The next wave of ICOs

About half a year ago, SEC released an investigative report concluding that DAO Tokens were securities. Since then there have been a number of high profile cases reinforcing this classification world-wide - UIP, LLToken, CCC, and HMS had to issue refunds to the ICO purchasers in China, Protostarr closed up shop, REcoin and DRC World were charged with fraud and so on.

On one hand, the future of ICOs may be looking grim, with the law enforcement making it harder for various projects to raise money by issuing tokens. On the other hand, the new classification of (some) ICOs as securities might be one of the best things that has happened in the space lately. We might be on the bring of a new wave of ICOs, and here is why...

Historical waves

Long-term bitcoiners might start to see some pattern in history. Early on, we had the pioneering invention that was Bitcoin. After a few years, it became somewhat successful, earning its early adopters some hefty amount of money. We then saw a few other projects pop up saying "I too would like some money". We then saw first a trickle of new coins appearing, altering the Bitcoin codebase slightly, and then an entire wave of thousands of altcoins doing the same, tweaking the parameters and claiming they are better than Bitcoin, therefore they should get the money Bitcoin gets.

We then saw a new wave come in. Coins that were generally not mined, but created and pre-sold to raise the money the team needed to build their product. Mastercoin, Ethereum, etc. Soon after, once a few high-profile projects have made bank, we saw a repeat of what happened before - a large influx of projects also doing an ICO in a "me too" mentality.

It is rather likely that the next wave of altcoins / ICOs will follow the same trends - starting with a trickle of trail-blazers, following with a wave of followers.

ICO Securities and the next wave

For awhile now, you could see a number of ICOs skirting the line of being a security or a utility token. Perhaps giving a wink to their pre-purchasers - "of course you should not expect a profit, but you know we're just like that other ICO that made such great ROI. We're not promising ours will do the same, but you know...". Maybe they tacked on some functionality to have an excuse to call themselves a utility token - "this token will be used to pay for ads to display to our users. It only has a utility value of those ads. You should definitely not speculate on the token representing a share in the platform we're building" or something like that.

Now, with the SEC report, it seems that some ICO projects are taking things a bit more seriously. The grey area between a utility and a security token has become less of a safe harbour. We can expect ICOs to take a firmer stance on what they are. On one hand, we will have token ICOs staying far away from being a security to avoid the extra compliance burden associated with that, but on the other hand, we will see some new ICOs emerge - ICOs that fully embrace being a security and go all-out.

If you're already aiming to be a security and do all of the due diligence associated with it, you could drop the song and dance of utility from your token. We might see tokens that represent shares in a company, tokens that represent rights to dividends and so on, rather than trying to pretend they are tied to some specific functionality of a utility token.

More importantly, by embracing the due diligence of being a security, those tokens might attract the more traditional investors. Companies could do ICOs instead of IPOs, raise money through token presales rather than seed rounds and so on.

This might be the next big wave of ICOs - ICO securities. We will probably see first trailblazers like impak Coin soon, and we can expect the wave to come soon after. We might see a number of people trying to get rich quick, but hopefully we will also see some true innovators creating something new we haven't seen before in the crypto space. I have a few ideas of my own of what those might be, but one shouldn't give away the billion dollar ideas too quickly ;).

Conclusions

In the past, we have seen a wave of altcoins and a wave of ICOs sweep into the crypto world. Due to the recent SEC report, we might soon see a new wave of ICO securities repeat the same cycle, hopefully bringing in a wave of new kinds of investors into the space.

If you're interested in launching an ICO compliant with the securities regulation, perhaps you'd be interested in checking out the new company I work for - https://www.icomplyico.com/ . We're focused on helping new projects launch compliant ICOs.

Another crypto bubble and the rise of altcoin markets - a story in 9 charts

The crypto markets seem to be in another bubble, orders of magnitude bigger than the last. However, this time a lot of the money is flowing into altcoins interestingly enough. How this situation will play out and where the market will stabilise at will be a really interesting story to watch unfold - whether Bitcoin will re-capture the market, or will some other crypto take its place. I would like to take this time to go over some of the history that brought us here however, as it's also a fascinating tale (if you like graphs).

Here is a short version of the story, in one graph by Woobull:

Bitcoin network congestion, market dominance, and altcoin marketcap, by Woobull.

