Spitfire List Web site and blog of anti-fascist researcher and radio personality Dave Emory.

News & Supplemental  

The Big Bitcoin Bet: Currency of the Future or Just a Better Casino?

Bit­coin’s near­ly par­a­bol­ic rise in price this year has, not sur­pris­ing­ly, led to a sim­i­lar rise in expec­ta­tions. What does the future hold for bit­coin? Could bit­coin replace gold? Or might it grow even big­ger:

Ron Paul: Bit­coin could ‘destroy the dol­lar’
By Jose Pagliery
Decem­ber 4, 2013: 12:01 PM ET

NEW YORK (CNN­Money)
Imag­ine a world in which you can buy any­thing in secret. No banks. No fees. No wor­ries infla­tion will make today’s mon­ey worth less tomor­row.

The dig­i­tal cur­ren­cy Bit­coin promis­es all these things. And while it’s far from achiev­ing any of them — its val­ue is unsta­ble and it’s rarely used — some have high hopes.

“There will be alter­na­tives to the dol­lar, and this might be one of them,” said for­mer U.S. con­gress­man Ron Paul. If peo­ple start using bit­coins en masse, “it’ll go down in his­to­ry as the destroy­er of the dol­lar,” Paul added.

It’s unlike­ly that Bit­coin would replace the dol­lar or oth­er gov­ern­ment-con­trolled cur­ren­cies. But it could serve as a kind of uni­ver­sal alter­na­tive cur­ren­cy that is accept­ed every­where around the globe. Con­cerned about the dol­lar’s infla­tion? Just move your cash to bit­coins and use them to pay your bills instead. Tired of hefty cred­it card fees? Bit­coin allows trans­ac­tions that bypass banks.

...

And who knows, maybe bit­coin real­ly will be the “destroy­er of the dol­lar”. But such a pos­si­bil­i­ty rais­es a fun ques­tion: Can a fixed-sup­ply dig­i­tal cur­ren­cy like bit­coin “destroy” the dol­lar by sup­plant­i­ng it the world’s reserve cur­ren­cy? Sure, it’s pos­si­ble:

oftwominds.com
Could Bit­coin (or equiv­a­lent) Become a Glob­al Reserve Cur­ren­cy?
(Novem­ber 7, 2013)
Charles Hugh Smith

It’s a wor­thy thought exper­i­ment to ask if a dig­i­tal cur­ren­cy could also act as a reserve cur­ren­cy.

Could a non-state issued dig­i­tal cur­ren­cy like Bit­coin become a glob­al reserve cur­ren­cy? The idea came up in my recent con­ver­sa­tion with Max Keis­er on the Keis­er Report dur­ing our dis­cus­sion of reserve cur­ren­cies.

The idea is intrigu­ing on a num­ber of lev­els. In terms of retain­ing val­ue though thick and thin, the ulti­mate reserve cur­ren­cy can­not be print­ed (and thus deval­ued) with aban­don by a gov­ern­ment. Gold and sil­ver have served as the ulti­mate reserve cur­ren­cy, as pre­cious met­als can be trad­ed for com­modi­ties and ser­vices, pro­vide col­lat­er­al for debt and serve as reli­able stores of val­ue.

While many observers believe gold is still the only reli­able reserve cur­ren­cy (or if you pre­fer, the only reli­able back­ing for gov­ern­ment-issued paper mon­ey), it’s a wor­thy thought exper­i­ment to ask if a dig­i­tal cur­ren­cy could also act as a reserve cur­ren­cy.

Since there is no real-world com­mod­i­ty back­ing the dig­i­tal cur­ren­cy, its val­ue must be based on scarci­ty and its ubiq­ui­ty as mon­ey. The two ideas are self-rein­forc­ing: there must be demand for the dig­i­tal mon­ey to cre­ate scarci­ty, and the source of demand is the dig­i­tal cur­ren­cy’s accep­tance as mon­ey that can be used to buy com­modi­ties, goods, ser­vices and (the ulti­mate test) gold.

It fol­lows that the first step in a non-state issued dig­i­tal cur­ren­cy becom­ing a reserve cur­ren­cy is that it isn’t cre­at­ed in quan­ti­ties that dwarf demand. If the dig­i­tal cur­ren­cy is issued with aban­don, it can­not be scarce enough to gain any val­ue. If I own one quat­loo (our hypo­thet­i­cal dig­i­tal cur­ren­cy) and a tril­lion new quat­loos are issued tomor­row, the val­ue of my one quat­loo will decline to near-zero.

The sec­ond step is its wide­spread accep­tance glob­al­ly as mon­ey, i.e. a store of val­ue and some­thing which can be trad­ed for goods and ser­vices.

There is a bit of a built-in con­flict in these two require­ments. To be use­ful in the $60 tril­lion glob­al econ­o­my, the quat­loo must be issued in size: there must be enough of it around to grease trans­ac­tions large and small in all sorts of mar­kets. Using the U.S. dol­lar as a guide (since the USD is the pri­ma­ry reserve cur­ren­cy), we can esti­mate that a min­i­mum of $1 tril­lion in quat­loos would be need­ed to become a prac­ti­cal glob­al cur­ren­cy.

To act as a reserve cur­ren­cy, anoth­er tril­lion or two would be need­ed, as nations would hold these quat­loos as reserves. (Nations hold an esti­mat­ed $7 tril­lion in USD reserves, about $3 tril­lion euros and $1 tril­lion or so in yen, pounds and oth­er cur­ren­cies.)

But issu­ing quat­loos in these quan­ti­ties would remove any scarci­ty val­ue. Thus the issuer of the quat­loo would have to care­ful­ly issue more quat­loos only when demand jus­ti­fied the need for more mon­e­tary “grease” for the glob­al econ­o­my.

If on the oth­er hand sky­rock­et­ing demand/scarcity drove the val­ue to the stratos­phere, hold­ers of the quat­loo would rejoice, but this volatil­i­ty would present its own set of risks for those seek­ing to use the quat­loo as a reserve against cur­ren­cy volatil­i­ty in the home-coun­try cur­ren­cy. If a dig­i­tal cur­ren­cy can leap ten-fold in a short time, then might it not drop with equal volatil­i­ty?

Volatil­i­ty is the ene­my of reserves; the hold­er of reserves needs a liq­uid (mean­ing it can eas­i­ly be sold or trad­ed in size) cur­ren­cy that pre­dictably retains its val­ue. A volatile cur­ren­cy pos­es risks, as do cur­ren­cies that can­not be trad­ed in size with­out dras­ti­cal­ly influ­enc­ing the mar­ket val­ue of the cur­ren­cy.

These con­di­tions pose a steep chal­lenge for any dig­i­tal cur­ren­cy, but they are not insur­mount­able. Even as a niche cur­ren­cy, non-state issued dig­i­tal cur­ren­cies could play a role in the glob­al econ­o­my, espe­cial­ly if gov­ern­ment-issued fiat cur­ren­cies destabilize/ deval­ue due to mas­sive mon­ey cre­ation by des­per­ate cen­tral banks and state trea­suries.

Is scarci­ty enough to back a non-state issued cur­ren­cy? Bit­coin offers a real-world exper­i­ment.

So yes, in the­o­ry, bit­coin or any oth­er dig­i­tal fixed-sup­ply cur­ren­cy could become the new dom­i­nant glob­al reserve cur­ren­cy if the US real­ly does descend into a hyper­in­fla­tion­ary death-spi­ral and if total val­ue of the new reserve cur­ren­cy becomes worth tril­lions of dol­lars (at today’s prices) and also becomes more sta­ble than any of the alter­na­tives. In oth­er words, yes, we could see a new non-state-backed dig­i­tal reserve cur­ren­cy, but that cur­ren­cy would have to have prop­er­ties not yet exhib­it­ed by bit­coin or any oth­er fixed-sup­ply cur­ren­cy and all oth­er major cur­ren­cies would have to fail. And such a sce­nario might not actu­al­ly do any­thing to reduce infla­tion any­ways but, in the­o­ry, it could hap­pen.

So why is it that so many bit­coin enthu­si­asts are pre­dict­ing that the dol­lar’s death­blow has final­ly arrive? Well, in part it’s because there are a lot of Lib­er­tar­i­ans. Also, a lot of Lib­er­tar­i­ans bought a lot of bit­coins:

Forbes
ECB: “Roots Of Bit­coin Can Be Found In The Aus­tri­an School Of Eco­nom­ics”
11/03/2012 @ 11:04AM
Jon Mato­nis, Con­trib­u­tor

The ECB (Euro­pean Cen­tral Bank) has pro­duced the first offi­cial cen­tral bank study of the decen­tral­ized cryp­to­graph­ic mon­ey known as bit­coin, Vir­tu­al Cur­ren­cy Schemes. Ignor­ing for a moment the ECB’s con­de­scend­ing and deroga­to­ry use of the vir­tu­al cur­ren­cy phrase and scheme phrase, the study pro­duced at least one land­mark achieve­ment.

In claim­ing that “The the­o­ret­i­cal roots of Bit­coin can be found in the Aus­tri­an school of eco­nom­ics,” the ECB for­ev­er linked Bit­coin to the proud eco­nom­ic her­itage of Menger, Mis­es, and Hayek as well as to Aus­tri­an busi­ness cycle the­o­ry. This recog­ni­tion is also a direct tes­ta­ment to the mon­e­tary the­o­ry work of Friedrich von Hayek who inspired many with his 1976 land­mark pub­li­ca­tion of Dena­tion­al­i­sa­tion of Mon­ey.

Bit­coin ful­ly embod­ies the spir­it of dena­tion­al­ized mon­ey as it seeks no author­i­ty for its con­tin­ued exis­tence and it rec­og­nizes no polit­i­cal bor­ders for its cir­cu­la­tion. Indeed accord­ing to the report, pro­po­nents see Bit­coin as “a good start­ing point to end the monop­oly cen­tral banks have in the issuance of mon­ey” and “inspired by the for­mer gold stan­dard.”

Econ­o­mists from the 19th and mid-20th cen­turies can be for­giv­en for not antic­i­pat­ing an inter­con­nect­ed dig­i­tal realm like the Inter­net with its p2p dis­trib­uted archi­tec­ture, but mod­ern econ­o­mists can­not be. From their own con­clu­sions (on page 48) which inac­cu­rate­ly lump Bit­coin togeth­er with Lin­den Dol­lars, here is what the mod­ern-day econ­o­mists at the ECB are still not get­ting:

1. ECB con­cludes that if mon­ey cre­ation remains at a low lev­el, bit­coin does not pose a risk to price sta­bil­i­ty. This is incor­rect on two lev­els. One, the cre­ation of new bit­coin is capped at 21 mil­lion with eight cur­rent dec­i­mal places so it grows through adop­tion and usage rather than mon­e­tary expan­sion. And two, as with gold, sil­ver, and oth­er com­modi­ties hav­ing a mon­e­tary com­po­nent, price sta­bil­i­ty is a func­tion of the mar­ket not cen­tral plan­ners;

2. ECB con­cludes that bit­coin can­not jeop­ar­dize finan­cial sta­bil­i­ty due to its low vol­ume and lim­it­ed con­nec­tion with the real econ­o­my. Con­verse­ly, bit­coin will tend to increase finan­cial sta­bil­i­ty and over­all sound­ness. Bitcoin’s con­nec­tion with the real econ­o­my is only a con­cern for the reg­u­lat­ed and taxed econ­o­my, where­as bit­coin inde­pen­dent­ly may thrive in the $10 tril­lion shad­ow or “orig­i­nal” econ­o­my. Besides, with its repeat­ed mar­ket inter­ven­tions, no one has done more to jeop­ar­dize finan­cial sta­bil­i­ty than the ECB itself;

3. ECB con­cludes that bit­coin is cur­rent­ly not reg­u­lat­ed and super­vised by any pub­lic author­i­ty. It would be more accu­rate to say that State-spon­sored reg­u­la­tion is large­ly irrel­e­vant because of the inher­ent design prop­er­ties of a peer-to-peer dis­trib­uted com­put­ing sys­tem. But hap­pi­ly, this is still a con­clu­sion that I can agree with and rec­om­mend that it remains the case;

4. ECB con­cludes that bit­coin could rep­re­sent a chal­lenge for pub­lic author­i­ties, giv­en the legal uncer­tain­ty and poten­tial for per­form­ing ille­gal activ­i­ties. While pub­lic author­i­ties will cer­tain­ly be chal­lenged by the intro­duc­tion of a mon­e­tary unit that can­not be manip­u­lat­ed for polit­i­cal pur­pos­es, bit­coin in some cas­es does have the abil­i­ty to pro­vide track­ing capa­bil­i­ty that far exceeds that of nation­al cash or mon­ey sub­sti­tutes. What author­i­ties will find most trou­bling though, with bit­coin, is that mon­ey flows between indi­vid­u­als and busi­ness­es will no longer be exploitable for pur­pos­es of unlim­it­ed iden­ti­ty track­ing and uncon­sti­tu­tion­al ‘fish­ing expe­di­tions’;

...

Bit­coin: Destroy­er of the dol­lar... yuan?

The ECB’s report on bit­coin dis­cussed above was pub­lished over a year ago. A lot’s changed with bit­coin over the last year, most notably the price. But there have been plen­ty of oth­er changes too. For instance, a state-owned Chi­nese tele­com, Jiang­su Tele­com, recent­ly announced a deci­sion to accept bit­coin as pay­ments. And just a few days lat­er, the most pop­u­lar search engine in Chi­na stopped accept­ing Bit­coins as pay­ments.

Why all the sud­den bit­coin pol­i­cy swings in Chi­na? Well, in part, it’s because the one of the oth­er big bit­coin changes over the past year has been the grow­ing recog­ni­tion of bit­coin’s poten­tial for affect­ing the “real” econ­o­my. It’s not that bit­coin is now wide­ly used for legal com­merce...that’s still a niche use for dig­i­tal cur­ren­cies. Instead, as the author of the above arti­cle pre­dict­ed over a year ago, much of the con­cern over bit­coin’s impact on the “real” (non-under­ground) econ­o­my is due to bit­coin’s grow­ing appli­ca­tions for under­ground com­merce that can affect the “real” econ­o­my in real ways. Espe­cial­ly an econ­o­my like Chi­na’s with strict cap­i­tal con­trols a lot of very wealthy peo­ple with a lot of mon­ey. Mon­ey they would like to laun­der and then move out of the coun­try.

So a big part of the rea­son we saw a state-backed tele­com announce the accep­tance of bit­coin fol­lowed by a rejec­tion bit­coins by Baidu just days lat­er is that this hap­pened in between:

The Verge
Bit­coin banned from Chi­nese banks amid fears of laun­der­ing

Reg­u­la­tors say indi­vid­u­als are still free to use the vir­tu­al cur­ren­cy at their own risk

By Amar Toor on Decem­ber 5, 2013 04:04 am

Chi­nese reg­u­la­tors have banned finan­cial insti­tu­tions from using Bit­coin, warn­ing that the vir­tu­al cur­ren­cy could be used for ille­gal activ­i­ties and spec­u­la­tion. Chi­na’s cen­tral bank, the Peo­ple’s Bank of Chi­na, announced the deci­sion in a state­ment released Thurs­day, though it stopped short of ban­ning Bit­coin alto­geth­er. Indi­vid­u­als are still free to use the dig­i­tal cur­ren­cy in Chi­na, albeit at their own risk. Bit­coin prices fell in response to today’s announce­ment, drop­ping to as low as $970.62 on Thurs­day after trad­ing at over $1,100 pri­or to the cen­tral bank’s deci­sion.

...

Chi­na has long imple­ment­ed tight cur­ren­cy con­trols, so it’s not sur­pris­ing that reg­u­la­tors would be wary of Bit­coin, which has yet to be reg­u­lat­ed in any coun­try. In its state­ment, the cen­tral bank said it would close­ly mon­i­tor the risks that Bit­coin pos­es, adding that it would take mea­sures to pre­vent the cur­ren­cy from being laun­dered for illic­it activ­i­ties.

“As Bit­coin trans­ac­tions can be done anony­mous­ly and are not restrict­ed by loca­tion, it’s dif­fi­cult to mon­i­tor cap­i­tal flows and it there­fore facil­i­tates mon­ey laun­der­ing and financ­ing for ter­ror­ist activ­i­ties,” the Peo­ple’s Bank of Chi­na said.

“There have been crim­i­nal activ­i­ties using Bit­coins, such as trad­ing of drugs and guns,” the bank added. “Rel­e­vant cas­es are under inves­ti­ga­tion.”

Yes, Chi­na just banned finan­cial firms from trad­ing in bit­coins over mon­ey-laun­der­ing and cap­i­tal con­trol con­cerns. For a coun­try like Chi­na that has long lim­it­ed the flow of mon­ey cross­ing its bor­ders bit­coin presents an new and rather poten­tial­ly pow­er­ful threat to Chi­na. Why? Because Chi­na’s long-stand­ing pol­i­cy of arti­fi­cial­ly sup­press­ing the val­ue of the yuan via cap­i­tal con­trols has result­ed in A LOT of cap­i­tal in the hands of peo­ple that want to move it out of Chi­na. Now. And the Chi­nese gov­ern­ment has mere­ly promised to even­tu­al­ly allow them to move all of that mon­ey out of the coun­try. Even­tu­al­ly. Maybe in 2020 at the ear­li­est:

South Chi­na Morn­ing Post
Chi­na promis­es to loosen cap­i­tal con­trol, but no rapid progress expect­ed
Despite pledge to speed up dereg­u­la­tion, econ­o­mists raise con­cerns over funds out­flows and spec­u­la­tive activ­i­ties that may arise

Jane Cai in Bei­jing
xuejun.cai@scmp.com
PUBLISHED : Fri­day, 29 Novem­ber, 2013, 8:40am
UPDATED : Sat­ur­day, 30 Novem­ber, 2013, 2:03am

Julia Yang’s spir­its rose when the Com­mu­nist Par­ty said this month it would accel­er­ate the dereg­u­la­tion of the main­land’s cap­i­tal account to facil­i­tate cross-bor­der invest­ment.

“I will sell one of my apart­ments in Bei­jing to escape the prop­er­ty tax that will be launched soon­er or lat­er,” said the accoun­tant, who owns two flats. “I will buy some US stocks or look into prop­er­ties in Europe, where invest­ment oppor­tu­ni­ties should be bet­ter.”

Has­ten­ing the yuan’s con­vert­ibil­i­ty under the cap­i­tal account was one of the key reform pro­pos­als decid­ed on at the third plenum of the par­ty’s Cen­tral Com­mit­tee, accord­ing to a doc­u­ment released on Novem­ber 15. Tar­gets for what amounts to par­tial con­vert­ibil­i­ty are planned to be achieved by 2020.

When the cap­i­tal account is ful­ly opened, for­eign direct invest­ment, port­fo­lio invest­ment and oth­er cross-bor­der invest­ment can be con­duct­ed with­out restric­tions on con­vert­ing yuan.

Yang’s plans part­ly jus­ti­fy the con­cerns expressed by many econ­o­mists. They say the pace of cap­i­tal account open­ing up will be slow because pol­i­cy­mak­ers are wor­ried about large cap­i­tal out­flows in the ini­tial years of open­ing up and spec­u­la­tive cap­i­tal activ­i­ties that could cause finan­cial tur­moil in the absence of sound reg­u­la­to­ry mea­sures.

“Many peo­ple have high hopes of cap­i­tal-account lib­er­al­i­sa­tion but I think the new lead­ers will be cau­tious in advanc­ing the reform,” said Lu Ting, an econ­o­mist at Bank of Amer­i­ca Mer­rill Lynch.

Cen­tral bank gov­er­nor Zhou Xiaochuan says the cen­tral gov­ern­ment will sim­pli­fy admin­is­tra­tive mea­sures gov­ern­ing for­eign exchange, draw up a list of sec­tors where direct invest­ment will be pro­hib­it­ed and expand quo­tas under the qual­i­fied domes­tic and for­eign insti­tu­tion­al investor pro­grammes by 2020.

How­ev­er, Lu said, reforms on more impor­tant fronts, includ­ing loos­en­ing con­trols on cross-bor­der lend­ing and equi­ty port­fo­lio invest­ment, would “remain quite slow”.

Oppo­si­tion to rapid cap­i­tal-account lib­er­al­i­sa­tion has been strong since it was first put on the cen­tral gov­ern­men­t’s agen­da in the 1990s. Although cen­tral bank offi­cials gen­er­al­ly advo­cate speed­ing up the process, many aca­d­e­mics are against it, bear­ing in mind lessons from the 1997 Asian finan­cial cri­sis, when for­eign spec­u­la­tors under­mined the finan­cial sta­bil­i­ty of coun­tries with open cap­i­tal accounts fol­low­ing a cred­it binge.

Fan Wei, an ana­lyst at Hongyuan Secu­ri­ties, said: “I think the process will be pro­longed. Aca­d­e­mics, rep­re­sent­ed by those from the Chi­nese Acad­e­my of Social Sci­ences, strong­ly oppose it.”

Yu Yongding, a top econ­o­mist at the acad­e­my, told a forum this month: “So far I don’t see any neces­si­ty for the gov­ern­ment to accel­er­ate cap­i­tal-account lib­er­al­i­sa­tion.”

...

As the above excerpt indi­cates, if Chi­na’s cap­i­tal con­trols are lib­er­al­ized mon­ey will flow more eas­i­ly both in and out of the coun­try but at the moment there is just much more mon­ey ready to flow into Chi­na than out of it. And the lift­ing of those cap­i­tal-con­trols isn’t going to come any soon­er than 2020 and pos­si­bly much lat­er. Hence the con­cerns about bit­coin.

But keep in mind that Chi­na only barred its finan­cial insti­tu­tions from trad­ing in bit­coins. Indi­vid­u­als are still free to buy and sell all the bit­coins they want. And that pre­sum­ably includes indi­vid­u­als with a lot of mon­ey. And gam­bling prob­lem. A lot of mon­ey and gam­bling prob­lem in Macau:

Busi­ness Insid­er
I’m Chang­ing My Mind About Bit­coin
Joe Weisen­thal

Dec. 1, 2013, 4:40 PM

I’m chang­ing my mind about Bit­coin.

I used to think it was a joke or at best a cur­ren­cy for clowns.

Now, I no longer think that. Now, I don’t know what its future is.

Here, let me explain.

...

Pro­vid­ed the mar­ket is liq­uid enough, and the trans­ac­tion infra­struc­ture is robust enough, both the buy­er and the sell­er should be able to con­duct a mutu­al­ly agree­able trans­ac­tion at a fair U.S. dol­lar-based price, with Bit­coin sim­ply pro­vid­ing the anonymi­ty need­ed for the actu­al swap.

The same argu­ment applies to the defla­tion­ary aspect of Bit­coin. If I’m buy­ing weed online, what do I care if oth­ers are hoard­ing it, or if the price has gone up five times in the last day? So long as at the cur­rent price, the sell­er and me are able to come to a mutu­al­ly agree­able price when trans­lat­ed back into U.S. dol­lars, the price rise just isn’t that big of an imped­i­ment. In fact, the price rise might actu­al­ly be help­ful (more on this lat­er).

Even if you don’t think drugs, online gam­bling, and oth­er ille­gal activ­i­ty is enough to sus­tain a “cur­ren­cy,” the same prin­ci­ple applied above could apply to some­thing more impor­tant: mon­ey laun­der­ing or cir­cum­vent­ing cap­i­tal con­trols.

This is what the excite­ment about Bit­coin in Chi­na is all about. In the Bit­coin com­mu­ni­ty, there’s tons of talk about how the future of Bit­coin is in Chi­na, and there does seem to be tons of trad­ing vol­ume hap­pen­ing there. Here’s the poten­tial: Chi­na has lots of rich peo­ple, but a frag­ile bank­ing sys­tem, and strict cap­i­tal con­trols, mean­ing it’s dif­fi­cult to get your wealth out of the coun­try. One way rich peo­ple get their wealth out of the coun­try is by laun­der­ing it through Macau. Mam­ta Bad­kar wrote a great explain­er of how this works.

Basi­cal­ly, your Chi­nese mil­lion­aire gives mil­lions of dol­lars to a “jun­ket” oper­a­tor in the main­land. That jun­ket oper­a­tor then pro­vides them with mil­lions of dol­lars worth of chips at a casi­no in Macau. The mil­lion­aire then plays numer­ous hands of some game (prob­a­bly bac­carat) then at the end of the ses­sion cash­es in the chips in Macau’s cur­ren­cy, the Pat­a­ca. Then those Pat­a­cas are deposit­ed into a bank in Macau, and voila, the mil­lion­aire has just escaped Chi­na’s cap­i­tal con­trols, hav­ing suc­cess­ful­ly moved mil­lions out­side of the Chi­nese bank­ing sys­tem.

Bit­coin, the­o­ret­i­cal­ly, promis­es an even eas­i­er path to do this. Rich per­son buys a bunch of bit­coins, trans­fers them to a Bit­coin wal­let asso­ci­at­ed with a finan­cial insti­tu­tion out­side of Chi­na, sells the bit­coins into some new cur­ren­cy, and then voila.

Econ­o­mist Tyler Cowen wrote a long post about Bit­coin and its poten­tial in Chi­na last week:

Right now, you can think of the val­ue of Bit­coin being set in the same way that the val­ue of an export license might be set through bids. If/when Chi­na ful­ly lib­er­al­izes cap­i­tal flows, the val­ue of Bit­coin like­ly will fall. A lot. To the extent the shad­ow mar­ket val­ue of the yuan ris­es, and approach­es the lev­el of the cur­rent qua­si-peg, the val­ue of Bit­coin will fall, by how much is not clear. Or maybe get­ting mon­ey out through Hong Kong (or Shang­hai) will become eas­i­er and again the val­ue of Bit­coin would fall. If Bei­jing shuts down BTC Chi­na, the main bro­ker, which by the way accounts for about 1/3 of all Bit­coin trans­ac­tions in the world, the val­ue of Bit­coin very like­ly will fall. A lot. You will recall that the Chi­nese gov­ern­ment shut down the vir­tu­al cur­ren­cy QQ in 2009; admit­ted­ly stop­ping Bit­coin could prove hard­er but still they could thwart or lim­it it.

