2016-08-15

Secondary and debt markets for exchanges

As discussed last week, Bitfinex has followed through with their bail-in and gave all of their users a 36% "haircut". While not ideal, with the right approach and conviction, this might be a way for the exchange to eventually right their customers. The idea is not new - I recall discussing something similar a few years ago when another big exchange was not measuring up...

MtGox's secondary market


MtGox, the poster child of why one shouldn't trust exchanges with one's BTC, has officially shut down in 2014. However, months before that you could already see some red flags popping up that something was going wrong. MtGox started having some fiat withdrawal problems, and as a result, its market was off by 10+% and ripe for arbitrage. Some people could make a tidy profit churning money around, provided they could get their fiat out of the exchange.

A few months later, the situation got worse - MtGox has officially halted both its bitcoin and fiat withdrawals altogether. However, probably due to some interesting code optimisation, someone figured out that if you withdraw bitcoins straight into a deposit address of another MtGox account, the funds would be transferred without creating a transaction on the blockchain. It looked like that functionality was governed by the "MOVE" API call, rather than "SEND". This tiny functionality was enough for someone to build an entire secondary market for MtGox before the whole exchange went under.

While I can't find any reference to what the site was (EDIT: the website was Bitcoin Builder, as pointed out by /u/samurai321), as the news of MtGox collapse has probably buried it in the sands of time, I remember it being a simple BTC-MtGoxBTC exchange. One could deposit actual bitcoins and trade them for bitcoins owed by MtGox that were moved to the secondary market's address. It allowed some people to get rid of their coins frozen at the exchange and cash out to the safety of the wallets their own, while letting others speculate on whether or not MtGox would be going under. I remember seeing the price reaching a level of 30+% discount on the market, which is fairly comparable to the current Bitfinex scenario...

Decentralised secondary markets


After MtGox collapsed, I haven't seen a similar secondary market pop up anywhere. The closest thing that comes to mind is being able to trade Bitstamp's IOUs on Ripple, which might be an ideal approach for trading exchanges' debt (at least provided the exchange doesn't run into new hacks). If Bitstamp was to go under, you could still trade about 1.5M USD and 2k BTC of its issue on the decentralised exchange nearly indefinitely. Figuring out its USD-USD and BTC-BTC exchange rate against an operating pool could be a clear gaige of confidence in the platform - if there were talks of the exchange recovering, the price might get closer to parity, or go away from it in the opposite case.

At the same time, such a secondary market might be used for something more morally muddy...

Buying one's own debt


Say Bitfinex's tokens were tradable during the hack. Before everyone knew how much was lost percentage-wise, the market would be wild with speculation - you probably could buy bitcoins at 50+% discount, perhaps even at 90% discount if the fear would set in. Now, if Bitfinex was aware of such a situation and knew how much deposits they could actually cover, they could try buying up their own debt for pennies on the dollar before the haircut was to take place. This could allow them to buy off some of their debt at a discount, reducing their obligations to their customers and therefore creating a theoretical profit.

Such a scenario would be highly unethical and I would guess highly illegal, but I wouldn't be surprised to see something like this happen sooner or later in the Bitcoin world. Instead, let's imagine some more ethical approach Bitfinex could act on their current situation...

Slow debt repayment


I'm not sure how Bitfinex structured their token program as I don't use the exchange. However, a good approach to eventually righting everyone would be for them to convert everyone's BTC balance into those tokens. At any time, the users would be able to cash the tokens in and get actual coins, minus the haircut. With each token converted, their obligations would decrease.

The tokens would also be tradable on the exchange itself for actual coins, creating a market for the debt. Anyone wishing to speculate would be able to trade the coins for a value between the haircut discount and 1BTC. The price would have upper and lower bounds, but could fluctuate in between.

If Bitfinex was diligent and set on repaying the debt by eventually buying up all of the tokens, they could publicly declare their strategy of doing so - perhaps a portion of their monthly income would go directly into purchasing the tokens from the market at the spot rate. With every purchase, the amount of tokens in circulation would decrease, thus the ratio of their bitcoins earmarked for buying back the tokens to the actual amount of tokens would increase, making the haircut smaller and smaller. Gradually, the gap between the value of the tokens and the real coins would shrink so much they could convert the tokens themselves straight into coins at a 1:1 ratio and remove them entirely.

In the end, the amount of coins you would get back would rely only on how quickly you need them - you could get them today for 36% off, perhaps get them for 30% off in a year, or get a full amount in a decade. The market would decide what the future value of the tokens would be, and with each month (and perhaps with each trade if some fees were to be maintained for this market), the debt would be slowly repaid.

In the end, this is an optimistic scenario assuming the exchange could earn back millions of dollars worth of coins before the company would go under. Similarly, if you believe the value of bitcoins will go up, the debt may never be repaid - the value of the coins left to be repaid could be going up as the number of the coins would be going down thanks to the increasing price.

