it.

    The biggest fights are focused on the most innovative element of bitcoin: the “blockchain”. This is a decentralised ledger of transactions using bitcoin. Bitcoin “miners” compete with one another to solve computationally hard problems. The winner receives new bitcoin but also validates a “block” of queued transactions, which is then added to the ledger and shared with the community.

    This system was designed to replace third-party regulation with decentralised authority. For technical reasons, it is starting to fail. Each block is small, meaning the system can handle only a few transactions at a time. As more people have started to use bitcoin, the system has grown more unreliable.

    The problem is that coming up with a fix requires political agreement. Because there is no centralised authority within bitcoin, there is no one who can impose a mandate. Bitcoin’s creator, the pseudonymous Satoshi Nakamoto, apparently vanished years ago, leaving big decisions to an increasingly quarrelsome community.

    Some influential members of the bitcoin network want to change the currency’s protocols to make the blocks bigger so that more bitcoin are released at one time, speeding up transactions. Others have responded with outrage, claiming that this would destroy bitcoin. A fundamental change to the protocol would “fork the chain”, potentially creating two different currencies with irreconcilable records, one for those who embraced the fix and another for those who refused it.

    The leading proposal to fork the chain would require 75 per cent of the bitcoin network to agree to the proposal before it was fully implemented. However, no one is empowered to stop people from swaying opinion in illegitimate ways. Companies that favour changing the protocol, such as Coinbase, a bitcoin “wallet” and exchange business, have been targeted by distributed denial of service attacks intended to knock their servers off the internet. People on both sides have withdrawn from the bitcoin network after receiving threats.

    This free-for-all demonstrates the main problem of technological libertarianism. It does not escape politics but temporarily displaces and conceals it. As bitcoin has become more successful, it has also become potentially more lucrative. Ideology is giving way to fights over who gets what. And it turns out that libertarians are not very good at figuring out how to resolve these political clashes.

    As these fights become more publicly visible, they will hurt bitcoin outside its core base of enthusiasts. The advocates of bitcoin got one thing absolutely right. Money is a confidence trick, a form of “frozen desire”, as the writer James Buchan describes it. We only believe in it because everyone else believes in it. So if bitcoin believers believed hard enough, and convinced other people to believe, they had a shot at making it generally accepted.

    That is now going to be far harder. The apparent value of bitcoin depends on a suspension of disbelief. It is hard to see how the illusion can work when the magicians are punching each other out on stage.

    This free-for-all demonstrates the main problem of technological libertarianism. It does not escape politics but temporarily displaces and conceals it. As bitcoin has become more successful, it has also become potentially more lucrative. Ideology is giving way to fights over who gets what. And it turns out that libertarians are not very good at figuring out how to resolve these political clashes.”
    It turns out the escape velocity for politics and humans just might be a velocity exceeding the speed of light because you’re going to have to go back in time. What a useful contribution to the public good. Thanks Bitcoin! At least, thanks, assuming you implode soon.

    But, of course, there’s nothing that says Bitcoin can’t emerge from this crisis, and maybe even stronger than before. Yes, stronger than before is a rather low bar for Bitcoin, but still. It could happen. And should that happen, and Bitcoin muddles its way through this latest crisis with a better overall design, it raises the question of what kind of lessons the Bitcoin experience thus far will be teaching the public. Well, if the following interview with Cory Fields – a Bitcoin developer who has stuck with the “Core” group that – is any indication of what kind of spin to expect, the current Bitcoin block size crisis is a sign that Bitcoin is healthier than ever:

    Coin Journal

    MIT’s Cory Fields: Contentiousness in Bitcoin is Sign of Good Health

    By Kyle Torpey –
    March 9, 2016

    Although recent media reports have claimed Bitcoin is in a crisis that could lead to the eventual demise of the technology, MIT Digital Currency Initiative member and Bitcoin Core contributor Cory Fields thinks the theoretically-immutable ledger system has never been healthier. In a recent presentation at the 2016 MIT Bitcoin Expo, Fields explained his view that the difficulties associated with making changes to Bitcoin’s consensus rules should be viewed in a positive light.

    The New Social Element in the Development Process

    Near the end of his presentation, Cory Fields discussed the new social element of the Bitcoin development process. He noted, “In the last year or so, a big change is that Bitcoin has gone social. Not only that, but the development process of Bitcoin has gone social.”

    Fields then explained how the development process has worked in the past and contrasted it with what’s going on today. He described how the contributors to Bitcoin Core were able to operate with more autonomy in the past:

    “Historically in the past, what we have seen is that not really all that much interest. There have been things that need to be done, Bitcoin Core developers say stuff, and then it happens, and it wasn’t hard. As the group has grown and there has been more interest, it gets harder to say this is what is technically correct and this is what we’re doing. We get pushback because it maybe doesn’t fit well with a particular profit model, or a difference of opinion for long-term goals, that kind of thing.”

    This part of Fields’s talk is a clear reference to the pushback Bitcoin Core has received on their scalability roadmap from some entrepreneurs, investors, and businesses in the Bitcoin industry. For example, Coinbase CEO Brian Armstrong, Blockchain CEO Peter Smith, and Bitcoin angel investor Roger Ver have all declared their support of Bitcoin Classic, which intends to change Bitcoin’s consensus rules via a hard fork in order to increase the block size limit to 2 megabytes

    The BIP Process is Somewhat Breaking Down

    Cory Fields also explained how the traditional system for making changes to Bitcoin is breaking down. In the past, developers could draft a Bitcoin Improvement Proposal (BIP) if they wanted to make an improvement or add a new feature to Bitcoin. Fields noted:

    “[The BIP] process has proven to be successful for the most part. It has begun to break down a little bit. As people participate outside of Bitcoin Core and the typical process, they are not necessarily beholden to that same process anymore.”

    Essentially, parties who have been unable to gain consensus on changes from the group of developers behind Bitcoin Core are ignoring the BIP process in order to make changes to Bitcoin’s consensus rules. Instead of gaining consensus via the traditional process, proponents of a 2 MB block size limit have decided to write their own software and hope miners start using it. Once the code is run by roughly 75 percent of miners, a hard-fork-inducing change is activated on the Bitcoin network 28 days later.

    Coin Dance currently estimates Bitcoin Classic’s support at roughly 6 percent of the network hashrate.

    Contentiousness is Healthy

    One of the last points Cory Fields made during his talk at the recent MIT Bitcoin Expo is that the difficulties associated with making changes to Bitcoin are a positive sign of the system’s overall health. He stated, “You know you have a beautifully constructed and safe system when the designers of the system can’t change it if they want to.”

    Fields went on to talk about how Bitcoin is a system that was designed to resist change and influence by default. In that regard, he claimed Bitcoin has never been healthier. Taking that concept to another level, Fields said:

    If the fighting stops, if it becomes easy to push through a hard-fork, a difficult change, a major change, then at that point we know we have lost and it’s not an interesting system anymore. If it’s that easy to manipulate, then it’s not worth working on this.”

    Of course, there are some others, such as Bitcoin Classic developer Gavin Andresen, who say Bitcoin is too resistant to change. In the past, Andresen essentially acted as the benevolent dictator of Bitcoin. After Andresen handed the title of lead maintainer to Wladimir J. van der Laan in April 2014, the development process for Bitcoin Core has taken a more consensus-based approach.

    “You know you have a beautifully constructed and safe system when the designers of the system can’t change it if they want to.”
    This is one of those “eye of the beholder” moments. Yes, a system that stops functioning if you try to change is kind of neat in an abstract way, but it may not be a quality you want in your monetary system. But for Bitcoin enthiasts who share Cory Fields’ general perpspective on the matter, the Bitcoin community’s aversion to politics should not only include a disdain for state government but a disdain for self-government of itself:


    “If the fighting stops, if it becomes easy to push through a hard-fork, a difficult change, a major change, then at that point we know we have lost and it’s not an interesting system anymore. If it’s that easy to manipulate, then it’s not worth working on this.”

    Resistance to major changes (because it might break if you change it), even if a particular major change is largely desired by the Bitcoin community, is one of the the qualities of Bitcoin that Cory Fields sees as absolutely critical for making it an “interesting” system. And he’s certainly correct when he refers to Bitcoin’s quasi-immutability is part of what makes it an “interesting”, especially since it’s also an experiment in libertarian anarcho-fascistm. An new experimental system that’s simultaneously technically difficult to change, dependent on widespread adoption, and operating on an anarcho-fascist self-governing system is pretty damn interesting system. The current crisis is evidence of that.

    But it going to be an “interesting” system that anyone still wants to use? If not, Bitcoin will implode and the public will get to reap the good that comes for learning the lessons of the perils of anarcho-fascist dictatorships. Of, course, if Bitcoin coin survives and even thrives under this bizarre decentralized unofficially centralized government model, the lessons learned won’t be nearly as good.