If you are long Bit­coin for any appre­cia­ble amount of time, it seems you are bet­ting that the Chi­nese econ­o­my will do poor­ly and cap­i­tal con­trols will remain. Then more peo­ple will be increas­ing­ly des­per­ate to get more mon­ey out of the coun­try. Or you may be bet­ting that the Chi­nese use of Bit­coin to laun­der mon­ey will increase due to the mere spread of the idea, through social con­ta­gion. Accord­ing to this source, the val­ue of Bit­coin is up by a fac­tor of 66 this year in Chi­na.

...

Note that the Macau casi­no jun­ket indus­try is dom­i­nat­ed by the Tri­ads so the jun­ket oper­a­tors are prob­a­bly pret­ty good at pro­vid­ing a full-ser­vice expe­ri­ence.

Con­tin­u­ing...

...
Now, ear­li­er I men­tioned that the ris­ing price of Bit­coin, rather than being a hin­drance, could actu­al­ly be help­ful.

Here’s why. See, while every­one talks about Bit­coin, there are actu­al­ly a ton of cryp­to-cur­ren­cies. The web­site CoinMarketCap.com lists 42 dif­fer­ent ones, and help­ful­ly lists the total “mar­ket cap” of each. The “mar­ket cap” is just the price of each coin mul­ti­plied by the num­ber of out­stand­ing coins there are for each.

Here’s a look at the top eight among them. Bit­coin, at over $10 bil­lion, is the biggest. Feath­er­coin, at over $19 mil­lion, is still pret­ty sub­stan­tial.

Now each one of these coin sys­tems are pret­ty sim­i­lar, but they have slight­ly dif­fer­ent char­ac­ter­is­tics. The sec­ond biggest one is Lite­coin, which adver­tis­es that trans­ac­tions are faster, and that the min­ing sys­tem is fair­er than bit­coins.

The­o­ret­i­cal­ly, any one of these would suf­fice if you’re a rich per­son in Chi­na look­ing to get your mon­ey out­side the bor­der. But in prac­tice, sev­er­al of these would­n’t suf­fice. For you to get your mon­ey out of Chi­na you need to be able to buy coins in size, and then be con­fi­dent that once you’ve switched them to a wal­let out­side of the coun­try, that you’d be able to sell those coins in size for rough­ly the same price.

If you want­ed to move $1 mil­lion worth of Feath­er­coin, you’d be try­ing to move over 5% of the entire Feath­er­coin mar­ket. It’s high­ly unlike­ly you’d be able to find that kind of liq­uid­i­ty in any rea­son­able peri­od of time. You’d be tak­ing a gigan­tic risk that when you want­ed to sell your Feath­er­coin, that there would be no buy­ers, and you’d be total­ly screwed.

Now that Bit­coin has, notion­al­ly, bil­lions of dol­lars in the ecosys­tem, mov­ing $1 mil­lion (just ~1,000 bit­coins) is less like­ly to cause any kind of splash. You can prob­a­bly obtain the coins and sell them with­out much dis­rup­tion. So although the­o­ret­i­cal­ly the com­pet­ing coins can tech­ni­cal­ly do the job of get­ting past the bor­der, you real­ly need the net­work effects of a sys­tem with a high “mar­ket cap” to make it work. So in a sense, the ris­ing price makes it eas­i­er for the whole sys­tem to oper­ate. Rather than being dis­cour­ag­ing to the Bit­coin ecosys­tem, it enables it, because there’s enough mon­ey in the sys­tem to absorb the needs of buy­ers and sell­ers doing trans­ac­tions.

Felix Salmon wrote a post titled Wait­ing for Bit­coin to get Bor­ing in which he argued that Bit­coin bulls should be more excit­ed by long peri­ods with lit­tle volatil­i­ty rather than the peri­ods like recent­ly where the price goes bal­lis­tic. But while that seems intu­itive if you think of Bit­coin like a “cur­ren­cy” that needs sta­bil­i­ty, it does­n’t nec­es­sar­i­ly jibe with the think­ing above. High­er and high­er bit­coin prices enable trans­ac­tions in size. It’s because Bit­coin has gone par­a­bol­ic, and the num­ber of dol­lars asso­ci­at­ed with it are now over $10 bil­lion that it could become a plau­si­ble avenue for rich Chi­nese to start think­ing of it as a way for them to get mon­ey out of the coun­try. Rather than the high price being a hin­drance, the high price expands the mar­ket.

...

So will bit­coin replace casi­no jun­kets in Macau as the method of choice for rich Chi­nese in need of some clean­ing ser­vices? Only time will tell!

Or maybe gam­blers can take their bit­coins to casi­nos direct­ly and just skip the jun­ket. That’s the idea behind Bit­mark­er, a new com­pa­ny that’s try­ing facil­i­ty the use of bit­coins for the financ­ing inter­est-free loans from casi­nos.

Either way, if bit­coin is going to laun­der in the “big leagues” the bit­coin econ­o­my and the total val­ue of bit­coin is going to have to grow by many orders of mag­ni­tude.

Gam­bling on bit­coins can involve a lot of gam­bling online with bit­coins
Bit­coin’s poten­tial to com­pete with the casi­no indus­try isn’t lim­it­ed to its poten­tial for mon­ey-laun­der­ing. Bit­coin also has anoth­er fea­ture that makes it a potent com­peti­tor with the online casi­no indus­try. It’s a fea­ture that makes bit­coin great for mon­ey-laun­der­ing but not so great for use as actu­al mon­ey: bit­coin trans­ac­tions are irre­versible. It turns out that irre­versibil­i­ty may make bit­coin dif­fi­cult to use for gen­er­al com­merce, but irre­versibil­i­ty and qua­si-anonymi­ty also make bit­coin close to the per­fect online pok­er chip.

Bit­coin’s near-per­fect pok­er chip-sta­tus is a real­i­ty that’s become self appar­ent by the fact that Satoshi Dice, the most pop­u­lar online bit­coin gam­bling site, has been sin­gle hand­ed­ly gen­er­at­ing around half of the total bit­coin trans­ac­tions for over a year:

Forbes
Bit­coin Casi­nos Release 2012 Earn­ings

Jon Mato­nis, Con­trib­u­tor

1/22/2013 @ 11:35AM

It is earn­ings sea­son on Wall Street and it is report­ing sea­son for some of the lead­ing bit­coin casi­no oper­a­tors. Three sig­nif­i­cant Bit­coin-relat­ed gam­bling sites have report­ed their earn­ings and sta­tis­tics for cal­en­dar year 2012. Some of the data is fair­ly reveal­ing giv­ing us a fas­ci­nat­ing glimpse into the world­wide growth of bit­coin and gam­bling.

First up is the ven­er­a­ble SatoshiDice, which is the lead­ing bit­coin gam­bling site in terms of amount wagered. Respon­si­ble for more than 50% of dai­ly net­work vol­ume on the Bit­coin blockchain, SatoshiDice report­ed first year earn­ings from wager­ing at an impres­sive ?33,310. Dur­ing the year, play­ers bet a total of ?1,787,470 in 2,349,882 indi­vid­ual bets at an aver­age month­ly growth rate of 78%. Earn­ings were cal­cu­lat­ed from eight months of data cov­er­ing May to Decem­ber, 2012.

With servers based in Ire­land and pro­mot­ed by Erik Voorhees, SatoshiDice is con­sid­ered a blockchain-based bet­ting game and it is self-described as the “most pop­u­lar Bit­coin game in the world.” Sim­i­lar to ran­dom num­ber gen­er­a­tion, the site uses a method to pro­duce a num­ber between 0 and 65,535 which is then wagered on by mak­ing a bit­coin trans­ac­tion to one of the sta­t­ic address­es rep­re­sent­ing dif­fer­ent pay­outs. The odds are cal­cu­lat­ed to give the house an edge of 1.90% with full trans­paren­cy because all dice rolls and earn­ings sta­tis­tics are ver­i­fi­able using the blockchain.

Oper­at­ing expens­es were min­i­mal in 2012 and the com­pa­ny also paid month­ly bit­coin div­i­dends to ‘pub­lic’ share­hold­ers which rep­re­sent 10% of the total 100,000,000 out­stand­ing shares. To invest in the oper­a­tor and bet on the house, SatoshiDice shares are trad­ed on the MPEx bit­coin stock exchange under tick­er sym­bol S.DICE (see August 19th, 2012 Prospec­tus). At the cur­rent exchange rate of $17.00 per BTC, SatoshiDice is a com­pa­ny val­ued at $8.9 mil­lion.

Voorhees empha­sizes that until the site’s legal sta­tus is clear, all bal­ances and account­ing will be main­tained in play-mon­ey bit­coin, because “it’s bet­ter to keep it com­plete­ly sep­a­rate from real life.” For all of the ven­ture cap­i­tal­ists out there, here is how SatoshiDice start­ed. Where is the next big one?

...

With pri­va­cy, effi­cien­cy, growth, pay­ment irre­versibil­i­ty, and cost sav­ings as demon­strat­ed by the above, it’s only a mat­ter of time before the main­stream casi­no oper­a­tors of Gibral­tar and Mal­ta real­ize the ben­e­fits of a gam­ing econ­o­my that lever­ages the ide­al dig­i­tal casi­no chip.

Keep in mind that SatoshiDice began gen­er­at­ing a major­i­ty of bit­coin’s dai­ly tran­sca­tions with­in 10 days of its launch last year and was still gen­er­at­ing about half of the total num­ber of bit­coin trans­ac­tions as of August if this year. If that sounds like an absurd­ly high per­cent­age of the total trans­ac­tion vol­ume for just a sin­gle site, keep in mind that bit­coins real­ly aren’t used for much else at this point. The top 100 bit­coin accounts con­sti­tute ~20% of the total num­ber of bit­coins mint­ed. The top 500 accounts hold ~35% of the total. The top 927 accounts hold ~50% of the total. And, per­haps more impor­tant­ly, the con­cen­tra­tion of bit­coins held by these big accounts has bare­ly changed over the course of the bit­coin boom. A huge share of old-school bit­coin hold­ers are sim­ply not inter­est­ed in trad­ing their vast bit­coin hoards for goods and ser­vices. As a con­se­quence, bit­coin gam­bling — which pri­mar­i­ly trades just bit­coins back and forth — has become the dom­i­nant type of bit­coin trans­ac­tion.

Does bit­coin have a gam­bling prob­lem?
The fact that a sin­gle gam­bling site gen­er­ates close to half of the total bit­coin trans­ac­tions might seem like just anoth­er inter­est­ing fun-fact about bit­coins and lit­tle more. But there are some seri­ous con­se­quences to the bit­coin gam­bling phe­nom­e­na on bit­coin’s poten­tial to grow and become a true alter­na­tive cur­ren­cy (and also become a venue for big time mon­ey-laun­der­ing).

For exam­ple, SatoshiDice pays an enhanced “trans­ac­tion fee” to bit­coin min­ers, giv­ing the SatoshiDice trans­ac­tions pri­or­i­ty over wait­ing trans­ac­tions. When a huge per­cent­age of the total bit­coin traf­fic has pri­or­i­ty in trans­ac­tion clear­ing it risks poten­tial­ly clog­ging the bit­coin sys­tem with spam trans­ac­tions that cre­ate delays for non-gam­bling trans­ac­tions. SatoshiDice even once con­tributed to the much fear “fork­ing” event (the dou­ble spend­ing of bit­coin). In oth­er words, the more bit­coin is used for gam­bling, instead of com­mer­cial trans­ac­tions, the less use­ful bit­coin becomes for com­mer­cial trans­ac­tions. At least, that’s one poten­tial out­come.

Or maybe bit­coin has a gam­bling solu­tion
There’s anoth­er argu­ment that could be made that bit­coin gam­bling is actu­al­ly cre­at­ing a stronger, more robust bit­coin ecosys­tem that will have to exist in order for bit­coin to have the trans­ac­tion pro­cess­ing capac­i­ty to com­pete with cred­it card trans­ac­tions. That’s because SatoshiDice, and bit­coin gam­bling com­mu­ni­ty in gen­er­al, also acts as a pow­er­ful finan­cial incen­tives to jump into the bit­coin min­ing game bay pro­vid­ing a steady stream of trans­ac­tion fees. If the demand for bit­coin trans­ac­tion clear­ances exceeds the sup­ply by too much the whole sys­tem grinds to a halt. And if bit­coin is ever going to com­pete with cred­it cards, it’s going to have to get a lot big­ger and a lot faster. Maybe about three orders of mag­ni­tude faster:

The Wash­ing­ton Post The Switch
Bit­coin needs to scale by a fac­tor of 1000 to com­pete with Visa. Here’s how to do it.

By Tim­o­thy B. Lee
Novem­ber 12 at 3:38 pm

At the heart of Bit­coin is the blockchain, a glob­al, shared record of every Bit­coin trans­ac­tion that has ever occurred. It gets its name from the fact that every 10 min­utes, on aver­age, the peer-to-peer Bit­coin net­work adds a new “block” con­tain­ing records of recent trans­ac­tions.

The blockchain is shared among the numer­ous com­put­ers that par­tic­i­pate in the trans­ac­tion-clear­ing process known as “min­ing.” To avoid over­load­ing those com­put­ers, Bit­coin soft­ware cur­rent­ly lim­its each block to one megabyte in size. The result: right now, the Bit­coin net­work is only capa­ble of pro­cess­ing around 7 trans­ac­tions per sec­ond. For com­par­i­son, the Visa net­work is designed to han­dle peak vol­umes of 10,000 trans­ac­tions per sec­ond.

So far, that has­n’t been a prob­lem because Bit­coin users are only gen­er­at­ing around 1 trans­ac­tion per sec­ond. But if the Bit­coin econ­o­my con­tin­ues to grow, it’s only a mat­ter of time before that lim­it becomes a prob­lem.

Can the Bit­coin net­work be tweaked to han­dle the much high­er trans­ac­tion vol­umes that could occur in the future? To answer that ques­tion, I talked to promi­nent Bit­coin devel­op­er Mike Hearn. He helped me under­stand the cur­rent lim­its on Bit­coin per­for­mance and how Bit­coin’s devel­op­ment team plans to over­come them.

Tim­o­thy B. Lee: Can you briefly describe the cur­rent lim­its on how many trans­ac­tions the Bit­coin net­work can accom­mo­date?

Mike Hearn: There are two dif­fer­ent kinds of Bit­coin client: Full nodes and “light nodes” we call sim­pli­fied pay­ment ver­i­fi­ca­tion (SPV) nodes. Light nodes don’t care how big the blocks are. And full nodes have a hard phys­i­cal lim­it [of one megabyte per block.]

So one megabyte every 10 min­utes, divid­ing by the aver­age size of trans­ac­tions [gives us] the cur­rent lim­it [of] about 7 per sec­ond.

How close are we to that lim­it right now?

If you look at a chart of the num­ber of trans­ac­tions per day, we’re peak­ing at 70,000 trans­ac­tions per day. We’re not even at one per sec­ond [e.g. 86,400 trans­ac­tions per day] yet. It’s grown. It’s grown pret­ty nice and fast. If you plot the over­all graph from the sys­tem. It has this nice lit­tle expo­nen­tial slope. We’re quite a way from hit­ting these lim­its. It’s a lit­tle bit fuzzy as well, for var­i­ous rea­sons. We’re not in any dan­ger of run­ning out of capac­i­ty right now.

What’s going to be required to get beyond 7 trans­ac­tions per sec­ond?

We just need to take away the lim­it and get peo­ple to upgrade their nodes. The rea­son it has­n’t been done yet is that we’re still try­ing to fig­ure out whether there should be a new lim­it or no lim­it at all. [If there’s no lim­it,] how do we ensure some­one does­n’t mine an arti­fi­cial­ly bloat­ed block that’s just there to annoy peo­ple?

...

Note that debates over top­ics like “whether there should be a new lim­it or no lim­it at all. [If there’s no lim­it,] how do we ensure some­one does­n’t mine an arti­fi­cial­ly bloat­ed block that’s just there to annoy peo­ple?” are, in part, debates over whether or not bit­coin gam­bling should be allowed.

Con­tin­u­ing...

...

Gavin [Andresen, Bit­coin’s lead devel­op­er] is work­ing on some of the work that’s need­ed for this to be done. He’s work­ing on reform­ing the fee sys­tem. The design we’re head­ing toward is that there won’t be any lim­it, but by default min­ers will refuse to process blocks that are ridicu­lous­ly big.

Can you explain how Bit­coin fees work and why the sys­tem has them?

You can attach a fee [e.g. a pay­ment to the min­er pro­cess­ing the trans­ac­tion] to any trans­ac­tion in Bit­coin. Orig­i­nal­ly when Bit­coin was new, all trans­ac­tions were free, and over time the rules were adjust­ed so you can still send free trans­ac­tions but they’re slow­er. Fees act as a kind of a throt­tle for pre­vent­ing flood­ing the net­work with bogus trans­ac­tions. If every trans­ac­tion was always free, you’d get peo­ple bounc­ing coins back and forth all the time.

The main issue we have at the moment is the way that fees are set and nego­ti­at­ed across the net­work is very basic. They’re not real­ly nego­ti­at­ed. The min­i­mum fee size was picked by Gavin less than a year ago. It was picked at a time when the Bit­coin price was much low­er than today. Because the num­bers are fixed in the soft­ware, they’re not spec­i­fied in terms of dol­lars, they’re spec­i­fied in terms of Bit­coins. So Bit­coin trans­ac­tions have become more expen­sive for no good rea­son. Gavin is work­ing on changes to how that works.

Nodes will watch the trans­ac­tions that get broad­cast on the sys­tem, and then they’ll watch how long trans­ac­tions take. So they’ll say “if you want to get processed in 3 blocks, you should pay this much.” The idea is that min­ers set the fees they are will­ing to charge, and nodes observe the oper­a­tion of the mar­ket and esti­mate observed behav­ior. My hope, if oth­er things have been done cor­rect­ly, is that fees will fall sig­nif­i­cant­ly.

...

As the above arti­cle points out, there is cur­rent­ly a fixed num­ber of bit­coins that gets paid to the min­ing team that suc­cess­ful­ly gen­er­ates the each suc­ces­sive “blockchain” of val­i­dat­ed trans­ac­tions (cur­rent­ly 25). Even­tu­al­ly, once all 21 mil­lion bit­coins are “mined”, there will no longer be any bit­coins award­ed and instead it will be sole­ly trans­ac­tion fees that finance the bit­coin min­ing indus­try. But for now, every 10 min­utes or so a “lucky” bit­coin min­ing team is award­ed 25 bit­coins. On a day like Novem­ber 29th, 2013, bit­coin was award­ing the equiv­a­lent of 25 ounces of gold to a min­ing team every ten min­utes on top of any trans­ac­tion fees that would have been paid by the users.

And bit­coin min­ers aren’t the only one’s mak­ing large amounts of mon­ey (or at least mak­ing lots of bit­coins): In July of 2013, the own­er of SatoshiDice, Erik Voorhees, became the first “Bit­coin mil­lion­aire” after sell­ing SatoshiDice to an undis­closed buy­er for 126315 bit­coins (worth ~$11.5 mil­lion at the time and a lot more now). Erik Voorhees, an ardent Lib­er­tar­i­an and staunch oppo­nent of the Fed­er­al Reserve, dis­cov­ered bit­coin in 2011 after mov­ing to New Hamp­shire to become part of the Free State Project (which calls for +20k Lib­er­tar­i­ans to move to New Hamp­shire and get the state to secede). Dur­ing his expe­ri­ences with bit­coin Mr. Voorhees learned many lessons. One of the lessons he learned was that “Amer­i­ca is a lie” and “Amer­i­ca is not the land of free mar­kets and free peo­ple that it was adver­tised to be in Gov­ern­ment schools when I was grow­ing up”.

We don’t know yet if any of Mr. Vorhees’s sub­stan­tial SatoshiDice for­tune will be put towards future Free State Projects since he’s not inter­est­ed in trad­ing his 156,315 bit­coins “for fiat toi­let paper”. But should he ever decide to cash out and finance a new coun­try he’ll prob­a­bly have a lot of sim­i­lar­ly mind­ed bit­coin mil­lion­aires to join him.

There’s gold in them mines! Want to buy some min­ing equipt­ment?
There’s anoth­er sec­tor of the bit­coin econ­o­my that’s been mak­ing quite of bit of mon­ey late­ly. And not just bit­coin “mon­ey”: but actu­al mon­ey mon­ey. It’s most­ly min­ers’ mon­ey:

South Chi­na Mon­rn­ing Post
Bit­coin min­ers find it increas­ing­ly hard to make mon­ey

It’s becom­ing increas­ing­ly tough to earn mon­ey from mak­ing bit­coins; it’s the mak­ers of souped-up com­put­er equip­ment that are mint­ing it

PUBLISHED : Sun­day, 10 Novem­ber, 2013, 3:26am
UPDATED : Thurs­day, 28 Novem­ber, 2013, 9:58am

Tucked away in an air­con­di­tioned data cen­tre in Sil­i­con Val­ley is a hotch­potch of black box­es, cir­cuit boards and cool­ing fans owned by 27-year-old Aaron Jack­son-Wilde, a mod­ern-day prospec­tor look­ing for bit­coins.

Since dis­cov­er­ing the dig­i­tal cur­ren­cy a few months ago, Jack­son-Wilde has paid about US$2,000 for his “rigs”, which are pow­ered by spe­cialised com­put­er chips. They are designed to help oper­ate and main­tain the bit­coin net­work — and, in return, gen­er­ate a small reward in a process known as “bit­coin min­ing”.

...

In a key twist that keeps infla­tion in check, the dif­fi­cul­ty of the cryp­to­graph­ic maths that leads to new­ly mint­ed coins grows as more com­put­ers join the net­work.

That has led some tech­nol­o­gy pro­fes­sion­als to tar­get a new mar­ket in souped-up com­put­ers and spe­cialised chips aimed at the grow­ing ranks of bit­coin “min­ers”.

...

The goal of bit­coin min­ers is to pull in more than what they spend on their rigs — some cost over US$20,000 — and the elec­tric­i­ty they need to keep the machines run­ning 24 hours a day.

It has become so hard to make a prof­it that com­par­isons to the 19th cen­tu­ry Cal­i­for­nia gold rush, when mon­ey was often made sell­ing shov­els to naive prospec­tors, have become a run­ning joke among bit­coin min­ers.

“It’s the guys who sell the equip­ment who are mak­ing the mon­ey, not the bit­coin min­ers,” said Jack­son-Wilde, a man­ag­er at a com­pa­ny that makes motor­cy­cle bat­ter­ies.

Coin­T­er­ra believes spend­ing on new bit­coin min­ing chips could eas­i­ly hit US$100 mil­lion a year for the next three years, assum­ing no change in prices. While that is peanuts for large semi­con­duc­tor com­pa­nies like Intel and Qual­comm, it is a lucra­tive mar­ket for small devel­op­ers.

About 11.9 mil­lion bit­coins, worth US$2.4 bil­lion at recent prices, have been mint­ed since the cur­ren­cy began cir­cu­lat­ing. Based on recent activ­i­ty, the net­work is on track to cre­ate around 1.4 mil­lion new bit­coins annu­al­ly over the next three years, the equiv­a­lent of more than US$280 mil­lion a year at recent exchange rates.

Reflect­ing grow­ing com­pe­ti­tion, Jack­son-Wilde says his gear — which fea­tures mod­el names like Erupter, Jalapeno and Spar­tan — now pulls in a tiny frac­tion of the bit­coins it used to, but he expects anoth­er US$10,000 worth of next-gen­er­a­tion equip­ment to put him in the black.

...

Keep in that the val­ue of the 1.4 mil­lion bit­coins slat­ed to be mint­ed over the next three years and award­ed to min­ers will be worth a lot more that $280 mil­lion today even after the recent price melt­down fol­low­ing the bit­coin trad­ing ban for Chi­nese banks. There’s a poten­tial for­tune to be “mined” over the next few years, and the high­er the bit­coin bub­ble gets the big­ger that ~10 minute award gets and the greater the com­pe­ti­tion for more bit­coin com­put­ing pow­er.

There’s gold in them hills! Let’s set up a casi­no to mine it.
And, of course, the greater the price of bit­coin, the more temp­ta­tion there’s going to be for schemes. Schemes like get­ting a super­com­put­ing min­ing cen­ter and then set­ting up gam­bling site so you can mine your site’s own trans­ac­tions and all the oth­er trans­ac­tions (which are still most­ly gam­bling trans­ac­tions that pay fees).

And, of course, some­one is already doing that: Mas­sive Luck Invest­ments — a Hong Kong based invest­ment firm that owns betcoin.tm, a SatochiDice clone — recent­ly decid­ed to plunge into the bit­coin min­ing busi­ness. It involves mul­ti­ple gen­er­a­tions of min­ing machines planned for sale to the pub­lic and even a pri­vate­ly held mul­ti-peta­hash/sec­ond cut­ting edge sys­tem for the in-house min­ing. The advanced chips appear to be tar­get­ed towards a cloud-min­ing oper­a­tion. Based in Chi­na. Using two super­com­put­ing cen­ters. For one of the super­com­put­ing cen­ters, the “Shang­hai super­com­put­er cen­ter will be respon­si­ble for the over­all facil­i­ty design and staff train­ing”. At least that’s all what they announced this April. Part of that announce­ment includ­ed:

“The Chi­nese gov­ern­ment pro­vides pref­er­en­tial poli­cies to attract FDI [for­eign direct invest­ment] in cer­tain high tech areas that ben­e­fit the Chi­nese econ­o­my,” said the Mas­sive Luck exec. “They require tra­di­tion­al CPU-based tra­di­tion­al com­put­ing pow­er to address the acute short­age of it. Shang­hai super­com­put­er cen­ter will be respon­si­ble for the over­all facil­i­ty design and staff train­ing.”