One way or the other, it would be a really interesting case study if Bitfinex was to implement something like this...

Related links:


2016-08-08

Avoiding Bitfinex scenarios with Voting Pools

This week, a high-profile Bitcoin theft took place at the Bitfinex exchange. The attacker reportedly stole 119'756BTC, worth about 70.5M USD. Those funds were held at a 2-out-of-3 multisignature wallet - one key was held at Bitfinex's server, another was kept by BitGo, and a third was a backup key held offline by Bitfinex. From what the reports say, the hacker was able to get their hands on the first key, as well as the API credentials required to authorise BitGo to process the withdrawal. With no additional safeguards, they were able to drain the hot wallet and land themselves around the number 2 spot of the biggest Bitcoin theft to date, after MtGox.

The scenario is still unfolding, so there are a lot of theories still floating around as to why the situation was allowed to take place. Some have speculated Bitfinex was forced to keep all of their coins in a hot wallet due to CFTC's ruling (as Bitfinex was not a registered futures trading platform), although it seems that the change was made before the ruling. Bitfinex also unveiled a plan for a "bail in", wherein everyone's assets would be devalued by about 36% so the exchange could continue operating.

Since Bitcoin's past seems to be littered with theft, I would like to have a look at one possible solution to minimise such high-profile hacks:

Voting Pools


Voting Pools is an idea proposed by Open Transactions, a Crypto 2.0 platform focused on notaries issuing IOU tokens and other financial instruments. The main issue such systems have to cope with is securing the cryptos, currencies and commodities underlying the assets circulating on the platform - an USD IOU is only useful if you can redeem it for real USD at the end of the day.

The way Voting Pools help secure users' funds is through shared responsibility from competing actors. Multiple exchanges of similar size would group together in a pool and secure one another's funds through multisig and a legal agreement to share responsibility in an event of a loss (be it from theft or one of the exchanges trying to run off with everyone's money). The multisig would be distributed in such a way that any one actor would not be able to control even their own money, and the system being robust enough to handle a loss of some keys (2-of-3, 3-of-5, 4-of-5, etc.).

This setup would make sure that a critical failure of one actor would not compromise the system. Even if one of the exchanges would burn down, get hacked, or the owner would decide to run away with all of the private keys, they couldn't do anything. The other exchanges would take over the responsibility and secure all of the funds to be able to pay all of the failed exchange's customers without suffering a loss of their own funds.

More importantly, however, this solution also forces every participating company to not only police themselves and ensure they have the most adequate security practices in place, but also to look at one another. When your own money is on the line, you will make sure everyone is keeping up with the rest of the pack in terms of keeping the money safe. Since the exchanges would still be competing with one another, they would have every incentive to expose other actors in the voting pool that are compromising the security.

Beyond that the full implementation of Voting Pools also necessitate that the exchanges would open up their transaction logs to one another to make sure everyone knows how much every customer is owed in case of a database wipe or the exchange vanishing from the face of the earth. This is pretty much automatic when it comes to gateways on a public ledger like Ripple or some shared permissioned blockchain, and it shouldn't be too hard to accomplish if an exchange already creates a strict and timely Proof of Solvency. That being said, it is pretty much unheard of for a normal Bitcoin exchange to do that currently, which might make it more problematic.

Having access to a full, real-time set of transaction logs the participants in a voting pool have everything they need to not only be able to settle with every customer in case the exchange goes under, but they can also police the exchange in real-time and raise flags in case of discrepancy. If exchange's liabilities exceed their assets, all withdrawals can be automatically haled until the matter is resolved. Large withdrawals, sudden market crashes and balance changes could similarly raise a lot of flags (to avoid another MtGox scenario, wherein a hacker crashed the market to be able to bypass the $1000/day withdraw limit).

Conclusions


All in all, voting pools would force a strong degree of transparency on every actor and couple that with multiple security teams making sure the system is secured against a growing number of hacks. While the participating exchanges would sacrifice their business data secrecy to their direct competitors, security through obscurity is never a good approach.

2016-08-01

Contentious Bitcoin fork WILL create a split

The Bitcoin community has debated a potential hardfork to Bitcoin for over a year now. There have been various solutions proposed to change the hard cap on block size and increase the amount of transactions that can go into any single block.

Leaving aside the discussion as to which approach would be the best for Bitcoin in the long run, we can agree that there is a disagreement on the issue and any hard fork that may happen will not be as unanimous as the previous forks were. Looking at some recent examples, we can expect that any contentious Bitcoin fork will create a split in the network.

Big players can trump forks - Elacoin


Last year Steve Sokolowski shared his thoughts on a Bitcoin hard fork proposal in a forum post. Other than discussing the actual solution, Steve also shared a story of Elacoin's attempted hard fork. Apparently, it was some unremarkable Proof of Work altcoin which activity has died off after awhile. A new developer came in and decided to breathe new life into the coin by creating a Proof-of-Stake fork. A lot of people got excited for the update and the trading volume and price rose back up.

