2014 could have been better for Bitcoin. After peaking near $1100 in December 2013, Bitcoin is currently under $250. 2014 was not a good year for Bitcoin [1].
But that doesn’t mean 2015 has to be the same. And if a slew of recent announcement involving some very big investors are any indication of what to expect, the mainstreaming Bitcoin is about to get a big boost. But that boost could come with a big price too. All those “microtransactions” of as little as 0.000000001 of one bitcoin (BTC) that much of the Bitcoin community hates so much is precisely what these deep pocketed interests are planning on promoting in a big way. And in order to make it all happen, they might have to become some of the biggest bitcoin miners around too. And that means the future of Bitcoin is increasing in the hands of ‘The Man’. Also, the microtransactions might be used to monetize how we access the web. And how the Internet of Things spies on us. It doesn’t actually sound very fun.
So, 2015 could be a big year for Bitcoin the protocol. But Bitcoin the dream — the rebellious currency that overthrows the banks and government in general — 2015 could get weird and just keep getting weirder [2]:
The Wall Street Journal
A Bitcoin Technology Gets Nasdaq Test
Pilot to take place in fledgling Nasdaq Private MarketBy Bradley Hope And
Michael J. Casey
May 10, 2015Nasdaq OMX Group Inc. is testing a new use of the technology that underpins the digital currency bitcoin, in a bid to transform the trading of shares in private companies.
The experiment joins a slew of financial-industry forays into bitcoin-related technology. If the effort is deemed successful, Nasdaq wants to use so-called blockchain technology in its stock market, one of the world’s largest, and potentially shake up systems that have facilitated the trading of financial assets for decades.
“Utilizing the blockchain is a natural digital evolution for managing physical securities,” said Nasdaq Chief Executive Robert Greifeld. He said the technology holds the potential to “benefit not only our clients, but the broader global capital markets.”
Nasdaq will start its pilot project in Nasdaq Private Market, a fledgling marketplace launched in January 2014 to handle pre-IPO trading among private companies. The platform has more than 75 private companies signed up, according to the company.
Private companies typically handle sales and transfers of shares with largely informal systems, including spreadsheets maintained by lawyers who verify transactions by hand. Nasdaq wants to replace that process with a system based on bitcoin’s blockchain technology.
The blockchain ledger is seen by some in the financial industry as the most compelling aspect of bitcoin because it can be used beyond merely buying and selling goods or services with a new currency.
The blockchain is maintained, updated and verified by a vast global network of independently owned computers known as “miners” that collectively work to prove the ledger’s authenticity.
In theory, this decentralized system for verifying information means transactions need no longer be channeled through banks, clearinghouses and other middlemen. Advocates say this “trustless” structure means direct transfers of ownership can occur over the blockchain almost instantaneously without the risk of default or manipulation by an intermediating third party.
One idea is that encrypted, digital representations of share certificates could be inserted into minute bitcoin transactions known as “Satoshis,” facilitating an immediate, verifiable transfer of stock ownership from seller to buyer.
Still, bitcoin-based settlement remains untested in the real world. Regulators worry about the anonymous status of the bitcoin miners that collectively manage the system. It is conceivable that bad actors might one day take over the mining network and destroy the integrity of its verification system, some say.
Also, bitcoin’s underlying software is unable to handle the massive increase in data storage that a Wall Street settlement system would require. While the software could simply be updated, implementation will require consensus among the many, far-flung miners.
Nasdaq Private Market is also a relatively small project for Nasdaq so any changes there aren’t far-reaching. At the same time, the experiment is the latest example of large financial firms exploring the use of the technology.
In recent months, the New York Stock Exchange unit of Intercontinental Exchange Inc. announced an investment in the bitcoin-trading platform Coinbase; Goldman Sachs Group Inc. invested in bitcoin consumer- services company Circle Internet Financial; and big trading firm DRW Holdings LLC said a subsidiary had “begun to experiment with cryptocurrency trading.”
Meanwhile, Digital Asset Holdings, led by former J.P. Morgan Chase & Co. executive Blythe Masters, is, like Nasdaq, developing a blockchain-based system for settling transfers of securities and funds.
Some see the blockchain as a way to attain a long-held securities-industry goal of real-time settlement, shifting the current “T+3” structure, in which the final transfer of funds and securities occurs three days after each trade, to “T+0.”
Real-time settlement has been a goal of regulators and investors alike as it would reduce the risk of counterparty failure and free up billions of dollars of capital that is sidelined during that wait period.
Oliver Bussmann, chief information officer of Swiss bank UBS AG, last year said the blockchain was the biggest disrupting force in the financial sector, meaning its success could potentially have far-reaching ramifications for banks, trading houses and others. His bank has since established a special blockchain lab to study uses of the technology.
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Now, the fact that Wall Street is interested in the blockchain technology isn’t surprising. After all, while Bitcoin zealots like to dream that Bitcoin, itself, is going to replace Wall Street, using the Bitcoin protocol for tracking transactions is probably where the future of the blockchain is and that’s exactly what Wall Street appears to have in mind.
According to Bitcoin’s fans, the bitcoins, themselves, hold inherent value. But what Nasdaq and the rest of Wall Street appear to have in mind is an application where the bitcoin transactions have no inherent value at all and merely use the bitcoin transactions to represent the exchange of something a completely unrelated to bitcoins.
So it’s not at all surprising to see Wall Street adopt some sort of blockchain technology. But here’s what’s really interesting in Nasdaq’s blockchain experiment: Nasdaq isn’t going to be using a blockchain of their own to run the stock-trading system. It’s going to use the actual Bitcoin blockchain [3]:
Coin Center
Wall Street is using Bitcoin, not just the blockchain.Peter Van Valkenburgh
May 12, 2015Nasdaq has catapulted bitcoin into the headlines again this week, announcing that the world’s second largest exchange will be running a surprisingly forward-thinking pilot program: trading stock shares on a blockchain.
There’s been, however, a nagging question post announcement: what blockchain? Bitcoin’s blockchain? Some new blockchain? More worryingly, many in the press have taken the ill-defined details as an excuse to sing an increasingly common refrain: “I’m not wild about Bitcoin, but I love the blockchain!” I’d like to take a moment to clear up this bitcoin-blockchain confusion in the context of what we know about Nasdaq’s plan thus far, but first, a quick review is in order.
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Nasdaq on Chain
We don’t know too many details about what exactly Nasdaq has in the works, but a critical passage in the press release settles the blockchain sans bitcoins question:
Nasdaq will initially leverage the Open Assets Protocol, a colored coin innovation built upon the blockchain.
“Colored coin” means [4] that the amount specified in a particular bitcoin transaction will be representing something beyond the bitcoin amount itself. It’s as if I painted a dime red and passed it around the office saying, “whoever has the dime is allowed to speak at the meeting.” You can do this to a bitcoin by attaching a short message to your bitcoin transaction when you ask that it be written to the blockchain. The message effectively marks or colors the amount in the transaction as something more than just bitcoins.
Now, you could color the coins on some other blockchain, say Dogecoin or Litecoin, but we’re fairly certain that Nasdaq is coloring bitcoins. Michael Casey of the Wall Street Journal, who broke the story, confirmed as much on Twitter:
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So in Nasdaq’s case, a normal bitcoin transaction is initiated by the stock trader, the trader includes a short message that says, “this tiny fraction of a bitcoin represents one share of IBM stock,” and some software that Nasdaq builds will track all future transactions involving those fractional, now-colored, bitcoins. Whoever ends up the last recipient in a string of transactions involving those bitcoin fractions is the legal owner of the shares.
So, to be abundantly and perhaps pedantically clear, Nasdaq’s platform will trade shares by trading bitcoins. This is not blockchain-technology standing alone, this is Bitcoin being used by Wall Street. It is technically impossible to use Bitcoin’s blockchain without holding and transacting in bitcoins. In this case, Nasdaq is using Bitcoin’s blockchain, so they are using Bitcoin, not just “the technology behind Bitcoin.”
Keep in mind that the “colored coins” concept was only added to Bitcoin in 2014 with something exactly like trading stocks in mind [4]. So turning Bitcoin into a giant trading platform is part of the long term plan for mainstreaming the use of bitcoin. But as the article above pointed out:
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Also, bitcoin’s underlying software is unable to handle the massive increase in data storage that a Wall Street settlement system would require. While the software could simply be updated, implementation will require consensus among the many, far-flung miners.
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And that’s what makes this all such a fascinating development for Bitcoin: If Bitcoin goes down the ‘colored’ coins path of development it could require fundamental changes to how Bitcoin operated just to handle the vastly increased number of trades. And in order to do that, the Bitcoin community has to agree to those changes.
With Bitcoin, Everyone is the Boss. Together. Hostile Takeovers are Optional.
As Bitcoin’s chief developer, Gavin Andresen, admitted last October when he proposed a “hard fork” to Bitcoin’s protocol that would increase the size of Bitcoin’s “blocks” (each block records a set of transactions that are permanently added to the “blockchain”) by 50% every year, such a change would not be easy to implement. Not that changing the code is difficult. It’s getting everyone to agree to use it that’s the harder part [5]:
Coindesk
Gavin Andresen Proposes Bitcoin Hard Fork to Address Network Scalability
Stan Higgins | Published on October 8, 2014 at 01:25 BSTBitcoin Foundation chief scientist Gavin Andresen has proposed increasing the number of transactions allowed on the bitcoin network by raising the maximum block size by 50% per year.
Doing so would require a hard fork and “some risk”, Andresen conceded in a new Bitcoin Foundation blog post [6], but he concluded that such proposals are necessary for the long-term viability of bitcoin as a global payments system.
Entitled A Scalability Roadmap, the piece builds on Andresen’s past statements regarding how he believes the bitcoin network can be scaled to handle more transactions. While the near-term need to do so may not seem apparent, Andresen wrote, an opportunity to address the bitcoin network’s scalability needs shouldn’t be missed.
Andresen suggested that the bitcoin development community’s consensus-driven decision-making process might result in an alternative solution or even multiple fixes to scalability. Still, he argued that the limit on bitcoin transactions has been identified in the past as a weakness in need of addressing.
Andresen wrote:
“Agreeing on exactly how to accomplish that goal is where people start to disagree – there are lots of possible solutions. Here is my current favorite: roll out a hard fork that increases the maximum block size, and implements a rule to increase that size over time, very similar to the rule that decreases the block reward over time.”
Andresen added that the development community has always intended to raise the block size, but that a long-term scalability fix has yet to take place.
Bigger blocks are better
The bitcoin network is currently experiencing 50,000–80,000 transactions per day [7]. As Andresen noted, however, the data needs being placed on the bitcoin network aren’t huge, making the 1‑megabyte block size sufficient for use today.
In the long-term, though, this block size may lead to issues, Andresen wrote, arguing that the need to take action makes sense not only from a practical perspective but also an ideological one.