Could a super­com­put­ing cen­ter ded­i­cat­ed to bit­coin min­ing that’s designed by the Shang­hai Super­com­put­ing Cen­ter and run by the own­ers of a SatoshiDice clone real­ly be in the works? The Chi­nese gov­ern­ment does have an ambi­tious pro­gram to build super-com­put­ing sites. The recent rul­ing by the Chi­nese gov­ern­ment did­n’t restrict pri­vate bit­coin activ­i­ty at all and before the bit­coin bank ban, signs were point­ing towards an embrace of bit­coin by Bei­jing. Busi­ness­es like this could be handy if the Chi­nese elites real­ly do have an inter­est in expand­ing their oppor­tu­ni­ties for get­ting a head start on the lift­ing of cap­i­tal con­trols.

But bit­coin min­ers with less-than-super­com­put­ing capa­bil­i­ties should­n’t fret quite yet. Betcoin.tm users have already charged betcoin.tm with not actu­al­ly imple­ment­ing the math­e­mat­i­cal­ly “prov­ably fair” gam­bling pro­to­cols and are alleged to have been attack­ing bet­coin’s com­peti­tors with denial-of-ser­vice attacks and gen­er­at­ing fraud­u­lent bets using scripts to puff up their num­bers. As SatoshiDice founder Eric Voorhees put it “Bit­coin is absolute­ly the Wild West of finance, and thank good­ness”. Yes it is. So this par­tic­u­lar bit­coin adven­ture could end up being most­ly good PR. Then again, maybe there real­ly are super­com­put­ing cen­ters in Chi­na get­ting set up to mine bit­coins. That might bode well for the investors in the super­com­put­ing cen­ter, but what do pos­si­ble pub­lic-pri­vate part­ner­ships with Chi­nese super­com­put­ing cen­ters say about bit­coin’s poten­tial to live the dream and slay the Beast when you have to own a super­com­put­ing clus­ter to even begin seri­ous­ly com­pet­ing in the Great Dig­i­tal Gold Rush? We’re not at that point yet, but if bit­coin takes off, it’s com­ing. And in race of com­put­ing speed and pow­er guess who wins.

The sto­ry of betcoin.tm and Mas­sive Luck Invest­ments is an exam­ple of what is pos­si­ble nowa­days: Bit­coin min­ing is an unreg­u­lat­ed com­pe­ti­tion and if a pub­lic or pri­vate orga­ni­za­tion wants to allo­cate super­com­put­ing resources towards the bit­coin min­ing mar­kets they just might go ahead and do that. And maybe there will be pub­lic-pri­vate part­ner­ships using very pow­er­ful com­put­ing resources. Why not, espe­cial­ly if bit­coin takes off? Bit­coin has the poten­tial to enrich gov­ern­ments and their pri­vate part­ners too. Don’t for­get that bit­coin had a pret­ty pos­i­tive recep­tion dur­ing the recent US Con­gres­sion­al hear­ings and Chi­na’s gov­ern­ment real­ly did­n’t do all that much to restrict bit­coin’s usage. And there’s no rea­son the world’s Big Broth­ers have to hate dig­i­tal cryp­tocur­ren­cies. Espe­cial­ly if the gov­ern­ments of the world con­tin­ue to seize sig­nif­i­cant per­cent­ages of bit­coins in sin­gle crim­i­nal busts. Con­trary to pop­u­lar opin­ion, Big Pow­er (gov­ern­ment) may not have much to fear from this dig­i­tal gov­ern­ment-slay­er.

We’ll have to wait and see how all of this turns out. Bit­coin could fiz­zle out in months or just keep par­a­bol­i­cal­ly chug­ging along for years to come. And if bit­coin does­n’t end up slay­ing the twin beasts of Big Mon­ey and Big Pow­er and does­n’t assume the man­tel as the new glob­al cur­ren­cy for a post-gov­ern­ment cryp­to-gold­en age oth­ers will keep try­ing. Some dreams don’t die eas­i­ly, espe­cial­ly the col­lec­tive night­mares.

And regard­less of whether or not bit­coin suc­ceeds in becom­ing the got­ta have cur­ren­cy, one thing is clear: Big Elec­tric­i­ty has got to be lov­ing this new pro­cess­ing-inten­sive dig­i­tal cryp­tocur­ren­cy craze. Absolute­ly lov­ing it.

Discussion

18 comments for “The Big Bitcoin Bet: Currency of the Future or Just a Better Casino?”

  1. @Pterrafractyl–

    Excel­lent work! The whole bit­coin phe­nom­e­non is amaz­ing to me.

    This thing is S‑O-O‑O full of holes, loop­holes, built-in weak­ness­es and scams that it is amaz­ing to me that any­one dares to get involved.

    Maybe the Erik Voorhees’s of the world can game this to their lik­ing, but this so-called cur­ren­cy has, as I said in FTR #764, all of the weak­ness­es of the fiat cur­ren­cies that bit­coin­ers crit­i­cize and NONE of the advantages/safeguards.

    Talk about “caveat emp­tor,” sheesh!

    Best,

    Dave

    Posted by Dave Emory | December 11, 2013, 9:29 pm
  2. @Dave: Part of what makes the bit­coin phe­nom­e­na so amaz­ing is that the “val­ue” of the bit­coins are deeply inter­twined with the cost of elec­tric­i­ty and there seems to be very lit­tle recog­ni­tion of this real­i­ty. The bit­coin min­ing prob­lems are designed to be arti­fi­cial­ly dif­fi­cult in order to ensure the entire bit­coin min­ing com­mu­ni­ty can’t eas­i­ly alter the blockchain (which intro­duces oppor­tu­ni­ties for dou­ble spend­ing and oth­er shenani­gans). So bit­coin users, as a whole, can’t reap all the ben­e­fits from improve­ments in com­put­ing power...if there was a break­through tomor­row that made it much eas­i­er to “mine” bit­coins the algo­rithm would sim­ply make the min­ing much more dif­fi­cult. So the price of bit­coin has to rise or the cost of elec­tric­i­ty has to fall if the bit­coin econ­o­my is going to pay for itself as it grows. More effi­cient use of elec­tric­i­ty (via bet­ter proces­sor tech­nol­o­gy) won’t help. And at the cur­rent price of ~$900/bitcoin, the bit­coin econ­o­my is not pay­ing for itself:

    Quartz
    Min­ers spend $17 mil­lion a day for a shot at $4.4 mil­lion of bit­coin
    By Tim Fern­holz @timfernholz Decem­ber 11, 2013

    The price of a sin­gle bit­coin, now sit­ting at $899, is derived from many mys­te­ri­ous sources: sup­ply and demand, poten­tial future busi­ness val­ue, ani­mal spir­its. One fac­tor is less wide­ly under­stood: The price of bit­coin depends on the price of elec­tric­i­ty.

    Bit­coin are pro­duced by “min­ing,” hav­ing com­put­ers solve code-break­ing prob­lems that, when com­plet­ed, yield a unique bit­coin. The more bit­coin that are mined, the hard­er those prob­lems become, a wrin­kle designed to con­trol infla­tion in the cryt­pocur­ren­cy and one some econ­o­mists sus­pect will lead to future defla­tion. But the cost of solv­ing those prob­lems is basi­cal­ly a func­tion of proces­sor pow­er and elec­tric­i­ty. And accord­ing to Blockchain, an orga­ni­za­tion that mon­i­tors the peer-to-peer cur­ren­cy, today bit­coin min­ers spend approx­i­mate­ly $17 mil­lion on this task dai­ly—and, at cur­rent val­u­a­tions, only make bit­coin worth $4.4 mil­lion.

    That cal­cu­la­tion is based on a few assump­tions, which makes it worth tak­ing with a grain of salt. One is that the net­work solves 7.5 mil­lion bil­lion “hash­es” (the prob­lems solved in the min­ing process) each sec­ond, and that each of these giga­hash­es requires 650 watts of elec­tric­i­ty to solve, which in turn costs 15 cents per kilo­watt hour. That’s slight­ly high­er than the US aver­age of 12.52 cents per kilo­watt hour, and also doesn’t take into account the efforts of bit­coin min­ers to devel­op spe­cial­ized high-speed com­put­ers that mine the coins more effi­cient­ly, effec­tive­ly dri­ving your aver­age per­son­al com­put­er out of the busi­ness. Still, it’s safe to say that more mon­ey is spent attempt­ing to gen­er­ate bit­coins each day than those bit­coins are worth.

    This proces­sor-speed arms race has rapid­ly ramped up the dif­fi­cul­ty of bit­coin min­ing, elim­i­nat­ing the aver­age miner’s prof­its or send­ing them into coop­er­a­tive pools. Min­ing oper­at­ing mar­gins are now mea­sured at ‑329.04% by Blockchain.

    For most peo­ple to actu­al­ly prof­it off their bit­coin-min­ing efforts, the asset needs to con­tin­ue to dra­mat­i­cal­ly increase in val­ue. That in turn has spurred on bit­coin com­peti­tors like Lite­coin that promise a more lev­el play­ing field. It also sets up poten­tial­ly trou­ble­some dynam­ics with­in the cryp­to-cur­ren­cy. For one thing it stokes volatil­i­ty. And if min­ing is only prof­itable for peo­ple mak­ing the largest invest­ments, fears of a min­ers car­tel could come to life.

    Note that there are also trans­ac­tion fees get­ting paid out from all the gam­bling sites so that pre­sum­ably helps cov­er some of the min­ing cost. But since min­ing awards are sched­uled to get cut in half until they dis­ap­pear around 2040 (when all 21 mil­lion bit­coins have been mint­ed) the trans­ac­tion fees are going to have to grow to pay for larg­er and larg­er shares of the total cost or bit­coin’s val­ue is going to have to con­tin­ue sky­rock­et­ing. It rais­es the ques­tion of why any­one would even both­er with bit­coin in the long run since that arti­fi­cial­ly enhanced min­ing dif­fi­cul­ty poten­tial­ly trans­lates into very real elec­tric­i­ty costs that are total­ly unnec­es­sary. Even assum­ing one is total­ly ded­i­cat­ed to the bit­coin idea, why not just switch over to a bit­coin clone with eas­i­er min­ing instead of hand­ing all that mon­ey over to Big Elec­tric­i­ty?

    Posted by Pterrafractyl | December 12, 2013, 1:29 pm
  3. @Pterrafractyl–

    Much of the tech­ni­cal aspect of “bit­coin­ery” is over my head–I’m an old guy, well into mid­dle age when the inter­net phe­nom­e­non broke.

    Vis a vis bit­coin, just remem­ber who appears to have developed–NOT the prob­a­bly fic­tion­al “Satoshi Nakamo­to.”

    As dis­cussed in FTR #760, bit­coin appears to have been devel­oped by Lan­tiq, part Siemens (read “BND”), part Gold­en Gate Cap­i­tal, com­posed of alum­ni of Bain Cap­i­tal (read “Under­ground Reich.”)

    Posted by Dave Emory | December 12, 2013, 5:17 pm
  4. @Dave:
    Part of what makes bit­coin rather fas­ci­nat­ing is that we’re see­ing a kind of real life test of Lib­er­tar­i­an ideals and this exper­i­ment is only going to get weird­er and more reveal­ing as time goes on. The bit­coin mod­el for dena­tion­al­ized cur­ren­cy is being pro­mot­ed as a fight for the “lit­tle guy” to fight against “The Man” (cen­tral bank­ing sys­tems run by gov­er­ments) to cre­ate a tru­ly “free” cur­ren­cy that will ush­er in an era of glob­al pros­per­i­ty. But the tech­ni­cal design of bit­coin is almost exact­ly what one would imag­ine if bank­ing car­tels got togeth­er and want­ed to cre­ate a sys­tem that sort of looks like its struc­tured around a one-man-one-vote ide­al but is actu­al­ly run on a one-dol­lar-one-vote sys­tem. It’s great real-life metaphor for Lib­er­tar­i­an­ism.

    Here’s a brief descrip­tion of how bit­coin’s “min­ing” sys­tem and why its poten­tial­ly a bankster’s dream: One of bit­coin’s strengths is that, as a dis­trib­uted sys­tem, bit­coin is the­o­ret­i­cal­ly very hard to game. That’s because there are so many dif­fer­ent peo­ple that are par­tic­i­pat­ing in “min­ing” it’s very dif­fi­cult for peo­ple to mess with the “val­i­da­tion” process.

    “Val­i­dat­ing” bit­coin trans­ac­tions is, in a way, a triv­i­al­i­ty. All you have to do is ensure a per­son isn’t spend­ing the same bit­coin in sep­a­rate trans­ac­tions simul­ta­ne­ous­ly — the much feared “dou­ble spend­ing” attack. It’s just basic account­ing. That’s it. A sin­gle crap­py com­put­er hooked up to the inter­net could poten­tial­ly accom­plish this task on its own. But that sin­gle com­put­er could only do this if that com­put­er was some­how des­ig­nat­ed as “the” com­put­er that val­i­dates bit­coin trans­ac­tions, act­ing as a sort of cen­tral clear­ing­house for bit­coin.

    One of the chal­lenges involved with the sys­tem of select­ing a sin­gle com­put­er is that the peo­ple run­ning the com­put­er might some­how secret­ly mess around with the pub­lic ledger of trans­ac­tions and, more impor­tant­ly, there’s the ques­tion of how the bit­coin com­mu­ni­ty decides who gets to run that cen­tral com­put­er. Because bit­coin is sup­posed to be a state­less sys­tem run by pro­to­col, and not dic­tate, there aren’t clear mech­a­nisms for decid­ing who gets to be the bit­coin clear­ing­house.

    Bit­coin’s solu­tion to these prob­lems is where the MAD­ness enters into the sys­tem and where the banksters or gov­ern­ments or any­one else with seri­ous resources could col­lude to take it over: Bit­coin val­i­dates all trans­ac­tions in batch­es. These batch­es of val­i­dat­ed trans­ac­tions are the “blocks” in the bit­coin “blockchain”. Because there’s no cen­tral bank, or no clear­ing­house to over­see and pre­vent “dou­ble spend­ing” the bit­coin sys­tem has to rely on a pro­to­col instead. And the pro­to­col cho­sen by Satoshi Nakamo­to is one that basi­cal­ly allows any­one to become the bit­coin’s cen­tral bank...but only for a sin­gle “block” of trans­ac­tions. Now the whole net­work is the cen­tral bank! Score one for the lit­tle guy, right?

    Well, it turns out that the par­tic­u­lar mech­a­nism Satoshi Nakamo­to chose to decide who “wins” the right to val­i­date a giv­en block of trans­ac­tions is the “proof-of-work” algo­rithm. It’s an algo­rithm designed to cre­ate a cheat-proof sys­tem where­by you could have an arbi­trary pro­to­col for choos­ing only one per­son amongst a large pool of can­di­dates. You could use a ran­dom num­ber gen­er­a­tor to select the lucky win­ner, but the ran­dom num­ber gen­er­a­tor sys­tem can poten­tial­ly be rigged, cre­at­ing a vul­ner­a­bil­i­ty in the sys­tem.

    So, instead of ran­dom­ly decid­ing a win­ner, the proof-of-work algo­rithm is cen­tered around the scheme of giv­ing every­one a real­ly dif­fi­cult prob­lem to solve. The prob­lem is so dif­fi­cult that the odds of hav­ing two peo­ple solv­ing it near­ly-simul­ta­ne­ous­ly are real­ly low. The per­son that solves the real­ly real­ly hard prob­lem first becomes the win­ner. Behold! A com­plete­ly dis­trib­uted and cheat-proof sys­tem that does­n’t rely on any cen­tral banks, gov­ern­ments, pri­vate cor­po­ra­tions or any messy demo­c­ra­t­ic deci­sion-mak­ing! It’s a self-orga­niz­ing sys­tem that any­one can par­tic­i­pate in with no bar­ri­ers to entry. The Every­man’s cur­ren­cy.

    Yes, instead of the messi­ness of gov­ern­ment and col­lec­tive­ly cre­at­ing rules, bit­coin is run by sys­tem that rewards users based on the raw com­put­ing pow­er that they put towards “rac­ing” to win the right to val­i­date each block of trans­ac­tions. A pure test of com­put­ing pow­er and that’s it. A true one-dol­lar-one-vote sys­tem out­side of gov­ern­ment con­trol. What’s not to love?

    So vir­tu­al­ly all of that com­pu­ta­tion­al pow­er ded­i­cat­ed to bit­coin min­ing has NOTHING to do with man­ag­ing bit­coin except that it deter­mines who wins the race for the right to val­i­date each block and col­lect the fees. And the race is com­plete­ly unreg­u­lat­ed. If a sin­gle user set up a super­com­put­ing cen­ter that had 10% of the total com­put­ing pow­er ded­i­cat­ed to bit­coin min­ing, that user could expect to win the right to val­i­date about 10% of the blocks issued on a giv­en day. It’s that straight for­ward.

    How could such a sys­tem not end up being dom­i­nat­ed by the groups with the deep­est pock­ets on the plan­et or access to the most advanced tech­nol­o­gy if the bit­coin sys­tem ever tru­ly suc­ceed­ed in becom­ing a major currency/commodity? And what are the odds that we aren’t going to see a “self­ish-min­ers” sce­nario turn into a trans­ac­tion-fee-rig­ging sce­nario once the oli­garchs are run­ning the world’s fastest com­put­ers? Unless bit­coin under­goes some very fun­da­men­tal changes where its no longer a sys­tem that awards those that are able to muster the great­est resources it’s hard to see how bit­coin does­n’t remain a bankster’s dream and a won­der­ful metaphor for the Lib­er­tar­i­an utopia.

    Posted by Pterrafractyl | December 15, 2013, 6:46 pm
  5. Here’s a nice piece on how the cre­ation of a giant ener­gy sink is cen­tral to how bit­coin is sup­posed to work:

    Pan­do­Dai­ly
    Bit­coin has a dark side: its car­bon foot­print
    By Michael Car­ney
    On Decem­ber 16, 2013

    Bit­coin may be mak­ing a few peo­ple wealthy, but it’s killing us all. The cryp­to-cur­ren­cy that’s caught the world by storm has a dark side: its car­bon foot­print.

    At today’s val­ue of rough­ly $1,000 per bit­coin, the elec­tric­i­ty con­sumed by the bit­coin min­ing ecosys­tem has an esti­mat­ed car­bon foot­print – or total green­house gas emis­sions – of 8.25 mega­tonnes (8,250,000 tonnes) of CO2 per year, accord­ing to research by Bitcarbon.org. That’s 0.03 per­cent of the world’s total green­house gas out­put, or equiv­a­lent to that of the nation of Cyprus. If bitcoin’s val­ue reach­es $100,000, that impact will reach 3 per­cent of the world’s total, or that of Ger­many. At $1 mil­lion – which seems far­ci­cal but which may not be out of the realm of pos­si­bil­i­ty giv­en the arti­fi­cial­ly lim­it­ed bit­coin sup­ply – this impact ris­es to 8.25 giga­tonnes, or 30 per­cent of today’s glob­al out­put, and equiv­a­lent to that of Chi­na and Japan com­bined.

    Bit­coins aren’t mined from the earth’s crust like most phys­i­cal com­modi­ties – although at least that leaves tan­gi­ble evi­dence of its envi­ron­men­tal impact. Rather, they are “mined” by com­put­ers solv­ing a set of com­pli­cat­ed com­pu­ta­tion­al prob­lems. These prob­lems are designed to get more dif­fi­cult over time, until the year 2140 when the 21 mil­lionth (and final) bit­coin is mined. Ear­ly in bitcoin’s exis­tence, it was fea­si­ble to run a suc­cess­ful min­ing oper­a­tion with a stan­dard PC. Now the task requires cus­tom min­ing rigs that can run orders of mag­ni­tude more process­es per sec­ond.

    The top of the line mod­el, which is cur­rent­ly made by a Swedish com­pa­ny called KnCMin­er, costs around $13,000 and can mine at a rate 550 giga­hash­es per sec­ond: They’ve sold $28 mil­lion worth, and soon these too will be obso­lete. The total com­pu­ta­tion­al pow­er of the glob­al bit­coin min­ing net­work today is more than sev­en mil­lion giga­hash­es, and climb­ing. That’s 256 times greater than the world’s top 500 super­com­put­ers, com­bined.

    These com­put­ers are con­sum­ing so much elec­tric­i­ty that it’s already unprof­itable to mine in some regions of the world. Accord­ing to Blockchain.info the total elec­tric­i­ty cost of all min­ing actic­i­ty con­duct­ed over the last 24 hours was $19,652,986.38, as the sys­tem con­sumed 131,019.91 megawatt hours. In April, Bloomberg Sus­tain­abil­i­ty called bit­coin min­ing it a “real-world envi­ron­men­tal dis­as­ter.” At the time, the sys­tem was con­sum­ing just 7,000 megawatt hours per day – things have increased 142-fold in the last eight months.

    Bitcoin’s bril­liance may also be its down­fall. The entire sys­tem is built on a “proof of work” algo­rithm in which min­ers race to find the sim­plest and short­est piece of data to rep­re­sent the ever-grow­ing bit­coin trans­ac­tion record, or blockchain. Proof of work solves the biggest chal­lenge fac­ing all pre­ced­ing cryp­tocur­ren­cies: How do you build a finan­cial sys­tem among dis­trib­uted nodes with­out trust­ed cen­tral­ized clear­ing­house, aka a bank? Chris Dixon recent­ly not­ed that this prob­lem, which is called the byzan­tine gen­er­als proble in com­put­er sci­ence, was pre­vi­ous­ly thought to be impos­si­ble.

    The answer to this prob­lem, it turns out, was to pay min­ers a non-triv­ial amount to solve these prob­lems and thus ver­i­fy each block of bit­coin trans­ac­tions. With enough min­ers, the sys­tem rolls on. But invis­i­ble to the naked eye, so does the mas­sive car­bon out­put. In fact, the cost of elec­tric­i­ty is a sys­temic design con­sid­er­a­tion that bitcoin’s cre­ators real­ized would reg­u­late the pace at which bit­coins were mined. The think­ing goes that as com­put­ers get more pow­er­ful, per Moore’s Law, the cost of min­ing bit­coin will fall back into rea­son – and then the race will begin again in earnest.

    The exact car­bon foot­print of the bit­coin sys­tem is unknown. The above Bit­car­bon fig­ures are mere esti­mates based on sev­er­al sim­plis­tic assump­tions. First, the cal­cu­la­tion assumes that min­ers will be will­ing to spend 90 per­cent of the val­ue of a sin­gle bit­coin to mine it. This could be a gross under­es­ti­mate if min­ers are will­ing to bet on appre­ci­a­tion. Sec­ond, these fig­ures are based on the assump­tion that 50 per­cent of all min­ing activ­i­ty takes place in the US and 50 per­cent in Chi­na. This is a delib­er­ate over­sim­pli­fi­ca­tion for arriv­ing at a rea­son­able esti­mate of the blend­ed cost and car­bon out­put of first-world and sec­ond/third-world min­ing activ­i­ties. It also rais­es the inter­est­ing point that, from an envi­ron­men­tal per­spec­tive, not all bit­coins are cre­at­ed equal. Chi­nese bit­coins are “dirt­i­er,” yet less expen­sive eco­nom­i­cal­ly to pro­duce than those mined in the US.

    But, even if tak­en as just order-of-mag­ni­tude accu­rate, Bitcarbon’s math makes it obvi­ous that we have a real prob­lem on our hands here. Bitcoin’s car­bon out­put impact threat­ens both the envi­ron­ment and it’s long term via­bil­i­ty as an eco­nom­ic sys­tem. In fact, it’s incon­ceiv­able that major world gov­ern­ments would allow bit­coin (or any oth­er sys­tem) to con­sumer a tenth or a third of the world’s car­bon out­put, as is pre­dict­ed.

    There are things that can be done to off­set or arrest bitcoin’s car­bon foot­print, but none are like­ly enough to make up for the design choic­es made by the system’s cre­ators. Bit­car­bon has intro­duced an off­set pro­gram through which min­ers can vol­un­tar­i­ly pur­chase car­bon cred­its cre­at­ed from clean tech projects. But it’s unlike­ly that the desire for a clean con­science will be enough to dri­ve such behav­ior.

    Bit­coin could also fol­low in the foot­steps of oth­er alter­na­tive cur­ren­cies, or alt­coins, sev­er­al of which have imple­ment­ed alter­na­tives to the proof of work sys­tem that don’t demand such com­pu­ta­tion­al heft. For exam­ple Lite­coins, which many have referred to as “sil­ver to bitcoin’s gold,” uses a dif­fer­ent type of algo­rithm that is said to negate the ben­e­fit of uti­liz­ing spe­cial­ized min­ing hard­ware. This doesn’t elim­i­nate the car­bon out­put of the sys­tem, but reduces it dra­mat­i­cal­ly. Peer­coin, on the oth­er hand, is built upon a proof-of-stake sys­tem that dis­trib­utes new coins based on the size of an individual’s hold­ings. This has its own draw­backs, but elim­i­nates the need for min­ing rigs all­to­geth­er.

    Unfor­tu­nate­ly, the bit­coin ecosys­tem is like­ly too big and too dis­trib­uted to imple­ment sig­nif­i­cant changes to its proof of work sys­tem now. Such changes would require the major­i­ty (like­ly 80 per­cent) of all min­ing nodes to agree and to imple­ment the shift simul­ta­ne­ous­ly in order to pre­serve the sys­temic integri­ty. With­out a cen­tral gov­ern­ing body or even lead­er­ship coun­cil, this is high­ly implau­si­ble.

    For those con­cerned about bitcoin’s car­bon foot­print, the best recourse may be to pro­mote the use of one of these alt­coins in favor of bit­coin. The Lite­coin sys­tem is cur­rent­ly less than 10 per­cent that of bit­coin in terms of total val­ue, and its under­ly­ing infra­struc­ture and lev­el of pub­lic aware­ness both pale in com­par­i­son. But as the sec­ond largest dig­i­tal cur­ren­cy it may have the best shot of all exist­ing alt­coins at reach­ing such mean­ing­ful scale as to chal­lenge bitcoin’s dom­i­nance.

    ...