When the fork was scheduled to take place, despite the backing of the community, the developers and stakers, the fork failed since Cryptsy continued to trade the coin without upgrading their daemon. Eventually the hard fork was deemed a failure while the old coins were still being traded.

This brings to mind the famous experiments with five monkeys, a ladder and a banana. People would trade a coin in anticipation of the fork, then ignore the fork and continue trading the coin due to its increased price and volume, completely forgetting why they were trading it in the first place. Classical altcoin speculators.

This only goes to show that big players, even if they are in a minority, can trump developer forks. While a story like this is rather unlikely to happen in Bitcoin, since the coin itself has many different markets and a vast community, we could experience a different problem when a hard fork happens...

New Coke vs Coke Classic - Ethereum


Not so long ago, Ethereum has experienced The DAO debacle, wherein a large quantity of ethers were drained from a high-profile smart contract. This prompted the Ethereum developers to create a hard fork that invalidated the attack. For a few days everything seemed to go smoothly - the majority of the network supported the fork, everyone transitioned just fine and it looked like the network could put the kerfuffle behind them. Then came Ethereum Classic...

Ethereum Classic is, I suppose, an "un-fork" of Ethereum - a codebase designed to ignore the DAO hard fork and continue the network as if it never happened. Whether the developers believe that they are supporting the community that disagrees with the fork, or they just want to make a quick buck, the fact is that the classic ethers (ETC) started being traded on Poloniex, probably one of the biggest altcoin exchanges currently, and now are being actively traded on a number of other exchanges with a current market cap of $200M and 24h trade volume of $65k - forth market cap after Bitcoin, Ethereum and Ripple, and having double the trading volume of Ethereum, second only to Bitcoin...

From a perspective of any Bitcoin core developer wanting to fork Bitcoin, this is probably the worst thing that could have happened in the given situation. Exchanges supporting both sides of a fork can set a precedent of what will happen when Bitcoin is forked in any fashion short of full unanimity. Even if the unforked version of Bitcoin has 1% of its market cap, that's $94M market waiting for an exchange to take their money - it would be the 7th largest coin market, around the halfway point between Litecoin and Dash.

As an Ethereum Developer pointed out in an Ethereum Foundation Skype Chat leak - ignoring Ethereum Classic means there is no money to be made, while embracing it allows you to tap into some "vestigial value remaining from the shared chain history".

Even if any potential fork has all of the support from all of the developers and miners, there isn't much one can do to stop the un-fork, perhaps short of a Coiledcoin-esque 51% attack. Even if networks like Ethereum implemented "the bomb" (a special smart contract that prints tokens out of thin air, intended to kill an un-forked network), a developer could just create another hard fork to disable that code pretty much like the DAO was disabled...

Kill it with fire


So when all is said and done, it looks like the only way to ensure only one version of Bitcoin is around, one would need to reach an overwhelming consensus with the developers, the miners and the exchanges to support only one part of the fork. Anything short of that will create a split network with duplicate tokens being created on both tines of the fork.

To ensure the rest of the network follows suit, someone should put aside some funds and mining power to be able to execute 51% attacks on any un-fork that would start being traded at an exchange. While a 51% attack in normal cases might be in the legal murky territory, perhaps using it to enforce a hard fork might not be seen as an attack on the currency, but as a part of the upgrade process. The law might not catch up to this conundrum for years still.

Conclusions


Anything short of an unanimous hard fork to Bitcoin will most likely result in a network split where both sides of the fork. The split will most likely be motivated by short-term profit to extract some remaining value from the alt-chain. A good way to ensure no such split happens would be to divert some resources to performing 51% attacks on the minority chain and thus causing whatever exchange that tries to trade them to lose money.

Related discussions:


2016-07-26

How not to blockchain - a look at OneCoin

In the recent weeks there has been a resurgence of news about OneCoin, what appears to be a high-profile MLM ponzi scheme disguised as an altcoin. From what I can gather, the renewed popularity of the topic was sparked by OneCoin's Coin Rush Global Event:

Coin Rush Global Event

Watching this video as someone that has been around Bitcoin for 5 years now, there are more red flags here than you would see during International Workers' Day in some places. In fact, the video and OneCoin in general are such a good example of how you can bamboozle people by saying just the right thing that it might be a worthwhile exercise to dissect a lot of it.