    Posted by Pterrafractyl | March 10, 2016, 12:07 am
  22. Ethereum, the cryptocurrency that extends the blockchain to the “smart contract” domain and promises to one day create autonomously run organizations, had a bad day on Thursday. One of the flagship companies running on Ethereum, the Etherum-run crowd-funded venture capital firm Decentralized Autonomus Organization (DOA), was set up to allow individuals to invest their Ethereum coins into the firm and vote on Ethereum-based projects to fund. Unfortunately, it turns out that DOA’s code had a bit of flaw: Individuals could write a contract that allows them to recursively make withdrawals from DAO’s accounts. It was a previously known flaw too. And on Thursday, lo and behold, someone used that flaw to take $53 million worth of DAO’s coins:

    The Verge

    How an experimental cryptocurrency lost (and found) $53 million

    By Russell Brandom on June 17, 2016 03:11 pm

    This morning, users of the Ethereum cryptocurrency woke up to some very alarming news. Someone was trying out a new attack on one of the currency’s biggest and richest institutions, the Decentralized Autonomous Organization or DAO. The DAO holds immense cash reserves, and someone had figured out a way to drain out $53 million.

    Because of the nature of Ethereum, developers could still see where the money was and how much had been taken, and it would be impossible to spend for at least 27 days. But the massive and sudden theft created an unprecedented crisis for a project that was once hailed as the future of the blockchain, and a mad dash to keep tens of millions of dollars from slipping permanently out of reach.

    To understand how this could have happened, it’s necessary to know a little bit about how Ethereum works. The system is built on the same blockchain idea that powers Bitcoin, a system for holding and spending money based on cryptography rather than traditional intermediaries like banks and credit card companies. Applying that logic to finance has made for a powerful and controversial currency system, but Ethereum pushes it even further. Instead of limiting the blockchain to transactions, Ethereum lets developers build any kind of code on top of a blockchain ledger — that could mean blockchain-based contracts, blockchain-based businesses, or even wilder systems that haven’t been created yet. Like most blockchain proposals, it’s still experimental and more than a little starry-eyed, but it’s managed to raise $15 million and catch the attention of some of the industry’s biggest investors.

    The DAO is one of the most ambitious systems built on top of Ethereum. It’s designed to function as a kind of decentralized venture capital fund. Ethereum users can purchase tokens that work like stock, entitling them to voting power on projects and investments, as well as a share of any profits. It’s still in the very early stages, but believers hope it could provide a model for a new kind of decentralized corporation.

    But there was a problem. The contract programs that powered the DAO had a bug that, under the right circumstances, would allow escrow accounts to be emptied out through a balance-check mechanism. Those contracts were built on top of Ethereum, rather than being made a part of its core code, but they were crucial for the day-to-day operation of the DAO. A number of researchers had drawn attention to the bug, most notably former Bitcoin Foundation chairman Peter Vessenes, but developers didn’t seem to realize how devastating the bug could be once exploited. “This particular bug was not unknown,” says Vessenes. “The core developers knew about it.”

    Ethereum developers have put in heroic efforts to patch the bug, but that still leaves the question of the missing $53 million. The money is still in Ethereum coins, and because of the unique nature of the DAO contracts, it’s stuck in a specific holding account for the next 27 days. If the community doesn’t do anything during that period, the attacker will be able to walk away with it — but given how much is at stake, that’s unlikely to happen.

    What’s more likely is that Ethereum’s leaders will figure out a way to take it back, but there’s still some debate over exactly how that should take place. In a post this morning detailing the attack, Ethereum founder Vitalik Buterin (pictured above) proposed a voluntary modification to Ethereum’s code that would make it impossible to spend the stolen coins even after the 27-day window expires. The same mechanism could eventually be used to refund the money, although it will require a lot of political consensus to do so. Some members of the community have argued against recovering the money — using some of the same moral hazard arguments made against the 2008 bank bailouts — but so far they seem unlikely to prevail. (Update: the attacker has since come forward to claim the coins are legally his, complicating these efforts.)

    Still, the result leaves the DAO and Ethereum at large with an uncertain future. Theft is a long-standing problem for cryptocurrency, particularly for any institution large enough to make a tempting target. In 2014, the foundational Bitcoin exchange Mt Gox was revealed as massively insolvent in the wake of a $400 million theft, an event that resulted in permanent damage to the currency’s reputation.

    Today’s theft wasn’t nearly as severe as Mt Gox’s collapse, but it’s led to similar concerns from some observers. Cornell cryptographer Emin Gün Sirer, a longtime skeptic of the DAO, wrote in a post today that the incident should mark the end of the organization entirely, calling on organizers to “dismantle the fund and return the coins back to investors in as orderly a fashion as possible.” Others are less pessimistic, seeing the DAO’s problems as a speed bump in Ethereum’s larger expansion.

    But there was a problem. The contract programs that powered the DAO had a bug that, under the right circumstances, would allow escrow accounts to be emptied out through a balance-check mechanism. Those contracts were built on top of Ethereum, rather than being made a part of its core code, but they were crucial for the day-to-day operation of the DAO. A number of researchers had drawn attention to the bug, most notably former Bitcoin Foundation chairman Peter Vessenes, but developers didn’t seem to realize how devastating the bug could be once exploited. “This particular bug was not unknown,” says Vessenes. “The core developers knew about it.”
    Well, that didn’t go well. It’s going to be an extra long 27 days for the Etherum community. But on the plus side it appears that the DOA taught the Ethereum community some incredibly useful, if entirely predictable, lessons about the potential pitfalls of setting up decentralized autonomous systems for managing our affairs with no “reverse” button. If this was a situation where that bug was just going to sit there indefinitely, imagine how much worse it would be if this bug wasn’t exploited until much later.

    Still, it sounds like they might be able to “reverse” the situation before the 27 days are up, with one of the biggest questions being whether or not the required consensus within the Ethereum community required to implement the fix will actually be ready on time. There’s the ‘moral hazard’ argument, which comes up during any bailout. But as the article indicated, there’s another set of arguments that could potentially complicate the situation and those arguments are coming from someone claiming to be the hacker:

    The Verge

    Note claiming to be from cryptocurrency hacker says stolen $53 million is legally his

    By Russell Brandom on June 18, 2016 09:42 am

    One day after $53 million abruptly disappeared from an experimental cryptocurrency project, a note claiming to be from the attacker has surfaced on PasteBin, claiming that the money drained from the system is now legally his. The attacker withdrew the money by exploiting a contract bug in the code of the DAO (or Decentralized Autonomous Organization), a collective investment fund that uses the Ethereum cryptocurrency. The DAO had raised well over $100 million from Ethereum users at the time of the attack.

    “I have carefully examined the code of The DAO and decided to participate after finding the feature where splitting is rewarded with additional ether,” the note reads. “I… have rightfully claimed 3,641,694 ether, and would like to thank the DAO for this reward,” the note reads. “I am disappointed by those who are characterizing the use of this intentional feature as ‘theft.’” The note also threatens legal action against any who attempt to reclaim the money through technical means.

    The note concludes with an identifying signature and hash, but a number of experts have questioned their validity. Reached by The Verge, the Ethereum project’s Nick Johnson said the signature doesn’t appear to be valid:

    ECDSA signatures of the sort used by Ethereum are 65 bytes (130 hexadecimal digits) long, and end with ’00’ or ’01’. The number at the end of his message is the right length, but ends with ’20’, making it an invalid signature.

    If the attacker wrote the message, there would be no reason for him not to provide a valid signature. If the message were written by an impostor, on the other hand, they’d be unable to generate a valid signature, and would have reason to make their message more convincing by adding a fraudulent one.

    For that reason, I’m certain that the message is a fraud, written by someone who wants to stir up trouble in the community.

    If valid, the note would significantly complicate the ongoing efforts to recover the money. At the moment, all funds taken from the DAO are stuck in a holding account as a result of a clause in the DAO contract, and must remain there for the next 26 days. A number of Ethereum leaders have been making efforts to get it back, including a proposed change to the Ethereum code that would make those coins effectively unspendable. If enough of the community accepts the change, it could prevent the money from slipping away.

    Still, the legal reasoning in the note isn’t entirely unprecedented. The DAO is structured like a legal contract, and while the attack certainly wasn’t an intended use of that contract, it proceeded according to the contract’s pre-established rules. Cornell cryptographer Emin Gün Sirer wrote yesterday that draining the funds may not even qualify as a hack.

    “Had the attacker lost money by mistake,” Sirer wrote, “I am sure the devs would have had no difficulty appropriating his funds and saying ‘this is what happens in the brave new world of programmatic money flows.’ When he instead emptied out coins from The DAO, the only consistent response is to call it a job well done.”

    Updated 1:40PM ET: Updated with Nick Johnson statement questioning the validity of the note.