    Note the scheme described above: The cost of elec­tric­i­ty is a sys­temic design con­sid­er­a­tion that bitcoin’s cre­ators real­ized would reg­u­late the pace at which bit­coins were mined. The think­ing goes that as com­put­ers get more pow­er­ful, per Moore’s Law, the cost of min­ing bit­coin will fall back into rea­son – and then the race will begin again in earnest.

    So, under per­fect mar­ket con­di­tions with large amounts of com­pe­ti­tion, bit­coin min­ing would basi­cal­ly end up trans­fer­ring the val­ue of all award­ed bit­coins and trans­ac­tion fees right into to the elec­tric­i­ty sec­tor (because prof­it will be min­i­mized under ide­al mar­ket con­di­tions). The banksters are going to be buy­ing a lot more pow­er plants if bit­coin real­ly takes off.

    Then again, since bit­coin min­ing is on track to even­tu­al­ly require a super­com­put­ing cen­ter just to real­is­tic have a chance of win­ning your invest­ment back, bit­coin min­ing could become an extreme­ly imper­fect mar­ket over time with very few seri­ous com­peti­tors due to the enor­mous costs need­ed just to get start­ed. And, sad­ly, per­haps that kind of mar­ket imper­fec­tion is what we should hope for at this point. It’ll enrich the banksters but at least it might cut down on the elec­tric­i­ty con­sumed. It’s sort of a “Heads: the banksters win. Tails: the pow­er com­pa­ny wins and the envi­ron­ment los­es” kind of sit­u­a­tion.

    Also, note that switch­ing over to a dif­fer­ent “proof-of-work” algo­rithm that does­n’t ben­e­fit from spe­cial­ized chips like lite­coin uses might make bit­coin min­ing more fair, but it’s not nec­es­sar­i­ly going to fix the under­ly­ing prob­lem.

    Posted by Pterrafractyl | December 16, 2013, 1:06 pm
  6. Uh oh! It looks like that Chi­nese ban on bit­coin bank­ing might extend to 3rd par­ty pay­ment sys­tems too. That poten­tial­ly makes bit­coin com­merce rather dif­fi­cult in Chi­na. And, per­haps more impor­tant­ly, it’s a sig­nal that the Chi­nese gov­ern­ment just might want to crush the cryp­tocur­ren­cy craze. Not good news for bit­coin:

    Chi­na Bans Pay­ment Com­pa­nies From Clear­ing Bit­coin, News Says
    By Bloomberg News Dec 17, 2013 2:52 AM CT

    Chi­nese cen­tral bank offi­cials told third-par­ty pay­ment ser­vice providers to stop offer­ing clear­ing ser­vices to online Bit­coin exchanges, accord­ing to Chi­na Busi­ness News, which is affil­i­at­ed with the Shang­hai gov­ern­ment.

    Com­pa­nies cur­rent­ly offer­ing ser­vices must end ser­vices by the Chi­nese New Year, a week­long hol­i­day that begins on Jan. 31, the news­pa­per cit­ed Zhou Jin­huang, deputy direc­tor of pay­ment clear­ance at the People’s Bank of Chi­na, as say­ing at a meet­ing with more than 10 third-par­ty pay­ment ser­vice providers.

    China’s cen­tral bank reg­u­lat­ed the vir­tu­al cur­ren­cy for the first time on Dec. 5 by ban­ning finan­cial insti­tu­tions and pay­ment providers from con­duct­ing trans­ac­tions in the vir­tu­al cur­ren­cy. Zhou was cit­ed as say­ing by Chi­na Busi­ness News that the rules would be “strict­ly enforced.”

    “The PBOC state­ment on Dec. 5 was some­what vague and there is more clar­i­ty now,” Zen­non Kapron, man­ag­ing direc­tor of finan­cial con­sul­tan­cy Kaprona­sia, said in an inter­view in Shang­hai. “The way it’s read­ing now is that after the Chi­nese New Year, you won’t be able to get your mon­ey off the plat­forms.”

    The PBOC’s news depart­ment didn’t imme­di­ate­ly com­ment on the Bit­coin report when con­tact­ed by Bloomberg News. Two calls to Li Yue, direc­tor gen­er­al of the cen­tral bank’s pay­ment and set­tle­ment depart­ment, were unan­swered.

    Bank Ban

    Bit­coin prices on BTC Chi­na, China’s largest exchange, plunged to as low as 3,251 yuan ($535) today before rebound­ing to 4,155 yuan at 4:16 p.m. local time. The drop in prices was trig­gered by con­cern that PBOC offi­cials may vis­it lenders next to enforce the ban against Bit­coin set­tle­ment, Kapron said. The num­ber of banks and pay­ment providers that can trans­act Bit­coin has shrunk since the ban was announced, he said.

    ...

    Posted by Pterrafractyl | December 17, 2013, 12:22 pm
  7. A cryp­tor­ag­narok trig­gered by prof­it-max­i­miza­tion? Uh oh:

    Quartz
    cryp­tor­ag­narok
    The exis­ten­tial threat to bit­coin its boost­ers said was impos­si­ble is now at hand
    By Christo­pher Mims @mims Jan­u­ary 9, 2014

    A dooms­day sce­nario that has long been dis­missed by bitcoin’s biggest boost­ers is now a clear and present dan­ger. At 3am ET this morn­ing, a sin­gle bit­coin min­ing col­lec­tive known as Ghash.io reached 45% of the com­put­ing pow­er of all glob­al bit­coin min­ers, just six points short of the 51% that would be required to break bit­coin by arbi­trar­i­ly manip­u­lat­ing the record of future trans­ac­tions upon which it rests. The result could be, at min­i­mum, “dou­ble spend­ing” of exist­ing bit­coins, which would ren­der the cur­ren­cy effec­tive­ly unus­able.

    To put this in con­text: Imag­ine that tomor­row, a sin­gle cor­po­rate enti­ty gained the abil­i­ty to clone all of its dol­lars, and then imme­di­ate­ly went on an asset buy­ing spree. To say that it would under­mine trust in the US dol­lar would be an under­state­ment. That’s what could hap­pen to bit­coin.

    Update: Ghash.io has issued a press release on the poten­tial for it to launch an attack on bit­coin. The min­ing pool says it is tak­ing steps to make sure that Ghash.io nev­er reach­es 51% of the world’s bit­coin min­ing capac­i­ty, “as it will do seri­ous dam­age to the Bit­coin com­mu­ni­ty, of which we are part of.” Ghash.io also said that they will tem­porar­i­ly stop accept­ing new inde­pen­dent bit­coin min­ers in their pool, and will allow exist­ing mem­bers of Ghash.io to mine bit­coins through oth­er pools.

    Update 2: Bit­coin mag­a­zine has weighed in, assert­ing that the suc­cess of Ghash.io is indica­tive of a larg­er prob­lem in bit­coin: near­ly unprece­dent­ed cen­tral­iza­tion of the min­ing upon which the currency’s secu­ri­ty depends.

    Update 3: Bit­coin entre­pre­neur Hen­ry Brade weighs in on Ghash.io’s pro­posed solu­tion, and finds it want­i­ng. Quartz’s Ritchie King weighs in: No, bit­coin isn’t about to be tak­en over by a mas­sive car­tel.

    Pop­u­lar dis­cus­sion boards devot­ed to bit­coin are freak­ing out about this pos­si­bil­i­ty, and every post on the home­page of, for exam­ple, the por­tion of Red­dit devot­ed to bit­coin is cur­rent­ly devot­ed to the dan­ger­ous rise of Ghash.io:

    ...

    The entreaties of bit­coin fans on Red­dit is hav­ing some effect: Between 3am ET and the writ­ing of this arti­cle at 10am ET, the pow­er of Ghash.io has dimin­ished by sev­en points, to 38%, prob­a­bly because of peo­ple leav­ing the col­lec­tive in response to the back­lash. But how close it came illus­trates the long-term prob­lem.

    How this attack on Bit­coin works

    A lit­tle back­ground for the unini­ti­at­ed: The way bit­coin works (see our recent explain­er on the top­ic) is that com­put­ers “mine” for the cur­ren­cy by solv­ing tough math prob­lems. In the process, they ver­i­fy all the recent trans­ac­tions that have been made via bit­coin. This is part of the genius of bit­coin: The only way to pro­duce new bit­coins is to cre­ate the com­put­ing infra­struc­ture required to make bit­coin work.

    Because so many dif­fer­ent peo­ple mine for bit­coin by run­ning bit­coin soft­ware and solv­ing these hard math prob­lems, the log­ic of bit­coin boost­ers has always been that the cur­ren­cy is safe because the bit­coin net­work is dis­trib­uted across so many dif­fer­ent com­put­ers. As long as at least 50% of the net­work is owned by “hon­est” bit­coin min­ers whose incen­tive is to keep bit­coin intact, no nefar­i­ous manip­u­la­tions of the record of bit­coin trans­ac­tions (known as the “blockchain”) will take place.

    What the mak­er of bit­coin appar­ent­ly did not antic­i­pate is that many bit­coin min­ers might band togeth­er into “pools” in which their total com­put­ing pow­er is har­nessed togeth­er as if it were one giant super­com­put­er. Being part of a pool means shar­ing the prof­its of that pool, which can lead to a stead­ier stream of income for indi­vid­ual min­ers.

    The poten­tial dan­ger of Ghash.io

    We’ve reached out to the founders of Ghash.io and await their com­ment. In the mean­time, many com­menters are point­ing out that in the past, some­one using noth­ing but Ghash.io’s pool to mine bit­coin has already attempt­ed to spend the same bit­coins twice, at a gam­bling site called Bit­coin Dice. Whether this per­son is a rogue actor or more inti­mate­ly con­nect­ed with the lead­ers of Ghash.io, it sug­gests that at least some­one in this min­ing pool has already real­ized that they could make a tem­po­rary prof­it by gam­ing bit­coin, even if it threat­ens the cur­ren­cy itself.

    ...

    Note that the gam­bling site that appears to have already been hit by dou­ble-spend­ing attacks by GHash.io isn’t “Bit­coin Dice”. It’s the same “Bet­coin Dice” dis­cussed above in the OP. No word on the sta­tus of Bet­Coin’s 4 petahash/second super­com­put­er, but if that’s going to hap­pen it had bet­ter hap­pen soon because 4 petahashes(4,000,000 Gigahashes)/second ain’t what it use to be.

    Anoth­er inter­est­ing dynam­ic ten­sion we’re see­ing in these 51%-attack threats is the ten­sion between the fact that a bit­coin min­ing monop­oly is an exis­ten­tial threat to the bit­coin sys­tem but monop­o­lies and oli­gop­o­lies are also what seem to nat­u­ral­ly form in bit­coin because that’s what’s most prof­itable. So it’s hard to see how the 51% threat is going away any time soon because it appears that the prof­it-max­i­miz­ing sit­u­a­tion for a bit­coin min­er is to be a part of the min­ing pool that has the max­i­mum mar­ket share that does­n’t trig­ger a neg­a­tive “51% threat”-backlash. That’s one hell of a mar­ket equi­lib­ri­um to main­tain: prof­it is max­i­mized when the blockchain min­ing is just about ready to spill over into sys­temic-cri­sis ter­ri­to­ry.

    Still, as many point out, the desire not to under­mine the val­ue of bit­coin might be enough to allow for self-reg­u­la­tion by the bit­coin com­mu­ni­ty. We’ll see. There’s still the ques­tion of what hap­pens when a min­ing guild comes along with a desire to actu­al­ly kill bit­coin. In an alt­coin world, the bet­ter-than-bit­coin alter­na­tives might not mind a cryp­tor­ag­narok or two.

    Posted by Pterrafractyl | January 12, 2014, 3:18 am
  8. One thing that will change the dynam­ics of Bit­coin will be the rise of oth­er cryp­tocur­re­nies, like quark, lite­coin and rip­ple. Once Bit­coin becomes too expen­sive for peo­ple to either mine or own the oth­er cryp­tos will rise in val­ue and pop­u­lar­i­ty. Hav­ing said that, part of the scarci­ty comes from the dif­fi­cul­ty in pur­chas­ing cryp­to’s from reli­able sources, the risks of get­ting robbed are high.

    Posted by Chris | January 12, 2014, 9:19 pm
  9. A peak into the future of bit­coin: Cor­po­rate mines and net­work peer­ing (where major min­ers set up ded­i­cat­ed con­nec­tions to each oth­er to ensure opti­mal net­work per­for­mance). The bit­coin min­ing indus­try won’t be killed by these trends, but the dream of cur­ren­cy con­trolled by ‘the lit­tle guy’ isn’t look­ing too good:

    Data Cen­ter Knowl­ege
    The Future of Bit­coin: Cor­po­rate Mines and Net­work Peer­ing?
    By: Rich Miller

    Jan­u­ary 24th, 2014

    LAS VEGAS — What’s the end game of the Bit­coin min­ing arms race? Min­ers are build­ing ever-more pow­er­ful hard­ware and larg­er data cen­ters, try­ing to stay a step ahead of their rivals and keep pace with “the dif­fi­cul­ty” – algo­rithm changes that make it pro­gres­sive­ly hard­er to earn new bit­coins.

    Some Bit­coin watch­ers believe the net­work will ulti­mate­ly shift from min­ing for new coins to a mod­el based on trans­ac­tion fees, which could accel­er­ate a shift of Bit­coin hard­ware into data cen­ters and the cre­ation of peer­ing net­works to man­age fees, just as cur­rent peer­ing agree­ments seek to reduce net­work tran­sit costs.

    The long-term out­look for Bit­coin is impor­tant for the data cen­ter indus­try, where some leas­es can run from three to 10 years. The emer­gence of Bit­coin has seen the cryp­tocur­ren­cy soar in val­ue, accom­pa­nied by rapid advances in the hard­ware required to suc­cess­ful­ly cap­ture new coins. The Bit­coin pro­to­col is designed so that these rewards will become hard­er to earn and will shrink over time. That means that the eco­nom­ics and busi­ness mod­els of bit­coin could shift over the life of a data cen­ter lease.

    Fees and the Future

    ...

    Over the past two years, gain­ing block rewards has become pro­gres­sive­ly more dif­fi­cult, forc­ing min­ers to upgrade their hard­ware from CPUs to GPUs and then FPGAs (Field Pro­gram­ma­ble Gate Arrays) and final­ly spe­cial­ized ASICs (Appli­ca­tion Spe­cif­ic Inte­grat­ed Cir­cuits) opti­mized for bit­coin data-crunch­ing. As the hard­ware has become more expen­sive, many enthu­si­asts have been priced out of the min­ing mar­ket.

    Prince­ton Uni­ver­si­ty com­put­er sci­ence researchers Ed Fel­ten, Joshua Kroll and Ian Dav­ey have stud­ied the bit­coin reward sys­tem and fore­see a shift ahead.

    “At present, the min­ing reward seems to be large enough, but under the cur­rent rules of Bit­coin the reward for min­ing will fall expo­nen­tial­ly with time,” the Prince­ton team wrote in a recent paper on Bit­coin eco­nom­ics. “Trans­ac­tion fees, which are vol­un­tary under the cur­rent rules, can­not make up the dif­fer­ence. The only way to pre­serve the system’s health will be to change the rules, most like­ly by either main­tain­ing min­ing rewards at a high­er lev­el than orig­i­nal­ly envi­sioned, or mak­ing trans­ac­tion fees manda­to­ry. The choice is like­ly to dri­ve polit­i­cal dis­putes with­in the Bit­coin com­mu­ni­ty.”

    Researchers from Microsoft and Cor­nell have also explored this sce­nario and out­lined refine­ments that would be need­ed to make incen­tives work in a shift to trans­ac­tion fees.

    The bit­coin com­mu­ni­ty is “debat­ing that (shift),” said Emmanuel Obio­dun, founder and CEO of Cloud­hash­ing, which leas­es com­put­ing pow­er to cus­tomers. “It’s becom­ing more expen­sive to mine coins. But trans­ac­tion fees are very low right now, and have very small prof­it mar­gins. For now, there’s still a lot of upside in bit­coin min­ing.”

    One Vision of a Fee-Based Future

    The future of min­ing was a hot top­ic at the Inside Bit­coins con­fer­ence in Las Vegas in Decem­ber, where Josh Zer­lan, Chief Oper­at­ing Offi­cer of But­ter­fly Labs, gave a pre­sen­ta­tion on the future role of trans­ac­tion fees.

    “In the future, there will not be much incen­tive to mine (for block rewards),” said Zer­lan. As rewards become hard­er to achieve and the growth of bit­coin leads to more trans­ac­tions, Zer­lan says that fees will need to increase to ensure that min­ers con­tin­ue to sup­port the net­work. As this hap­pens, min­ers will grav­i­tate towards trans­ac­tions with high­er fees attached to them, which will be processed before those with small­er rewards.

    If bit­coin gains wide accep­tance as a pay­ment plat­form or even as a cur­ren­cy, the growth of fees will present sev­er­al chal­lenges, Zer­lan said.

    “If you’re a large com­pa­ny, you have a prob­lem (with pay­ing trans­ac­tion fees),” he said. “The solu­tion is to main­tain a large min­ing farm in your data cen­ter to process your own trans­ac­tions for free, and your cus­tomers’ trans­ac­tions for free. You can also earn extra income to pro­cess­ing oth­ers trans­ac­tions.”

    ...

    Dis­trib­uted vs. Cen­tral­ized

    As we not­ed yes­ter­day, a shift to pro­fes­sion­al data cen­ters and cloud com­put­ing plat­forms would make the bit­coin net­work more effi­cient. But there’s also a built-in cul­tur­al chal­lenge: much of the bit­coin com­mu­ni­ty remains wary of efforts to cen­tral­ize the net­work.

    Ear­li­er this month bit­coin­ers raised alarms when Chi­nese min­ing pool GHash.io was gain­ing 45 per­cent of new coins – approach­ing the lev­el where a sin­gle par­tic­i­pant could under­mine the net­work by con­trol­ling a major­i­ty of its pow­er (known as a “51 per­cent attack”).

    The grow­ing pow­er of min­ing pools – con­sor­tiums orga­nized to com­bine the min­ing pow­er of indi­vid­u­als – has been a con­cern for some time. This week the four largest min­ing pools (GHash.io, BTC Guild, Eligius and Slush) held a com­bined mar­ket share of 75 per­cent of the network’s pow­er, as mea­sured by com­put­ing hashrate.

    “We’ve already cen­tral­ized the min­ing sys­tem,” said Zer­lan. “There are already large pools to con­trol a large per­cent­age of the min­ing. Cen­tral­iza­tion of min­ing will be a good thing.”

    Zer­land believes the Bit­coin com­mu­ni­ty can adapt to the trade­offs of a more cen­tral­ized infra­struc­ture. “It cre­ates a more desir­able tar­get, but I think that’s some­thing we have to man­age,” he said.

    The CEO of But­ter­fly Labs makes an impor­tant point: As the rewards for bit­coin min­ing drop off to zero (by ~2040), the trans­ac­tion fees are going to be the only thing financ­ing bit­coin min­ing. And at that point, “min­ers will grav­i­tate towards trans­ac­tions with high­er fees attached to them, which will be processed before those with small­er rewards”. How that ten­sion between cheap trans­ac­tions and the prof­it-max­i­miz­ing desire of cor­po­rate min­ers gets resolved is a pret­ty big ‘unknown’ for a trans­ac­tion plat­form that’s mak­ing low-trans­ac­tion fees a key sell­ing point. Espe­cial­ly when the sys­tem is also set up to incen­tivize the cre­ation of min­ing car­tels that could col­lude to ensure high wait times for low­er fees. The much-feared “51% attack” isn’t the only threat posed by a bit­coin oli­gop­oly.

    Posted by Pterrafractyl | January 24, 2014, 9:59 am
  10. Got 600 2.8 GHz quad-core servers sit­ting around that your aren’t doing any­thing with? Well, why not mines some bit­coins! With all that process pow­er you should be able to earn your first whole bit­coin maybe at some point in 2016 if you’re lucky

    Data Cen­ter Knowl­edge
    Min­ing Exper­i­ment: Run­ning 600 Servers for a Year Yields 0.4 Bit­coin

    Feb­ru­ary 24th, 2014 By: Rich Miller

    Can data cen­ters tap unused serv­er capac­i­ty to mine for Bit­coins? The ques­tion occurred to the team at the online back­up ser­vice iDrive, which per­forms most of its cus­tomer back­up jobs overnight, leav­ing its 3,000 quad-core servers idle for much of the day. So the com­pa­ny ran a test with 600 servers to see whether Bit­coin min­ing could become a sec­ondary rev­enue stream.

    The result: run­ning Bit­coin min­ing soft­ware on those 600 quad-core servers for a year would earn about 0.43 Bit­coin, worth a total return of about $275.08 at cur­rent prices on major Bit­coin exchanges.

    “Its a waste of time, so any oth­er com­pa­ny think­ing about min­ing with their infra­struc­ture, learn from us,” said iDrive’s Matthew Har­vey. “Don’t do it. You need cus­tom machines to effec­tive­ly mine bit­coins and gen­er­ate a real ROI.”

    The iDrive test-dri­ve rein­forced a com­mon theme on Bit­coin min­ing forums: To earn mon­ey by min­ing, you need to invest in high­ly-cus­tomized com­put­ers using ASICs (Appli­ca­tion Spe­cif­ic Inte­grat­ed Cir­cuits) to crunch data for cre­at­ing and track­ing bit­coins.

    ...

    Min­ers Upgrade to Pow­er­ful Hard­ware

    Over the past year, the com­put­ing pow­er sup­port­ing the bit­coin net­work has soared. The cryp­tocur­ren­cy is now sup­port­ed by a pow­er­ful glob­al net­work backed by 150,000 petaflops per sec­ond of com­put­ing pow­er, rough­ly 600 times the com­bined pow­er of the all the super­com­put­ers in the Top500 list. Prac­ti­tion­ers of Bit­coin min­ing – the term for using data-crunch­ing com­put­ers to earn new­ly-issued vir­tu­al­ly cur­ren­cy – are adopt­ing more pow­er­ful hard­ware, pool­ing their efforts and seek­ing to slash their pow­er bills.

    ...

    The horse­pow­er required to suc­ceed in Bit­coin is high­light­ed by the iDrive sim­u­la­tion, which used 600 servers.

    “Our study pro­ject­ed a year of min­ing at 100 per­cent pro­cess­ing pow­er 24/7 and the assump­tion that the dif­fi­cul­ty of min­ing (the cal­cu­lat­ing of hash­es) would increase lin­ear­ly,” iDrive not­ed in a blog post describ­ing its exper­i­ment. “In the end, we learned a lot about the inter­est­ing process of bit­coin min­ing, how­ev­er, for us, the pros did not out­weigh the cons. So, IDrive decid­ed to stick with that we do best.”

    They’re not the only ones who’ve con­tem­plat­ed repur­pos­ing pow­er­ful equip­ment to pur­sue cryp­tocur­ren­cy, The 4,000-core Odyssey super­com­put­er at Har­vard was secret­ly used to mine Doge­coin, the iron­ic vir­tu­al cur­ren­cy used pri­mar­i­ly for online tip­ping. The covert min­er has had their com­put­ing priv­i­leges at the uni­ver­si­ty sus­pend­ed.

    Posted by Pterrafractyl | February 24, 2014, 2:47 pm
  11. “The net­work would oper­ate just fine with only 1 per­cent of the cur­rent com­put­ing mus­cle devot­ed to it...It’s con­sum­ing resources that should be allo­cat­ed dif­fer­ent­ly.”:

    Bloomberg Busi­ness­week
    Bit­coin Min­er Taps Dad’s Pow­er Plant in Vir­tu­al-Mon­ey Hunt: Tech
    By Jason Clen­field and Pavel Alpeyev April 15, 2014

    In the five years since bit­coin was cre­at­ed, the hunt for them has con­sumed enough elec­tric­i­ty to keep the Eif­fel Tow­er lit for 260 years. One man’s way around the util­i­ty bills: the fam­i­ly pow­er plant.

    Alex Wil­helm is a bit­coin min­er, one of thou­sands who use com­put­ers to solve com­plex math prob­lems and get their hands on the dig­i­tal cur­ren­cy. The expa­tri­ate liv­ing in Tokyo has 30 remote-con­trolled servers min­ing vir­tu­al gold in an old brick build­ing in the Aus­tri­an coun­try­side. His father is donat­ing the elec­tric­i­ty, which comes from a water-dri­ven tur­bine that sur­vived a World War II bomb­ing raid and once pow­ered the entire vil­lage of Tat­ten­dorf, where Wil­helm grew up.

    While the oper­a­tion is mod­est as min­ing farms go — this year’s yield may total no more than $12,500 — it illus­trates a basic point: the race to uncov­er cyber cash has become so ener­gy inten­sive that pow­er bills now make it most­ly unprof­itable.

    “Basi­cal­ly you’re turn­ing elec­tric­i­ty into mon­ey,” Wil­helm said, sit­ting in jeans and a red sweat­shirt in front of a flat-screen mon­i­tor in his Tokyo study. “If the elec­tric­i­ty price goes up the math stops work­ing.”

    ...

    Globe Trot

    That’s the rea­son bit­coin min­ers are scour­ing the globe for the cheap­est pow­er prices.

    Con­sid­er Moses Lake, Wash­ing­ton, a qui­et town in the Pacif­ic North­west with more cows than peo­ple. With the sec­ond-low­est elec­tric­i­ty rates in the U.S., after Minot, North Dako­ta, it may become a bit­coin mec­ca.

    Robert Van Kirk is plan­ning a move there. At 1.7 cents per kilo­watt hour, rates are less than one-fifth the 10-cent nation­al aver­age. They’re also below the 5 cents Van Kirk and part­ner Damir Kalinkin now pay in Port­land for their busi­ness, MyRig­Space LLC, host­ing min­ing gear in an old serv­er farm.

    The part­ners aren’t the only ones to zero-in on Moses Lake’s rates.

    “I called a real estate agent and I told them, we need a loca­tion with a lot of elec­tric­i­ty,” 24-year-old Van Kirk recount­ed in a phone con­ver­sa­tion. “He said to me, ‘Oh are you guys involved in bit­coin?’ And I was like, ‘Oh wow.’”