The Basics


Going onto a cryptocurrency website you want to look for a few key pieces of information:

  1. Who is developing the project / the code? You want to find at least a competent development team identifying themselves. Examples: Bitcoin, Ethereum, Ripple. For OneCoin, the best resource I could come across was OneDream Team's "Top Leaders", which only boasts some news.
  2. Where is the company located? It is especially important for exchanges and other companies you're giving money to, but can be useful for the core development team if applicable. Examples: Ethereum (listed on the bottom page), Bitcoin FoundationBitStamp, not as much for Bitcoin Core (as it's a more decentralised development) Ripple, OneCoin or xcoinx.
  3. Where is the source code? If you can't see the code, you can't be sure what you're installing isn't malware or whether the blockchain itself is really there. Examples: Bitcoin, Ethereum, Ripple, but nothing for OneCoin.
  4. Is there a block explorer? If you can't browse the blockchain data and validate it yourself, how can you be sure everything adds up? Examples: Bitcoin, Ethereum, Ripple lacks a proper explorer, but has a public API endpoint. For OneCoin, best you can get is a falsi explorer (thank you /u/TimTayshun for the screenshot)
  5. Do any reputable exchanges trade it? A coin that isn't tradeable might not be a currency at all, but instead some "funny money". For a smorgasbord of examples, you can check out CoinMarketCap, indexing things as low as $8 market cap for COIN. OneCoin, despite boasting 5.2B USD market cap, is conspicuously missing...


Getting all five of the above points is a good start for any currency, but as we can see, even some of the largest coins are missing one or two of those features. Lacking all five does not bode well.

That's not how blockchain works


Putting all of that aside, let's look at the video proper and see what the event is about. Apparently the big news that day was that OneCoin is retiring it's old blockchain (!) and launching a new one in October so they can make more onecoins (!!). The justification being, and I kid you not, that they need more coins to grow, since there might not be enough coins for new merchants, Latin America, India, etc.

Let that sink in for a bit. A cryptocurrency that is not explicitly tied to a fiat currency is running out of coins for people. So instead of letting free market organically settle on a price it thinks the coins are worth and say, buying the coins from the market to give to the new merchants if they want, they instead decide to make more coins...


The issue is also more complicated than just that. OneCoin on its FAQ page claims its blockchain is mined with a custom solution based on Script and X11. However, you don't mine the blocks directly, instead "you just sign up on the mining dashboard on the exchange in your back office". This might remind some people of Proof of Stake or Delegated Proof of Stake, but no, OneCoin does it differently - "People are signed up and assigned to mining pools on a first come, first serve basis. Whenever a place is free you can join a pool.". The process appears to be:

  1. You send OneCoin money to buy the right to mine the coin
  2. You sign up to mine
  3. You wait for your turn to mine
  4. You get your coins
In other words, it's like purchasing coins from an exchange (send money, get coins), but with an arbitrary wait period (currently 3-6 MONTHS!) between sending money and receiving coins. As /u/TimTayshun pointed out, the block times are also very strange - too regular for a Bitcoin-like mining scheme. The blocks appear to be generated at the 10 minute mark without much variation. If there is any real mining going on, there is no real competition, no difficulty adjustment or anything like that. It looks a lot more like Ripple's Consensus algorithm than anything mining-related.


Splits and tokens


But even all of that is not the whole story. Enter the splits and tokens. You don't directly buy the onecoins, instead you buy packages that include tokens and splits:


Apparently in order to keep the price attractive, you split the tokens as you would company shares. In the end it means that you have a higher quantity of tokens that you can use for mining, but the value stays the same, I think. The splits apparently can only be used on the tokens, not the coins that are mined, and you can combo the various packages in some "strategy" to receive more and more splits.

This seems to accomplish a few things:

  • Make the process more opaque
  • Incentivise people to buy more and more packages to get the best value for their money
  • Make people feel like they are in control of how to get the most money and get ahead of everyone else
  • Widen the distance between real money and onecoins by extra few steps in a freemium-like model

So in other words, the entire system looks like a shady mobile app:

"Money, money, money money money money"

If that wasn't enough, you also can't forget about the match bonus for people you refer:
Because nothing inspires more confidence than a pyramid-like structure with the money flowing to the top...

There is also something about not actually purchasing tokens, but instead purchasing training from OneAcademy that conveniently comes with tokens, BVs and what have you, but at this point I think I made my point. Purchasing any cryptocurrency is simple - you take your money, you get your tokens. With OneCoin, a simple trade is a drawn out process taking many months with zero transparency. Mining is a joke, the numbers are multiplied over and over. But the story doesn't end there...

Show us your proof


During the Coin Rush Global Event, there have been a number of claims made about OneCoin and other coins as well. After hearing a lot of them, one feels the urge to shout "show us your proof". In no particular order:

  • OneCoin has 2 million active users, no other currency has as much - I would love to see a proof of that claim, since it not only asserts a lot of people are using OneCoin, but claims to know how many people are using other cryptocurrencies, which is an information that is hard to come by. Someone estimated Bitcoin to have 50M users by 2015, but that's a guess. How many people are actually active on Bitcoin or OneCoin, that would be interesting to know.
  • OneCoin has 4.5B USD market cap - seeing as the coins aren't actively traded at any reputable exchange and the blockchain is not verifiable, any number you throw out there is as valid as any other.
  • Bitcoin has almost no merchants taking it - there are 8000 physical locations taking Bitcoin today, in 2014 BitPay estimated the number to be over 20k. All in all, it would be interesting to see where the data is coming from, since it's not that easy to come by
  • OneCoin is in 195 countries, it's bigger than Western Union - It would be really interesting to see the actual list of their operations. There are 195 countries in the world, which means they would have to operate in the US, North Korea, Iran Sudan, Syria and Myanmar at the same time, violating a lot of international sanctions.
  • OneCoin can do more transactions than Visa and Mastercard combined - this would mean it can handle more than 2'000 transactions per second, it would be an impressive amount of data to synchronise in a blockchain
  • OneCoin stores all customer KYC information encrypted on the blockchain - this would not only be a huge customer data protection concern (blockchain by definition is shared between multiple parties, so all you need is a blockchain and encryption key leak and someone has compromised all of that data), but also an can be an issue of how decryption would be handled under a warrant
And from other sources:

The Icing on the Cake


Even after pointing out the various problems for a long while, there is still a lot more that needs to be addressed. Going into detail on everything would probably make this lengthy article probably twice as long. So let's finish off everything else in some quicker fashion. What follows are various claims, quotes and other titbits from the video presentation:

  • It takes over a year to mine one bitcoin - unless you're 21.co, nobody advocates Bitcoin mining to newcomers. Just like mining gold in real life, it's best left to professional companies
  • There are "Mickey Mouse coins" that copy OneCoin's concept - don't flatter yourself, everyone is aping Bitcoin
  • Just like you need a driver's license to drive a car, you need a drivers license for the cryptocurrencies - one of the beautiful things about Bitcoin is that it's inclusive - anyone can use it, you don't need a permission. While education is valuable, forcing people to go through a test before they can use cryptos is missing the point
  • OneCoin wants to be number 1 cryptocurrency world-wide in 2 years
  • When Bitcoin was one year old, it was worth 15 cents and nobody cared about it - it took two years for Bitcoin to be worth 15 cents, but now the speed at which good coins accelerate in price has increased thanks to Bitcoin. Dissing on the history to make your coin appear better is a false equivalence
  • OneCoin is one year old and it already wrote history - not really, but it will certainly write history once the jig will be up
  • They are aiming to have 20 million active users and 1 million merchants in 2 years
  • "We are the bigger community - we decide what the philosophy of cryptocurrency is"
  • The merchant / Latin America / India market capitalization is X trillions, OneCoin is only worth 5 billion, it simply does not work - normal coin would allow the price to grow to accommodate the market and use the 8 decimal places the coin has. Saying that you need to increase the amount of coins to grow is like saying you need to slice an apple into more pieces to make it bigger
  • "We can close new registrations, reject merchants... Or make more coins!"
  • "Biggest coin out there is Ripplecoin [sic], with 100 billion coins[sic]", and OneCoin will increase its number of coins to 120 Billion to be bigger than Ripple - that will still make you 3 times smaller than Fedoracoin, why not go for more?
  • You can't increase the amount with the current blockchain, need to retire the blockchain and launch a "new, more powerful blockchain" - you could, if your developers were up to snuff. Or maybe you're doing this to delete some old data from the old blockchain, or introduce some different balances that aren't supposed to be there?
  • Every account balance will be doubled after the blockchain is updated - again, increasing the numbers is not the same as increasing the value those numbers represent
  • When posting a question "will my coins be worth less after the update", the answer is not a clear "yes or no", but instead saying that the value of coins comes from brand and usability
  • Restaurant or retail store will never take Bitcoin - 8000 times false
  • "OneCoin will write history, and the cryptocurrency comminuty will have to rewrite philosophy"
  • "In 2 years nobody will speak of Bitcoin anymore"
And finally - "OneCoin Cryptocurrency is Unique, Safe, Global & With No Risk of Inflation", other than the doubling of the coins, the extra amount of coins that will be pumped into the system after the switch, etc. Those little things.

The Ecosystem


OneCoin, officially based in Dubai, boasts an impressive "ecosystem", consisting of 10 distinct items:

OneCoin's ecosystem

  • OneAcademy, an e-learning platform teaching about tarding, stock exchange, cryptocurrency, etc. in a 6-level program, boasting over 2'000'000 students and supporting 231 out of the current 195 world countries
  • OneExchange, currently not online
  • OneLife Network - "a digital platform with a unique ecosystem of sophisticated products and social networking tools that help members achieve financial independence", whatever that's supposed to mean. But fret not, they will offer you an "Ultimate Trader Package" for  the low low price of 118'000 EUR, and a tablet to match for 550EUR, only 5-6 times more expensive than a comparable tablet. No contact information
  • Merchants
  • OnePay - a payment solution based in Bulgaria
  • OneForex - an exchange that is not functional yet, but it will somehow be different from OneExchange?
  • Investment Funds
  • OneWorld Foundation - a charity helping the children based in Bulgaria, not to be confused with one world foundation, or One World Foundation or One World Foundation
  • CoinCloud - a cloud storage where you can buy 100GB of data space for 1 year for 3'030 EUR, which is about 1'500 times more expensive than Google Drive
  • CoinVegas - a gambling website based in Malta