This is a cautionary tale for Bitcoin, but before we can really talk about how Bitcoin might be impacted, we have to talk about some altcoins. So strap yourself in for this whale of a tale in 9 charts...

Story leading up

The story of this bubble really starts around 2015, when some Bitcoin core developers wanted to address the network congestion they saw coming in Bitcoin. This was the start of the Bitcoin scaling debate that gave rise to BitcoinXT, Bitcoin Unlimited, SegWit, UASF, etc. The writing was on the walls - if Bitcoin continued to grow in popularity, soon the blocks would be full and we would have to deal with the consequences. Two years have passed, and no consensus has been reached, thus priming us for the current events.

Bitcoin Unlimited Rally

The bubble proper was started by the disagreement on how to scale Bitcoin. At the moment, there were two major solutions being proposed to address the issue - SegWit and Bitcoin Unlimited. Perhaps tired of waiting for consensus to emerge, perhaps prompted by Roger Ver's ambitions, Bitcoin Unlimited started to rally people behind its hard fork. Those came in two main waves - around October 2016, and March 2017, increasing both node count and number of blocks mined.

Bitcoin Unlimited node count

Bitcoin Unlimited mined blocks (green)

The fact that Bitcoin Unlimited was gaining momentum, coupled with rumours of a planned 51% attack to cull a network split made serious waves in the community. We were faced with a real possibility that the network will fork and perhaps split. Every major player was taking sides in the discussion, and the tensions kept rising. The problem got exacerbated by the Covert ASICBOOST scandal. If Bitcoin had a doomsday clock for the network splitting, it would probably be uncomfortably close to midnight.

With the uncertainty of Bitcoin's future and the rising tensions, other events started to take place.

Rise of Ethereum

2016 has been a bit of a rollercoaster for Ethereum. The year started at a sub-dollar price per ETH, reached about 20 USD/ETH due to The DAO, then slumped to about 7 USD/ETH after its hard fork and network split. The new year started on a positive note with a roadmap for the future of Ethereum. ETHs were sitting comfortably at #2 market spot by market cap, increasing a bit with Bitcoin price increases (1, 2, 3, 4) as you'd expect in a calm market.

Then March came along. Bitcoin Unlimited started gaining popularity, and the fear of a potential Bitcoin network split started shaping the market. While historically Bitcoin has been seen as the stable gold standard among cryptos, the safe heaven you'd park your money at if you didn't want to cash out into fiat. However, with the future of the network being uncertain, some people decided to move their wealth elsewhere.

March was the month where Bitcoin slumped and Ethereum was there to pick up the money moving away (1, 2, 3, 4). You can practically see the ~21B USD market cap shifting gently towards Ethereum, giving it a boost from 1.6B USD to 4.6B USD in that month, while Bitcoin went from 20B USD to 15B USD.

Bitcoin price chart

Ethereum price chart

In April the Bitcoin situation started to calm down. Bitcoins started to recover along with their market cap going back to 21B USD by the end of the month (1, 2, 3, 4, 5). However, another important development started brewing elsewhere...

Litecoin and SegWit

Litecoin has always been "silver to Bitcoin's gold", its shadow. Sometimes outperforming Bitcoin price increases percentage-wise, but rarely making a big splash overall. Seeing Bitcoin stumble with its scaling solutions, it seized on the opportunity to make a name for itself.

What is important to remember, is that Litecoin can be classified as a "copycoin" - a cryptocurrency largely operating similar to Bitcoin, on a pretty similar codebase with minor tweaks. It's so similar, that by chance or negligence, Litecoin's multisig addresses have the same prefix as Bitcoin. Copycoins in general operate on hype and innovation (real or manufactured) - there are so many similar coins that if you don't stand out from the crowd, you're going nowhere.

While Litecoin did not have the network congestion issues of Bitcoin, it still decided to improve its network and push for SegWit adoption. While it looks like the process started in February, there was a considerable rally for SegWit in late March, as indicated by the sudden jump in SegWit blocks and market activity.

Litecoin SegWit adoption

Litecoin price chart

The process was spearheaded by Charlie Lee, the creator of Litecoin. A notable opposition to the SegWit progress were Bitmain and Antpool. Supposedly they were blocking Litecoin's SegWit activation to prevent further SegWit adoption on the Bitcoin blockchain, where they are allegedly profiting from Covert ASICBOOST. After a long ordeal, Litecoin finally locked in and activated SegWit mere days ago.