Andresen said that a hard fork to increase the block size is in line with the spirit of bitcoin, arguing:
“I think the maximum block size must be increased for the same reason the limit of 21 million coins must NEVER be increased: because people were told that the system would scale up to handle lots of transactions, just as they were told that there will only ever be 21 million bitcoins.”
Andresen suggested that the inflection point for the bitcoin block chain may come during a future price upswing, an event that has historically been associated with an increase in the number of bitcoin transactions.
Any fix needs time
Acknowledging the challenges involved, Andresen conceded that the process won’t be easy. However, he said that such work is inevitable, noting:
“Getting there won’t be trivial, because writing solid, secure code takes time and because getting consensus is hard. Fortunately, technological progress marches on, and Nielsen’s Law of Internet Bandwidth and Moore’s Law make scaling up easier as time passes.”
Andresen posited that the 50% annual growth rate he suggested would enable the distributed network to facilitate as many as 400 million transactions per day if implemented now. After 12 years, the bitcoin network’s estimated transaction capacity would reach 56 billion transactions per day, according to Andresen’s initial calculations.
This, Andresen said, would put the bitcoin network in a position to serve as a truly global value exchange system.
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As Gavin Andesen, lead Bitcoin developer, points out, an increase in scalability is necessary if Bitcoin is going to become the trading platform of the future, but it’s not going to be easy. Why? Because Bitcoin’s changes are concensus-driven and consensus is hard. Or at least is can be, depending on the nature of the change. In this respect, Bitcoin really is like a herd of lemmings most time because that just makes sense.
But it has the potential to become a herd of cats when the conditions are right. When Gavin Andresen issues a change to Bitcoin’ts protocols, those changes aren’t automatically implemented simply because the lead developer makes them happen. They’re implemented because all of Bitcoin’s users choose to implement them. So the bigger, and potentially more controversial, the changes to Bitcoin’s protocol, the greater the likelihood that it could be a change that a significant minority of Bitcoin users and/or miners choose not to implement. And if that happens, Bitcoin’s blockchain splits in two [8]:
Tradeblock.com
Go Fork Yourself – Life After a Bitcoin Hard Fork
Posted on June 6, 2013“I assign a 0% probability that we will continue with the present proof of work function. The present proof of work function is not going to survive the year. Period. If there’s one hard prediction I’m going to make it’s going to be that.” – Dan Kaminsky
[youtube=http://youtu.be/si-2niFDgtI?start=2416&w=320&h=240]
Dan Kaminsky’s statement at the bitcoin conference in San Jose proved extremely controversial. While many may find it unlikely that the mining algorithm changin is a certainty, it does raise the question of what would happen to bitcoin if there were a hard forking event in the future.
On March 11th, 2013 there was an accidental hard fork – two separate block chains were created that effectively made alternate transaction timelines. Shortly after the new 0.8 software was introduced, a block was found using the upgraded software that caused the 0.8 block chain to be incompatible with 0.7 software. Two forks were created, one for each bitcoin software version. This was quickly corrected by miners reverting back to 0.7. However, if an intentional hard fork was created there would be no reversion to common software and two separate chains would continue to exist.
For this article, we will be considering hard forks that are not bug fixes or uncontroversial upgrades, but rather changes in the protocol that will be contested by a subset of the bitcoin community. An intentional hard fork would operate in much the same way as the accidental one in March. A new version of the bitcoin software would create an incompatible block chain with older versions, effectively creating separate currencies going forward.
Potential Causes of Hard Forks
1. Changing the Mining Algorithm
As Kaminsky mentioned in the earlier quote, there are alternative options to the proof of work algorithm that will likely receive additional attention in the coming months. His concern was sparked by the high hashrate of current ASICs compared to the rest of the network. In the short term, the overall network hashrate is tiny compared the the ability of a large company or government to produce ASICs and potentially compromise the blockchain. It is possible that a sophisticated adversary could use this temporary vulnerability to create ASICs and attack the network, forcing bitcoin to change its mining algorithm. As Yifu Guo, CEO of Avalon, pointed out it will likely take several years before current ASIC companies catch up to modern manufacturing processes.
[youtube=http://youtu.be/LY1xgGiejIc?start=792&w=320&h=240]
It is likely that miners who have invested significant sums of money in current hardware will not willingly switch to the new block chain, and continue mining on the old one.
2. Change to MAX_BLOCK_SIZE
Bitcoin has a scalability concern [9] that is quickly reaching a head. The current block size limit is 1MB, constraining the network to a maximum average of 7 transactions per second (tps). Visa alone [10] averages 2,000 tps, with a peak rate over 4,000 tps. There are two contradicting schools of thought on how to solve this problem. Either (a) increase the maximum block size, or (b) bring microtransactions off-block-chain. The increase max block size side argues that modern internet connections will have no trouble handling much larger blocks every 10 minutes, and storage space is becoming less of a concern on a daily basis. The off-block-chain side argues that it is unnecessary to record every micro-transaction in the world on the block chain, and there are viable alternatives. Large blocks will be incompatible with anyone using smaller block size software, and will effectively fork the blockchain.
3. An Inflationary Model
It is possible in 50 to 100 years the popularity of bitcoin’s deflationary model may change. This could potentially occur for two reasons:
As block rewards reduce in size, transaction payments may not be sufficient to support the ever-increasing mining costs. This could result in the need to resort to a constant block reward for perpetuity in order to compensate miners appropriately.
Economic philosophy is constantly evolving, and there could be a revelation in economic theory that disproves deflationary models as a viable long-term policy.
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Implementation
A hard fork is the result of two separate clients being used which read two separate versions of the block chain. We will name these to chains BTC, the original client version, and BTC‑2, the version containing a modified block chain which is unreadable by the original version.
The block chain is a ledger containing a history of every bitcoin transaction. Bitcoin miners group transactions into blocks, and create 10 minute check-points in the transaction history. A hard fork would create 2 separate histories of transactions after the forking event. People owning coins on one chain would have a different transaction history on the other chain. As the two chains are used separately their transaction history will diverge. This effectively makes BTC‑2 an alt-coin with the same starting point as BTC.
Impact
Exchanges
After a hard fork event, people holding bitcoins before the event will now have value in two separate currencies, BTC and BTC‑2. Exchanges would likely be developed to add liquidity between the two while people trade back and forth in an effort to gain bitcoins on the chain they think more valuable long-term. Each chain would now be its own history of transactions, it would be impossible to reconcile them into a common history. If one chain eventually won, the alt coins would not disappear, however their use would wane and they would eventually become worthless.
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Intra-currency exchange rates will develop as the market explores the true value of each chain. Purists will likely trade BTC‑2 for BTC, while those believing the new protocol is a necessary improvement will sell their BTC.
Accepting PaymentsAny companies currently accepting bitcoin as payment will have to decide if they want to accept both BTC and BTC‑2, and post prices in both currencies based on separate exchange rates. This would increase the amount of infrastructure involved in processing payments, with little net gain. An alternative would be for companies to commit to one chain over the other – and a Betamax vs. VCR contest would ensue as companies chose sides until one wins.
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Potential for Severe Confidence Degradation
Any hard forks that the bitcoin community is not fully committed to could create irreversible harm to the currency. The value of bitcoin is based on its acceptance, reliability, and security. Undermining these factors can have a devastating effect on market confidence. Hard forks will reduce the network effect that bitcoin has developed over the last 5 years since it will no longer be a unified currency, but rather divided into two contradicting factions. Once a polarizing hard fork occurs, it seems significantly more likely to occur again in the future. Any decisions made which could potentially result in a hard fork must be made with great deliberation, since the potential impacts could be severe.
As the article puts it, “hard forks” that aren’t readily embrace by the Bitcoincommunity could effectively divide Bitcoin resulting in an eventual divide and conquer scenario:
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After a hard fork event, people holding bitcoins before the event will now have value in two separate currencies, BTC and BTC‑2. Exchanges would likely be developed to add liquidity between the two while people trade back and forth in an effort to gain bitcoins on the chain they think more valuable long-term. Each chain would now be its own history of transactions, it would be impossible to reconcile them into a common history. If one chain eventually won, the alt coins would not disappear, however their use would wane and they would eventually become worthless....
Now, such a forking scenario is also possible for Bitcoin. That’s how it’s designed. But how likely is it that you’ll have a substantial portion of the Bitcoing community collectively decide to ignore the updates and create a showdown between old and new? Sure, the the scenario where a change in the mining algorithm literally eliminates a category of mining hardware (like ASICs) could trigger a rebellion. But are there any other scenarios?
Well, note the proposed change to bring “microtransactions” (transactions involving extremely tiny fractions of a bitcoin) off-block-chain and keep in mind that “colored coins” are basically microtransactions that represent some other form of transaction. Each bitcoin can be broken down into 100 million “satoshis” (the smallest bitcoin unit) and, in theory, a trasaction could consist of a single satoshi (0.00000001 BTC).
Well, as we’ll see below, there’s a lot more than just blockchain bloat from all those microtransactions Nadaq and other Wall Street firms that might be causing headaches in the Bitcoin community. Since “Colored coins”, as opposed to regular bitcoins, represent a trade in something other thay bitcoins, they rely on trust. And when you have a marketplace that relies on trust, you have a marketplace that’s asking for market regulation as was pointed out back in June 2013 when Bitcoin introduced the new 5430 “satoshi” default minimum free transaction size [11]:
Coin Desk
Colored coins paint sophisticated future for Bitcoin
Danny Bradbury (@dannybradbury) | Published on June 14, 2013 at 10:00 BSTBitcoin is a useful way to exchange money, but what if you could do other things with it? If bitcoiners could use it to issue shares, bonds and IOUs, or even to create alternative currencies atop bitcoins, they could add even more value to this innovative cryptocurrency. Bitcoinx, a community wanting to “democratize finance,” is hoping to facilitate just that, with a concept called “colored coins”.
Colored coins is a concept designed to be layered on top of Bitcoin, creating a new set of information about coins being exchanged. Using colored coins, bitcoins could be “colored” with specific attributes. This effectively turns them into tokens, which can be used to represent anything.
“It’s a distributed asset management infrastructure that leverages the Bitcoin infrastructure, allowing individuals and companies to issue various asset classes,” says Ron Gross, an Israeli programmer and active member of the bitcoin community, who was involved in the early stages of the colored coins project.
“The issued assets can then be traded between users without relying on a central authority. All the relevant advantages of Bitcoin apply (your account cannot be frozen, no middleman, cheap transactions).”
In a whitepaper (still in progress) on the subject, another contributor, Meni Rosenfeld, describes a variety of applications. Colored coins can be used to represent physical assets, such as a house or car. They could stand in for financial instruments such as stocks or bonds, or even interest-bearing assets. How about an IOU? Smartcoins open the way for credit infrastructures built on Bitcoin.