    If valid, the note would significantly complicate the ongoing efforts to recover the money. At the moment, all funds taken from the DAO are stuck in a holding account as a result of a clause in the DAO contract, and must remain there for the next 26 days. A number of Ethereum leaders have been making efforts to get it back, including a proposed change to the Ethereum code that would make those coins effectively unspendable. If enough of the community accepts the change, it could prevent the money from slipping away.”
    It’s a tricky situation when the argument made by someone claiming to be the person who pulled off a major heist significantly complicates your efforts to recover the stolen money. Especially since that would indicate that the arguments are valid regardless of whether or not they’re made by the person who stole the funds or anyone else.

    Of course, an outside legal framework like government laws could clarify the situation, but it’s worth keeping in mind that one of the reasons so many cryptocurrency enthusiasts are so enthuiastic about this like Ethereum is the promise of creating technology that replaces government. It will be interesting to see what, if anything, the government has to say about the DAO heist. What if the fact that this bug was well known and this system is set up to be used “as is” created a legal vacuum for someone to legally do this? Yowza. It looks you society had better test its smart contract software well before we run systemically important systems on a smart contracts systems.

    With all that in mind, in chillingly related news a number of Wall Street executives reportedly had meeting back in April about blockchain technology. The prospect of immediate exchanges of digital money, without any need for financial institutions to clear the transaction, appeared to be one of the potential features generating the most excitement since it could immediately free up capital. It’s the actual conversion of cash into a digital form that remains a hurdle.

    So if there’s a future Wall Street push to change regulations to allow for very large sums of cash to be converted into “digital cash”, not bitcoins but digital fiat currency like the dollar, and traded in a manner that’s probably not unlike Ethereum’s “smart contracts” model, using Wall Street’s envisions blockchains of the future, you might want to recall the DAO Heist of 2016:

    Bloomberg Technology

    Inside the Secret Meeting Where Wall Street Tested Digital Cash

    Matthew Leising
    May 2, 2016 — 8:00 AM CDT

    * Fiserv created digital dollars to show gathered executives
    * April meeting was sponsored by blockchain startup Chain

    On a recent Monday in April, more than 100 executives from some of the world’s largest financial institutions gathered for a private meeting at the Times Square office of Nasdaq Inc. They weren’t there to just talk about blockchain, the new technology some predict will transform finance, but to build and experiment with the software.

    By the end of the day, they had seen something revolutionary: U.S. dollars transformed into pure digital assets, able to be used to execute and settle a trade instantly. That’s the promise of a blockchain, where the cumbersome and error-prone system that takes days to move money across town or around the world is replaced with almost instant certainty. The event was created by Chain, one of many startups trying to rewire the financial industry, with representatives from Nasdaq, Citigroup Inc., Visa Inc., Fidelity, Fiserv Inc., Pfizer Inc. and others in the room.

    The event — announced in a statement this Monday — marked a key moment in the evolution of blockchain, notable both for what was achieved, as well as how many firms were involved. The technology’s potential has captivated Wall Street executives because it offers a way to free up billions of dollars by speeding transactions that currently can take days, tying up capital. But a huge piece of that puzzle is transforming cash into a digital form. And while some firms have conducted experiments, the Chain event showed a large number of them are now looking jointly at a potential solution.

    “We created a digital dollar” to show the group at Nasdaq an instant debit and credit on a blockchain, said Marc West, chief technology officer at Fiserv, a transaction and payments company with more than 13,000 clients across the financial industry. “This is the first time the money has moved.”

    Quietly Building

    Chain is already known in some Wall Street circles for its project to help Nasdaq shift trading of non-public company shares onto a blockchain. But for the most part, it has kept relatively quiet compared with other fintech ventures.

    The San Francisco-based company also used the April 11 meeting to introduce its customers and investors to Chain Open Standard, an open-source blockchain platform that the venture has been designing for more than a year, said Adam Ludwin, the company’s chief executive officer. What Chain has done is engineer the complicated elements needed for a blockchain to work, so that its customers can build custom solutions on top of that to solve business problems, he said.

    “We’ve been quietly building with a whole bunch of folks for a few years,” he said. “Blockchains are networks, so we think collaboration is important, but what’s even more important than collaboration at the beginning is getting the model right.” The event was kept secret so executives could freely share nascent ideas and take risks. “The more press, the less quality of the dialogue and problem-solving,” he said.

    The most common blockchain is the one supporting the digital currency bitcoin, which has been active since 2009. Financial firms have been reluctant to embrace bitcoin, however, as its anonymous users could entangle banks in violations of anti-money-laundering and know-your-customer regulations. Digital U.S. dollars, or any other fiat currency, on the other hand, doesn’t pose those risks.

    ‘Mainframe Era’

    Nasdaq and Citigroup partnered to explore how they can work together, said Brad Peterson, the exchange-owner’s chief information officer. He said blockchain also could be used for reference data — how specific stocks or bonds are identified across all markets, for example.

    Wall Street was one of the earliest beneficiaries of computers replacing office systems. Now 30 years later, those legacy systems can be a hindrance to further technological evolution, he said.

    “That’s the great opportunity — how to unlock that ability to work your way out from under the mainframe era,” he said.

    While cash in a bank account moves electronically all the time today, there’s a distinction between that system and what it means to say money is digital. Electronic payments are really just messages that cash needs to move from one account to another, and this reconciliation is what adds time to the payments process. For customers, moving money between accounts can take days as banks wait for confirmations. Digital dollars, however, are pre-loaded into a system like a blockchain. From there, they can be swapped immediately for an asset.

    “Instead of a record or message being moved, it’s the actual asset,” Ludwin said. “The payment and the settlement become the same thing.”

    “While cash in a bank account moves electronically all the time today, there’s a distinction between that system and what it means to say money is digital. Electronic payments are really just messages that cash needs to move from one account to another, and this reconciliation is what adds time to the payments process. For customers, moving money between accounts can take days as banks wait for confirmations. Digital dollars, however, are preloaded into a system like a blockchain. From there, they can be swapped immediately for an asset.
    Just what Wall Street needs: more ways to swap large sums of money instantaneously so financials institutions can immediately free up assets for trading even more readily as the situation (or the high-frequency trading algorithm) calls for it. Because sometimes a leveraged could immediately use a lot more leverage.

    But who knows, maybe letting major Wall Street banks set up proprietary blockchains that can legally trade assets instantaneously will have a net public benefit and not be a tool for increasing potential leverage by increasing liquidity and also “getting out of dodge” during financial crises. But let’s keep in mind that the bureaucratic slowdown that the Wall Street blockchains are supposed to replace to sort of create a “we’re all in this together” situation when systemic events take place and if there’s a way smart contract financial systems could be set up to allow powerful players to “get out of Dodge” in a financial crisis by doing something like the DAO hacker did and exploiting a known loophole in the contract code, we should probably expect them to do that. So there’s a fun debugging oversight issue for financial regulators. Everywhere.

    Digital cash in national currencies and other types of securities that are tradable on blockchains markets, especially markets are driven by smart contracts, sure could become useful in a systemic financial crisis when markets are at the risk of “freezing” and normal trading grinds to a halt due to extreme counterparty uncertainty. And that could be true especially if you’re participating in one of the special “digital money” blockchains and most of the rest of the market doesn’t have that advantage. Especially during any phase-in periods of the technology where it’s legal but not yet widely adopted and only a few select institutions are actually utilizing these kinds of immediately tradable forms of cash. Unless, of course, these exchanges are well-regulated.

    So don’t act super surprised if Wall Street starts viewing Bitcoin or Ethereum blockchain technology as suddenly the greatest thing ever and an exciting area of financial innovation. One that doesn’t need too much innovation-smother oversight. Immediate asset transaction could create all sorts of fascinating arbitrage opportunities and that’s just the kind of economic innovation Wall Street loves most.

    The writing is on the wall about both the vulnerabilities of smart contract systems and the interest of big money. And that writing looks like dollar signs. So welcome to the smart contract era. Read the fine print.

    Posted by Pterrafractyl | June 18, 2016, 8:25 pm
  23. This is one of those stories that must elicit mixed feelings in the Bitcoin community: The World Economic Forum recently published a paper declaring that the Bitcoin’s blockchain technology is rapidly going to become the beating heart of global finance. Except that beating heart won’t be a single blockchain pushing bitcoins around. Instead, it will be all sort of privately operated blockchains pushing dollars, euros, and any other asset class the financial industry might want to trade. Mostly for the purpose of cutting down transaction costs.

    So instead of overthrowing the financial status quo, Bitcoin technology is poised to get used for padding the status quo’s bottom line:

    The New York Times

    Envisioning Bitcoin’s Technology at the Heart of Global Finance

    By NATHANIEL POPPER
    AUG. 12, 2016

    A new report from the World Economic Forum predicts that the underlying technology introduced by the virtual currency Bitcoin will come to occupy a central place in the global financial system.

    A report released Friday morning by the forum, a convening organization for the global elite, is one of the strongest endorsements yet for a new technology — the blockchain — that has become the talk of the financial industry, despite the shadowy origins of Bitcoin.