There have been some other altcoins that also followed Litecoin's SegWit adoption, but their stories aren't that interesting.

The price also reflected that - going from under 5 USD/LTC at the start of the year with about 220M USD market cap, to a high of 35 USD/LTC and 1.8B USD market cap in the recent weeks. While this would normally allow it to take #3 spot on the crypto market cap list, another network had a meteoric rise that came largely out of nowhere...

Rise of Ripple

Ripple has had a mixed reputation in the Bitcoin community. It's the oldest and one of the most prominent Crypto 2.0 networks. It has been caught the ire of bitcoiners in 2013 for being seen as "pro-regulation" during US Senate hearings, declared dead in 2014 (Bitcoin has been declared dead over 100 times now), has been fined by FinCEN for Bank Secrecy Act Violations, etc. Ripple Labs have developed essentially a competitor to its own network - the Interledger Protocol.

However, more recently it looks like the company is going back to its roots and focusing on the Ripple network. It stated publishing quarterly market reports on XRPs and talking about its plans for the future. There are more and more news about various banks using its network. All in all, it looks like the market has warmed up to the currency:

Ripple price chart

While we see a small blip on the chart in early April when it crossed 1B USD market cap, the currency started to enter a meteoric rise around the start of May (1, 2, 3). The year started with a market cap of 220M USD and a price of 0.006 USD/XRP, while currently it sits at 8.4B USD and 0.22 USD/XRP.

Now, let's look at how this all comes together.

Market dominance

At the time of writing, we this is how the market looks like:

#1 Bitcoin - price: 1813 USD/BTC, market cap: 29.6B USD
#2 Ripple - price: 0.22 USD/XRP, market cap: 8.4B USD
#3 Ethereum - price: 90.8 USD/ETH, market cap: 8.3 BUSD
#4 Litecoin - price: 29.6 USD/LTC, market cap: 1.5B USD

Total market capitalisation of all coins: 55B USD, of which 25B USD are in altcoins. This means Bitcoin's market dominance is under 55%, while at the start of the story, it was about 85%:

Market dominance

Bitcoin has historically been the "gold standard" for crypto. The market leader, the first mover, the biggest whale. However, it seems like in this market if you're standing still, you're moving backwards.

Since the start of our story, Bitcoin has periodically dipped in its price, but overall we're seeing all-time high price. The recovery was probably due to people worrying less about the potential network split that might come from Bitcoin Unlimited. Bitcoin is certainly stronger than ever, but there might also be blood in the water - despite the price of bitcoins rising, so too did the altcoin markets grew in leaps and bounds.

Whether this bubble we're in right now (and it certainly has the look of a bubble) will pop hard and the market will rebound in Bitcoin's favour, or whether a new paradigm will be made where bitcoins play less of a dominant role, only time will tell. It is very unlikely Bitcoin will ever sink too deep into the coin list, but if the scaling stalemate continues, Bitcoin's advantage will be eroded over time.

For years one could easily dismiss altcoins as being a fad, nowhere near as mature as Bitcoin. But at some point you have to realise you might have to compete for your top dog spot. We're living in a market that is used to exponential growth, and Bitcoin's market cap is "only" two doublings away from its next competitor.

Conclusions

We are probably in the biggest crypto bubble to date. Not only has once again reached its all-time high price recently, but the altcoins have also grew by leaps and bounds.

In the near future, I would expect some large contraction, especially in the alt market. Litecoin will probably dip back down now that SegWit is activated and its rally is over.

It will be interesting to see where the money will flow if the value of bitcoins will pop - whether people will be cashing out to fiat, or altcoins.

The biggest threat for Bitcoin is still the scaling issue - if that's not dealt with soon, the issue might just go away... along with many Bitcoin users that will switch to some of the alternatives.

Direct and indirect earnings in crypto

The crypto space is a strange place to be in over a long period of time. Once the coins you bought for a few dollars start becoming a noticeable portion of your net worth, you may start thinking to yourself - "should I work a normal job, or should I work for the cryptocurrency"?