There are 195-206 countries in the world. OneAcademy supports 231 of them

Conclusions


OneCoin, perhaps going in Microsoft's footsteps of wishing their products to be abbreviated into "The One" has raised a lot of red flags on all fronts. It does not instil any confidence in its products, its business strategy, or legitimacy of its creators. It takes money from a lot of people, turns it into a flashy show to boost confidence, and talks about its "community" and "family". The way it does business is overly complicated, intentionally opaque, and unverifiable. It is a blockchain and cryptocurrency only by self-proclamation. Keep as far away as you can from anything related and enjoy the slow-motion train wreck.

Related Links:


Bullshit checklist:


The Bitcoin Bullshit List

Your post advocates a new:
(x) Altcoin
(x) Permissioned blockchain
(x) Centralised / decentralised exchange
(x) Remittance service
(x) Gambling website
(x) Investment scheme
(x) Wallet
(x) Mining service (hardware, software, etc.)
(x) Mining pool

Your idea will not work.  Here is why it won't work.

(x) The proposed security model is (x) flawed / ( ) not enough / (x) completely wrong and therefore you will be ( ) scammed / ( ) hacked / ( ) stolen from / (x) implode quickly
(x) There is already a product on the market that does exactly what you’re doing, but (x) faster / (x) cheaper / (x) better / (x) is more established / (x) is not a scam
(x) You are proposing exorbitant fees for the use of your product that are unsustainable in the long run
(x) Your product gives unfair preferential treatment to (x) yourself / (x) the earliest adopters / ( ) early investors / ( ) select few / ( ) _____________________
(x) You violate the core principles of Bitcoin, including: (x) core cryptography of the protocol / ( ) 21M coin limit / ( ) coin distribution / (x) ownership of private keys / (x) inclusive nature of the network / (x) pseudonymity of users / (x) lack of transaction censorship / ( ) ______________
(x) You promise unreasonable return on investment without a clear business model of where the money is coming from
(x) Your project cannot be run legally at your jurisdiction
(x) Your project will not be compliant with the current ( ) KYC / ( ) AML / (x) gambling / (x) MLM regulations
(x) You rely on proprietary ( ) hardware / (x) software / ( ) intellectual property / ( ) _________
x) Your solution is worse than general-purpose computing hardware / software
(x) Your product is poorly implemented
(x) Your presale tokens have no economic value
(x) Your adoption goals are unrealistic
(x) Your product has zero transparency

Specifically, your plan fails to account for:
(x) The existing regulations
(x) The required Money Services Business license
(x) The anonymous nature of cryptography
(x) The geopolitical map of the world
(x) Adaptability to growth of the market cap
(x) The miner incentives
(x) Public reluctance to accept weird new forms of money
(x) Huge existing software and hardware investment in Bitcoin
(x) The known security exploits of the existing Internet services
(x) Secrecy of data decryption
(x) Increase in currency unit supply not being the same thing as increase in wealth
(x) Disproportionate increase in currency units drains wealth from one group into another
(x) The long-term sustainability of the project

and the following philosophical objections may also apply:
(x) It is a MLM scam
(x) It is a pump and dump
(x) It is a (x) ponzi / (x) pyramid / ( ) ___________ scheme
(x) A known (x) scammer / (x) person with poor reputation is involved with your project
(x) Why should we have to trust you and your servers?
(x) Incompatibility with open source or open source licenses
(x) Feel-good measures do nothing to solve the problem
(x) Extraordinary claims require extraordinary evidence (aka “Proof or GTFO”)
(x) I don’t trust YOU with the money

Furthermore, this is what I think about you:
(x) Sorry dude, but I don't think it would work.
(x) This is a stupid idea, and you're a stupid person for suggesting it.
(x) You’re a scammer and you should feel bad.



Bitcoin Bullshit Tier
You are advertising a new Bitcoin / crypto related project. Based on the information provided, you have reached the Bullshit Tier of 4 for the following reasons:

Bitcoin Bullshit Tier 1 - marketing babble, technology misunderstanding
(x) “Blockchain”
(x) “As good as / better than Bitcoin”
(x) Misunderstanding the technology

Bitcoin Bullshit Tier 2 - willful misinformation, bait and switch
(x) Selling overpriced / underperforming hardware or software
(x) Claiming your project can accomplish something hard without a clear explanation of how to do so

Bitcoin Bullshit Tier 3 - Many red flags
(x) Assuring your product is legal
(x) Speaking about profits / return on investment
(x) Providing no company contact information
(x) Multiplying coins
(x) Rebooting the blockchain
(x) Company being hosted in hard to reach countries
(x) Claiming your product services / is available at a large amount of institutions without a proof

Bitcoin Bullshit Tier 4 - Outright scams
(x) High return on investment
(x) Describing a financial security and claiming it’s not a security

2016-07-18

Transactional currencies - Entry Credits and Gas

DISCLAIMER:
While I work for Factom, the opinions expressed in this piece are, as always, my own.