<bThere are challenges for colored coins, however. One came in the form of a patch to the Bitcoin protocol, announced in early April. The “anti-dust” patch, as it has become known, imposed a minimum size on any output in a bitcoin transaction. An output is a unit in a bitcoin transaction that defines the new owner, and the amount of bitcoins that he or she receives. In the new setup, any amount fewer than 5,430 satoshis (0.0000543 bitcoins) is disregarded. The developers made this patch to stop people from stuffing the blockchain with lots of microscopic transactions.
While 5,430 satoshis may seem small, colored coins works best with far more granular transactions than this. The patch was a setback for the project. “Colored coins can still work more-or-less fine even with these drawbacks, but now people say we should redesign (the) coloring scheme,” says Alex Mizrahi, who heads the colored coins project. “There are several proposals, but this is just a major slowdown.”
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Note the above: back in April 2013, Bitcoin’s developers issued a patch to the Bitcoin protocol that was explicitly designed to eliminate microtransactions, where were identified as an transaction less than 5,430 “satoshis” (which was subsequently raised to 5,460 satoshis). There are 100,000,000 satoshis per Bitcoin and one satoshi is a the smallest allowable transaction (you can transact in fractions of a bitcoin but not fractions of a satoshi). This patch was done to eliminate “dust” spam. And yet, if Bitcoin is going to embrace microtransactions in the future, 1 satoshi is obviously the transaction amount that users would prefer to use since you’re trying to represent something other than bitcoins in the transaction. So there’s an inherent tension between the “waste” of blockchain bloat caused by a flood of microtransactions and the “waste” of paying more than 1 satoshi for a transaction that doesn’t actually represent an economic transaction in bitcoins. With Bitcoin at $250/BTC, 5430 satoshis = 0.13 pennies. Compared to 0.000025 pennies for one satoshi at the same exchange rate, the potential fight over where to set the default minimum transaction size may not be a trivial deal for the incoming new players like Nasdaq that are planning on very high microtransaction volumes (as we all know from Superman III [12]).
Continuing...
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What would it take to get the Bitcoin community using colored coins? Much depends on whether we’re talking about native support at the protocol level, or add-on, “floating” support in bitcoin clients.Native support will help with the performance of thin clients (client-server versions that don’t store entire copies of the blockchain), says Mizrahi. “I believe it is very unlikely. Bitcoin does not welcome new features, from what I can tell.”
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But the creator of another SHA-256 currency – Freicoin — is very interested in a variation on colored coins. It is perhaps no wonder that Mark Friedenbach is enthusiastic about the idea. After all, he wants to rewrite the rules of usury with his currency.
Building a colored coins technology that is binary-compatible with Bitcoin will be problematic, he asserts, because of what he describes as high transaction fees. “We came up with a proposal that achieves everything that people want from colored coins. We will implement those on Freicoin, and then let Freicoin be basically the medium for exchanging credit and IOUs in the same way that Bitcoin is for exchanging hard cash.”
He says that the specification is almost finished, and that he is working to get it peer reviewed. “As soon as we deploy Freicoin assets, we’ll be hitting the scaling of Bitcoin,” says Friedenbach. He’d better prepare himself, then, as he wants his version of colored coins – called Freicoin Assets – out by Christmas.
But Bitcoin could see its own implementation in the form of a floating set of specifications that can be implemented in third-party bitcoin clients, rather than in the protocol itself. The good news is that, unlike some other services such as anonymity, colored coins don’t explicitly need integrating into the protocol, says Tamás Blummer, CEO of Bits Of Proof. His company produces an open-source, enterprise-class Bitcoin server that he says can already propagate colored coins.
“Colored coins is a logical layer above the core Bitcoin protocol,” says Blummer. “I believe that it should not need changes, only extensions.” He aims to have a color-aware wallet by the autumn, and says that a supporting infrastructure for transactions could be reality by the end of the year.
In fact, clients are already available. Mizrahi and his colleagues produced a version of the Armory client capable of handling P2P colored coin transactions in January of this year. Then, realizing that colored coins added a processing burden to an already resource-hungry client, he produced a web-based client instead: WebcoinX.
Part of the problem with implementing colored coins, says Mizrahi, is getting developers to work on it. Gross agrees. “Unlike Bitcoin, a clear path to monetize the colored coin infrastructure hasn’t emerged yet. So, there is relatively little incentive for people for work on colored coin projects,” he says. “As a result, Ripple.com, a direct competitor, has gained significant market share. Ripple.com solves very similar problems to colored coins.”
Like colored coins, Ripple is designed to facilitate credit structures in the world of math-based currencies. But Ripple is based on its own currency, XRP, and is also still currently controlled by a holding company, putting it in direct opposition to the decentralized ethos underpinning Bitcoin.
There are other issues. Any credit-based mechanism in colored coins would have to involve an element of trust. In colored coins, the trust would have to happen “out of band,” using a separate system.
“I believe we’ll see some infrastructure around it. Something like rating agencies, which will audit companies that issue stocks, bonds and currencies based on colored coins,” says Mizrahi. Such third-party systems would verify assets.
“Of course, it is completely decentralized, and potentially such agencies will compete with each other. We are going to offer some support for this on an ‘asset-definition’ level,” he says.
Ratings agencies? Stocks? Bonds? Futures trading? All of this begins to sound suspiciously regulatory, doesn’t it? The Bitcoin community is still in a world of pain thanks to regulatory tensions over issues such as whether an exchange is a money services business. Now, bitcoinX is proposing a decentralized way to create complex financial instruments while dispensing with those pesky anti-money laundering (AML) and know-your-client (KYC) rules.
If colored coins enable people to trade bitcoins as a placeholder for anything, they could land us in a world of trouble with already nervous governments. When bitcoins and stock trading have mixed in the past, things haven’t gone well. Remember the Global Bitcoin Stock Exchange?
“Tensions are unavoidable and will be even more severe here,” agrees Blummer. “I believe that Bitcoin has to work itself up the food chain, first targeting areas like crowd-funding before we attempt to ‘attack’ clearinghouses of stocks.”
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“If colored coins enable people to trade bitcoins as a placeholder for anything, they could land us in a world of trouble with already nervous governments. When bitcoins and stock trading have mixed in the past, things haven’t gone well.”
So as we can see, while Wall Street’s embrace of Bitcoin might sound really exciting for the Bitcoin community, it’s also the source of a number of potential headaches involving not just how to handle the conflict between microtransactions and miner payouts but also government regulators.
Now, presumably Nasdaq has the clout to deal with regulators and someone is eventually going to figure out how to make the make this work. But if the “colored coin” revolution takes off, it’s not just going to be Wall Street jumping on board too, hoping to use the offical Bitcoin blockchain and “colored” microtransactions to take advantage of the Bitcoing blockchain. And each new “colored coin” implementation doubles as a new opportunity for regulatory scrutiny. But as just saw, each new form of microtransaction also doubles as a new source of blockchain spam that bitcoin miners don’t like because its just going to keep bloating the blockchain more.
21 Inc: Silicon Valley’s Giving Tree of Free Microtransaction Giving Trees
It all raises a potentially huge question for the future of Bitcoin:
In a fight between the Bitcoin traditionalists that want to see Bitcoin take over the financial world vs the Bitcoin newcomers from place like Wall Street that want to see Bitcoin become a microtransaction “colored coin” trading platform, who’s going to win?
It’s not just relevant for the future of Bitcoin. It’s rather symbolic given that so much of Bitcion’s ethos thus far has been about the little guy fighting The Man and takin down Wall Street. And now that Wall Street is jumping on board the Bitcoin bandwagon, but with a someone different vision than the rest of the Bitcoin community in mind, it’s entirely possible that The Man is going to have to over rule the rest of the Bitcoin community in order to make its vision come to frution.
Part of what makes this all such a compelling question is that there’s no permanent answer. Due to the decentralized consensus-based nature of Bitcoin, the struggle over who controls Bitcoin is never ending. If a new Bitcoing patch with some changes to the Bitcoin protocol is develpoed by its developers, and the vast majority of the users decided to not implement it, that patch would effectively die. Similarly, if someone else (like The Man), developed their own patch that, for instance, got rid or the 5460 Satoshi limit and someone got a majority of the miners to accept that patch that would become the new de facto Bitcoing protocol. That’s how decentralized the system is.
And while, right how, the traditionalist Bitcoin community no doubt vastly outnumbers Wall Street’s clout when it comes to which changes in protocol to adopt and which to accept, keep in mind that Bitcoin’s Wall Street newcomers that want to usher in a “colored coin” revolution of sorts might have some significant Silicon Valley allies that also want to see a microtransaction revolution and they happen to be some of Bitcoin’s biggest boosters. And Comcast wants in. And they’re about to usher in an era of using bitcoin microtransactions to access premium web content in an attempt to “reimagine the transaction confirmation process as a way to onboard consumers” by giving away free gadgets that double as bitcoin mining nodes that are (mostly) working on behalf 21 Inc [13]:
Coin Desk
Inside 21’s Plans to Bring Bitcoin to the Masses
Pete Rizzo (@pete_rizzo_) | Published on May 12, 2015 at 23:40 BSTSecretive bitcoin startup 21 Inc has performed tests illustrating how its technology could enable machine-to-machine bitcoin transactions as part of a company overview created during the fundraising of its latest $75m Series C.
In its pitch, 21 Inc [14], then still operating under original moniker 21e6, showcased both slides and video that demonstrate how bitcoin could be used to facilitate real-time marketplaces for Internet bandwidth. Using three proxy users, a Vimeo demonstration [15] outlines how a service can parcel out its download capacity through the use of bitcoin payments.
Connected to an account [16] set up in the name of 21 chairman Balaji Srinivasan, the demo illustrates an example whereby three clients participate in such an auction, with their bandwidth speeds changing in real time as bids are placed.
A narrator explains:
“Tomorrow, perhaps it would be possible for clients to send bitcoin to get bandwidth. That is to say, different clients could send bitcoin to the server to indicate their need for that resource.”
An analysis of the blockchain confirms the transactions for clients 1 [17], 2 [18] and 3 [19] were received by bitcoin’s public ledger on 16th October, while an example of the display can be found on a URL registered as cooperative-algorithms.com [20].
Also included in the overview is an email exchange allegedly taking place between Comcast West Coast strategic development managing director Francisco Varela and 21 CEO Matt Pauker in which the cable giant exec evaluates how its customers could benefit from participating in 21’s bitcoin mining operations.
A representative from Comcast confirmed such talks, but suggested they were “exploratory” in nature and that it has no plans to work with 21 at this time. Comcast boasts 4.4 million customers in 21 states and generated $67bn [21] in revenue in 2014.
Overall, the 80-page overview suggests 21 was, at the time of its apparent fall 2014 preparation, seeking to become one of the bitcoin network’s largest transaction processors, a microtransactions protocol layer for the Internet and a mining pool branded as a social networking platform.