    Bit­coin Bot­tle­neck

    Pow­er con­sump­tion has always been bitcoin’s bot­tle­neck, says cryp­tog­ra­ph­er Philipp Gühring. By one esti­mate, min­ing has gob­bled up more than 150,000 megawatt hours of elec­tric­i­ty since the cyber cur­ren­cy was invent­ed. That’s a year’s worth of elec­tric­i­ty for about 14,000 aver­age U.S. homes, or more than two cen­turies for the Eif­fel Tow­er.

    “Yes, you need the hard­ware and you need the soft­ware, but elec­tric­i­ty is the core thing that dri­ves bit­coin,” Gühring, who co-wrote a 2011 paper on energy’s role in vir­tu­al min­ing, said by phone from Vien­na. “It’s going to grav­i­tate to wher­ev­er elec­tric­i­ty is cheap­est.”

    Hence Tat­ten­dorf or Moses Lake, or Ice­land, where a few wily entre­pre­neurs are tap­ping cheap geot­her­mal pow­er from vol­ca­noes to dri­ve one of the world’s biggest min­ing farms.

    When bit­coin was cre­at­ed in 2009, by a pro­gram­mer or group under the name Satoshi Nakamo­to, it was intend­ed to be finite, like a pre­cious met­al that has to be dug out of the ground. That helped the term “min­ing” take hold, but it’s a mis­nomer.

    It’s more like a cross between a math quiz and a lot­tery held six times every hour. Peo­ple like Wil­helm race with their com­put­ers to solve puz­zles and reap some of the 25 bit­coins spat out every 10 min­utes by Nakamoto’s algo­rithm. The more machines you have — think of them as tick­ets — the bet­ter your chances are of win­ning.

    Bit­coin trans­ac­tions run through a mas­sive pub­lic ledger, open to any­one with the right soft­ware. Min­ers use their machines as accoun­tants would, to tal­ly and check all the bit­coins chang­ing hands around the world. The first to do the math gets the reward.

    Nev­er has book­keep­ing been so allur­ing.

    Black Hole

    Bit­coin prices shot up to more than $1,100 last year from about $13. The cur­ren­cy took hits in the last few months though, after Chi­na banned banks from deal­ing in it and the U.S. gov­ern­ment decid­ed to tax it. Anoth­er blow came when about $500 mil­lion in bit­coins dis­ap­peared from one of the biggest exchanges, Tokyo-based Mt.Gox, which then went bank­rupt. The coins trade at $522 today, accord­ing to the Coin­Desk Bit­coin Price Index, an aver­age from major glob­al exchanges.

    Even some of bitcoin’s fans say it’s turned into a waste­ful arms race. In a blog post wide­ly cir­cu­lat­ed on Twit­ter last month, tech­nol­o­gist Fred Trot­ter said min­ing has become a “black hole of resources.”

    “The net­work would oper­ate just fine with only 1 per­cent of the cur­rent com­put­ing mus­cle devot­ed to it,” Trot­ter, a soft­ware devel­op­er and health-care con­sul­tant, said by phone from Den­ver. “It’s con­sum­ing resources that should be allo­cat­ed dif­fer­ent­ly.”

    ...

    It looks like it might be time for a good old fash­ioned iden­ti­ty cri­sis.

    Posted by Pterrafractyl | July 15, 2014, 8:56 am
  12. One of Bit­coin’s exis­ten­tial crises from the very beg­ging has been the embrace an unreg­u­lat­ed poten­tial­ly-win­ner-take-all sys­tem that favors those that make the biggest invest­ments. It’s still one of Bit­coin’s exis­ten­tial crises:

    Coin­Desk
    From Gold Rush to Arms Race: Why Bit­coin Min­ing is Head­ing North

    Stan Hig­gins | Pub­lished on August 22, 2014 at 21:25 BST

    The face of indus­tri­al-scale bit­coin min­ing is chang­ing with every pass­ing month, hav­ing already pushed far beyond the bounds once envi­sioned, per­haps, by the hob­by min­ers of four years ago.

    The land­scape is much dif­fer­ent now. Many large-scale mines are shift­ing from ware­house set-ups to data cen­ters bet­ter equipped to deliv­er the mas­sive pow­er and cool­ing resources nec­es­sary to com­pete in a steadi­ly accel­er­at­ing indus­try.

    Coin­Desk spoke with exec­u­tives from some of the biggest hard­ware com­pa­nies in the min­ing space. Dur­ing those dis­cus­sions a pic­ture emerged of an indus­try under­go­ing a rapid lev­el of invest­ment, devel­op­ment, and most impor­tant­ly, com­pe­ti­tion.

    KnCMin­er direc­tor of mar­ket­ing and pub­lic rela­tions Nanok Bie put it sim­ply:

    “It’s an arms race. Absolute­ly.”

    As both he and Spon­doolies Tech CEO Guy Corem explained to Coin­Desk, the next stage of indus­tri­al-scale bit­coin min­ing will focus on squeez­ing every ounce of oper­a­tional effi­cien­cy out of both the hard­ware itself and the facil­i­ties that house it.

    The search for these capa­bil­i­ties has led bit­coin com­pa­nies to the Arc­tic Cir­cle, focus­ing on data cen­ter space in Nor­way, Ice­land and Swe­den in par­tic­u­lar, where sub-zero tem­per­a­tures make an ide­al envi­ron­ment for min­ing.

    Arc­tic push

    As Bie explained, the indus­tri­al­iza­tion of bit­coin min­ing has led com­pa­nies to seek out the low­est resource costs pos­si­ble. While many areas of the globe offer com­pet­i­tive costs and infra­struc­ture, the Arc­tic is unique because the nations there active­ly seek busi­ness from bit­coin com­pa­nies.

    Bie told Coin­Desk:

    “It has to do a lot with access to cheap cool­ing and cheap ener­gy. The ener­gy costs and the ener­gy tax­es are inter­est­ing in [the Arc­tic], and there are sev­er­al coun­tries in the region that are well posi­tioned. These coun­tries are also very keen on get­ting this busi­ness. In gen­er­al, the Arc­tic Cir­cle will be the cen­ter of these devel­op­ments going for­ward.”

    These cul­tur­al and polit­i­cal oppor­tu­ni­ties – as well as the promise of low-cost bit­coin min­ing – are bring­ing com­pa­nies to the region. At the same time, bit­coin min­ing in the region isn’t exact­ly new.

    A report by The New York Times from Decem­ber 2013 shined the spot­light on an Ice­land-based mine. Based on con­ver­sa­tions with those in the min­ing space, that company’s ear­ly approach could become the stan­dard in the months and years ahead.

    The issue of cen­tral­iza­tion

    The push for Arc­tic-based facil­i­ties capa­ble of deliv­er­ing greater hash rates rais­es a key issue in the bit­coin net­work: cen­tral­iza­tion. Many in the com­mu­ni­ty feel that putting con­trol of the trans­ac­tion process into the hands of a pow­er­ful few is dan­ger­ous, and for Corem, rep­re­sents a prob­lem not only fac­ing the bit­coin com­mu­ni­ty but the hard­ware com­pa­nies them­selves.

    He explained:

    “We think that too much cen­tral­iza­tion and too much indus­tri­al min­ing is not a good thing. Too much cen­tral­iza­tion is hurt­ful for bit­coin and for the ecosys­tem.”

    Corem con­tin­ued by say­ing that the mar­ket seems to be mov­ing in favor of cen­tral­iza­tion, but argued that oth­er play­ers in the space, includ­ing Spon­doolies, are active­ly mov­ing to keep the net­work as decen­tral­ized as pos­si­ble. This can be seen in efforts like MegaBigPower’s fran­chisee pro­gram, which begun explic­it­ly as a means of expand­ing the network’s capac­i­ty in a decen­tral­ized man­ner.

    ...

    One of Bit­coin’s oth­er exis­ten­tial crises revolves around the simul­ta­ne­ous and mutu­al­ly exclu­sive needs for a steady price to allow for the bit­coins to emerge as a reli­able, steady store of val­ue that will mak­ing bit­coins attrac­tive to mer­chants cou­pled with the need for rapid­ly ris­ing bit­coin prices in order to attract investors in the new cur­ren­cy. So there’s always been a hope that some­day the price of bit­coins will lev­el off, just not today.

    Inter­est­ing­ly, that par­tic­u­lar exis­ten­tial cri­sis appears to be inter­act­ing with the “win­ner-take-all” min­ing cri­sis in a way that might actu­al­ly be mak­ing both exis­ten­tial crises worse. Why? Because the cost of min­ing is ris­ing so rapid­ly that a grow­ing num­ber of min­ers are forced to sell their bit­coin hold­ings just to stay­ing in the min­ing game, thus ensur­ing a steady sup­ply of bit­coins for sale that puts a lid on prices. At the same time, the adop­tion of Bit­coin by a grow­ing num­ber of mer­chants is also ensur­ing a steady sup­ply of bit­coins for sale because those bit­coins they accept just get imme­di­ate­ly resold for cash. In oth­er words, instead of the see­ing bit­coins hit $100,000 in the future before lev­el­ing off, Bit­coin might already be flatlin­ing:

    Coin­Desk
    Citi: Min­ers and Mer­chants Are Keep­ing Bit­coin Prices Low

    Joon Ian Wong (@joonian) | Pub­lished on August 26, 2014 at 18:18 BST

    Bitcoin’s price is poised for “acute insta­bil­i­ty” due to an over­sup­ply of coins from min­ers and large mer­chants, along with a weak growth in demand, accord­ing to a new research note from finan­cial giant Citi.

    The Citi analy­sis points to the increased sophis­ti­ca­tion and cost of min­ing as a major dri­ver for growth in bit­coin sup­ply.

    As min­ing costs rise, min­ers come under pres­sure to sell their fresh­ly unearthed bit­coin to recoup the costs of their invest­ment in equip­ment. Citi notes that about 3,500 BTC are mined dai­ly, against a back­drop of 60,000–10,000 BTC in dai­ly trad­ing vol­ume in recent months. The research note says:

    “If the min­ers are a steady source of sup­ply and there is no increase in final demand, we have this over­hang of bit­coin being sold in the mar­ket. In con­se­quence, we have down­ward price pres­sures.”

    Mer­chants add down­wards pres­sure

    Citi also arrives at a counter-intu­itive con­clu­sion about promi­nent mer­chants embrac­ing bit­coin pay­ments.

    Moves by firms like Dell and Expe­dia to accept bit­coin for lap­tops or for hotel book­ings are gen­er­al­ly viewed with enthu­si­asm by the bit­coin faith­ful. How­ev­er, Citi points out that the mer­chants are con­vert­ing any bit­coin they receive from cus­tomers into fiat imme­di­ate­ly, putting fur­ther sell­ing pres­sure on the bit­coin price.

    Addi­tion­al­ly, Citi points out that account­ing rules may pre­vent large cor­po­ra­tions from hold­ing bit­coin even if they want­ed to.

    Under the gen­er­al­ly accept­ed account­ing prin­ci­ples (GAAP), cor­po­ra­tions may not be able to count bit­coin hold­ings as a hedge against cur­ren­cy risk due to the volatile nature of the dig­i­tal cur­ren­cy. They may instead have to count bit­coin assets as a spec­u­la­tive posi­tion, which would increase their risk pro­file.

    In oth­er words, large mer­chants can’t be relied on to dri­ve bit­coin demand, nor are they long-term hold­ers of the dig­i­tal cur­ren­cy.

    “For cor­po­ra­tions to receive bit­coin and hold it would be an aber­ra­tion,” the Citi note said.

    Weak con­sumer demand

    With bit­coin sup­ply grow­ing from min­er and mer­chant sales, demand for the dig­i­tal cur­ren­cy has to be tak­en up by con­sumers. Citi, how­ev­er, doesn’t see this hap­pen­ing.

    Accord­ing to the bank, bitcoin’s poten­tial to pro­vide ben­e­fits to the man on the street hasn’t been realised yet. As a result, there are cur­rent­ly few incen­tives for end-users to use bit­coin instead of a cred­it card, for exam­ple.

    Bit­coin demand is cur­rent­ly buoyed by users who spend the dig­i­tal cur­ren­cy “for love, not mon­ey”, the note says. How­ev­er, evi­dence from the mar­ket sug­gests that there isn’t enough love to keep the bit­coin price from declin­ing:

    “Con­sumers who do use bit­coin [...] are doing it for love, not mon­ey. And the flat trans­ac­tions pro­file sug­gests that love may not be enough.”

    Oth­er mar­ket observers have also con­clud­ed that the over­hang of sup­ply from min­ers and mer­chants could con­tribute to bitcoin’s price weak­ness. Mark Lamb, chief exec­u­tive at Coin­floor, a Lon­don-based bit­coin exchange, said that sell-side pres­sures have inten­si­fied in recent months, with min­ers and mer­chants as the most like­ly traders.

    “Last year min­ers were sell­ing a much low­er per­cent­age of new bit­coin mined. Nowa­days it’s esti­mat­ed that they’re sell­ing 70–90% of their bit­coin. Mer­chants com­ing in are also prob­a­bly sell­ing quite a bit of their bit­coin. So we’re hav­ing this con­stant sell-side demand,” he said.

    ...

    Keep in mind that this dynam­ic will even­tu­al­ly change because the amount of bit­coins paid out to min­ers (3,500 mined a day at this point) keeps get­ting reduced as the total sup­ply of bit­coins gets clos­er and clos­er to 21 mil­lion, which should hap­pen around 2040. So as we get clos­er and clos­er to 2040, the min­ing-race cri­sis that’s forc­ing min­ing sell off 70–90% of their mined coins actu­al­ly ease as the pay­out keeps shrink­ing unless. of course, the bit­coin fees also get increased to com­pen­sate for the loss of the min­ing pay­out and it’s very unclear what those fees will look like and how that could impact demand.

    And then there are the exis­ten­tial crises that def­i­nite­ly won’t go away in 2040 until Bit­coin goes away.

    Posted by Pterrafractyl | August 28, 2014, 8:35 pm
  13. So close, yet so far for Scot­coin:

    Moth­er Jones
    Could Bit­coin Become Scotland’s Offi­cial Cur­ren­cy?
    A reli­able medi­um of exchange is the biggest obsta­cle to Scot­tish inde­pen­dence. Enter the world’s lead­ing cryp­to-coinage.

    —By Josh Harkin­son
    | Tue Sep. 16, 2014 6:10 AM EDT

    With Thurs­day’s Scot­tish inde­pen­dence ref­er­en­dum too close to call, oppo­nents of an inde­pen­dent Scot­land have been stress­ing the would-be coun­try’s lack of a reli­able cur­ren­cy. An inde­pen­dent Scot­land could either keep using the British pound and lose con­trol of its mon­e­tary pol­i­cy, join the euro­zone’s well-known squab­bles, or cre­ate a new nation­al cur­ren­cy that’s almost cer­tain to be weak. But there’s an intrigu­ing fourth option: adopt­ing an online cryp­to-cur­ren­cy such as Bit­coin.

    Scot­land actu­al­ly has some his­tor­i­cal expe­ri­ence with this sort of thing: Instead of rely­ing exclu­sive­ly on the British pound in the 18th and 19th cen­turies, many Scot­tish banks issued their own currencies—a fact not­ed by Guy Debelle, the assis­tant gov­er­nor of Aus­trali­a’s cen­tral bank, at a recentcon­fer­ence on dig­i­tal cur­ren­cies in Lon­don. Here’s Debelle in the Guardian:

    “The Scots can go back to exper­i­ment­ing with a mul­ti­tude of cur­ren­cies, Bit­coin and the like, and we can just sit back and see how it goes. A nice nat­ur­al exper­i­ment about the future of mon­ey in Scotland—again. Because, as I said, they tried this in the 18th and 19th cen­turies. It worked for awhile, but even­tu­al­ly fell apart.”

    In the ensu­ing dis­cus­sion, David Birch, the direc­tor of the dig­i­tal cur­ren­cy con­sul­tan­cy Hype­r­i­on, argued that Scot­land’s cur­ren­cy exper­i­ment was more suc­cess­ful than one might think. From the Guardian:

    “The eco­nom­ic research shows that in Scot­land, the bank fail­ures were few­er, and less dis­rup­tive, than the bank fail­ures in Eng­land at the time,” he said. “Com­pet­ing note issue in Scot­land did­n’t end because it col­lapsed: it end­ed because of an out­ra­geous exten­sion of the Bank Act of 1844, which extend­ed the Bank of Eng­land’s monop­oly over note issue north of the bor­der.”

    But end­ing the Bank of Eng­land’s monop­oly might not be the biggest prob­lem with Bit­coin. A nation­al Bit­coin-based cur­ren­cy would, prac­ti­cal­ly speak­ing, resem­ble one based on gold: Bit­coins are designed to func­tion as a lim­it­ed com­mod­i­ty that becomes hard­er to acquire over time. In either case, the result is a high­ly inflex­i­ble nation­al cur­ren­cy that often can’t keep pace with eco­nom­ic growth. As Felix Mar­tin points out in the New States­man, one of the first peo­ple to iden­ti­fy this prob­lem was a Scots­man: The econ­o­mist John Law of Lau­ris­ton emi­grat­ed to France, became that coun­try’s min­is­ter of finance, and in 1719 replaced the gold stan­dard with paper mon­ey print­ed at the dis­cre­tion of the gov­ern­ment.

    No mat­ter: Edin­burgh-based ven­ture cap­i­tal­ist Derek Nis­bet recent­ly launched Scot­coin, which is offer­ing 1,000 free Scot­coins to every res­i­dent adult. “Our moti­va­tion is to empow­er the Scot­tish peo­ple with an alter­na­tive dig­i­tal cur­ren­cy oppor­tu­ni­ty,” he told the Guardian, “which may be used as a medi­um of exchange, should the need or wish arise.”

    ...

    While it does­n’t look like Scot­land is about to adopt a dig­i­tal cryp­tocur­ren­cy any time soon, there is a new nation­al dig­i­tal cur­ren­cy in the works. A non-cryp­to dol­lar-backed cur­ren­cy. Brought to you by the cen­tral bank of Ecuador:

    The Guardian
    Ecuador’s ‘dig­i­tal cur­ren­cy’ explained

    40% of Ecuado­ri­an adults don’t have a bank account, but is their new ‘cur­ren­cy’ more about escap­ing the US dol­lar?

    Rachel Ban­ning-Lover
    Guardian Pro­fes­sion­al, Thurs­day 11 Sep­tem­ber 2014 13.02 EDT

    How will Ecuador’s new ‘dig­i­tal cur­ren­cy’ work?

    Under a new mon­e­tary code, the Ecuado­ri­an gov­ern­ment in August released more infor­ma­tion about plans for what they call a dig­i­tal cur­ren­cy.

    40% of Ecuado­ri­ans do not have access to a bank account, says Pablo Pare­des, direc­tor of the Insti­tute of Eco­nom­ics at the Uni­ver­si­dad San Fran­cis­co de Quito. From Decem­ber 2014 peo­ple will be able to exchange phys­i­cal cash for dig­i­tal mon­ey that they will keep in an elec­tron­ic wal­let on their mobile phones. “It’s no dif­fer­ent from oth­er mobile wal­lets offered in oth­er coun­tries.”

    Who will use it?

    It will take time for it to take off, says Ale­jan­dro Salas, the region­al direc­tor for the Amer­i­c­as at Trans­paren­cy Inter­na­tion­al. Peo­ple will have to learn to use mobile tech­nol­o­gy for bank­ing, leav­ing the old­er gen­er­a­tion par­tic­u­lar­ly vul­ner­a­ble to being exclud­ed. Ecuado­ri­ans will also need to trust that their mon­ey is safe when they no longer have it in their hands. “It will take a change of mind­set,” adds Salas.

    As in oth­er coun­tries, it is like­ly that the elec­tron­ic wal­let will be used in addi­tion to cash, and not as a total replace­ment by users, Pare­des adds.

    Yet dig­i­tal units do have appeal over cash as they offer a cheap­er way to trans­fer remit­tances and a more secure way to store their mon­ey, says Ben Dyson, founder of Pos­i­tive Mon­ey.

    “Eco­nom­i­cal­ly, it should also boost the econ­o­my because more peo­ple will be able to trade fur­ther than they would have been able to do in the past.”

    Are com­par­isons to Bit­coin, the state­less dig­i­tal cur­ren­cy, accu­rate?

    Absolute­ly not, accord­ing to Dyson. “Bit­coin is cre­at­ing new mon­ey, which the Ecuado­ri­ans won’t. [Ecuador’s dig­i­tal ini­tia­tive] is some­one giv­ing you a box to put your cash in then giv­ing you an elec­tron­ic num­ber that says how much money’s in the box.”

    The new leg­is­la­tion requires the dig­i­tal mon­ey to be 100% backed which means for every elec­tron­ic dol­lar that they cre­ate there has to be a phys­i­cal dol­lar at the Bank of Ecuador.

    “What is inter­est­ing though is the cen­tral bank here is say­ing that the big banks aren’t doing what we need them to do for finan­cial inclu­sion so let’s just bypass them – that’s quite a big step for­ward for any cen­tral bank to take.”

    There is much spec­u­la­tion about whether Ecuador is try­ing to replace the US dol­lar. Why has the announce­ment been so con­tro­ver­sial?

    The pro­posed “dig­i­tal cur­ren­cy”, accord­ing to Salas, is the government’s attempt to set up an alter­na­tive cur­ren­cy sys­tem to the US dol­lar, the cur­ren­cy it has used since its bank­ing cri­sis in 2000. But it will run in par­al­lel to the dol­lar, as there are cur­rent­ly no plans to scrap cash com­plete­ly.

    The arti­cle in the mon­e­tary code that most con­cerns peo­ple, accord­ing to Pare­des, is one that sug­gests that the cen­tral bank can oblige peo­ple to sell their for­eign cur­ren­cy to it.

    “The ques­tion is this: if I have to sell my for­eign cur­ren­cy to the bank for its ‘dig­i­tal cur­ren­cy’, what will it give me in return when I lat­er want to exchange back to cash? A new cur­ren­cy? Gov­ern­ment bonds? We just don’t know whether this part of the code will be enforced.”

    Ulti­mate­ly, will the ‘dig­i­tal cur­ren­cy’ make trans­ac­tions more trans­par­ent and are con­sumers safe?

    The inten­tion is that it will – you will have more con­trols in the sys­tem and it will be eas­i­er to estab­lish if there are flaws and where mon­ey goes, accord­ing to Salas. It should be eas­i­er to spot coun­ter­feit­ing.

    How­ev­er, trans­paren­cy will depend on how the insti­tu­tions behind this sys­tem behave.

    “This can become a huge inva­sion of pri­va­cy because with elec­tron­ic bank­ing you can fol­low, even detect where the per­son is, and how much the per­son is spend­ing. It has the poten­tial to be a sur­veil­lance pro­gramme.”

    ...

    While the pos­si­bil­i­ty that Ecuador will sud­den­ly switch away from the dol­lar to anoth­er cur­ren­cy is going to be some­thing to watch, anoth­er fas­ci­nat­ing pos­si­bil­i­ty is that the non-Ecuado­ri­ans locals liv­ing just across the bor­der in Peru and Colom­bia could start using it too since they’ll still be able to spend these things in the local cross-econ­o­my. And the more regions that start using these dig­i­tal dol­lars greater the appeal and the more it can spread (just like with bit­coins). So, giv­en the dol­lar’s glob­al util­i­ty as a store of val­ue com­pared to oth­er nation­al cur­ren­cies, is Ecuador posi­tion­ing itself to become a sort of focal point for a grow­ing dig­i­tal dol­lar econ­o­my? If so, you have to won­der who would be more pissed: the bit­coin­ers, or the banks. The answer isn’t obvi­ous.

    Posted by Pterrafractyl | September 19, 2014, 6:44 pm
  14. Good ques­tion:

    Legal Insur­rec­tion
    What Ever Hap­pened to Bit­coin?

    The cryp­to-cur­ren­cy is 2014’s worst per­form­ing invest­ment, down over 57%

    Post­ed by Casey Breznick Fri­day, Decem­ber 19, 2014 at 10:00am

    In the race to the bot­tom, the Russ­ian ruble has final­ly sur­passed oil as a worse-per­form­ing asset.

    Over the year, the ruble has tum­bled 46% while WTI, the price mea­sure of North Amer­i­can oil, has fall­en 42%. Most like­ly, each will end the year even low­er.

    But the claimant to the title of the Worst Per­form­ing Asset of the Year is nei­ther oil nor the ruble. Bit­coin, which the pub­lic has seem­ing­ly for­got­ten about, has tak­en that title with a pre­cip­i­tous plunge in val­ue of 57% from $732 to $316.

    [see pic]

    In com­par­i­son, the Argen­tine peso is down 24% on the year despite the Argen­tine gov­ern­ment default­ing on its debts a few months ago..

    For Bit­coin, 2014 was sim­ply not a good year. In fact, the bad mar­ket news start­ed in ear­ly Decem­ber, when Bit­coin tum­bled from near­ly $1200 to just above $500 in a few days after BTC Chi­na, China’s largest bit­coin exchange, announced it would no longer accept Chi­nese yuan deposits.. Bit­coin man­aged to climb back above $900 in ear­ly Jan­u­ary, but come ear­ly Feb­ru­ary any hope of restor­ing bitcoin’s val­ue was lost.

    On Feb. 7 the largest bit­coin exchange in the world, Mt. Gox, halt­ed all bit­coin with­drawals, cit­ing dif­fi­cul­ties with “cur­ren­cy process­es.” With­drawals remained barred as Mt. Gox and CEO Mark Karpelès con­tin­ued to deal with unspec­i­fied “secu­ri­ty con­cerns” up through the sus­pen­sion of all trad­ing on Feb. 24, which was fol­lowed by the Mt. Gox web­site going offline the same day. At the time Mt. Gox was han­dling 70% of all bit­coin trans­ac­tions. On Feb. 28, Mt. Gox filed for bank­rupt­cy. (Time­line of bank­rupt­cy here).