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Working at Factom I came across an idea that seems seldom explored in the cryptocurrency space - a transactional currency called entry credits. They operate alongside the main currency of the network, factoids, but while factoids are a fully functional cryptocurrency that can freely circulate in the network, entry credits have a number of restrictions on them:

  • Entry credits are created out of factoids (by burning them) at an exchange rate dictated by the system, but they can't be turned back into factoids
  • Entry credits can be created ahead of time to lock in their factoid-entry credit exchange rate, and used later down the line
  • The exchange rate is tweaked by the system to stabilise the price of entry credits, while still allowing factoids to be a free-floating currency
  • Entry credits can only be spent (burned) to store entries into Factom - they can't be spent elsewhere
  • Entry credits are not transferable - they can only be spent by the account that received them during the factoid->entry credit conversion
These restrictions create a few interesting features for the system that I don't see explored much in other cryptocurrencies:
  • It is possible to put a large amount of entry credit tokens on a hot wallet without worrying much about theft - any would-be hacker wouldn't be able to cash out the stored value, only spend it. This makes production servers much less of a target for attacks.
  • Being able to lock in the price of the tokens ahead of time means companies can budget ahead of time and don't have to worry about token volatility
  • Having the exact amount of tokens in an account, one always knows how many transactions they can perform in the system before running out

Other tokens


While I haven't heard of another currency having the same features, there are some that function similarly.

Most cryptocurrencies adjust their transaction fees on a regular basis to keep up with the price of their coins. This can function as a way to keep the transaction cost stable without trying to control the price of a currency.

Ethereum uses a more formal approach to this with their gas currency. It is separate from their ethers, but you can't purchase gas ahead of time. The gas is used to pay for transactions and operations in smart contracts, but the final cost calculations are more complicated - one can get gas rebates for freeing up memory as far as I heard.

Conclusions


The Factom project might be one of the first projects to implement a fully transactional currency - entry credits. While being a confusing feature for some, it is an interesting approach of stabilising the transaction cost of production blockchain application, as well as limiting the attractiveness of an attack on the production servers.

2016-07-04

The Bitcoin Bullshit List

If you hand around the Bitcoin space for awhile, you will inadvertently come across a few or a few hundred copycoins, scamcoins, scams, ponzi schemes and what have you. Whether it's a large scam like Paycoin, small scale pump and dumps like Quarkcoin, or something that might look like an earnest project that got too big for its own good like The DAO, after awhile you start seeing the same pattern and red flags repeat themselves over and over again.

Being inspired by the ever timely SpamSolutions.txt (a quick checklist of "why your idea to solve the problem of spam won't work"), awhile back I started compiling "The Bitcoin Bullshit List" (also available at http://tiny.cc/Bullshit). It should be expansive enough to cover most of the common scenarios, but if you think it's missing something, let me know and I'll add it in the future revisions.

So, how does the Bitcoin Bullshit List work? You simply read up on or listen to a project pitch and start filling in the checkboxes in the "Your Crypto Idea Will Not Work" section. Once you're done, you can summarise your thoughts and give the project a short "Bitcoin Bullshit Tier".

Let's go through an example to show how this might work in practice (and cutting out the unnecessary parts of the lists).

Example - The DAO


Your post advocates a new:
(x) Altcoin
(x) Investment scheme

Your idea will not work.  Here is why it won't work.

(x) Your target audience is too small to support the project
(x) The proposed security model is (x) flawed / ( ) not enough / ( ) completely wrong and therefore you will be (x) scammed / (x) hacked / (x) stolen from / ( ) ________ quickly
(x) You promise unreasonable return on investment without a clear business model of where the money is coming from
(x) Your project cannot be run legally at your jurisdiction
(x) Your project will not be compliant with the current (x) KYC / (x) AML / ( ) gambling / (x) securities regulations
(x) The solution would work better as a (x) centralised / (x) decentralised / ( ) distributed solution
(x) Your product is poorly implemented
(x) Your presale tokens have no economic value
(x) Your adoption goals are unrealistic

Specifically, your plan fails to account for:
(x) The existing regulations
(x) The required Money Services Business license
(x) The anonymous nature of cryptography
(x) Public reluctance to accept weird new forms of money
(x) The human factor

and the following philosophical objections may also apply:
(x) Ideas similar to yours are easy to come up with, yet none have ever been shown practical

Furthermore, this is what I think about you:
(x) Sorry dude, but I don't think it would work.