The cornerstone of the strategy as presented would have been the release of consumer products that would turn power from wall sockets into bitcoin through the widespread dissemination of bitcoin mining chips.
When reached for comment, representatives from 21 suggested that information presented was “outdated” and “inaccurate”, and that it did not paint an accurate picture of how the company would ultimately seek to go to market.
“Much of the information is inaccurate, and that which is not grossly inaccurate is long obsolete (especially the numerical figures),” a 21 spokesperson said, declining to elaborate further.
Bitcoin is power
The slides laid out a plan hinging on embedding 21’s custom-made ‘BitSplit’ mining chips into everyday tech products such as USB chargers, PCs, routers, game consoles, phone chargers and direct chipsets at no cost to the hardware producers. The document suggests 21 had a working demo of its BitSplit chip at the time it was prepared.
According to the overview, the BitSplit chip’s key innovation was intended to be a hardcoded bitcoin wallet address that would give the user 25% of mining proceeds, with the remaining 75% going to 21.
Each device would be built with target applications in mind that would then allow consumers to, in theory, spend any bitcoin earned for online content or digital services.
For example, PCs, mobile phone chargers and USB hubs would seek to encourage micropayments in applications, while routers and game consoles would allow users to spend bitcoin for added bandwidth or on in-app purchases.
Given that users would constitute a small portion of the network individually, 21 detailed how it could potentially increase the average payouts for both itself and the owners of consumer products with its technology.
The documents suggest 21 had sought to build 20,000-server, 26-megawatt datacenters to serve as the center of a mining pool that could ensure block rewards.
As an example of the potential power of its pool, 21’s mining operations generated approximately 5,700 BTC [22] in 2013 and 69,000 BTC [22] the following year, according to the document.
By the time its chips were to be embedded into Internet of Things (IoT) devices, 21 projected its cost to produce 1 BTC could be as low as $7.45.
Going social
The documents suggest 21 had been considering a multi-pronged strategy to build out a competitive mining network that also sought to reimagine the transaction confirmation process as a way to onboard consumers.
Without a strong core of industrial bitcoin mining facilities, the document contended, consumer mining with the chips would have been too unprofitable to attract interest.
The documents projected that, should the BitSplit chips seek to process transactions alone, a user would need 34,722 days, or about 93 years, to discover a block. By pooling its resources, however, 21 projected it could reduce the average block time to 200 minutes, or roughly three hours, paying users 0.72 mBTC or about 17 cents per day.
As part of this effort, 21 would also seek to make the activity of mining more user-friendly by auto-enrolling users into its own social network. Named BlockParty, the project was introduced via a visual mock-up of how the social network might look running as a mobile application.
According to the image text, users could keep track of BTC earned daily and view the purchasing habits of friends. In the example, one user is able to use his BTC to skip 15 minutes of commercials on online video service Hulu.
Other updates show friends activating and deactivating devices.
Ties to Intel
Comcast was not the only major company named in the documents.
For example, 21 indicated that it had been processing bitcoin transactions with what it called the “only chip” built at computing giant Intel’s foundry, touting close relationship with US computing giant Intel.
Intel factories, the documents suggested, were responsible for at least two generations of 21 bitcoin mining chips, a 0.57 w/GH 22nm FinFET chip (codenamed CyrusOne) and a 0.22 w/GH 22nm chip (codenamed Brownfield).
Though Intel has so far kept its relationship with 21 quiet, the bitcoin startup took the opposite approach in its company overview, which included a screenshot of an email allegedly from Intel CEO Brian Krzanich. Dated 5th September, the email finds Krzanich informing Pauker and investor Marc Andreessen of his opinion on a proposal to distribute bitcoin mining chips in consumer electronic devices.
Krzanich indicated he would be instructing Intel VP and GM Doug L Davis to evaluate the potential addition of mining chips to Intel products, including desktop PCs, writing:
“I am copying Doug on this note to make an introduction … but trust me I will stay 100% engaged in this and be the godfather of it at Intel.”
Intel’s apparent vote of confidence in the company was detailed in another entry.
“We are taking your suggestion very seriously and if Intel was to ubiquitously apply mining to the majority of our chips, it is a significant event and will impact the landscape,” general manager of the New Business Group at Intel Corporation Jerry R Bautista [23] remarked in an email with Pauker.
Both 21 and Andreesseen Horowitz declined to comment on the nature of any talks with Intel. Intel did not offer a response when reached.
Additional emails included infer the company had reached out to technology companies such as Advanced Micro Devices [24] and Qualcomm to assess their interest in increasing their revenue through the addition of BitSplit-enabled products.
Emails included from Qualcomm’s Andy Oberst indicate that the firm had just approved an investment in 21 at the time of the document’s preparation. AMD declined to comment for this report.
Internet of Value
Once consumers and businesses are set up to receive bitcoin via everyday devices, the documents provide evidence 21 had built technology that intends to serve as the template for how such earnings could be used in microtransactions on the Internet.
In particular, 21 had been working on a process that would allow developers to block users from accessing websites unless funds are sent to a bitcoin address. Notably, the process used the 402 Payment Required [25] error code originally intended for web-based micropayments at the outset of the World Wide Web.
Under this scenario, a client would ask a server to open a connection, and rather than seeing an error when denied, the user would receive a price quote in BTC.
Paid APIs, paid Wi-Fi, priority email and ad-free web browsing, 21 had suggested, were all additional use cases that could be enabled once consumers are able to generate small amounts of bitcoin through its mining products.
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21 went on to describe the combined effect of its work in lofty terms that evoked the early Internet, suggesting the launch would mark the beginning of a more widespread uptick in consumer bitcoin adoption.
“The AOL CD of bitcoin,” the document called the strategy. “Give every user a free trial of bitcoin at near-zero marginal cost. A proven model to onboard millions.”
Wow. There’s a lot go digest there. But first, yes, you read that right:
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“We are taking your suggestion very seriously and if Intel was to ubiquitously apply mining to the majority of our chips, it is a significant event and will impact the landscape,” general manager of the New Business Group at Intel Corporation Jerry R Bautista [23] remarked in an email with Pauker.
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Intel is interested in creating a “significant event” that will “impact the landscape”. And it sounds like they already have since Intel has already designed two generations of 21 Inc’s chips:
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For example, 21 indicated that it had been processing bitcoin transactions with what it called the “only chip” built at computing giant Intel’s foundry, touting close relationship with US computing giant Intel.
Intel factories, the documents suggested, were responsible for at least two generations of 21 bitcoin mining chips, a 0.57 w/GH 22nm FinFET chip (codenamed CyrusOne) and a 0.22 w/GH 22nm chip (codenamed Brownfield).
Though Intel has so far kept its relationship with 21 quiet, the bitcoin startup took the opposite approach in its company overview, which included a screenshot of an email allegedly from Intel CEO Brian Krzanich. Dated 5th September, the email finds Krzanich informing Pauker and investor Marc Andreessen of his opinion on a proposal to distribute bitcoin mining chips in consumer electronic devices.
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Yes, it certainly looks like Intel’s onboard. Significantly.
But also take note of just how significant 21 Inc is going to become in the Bitcoin mining market as a whole:
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The documents suggest 21 had sought to build 20,000-server, 26-megawatt datacenters to serve as the center of a mining pool that could ensure block rewards.As an example of the potential power of its pool, 21’s mining operations generated approximately 5,700 BTC [22] in 2013 and 69,000 BTC [22] the following year, according to the document.
By the time its chips were to be embedded into Internet of Things (IoT) devices, 21 projected its cost to produce 1 BTC could be as low as $7.45.
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Keep in mind that ~1,312,500 bitcoins were “mined” in 2014 [26], so if 21 Inc “mined” ~69,000 bitoins in 2014, 21 Inc won was just over 5 percent of all the bitcoins mined that year.
And what do Intel and Comcast and the rest of 21 Inc’s big name investors have in mind for the future of Bitcoin? Turning 21 Inc’s consumer mining gadgets into a Bitcoin consumer bridge to the masses via a trickle of maybe like ~$0.17/day in Bitcoins (minus electicity costs) that users will be ecouraged to use to buy things like a temporary bandwidth boost. And then there’s the “colored coins” microtransactions for premium web content that 21 Inc and Comcast (and who knows who else at this point) is planning on dishing out.
21 Inc’s Microtransaction Giving Trees Might Need to Take Some of Your Electricity to Keep Giving. Also, Your Info
And in order to do all that, 21 Inc needs to guarantee that it consistently wins mining “rewards” by setting up the giant server farm to do most of the mining work. The consumer devices help with the mining too, but it sounds like they’re mostly just intemded used as some sort of electricity-consuming little Giving Trees [27] of microtransactions and trickles of Bitcoins. A Giving Tree of microtransactions that also collects information about how you use your micotransactions and maybe use your Giving Tree device too. And who knows what else [28]:
FT Alphaville
Meet the company that wants to put a bitcoin miner in your toaster
Izabella Kraminska | Apr 30 16:28The Manhattan Project-type secrecy surrounding a company called 21 Inc — hitherto known as 21e6 — has been stupendous, even by Silicon Valley standards.
Not that this has stopped cryptocurrency friendly journalists like Michael J. Casey at the WSJ [29] (co-author of the Age of Cryptocurrency) and Coindesk’s Pete Rizzo [30] from propagating 21 Inc’s claims about bitcoin being bigger than Google.
All we do know is that the company, headed by Matthew Pauker, has raised more than $116m worth of venture funding, a record for the sector, and claims to be developing technology that they believe will help to mainstream bitcoin.
Leading investors include Andreessen Horowitz, RRE Ventures, a Chinese PE firm called Yuan Capital and Qualcomm. But, Casey reports, the wider investor list includes everyone from PayPal co-founders Peter Thiel and Max Levchin, to eBay co-founder Jeff Skoll and Dropbox Inc CEO Drew Houston, to Expedia Inc. CEO Dara Khosrowshahi and Zynga Inc co-founder Mark Pincus.
To date, the only worthwhile snippets of info as to what 21 Inc might actually do have come by way of Balaji Srinivasan, Andreessen Horowitz partner and 21’s chairman. At a recent event Srinivasan claimed things like [30] … “payments are now packets. Bitcoin is here to stay” and that Bitcoins are like “tulips you can send anywhere in the world in arbitrary quantities”.
Yes, he actually said that: Bitcoins are like “tulips you can send anywhere in the world in arbitrary quantities”.
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According to our knowledgable sources, 21 Inc plans to “onboard” customers by giving many of these devices away for free, proving once and for all that it’s as easy to earn bitcoins as it is to watch Game of Thrones on the telly.
The company is telling people that it is decommoditising Bitcoin by bringing mining to the masses — and if you struggle to understand how that might be a break-even strategy in an environment of sub $250 bitcoin prices, that’s probably because you, unlike 21 Inc, under-estimated the average punter’s capacity to subsidise ASIC mining costs.