    After announc­ing its bank­rupt­cy, Mt. Gox admit­ted to los­ing 750,000 bit­coins belong­ing to cus­tomers and 100,000 of its own, which account­ed for 7% of all bit­coins in exis­tence at the time. In total, Mt. Gox lost about $473 mil­lion. It turns out these bit­coins were stolen by hack­ers, but that’s anoth­er sto­ry.

    Despite this Mt. Gox deba­cle, a brief recov­ery ensued; bit­coin prices rose 80%, but by the end of June they were falling again, cleav­ing the price from near­ly $700 to its cur­rent $316 lev­el. Clear­ly, since Feb­ru­ary and the respite in April-June, con­fi­dence in bit­coin as a safe, legit­i­mate asset has erod­ed, as inves­ti­ga­tors have par­ti­tioned blame for the Mt. Gox fail­ure both to Mt. Gox and to the Bit­coin pro­to­col (com­put­er code).

    But by now, exchanges have improved their secu­ri­ty and bugs in the pro­to­col have been addressed, so what explains the non-recov­ery in prices? Due to the fact that bit­coin sup­ply is self-reg­u­lat­ed per its pro­to­col, bit­coin price is most­ly a func­tion of demand, and indeed, the death knell for bit­coin this lat­ter-half of the year has sim­ply been the fall-off in inter­est.

    Last year bit­coin took the nation by storm. Media out­lets, and not just the finan­cial ones, had a field-day after field-day with the top­ic. Reporters spoke every week of new com­pa­nies adopt­ing bit­coin as a pay­ment method, and pun­dits debat­ed the crypto-currency’s legit­i­ma­cy, legal­i­ty, and invest­ment-grade wor­thi­ness.

    ...

    There is some hope for bit­coin bulls. Microsoft recent­ly announced it is accept­ing bit­coins as an online pay­ment, and bit­coin exchanges are report­ing huge growth in trans­ac­tions involv­ing rubles for bit­coins, an indi­ca­tion that Russia’s elite, or the tech savvy, trust bit­coin even more than their home cur­ren­cy.

    A ral­ly to close out the year might pro­vide a cat­a­lyst to pro­pel prices upwards once again, but there is no telling what else might lie in store for bit­coin.

    There’s still some time left in the year, so might the rou­ble over­take bit­coins as the worst per­form­ing cur­ren­cy? We’ll find out soon!

    Posted by Pterrafractyl | December 19, 2014, 3:47 pm
  15. Wow. Well, it was prob­a­bly inevitable, but we’ve final­ly learned the pur­pose of 21 Inc, a new Bit­coin ven­ture brought to by a num­ber of Sil­i­con Val­ley’s cyber­lib­er­tar­i­ans like Mark Andreesen, Peter Thiel, and Max Levchin, as well as the chip man­u­fac­ter­er Qual­comm: They want to turn the ‘inter­net of things’ into a giant Bit­coin min­ing machine. And in order to get you to sign up to your devices for this Bit­goin min­ing ser­vice, which costs you elec­tric­i­ty, 21 Inc is going to give away for free the var­i­ous devices, like a toast­er, that peo­ple can use for what­ev­er but that also dou­ble as Bit­coin min­ers. The idea is that if you give peo­ple these devices for free along with the promise of some share of the bit­co­ing min­ing rev­enue, peo­ple will be will­ing to use them and thus pay the cost of elec­tric­i­ty for all the pro­cess­ing that goes into the min­ing. Plus, pre­sum­ably, these free devices hooked up to the inter­net will also be send­ing all sorts of the usage data on the devices back to 21 Inc.

    So, if this real­ly look off and a sub­stan­tial por­tion of the Bit­coin min­ing sec­tor was tak­en over by the ‘Inter­net of Things’, the mon­ey in Bit­coin min­ing would sud­den­ly start com­ing not from the actu­al val­ue of the bit­coins mined and/or trans­ac­tions fees earned. Those would be too dilut­ed to be a sub­stan­tial income flow. Instead, the val­ue of Bit­coin min­ing would come from the val­ue of derived from the col­lec­tion of infor­ma­tion from the bit­coin min­ing devices by com­pa­nies like 21 Inc.

    The Bit­coin phe­nom­e­na just keeps get­ting bet­ter and bet­ter. Or some­thing:

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

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

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

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

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

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

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

    You can reg­is­ter for future updates on 21 Inc here and view the jobs here, with a view to work­ing from an office suite in San Fran­cis­co…

    But let’s put some meat on these dig­i­tal bones.

    FT Alphav­ille is now hap­py to tell the world exact­ly what 21 Inc is up to.

    Its core busi­ness plan it turns out will be embed­ding ASIC bit­coin min­ing chips into every­day devices like USB bat­tery charg­ers, routers, print­ers, gam­ing con­soles, set-top box­es and — the piece de resis­tance — chipsets to be used by inter­net of things devices.

    21 Inc wants to put your toast­er to work, forg­ing our cryp­tocur­ren­cy future.

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

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

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

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

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

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

    If it’s free you’re prob­a­bly the prod­uct

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

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

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

    _______________________

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    “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.” It’s a dif­fer­ent kind of ‘Fremi­um’.

    And since it looks like one of the pri­ma­ry pur­pos­es behind this whole scheme is to get peo­ple to vol­un­tar­i­ly accept vam­pire devices that leach extra elec­tric­i­ty in order to cov­er the cost of bit­coin min­ing and the whole enter­prise could lead to an ever grow­ing amount of elec­tric­i­ty being spent on every sin­gle “blockchain” trans­ac­tion, keep in mind that when we’re talk­ing about Bit­coin “min­ing”, we’re not actu­al­ly talk­ing about any sort of use­ful com­pu­ta­tions that have any­thing at all to do with pro­cess­ing the bit­coin trans­ac­tions. The only pur­pose of all the incred­i­ble amounts elec­tric­i­ty con­sumed is to decide which per­son gets to “win” each round of the Byzan­tine Gen­er­als’ Prob­lem and decide which set of trans­ac­tions will go into the next entry in the blockchain. And it’s not even doing that very well:

    Pan­da Strike
    Bit­coin’s Ama­teur­ish, But Cryp­to­graph­ic Pay­ment Net­works Are The Future

    April 22nd, 2015Dan Yoder

    This blog post rep­re­sents opin­ion, and is absolute­ly not invest­ment advice. It is pro­vid­ed with absolute­ly no guar­an­tees or rec­om­men­da­tions what­so­ev­er.

    One day, the vast major­i­ty of finan­cial trans­ac­tions will be processed via cryp­to­graph­i­cal­ly-secured pay­ment net­works. Bit­coin pop­u­lar­ized this idea. But when this idea takes over the world, Bit­coin won’t be part of any suc­cess­ful, large-scale imple­men­ta­tion. Because it’s a mess.

    Unlike a lot of peo­ple with opin­ions about Bit­coin, we’ve looked at the code base. We did­n’t like what we saw, but we can make our case with­out walk­ing you through bad C++, line by line.

    Bit­coin fell from a high of well over $1K each to $237 as of this writ­ing. Spec­u­la­tors have been leav­ing the mar­ket, and most of the finan­cial world has con­tin­ued on like Bit­coin nev­er hap­pened. The finan­cial world will incre­men­tal­ly adopt pay­ment tech­nolo­gies sim­i­lar to Bit­coin, because these tech­nolo­gies will reduce trans­ac­tion costs. But Bit­coin itself is too deeply flawed to be the basis of any real rev­o­lu­tion in finance.

    The Byzan­tine Gen­er­als’ Prob­lem

    Let’s begin with one of the grand­est claims that the Bit­coin com­mu­ni­ty’s made: that Bit­coin solves the Byzan­tine Gen­er­als’ prob­lem (BGP). To quote Marc Andreessen, among the most cred­i­ble advo­cates for Bit­coin, from an arti­cle he penned for the New York Times:

    First, Bit­coin at its most fun­da­men­tal lev­el is a break­through in com­put­er sci­ence… Bit­coin is the first prac­ti­cal solu­tion to a long­stand­ing prob­lem in com­put­er sci­ence called the Byzan­tine Gen­er­als Prob­lem… Bit­coin gives us, for the first time, a way for one Inter­net user to trans­fer a unique piece of dig­i­tal prop­er­ty to anoth­er Inter­net user… The con­se­quences of this break­through are hard to over­state.

    The “break­through” itself is easy to over­state. Although Mr. Andreessen is usu­al­ly quite bril­liant, his boast was based on a more mod­est claim made by Bit­coin’s pseu­do­ny­mous archi­tect Satoshi Nakamo­to, in a mes­sage post­ed to a cryp­tog­ra­phy mail­ing list in 2008:

    The proof-of-work chain is a solu­tion to the Byzan­tine Gen­er­als’ Prob­lem.

    To be clear, that was­n’t in Nako­mo­to’s orig­i­nal paper. And he did­n’t claim that it was any sort of major break­through. He just said it was a solu­tion. In his paper describ­ing Bit­coin, he offers an infor­mal “cal­cu­la­tion,” cit­ing a 1957 paper enti­tled Intro­duc­tion to Prob­a­bil­i­ty The­o­ry.

    Some­how, the Bit­coin com­mu­ni­ty went from an infor­mal cal­cu­la­tion, based on an intro­duc­to­ry paper an engi­neer­ing stu­dent might read in their fresh­man year, to pro­claim­ing a fun­da­men­tal break­through in com­put­er sci­ence. This would have come as a sur­prise to Tur­ing Awards recip­i­ents Leslie Lam­port (2013) and Bar­bara Liskov (2008), who had already solved the BGP many years ear­li­er. How­ev­er, they showed no reac­tion at all.

    Lam­port, of course, co-authored the orig­i­nal paper on the BGP back in 1982, which includ­ed solu­tions for the prob­lem and its per­mu­ta­tions, along with math­e­mat­i­cal proofs of the solu­tions’ lim­i­ta­tions. In 1989, Pro­fes­sor Liskov co-authored a paper demon­strat­ing a dis­trib­uted filesys­tem capa­ble of func­tion­ing reli­ably in the face of Byzan­tine fail­ures.

    If Bit­coin’s BGP solu­tion were tru­ly big news, as Andreessen claimed, then you might expect to hear about it from Liskov or Lam­port. But, while both pro­fes­sors have con­tin­ued to pub­lish papers on dis­trib­uted sys­tems, nei­ther has made any pub­lic state­ments about Bit­coin. For exam­ple, in his 2014 inter­view with the MIT Tech­nol­o­gy Review., con­duct­ed short­ly after he’d been pre­sent­ed with the Tur­ing award, Dr. Lam­port men­tions Microsoft, Ama­zon, Google, and NASA—but noth­ing about Bit­coin. This is very like­ly because Bit­coin does not, in fact, solve any fun­da­men­tal prob­lem in com­put­er sci­ence.

    Lam­port’s orig­i­nal paper proved math­e­mat­i­cal­ly that a naive net­work could not reach reli­able con­sen­sus unless more than two-thirds of the nodes are trust­wor­thy.

    no solu­tion with few­er than 3m + 1 gen­er­als can cope with m trai­tors

    The paper goes on to out­line solu­tions employ­ing signed mes­sages and oper­at­ing over par­tial­ly con­nect­ed net­works. Lam­port, et al., con­clude:

    Algo­rithms [guar­an­tee­ing reli­a­bil­i­ty] involve send­ing up to (n — 1)(n — 2) ... (n — m — 1) mes­sages [where n is the num­ber of nodes and m is the num­ber of trai­tors]. The num­ber of sep­a­rate mes­sages required can cer­tain­ly be reduced by com­bin­ing mes­sages. It may also be pos­si­ble to reduce the amount of infor­ma­tion trans­ferred… Achiev­ing reli­a­bil­i­ty… seems to be inher­ent­ly expen­sive.

    In oth­er words, we had solu­tions for reach­ing reli­able con­sen­sus back in 1982. The ques­tion was whether we could make them cost-effec­tive.

    By 1989, Pro­fes­sor Liskov (along with Miguel Cas­tro) had demon­strat­ed the use of state-machine repli­ca­tion to achieve reli­a­bil­i­ty with­out sac­ri­fic­ing per­for­mance. The fol­low­ing year, Lam­port sub­mit­ted a paper describ­ing the Pax­os con­sen­sus pro­to­col, based on sim­i­lar prin­ci­ples, although it was­n’t pub­lished until 1998.

    Like the paper on the Byzan­tine Gen­er­als’ Prob­lem, this paper defines the prob­lem of reli­a­bil­i­ty via an extend­ed anal­o­gy. This time the cul­prits were eas­i­ly-dis­tract­ed leg­is­la­tors. This paper became the basis for an entire fam­i­ly of pro­to­cols, each opti­mized for deal­ing with spe­cif­ic kinds of fail­ures. So, thanks to Dr. Lam­port, we not only had solu­tions to the BGP, we had an entire tax­on­o­my of them.

    Prac­ti­cal imple­men­ta­tions of con­sen­sus algo­rithms typ­i­cal­ly accept that you need more than a major­i­ty of the nodes on the net­work to be trust­wor­thy. At its best, this is what the Bit­coin pro­to­col achieves. How­ev­er, unlike state-of-the-art con­sen­sus algo­rithms, it can­not guar­an­tee this. This is clear­ly acknowl­edged on the Bit­coin wiki (empha­sis added):

    An attack­er that con­trols more than 50% of the net­work’s com­put­ing pow­er can, for the time that he is in con­trol, exclude and mod­i­fy the order­ing of trans­ac­tions… With less than 50%, the same kind of attacks are pos­si­ble, but with less than 100% rate of suc­cess. For exam­ple, some­one with only 40% of the net­work com­put­ing pow­er can over­come a 6‑deep con­firmed trans­ac­tion with a 50% suc­cess rate.

    In oth­er words, it’s not just that the Bit­coin pro­to­col is not a “break­through in com­put­er sci­ence” after all. It’s actu­al­ly a step back­wards. But that’s not even real­ly the worst of it.

    Proof-Of-Work Is Just A Waste Of CPU

    The Bit­coin pro­to­col requires nodes to expend sig­nif­i­cant CPU cycles to par­tic­i­pate in the net­work, basi­cal­ly just play­ing a guess­ing game. This is known as a proof-of-work algo­rithm. The entire point is to artif­i­cal­ly inflate the cost of par­tic­i­pat­ing on the net­work. Once you’ve accept­ed that the Bit­coin pro­to­col does­n’t offer any nov­el guar­an­tees, you can’t real­ly defend the proof-of-work scheme. It sig­nif­i­cant­ly increas­es the cost of reach­ing con­sen­sus with­out even being able to match the guar­an­tees pro­vid­ed by exist­ing con­sen­sus pro­to­cols.

    And the ratio­nale for this is like some­thing right out of Alice in Won­der­land. Sup­pos­ed­ly, proof-of-work makes it pro­hib­i­tive­ly expen­sive for an attack­er to con­trol more than half the net­work. But it also makes it sim­i­lar­ly expen­sive for any­one else to par­tic­i­pate in the net­work at all. So the only peo­ple who’d be deterred from par­tic­i­pat­ing in the net­work with mali­cious intent are peo­ple who would also be deterred from par­tic­i­pat­ing in the net­work with any oth­er intent.

    Mean­while, in real­i­ty, a group of nodes, known as GHASH, con­trolled more than half the net­work any­way. They had to issue a pub­lic announce­ment that they weren’t going to use their pow­er for evil. The bot­tom line is that the Bit­coin pro­to­col’s proof-of-work com­po­nent is sim­ply a giant waste of resources, both in com­pute cycles and pow­er con­sump­tion. It does­n’t pre­vent attack­ers from tak­ing con­trol of the net­work, and does­n’t improve the guar­an­tees the net­work can make.

    Bit­coin was a great sto­ry. In the wake of mas­sive bailouts for dis­hon­est bankers, an anony­mous hack­er dis­cov­ers a way to sub­vert the entire finan­cial sys­tem. This was bet­ter than stock­pil­ing gold because you could use Bit­coin to buy drugs over the Inter­net! The sto­ry led to hype which led to spec­u­la­tion. Silk Road got bust­ed. Mount Gox col­lapsed. Spec­u­la­tors fled. And Bit­coin’s cap­i­tal­iza­tion returned to pre-bub­ble lev­els.

    The Real Future Of “Cryp­tocur­ren­cy”

    How­ev­er, many peo­ple now under­stand the basic con­cept of finan­cial trans­ac­tions processed via a decen­tral­ized net­work. Many new cryp­tocur­ren­cies sprang into exis­tence, inspired by Bit­coin. Today there are thou­sands of devel­op­ers think­ing about how to imple­ment Bit­coin-like net­works who would­n’t have been think­ing about it oth­er­wise.

    One of them will lever­age the great research that’s already been done on this sub­ject to imple­ment a pay­ment net­work which is supe­ri­or to Bit­coin. In fact, that may have already hap­pened. And that will be Bit­coin’s lega­cy.

    Which isn’t a bad thing (unless you’re hold­ing lots of Bit­coin). Five years ago, it was dif­fi­cult to explain things like dig­i­tal sig­na­tures and con­sen­sus pro­to­cols. It’s still dif­fi­cult to explain those things, but at least now peo­ple have heard of them Engi­neers are in love with the pos­si­bil­i­ties, and Bit­coin has giv­en us a kind of short­hand to talk about them.

    ...

    There were all sorts of great points made in that arti­cle, but per­haps this is the most impor­tant one in light of the new 21 Inc busi­ness mod­el:

    ...
    Proof-Of-Work Is Just A Waste Of CPU

    The Bit­coin pro­to­col requires nodes to expend sig­nif­i­cant CPU cycles to par­tic­i­pate in the net­work, basi­cal­ly just play­ing a guess­ing game. This is known as a proof-of-work algo­rithm. The entire point is to artif­i­cal­ly inflate the cost of par­tic­i­pat­ing on the net­work. Once you’ve accept­ed that the Bit­coin pro­to­col does­n’t offer any nov­el guar­an­tees, you can’t real­ly defend the proof-of-work scheme. It sig­nif­i­cant­ly increas­es the cost of reach­ing con­sen­sus with­out even being able to match the guar­an­tees pro­vid­ed by exist­ing con­sen­sus pro­to­cols.

    And the ratio­nale for this is like some­thing right out of Alice in Won­der­land. Sup­pos­ed­ly, proof-of-work makes it pro­hib­i­tive­ly expen­sive for an attack­er to con­trol more than half the net­work. But it also makes it sim­i­lar­ly expen­sive for any­one else to par­tic­i­pate in the net­work at all. So the only peo­ple who’d be deterred from par­tic­i­pat­ing in the net­work with mali­cious intent are peo­ple who would also be deterred from par­tic­i­pat­ing in the net­work with any oth­er intent.

    Mean­while, in real­i­ty, a group of nodes, known as GHASH, con­trolled more than half the net­work any­way. They had to issue a pub­lic announce­ment that they weren’t going to use their pow­er for evil. The bot­tom line is that the Bit­coin pro­to­col’s proof-of-work com­po­nent is sim­ply a giant waste of resources, both in com­pute cycles and pow­er con­sump­tion. It does­n’t pre­vent attack­ers from tak­ing con­trol of the net­work, and does­n’t improve the guar­an­tees the net­work can make.
    ...

    Yikes. And yes, the method of using a com­pu­ta­tion­al guess­ing game for solv­ing the Byzan­tine Gen­er­als’ Prob­lem that is cel­e­brat­ed as one of Bit­coin’s great­est inno­va­tions is arguably one of its great­est weak­nessnes. And despite all that we just might see 21 Inc, backed by some of the biggest Lib­er­tar­i­an oli­garchs in Sil­i­con Val­ley and Qual­comm, attempt to turn the com­ing “Inter­net of Things” into a giant Bit­coin elec­tric­i­ty vam­pire/spy-net­work (which also hap­pens to be quite ben­e­fi­cial to the Kochto­pus, FYI).

    In addi­tiono, thanks to this new ‘Inter­net of Things Min­ing Bit­coins (and maybe spy­ing on you)’-business mod­el, we now all have to come to grips with the fact that George W. Bush, who famous­ly pri­or­i­tized the elim­i­na­tion of vam­pire elec­tron­ic devices sap­ping elec­tric­i­ty in stand­by mode as part of his 2001 nation­al ener­gy sav­ing cam­paign, is now pre­scient. That’} on you, Bit­coin!

    So get ready for a fab­u­lous new world of free toast­ers that pay you in trick­les of bit­coin frac­tions while suck­ing up your elec­tric­i­ty and spy­ing on you. But as the Pan­daS­trike arti­cle also notes, also get ready for all the non-crazy new inno­va­tions involv­ing decen­tral­ized net­works that track own­er­ship (which is basi­cal­ly what Bit­coin is) that don’t have Bit­coin’s flaws. At this point, the biggest thing hold­ing back the Bit­coin rev­o­lu­tion is Bit­coin and its idio­syn­crat­ic mega-flaws like its defla­tion­ary bias and being a giant ener­gy suck. If you’re going to set up a new stan­dard it had bet­ter be time­less and not be prone to self-implod­ing. Oth­er­wise it’s scle­rot­ic.

    At the same time, Bit­coin-esque tech­nolo­gies with­out Bit­coin’s flaws are just a mat­ter of time. A dis­trib­uted own­er­ship sys­tem based on exist­ing Bit­coin tech­nol­o­gy would prob­a­bly work find if its just used by a small com­mu­ni­ty of peo­ple and does­n’t turn into a glob­al com­pu­ta­tion­al arms race and isn’t han­dling some crit­i­cal social infra­struc­ture like the finan­cial sys­tem. Today’s Bit­coin just does­n’t scale well. But there’s no rea­son to assume decen­tral­ized own­er­ship sys­tems or some oth­er Bit­coin-esque ser­vices won’t be sprout­ing up all over in the future. There are plen­ty of uses.

    So, since the exist­ing Bit­coin par­a­digm is so flawed but has so many deeply vest­ed inter­ests with very deep pock­ets ded­i­cat­ed to Bit­coin’s suc­cess, it going to be inter­est­ing to see how hard Sil­i­con Val­ley’s Pow­ers That Be work to ensure that Bit­coin, with its cur­rent vam­pire pow­er-suck­ing par­a­digm, con­tin­ues hold its dom­i­nant sta­tus in “cryp­tocur­ren­cy” mar­kets. So much of the Bit­coin phe­nom­e­na is about all the mon­ey being made off the waste, like the for­tunes made sell­ing min­ing-opti­mized machines or super-com­put­ing cen­ters. And if the 21 Inc busi­ness mod­el is viable, there’s going to be a whole lot more Bit­coin waste to be mon­e­tized. Espe­cial­ly once it’s turned into a per­son­al data col­lec­tion plat­form. Just imag­ine, an entire data col­lec­tion indus­try that’s based on learn­ing things about you by giv­ing you devices that you will use and when you’re not using them will sit there burn­ing elec­tric­i­ty in an attempt to win a point­less math­e­mat­i­cal race.

    But it was prob­a­bly inevitable. The chip man­u­fac­tur­ers and Sil­i­con Val­ley big­wigs have fig­ured out that Bit­coin has a lot of mon­ey-mak­ing poten­tial as it exists today with its giant com­pu­ta­tion min­ing race as a key fea­ture of the sys­tem. One of the main fea­tures of Bit­coin’s absurd “min­ing” race is that the lev­el of resources con­sumed by the min­ing par­tic­i­pants are going to be direct­ly pro­por­tion­al to the val­ue of the min­ing reward/transactions fees that they can expect to col­lect, so the more the Bit­coin “econ­o­my” grows, the more peo­ple you can poten­tial­ly wran­gle in to accept­ing your ‘free’ Bit­coin min­ing devices. And, again, all of this ‘min­ing’ is sim­ply a race to see who gets to decide what the offi­cial next set of trans­ac­tions is in the blockchain and get an award and/or trans­ac­tion fee. Thanks to com­pa­nies like 21 Inc, Bit­coin’s sys­temic ener­gy leak could be mag­ni­fied and trans­formed into an Inter­net of Things data-pri­va­cy leak and now our free toast­ers spy­ing on us but pay­ing us for the spy­ing in the form of a trick­le of dig­i­tal cur­ren­cies that hope­ful­ly cov­ers the cost of elec­tric­i­ty.

    It does­n’t have to be this way.

    Posted by Pterrafractyl | May 3, 2015, 11:05 pm
  16. Ghana has a new indus­try. It’s hard to say if this is actu­al­ly good news for Ghana, but it’s news: Ghana got its first Bit­coin farm:

    Bit­coin News Ser­vice

    Ghana Sets up the First African Bit­coin Farm

    Bit­coin min­ing has entered the African con­ti­nent; the very first Bit­coin min­ing facil­i­ty in the region is now in Ghana.

    Post­ed on 5:30 pm March 15, 2016 Author Gau­tham

    Africa has always been a cen­ter of attrac­tion for both Bit­coin and fin­tech-based busi­ness­es. The African con­ti­nent has pro­vid­ed a lot of pos­i­tive PR to the Bit­coin ecosys­tem – It has been and still is the test­ing ground for Bit­coin-based basic alter­nate finan­cial ser­vices. Bank­ing the unbanked is one of the taglines for the dig­i­tal cur­ren­cy and there is no dearth of the unbanked and under­banked pop­u­la­tion in Africa. Also, the phe­nom­e­nal suc­cess of M‑Pesa in Kenya has giv­en rise to high expec­ta­tions among the bit­coin com­mu­ni­ty.

    Many small and medi­um sized cryp­tocur­ren­cy busi­ness­es have made entry to the African mar­ket so far. How­ev­er, the involve­ment of inter­na­tion­al com­pa­nies as well as local star­tups was so far lim­it­ed to ser­vice offer­ings. Now, as a sure sign of improve­ment in the ecosys­tem, Ghana has dis­played that the coun­try, as well as the African con­ti­nent, can keep up with the tech­nol­o­gy. The decen­tral­ized nature of bit­coin, mak­ing it a glob­al cur­ren­cy has also helped in this effort.