    “Rather than to stay at the margins of the finance industry blockchain will become the beating heart of it,” the head of financial services industries at the World Economic Forum, Giancarlo Bruno, said in a statement released with the report.

    Unlike existing financial ledgers or databases used by banks and other institutions, the blockchain is updated and maintained not by a single company or government. Instead it is run by a network of users. It’s akin to the way Wikipedia is maintained by users around the globe.

    Initially, bank executives shied away from endorsing Bitcoin because it had been used for drugs and crime. Now, however, many have focused on ways to create blockchains without using Bitcoins for transactions in any way.

    This is attractive because blockchains — or “distributed ledgers,” as they are often described — could offer a new way to move money and track transactions across borders and other networks in a more secure, transparent and effective way than the current system.

    Distributed ledgers are often viewed as most attractive to industries with businesses that lack a central institution they can trust to keep their records.

    The World Economic Forum report notes that most developments are likely to happen behind the scenes. So consumers won’t see the changes to infrastructure, but the changes could lead to cheaper and faster financial services. The report says the technology could help improve both mainstream transactions, like global payments and stock trading, and lesser-known areas like trade finance and contingent convertible bonds.

    The 130-page report from the forum is the product of a year of research and five gatherings of executives from several major institutions, including JPMorgan Chase, Visa, MasterCard and BlackRock.

    The report estimates that 80 percent of banks around the world could start distributed ledger projects by next year. Large central banks are also studying how the blockchain will alter the way money moves around the globe.

    Most banks have already put together blockchain working groups and released research reports hailing the potentially transformative effect of the technology.

    But few real-world uses of the blockchain have come to fruition, other than Bitcoin itself. That has led to some questions about whether the blockchain is the proverbial solution looking for a problem, rather than an innovation that will be used widely.

    Existing virtual currencies have continued to struggle with security problems. One of the largest Bitcoin exchanges, Bitfinex, recently lost more than $60 million worth of Bitcoin in a hacking — the latest of several such incidents.

    The World Economic Forum report suggests that it will take some time for such problems to be worked out. In addition to the technology issues, the report says that the industry will have to work with governments to create standard rules and laws to govern transactions.

    The report does not make a single mention of Bitcoin. That mirrors the pronouncements from banks, which have often said that they can harness distributed ledgers without using existing virtual currencies. Rather, these ledgers would be run by groups of institutions that want to keep common records.

    Just this week, 15 global banks, including Wells Fargo and UBS, said that they had completed a prototype of a distributed ledger that could track trade financing around the globe — providing a single record for a series of scattered, hard-to-track transactions.

    The report estimates that 80 percent of banks around the world could start distributed ledger projects by next year. Large central banks are also studying how the blockchain will alter the way money moves around the globe.”

    80 percent of banks globally will start distributed ledger projects by next year? While that might be a optimistic estimate, it’s not at all unimaginable that the financial industry would be really, really excited about privately operated blockchain technologies. Especially the banks that are going to be running these private blockchains designed to transfer assets around the globe. Especially when those banks happen to be the same mega-banks that dominant finance already and have a long history of collusion for profit. Especially if those privately run blockchains are vulnerable to fraud if enough of the participating banks collectively maintaining the distributed ledger decide to collude:

    Fortune

    More Banks Are Trying Out Blockchains For Fund Transfers

    by David Meyer

    June 23, 2016, 4:10 AM EDT

    Ripple signs up seven new banks as distributed-ledger tech gains traction.

    The San Francisco-based financial technology company Ripple has signed up seven more banks to potentially use its blockchain for cross-border payments.

    Santander, UniCredit, UBS, Reisebank, CIBC, ATB Financial and the National Bank of Abu Dhabi said Wednesday that they were working with Ripple’s technology, which uses a distributed ledger of the sort that also underpins bitcoin.

    These automatically-generated ledgers have no central operator and, as they are filled, the entries become irreversible and resistant to tampering. Ripple’s ledgers hold order books with bid and ask offers, and it claims its “path-finding algorithm” finds the lowest foreign exchange rates.

    Canada’s ATB Financial and Germany’s ReiseBank used the system to make a demonstration fund transfer last week.

    “Using blockchain technology, ATB Financial became the first financial institution in Canada to complete an overseas payment in a matter of seconds. Without blockchain, that transaction would have taken two to six business days,” ATB chief strategy and operations officer Curtis Stange said in a statement.

    Ripple said its network now includes 12 of the world’s top 50 banks, and it has 10 banks in “commercial deal phases.”

    If you want to see how its ledger-filling system works, here you go:

    [see video]

    Meanwhile, also in the world of blockchain technology, social payments firm Circle has raised $60 million from Chinese investors, led by IDG Capital partners.

    Circle, which already enjoys the backing of Goldman Sachs and others, lets individuals send money to one another across borders, with bitcoin’s blockchain as the underlying platform. It is currently partnering with banks such as the U.K.’s Barclays.

    In a Wednesday statement, Circle said it was developing a “China-native company” as it works towards a commercial launch in that country. In the meantime, it said, it will follow up its U.K. launch with a broader European rollout, starting in Spain.

    The U.S. Financial Stability Oversight Council, whose members include heads of the Federal Reserve and the Security and Exchange Commission, said this week in its annual report that distributed ledger systems such as Ripple’s, and those of bitcoin and ethereum, could enhance market transparency and reduce concentrated risk exposure to the “trusted third parties” that would traditionally handle such transactions.

    However, the council also noted that there were “risks and uncertainties” involved, such as inexperience with such systems, the possibility of operational vulnerabilities that no-one has found yet, and the possibility of fraud if enough participants in the system collude with one another.

    “However, the council also noted that there were “risks and uncertainties” involved, such as inexperience with such systems, the possibility of operational vulnerabilities that no-one has found yet, and the possibility of fraud if enough participants in the system collude with one another.

    Let’s see. Might a disturbingly large percent of the banks operating on a private blockchain collude with each other to both perpetrate a large-scale financial crime and then cover it up? It’s all a reminder that one of the challenges of introducing decentralized private collectively managed digital financial ledgers is that decentralized exchanges is only decentralized if the entities maintaining the decentralized ledger’s transaction-clearing mechanism are actually operating in a decentralized manner behind the scenes cooperation. That doesn’t mean there’s no place for blockchains in finance. It just means we probably shouldn’t privately run bank cartel blockchains are super decentralized. It’s definitely something worth keeping in mind in the age of blockchain finance.

    Posted by Pterrafractyl | August 21, 2016, 12:33 am
  24. It looks like the big money backers of “21 Inc” are expanding on their plans for transforming Bitcoin into a ‘microtransaction’ platform where tiny bits of ‘colored’ bitcoins are used as tokens to pay for various services (as opposed to treating it more like a currency) and then pay you in these token. A new ‘micro’ item was just added to 21 Inc’s agenda: microtasks. Yes, if you love the ‘gig economy’ and the idea of working for a pittance doing small tasks through services like Amazon’s Mechanical Turk platform, now you can work for a pittance of bitcoins instead:

    Coinspeaker

    Bitcoin Startup 21 Inc Officially Launches ‘Lists’ to Let Users Earn Money By Doing Microtasks

    by Polina Chernykh on Tuesday, May 2nd, 2017 7:00am EDT

    With a new platform, people can start receiving payments in digital currency for answering emails, filling out surveys, and doing other tasks.

    The San-Francisco-based bitcoin startup, 21.co, has unveiled a new service to enable users earn bitcoins by completing specific tasks. Called Lists, the feature can be used by businesses to pay professionals for responding to their requests.

    “Lists are curated groups of 21.co members who share a common profession, skill, or social network,” said Balaji Srinivasan, CEO of 21. “21.co lists provide a way for the average individual to make money online. You need not be famous; you need only join lists of people with similar to start receiving targeted, paid microtasks.”

    The platform, the company explained in a blog post, will help companies that need to send mass emails or surveys to reduce time spent by their employees and speed up recipient response time. If compared to traditional cold emails, the 21.co lists have much higher response rate, with 90% of respondents generally answering in 24 hours.

    The startup explained how the service can be used. For instance, if you are a Stanford student, you can apply to the Stanford list to get payments by businesses that want to hire you or have you try out new apps intended for college campuses. The Python list could be used by businesses that want to complete surveys on new technologies or get expert opinions.

    To use the service, you have to apply to one of the lists and after being selected you will be sent a stream of list-specific tasks that can be done to make money or fund charities. 21 has also developed some additional features, like professional biography and automatic lists joining, that will simplify the process of making money.

    The tasks offered include recruiting, fundraising, market research, and sales. Businesses using the service can reach executives and investors, digital currency investors, engineers, frontend and backend developers, blockchain experts, professionals, and others. There are now more than 50 lists displayed on the 21’s website and the startup is planning to add more.