For example, there used to be a time when Bitcoin miners seeking to subsidise their energy costs had to clandestinely hack into Joe Public’s computer device to enslave [31] their processing power (and their energy) for their own mining purposes. But with 21 Inc’s model, the assumption seems to be that if you give the punter a free device which provides him with some small utility and a promise of some bitcoin revenue (25 per cent if rumours are true) he’ll be more than happy to majority fund your Bitcoin energy mining costs.
With 75 per cent of the bitcoin revenue left for 21 Inc’s taking, small surprise then that the company anticipates its initial revenue will be impressive when compared to the first two years of zero revenue growth at Google and Facebook. Or, at least, so we understand.
It’s a tempting money back guarantee for a VC in any case — especially if the hardware being provided is guaranteed to be safe, sound and compliant with local consumer protection regulations. Add to that the fact that 21 Inc is allegedly also working with both Intel and Qualcomm on the development of something it calls “split chip” technology for IoT devices, with further strategic partnerships being sought with Facebook, CISCO and IBM and, well, what’s not to like if you’re an investor?
On one hand you’ve got the roll-out of devices that mine Bitcoin at the consumer’s own energy cost. On the other hand you’ve got a company promising to embed Bitcoin ASIC chips into IoT devices that are already connected to the internet that might as well be mining bitcoins at someone else’s energy expense.
If it’s free you’re probably the product
Now, there is, we’d argue, a deep-seated problem with any business model that relies on a perpetual free lunch to maintain its bottom line. Our contacts, for example, note that bitcoin is already trading below 21 Inc’s worst-case projected price scenario, upon which the original business plan was based.
But there’s something broader. 21 Inc claims to be democratising and decommoditising bitcoin but seems to be openly corporatising mining by promising to turn everyone into a poorly paid employee.
As Jaron Lanier, author of Who Owns the Future? [32], has opined in the past, it is efforts like these that stand to turn Bitcoin into a plutocracy generating machine.
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What about the “internet of things” potential? There must be something in that?
Well, if IBM’s view on the potential of the blockchain is anything to go by [33] — and IBM is probably amongst the most enthusiastic in the sector about the technology — there are problems even here.
For one thing, consumer behaviours don’t necessarily compliment the servicing needs of bitcoin mining devices. As IBM’s own note on “device democracy reflects” (our emphasis):
While many companies are quick to enter the market for smart, connected devices, they have yet to discover that it is very hard to exit. While consumers replace smartphones and PCs every 18 to 36 months, the expectation is for door locks, LED bulbs and other basic pieces of infrastructure to last for years, even decades, without needing replacement … In the IoT world, the cost of software updates and fixes in products long obsolete and discontinued will weigh on the balance sheets of corporations for decades, often even beyond manufacturer obsolescence.
Namely, those who buy devices for core functions like toasting bread are unlikely to invest in maintaining their secondary functions, especially if they profit only marginally from them, if at all.
The internet economy, however, is famous for having perfected the art of two-sided dealmaking — the sort that allows the true cost of one thing to be offset or disguised by the functionality of another thing. To the minds of technologists and cyberneticists it’s this sort of symbiosis that allows for the formation of a digital “ecosystem”, the holy grail of the digital economy, made up of a perfect co-dependent state wherein positive feedback loops prevail and where almost anyone can have it all.
It’s the discovery of these sorts of ecosystems that has led, over time, to the breakdown of creative content markets. So, whereas prices used to be based on the cost of production, demand and quality of content, they’re now determined by the hidden value of one’s digital footprint to advertisers.
We bring this up because 21 Inc’s efforts seem intent on doing something similar for the world of physical devices.
So, whereas the cost of white goods and devices is still based around their cost of production and their utility, one can imagine the day these costs will be aligned to how easy or difficult it is to groom economic data or rents from devices instead.
The devices may be free, but their true cost will probably be based on the value of the information they allow manufacturers to extract (and add to the system as a whole for efficiency’s sake) by having you and your behaviours linked to your devices, and those devices linked to everyone else’s devices and behaviours as a result.
Indeed, if the IoT is to create a positive two-sided effect of the “ecosystem variety”, it must come at a consumer data or privacy cost. That, in a nutshell, is the faustian pact associated with the rise of the digital economy. A simple case of quid pro quo, which sees the act of sharing information within a network rewarded with additional economic efficiency.
Herein, we think, lies the ultimate flaw with 21 Inc’s plans to encourage growth of the connected machine economy by waiving transaction fees and monetising nodes. The only way the economics can work is if the data carried through the bitcoin network ends up being attached to meaningful information about the identity and behaviours of the nodes (a.k.a. people) themselves.
This, however, contradicts the fundamental raison d’etre of bitcoin, whose value — if any — is linked to the system’s ability to obscure data and maintain privacy in the digital world.
Yet, experts tell us, if and when the pseudonymous but unencrypted data within the blockchain is linked to the real world of fixed devices in people’s homes, it’s likely to get a whole lot less pseudonymous very quickly and provide, ironically, an excellent data-mining resource for almost any corporation, hacker or government.
This is truly nuts [34]. Please! bring on the tech crash.
Once again:
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If it’s free you’re probably the productNow, there is, we’d argue, a deep-seated problem with any business model that relies on a perpetual free lunch to maintain its bottom line. Our contacts, for example, note that bitcoin is already trading below 21 Inc’s worst-case projected price scenario, upon which the original business plan was based.
But there’s something broader. 21 Inc claims to be democratising and decommoditising bitcoin but seems to be openly corporatising mining by promising to turn everyone into a poorly paid employee.
As Jaron Lanier, author of Who Owns the Future? [32], has opined in the past, it is efforts like these that stand to turn Bitcoin into a plutocracy generating machine.
...Herein, we think, lies the ultimate flaw with 21 Inc’s plans to encourage growth of the connected machine economy by waiving transaction fees and monetising nodes. The only way the economics can work is if the data carried through the bitcoin network ends up being attached to meaningful information about the identity and behaviours of the nodes (a.k.a. people) themselves.
This, however, contradicts the fundamental raison d’etre of bitcoin, whose value — if any — is linked to the system’s ability to obscure data and maintain privacy in the digital world.
Yet, experts tell us, if and when the pseudonymous but unencrypted data within the blockchain is linked to the real world of fixed devices in people’s homes, it’s likely to get a whole lot less pseudonymous very quickly and provide, ironically, an excellent data-mining resource for almost any corporation, hacker or government.
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Yes, 21 Inc’s little Giving Trees can probably only really work as long as consumers are, in effect, paying rent. Payin rent by giving the devices electricity first which gets used for mining and the devices give 75% of the bitcoin minimg rewards back to 21 Inc and 21 Inc gets to keep all sorts whatever info about you that it collects through the devices and/or your use of the microtransactions. A rentier model that’s being promoted by 21 Inc as a populist way to democratize Bitcoin. A rentier model that could double as a giant paywall of the future. For the Big Boys of Silicon Valley and Big Media, that’s the future of Bitcoin: A pay to play/browse/watch medium for the “colored coin”-paywalled internet of the future [35]:
FT Alphaville
21 Inc and the plan to kill the free internet
Izabella Kaminska | May 19 15:10Details of the hottest, most secretive bitcoin start-up in Silicon Valley have finally been revealed by chairman and soon-to-be CEO Balaji Srinivasan of 21 Inc in a post on Medium [36]. They are, by and large, exactly what FT Alphaville reported them to be. [28] Cold sharp summary: Bitcoin mining devices in toasters.
Calling this a simple internet of things play, however, would be lazy. To really put the audacity of Srinivasan’s vision into perspective one first has to go back in time to the days of the early internet.
The first thing to understand is that the structure of today’s internet economy owes almost everything to a single bold assumption by the early web pioneers, namely that “information wants to be free! [37]“.
Nowhere is this vision better set out than in the 1982 movie Tron [38], which tells the story of a bunch of anthropomorphised computer programmers going against the yoke of an oppressive Master Control Programme in “the grid”, a celluloid metaphor for the monopolistic tech corporations of the day.
What is less known about the film is that computer scientist and digital utopian Alan Kay [39] — the founding father of object oriented computing — acted as its key technical consultant, rendering much of the narrative his personal call to digital nerds to rise up and be rid of the evil corporate overlords who constrain the dissemination of information, as much as a Disney-type fable.
And, in the real world, that’s pretty much how the web turned out. Information was set free; industries were Napsterised and the internet economy was transformed into a socialistic system in which data and information roamed free.
Except that, with time, it has become clear that things didn’t work out as intended. Instead of empowering the masses, the proliferation of free data has led to a Wild West free-for-all, where those who have a good understanding of how free information can be commandeered and exploited do exactly that.
Returning to the Tron analogy, destroying the Master Control Programme did not lead to the free society the web idealists envisioned. The old authoritarian powers were simply displaced by newly emergent authorities instead.
By the time the sequel to the Tron movie arrived in 2010, it’s clear the movie producers felt a need to communicate this change of heart as gracefully as possible. And so it was that the movie’s message turned from advocating free information to warning that systems which strive for too much perfection inevitably fail, and that ‘imperfection’ is desirable. In this recasting, the web’s most creative and vulnerable members needed protection if the web were to retain meaning and relevance in the real world.
As Kevin Flynn, chief protagonist and voice of the web pioneers, expresses ignominiously in the film: “I screwed it up, chasing after perfection.”
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Back in the real world, decades worth of social conditioning about the merits of free information hasn’t been so easily overturned. Free digital content is pretty much taken for granted, even if there’s no such thing as “free.”
The tech sector has a problem publicly admitting this.
If the sequel to the web, as we know it, is a hierarchal and monetised system, the transition consequently needs to be achieved in the same way that capitalism defeated Soviet communism — namely, by providing a small flavour of what it feels like to be a profiteering capitalist to those who, under the old system, would not have been able to profiteer in the same way.
Which brings us back to the 21 Inc launch and a very obvious fact: Information is not free and Silicon Valley knows it
One of the reasons, we propose, the tech gods of Silicon Valley are so keen on forwarding Bitcoin as a concept is because it ultimately allows them to back-pedal on the original premise that information should be free.
In that regard, 21 Inc arguably plays a critical role in the new Silicon Valley vision for a “paid for” meritocracy on the internet.
When FT Alphaville first outlined [28] 21 Inc’s business model, showing that it planned to ‘democratise’ Bitcoin mining by embedding ASIC mining chips into everyday connected devices like USB rechargers, we noted the economics didn’t seem to make any sense. For one thing, it didn’t seem conceivable that consumers could ever profit from the tiny fractions of bitcoins they were mining, especially after their energy costs were factored in. Secondly, it seemed much more likely the model would see consumers subsidising the energy costs of 21 Inc’s own mining pool.