    Its Bit­coin After Inter­net for Ghana Dot Com

    Accord­ing to local news sources, the Bit­coin min­ing farm in Ghana is set up by one of the lead­ing IT solu­tions com­pa­nies in the coun­try. The com­pa­ny, Ghana Dot Com has been the prime mover of the inter­net in the coun­try, the same com­pa­ny has now tak­en up anoth­er new tech­nol­o­gy won­der – Bit­coin to pro­mote in the region. While the exact hash­ing pow­er of the min­ing set­up is not men­tioned, it is believed to have a capac­i­ty of sev­er­al hun­dred Tera hash­es per sec­ond.

    Ghana Dot Com was pre­vi­ous­ly known as Net­work Com­put­er Sys­tems and it was respon­si­ble for intro­duc­ing and pro­mot­ing the use of inter­net in Ghana back in the year 1993. The com­pa­ny was lat­er shut down only to start over again as Ghana Dot Com.

    Ghana Dot Com’s Bit­coin farm is said to have pro­duced its first bit­coin on the eighth of last month. The Bit­coin min­ing project is being spear­head­ed by one of the respect­ed com­put­er sci­en­tists, Pro­fes­sor Nii Narku Quaynor. The pro­fes­sor also hap­pens to be the Chair­man of Ghana Dot Com. Accord­ing to him, the com­pa­ny is com­mit­ted toward encour­ag­ing the adop­tion of Com­put­er Sci­ences in the coun­try and it is also in their inter­est to take the same approach towards cryp­tocur­ren­cies.

    Pro­fes­sor Nii Narku Quaynor has also men­tioned that they are more inter­est­ed in the encryp­tion tech­nol­o­gy, hash­ing, trees etc. behind cryp­tocur­ren­cies. They seem to be more inter­est­ed in the blockchain tech­nol­o­gy and its end­less list of appli­ca­tions.

    ...

    In many African and Asian coun­tries, the use of blockchain tech­nol­o­gy in the bank­ing sec­tor will help banks cater to the unbanked and under­banked pop­u­la­tion at low oper­a­tional costs. They will also be able to pass on the cost ben­e­fit to its cus­tomers.

    This is just a start for Ghana, soon the coun­try may start using the cryp­to-tech to cater to its var­i­ous needs.

    “Ghana Dot Com’s Bit­coin farm is said to have pro­duced its first bit­coin on the eighth of last month. The Bit­coin min­ing project is being spear­head­ed by one of the respect­ed com­put­er sci­en­tists, Pro­fes­sor Nii Narku Quaynor. The pro­fes­sor also hap­pens to be the Chair­man of Ghana Dot Com. Accord­ing to him, the com­pa­ny is com­mit­ted toward encour­ag­ing the adop­tion of Com­put­er Sci­ences in the coun­try and it is also in their inter­est to take the same approach towards cryp­tocur­ren­cies.
    Yes, a giant elec­tric­i­ty-suck­ing black hole where almost all the work is done by machines. It’s just what an econ­o­my suf­fer­ing from years of chron­ic elec­tric­i­ty black­outs needs to pre­pare its econ­o­my for the future.

    Posted by Pterrafractyl | March 17, 2016, 2:19 pm
  17. Here’s a fun arti­cle that attempts to pro­vide a range for Bit­coin’s net elec­tric­i­ty con­sump­tion for “min­ing” by the year 2020. As the author makes clear, giv­en all the vari­ables that could impact the cur­rent trends for both Bit­coin’s pop­u­lar­i­ty, advances in tech­nol­o­gy used for min­ing, and the mechan­ics behind the “min­ing” process itself, mak­ing a pre­dic­tion four years out is inevitably going to involve a large range of pos­si­bil­i­ties. So what did the author con­clude: Well, if you use his most “opti­mistic” assump­tions (opti­mistic in terms of min­i­miz­ing elec­tric­i­ty con­sump­tion), the total elec­tric con­sump­tion for Bit­coin might be around 417 megawatts, which would be around the elec­tric­i­ty gen­er­at­ed by small pow­er plant. On the high end? 14600 megawatts, which would be around the elec­tric­i­ty con­sumed by Den­mark:

    Vice Moth­er­board

    Bit­coin Could Con­sume as Much elec­tric­i­ty as Den­mark by 2020

    Writ­ten by Sebas­ti­aan Deet­man
    March 29, 2016 // 10:30 AM EST

    I’m an engaged envi­ron­men­tal researcher and have recent­ly become a bit­coin enthu­si­ast.

    These are two pos­si­bly con­flict­ing fas­ci­na­tions, as pre­vi­ous­ly point­ed out by Christo­pher Mal­mo here at Moth­er­board. That’s because bit­coin is incred­i­bly ener­gy inten­sive: at the time of Malmo’s piece, he cal­cu­lat­ed that a sin­gle bit­coin trans­ac­tion requires as much elec­tric­i­ty as the dai­ly con­sump­tion of 1.6 Amer­i­can house­holds, and that num­ber has increased since then. “Adopt­ing Bit­coin as a major cur­ren­cy any­time in the next few decades,” he wrote, “would just exac­er­bate anthro­pogenic cli­mate change by need­less­ly increas­ing elec­tric­i­ty con­sump­tion until it’s too late.”

    As I have some expe­ri­ence in devel­op­ing ener­gy sce­nar­ios, I want­ed to see how this could devel­op into the future. My find­ings weren’t much more encour­ag­ing. Accord­ing to my cal­cu­la­tions, if the bit­coin net­work keeps expand­ing the way it has done recent­ly, it could lead to a con­tin­u­ous elec­tric­i­ty con­sump­tion that lies between the out­put of a small pow­er plant and the total con­sump­tion of a small coun­try like Den­mark by 2020.

    What deter­mines the ener­gy con­sump­tion of the bit­coin net­work?

    Let’s start with the basics. Bit­coin trans­ac­tions are val­i­dat­ed and processed by a decen­tral­ized net­work of vol­un­teers, usu­al­ly host­ing ded­i­cat­ed hard­ware to per­form cal­cu­la­tions, called “hash­es,” to find solu­tions to a com­plex math­e­mat­i­cal algo­rithm in return for a reward of brand-new bit­coins plus some trans­ac­tion fees.

    This net­work of so-called bit­coin “min­ers” ensures the secu­ri­ty of the sys­tem, but unfor­tu­nate­ly also con­sumes a lot of electricity—currently about 350 megawatts accord­ing to my own cal­cu­la­tions, which is rough­ly equiv­a­lent to the elec­tric­i­ty demand of 280,000 Amer­i­can house­holds.

    Effi­cien­cy of min­ing hard­ware

    I start­ed with the the amount of oper­a­tional min­ing hard­ware (mea­sured as the hashrate in num­ber of hash­es per sec­ond), and the effi­cien­cy of the hard­ware (which can be mea­sured in Joules per hash).

    The total bit­coin min­ing net­work cur­rent­ly com­pris­es a cal­cu­la­tion speed of over 800 peta­hash­es per sec­ond, which requires over 10,000 met­ric tonnes of hard­ware, con­sid­er­ing that even the new­er machines weigh over 12 kilo­grams each (15 grams per GHash/sec. on aver­age in the analy­sis below). That is enough mate­r­i­al to build anoth­er Eif­fel tow­er.*

    In the begin­ning of the bit­coin phe­nom­e­non, min­ers used any lap­top or com­put­er to gen­er­ate bit­coins. As the dif­fi­cul­ty of min­ing bit­coin increased—part of the cryptocurrency’s design—miners upgrad­ed to graph­ics cards, and then more sophis­ti­cat­ed hard­ware. The state of the art is ded­i­cat­ed bit­coin min­ing chips (called appli­ca­tion spe­cif­ic inte­grat­ed cir­cuits, or ASICs). ASICs have been avail­able for three years, so we have a small basis to explore the improve­ments in the effi­cien­cy of min­ing hard­ware.

    Let’s have a look at the effi­cien­cy of those ASIC min­ers over time. I took an exist­ing com­par­i­son of bit­coin min­ing hard­ware, to which I added a few min­ers myself and looked up all their first ship­ping dates, based on var­i­ous sources (com­pa­ny spec­i­fi­ca­tions, blog-posts, first reviews, etc.). After exclu­sion of the ones that were nev­er actu­al­ly shipped to cus­tomers, and after exclu­sion of some of the ear­ly high­ly inef­fi­cient ASIC min­ers because they didn’t fit any trend, I end­ed up with a list of 53 types of bit­coin min­ers and plot­ted their effi­cien­cies against their orig­i­nal ship­ping dates as can be seen below.

    [see pic]

    ...

    Draw­ing a trend from the oth­er 46 min­ers has been done in two dis­tinct­ly dif­fer­ent ways, to rep­re­sent both an opti­mistic as well as a more pes­simistic assump­tion for the future devel­op­ment.

    The pes­simistic trend line is based on the aver­age of all ASIC min­ers (the blue dots) and has the form of a pow­er equa­tion, thus it starts with a high­er elec­tric­i­ty con­sump­tion and though it assumes a con­tin­ued increase in effi­cien­cy, it leads to a slight­ly high­er future pro­jec­tion of elec­tric­i­ty con­sump­tion per hash as com­pared to the opti­mistic approach. For the opti­mistic case, I based the trend line only on the most effi­cient devices brought on the mar­ket (indi­cat­ed with a black out­line in the graph), and assumed an expo­nen­tial decrease in elec­tric­i­ty demand per hash, which actu­al­ly rep­re­sent­ed the best fit to the data and leads to an even high­er long-term effi­cien­cy.

    Though these trend lines give us a hint of the future to come, they are only based on the effi­cien­cy of new min­ing hard­ware, and as such don’t rep­re­sent the effi­cien­cy of the cur­rent bit­coin net­work, which still par­tial­ly depends on the cal­cu­la­tion pow­er of old­er, less effi­cient min­ing devices. To approx­i­mate the effec­tive effi­cien­cy of the whole net­work I assumed that the growth of the network’s hashrate deter­mined the amount of new­ly installed min­ing capac­i­ty each month, and then used weight­ed aver­ag­ing over a peri­od of either three or five years to rep­re­sent the effi­cien­cy of the total stock of bit­coin min­ing hard­ware in an opti­mistic and pes­simistic case respec­tive­ly. The result­ing long term trends of both new and effec­tive elec­tric­i­ty con­sump­tion per hash can be seen below.

    [see pic]

    My inter­nal tor­ment between envi­ron­men­tal con­cerns and my enthu­si­asm about bit­coin mel­lowed some­what when I saw these ini­tial results. Appar­ent­ly, the tech­no­log­i­cal advance­ments at chip­mak­ers and hard­ware man­u­fac­tur­ers made sure that in the future, bit­coin min­ers will prob­a­bly become more than three times as effi­cient. I could rest assured with­out a feel­ing of guilt. Or could I?

    Know­ing that the effi­cien­cy of the min­ers was only one part of the equa­tion, the oth­er part start­ed haunt­ing me at night. Could it be that as bit­coin usage grows, the total hashrate of the bit­coin net­work kept grow­ing at such a speed that it would out­com­pete the increase in effi­cien­cy of the min­ers? Could it be that the total ener­gy con­sump­tion would keep on grow­ing?

    Pop­u­lar­i­ty of bit­coin

    To com­plete the pic­ture and answer this ques­tion, I dug up the his­toric devel­op­ment of the month­ly hashrate at blockchain.info. Since the intro­duc­tion of the first ASIC min­ing hard­ware in Jan­u­ary 2013, the aver­age month­ly growth of the network’s hashrate has been a daunt­ing 37 per­cent. If we use that as a proxy for the month­ly growth in the years to come, the bit­coin net­work would require more elec­tric­i­ty than is cur­rent­ly gen­er­at­ed glob­al­ly, by the end of 2016 (yes, Decem­ber this year, regard­less even of the assump­tions for min­ing effi­cien­cy).

    That couldn’t be right. The bit­coin price was increas­ing rapid­ly in 2013, hit­ting $1,000 apiece in late 2013 and again in ear­ly 2014. This price runup seemed like an anom­aly fueled by hype, so it didn’t seem accu­rate to use in my cal­cu­la­tions for expect­ed hashrate growth. I had to find a more real­is­tic esti­mate.

    As can be seen in the graph below, the high growth in hashrate orig­i­nat­ed most­ly in the ear­ly days of ASIC min­ing, thus aver­ag­ing over the more mod­est growth in more recent months should give a more bal­anced indi­ca­tion of the expect­ed growth.

    [see pic]

    I applied two growth rates on the cur­rent 800 Peta hash­es per sec­ond, one being opti­mistic and defined by the aver­age of the net­work growth rate in the 12 months with the low­est growth since the intro­duc­tion of ASIC min­ers (cov­ered by the small blue box, which in fact was a peri­od with a flat or some­times even declin­ing bit­coin price), lead­ing to a 5 per­cent growth rate each month.

    The oth­er rate is a bit more pes­simistic (for the envi­ron­ment, not for the net­work secu­ri­ty), and is based on the peri­od that includes the three months pre­ced­ing and fol­low­ing these 12 months (the larg­er blue box), lead­ing to a 12 per­cent month­ly increase.

    Obvi­ous­ly, these growth rates are high­ly uncer­tain and are always relat­ed to the bit­coin price, as min­ers will keep adding hash­pow­er as long as it is prof­itable. How­ev­er, the price of bit­coin has been so volatile that it is sim­ply impos­si­ble to pre­dict. There­fore I use the pre­vi­ous­ly men­tioned his­toric aver­age growth in hashrate as a con­ser­v­a­tive (5 per­cent) and a more dar­ing (12 per­cent) esti­mate of the sta­ble growth for the years to come.

    The block reward

    Two oth­er fac­tors that may influ­ence the growth rate of the network’s total hashrate are the bit­coin block size and the halv­ing of the bit­coin block-reward, expect­ed to hap­pen this sum­mer. I’ve not account­ed for any out­come of the dis­cus­sion on the block size, as it is still being debat­ed and the out­come is unknown still. How­ev­er, the block-reward halv­ing is by design, based on the idea that bit­coin trans­ac­tion fees will slow­ly take over as the main incen­tive for min­ing, thus it may have severe con­se­quences on the ener­gy con­sump­tion.

    How­ev­er, the long-term effect on the total hashrate of this halv­ing is unknown. Some have argued that the reduced bit­coin reward would low­er the incen­tive to bit­coin min­ers, pos­si­bly even lead­ing to a large decrease in min­ing activ­i­ty (what some call the “min­ing gap”) as elec­tric­i­ty costs will make min­ing unprof­itable until the price of bit­coin ris­es again.

    Oth­ers have argued that the halv­ing of the min­ing reward will lead to increased bit­coin scarci­ty and there­fore a quick increase in the bit­coin price, which would pos­si­bly lead to an even high­er growth in hashrate quick­ly after the gap. Again, it is impos­si­ble to say who is right. But to some­how account for the dimin­ish­ing block-reward, I assumed that the hashrate will either stop grow­ing and sta­bi­lize dur­ing the six months fol­low­ing the halv­ing of the block-reward (opti­mistic) or that it will sim­ply keep grow­ing as it did his­tor­i­cal­ly (pes­simistic).

    Two sce­nar­ios

    With the com­bi­na­tion of both opti­mistic and pes­simistic assump­tions on the ener­gy con­sump­tion of the bit­coin net­work we have in fact cre­at­ed two wild­ly dif­fer­ent sce­nar­ios on how the bit­coin future may unfold. What would this mean for the envi­ron­men­tal impact of bit­coin by, say, Jan­u­ary 2020? The table below sum­ma­rizes the main assump­tions and gives an indi­ca­tion of the expect­ed pow­er con­sump­tion of the bit­coin net­work.

    [see pic]

    The results show that in an opti­mistic sce­nario, the increase in elec­tric­i­ty con­sump­tion of the bit­coin net­work com­pared to now is not shock­ing, from around 350 MW to around 417 MW, but still on the order of one small pow­er sta­tion. If things play out a lit­tle less favor­ably, how­ev­er, the bit­coin net­work may draw over 14 Gigawatts of elec­tric­i­ty by 2020, equiv­a­lent to the total pow­er gen­er­a­tion capac­i­ty of a small coun­try, like Den­mark for exam­ple.

    This is by no means a com­pre­hen­sive analy­sis and these num­bers should be tak­en with a pinch of salt, but the con­clu­sion is an impor­tant one: If the net­work of bit­coin min­ers keeps expand­ing the way it has done, the increased effi­cien­cy of min­ing devices is most like­ly off­set, leav­ing us any­where between a slight growth or an explo­sion of the total ener­gy con­sump­tion.

    Even in the opti­mistic sce­nario, just min­ing one bit­coin in 2020 would require a shock­ing 5,500 kWh, or about half the annu­al elec­tric­i­ty con­sump­tion of an Amer­i­can house­hold. And even if we assume that by that time only half of that elec­tric­i­ty is gen­er­at­ed by fos­sil fuels, still over 4,000 kg of car­bon diox­ide would be emit­ted per bit­coin mined. It makes you won­der whether bit­coin could still be called a vir­tu­al cur­ren­cy, when the phys­i­cal effects could become so tan­gi­ble.

    Per­son­al­ly, I haven’t giv­en up on the idea of dis­trib­uted net­work trans­ac­tions, but a rad­i­cal rethink­ing of how these may be secured would be ben­e­fi­cial, be it at least for the envi­ron­ment. Per­haps a sys­tem where all min­ers are reward­ed for their pledged sur­plus in CPU pro­cess­ing pow­er, but the actu­al hash­ing is per­formed only by a few thou­sand ran­dom­ly select­ed and con­tin­u­ous­ly chang­ing CPUs, would be a solu­tion. We could throw the rem­nants of our destruc­tive arms race for hash­ing pow­er out the win­dow, per­haps find a way to make a few old min­ers use­ful in func­tion­al cal­cu­la­tions, and use the rest of them to build a rusty totem in hon­or of Satoshi.

    “This is by no means a com­pre­hen­sive analy­sis and these num­bers should be tak­en with a pinch of salt, but the con­clu­sion is an impor­tant one: If the net­work of bit­coin min­ers keeps expand­ing the way it has done, the increased effi­cien­cy of min­ing devices is most like­ly off­set, leav­ing us any­where between a slight growth or an explo­sion of the total ener­gy con­sump­tion.”
    So Bit­coin’s car­bon foot­print is slat­ed to get either a lit­tle worse or A LOT worse by 2020. But not any bet­ter even under the most opti­mistic sce­nario, which is unfor­tu­nate since that opti­mistic sce­nario does­n’t look all that opti­mistic:

    ...
    Even in the opti­mistic sce­nario, just min­ing one bit­coin in 2020 would require a shock­ing 5,500 kWh, or about half the annu­al elec­tric­i­ty con­sump­tion of an Amer­i­can house­hold. And even if we assume that by that time only half of that elec­tric­i­ty is gen­er­at­ed by fos­sil fuels, still over 4,000 kg of car­bon diox­ide would be emit­ted per bit­coin mined. It makes you won­der whether bit­coin could still be called a vir­tu­al cur­ren­cy, when the phys­i­cal effects could become so tan­gi­ble.
    ...

    Keep in mind that bit­coins are “mined” around every 10 min­utes, so that’s half the annu­al con­sump­tion of an Amer­i­can house­hold (uh oh) every 10 min­utes. Opti­misti­cal­ly.

    But there was one source of opti­mism in that arti­cle: The author’s sug­ges­tions at the end:

    ...
    Per­son­al­ly, I haven’t giv­en up on the idea of dis­trib­uted net­work trans­ac­tions, but a rad­i­cal rethink­ing of how these may be secured would be ben­e­fi­cial, be it at least for the envi­ron­ment. Per­haps a sys­tem where all min­ers are reward­ed for their pledged sur­plus in CPU pro­cess­ing pow­er, but the actu­al hash­ing is per­formed only by a few thou­sand ran­dom­ly select­ed and con­tin­u­ous­ly chang­ing CPUs, would be a solu­tion. We could throw the rem­nants of our destruc­tive arms race for hash­ing pow­er out the win­dow, per­haps find a way to make a few old min­ers use­ful in func­tion­al cal­cu­la­tions, and use the rest of them to build a rusty totem in hon­or of Satoshi.

    Now, there’s prob­a­bly all sorts of tech­ni­cal rea­sons that would com­pli­cate a sys­tem where just a frac­tions of min­ing proces­sors are select­ed at any giv­en moment. But at least the author is try­ing to address this issue, which is more than the rest of the Bit­coin com­mu­ni­ty seems to be doing. Who knows? Maybe there’s a clever strat­e­gy that could not just pre­vent an explo­sive growth in ener­gy con­sump­tion but actu­al­ly reduce the elec­tric­i­ty load from where it is today. It’s at least worth look­ing into, so it’s nice to see some­one doing it if Bit­coin is going to keep chug­ging along.

    But it’s also worth keep­ing in mind that there’s a very straight­for­ward solu­tion to Bit­coins long-term ener­gy woes: Green ener­gy. If human civ­i­liza­tion had already switched over to sus­tain­able green ener­gy sources no one would care how much elec­tric­i­ty Bit­coin uses. Keep in mind that the above esti­mates were just for 2020. It’s only get­ting worse from there bar­ring some rad­i­cal over­haul of how the min­ing process is done. So if Bit­coin wants to do some­thing to address both its grow­ing ener­gy prob­lems and the image prob­lem that’s only going to grow too, should­n’t the Bit­coin com­mu­ni­ty become cham­pi­ons of green ener­gy? How about a Bit­coin green ener­gy lob­by?

    In oth­er words, Den­mark’s annu­al ener­gy con­sump­tion pat­terns might not just be an omi­nous near-term sym­bol for Bit­coin. When you fac­tor in how the coun­try actu­al­ly gen­er­ates its elec­tric­i­ty, Den­mark’s elec­tric­i­ty con­sump­tion pat­terns are also Bit­coin’s long-term solu­tion. So let’s hope the Bit­coin com­mu­ni­ty invests some bit­coins in con­vinc­ing the rest of the world to adopt the solu­tion it needs. It should­n’t be a tough sell.

    Posted by Pterrafractyl | April 7, 2016, 9:14 pm
  18. Bit­coin is no stranger to com­pe­ti­tion. In par­tic­u­lar supe­ri­or com­pe­ti­tion. Being the first mover for some­thing that is col­lab­o­ra­tive­ly main­tained and dif­fi­cult to upgrade, like a cryp­tocur­ren­cy, is inevitably going to bring a lot of supe­ri­or com­pe­ti­tion. At the same time, being the first mover for some­thing that is col­lab­o­ra­tive­ly main­tained and dif­fi­cult to upgrade also con­fers incred­i­ble ben­e­fits to the first-mover. Espe­cial­ly for some­thing like a cryp­tocur­ren­cy. And that’s part of what’s going to make Bit­coin’s strug­gle to main­tain its King of the Cryp­tocur­ren­cies sta­tus so inter­est­ing to play out: the longer the cryp­tocur­ren­cy phe­nom­e­na exists and grows, the hard­er its going to be to dis­lodge Bit­coin as the most pop­u­lar cryp­tocur­ren­cy sim­ply because it has the largest user base and there’s an immense advan­tage there. But at the same time, the longer the cryp­tocur­ren­cy phe­nom­e­na exists and grows, the crap­pi­er Bit­coin gets, in terms of fea­tures, com­pared to its increas­ing­ly supe­ri­or com­pe­ti­tion:

    Wired

    Mon­ero, the Drug Dealer’s Cryp­tocur­ren­cy of Choice, Is on Fire

    Andy Green­berg
    01.25.17 7:00 am

    For the cryp­tocur­ren­cy com­mu­ni­ty, 2016 was a very good year. Bit­coin dou­bled in price. The far-out Bit­coin alter­na­tive Ethereum shot up by a fac­tor of 10. But anoth­er, once-obscure cryp­tocur­ren­cy called Mon­ero out­paced all of them, mul­ti­ply­ing its val­ue around 27-fold. That’s a wind­fall not just for cryp­tocur­ren­cy spec­u­la­tors, but for finan­cial pri­va­cy advo­cates everywhere—including a few sud­den­ly wealthy dark web drug deal­ers.

    Over the last year, the val­ue of the hyper-anony­mous cryp­tocur­ren­cy Mon­ero grew 2,760 per­cent, mak­ing it almost cer­tain­ly the best-per­form­ing cryp­tocur­ren­cy of 2016. Today each Mon­ero is worth around $12, com­pared with just 50 cents at the begin­ning of last year, and the col­lec­tive val­ue of all Mon­ero has grown to close to $165 mil­lion. Over the last year, the val­ue of the hyper-anony­mous cryp­tocur­ren­cy Mon­ero grew 2,760 per­cent, mak­ing it almost cer­tain­ly the best-per­form­ing cryp­tocur­ren­cy of 2016

    Those fea­tures have made Mon­ero a bud­ding favorite with­in at least one com­mu­ni­ty that has a press­ing need for secre­cy: the dark web black mar­ket. In August, the dark­net mar­ket site Alphabay began offer­ing its thou­sands of ven­dors the option to accept Mon­ero as an alter­na­tive to Bit­coin. A quick browse through the mar­ket today shows deal­ers of every­thing from stolen cred­it cards to hero­in to hand­guns accept­ing the stealth­i­er cryp­to­coin. That increase in illic­it users also illus­trates Monero’s pri­va­cy poten­tial, says Ric­car­do Spag­ni, one of Monero’s core devel­op­ers.

    ...

    Not Anoth­er Bit­coin

    It’s tempt­ing to think of cryp­tocur­ren­cies in terms of Bitcoin—in part because many cryp­tocur­ren­cies are Bit­coin deriva­tions. Monero’s ful­ly its own enti­ty, though. First out­lined in an Octo­ber 2013 whitepa­per by the pseu­do­ny­mous fig­ure Nico­las van Saber­ha­gen and called Cryptonote, anoth­er pseu­do­ny­mous indi­vid­ual known only as “thankful_for_today” lat­er cod­ed those ideas into a cur­ren­cy called Bit­monero. When open-source coders on the Bit­cointalk forum dis­agreed with thankful_for_today’s direc­tions for the cur­ren­cy, they forked it in 2014 to cre­ate Mon­ero, whose name means sim­ply “coin” in Esperan­to.