This mostly stems from the fact that you generally can't use a cryptocurrency without also being invested in it. I may hold $1000 in a credit card, but I don't own any shares in Visa or Mastercard. However, when I hold $1000 worth of bitcoins, I inevitably own a part of the Bitcoin economy. As its value rises and falls, so too do the coins in my wallet. While this also is true for real-world currencies, their market cap is so far beyond us mere mortals that we can't really hope to influence it in a significant way. Cryptos are still fledgling economies where each person could make an impact.

Some of the Bitcoin core developers are also early Bitcoin adopters. I would imagine a good number of them hold a significant amount of coins. Those that do don't need to expect a salary for developing the core technology behind Bitcoin if their work contributes to the increased price of Bitcoin. If you hold $1M worth of coins and the value increases by 10% in a year, you have indirectly earned $100k that year. This is essentially the same as working for equity, except you can cash out more freely.

The same goes to a lesser or greater extent to everyone else in the space. Anyone holding the coins stands to benefit from the coins increasing in value. While this can be benevolent, the same economic forces can encourage people to use their influence for personal gain at the expense of the much broader community. Because coins aren't stocks, you can cash out and change "allegiance" at a drop of a hat unfortunately.

Even when we're not talking about people that can influence the market, the endowment effect is very much real in the crypto community. You value and perceive the coins you own much more favourably than the ones you don't. If you don't own ethers you might have cheered when the network forked and belittle its rise in price in the more recent times. It's a similar mechanism behind the "hodl" mentality. Even though you may benefit from selling coins when the value is going down and buying when the value is going up, some people tend to prefer holding onto their coins going up and down rather than realising their gains or losses. "If the price is going up, my bitcoins will be worth more. If the price is going down, I'll be able to buy more bitcoins".

With the value of various coins going through the roof in recent months, more and more of us will have to face the dilemma of what to do in regards to our growing crypto stash. Whether we continue working our day jobs like nothing happened, retire to a possible life of luxury, or perhaps start working for our cryptos in hopes of contributing to the community and indirectly to the value of our coins. A single person's contribution might not be that large, but a large community working towards similar goals can be influential. Everyone owning a crypto has their skin in the game.

A path to riches and rags - crypto trading and investing

Cryptocurrencies are a fascinating development in technology. At the same time being an ingenious application of cryptography, the software designed to run it, and the currency that flows through the system. It is perhaps this tantalising mix of emerging technology and money that drives a lot of people that discover cryptocurrencies to greed at some point in their experience.

A lot of people got rich with this technology already, whether through investing, innovating, gambling or dumb luck. Those people are often visible and praised, but let's not forget about the survivorship bias - there are probably just as many if not more people that have lost a lot of money trading cryptocurrencies.

The gold rush

A number of people I've talked to seem to be going through something akin to a "gold rush" at some point of their crypto career. This usually happens early on - you discover this new technology, figure out it's a form of money, then look at the past gains and tell yourself "wow, this can make me rich!". You immerse yourself in the crypto world, take in the torrent of information, then try going into mining, trading, or something similar. In my case - it was discovering the GPU mining during the first few days of the first Bitcoin bubble (where the price went to a whopping ~$30 in the end).

In most cases, the rush is rather unsustainable as a hobby - mining is a specialised industry, short-term trading is a gamble, and services developed by inexperienced developers can be a liability. You are more likely to get burned than to make an actual profit.

From here, you can generally see a few transition options - deciding to cut one's losses and leave crypto altogether, "buy and hold" approach, or going professional.

Crypto as an investment

It is possible to treat cryptocurrencies as an investment - a high-risk investment. If you're lucky, you can get high returns. If you're not - you will end up with nothing.

A long while ago I came across an idea that "buying bitcoin is like investing in the entire bitcoin economy". Given Bitcoin's finite supply, the only way for the Bitcoin economy to grow to accommodate larger trades is through increase in velocity (how fast the coins circulate) and through the increase in value. Assuming you expect the Bitcoin economy to grow, you can expect the value of Bitcoin to grow as well. Same goes for other cryptocurrencies adhering to similar principles.