But the clue to 21’s real intention comes in the second part of Srinivasan’s opening and explanatory paragraph:
After much hard work, we’ve created an embeddable mining chip which we call the BitShare that comes in a variety of form factors. The 21 BitShare can be embedded into an internet-connected device as a standalone chip or integrated into an existing chipset as a block of IP to generate a continuous stream of digital currency for use in a wide variety of applications. You can request a dev kit by signing up on our website to get started.
What this really is, in other words, is a plan to bring a digital metering system to the internet.
And on that note the two following paragraphs are critical to understanding the vision here:
a continuous stream of digital currency for use in a wide variety of applications. At the manufacturer’s discretion, the 21 BitShare chip can be configured to support a variety of different revenue shares for the mined bitcoin. For example, one could build an internet-connected device that shared some portion of mined bitcoin between the user, the retailer, the handset maker, and the carrier?—?thereby reducing costs and/or increasing margins throughout the entire supply chain. And because of the nature of mining as an embarrassingly parallel problem, embedded mining can scale up or down to fit within the power and thermal envelope of virtually any device.
Bitcoin-subsidized devices for the developing world. 21 was built by immigrants, and using our technology to get more people around the world online is important to us. We believe the most significant long-term application of bitcoin may be reducing the upfront cost of internet-connected devices to make them more accessible for the developing world. The success of the iPhone was in nontrivial part due to the carrier subsidy; with embedded bitcoin mining we can in theory extend that model to any internet-enabled device, turning a lump sum upfront cost into a potentially more manageable cost of power over time.
Suddenly, a few of the 21 Inc pitch deck slides, which are circulating online and dare to compare 21 Inc to Google and Facebook, begin to make more sense:
This isn’t about disrupting fiat money, central banks or the existing financial rentier system. It’s about making the internet much more like the financialised real world. Namely, by adding an energy and scarcity cost to digital transfers on the web so that information can’t be as easily exploited as it is today.
Up for grabs, notably, is the marketshare of Google, Facebook and Twitter and their ilk, due to their dependency on free consumer data to drive their advertising-based revenue.
A market mechanism for valuing data and trust?
As it stands today, nobody really has an idea of what their data is worth because there’s no mechanism by which processed or unprocessed data bundles can be valued.
Yet we know for a fact that personal data, especially when processed in aggregate form, does have a value in the open market. If it didn’t, Facebook and Google wouldn’t be the multi-billion dollar organisations that they are today.
But the data market trades much more like highly illiquid OTC commodities than anything akin to an open market exchange. Deals seem to be done bilaterally, on a bespoke and opaque basis. There is no “processed data”-value index. And there is no inspection agent akin to a Platts or an Argus agent setting out the frequency and value of the trades that are taking place.
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A benchmark for data value
Anyone who hangs around the Bitcoin faithful long enough will encounter the assertion that bitcoin is superior to fiat currency because it is “backed by maths” — which, of course, is utterly meaningless. It would be much better to say that bitcoin is backed by the sum of human knowledge about maths.
Or alternatively, and much more accurately, that it’s backed by a stock of pre-processed data.
While it’s true that the processed data in question is light on both information (due to so much of it being pseudonymous in nature), there’s no denying the energy it took to create it.
It’s this base energy cost that can now be used as a public benchmark to price more information-intensive data against.
This makes us think the key objective of the high-order bitcoin enthusiasts (as opposed to the financial speculators) is mostly about giving consumers a choice. On the one hand to pay for specially designed web services with spent processing time (and energy) that helps support the public digital commons (which acts as a glue that links up all sorts of different datasets). Or, on the other hand, to pay for open web services directly with personal data on a trust basis.
Either way, once a transparent price is established for the former, it stands to reason a price for the latter can also be equally derived, opening the door to a meritocratic paid-for internet and a market where all personal data has a clear market price.
This, in any case, seems to be the vision Srinivasan is outlining for both 21 Inc and the web when he speaks of “reducing costs and/or increasing margins throughout the entire supply chain”.
The question is, to what degree will factoring in a price for something that was previously free upset the economic balance? And will the average user — especially the one who opts to subscribe to rental contracts for device access — understand the value of their own worth any better in this new paradigm than in the last one?
Note these key points because they really do seem to summarize what 21 Inc, and therefore the biggest names in Silicon Valley and the Big Media, have in mind:
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If the sequel to the web, as we know it, is a hierarchal and monetised system, the transition consequently needs to be achieved in the same way that capitalism defeated Soviet communism — namely, by providing a small flavour of what it feels like to be a profiteering capitalist to those who, under the old system, would not have been able to profiteer in the same way...
This makes us think the key objective of the high-order bitcoin enthusiasts (as opposed to the financial speculators) is mostly about giving consumers a choice. On the one hand to pay for specially designed web services with spent processing time (and energy) that helps support the public digital commons (which acts as a glue that links up all sorts of different datasets). Or, on the other hand, to pay for open web services directly with personal data on a trust basis.
Either way, once a transparent price is established for the former, it stands to reason a price for the latter can also be equally derived, opening the door to a meritocratic paid-for internet and a market where all personal data has a clear market price.
This, in any case, seems to be the vision Srinivasan is outlining for both 21 Inc and the web when he speaks of “reducing costs and/or increasing margins throughout the entire supply chain”.
The question is, to what degree will factoring in a price for something that was previously free upset the economic balance? And will the average user — especially the one who opts to subscribe to rental contracts for device access — understand the value of their own worth any better in this new paradigm than in the last one?
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A new model for hierarchical, monetized web usage just might be what 21 Inc has in mind. A model where microtransaction-based access replaces the prevailing free web model. Consumers could have the option of either paying for that access or obtained it indirectly through a combination of subsidizing 21 Inc’s mining electricity cost and giving up private information. And the developing world appears to be an area where 21 Inc really sees a lot of potential since that’s where so many people won’t be able to afford the upfront cost of these consumer devices.
In other worlds, 21 Inc wants to help the developing world by encouraging a massive waste of electricity that serves no purpose actual purpose. Because that’s what the developing world, and the rest of the world really needs: a bunch of extra energy-hungry consumer electronics that doubles as spyware. And in the process of brining the world the developing world (and poor people everywhere) this wonderful gift of energy-sucking Giving Trees, a new model for a monetized, transactional internet might be born. Whoopie!
Monetize the Internet Via Microtransaction Means Mining Might is a Must
So 21 Inc and its many big name backers clearly have big plans for not just Bitcoin but the internet in general. But it’s important to keep in mind just how critical it is that 21 Inc has massive mining power that guarantees regular mining “rewards” for this scheme to really work. Why? Because that vision is explicitly for these microtransactions to be allowed with just a single satoshi [36] and when Bitcoin issued the patch to the protocol back in April 2013, that patch included a loophole: If minor can include all the microtransactions they want. But it’s optional. So if 21 Inc wants to see its microtransactions included in blockchains without make each one cost 1 satoshi instead of 5460 satoshis, it probably has to get those transactions inserted into the blockchain itself by winning the mining race over and over [40]:
Bitcoin Magazine
Bitcoin Developers Adding $0.007 Minimum Transaction Output Size
by Vitalik Buterin on May 6, 2013Clarifications:
1. This is NOT a change to the Bitcoin protocol, it is a change to default transaction inclusion and propagation rules. If you can get your transaction to a miner willing to bend these rules, you will get included in the blockchain (although it will be inconvenient for you).
2. There is another justification given for adding a minimum transaction size: many new users end up receiving very small quantities of bitcoin from free bitcoin sites [41] and are unable to spend them because the total amount is less than the minimum transaction fee for sending small amounts. This patch will eliminate this problem.
3. This is actually a softened version of a previous change that would have the 5430 satoshi minimum hardcoded with no option for individual miners to customize it without editing and recompiling source code, and so is already an improvement. Any expressed or implied criticism was directed at the original introduction of the minimum, not this particular patch.See criticism of this article and my replies (and so on) at http://www.reddit.com/r/Bitcoin/comments/1drnvp/bitcoin_developers_adding_0007_minimum/ [42], and feel free to make your own judgement.
About a week ago, lead Bitcoin developer Gavin Andresen quietly introduced a patch [43] that would add a fairly significant change to the transaction propagation rules: any transaction with any of its outputs less than 5430 satoshis (0.00005430 BTC) would be classified as non-standard, and will not be included or further propagated across the network by default miners. The minimum is a setting that individual miners are free to change (including to zero), and such transactions will remain valid under the rules of the Bitcoin protocol, but with only non-standard miners and miners that bother to change default settings including them in blocks and even passing them along to other nodes it will take much longer for them to get accepted (ie. “confirmed”) by the Bitcoin blockchain.
The main motivation for the patch is the same as that for many of the other rules [44] restricting transaction propagation and inclusion in default miners: to fight “transaction spam”. One of the more problematic aspects of Bitcoin is that every transaction ever made will need to be stored by every fully participating node in the Bitcoin network forever, and already the size of the Bitcoin blockchain is over 7 gigabytes [45]. Thus. there is an understandable desire to attempt to limit transactions that are deemed to be more trouble to store and verify than they’re worth. Some rules, like one added three months ago [46] to make transactions that are over 100,000 bytes in size non-standard, exist to block single transactions that would cause an excessive amount of computing power to process and hard disk space to store. Others serve to discourage features of the Bitcoin protocol that are not well-tested. This one, however, serves a slightly different purpose: to block transactions that are perfectly ordinary in format and size, but which provide an extremely small benefit to the sender.
A substantial portion of Bitcoin transactions will be affected; a chart linked in Gavin’s pull request shows that about 20% of all recent transactions [47] are under the threshold. By far the main user of such small outputs is the popular Bitcoin gambling site SatoshiDice [48]. All bets on SatoshiDice take place directly over the blockchain; the bettor sends any amount of bitcoins between 0.01 and (usually) 500 to one of SatoshiDice’s addresses, if the bet wins, the original bet multiplied by the prize multiplier is sent back, and if the bet loses the bettor would receive 1 satoshi to let them know that they did, in fact, lose the bet, and their transaction was not lost due to some kind of error on the part of SatoshiDice or the Bitcoin network. SatoshiDice is prepared; the site has already increased the size of their “loss notification” transactions from 1 satoshi to 0.00005 BTC [49].
Also affected will be the colored coins project [50]. The colored coins project’s core idea is to assign additional value to extremely small amounts of bitcoin; one application would be to “tag” ten thousand specific satoshis and then use them to represent shares of a corporation. One single satoshi can be used to represent smart property [51]. Now, in order to achieve the same granularity what could be done with a single satoshi before would now need to be done with a block of 5430. However, in the discussion [43] on this patch on Github, colored coins developer Alex Mizrahi commented: “I don’t think this change will create significant problems for ‘colored coins’. I mean, it’s strange that you’re doing this, but I guess we can live with it.” Although this will increase the expense of creating shares, it will not overshadow all other expenses; each individual colored coins transaction already required a 10,000 satoshi transaction fee in order to get included into the network without unreasonable delay.