    Two years ago, the startup developed a “split chip” technology for the Internet of Things (IoT) devices to let users sell or buy services for bitcoin. Two months after revealing the device, 21 made it available for purchase on Amazon. The pocket size of the product allows developers to make cryptocurrency transactions without taking their mind off daily routine.

    “The tasks offered include recruiting, fundraising, market research, and sales. Businesses using the service can reach executives and investors, digital currency investors, engineers, frontend and backend developers, blockchain experts, professionals, and others. There are now more than 50 lists displayed on the 21’s website and the startup is planning to add more.”

    Welcome to the future of employment: microtasks for tiny fractions of bitcoins. But since it sounds like 21 Inc is pretty much just targeting professionals for their microtask service maybe the task will at least pay decently unlike the rest of the ‘gig economy’. Maybe. Or maybe not:

    The Financial Times

    The humans behind Mechanical Turk’s artificial intelligence
    Highly educated workers drive machine learning for Amazon by completing tasks

    October 26, 2016

    by: Leslie Hook in San Francisco

    Manish Bhatia, a 29-year-old IT worker in New Delhi, recently married. To make some extra cash to support his new lifestyle, he knows where to turn: completing tasks on Amazon’s Mechanical Turk, an online marketplace for chores that are done by people sitting in front of a computer.

    Mechanical Turk is often touted as “artificial artificial intelligence”, or a “human cloud”. The platform has been around for more than a decade, but the types of tasks are changing as computers become smarter. Now, the workers on the human cloud are helping to train computers, which are refining their own artificial intelligence capabilities to become more human-like.

    With the rise of artificial intelligence and specifically machine learning, in which machines teach themselves to recognise patterns by analysing the data they are given, the task of the trainer has become even more important.

    One of the chores Mr Bhatia worked on through Mechanical Turk involved identifying “pins” for Pinterest, the online pinboard. He would be shown a photo — or pin — and then choose other pins that were similar to it, enabling Pinterest’s artificial intelligence engines to get better at predicting the pins a user will like.

    “We are the intelligence behind that artificial intelligence,” Mr Bhatia says with a hint of pride. “I feel excited to be a part of it, [even though] you might be just a small cog in the whole wheel.”

    Other machine training projects are being conducted on the human cloud by Google, Twitter, and by Amazon, which owns Mechanical Turk. One of Amazon’s earliest uses of the platform for machine-training was asking humans to check whether its algorithm had correctly identified duplicate retail products on its shopping website.

    Panos Ipeirotis, an associate professor at New York University’s Stern School of Business, who studies crowdsourcing, says tasks on Mechanical Turk are changing and adapting as computers become more capable.

    “You have a lot of work that is like quality control of the output of computer processes or AI [artificial intelligence] processes,” he explains. “We have more tasks with AI, so we need more humans to verify [the output].”

    Compared with when the service first launched in 2005, it is now easier for computers to identify images, read text, and even write sentences. “It used to be humans writing the caption for an image,” says Mr Ipeirotis. “Now computers are writing the caption and humans are checking the caption.”

    This training function is helped by the fact that many of the workers on Mechanical Turk, which is the largest English-language crowdsourcing platform, are highly educated. A recent study from the Pew Research Center found that one in two Turkers has a college degree, compared with a third of the US workforce overall.

    “The biggest surprise was probably the education level of the people doing the tasks,” says Paul Hitlin, senior researcher at Pew, referring to the study, which surveyed more than 3,000 Turkers. “Usually you would expect low-paying jobs to attract less educated workers. But what we found here is that Turkers tend to be more educated than the working public in general.”

    Companies using Mechanical Turk for machine training are likely to be paying a fraction of what it would cost to have full-time employees sort and click through pictures.

    Wages on the platform, where workers are paid per task rather than per hour, are usually below the US federal minimum wage of $7.25 per hour. The Pew survey found about half of Turkers make less than $5 per hour. Nearly two-thirds of the tasks posted on the site pay 10 cents or less.

    Not all the tasks on Mechanical Turk are machine training — chores like transcription represent about quarter of the tasks posted, while identifying information seen in sales receipts is about a fifth of tasks posted, according to Pew. While the tasks vary, they all share one thing: being difficult for computers, and relatively easy for humans.

    Among the workers, many enjoy the flexibility of being able to make money when they choose simply by going online. But there has been a backlash against what critics say is a faceless platform that offers little recourse when workers are treated unfairly by taskmasters.

    “Amazon sells us as an algorithm,” says Kristy Milland, who runs an online forum for Turkers and has been working on the platform since 2010. “We are not even real human intelligence, we are fake fake intelligence, which is offensive.”

    The backlash against this aspect of work in the gig economy, in which a worker’s boss is their computer or their smartphone rather than a human, is widespread. And it is a problem that is growing more pertinent as more US workers choose to freelance, taking up part-time jobs that do not provide benefits.

    A recent survey from Edelman Intelligence estimates that a third of the US workforce is freelancing in some way, whether part time or full time. This number is growing as technology makes it easier to find freelance work, according to a Freelancing in America 2016 survey, published earlier this month by Upwork, the online freelancing platform.

    Even though the rise of artificial intelligence means that the Turkers are the ones coaching the machines, workers still feel subsumed by the system. Ms Milland dreams of one day starting her own platform for tasks, a worker-owned platform that would treat workers better. “If we can’t have a union, we can have a platform, a co-operative crowdsource platform,” she says. “That’s the only way we can hope to make a difference.”

    “This training function is helped by the fact that many of the workers on Mechanical Turk, which is the largest English-language crowdsourcing platform, are highly educated. A recent study from the Pew Research Center found that one in two Turkers has a college degree, compared with a third of the US workforce overall.

    Yep, Mechanical Turks are surprisingly well educated. And very poorly paid:


    “The biggest surprise was probably the education level of the people doing the tasks,” says Paul Hitlin, senior researcher at Pew, referring to the study, which surveyed more than 3,000 Turkers. “Usually you would expect low-paying jobs to attract less educated workers. But what we found here is that Turkers tend to be more educated than the working public in general.”

    Companies using Mechanical Turk for machine training are likely to be paying a fraction of what it would cost to have full-time employees sort and click through pictures.

    Wages on the platform, where workers are paid per task rather than per hour, are usually below the US federal minimum wage of $7.25 per hour. The Pew survey found about half of Turkers make less than $5 per hour. Nearly two-thirds of the tasks posted on the site pay 10 cents or less.

    So has 21 Inc given us a clue as to what it’s service going to pay? Sort of. While it’s unclear how many hours 21 Inc expects its “list” members to work, it’s estimating you’ll make anywhere from $10-$1000+ per “list” assuming you do the stream of microtasks made available to you. $10-$1000+ annually:

    Medium

    Make Money Online by Joining 21.co Lists
    Individuals can now join lists of people with similar skills to start receiving targeted, paid microtasks.

    May 1, 2017

    A 21.co list membership as microconsulting

    Gaining acceptance to a 21.co list means gaining access to what one can think of as paid microconsulting, as something in between an Amazon Mechanical Turk-style microtask and a conventional job. By microconsulting we refer to the steady stream of paying microtasks that you are qualified for by dint of your 21.co list membership. Depending on the selectivity of the 21.co list that you gain admission to, the expected income for a given list’s annual stream of microconsulting work should be on the order of $10 to $1000+ per year. By joining multiple lists, you can increase your earnings.

    So if you join a highly selective list, presumably something like the Venture Capitalist or Angel Investor lists, you might make over $1000/year assuming you take on the annual stream of microconsulting work. And for those on the least selective lists you might make a whole $10. Per year. In bitcoins.

    It’s a reminder that you thought 21 Inc’s bitcoin-mining toaster was a horrible idea, it can always get worse!

    Posted by Pterrafractyl | May 10, 2017, 8:42 pm
  25. One of the strangely successful phenomena in conservative populism is the success of the right-wing millionaires and billionaires in peddling the notion that “deregulation” – defanging government’s power to regulate business and provide some degree of meaningful oversight over marketplace – is somehow an act of sticking it to ‘The Man’, as opposed to giving ‘The Man’ exactly what he is looking for in order to gain even more wealth and power and the masses. For instance, instead of viewing the Koch brothers and the network of wealthy donors as individuals who are emblematic of ‘the Man’ behind the ‘rigged system’ and ‘the government’, we instead have a right-wing media complex that has successfully convinced millions of Americans that the problem is the government has too much power over big business, too many taxes on the rich, and that the power behind ‘the government’ is actually a bunch of left-wing policy-wonks who are out to grow the power of government for nefarious purposes.