Bitcoin Bullshit Tier
You are advertising a new Bitcoin / crypto related project. Based on the information provided, you have reached the Bullshit Tier of 4 for the following reasons:

Bitcoin Bullshit Tier 1 - marketing babble, technology misunderstanding
(x) Dropping names of crypto celebrities to bolster one’s credibility


Bitcoin Bullshit Tier 2 - willful misinformation, bait and switch
(x) Claiming your project can accomplish something hard without a clear explanation of how to do so

Bitcoin Bullshit Tier 3 - Many red flags
(x) Assuring your product is legal
(x) Speaking about profits / return on investment
(x) Presale
(x) Token IPO
(x) Providing no company contact information


Bitcoin Bullshit Tier 4 - Outright scams
(x) Describing a financial security and claiming it’s not a security



Well, that was pretty straightforward. Now, let's compare that to something that is generally not considered a scam and see how well it fares.


Example - Litecoin


Your post advocates a new:
(x) Altcoin

Your idea will not work.  Here is why it won't work.

(x) There is already a product on the market that does exactly what you’re doing, but ( ) faster / ( ) cheaper / (x) better / (x) is more established / ( ) ______________ You are proposing exuberant fees for the use of your product that are unsustainable in the long run


Specifically, your plan fails to account for:
(x) Public reluctance to accept weird new forms of money
(x) Huge existing software and hardware investment in Bitcoin

and the following philosophical objections may also apply:


Furthermore, this is what I think about you:
(x) Sorry dude, but I don't think it would work.



Bitcoin Bullshit Tier
You are advertising a new Bitcoin / crypto related project. Based on the information provided, you have reached the Bullshit Tier of 1 for the following reasons:

Bitcoin Bullshit Tier 1 - marketing babble, technology misunderstanding
(x) “As good as / better than Bitcoin”



Generally, not that bad - some tick boxes will apply to even the most benign and well meaning projects, and that's fine.

Conclusions


With many new crypto projects cropping up and vying for your money, it's useful to step back once in awhile and see how many flags certain projects raise before buying into them. Whether it's for laughs or as a sanity check, the Bitcoin Bullshit List might be a useful tool to run through when looking at new Bitcoin and crypto-related projects:

2016-06-27

A retrospective on one hundred posts

Last week marked a 100th post I have posted on this blog since about 2.5 years I've been blogging somewhat regularly. Today I would like to take a look back and do a bit of a retrospective on some things posted and an overall state of the blog.

General thoughts


Like most people, I get a lot of ideas on various subjects all of the time. Some are so-so, while others merit more contemplation. This is one of the reasons why I started writing this blog - to be able to formulate my thoughts, put them down somewhere and to be able to reference them later as needed - during online conversations, or when writing out other ideas.

It has really been a useful tool for me over the years - before I started writing the blog I would discuss some interesting ideas I had either without writing them down, or in random places over the Internet where I couldn't easily find them afterwards. This would usually mean I couldn't go into that much depth and the thoughts were more ephemeral.

A few months ago I was looking for some post on my blog and I stumbled upon the post about volatile currencies I have completely forgotten about at that point. It's perhaps not the most relevant or best written post out there, but it still contains an interesting idea nugget that might be a useful reference in the future. If I relied only on my memory, it would be gone.

With that in mind, lets look at some popular or interesting posts I have written over the years that you might've missed.

Top ten


Here are the ten most popular posts from this blog, based on the number of views:

  1. On the subject of altcoins - do altcoins have any merit to exist?
  2. On /r/Bitcoin moderation - three years in review - /r/Bitcoin moderation
  3. Deniable proof of Satoshi - talking about Craig Wright's claim to being Satoshi and how future claims should be handled
  4. Liquid - when sidechains say "fuck it" - pondering the Liquid network
  5. Bitcoin historical rallies, halvenings and bubbles - talking about my experience with past bubbles
  6. Why fast maturing altcoins are doomed to fail, or why $30 dollars a day is not enough to secure Quarkcoin - discussing Quarkcoin and its reward schedule
  7. A killer feature for wallets and exchanges - an idea about how exchanges could help grow the value of Bitcoin
  8. How to kill a currency - how could one go about destroying a cryptocurrency
  9. Crypto 2.0 systems - comparing various Crypto 2.0 systems
  10. Mining versus Consensus algorithms in Crypto 2.0 systems - the consensus algorithm and its impacts on a cryptocurrency

Generally, not a bad cross-section of the blog - talking about Crypto 2.0s a number of times, criticising some projects that have some objectionable features, talking about some ideas I still wait to be implemented, etc. Some information is starting to get a bit outdated (I would've expanded the good list to include projects like Ethereum), but overall I can't complain.

Other good posts


The above posts got the most views. However, there are some other posts that I'm proud of. Maybe they got unlucky when they got posted, or the ideas presented are rather niche, but they might be still worth checking out:


Conclusions


Thank you everyone for sticking with me for the one hundred posts. If you find your mind similarly teeming with ideas, my advise to you would be to put them to writing. You may never know when your past self will surprise you with interesting thoughts that would otherwise flee.