In both cases, however, from both the Github discussion and conversations elsewhere it is clear that many core Bitcoin developers have a dim view of both SatoshiDice’s loss notification mechanism and colored coins being in the Bitcoin network. One poster said, “personally I think that a ‘colored coin’ solution lies in alt-chains and using the main BTC block chain is not appropriate for this application”, echoing a commonly held belief that Bitcoin is meant to be used to send payments and not information. Jeff Garzik added in response to another comment, “It is not breaking fundamentals — bitcoin has never ever been a micro-transaction or micro-payment system”.
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Where disagreement lies is twofold. First, there is the question of just how small a milli-transaction needs to be before it becomes a micro-transaction. On the one side are Bitcoin developers like Peter Todd, who stated in the Github thread that “We do need better communication of this stuff, and that includes doing things like taking ‘Low or zero processing fees’ off of bitcoin.org and not talking about microtransactions.” The argument in Todd’s favor was already mentioned; restricting as many low-value transactions as possible keeps the size of the Bitcoin blockchain down, mitigating the need for Bitcoin users to move away from “full clients” to “light clients” which do not store the Bitcoin blockchain themselves and instead rely on third-party servers to do much of the legwork. On the other side are those who see low processing fees and smaller minimum transaction sizes as being among Bitcoin’s cardinal features, for which it is even worth it to give up the idea that anyone other than a miner or business will be actually storing the full Bitcoin blockchain. The argument that this group makes is that most users have migrated off the “Satoshi client” maintained by the core developers to “light clients” like Electrum and Blockchain already, and it is a fool’s game to attempt to forestall this trend.
The other question is that of alternative uses of the Bitcoin protocol. The solution used to limit low-value transactions before this move toward an outright ban was transaction fees, and this mechanism had the advantage that, rather than outright banning any particular uses that are deemed “wasteful”, it allows the sender themselves to decide whether or not sending the transaction brings enough benefit to them to be worth the public cost. Here, no such individual judgement is possible, and so in order for a Bitcoin transaction to be deemed “valuable enough” to be allowed into the blockchain it must at least appear to be a substantial transfer of Bitcoin-denominated monetary value. The fact that colored coins users might benefit more from sending single satoshis than some other users benefit by moving around entire bitcoins, while the public storage cost for both types of transactions is the same, is not reflected in this rather blunt style of regulation. The argument used by developers, once again, is that Bitcoin is only intended to be a system for storing and sending money, and other uses belong on alternative blockchains better suited to their individual purposes.
It may well be that a community consensus will emerge that Bitcoin is a network for sending money and nothing but money, and substantial amounts of money too. However, so far no such consensus exists, and these questions remain very much up for debate. Because of its limited scope, and its nature as a modifiable miner setting, this particular patch is not particularly important, but it does highlight the importance of these long-standing issues that still remain unresolved. Exactly what minimum size of transactions should Bitcoin target itself toward, and should it aim for virtually no fees? Is the use of the Bitcoin network to send trivial amounts of information, whether that may be information about ownership in the form of a colored coins transaction or a loss notification from SatoshiDice, something that we want to accept? Exactly what balance we strike with each of these questions is a crucially important decision that will affect the course that Bitcoin will take for decades to come, and it is very important that we as a community have solid communication, and genuine two-way discussion, when these kinds of issues arise.
As we can see, back when Bitcoin’s developers patch Bitcoin in 2013 to limit the transactions to 5430 (now 5460) satoshis, this wasn’t a hard limit on the minimumum size for a bitcoin transaction because individual miners can still add 1 satoshi microtransactions if they choose to do so. They merely have to change the default settings for their mining software. And that means that 21 Inc, or anyone else, is free to process 1 satoshi microtransactions today...as long as it’s 21 Inc consistently wins enough of the mining “rewards” each day to guarantee that its chosen transactions get added to the next “block” in the blockchain.
But as we can also see, when this patch was put into place back in 2013, the issue of whether or not to embrace or discourage microtransactions was still very much an open question within the Bitcoin community. And since the 5460 satoshi restriction (default restriction) is still in place today, it’s pretty clear that the issue has yet to be resolved.
So one of the big questions looming over Bitcoin now is what happens if Wall Street, 21 Inc and the rest of their deep pocketed allies just decide that microtransactions with zero fees are the way of the future, blockchain bloat be damned, and the rest of the Bitcoin community effectively revolts. Or what about any other changes that the Big Boys want to see in the future? Who wins? Keep in mind that the more resources big firms like 21 Inc throw into mining, the more little guys throw in the towel and leave entirely because they can’t compete as the difficulty level in the mining process automatically rises. At some point its only going to be major mining operations that even bother mining because it’s just not feasible for smaller operators. Well, there will also be 21 Inc’s sea of consumer device miners. If 21 Inc continues in its plans to dominate the mining market, it will merely be accelerating an existing trend of a lot fewer small miners and a lot more concentration of mining power [52]. It will mostly be super computing centers at some point if the Bitcoin arms race continues. And 21 Inc wants to be a dominant player in that market and clearly has the resources to do it.
And with just over 4,000 nodes (which are distinct from the mining nodes and instead propagate information across the network) [53] in operation in January of 2015 (down from 10,000 nodes in March 2014 [54]), how hard would it be for 21 Inc to overwhelm the rest of the Bitcoin node network? 5,000 USB chargers doubling as miners and nodes would do the trick today. What are the implications of a 21 Inc node takeover in terms of their ability to controls which 3rd part microtransactions get recorded? Or which version of Bitcoin is used in general?
It’s going to be interesting to see what happens if the “old money” (Wall Street and Silicon Valley giants) and the “new money” (Bitcoin ideologues that want to see it replace all other forms of money) actually go to battle because, as we’ve seen, it’s not simply the case that Bitcoin’s mining protocol is set up on a “1 dollar 1 vote” system. The very rules that run Bitcoin (what version of the software and protocol) also sort of follows the same “1 dollar one vote model”, although not quite to the same extent.
Bitcoin miners, but also Bitcoin users, all collectively decide which rules are followed depending on which version of the software everyone collectively decides to use. And while 21 Inc or someone else with deep pockets could potentially create so much mining capacity that they dominate the which version of the Bitcoin protocol is used by most of the miners, it’s not possible to also control which version is used by all of Bitcoin’s users. Except, under 21 Inc’s business model, 21 Inc will presumably also have control over which version of the Bitcoin protocol all its device users use too. So the more devices 21 Inc gives away, the more voting clout 21 Inc has in determining which version of Bitcoin is actually the “official” version on the client side too simply by controlling which versions are run by all of its user devices.
In other words, while Bitcoin is constantly, and absurdly, championed as some sort of populist form of money that will use the power of its decentralized nature to slay the evil banks and fiat currency and return us to a simpler time of with a digital gold-standard, it’s looking increasingly like the Big Money is about to buy Bitcoin using that very same decentralized “one dollar one vote” system that’s been hailed as Bitcoin’s source of populist strength all along. At least in part.
On its own, the potential takeover of Bitcoin by Big Money interests would simply be the latest amusing development another dystopian Libertarian experiment. But when you consider that some of the bigggest names in Silicon Valley and media giants like Comcast appear to be keenly interesting in hooking consumers onto some sort of microtransaction-for-electricity-spent-on-third-part-processing-and-personal-info-collection rentier model for electronic gadets and it’s targetted especially for the developing world where they don’t exactly have electricity to spare, the latest Bitcoin development is a lot less amusing and a lot more, well, like a potential catastrophe. We’re lookin at a business model where stuff is produced and then given away potentially to billions of people that’s specifically designed to have all those devices suck away little bits of electricity in pursuit of victory (mostly 21 Inc’s victory) in the endlessBitcoin global mining arms race resource black hole.
E.T. Phone Home and Have Your Buddies Come Help Us
Keep in mind that the more 21 Inc, Nasdaq and the rest of the big vested interested boost Bitcoin’s value and popularity by pushing it onto consumers for free, the higher Bitcoin’s price goes and the more all the miners can justify in paying for equipment and electricity. And the black hole grows. And the more vampire devices that feed on electricity and info about you that 21 Inc can afford to give away. And the more the internet can become transactional vs free in nature. As far as business plans from hell goes, making an selection of electricity sucky spyware gadgets that fuel a Bitcoin price bubble to fuel their own production and free distribution and trash the internet with some sort of new microtransaction rentier model powered by keeping the electricty vampires plugged in is not a bad candidate.
But if 21 Inc’s plan is going to happen, and more and more financial assets and other types of assets start trying to glom onto Bitcoing, it’s worth reminding ourtselves that it raises the distinct possibility that Bitcoin will end up largely abandoning its original purpose of being the cryptocurrency that ends banking and efeectively turns into a giant “colored coin” trading platform, with bitcoin usage as a currency getting relegated to second tier status. And if that happens, great! Bitcoin as an ownership trading platform is probably going to be far more useful for everyone than its current quest of trying to kill fiat currencies. At least, it could be way more useful if it the mining process wasn’t so wasteful.
And so if Bitcoin comes under effective control of a handfull of big corporations via raw mining power, it’s going to be very interesting to see if Bitcoin’s proof-of-work protocol, which is what causes the endless energy arms race, doesn’t end up getting switch over to something either more eco-friendly or more useful. Because the idea of the biggest corporations in America giving developing world kids energy sucking vampire devices seems rather controversial in the emerging era of global warming heat waves and other mega catastrophes caused by our wasteful energy ways. 21 Inc is like a giant PR disaster just for not just Bitcoin but all the companies involved just waiting to happen. And, who knows, maybe public pressure could result in the emerging Bitcoin plutocracy actually using its future clout with both consumer and mining protocols to change Bitcoin’s validation method into something that isn’t a complete waste. There are options [55]:
Bitcoin Magazine
Primecoin: The Cryptocurrency Whose Mining is Actually Useful
by Vitalik Buterin on July 8, 2013One of the disadvantages of Bitcoin that its proponents often gloss over is the fact that its mining algorithm has little real-world value. The underlying issue is this: in order to add a new block to the Bitcoin blockchain, a Bitcoin miner must include a “proof of work”, a number which has a property that is hard to find numbers that satisfy, but is efficient to verify. Essentially, a proof of work is a way of proving to the world that the miner spent a certain amount of computational effort generating the block, and is in fact a vital component of Bitcoin’s security – without proof of work, an attacker could easily pretend to be a million Bitcoin nodes at the same time, and in that way seriously compromise Bitcoin’s transaction ordering mechanisms. The canonical attack, the so-called “double spending” fraud, involves sending a payment to a merchant, later sending the same coins back to yourself and then creating a false consensus that the second transaction happened first, thereby depriving the merchant of their money. Proof of work solves the problem by making “pretending to be a million Bitcoin nodes” prohibitively expensive. However, what makes people uncomfortable is that in Bitcoin’s case the work (SHA256 computations [56] has no underlying value; rather, Bitcoin’s proof of work is literally nothing more than burning electricity for its own sake.