    Its struc­ture solves sev­er­al key pri­va­cy vul­ner­a­bil­i­ties that dog Bit­coin, which despite its rep­u­ta­tion for secret trans­ac­tions has long been stuck in a strange pri­va­cy para­dox. Unlike com­mer­cial ser­vices like Pay­Pal, Bit­coin allows any­one to spend mon­ey online with­out pro­vid­ing iden­ti­fy­ing details. But if someone’s Bit­coin address is linked with their real iden­ti­ty, any trans­ac­tion from that address is entire­ly vis­i­ble on the pub­lic blockchain, the account­ing ledger that pre­vents fraud and forgery in the Bit­coin econ­o­my. Hid­ing those trans­ac­tions requires tak­ing extra steps, like rout­ing bit­coins through “tum­blers” that mix up coins with those of strangers—and occa­sion­al­ly steal them—or using tech­niques like “coin­join,” built into some bit­coin wal­let pro­grams, that mix pay­ments to make them hard­er to trace. “If I pay my rent in Bit­coin, it wouldn’t be that hard for the land­lord to fig­ure out how much mon­ey I earned if I don’t take extra pre­cau­tions,” says encryp­tion and cryp­tocur­ren­cy con­sul­tant Peter Todd. “Then they can decide whose rent to increase. You’re giv­ing away infor­ma­tion you don’t want to make pub­lic.”

    Mon­ero not only bakes anonymi­ty fea­tures into the cryp­tocur­ren­cy itself, but imple­ments a few fea­tures that Bit­coin still can’t offer. It uses a tech­nique called “stealth address­es” to gen­er­ate address­es for receiv­ing Mon­ero that are essen­tial­ly encrypt­ed; the recip­i­ent can retrieve the funds, but no one can link that stealth address to the own­er. It employs a tech­nique called “ring sig­na­tures,” which means every Mon­ero spent is grouped with as many as a hun­dred oth­er trans­ac­tions, so that the spender’s address is mixed in with a group of strangers, and every sub­se­quent move­ment of that mon­ey makes it expo­nen­tial­ly more dif­fi­cult to trace back to the source. And it uses some­thing called “ring con­fi­den­tial trans­ac­tions,” which hides the amount of every trans­ac­tion.

    “Even with big data analy­sis, the abil­i­ty to farm any­thing out of the meta­da­ta is cryp­to­graph­i­cal­ly neg­li­gi­ble,” says Spag­ni. In future imple­men­ta­tions, he notes that Mon­ero will add the anonymi­ty soft­ware I2P to mask not only users’ trans­ac­tions on the Mon­ero blockchain, but also the inter­net traf­fic under­ly­ing those trans­ac­tions.

    All of that makes Mon­ero a sig­nif­i­cant upgrade for a cryp­tocur­ren­cy user’s finan­cial pri­va­cy. Todd, for instance, says he keeps a small Mon­ero account, but trans­fers bit­coins into it when he wants to spend his cryp­tocur­ren­cy more stealth­ily, using the exchange tool Shapeshift to trans­form the coins from Mon­ero back to bit­coin before they reach the recipient’s account. “I basi­cal­ly use Mon­ero to pay peo­ple with bit­coin anony­mous­ly,” Todd says.

    The Mon­ero Mar­ket

    That strict secre­cy also helps explain Monero’s dark­net pop­u­lar­i­ty. After Alphabay and a small­er dark web black mar­ket, known as Oasis, inte­grat­ed the cryp­tocur­ren­cy last sum­mer, its val­ue imme­di­ate­ly increased around six-fold. Alphabay told Bit­coin Mag­a­zine last month that the cur­ren­cy now accounts for about two per­cent of its sales. That’s a small frac­tion, but still like­ly amounts to mil­lions of dol­lars in annu­al rev­enue, giv­en Alphabay’s dom­i­nant posi­tion in the dark web drug mar­ket and esti­mates of that market’s total size and growth.

    Spag­ni says he expects Mon­ero will no doubt be used in oth­er poten­tial­ly unsa­vory ways, too, like ran­somware, and as cur­ren­cy for the gam­bling and porn indus­tries. But he argues it will also be used for more inno­cent forms of finan­cial pri­va­cy, like keep­ing your net worth secret while mak­ing rou­tine pur­chas­es, or buy­ing con­tra­band like out­lawed books in oppres­sive regimes. He also argues the uses of Mon­ero are out of his and his fel­low devel­op­ers’ con­trol. “I’m in no posi­tion to judge what peo­ple should or shouldn’t do, and no one else should be either from a code per­spec­tive,” he says.

    Mon­ero isn’t the first cryp­tocur­ren­cy designed to offer a finan­cial pri­va­cy panacea: Dash, for­mer­ly known as Dark­coin, inte­grates the “coin­join” tech­nique that allows bit­coin users to mix their trans­ac­tions with a few oth­er spenders in what Todd calls a weak­er form of anonymi­ty than Mon­ero offers. More recent­ly, Zcash debuted with the strongest anonymi­ty promis­es yet—it uses cryp­to­graph­ic tricks designed to make trac­ing a trans­ac­tion not only unlike­ly, but math­e­mat­i­cal­ly impos­si­ble. Zcash has yet to be inte­grat­ed into dark web mar­kets, though, and still requires wield­ing the com­mand line to use.

    Despite the currency’s sud­den spike in price, Spag­ni denies that he or any of the oth­er core Mon­ero coders are sit­ting on a mas­sive pile of wealth. “We’re just work­ing on this to see where it goes,” he says. But the promise and per­il of Mon­ero, of course, is that no one can check that claim. The stash­es of the Mon­ero devel­op­ers, like those of its grow­ing base of users, will stay secret by design.

    ———–
    “Mon­ero, the Drug Dealer’s Cryp­tocur­ren­cy of Choice, Is on Fire” by Andy Green­berg; Wired; 01/25/2017

    Mon­ero not only bakes anonymi­ty fea­tures into the cryp­tocur­ren­cy itself, but imple­ments a few fea­tures that Bit­coin still can’t offer. It uses a tech­nique called “stealth address­es” to gen­er­ate address­es for receiv­ing Mon­ero that are essen­tial­ly encrypt­ed; the recip­i­ent can retrieve the funds, but no one can link that stealth address to the own­er. It employs a tech­nique called “ring sig­na­tures,” which means every Mon­ero spent is grouped with as many as a hun­dred oth­er trans­ac­tions, so that the spender’s address is mixed in with a group of strangers, and every sub­se­quent move­ment of that mon­ey makes it expo­nen­tial­ly more dif­fi­cult to trace back to the source. And it uses some­thing called “ring con­fi­den­tial trans­ac­tions,” which hides the amount of every trans­ac­tion.”

    So Mon­ero is basi­cal­ly bet­ter than Bit­coin in every way. At least in terms of the one big prop­er­ty Bit­co­ing users gen­er­al­ly val­ue: anonymi­ty

    ...
    “Even with big data analy­sis, the abil­i­ty to farm any­thing out of the meta­da­ta is cryp­to­graph­i­cal­ly neg­li­gi­ble,” says Spag­ni. In future imple­men­ta­tions, he notes that Mon­ero will add the anonymi­ty soft­ware I2P to mask not only users’ trans­ac­tions on the Mon­ero blockchain, but also the inter­net traf­fic under­ly­ing those trans­ac­tions.
    ...

    An effec­tive­ly tru­ly anony­mous cryp­tocur­ren­cy that does­n’t like a giant, ever-grow­ing dig­i­tal paper-trail. So why still use Bit­coin? Iner­tia. That’s pret­ty much it. And don’t dis­miss iner­tia. It’s an incred­i­bly pow­er­ful force.

    Still, when it comes to cryp­tocur­ren­cy appli­ca­tions that either require as much anonymi­ty as pos­si­ble and/or don’t nec­es­sar­i­ly require the use of the most wide­ly used cryp­tocur­ren­cy it’s hard to see why alter­na­tives with clear­ly supe­ri­or fea­tures like Mon­ero aren’t going to erode Bit­coin’s mar­ket share over time. For instance, let’s say you want­ed to uti­lize some of the hack­ing code released by the “Shad­ow Bro­kers” and you want to use this code to unleash a wave of hacks that turn com­put­ers around the world into cryp­tocur­ren­cy min­ing machines, isn’t Mon­ero, with its sky­rock­et­ing val­ue and vast­ly improved anonymi­ty, the supe­ri­or choice? It seems like it. And the peo­ple who just unleashed a Mon­ero-based virus using the Shad­ow Bro­kers’ leaked NSA code appear to agree:

    Ars Tech­ni­ca

    Mas­sive cryp­tocur­ren­cy bot­net used leaked NSA exploits weeks before WCry
    Cam­paign that flew under the radar used hacked com­put­ers to mine Mon­ero cur­ren­cy.

    Dan Good­in — 5/16/2017, 12:38 AM

    On Fri­day, ran­somware called Wan­naCry used leaked hack­ing tools stolen from the Nation­al Secu­ri­ty Agency to attack an esti­mat­ed 200,000 com­put­ers in 150 coun­tries. On Mon­day, researchers said the same weapons-grade attack kit was used in a much-ear­li­er and pos­si­bly larg­er-scale hack that made infect­ed com­put­ers part of a bot­net that mined cryp­tocur­ren­cy.

    Like Wan­naCry, this ear­li­er, pre­vi­ous­ly unknown attack used an exploit code­named Eter­nal­Blue and a back­door called Dou­blePul­sar, both of which were NSA-devel­oped hack­ing tools leaked in mid April by a group call­ing itself Shad­ow Bro­kers. But instead of installing ran­somware, the cam­paign pushed cryp­tocur­ren­cy min­ing soft­ware known as Adylkuzz. Wan­naCry, which gets its name from a pass­word hard-cod­ed into the exploit, is also known as WCry.

    Kafeine, a well-known researcher at secu­ri­ty firm Proof­point, said the attack start­ed no lat­er than May 2 and may have begun as ear­ly as April 24. He said the cam­paign was sur­pris­ing­ly effec­tive at com­pro­mis­ing Inter­net-con­nect­ed com­put­ers that have yet to install updates Microsoft released in ear­ly March to patch the crit­i­cal vul­ner­a­bil­i­ties in the Win­dows imple­men­ta­tion of the Serv­er Mes­sage Block pro­to­col. In a blog post pub­lished Mon­day after­noon, Kafeine wrote:

    In the course of research­ing the Wan­naCry cam­paign, we exposed a lab machine vul­ner­a­ble to the Eter­nal­Blue attack. While we expect­ed to see Wan­naCry, the lab machine was actu­al­ly infect­ed with an unex­pect­ed and less noisy guest: the cryp­tocur­ren­cy min­er Adylkuzz. We repeat­ed the oper­a­tion sev­er­al times with the same result: with­in 20 min­utes of expos­ing a vul­ner­a­ble machine to the open web, it was enrolled in an Adylkuzz min­ing bot­net.

    The attack is launched from sev­er­al vir­tu­al pri­vate servers which are mas­sive­ly scan­ning the Inter­net on TCP port 445 for poten­tial tar­gets.

    Upon suc­cess­ful exploita­tion via Eter­nal­Blue, machines are infect­ed with Dou­blePul­sar. The Dou­blePul­sar back­door then down­loads and runs Adylkuzz from anoth­er host. Once run­ning, Adylkuzz will first stop any poten­tial instances of itself already run­ning and block SMB com­mu­ni­ca­tion to avoid fur­ther infec­tion. It then deter­mines the pub­lic IP address of the vic­tim and download[s] the min­ing instruc­tions, cryp­tomin­er, and cleanup tools.

    It appears that at any giv­en time there are mul­ti­ple Adylkuzz com­mand and con­trol (C&C) servers host­ing the cryp­tomin­er bina­ries and min­ing instruc­tions.

    Symp­toms of the attack include a loss of access to net­worked resources and sys­tem slug­gish­ness. Kafeine said that some peo­ple who thought their sys­tems were infect­ed in the Wan­naCry out­break were in fact hit by the Adylkuzz attack. The researcher went on to say this over­looked attack may have lim­it­ed the spread of Wan­naCry by shut­ting down SMB net­work­ing to pre­vent the com­pro­mised machines from falling into the hands of com­pet­ing bot­nets.

    Proof­point researchers have iden­ti­fied more than 20 hosts set up to scan the Inter­net and infect vul­ner­a­ble machines they find. The researchers are aware of more than a dozen active Adylkuzz con­trol servers. The bot­net then mined Mon­ero, a cryp­tocur­ren­cy that bills itself as being ful­ly anony­mous, as opposed to Bit­coin, in which all trans­ac­tions are trace­able.

    Mon­day’s report came the same day that a secu­ri­ty researcher who works for dig­i­tal fin­ger­prints tying a ver­sion of WCry from Feb­ru­ary to Lazarus Group, a hack­ing oper­a­tion with links to North Korea. In a report pub­lished last month, Kasper­sky Lab researchers said Blueno­roff, a Lazarus Group off­shoot respon­si­ble for finan­cial prof­it, installed cryp­tocur­ren­cy-min­ing soft­ware on com­put­ers it hacked to gen­er­ate Mon­ero coins. “The soft­ware so intense­ly con­sumed sys­tem resources that the sys­tem became unre­spon­sive and froze,” Kasper­sky Lab researchers wrote.

    ...

    ———-
    “Mas­sive cryp­tocur­ren­cy bot­net used leaked NSA exploits weeks before WCry” by Dan Good­in; Ars Tech­ni­ca; 5/16/2017

    “Proof­point researchers have iden­ti­fied more than 20 hosts set up to scan the Inter­net and infect vul­ner­a­ble machines they find. The researchers are aware of more than a dozen active Adylkuzz con­trol servers. The bot­net then mined Mon­ero, a cryp­tocur­ren­cy that bills itself as being ful­ly anony­mous, as opposed to Bit­coin, in which all trans­ac­tions are trace­able.

    So now you know: if you’re writ­ing a virus that will turn your vic­tims’ com­put­ers into cyryp­tocur­ren­cy min­ing machines, con­sid­er the advan­tages of Mon­ero. And the same goes for your ran­somware virus like Wan­nCry. Not only will it be hard­er to trace your ran­som pro­ceed back to you, but if you’re attack is a spec­tac­u­lar fail­ure and hard­ly any­one sends you mon­ey no one will know. As opposed to the Wan­naCry ran­somware attack which was such a spec­tac­u­lar fail­ure in terms of get­ting ran­som, as evi­denced by Bit­coin’s trace­able blockchain used to pay the ran­som, that some are spec­u­lat­ing it was­n’t intend­ed to make mon­ey but instead embarass the NSA:

    Wired

    The Wan­naCry Ran­somware Hack­ers Made Some Real Ama­teur Mis­takes

    Andy Green­berg
    05.15.17 2:43 pm

    The Wan­naCry ran­somware attack has quick­ly become the worst dig­i­tal dis­as­ter to strike the inter­net in years, crip­pling trans­porta­tion and hos­pi­tals glob­al­ly. But it increas­ing­ly appears that this is not the work of hack­er mas­ter­minds. Instead, cyber­se­cu­ri­ty inves­ti­ga­tors see in the recent melt­down a slop­py cyber­crim­i­nal scheme, one that reveals ama­teur mis­takes at prac­ti­cal­ly every turn.

    As the unprece­dent­ed ran­somware attack known as Wan­naCry (or Wcrypt) unfolds, the cyber­se­cu­ri­ty com­mu­ni­ty has mar­veled at the inex­plic­a­ble errors the malware’s authors have made. Despite the giant foot­print of the attack, which lever­aged a leaked NSA-cre­at­ed Win­dows hack­ing tech­nique to infect more than 200,000 sys­tems across 150 coun­tries, mal­ware ana­lysts say poor choic­es on the part of WannaCry’s cre­ators have lim­it­ed both its scope and prof­it.

    Those errors include build­ing in a web-based “kill-switch” that cut short its spread, unsavvy han­dling of bit­coin pay­ments that makes it far eas­i­er to track the hack­er group’s prof­its, and even a shod­dy ran­som func­tion in the mal­ware itself. Some ana­lysts say the sys­tem makes it impos­si­ble for the crim­i­nals to know who’s paid the ran­som and who hasn’t.

    An attack of this mag­ni­tude involv­ing so many mis­steps rais­es plen­ty of ques­tions while deliv­er­ing a sober­ing reminder: If actu­al cyber­crim­i­nal pro­fes­sion­als improved on the group’s meth­ods, the results could be even graver.

    Mis­takes Were Made

    At last count, the group behind Wan­naCry has earned just over $55,000 from its inter­net-shak­ing attack, a small frac­tion of the mul­ti­mil­lion-dol­lar prof­its of more pro­fes­sion­al stealthy ran­somware schemes. “From a ran­som per­spec­tive, it’s a cat­a­stroph­ic fail­ure,” says Craig Williams, a cyber­se­cu­ri­ty researcher with Cisco’s Talos team. “High dam­age, very high pub­lic­i­ty, very high law-enforce­ment vis­i­bil­i­ty, and it has prob­a­bly the low­est prof­it mar­gin we’ve seen from any mod­er­ate or even small ran­somware cam­paign.”

    Those mea­ger prof­its may part­ly stem from Wan­naCry bare­ly ful­fill­ing its basic ran­som func­tions, says Matthew Hick­ey, a researcher at Lon­don-based secu­ri­ty firm Hack­er House. Over the week­end, Hick­ey dug into WannaCry’s code and found that the mal­ware doesn’t auto­mat­i­cal­ly ver­i­fy that a par­tic­u­lar vic­tim has paid the demand­ed $300 bit­coin ran­som by assign­ing them a unique bit­coin address. Instead, it pro­vides only one of four hard­cod­ed bit­coin address­es, mean­ing incom­ing pay­ments don’t have iden­ti­fy­ing details that could help auto­mate the decryp­tion process. Instead, the crim­i­nals them­selves have had to fig­ure out which com­put­er to decrypt as ran­soms come in, an unten­able arrange­ment giv­en the hun­dreds of thou­sands of infect­ed devices. “It real­ly is a man­u­al process at the oth­er end, and some­one has to acknowl­edge and send the key,” says Hick­ey.

    ...

    Using only four hard­cod­ed bit­coin address­es in the mal­ware not only intro­duces the pay­ments prob­lem but also makes it far eas­i­er for the secu­ri­ty com­mu­ni­ty and law enforce­ment to track any attempt to anony­mous­ly cash out Wan­naCry prof­its. All bit­coin trans­ac­tions are vis­i­ble on bitcoin’s pub­lic account­ing ledger, known as the blockchain.

    “It looks impres­sive as hell, because you think they must be genius coders in order to inte­grate the NSA exploit into a virus. But in fact, that’s all they know how to do, and they’re bas­ket cas­es oth­er­wise,” says Rob Gra­ham, a secu­ri­ty con­sul­tant for Erra­ta Secu­ri­ty. “That they have hard­cod­ed bit­coin address­es, rather than one bit­coin address per vic­tim, shows their lim­it­ed think­ing.”

    Cis­co researchers say they’ve found that a “check pay­ment” but­ton in the ran­somware doesn’t actu­al­ly even check if any bit­coins have been sent. Instead, Williams says, it ran­dom­ly pro­vides one of four answers—three fake error mes­sages or a fake “decryp­tion” mes­sage. If the hack­ers are decrypt­ing anyone’s files, Williams believes it’s through a man­u­al process of com­mu­ni­ca­tion with vic­tims via the malware’s “con­tact” but­ton, or by arbi­trar­i­ly send­ing decryp­tion keys to a few users to give vic­tims the illu­sion that pay­ing the ran­som does free their files. And unlike more func­tion­al and auto­mat­ed ran­somware attacks, that janky process pro­vides almost no incen­tive for any­one to actu­al­ly pay up. “It breaks the entire trust mod­el that makes ran­somware work,” Williams says.

    Scale Over Sub­stance

    To be fair, Wan­naCry has spread with a speed and scale that ran­somware has nev­er achieved before. Its use of a recent­ly leaked NSA Win­dows vul­ner­a­bil­i­ty, called Eter­nal­Blue, cre­at­ed the worst epi­dem­ic of mali­cious encryp­tion yet seen.

    But even judg­ing Wan­naCry sole­ly by its abil­i­ty to spread, its cre­ators made huge blun­ders. They inex­plic­a­bly built a “kill switch” into their code, designed to reach out to a unique web address and dis­able its encryp­tion pay­load if it makes a suc­cess­ful con­nec­tion. Researchers have spec­u­lat­ed that the fea­ture might be a stealth mea­sure designed to avoid detec­tion if the code is run­ning on a vir­tu­al test machine. But it also allowed a pseu­do­ny­mous researcher who goes by the name Mal­wareTech to sim­ply reg­is­ter that unique domain and pre­vent fur­ther infec­tions from lock­ing up vic­tims’ files.

    Over the week­end, a new ver­sion of Wan­naCry appeared with a dif­fer­ent “kill switch” address. Dubai-based secu­ri­ty researcher Matt Suiche reg­is­tered that sec­ond domain almost imme­di­ate­ly, cut­ting short the spread of that adapt­ed ver­sion of the mal­ware, too. Suiche can’t imag­ine why the hack­ers haven’t yet cod­ed their mal­ware to reach out to a ran­dom­ly gen­er­at­ed URL, rather than a sta­t­ic one built into the ransomware’s code. “I don’t see any obvi­ous expla­na­tion for why there’s still a kill switch,” Suiche says. Mak­ing the same mis­take twice, espe­cial­ly one that effec­tiv­ly shuts Wan­naCry down, makes lit­tle sense. “It seems like a log­ic bug,” he says.

    All of which has vast­ly lim­it­ed WannaCry’s prof­its, even as the ran­somware has shut down life-sav­ing equip­ment in hos­pi­tals and par­a­lyzed trains, ATMs, and sub­way sys­tems. To put the hack­ers’ five-fig­ure haul in per­spec­tive, Cisco’s Williams notes that an earlier—and much less publicized—ransomware cam­paign known as Angler took in an esti­mat­ed $60 mil­lion a year before get­ting shut down in 2015.

    In fact, Wan­naCry has caused so much dam­age with such lit­tle prof­it that some secu­ri­ty researchers have begun to sus­pect that it may not be a mon­ey-mak­ing scheme at all. Instead, they spec­u­late, it might be some­one try­ing to embar­rass the NSA by wreak­ing hav­oc with its leaked hack­ing tools—possibly even the same Shad­ow Bro­kers hack­ers who stole those tools in the first place. “I absolute­ly believe this was sent by some­one try­ing to cause as much destruc­tion as pos­si­ble,” says Hack­er House’s Hick­ey.

    With the NSA bash­ing over WCry & how easy it is to dis­able the ran­somware, one might con­jec­ture it was cre­at­ed for polit­i­cal not $ rea­sons.— Don A. Bai­ley (@DonAndrewBailey) May 14, 2017

    Yeah not a small num­ber of peo­ple believe #Wan­nacry is con­nect­ed to who­ev­er is behind shad­ow­bro­kers https://t.co/4j5O9FWP86— Ste­fan Ess­er (@i0n1c) May 15, 2017

    Spec­u­la­tion aside, the hack­ers’ slop­py meth­ods also car­ry anoth­er les­son: A more pro­fes­sion­al oper­a­tion could improve on WannaCry’s tech­niques to inflict far worse dam­age. The com­bi­na­tion of a net­work-based self-spread­ing worm and the prof­it poten­tial of ran­somware won’t go away, says Cisco’s Williams.

    “This is obvi­ous­ly the next evo­lu­tion of mal­ware,” he says. “It’s going to attract copy­cats.” The next set of crim­i­nals may be far more skilled at fuel­ing the spread of their epidemic—and prof­it­ing from it.

    ———-
    “The Wan­naCry Ran­somware Hack­ers Made Some Real Ama­teur Mis­takes” by Andy Green­berg; Wired; 05/15/17

    “In fact, Wan­naCry has caused so much dam­age with such lit­tle prof­it that some secu­ri­ty researchers have begun to sus­pect that it may not be a mon­ey-mak­ing scheme at all. Instead, they spec­u­late, it might be some­one try­ing to embar­rass the NSA by wreak­ing hav­oc with its leaked hack­ing tools—possibly even the same Shad­ow Bro­kers hack­ers who stole those tools in the first place. “I absolute­ly believe this was sent by some­one try­ing to cause as much destruc­tion as pos­si­ble,” says Hack­er House’s Hick­ey.”

    If Wan­naCry’s orig­i­na­tors want­ed to make mon­ey they must be near tears. In terms of a polit­i­cal attack, how­ev­er, it cer­tain­ly got the job done. And yet think about how much more effec­tive it would be as a polit­i­cal attack has the spec­tac­u­lar fail­ure of Wan­naCry’s ran­som col­lec­tion not been so eas­i­ly trace­able on Bit­coin’s blockchain:

    ...
    Using only four hard­cod­ed bit­coin address­es in the mal­ware not only intro­duces the pay­ments prob­lem but also makes it far eas­i­er for the secu­ri­ty com­mu­ni­ty and law enforce­ment to track any attempt to anony­mous­ly cash out Wan­naCry prof­its. All bit­coin trans­ac­tions are vis­i­ble on bitcoin’s pub­lic account­ing ledger, known as the blockchain.
    ...

    And keep in mind that, while using only four bit­coin address­es makes it a lot eas­i­er for researchers to track their ran­som pay­ments, it’s not like it would be par­tic­u­lar­ly dif­fi­cult for researchers to detect new accounts set up to send $3000 worth of bit­coins to new­ly cre­at­ed address­es had the peo­ple behind Wan­naCry gone through the effort of set­ting up unique address­es for each vic­tim. It’s still high­ly trace­able. Because that’s how Bit­coin works. Trans­ac­tions are vis­i­ble even if the ids behind the accounts are poten­tial­ly kept hid­den.

    So if your com­pa­ny is stock­pil­ing cryp­tocur­ren­cy in antic­i­pa­tion to being forced to pay in a future ran­somware attack (com­pa­nies do this these days), you might want to con­sid­er Mon­ero. Dit­to if your com­pa­ny is plan­ning on writ­ing some ran­somware. Sor­ry Bit­coin.

    Posted by Pterrafractyl | May 17, 2017, 8:43 pm

Post a comment