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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 [1].

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 [2]:

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 [3]:

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 [4] 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 [4]. 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 [5]:

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 [6], 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 [7]. 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 [8]:

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 [9] 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 [10] 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 [11]:

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 [12]).

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 [13]:

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 [14], 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 [15] out­lines how a ser­vice can par­cel out its down­load capac­i­ty through the use of bit­coin pay­ments.

Con­nect­ed to an account [16] 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 [17], 2 [18] and 3 [19] 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 [20].

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 [21] 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 [22] in 2013 and 69,000 BTC [22] 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 [23] 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 [24] 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 [25] 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 [23] 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 [22] in 2013 and 69,000 BTC [22] 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 [26], 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 [27] 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 [28]:

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 [29] (co-author of the Age of Cryp­tocur­ren­cy) and Coindesk’s Pete Riz­zo [30] 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 [30] … “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 [31] 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? [32], 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 [33] — 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 [34]. 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? [32], 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 [35]:

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 [36]. They are, by and large, exact­ly what FT Alphav­ille report­ed them to be. [28] 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! [37]“.

Nowhere is this vision bet­ter set out than in the 1982 movie Tron [38], 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 [39] — 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 [28] 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 [36] 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 [40]:

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 [41] 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/ [42], and feel free to make your own judge­ment.

About a week ago, lead Bit­coin devel­op­er Gavin Andresen qui­et­ly intro­duced a patch [43] 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 [44] 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 [45]. 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 [46] 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 [47] are under the thresh­old. By far the main user of such small out­puts is the pop­u­lar Bit­coin gam­bling site SatoshiDice [48]. 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 [49].

Also affect­ed will be the col­ored coins project [50]. 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 [51]. 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 [43] 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 [52]. 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) [53] in oper­a­tion in Jan­u­ary of 2015 (down from 10,000 nodes in March 2014 [54]), 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 [55]:

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 [56] 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 [57] or folding@home [58], 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 [59] 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 [60] 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 [61] 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 [62], 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 [63] 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 [64] 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 [57] or folding@home [58], 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 [65]) 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 [66]).

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 [67], includ­ing the new so we’re prob­a­bly already on the galac­tic do-not-call list [68].

Human­i­ty isn’t real­ly ready for SETI [69]. *sigh* [70]