It has always been thought that we could do better. Many newbies to Bitcoin immediately suggest that the mining algorithm should have involved SETI@home [57] or folding@home [58], so that the computations would also help bring humanity closer to curing protein misfolding diseases or finding aliens. The problem is, however, that Bitcoin mining requires one key property that SHA256 does have but SETI@home and folding@home do not: it is efficiently verifiable. Right now, all participants in the SETI and folding networks are volunteers, meaning that they (probably) have no intentions other than the desire to actually help the project’s underlying goal. If these networks become tied to Bitcoin mining, however, participants will be motivated by profit, so there would be an overwhelming incentive for miners not to bother with the actual computations and instead provide fake data that has no value to the networks’ underlying goals but is indistinguishable from a genuine computational output.
Primecoin is the first proof-of-work based cryptocurrency that has come up with any kind of workable solution. The central premise of Primecoin is that, instead of useless SHA256 hashes, the proof of work protocol would require miners to find long chains of prime numbers. There are three specific types of chains that are of interest: Cunningham chains of the first kind, Cunningham chains of the second kind, and “bi-twin” chains. The rule behind a Cunningham chain of the first kind is that each prime in the chain must be one less than twice the previous. The first Cunningham chain of length 5, for example, consists of the following six primes:
1531, 3061, 6121, 12241, 24481
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What is the practical utility of finding primes? Well, if the effort that we put into the topic today for its own sake is any indication, there is definitely at least something to it. The Electronic Frontier Foundation is offering $550,000 worth of prizes [59] to the first groups to discover a prime number more than 1 million, 10 million, 100 million and 1 billion digits long. The first two awards have already been claimed. The Great Internet Mersenne Prime Search [60] has been looking for large prime numbers since 1996, and mathematicians in universities around the world are involved. The University of Tennessee at Martin provides a list of reasons [61] why looking for primes is useful; aside from “for the glory!”, searching for primes leads to useful byproducts in other areas of number theory, provides an incentive for computational hardware development and leads to insights in the underlying workings of prime numbers themselves; the prime number theorem [62], for example, a theorem stating with high precision how often prime numbers are likely to occur at a given size, was first conjectured by looking at the distribution of actual prime numbers. Here, the hope is that if Primecoin takes off people will start looking for much more efficient ways of finding Cunningham and bi-twin chains, potentially leading to mathematical breakthroughs in how these chains work.
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Primecoin also adds a number of other innovations on the side:
* Smooth difficulty adjustment – unlike Bitcoin, which adjusts its difficulty to exactly match the target rate of 1 block per 10 minutes every 2016 blocks (roughly two weeks), Primecoin adjusts its difficulty slightly every block, nudging it toward the target rate in an exponential decay pattern. For example, if network hash power (or rather, prime generation power) suddenly doubles, the next block would be 0.02% harder than the previous, increasing the amount of work required per block to 186.5% of the original after one week and 198.2% after two weeks, assuming no further mining power increases take place.
* Very fast confirmations – unlike Bitcoin, where transactions take an average of ten minutes to confirm (eight minutes in practice since the difficulty must constantly catch up to increasing mining power), Primecoin blocks come at a rate of one per minute. This allows secure transactions to be made much more quickly; six confirmations may take fifty minutes in Bitcoin, but they take only six minutes in Primecoin. The underlying mathematics behind why six confirmations is a fairly safe threshold is independent of block confirmation time, so the Primecoin transaction at six confitmations is no less secure (it can be argued that attackers can make double-spending attempts ten times more frequently, but going up to just seven or eight confirmations more than makes up for this).
* Self-adjusting block reward – Bitcoin is known for its controlled currency supply [63] algorithm, which guarantees that only 21 million bitcoins will ever be generated, as well as specifying the rate at which these bitcoins will come out. Primecoin follows a different path. The number of primecoins (XPM) released per block is always equal to 999 divided by the square of the difficulty, a formula which should converge [64] to some maximum if the difficulty increases linearly. Given that Moore’s Law states that computing power increases exponentially, and the effort it takes to find a prime chain is exponential in its length, that is quite likely to hold true.There are some places where Primecoin missed some serious opportunities for improvement. First of all, the self-adjusting block reward was intended to be a “more natural simulation of gold’s scarcity”. However, in practice it does the exact opposite. The desirable property that gold has is that its supply at least somewhat increases with its value; if the gold price shoots past $5,000, mining opportunities will become profitable that were not profitable before, increasing the rate at which new gold is mined and eventually making the supply go up, partially counteracting the price shock. Here, if the price goes up by a factor of ten, the difficulty will shoot up significantly as well as more miners move in, leading to… a reduction in the Primecoin generation rate. Thus, instead of adding the negative feedback mechanism inherent in gold, Primecoin instead creates a positive feedback mechanism that exacerbates the problem of volatility. Also, Primecoin could have set up its exponential adjustment algorithm to have a much longer period – reaching 86.5% adjustment after two months, for example, instead of a week. This is one innovation that would also at least somewhat stabilize the value of the currency by generating more coins when interest goes up, but unfortunately so far no currency has tried this; Primecoin, despite all of its other improvements, missed the chance to be the first.
All in all, Primecoin presents itself as an extremely interesting experiment; for the first time, we have a currency whose mining algorithm has a secondary value, and at the same time Primecoin, unlike so many other coins before it, actually makes serious attempts to improve on Bitcoin in unrelated aspects. Not taking into account Bitcoin’s massive headstart, Primecoin may well be the first alternative coin to actually be better than Bitcoin, giving the currency the potential for a bright future ahead.
Well there we go! If humanity is dead set on having public ledger systems using proof-of-work contests for digital chits, why not do something like primecoin and make it useful? There’s nothing stopping the Bitcoin community from doing something like that. And if 21 Inc or some other big money cartel takes over Bitcoin’s client and mining networks, who knows, maybe they will. Why not? It will make their horribly wasteful vampire spyware scheme so much less horrible, although it’s still kind of twisted to expect poor people to pay for electronic gadgets with electricity and their privacy.
So some big changes are in store for Bitcoin but, at this point, we really don’t know what those changes are going to be. We just know a lot more growing pains are on the way and the Big Boys like Wall Street, Comcast, Intel, and the rest of 21 Inc’s Silicon Valley investors are intending on imposing a number of them, including vampire spyware-infested microtransaction Giving Trees. Probably. We’ll see. It’s going to be a whole new rentier business model.
And bitcoin paywalls might pop up everywhere, so it’s not just big changes for Bitcoin that are on the agenda. The same forces that are big enough to take over Bitcoin by creating an army of electricity surfs are also big enough to start a whole new trend of bitcoin-based internet microtransactions where users are give a choice of either paying with money or using a vampire Giving Tree (to get the microtransaction chits). The emerging Internet of Things will be given to use freely, with Bitcoin chips and spyware. That’s a crappy trend.
So let’s hope, once the very possible big money takeover of Bitcoin happens, public pressure can get them to fix the proof-of-work system so it’s not a giant energy black hole or if it is that’s actually useful. Then it can drop its hyper-Libertarian roots and just be public ledger for “color coins” or whatever because that’s actually kind of useful. Blood feuds with fiat currencies not so much.
But let’s also no one gives up on the SETI option. After all, it sounded like the primary problem with that scenario was that it didn’t work well with the profit motive or a network of people that all independently contributed “solutions” to the distributed mathematical problems used to search for signals of intelligent life in the cosmic noise. In other words, the hurdle to working on SETI is largely due to a different kind of “selfish mining” attack. Miners want to get paid at all instead of just donating their computational power to SETI freely:
...
It has always been thought that we could do better. Many newbies to Bitcoin immediately suggest that the mining algorithm should have involved SETI@home [57] or folding@home [58], so that the computations would also help bring humanity closer to curing protein misfolding diseases or finding aliens. The problem is, however, that Bitcoin mining requires one key property that SHA256 does have but SETI@home and folding@home do not: it is efficiently verifiable. Right now, all participants in the SETI and folding networks are volunteers, meaning that they (probably) have no intentions other than the desire to actually help the project’s underlying goal. If these networks become tied to Bitcoin mining, however, participants will be motivated by profit, so there would be an overwhelming incentive for miners not to bother with the actual computations and instead provide fake data that has no value to the networks’ underlying goals but is indistinguishable from a genuine computational output.
...
Because we can’t quickly know, mathematically, if a SETI calculation is correct, we can’t use it in a proof-of-work scheme. But if there was a way to make that work, liek if multiple parties were given the same data to crunch and a consensus-based method could work or whatever, then we could actually pat ourselves on the back for a job well done. After all, if humanity continues down the path of having the same giant corporations control more and more of our lives, with privacy now getting traded away for technology because we largely hate the poor and think giving people enough money to buy environmentally sound consumer gadgets that don’t spy on you is somehow morally corrupting, we clearly could use analien intervention. And there’s nothing stopping 21 Inc from creating devices that are dedicated to the SETI project whether it’s tied to generating bitcoins or not. At least it might be contributing towards a chat with E.T.
And 21 Inc’s model could actually be particularly appropriate for “rewarding” people for using devices that are decicated to computing something that can’t be easily validated. Why? Because you wouldn’t have to worry about people flooding the system with spam junk calculations to get the rewards. Users presumably can’t get thier 21 Inc gadgets to generate junk. So they could pay their gadget users by computation time, regardless of whether it was validated. Yay! SETI time! Or protein-folding time! Or whatever other useful scientific public research time! Now all we have to do is get public and private funds to finance all this parallel research-oriented computing and actually further the public good.
But if we do contact E.T. after creating an Internet of Things SETI network, let’s all try to shift the planet towards a demand-driven global economy ASAP, where people get enough to live well by virtue of being alive and that demand, deserved or not, leads to a flourishing economy (not run by a global corporate cartel [65]) free of poverty and oppression and the kind of financial need that might lead to people taking the rentier spyware vampire model version of a gadget instead of the non-scary version of the same thing. The aliens probably aren’t too keen on things like following the 21 Inc philosophy or the concentration of wealth in general (although who knows [66]).
So Wall Street and Silicon Valley and Big Media might be moving into Bitcoin. Out with the old, in with the older. Oh well. But if we could just skip the whole rentier-chip idea that makes manufacturing throw away microchips extra profitable and also take a pass on the new internet micropayment-for-privapcy business model, that would be great. How about those resources get used for more non-rentier gadgets for the poor instead. Yes, the SETI chip devices would be awesome, but any aliens we can contact have presumably already picked up our TV signals [67], including the new so we’re probably already on the galactic do-not-call list [68].
Humanity isn’t really ready for SETI [69]. *sigh* [70]