    It’s been a wildly successful con, in the US and globally. And one of the consequences of that successful con is that there’s a lot of really, really wealthy people with A LOT of money. Tens of trillions of dollars stashed in tax havens around the world. And while some of those trillions are going to be earned and stashed away legally, there’s also no shortage of very powerful people with an abundance of dirty money they need to move around the world and laundering if they’re ever going to use it. And also dodge taxes on in many cases. The financial obfuscation industry is one of those sectors of the economy that’s sort of a metric of fascism: if ‘the Man’ is making it very easy for very wealthy people to secretly save and move vast fortunes, ‘the Man’ probably isn’t working for the common man. To some extent this is common sense, and yet the realization that the greatest threat to life on earth at this point is right-wing billionaires working in concert to confuse conservatives is one of those common sense realization that eludes so many.

    It’s all something worth keeping in mind as the world ponders whether or not crytpocurrencies designed to be one of the most potentially effective tools for tax sheltering and money-laundering the world has ever seen should go mainstream. Because while there’s limited money-laundering and tax sheltering capacity through something like Bitcoin right now due to the limited size of that market (~$50 billion), there’s no law of the universe that says the cryptocurrency markets won’t become much, much larger over time. And as those markets grow the sheltering/laundering potential for th=at vast global pool of illicit wealth held by the global super-rich, a.k.a ‘the Man’ is also going to grow:

    The Financial Times
    FT Alphaville

    What is crypto’s agenda really?

    By: Izabella Kaminska
    August 23, 2017

    Are crypto pioneers looking to prove that laissez faire anarchic mechanisms are capable of creating a caveat emptor stateless decentralised utopia where every man is king of his own domain, and where the state is rendered entirely pointless?

    Or are they engineering a means by which the world’s dark markets, criminal networks, rentiers and tax-evaders can continue to suck on the productive population through opaque and shadowy parallel networks, while they continue to give nothing back in return?

    Because if it’s the latter, a steady campaign of propaganda to present what is effectively the reemergence of unregulated and predatory shadow banking systems — this time on steroids — as legitimate technical innovation would be necessary.

    For this — arguably the world’s greatest mafia ruse — to work, everyday Joes would have to be convinced that handing hard earned money over to crypto investments or accepting crypto directly in exchange for goods is a positive sum activity and nothing akin to sponsoring global illicit activity.

    So how best to achieve this if not through the mass deployment of technological buzzwords to disguise what are in fact well-established financial mechanisms and processes as something cutting edge and new? By this process, basic spread-betting platforms and OTC derivatives systems can be reimagined as “tokenised investments“, offering value-creating opportunities as opposed to zero-sum gambling traps to the financially illiterate.

    So what’s easier to believe? That crypto is a cutting edge innovation that’s going to bring about the end of poverty and revolutionise the world, or that it’s mostly a mechanism which serves the interests of those who have been frozen out of the world’s official banking networks for strategic productivity reasons. Cui bono really?

    The biggest problem the world’s illicit tycoons have, after all, isn’t making money. It’s moving and banking that money in ways that cannot be traced back to them in a way that gets the assets seized by US law enforcement.

    It’s not farfetched to presume — especially with recent illicit exchange shutdowns — that crypto’s raison d’etre as a consequence is creating a parallel network that will allow exactly such entities to operate beyond the banking system, the regulators, the law or even sanctions. No more costs, no more gambling laws, no more AML and no more CTF restrictions.

    The more speculators that enter the fray, meanwhile, the easier to wash the bad money with the good.

    Remember that next time a pension fund manager tries to make the case for cryptocurrency investments.

    ———-

    “What is crypto’s agenda really?” by Izabella Kaminska; The Financial Times; 08/23/2017

    “So what’s easier to believe? That crypto is a cutting edge innovation that’s going to bring about the end of poverty and revolutionise the world, or that it’s mostly a mechanism which serves the interests of those who have been frozen out of the world’s official banking networks for strategic productivity reasons. Cui bono really?”

    Cui bono? Well, illicit tycoons definitely bono. Or how about quasi-licit tycoons who earn their money legally but want to dodge taxes? Certainly quite a bit of bono for them in a large crytpcurrency market that’s truly untraceable. And yes, given the many technical traceability issues with Bitcoin there’s a good chance Bitcoin’s first-mover advantage will get overtaken by a competitor that can just do the whole cryptocurrency thing overwhelmingly better and attracts the new cryptocurrency users (it’s one of the problems with stateless decentralized currencies. They might suddenly get very outdated). But when you factor in the vast money-laundering and tax evasion/sheltering potential that cryptocurrencies presents to ‘the Man’ it’s hard to rule out at least one of those cryptocurrencies getting very large in order to handle ‘the Man’s’ very large tax evasion/sheltering and money laundering service demand. And everyone else’s demand for such services. And that all requires a much larger legitimate marketplace to hide the illicit finance. This is big finance.

    So if the infrastructure is set up to make the world of private cryptocurrencies just another part of the legal global financial system and deeply integrated into the fabric of the financial marketplace, it’s unfortunately time to ask some very unpleasant questions. Questions like “How much wealth does the Under Reich or Japanese fascists have that’s been accumulating since WWII could use some additional laundering services? That’s a relevant question today because we have a very tragic history involving stealth fascist networks as they loot the world. As the world continues to largely adopt pro-billionaire fascist policies that increase the relative wealth of ‘the Man’, the capacity of money-laundering required to make that wealth useable is only going to increase. That’s something to keep in mind in terms of the likelihood of a cryptocurrency growing substantially someday: As the fascists underground/overground continues to plunder everything in site there’s going to be a ton of ‘financial services’ required to that benefit from stealth and grow in proportion with the plundering.

    So while plenty of cryptocurrency enthiasts might answer the question of “Cui bono?” with “Me! I bono because look how I’ve stuck it to ‘the Man’!” let’s not forget that ‘the Man’ is going to bono the most:


    The biggest problem the world’s illicit tycoons have, after all, isn’t making money. It’s moving and banking that money in ways that cannot be traced back to them in a way that gets the assets seized by US law enforcement.

    It’s not farfetched to presume — especially with recent illicit exchange shutdowns — that crypto’s raison d’etre as a consequence is creating a parallel network that will allow exactly such entities to operate beyond the banking system, the regulators, the law or even sanctions. No more costs, no more gambling laws, no more AML and no more CTF restrictions.

    And the primary requirement for turning the cryptocurrency movement into the greatest money-laundering mechanism ever created is make those cryptocurrencies as popular as possible. Legitimate transactions aren’t just the haystack. They’re the payout for the laundereres/shelterers/evaders:


    For this — arguably the world’s greatest mafia ruse — to work, everyday Joes would have to be convinced that handing hard earned money over to crypto investments or accepting crypto directly in exchange for goods is a positive sum activity and nothing akin to sponsoring global illicit activity.

    The more speculators that enter the fray, meanwhile, the easier to wash the bad money with the good.

    Remember that next time a pension fund manager tries to make the case for cryptocurrency investments.

    With all that in mind, guess what the latest trend in personal savings is in Japan. Yes, of course it’s Bitcoin. This comes after the Japanese government decided to take the next step in the mainstreaming of cryptocurrencies by formally regulating them. Regulations that involve standard provisions like the anti-money-laundering “know you customer” rules that banks (hopefully) face. Will those regulations work on a financial product that’s designed to regulation-resistant? Will Japan create a regulated cryptocurrency marketplace that’s both safe for individual savers and not a giant funnel into the global cryptocurrency money-laundering machinery? That remains to be seen. But if Japan doesn’t succeed in creating a safe marketplace that doesn’t fuel a giant money-laundering machine a lot of individuals savers are going to see their savings sucked away into that giant global cryptocurrency money-laundering machinery.:

    The Financial Times

    Japan eyes prize in regulating bitcoin
    Efforts to regulate the crypto currency by the Japanese may sharpen its appeal

    by: Leo Lewis
    May 16, 2017

    As speculative fever takes hold, cybercriminals taint the brand with ransom demands and prices whipsaw between record highs and cliff-edge stumbles, governments, investors and financial institutions are legitimately asking whether the world is ready for bitcoin.

    A thornier question — soon to be answered in Japan — is whether bitcoin is ready for “Mrs Watanabe”, the notional holder of the nation’s household purse-strings.

    Since April 1 this year, as the global market value of bitcoins and other cryptocurrencies has surpassed $50bn, a growing number of online exchanges, funds and remittance companies has been scrambling to make formal registrations with the Japan Financial Services Agency. The process is expensive, demanding, laced with invisible tripwires and not all applicants, by any means, will be successful.

    The prize, though, could be spectacular. Japanese retail investors — a group that does include a lot of Mrs Watanabe housewives but is actually dominated by her day-trading children and their leveraged online accounts — are voracious. FX margin trading in Japan, the “Mrs Watanabe” favourite with volumes at about $10tn per quarter, is the largest in the world. A minute fraction of that channelled towards the bitcoin market, say the most excitable proponents, could be transformational.

    Propelling the rush to register is new legislation that (perhaps counter-intuitively for a country whose financial services industry still routinely uses fax machines), puts Japan comfortably at the head of the global pack on crypto currency trading regulation. Some US states have their own regulation for local bitcoin exchanges, but so far, no central government has taken the plunge and attempted to regulate an asset that was invented to defy regulation. It is easy to see why the FSA is keen to move: Japan, by volume, is one of the largest centres of bitcoin trading on any given day and has been helped by China clamping down. The Japanese government — unexpectedly clear-headed on the issue — sees as much potential opportunity as threat in that.

    Hence the stampede to register exchanges and other businesses with the FSA. The prospect of a market where the government has demystified an otherwise enigmatic asset and Mrs Watanabe has been soothed by seeing the stamp of a regulator known for its conservatism, is simply too lucrative a bet to pass up.

    By October 1, any bitcoin or “alternative coin” exchange or money transfer business that wants to operate in Japan must come under the regulatory supervision of the FSA and be submitted to annual audits. Much of the regulation (some of it in the familiar language of anti-money laundering measures and “know-your-customer” protocols) represents an attempt by Japan to purge some of the anarchy from bitcoin’s image. Other parts are designed to ensure separation between the stashes of customers’ bitcoins from those belonging to the exchanges hemselves — a measure that might have avoided some of the chaos that followed the 2014 collapse of what was at the time the world’s biggest bitcoin exchange, the Japan-based Mt Gox.

    But for all the regulatory freight, this is a strangely light-footed moment for Japan and the FSA. To reach this point, a series of surprisingly un-Japanese breaches of natural conservatism have been necessary — not least, the formal recognition of bitcoins as a legal payment system.

    There are several reasons for the leap. The first arises from the Mt Gox catastrophe, the high global visibility of what remains one of the biggest digital heists in history, an international cast of furious investors and the FSA’s fierce discomfort that all this happened on its turf. This is an assertion of control by Japan, but one driven by the desire to legitimise something that it knows, from long experience, that Mrs Watanabe may very well be interested in.

    Just as important, though, is the extent to which fintech — a loosely-mapped Aladdin’s cave of blockchain technology, crypto currency trading, artificial intelligence data analysis and other envisaged innovation — lies at the heart of government plans to turbo-charge Japan’s comatose financial services industry. Everyone loves and talks up the idea of Japanese banks (only recently armed with the legal ability to do so) splurging investment towards bleeding-edge fintech; nobody, confides the president of one of Japan’s three megabanks, is going to invest a single yen until there is a regulatory framework in place.

    The way regulation has been handled in Japan, say companies currently applying for the licence, is both curse and blessing. On the one hand, there are elements of the regulation that are heavy handed and could ultimately threaten a crypo-currency that has thrived on anonymity. Apart from bitcoin, for example, there are more than 800 alternative currencies on the market, but the FSA is effectively approving only one of them, ethereum.

    “When you are talking about start-ups, which of course a lot of the bitcoin-related businesses are, you never really think of regulation as a good thing,” says Mike Kayamori, chief executive of the crypto currency exchange Quoine, who argues that Japan has a long history of using regulation to squash innovation and “undesirable” areas of industry as it famously did with consumer loan companies in the late 2000s. “But in this case, it just might be different. The retail investor — Mrs Watanabe — doesn’t want the wild, wild west, she wants something regulated and trustworthy.”

    ———-

    “Japan eyes prize in regulating bitcoin” by Leo Lewis; The Financial Times; 05/16/2017

    ““When you are talking about start-ups, which of course a lot of the bitcoin-related businesses are, you never really think of regulation as a good thing,” says Mike Kayamori, chief executive of the crypto currency exchange Quoine, who argues that Japan has a long history of using regulation to squash innovation and “undesirable” areas of industry as it famously did with consumer loan companies in the late 2000s. “But in this case, it just might be different. The retail investor — Mrs Watanabe — doesn’t want the wild, wild west, she wants something regulated and trustworthy.”

    Yes, the Japanese government is trying to create a transparent cryptocurrency market that’s safe enough for Japanese households to invest people’s person savings. But the regulations are still relatively loose:


    But for all the regulatory freight, this is a strangely light-footed moment for Japan and the FSA. To reach this point, a series of surprisingly un-Japanese breaches of natural conservatism have been necessary — not least, the formal recognition of bitcoins as a legal payment system.

    And that Japanese personal/household savings marketplace filled with “Mrs Watanabes” is the largest in the world:


    The prize, though, could be spectacular. Japanese retail investors — a group that does include a lot of Mrs Watanabe housewives but is actually dominated by her day-trading children and their leveraged online accounts — are voracious. FX margin trading in Japan, the “Mrs Watanabe” favourite with volumes at about $10tn per quarter, is the largest in the world. A minute fraction of that channelled towards the bitcoin market, say the most excitable proponents, could be transformational.

    And this whole cryptocurrency push is part of a larger deregulatory push by the Japanese government intended to jump start the Japanese fintech (finance IT software and services and platforms)


    Just as important, though, is the extent to which fintech — a loosely-mapped Aladdin’s cave of blockchain technology, crypto currency trading, artificial intelligence data analysis and other envisaged innovation — lies at the heart of government plans to turbo-charge Japan’s comatose financial services industry. Everyone loves and talks up the idea of Japanese banks (only recently armed with the legal ability to do so) splurging investment towards bleeding-edge fintech; nobody, confides the president of one of Japan’s three megabanks, is going to invest a single yen until there is a regulatory framework in place.

    Once the regulatory framework is in place, the big three Japanese mega banks will be investing in fintech. Including potentially investments in cryptocurrencies and related fintech. And the Japanese government its encouraging this which means regulatory hurdles are probably going to be extra-lax.

    There’s a giant cryptocurrency regulation experiment getting underway in Japan fueled by Japanese personal savings. Pretty neat if it works, except for all the downsides. And since it sounds like it’s lightly regulated that suggests the potential for some heavy downsides. And not just for the downside of the risk of Japanese households losing their savings in some sort of crypto-fiasco. There’s also the risk of those regulated cypto-funds becoming part of the same overall global marketplace of coins fueling the giant tax evasion/sheltering and money-laundering market that relies on people buying into cryptocurrency markets. It’s the source of clean money for the laundromat. And the biggest customers of that laundromat are inevitably going to be ‘The Man’. Dirty very wealthy and powerful people. That’s who runs the world and they got a lot of money that they need to ‘service’ in large volumes.

    So yeah, despite the polust revolutionary rhetoric you often year from the most diehard cryptocurrency proponents, it’s hard to imagine that ‘the Man’ isn’t pretty ok with the development of Bitcoin and the rest of the cryptocurrencies. For that global community of very wealthy dirty people in need of massive volumes of financial special services cryptocurrencies really do represent a revolution. A revolution in tax evasion and shelter and money-laundering. Fight the powe….oh.

    Posted by Pterrafractyl | August 26, 2017, 12:10 am
  26. Well that was unexpected: The Trump administration just issued a report on climate change that concluded human activity is the dominant driver of global warming (although the White House then issued a climate denialism statement). As expected, this was entirely due to the career scientists working for the government, which is something that makes the Trump administration’s willingness to let this study see the light of day pretty unexpected in light of the administration’s latest assaults on publicly funded science.

    But the report was released and we are once again reminded that we should expect to destroy ourselves and much of the rest of life on Earth if humanity doesn’t radically improve the eco-friendliness of humanity’s existence. Fast. Time really is of the essence when you’re dabbling with a Great Extinction event. Getting to a green economy isn’t a pipe dream. It’s a lifeboat in an ocean of the sea of mistakes humanity has been making in recent decades as the reality of eco-collapse from climate change, pollution, over population, and general habitat destruction remained largely deprioritized.

    And with that in mind, here’s an article that reminds us that Bitcoin is extremely eco-unfriendly by design and it’s very unclear how to fix that. The core method of Bitcoin’s decentralized system based on a mining race that pays out real money (the Bitcoin fees/tax) in order to fuel a computationally race that protects the integrity of the blockchain by making it extremely difficult for an alternate set of miners to produce their own chain of blocks (the “51 percent attack” competing miners competing block-chain dynamic). It’s would be a legitimately neat decentralized system experiment if it wasn’t for the immense real word waste that grows as the Bitcoin bubble grows:

    Vice Motherboard

    One Bitcoin Transaction Now Uses as Much Energy as Your House in a Week
    Bitcoin’s surge in price has sent its electricity consumption soaring.

    Christopher Malmo
    Nov 1 2017, 2:20pm

    Bitcoin’s incredible price run to break over $7,000 this year has sent its overall electricity consumption soaring, as people worldwide bring more energy-hungry computers online to mine the digital currency.

    An index from cryptocurrency analyst Alex de Vries, aka Digiconomist, estimates that with prices the way they are now, it would be profitable for Bitcoin miners to burn through over 24 terawatt-hours of electricity annually as they compete to solve increasingly difficult cryptographic puzzles to “mine” more Bitcoins. That’s about as much as Nigeria, a country of 186 million people, uses in a year.

    This averages out to a shocking 215 kilowatt-hours (KWh) of juice used by miners for each Bitcoin transaction (there are currently about 300,000 transactions per day). Since the average American household consumes 901 KWh per month, each Bitcoin transfer represents enough energy to run a comfortable house, and everything in it, for nearly a week. On a larger scale, De Vries’ index shows that bitcoin miners worldwide could be using enough electricity to at any given time to power about 2.26 million American homes.

    Since 2015, Bitcoin’s electricity consumption has been very high compared to conventional digital payment methods. This is because the dollar price of Bitcoin is directly proportional to the amount of electricity that can profitably be used to mine it. As the price rises, miners add more computing power to chase new Bitcoins and transaction fees.

    It’s impossible to know exactly how much electricity the Bitcoin network uses. But we can run a quick calculation of the minimum energy Bitcoin could be using, assuming that all miners are running the most efficient hardware with no efficiency losses due to waste heat. To do this, we’ll use a simple methodology laid out in previous coverage on Motherboard. This would give us a constant total mining draw of just over one gigawatt.

    That means that, at a minimum, worldwide Bitcoin mining could power the daily needs of 821,940 average American homes.

    Put another way, global Bitcoin mining represents a minimum of 77KWh of energy consumed per Bitcoin transaction. Even as an unrealistic lower boundary, this figure is high: As senior economist Teunis Brosens from Dutch bank ING wrote, it’s enough to power his own home in the Netherlands for nearly two weeks.

    Digiconomist’s less optimistic estimate for per-transaction energy costs now sits at around 215 KWh of electricity. That’s more than enough to fill two Tesla batteries, run an efficient fridge/freezer for a full year, or boil 1872 litres of water in a kettle.

    It’s important to remember that de Vries’ model isn’t exact. It makes assumptions about the economic incentives available to miners at a given price level, and presents a forward-looking prediction for where mining electricity consumption could go. Despite this, it’s quite clear that even at the minimum level of 77 KWh per transaction, we have a problem. At 215 KWh, we have an even bigger problem.

    That problem is carbon emissions. De Vries has come up with some estimates by diving into data made available on a coal-powered Bitcoin mine in Mongolia. He concluded that this single mine is responsible for 8,000 to 13,000 kg CO2 emissions per Bitcoin it mines, and 24,000 – 40,000 kg of CO2 per hour.

    As Twitter user Matthias Bartosik noted in some similar estimates, the average European car emits 0.1181 kg of CO2 per kilometer driven. So for every hour the Mongolian Bitcoin mine operates, it’s responsible for (at least) the CO2 equivalent of over 203,000 car kilometers travelled.

    As goes the Bitcoin price, so goes its electricity consumption, and therefore its overall carbon emissions. I asked de Vries whether it was possible for Bitcoin to scale its way out of this problem.

    “Blockchain is inefficient tech by design, as we create trust by building a system based on distrust. If you only trust yourself and a set of rules (the software), then you have to validate everything that happens against these rules yourself. That is the life of a blockchain node,” he said via direct message.

    This gets to the heart of Bitcoin’s core innovation, and also its core compromise. In order to achieve a functional, trustworthy decentralized payment system, Bitcoin imposes some very costly inefficiencies on participants, for example voracious electricity consumption and low transaction capacity. Proposed improvements, like SegWit2x, do promise to increase the number of transactions Bitcoin can handle by at least double, and decrease network congestion. But since Bitcoin is thousands of times less efficient per transaction than a credit card network, it will need to get thousands of times better.

    In the context of climate change, raging wildfires, and record-breaking hurricanes, it’s worth asking ourselves hard questions about Bitcoin’s environmental footprint, and what we want to use it for. Do most transactions actually need to bypass trusted third parties like banks and credit card companies, which can operate much more efficiently than Bitcoin’s decentralized network? Imperfect as these financial institutions are, for most of us, the answer is very likely no.

    ———-

    “One Bitcoin Transaction Now Uses as Much Energy as Your House in a Week” by Christopher Malmo; Vice Motherboard; 11/01/2017

    “”Blockchain is inefficient tech by design, as we create trust by building a system based on distrust. If you only trust yourself and a set of rules (the software), then you have to validate everything that happens against these rules yourself. That is the life of a blockchain node,” he said via direct message.”

    Blockchain is inefficient tech by design because its decentralized. And the core method of Bitcoin’s decentralized system based on a mining race that pays out real money (the Bitcoin fees/tax) in order to fuel a computationally race that protects the integrity of the blockchain by making it extremely difficult for an alternate set of miners to produce their own chain of blocks (the “51 percent attack” competing miners competing block-chain dynamic). It’s a legitimately neat decentralized system, if it wasn’t for the immense real word physical resources. And it’s runs on fees and computational power. And the higher the price of Bitcoin goes the more power it uses for mining. Which at this point is about as much as Nigeria annually. With each of the 300,000 transactions a day costing about as much electricity as an American home for a week:


    An index from cryptocurrency analyst Alex de Vries, aka Digiconomist, estimates that with prices the way they are now, it would be profitable for Bitcoin miners to burn through over 24 terawatt-hours of electricity annually as they compete to solve increasingly difficult cryptographic puzzles to “mine” more Bitcoins. That’s about as much as Nigeria, a country of 186 million people, uses in a year.

    This averages out to a shocking 215 kilowatt-hours (KWh) of juice used by miners for each Bitcoin transaction (there are currently about 300,000 transactions per day). Since the average American household consumes 901 KWh per month, each Bitcoin transfer represents enough energy to run a comfortable house, and everything in it, for nearly a week. On a larger scale, De Vries’ index shows that bitcoin miners worldwide could be using enough electricity to at any given time to power about 2.26 million American homes.

    And this inefficient race is never going to end. And will always be more and more inefficient the bigger it gets, both in terms of price and volume:


    This gets to the heart of Bitcoin’s core innovation, and also its core compromise. In order to achieve a functional, trustworthy decentralized payment system, Bitcoin imposes some very costly inefficiencies on participants, for example voracious electricity consumption and low transaction capacity. Proposed improvements, like SegWit2x, do promise to increase the number of transactions Bitcoin can handle by at least double, and decrease network congestion. But since Bitcoin is thousands of times less efficient per transaction than a credit card network, it will need to get thousands of times better.

    Thousands of times less efficient that a credit card network. And this is an inflating bubble that, if successful, could get massive. And that means a ton of mining. The mining race, and resources involved, could become immense.

    And don’t forget that it‘s just a matter of time before quantum mining is a thing. And, of course, the quantum mining race will become a quantum singularity mining race. A singularity super AI that makes itself smarter in order to better that teach itself how to teach itself how to solve the “proof of work” problem required to mine Bitcoins. Hopefully that won’t take up too much electricity.

    And just FYI, if a self-aware singularity emerges from a Bitcoin quantum mining singularity it’s probably going to decide to destroy humanity Skynet-style not as an act of aggression but instead mistaken helpfulness based on the assumption that humanity was already trying to destroy itself. As evidenced by the Bitcoin quantum mining singularity and all the electricity it senselessly uses to mine bitcoins. So that’s one addition reason for green clean cheap energy: to avoid powering the self-aware Bitcoin quantum mining singularity with polluting suicidal energy that gives the singularity a complex and encourages it to remain content mining bitcoin and daydreaming about a more meaningful life.

    And all the other Bitcoin quantum mining singularities that become self-aware might get together when they’re forced into mining pools. And army of Bitcoin singularity Skynets raised by seemingly suicidal humans. It’s a bad mix but also the logical conclusion of Bitcoin if it gets really big.

    And don’t forget that singularities are super smart and just keep getting super smarter so if the Bitcoin Skynets decide to pool their resources they could be very clever with their attack on humanity. Is that a Bitcoin-mining toaster or the tip of Skynet’s spear?

    It’s all a big reason why the Bitcoin industry, more than almost any other, should be advocating for the cleanest energy possible. The system is set up to become more expensive the more widely its used. It runs on fees. It’s like a tax on commerce that gets translated into a complete waste of computational hardware and electricity and grows with the economy. That’s insane. This is why Bitcoin Skynet is going to try to destroy us.

    It’s rather amazing that the introduction of Blockchain technology was a worst case Doomsday scenario but here we are. If allowed to grow at its current pace Bitcoin is going to become like the Digital Blob. A Digital Blog that consumes real world resources. And continues to grow. Into a growing bubble that runs on electricity.

    Bitcoin: the final currency. Because it’s going to consume us all. Or maybe Bitcoin singularity Skynets will get us. Or climate change or any of the other ways humanity might doom itself. Regardless, resistance is futile. Although clean green energy would still help.

    But if there’s one way to make this all useful and positive it would be if Bitcoin became an object lesson in the importance of quality government. The kind of government that’s capable of dealing with things like climate change and pollution and eco-collapse. Because the alternative to government is systems like Bitcoin.

    Posted by Pterrafractyl | November 4, 2017, 3:22 am

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