That being said, it is very important to remember that an investment in a cryptocurrency is not the same as an investment in a company that makes that cryptocurrency. XRP is not the same as Ripple Labs, factoids are not the same as Factom, etc. By investing in a company, you enter into a legally binding agreement. By buying the tokens, you're just holding the tokens. The company may do well developing projects unrelated to the token it initially created, which will increase the share price, but not necessarily the token price. Same is true the other way around - someone else may step in and make the token valuable, or possibly manipulate the price (for example, the hairy MAIDSafe presale on Mastercoin). The distinction is important to make.

While there are a lot of investment vehicles available for people in the developed countries, cryptocurrencies might be a more inclusive way to invest for the less fortunate people, or those wishing to hedge away from their government's monetary policy altogether. While this sort of way of investing can certainly yield great benefits, it can also be a fertile ground for scammers.

As usual, the age-old advise applies - don't invest more than you can afford to lose, hold, don't try to day trade, keep your coins safe.

I'd also add an advise to buy coins with long-term growth potential - coins developed by competent people, being a dominant player in their own crypto niche, etc. Those have a higher chance of sticking around than the flash-in-the-pan copycoins.

Crypto trading

An alternative to buying coins and holding them is to do trading. Bitcoin, the biggest crypto out there is certainly a volatile currency. Altcoins are just a wild ride, pumpers exist to exploit people, whales can sway the market, the honey badger don't care, etc. If you can make sense of this madness, there is certainly a lot of money to be made here.

However, the same riches can be lost as easily as they can be gained. A few interesting words of wisdom:

• The market can stay irrational longer then you can stay solvent
• Leverage trading in a volatile market is essentially gambling
• Meaningless pleasure is worthless, gambling doesn't produce anything but debt

Generally, trading cryptos is about speculating on which system will deploy the next big feature, get the next big headline, or score the next big partner. The only problem here is that the markets are so thin in comparison to the wallets of the big players, that they can be easily swayed in a direction that is not rational - this is why short-term trading is very risky.

If you don't know what you're doing, don't try to be too smart

In my crypto career I've had ample opportunity to make mistakes and learn from them. In the end, I came out ahead by sticking to what I know and not trying to be too smart for my own good. Here are some lessons I've learned along the way:

You can't really predict the market - don't try to trade if you're not a trader.

Never go full fiat. I once sold all of my coins when the market slowly crawled to about $25/BTC in early 2013. I had to buy them back at $35/BTC when the signs were clear the market wasn't going back down.

Don't diversify your portfolio into stupid things, don't invest in any company that can't realistically outperform Bitcoin. Back in the day I liked the idea of being able to buy stocks in Bitcoin companies with bitcoin itself. In the end, I'm a few coins poorer, have some mostly worthless "stocks" held by a company in Panama.

Don't keep your coins at a rickety company. While I was lucky / smart enough to survive a number of Bitcoin exchanges going under without losing any coins (I've used Bitomat, MtGox, BitCurex, Cryptsy, etc.). The two times my coins were lost were due to Ripple - some at WeExchange (a gateway that also had some crypto stocks AFAIR), and others due to the Ripple's official wallet being a brainwallet by default.

Don't lend crypto. Back in the day, I tried BTCJam. Lost all of the coins I put in, and it didn't look like the company had any plans of trying to enforce the collections. Other users have similar experience of high default rates. I've been staying clear of such websites ever since.

Be patient, make informed, long-term decisions. In the end, this approach has been the most successful for me. I haven't sold a single coin in a long time and I have a decent diversity of cryptos I expect to do well for themselves in the long run.

Conclusions

Cryptocurrencies are a high risk investment. They can yield great returns, but also end up losing you all that you've invested in them overnight.

Transactional currencies - Entry Credits and Gas

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

----

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.

The Regime Test - a Great Filter for the cryptocurrencies

Bitcoin is a decentralized cryptocurrency. Just like gold, nobody owns the system and no single entity controls the market. While some governments might try to restrict its use, at this point the Bitcoin network is so widely distributed that any attempt to shut it down is infeasible.

However, what about other cryptocurrencies out there? How can one be sure the network they use will stick with its tenants and not start acting like a centralized system? How does one know their coins are safe from being forked and erased?

One good indicator of whether a cryptocurrency will stay the course of remaining decentralized or caving in to government's will would be "The Regime Test" - waiting for the currency to be actively used by at least a few people in some sanctioned regime, bring it to the attention of both the system developers and their government and see whether they take any steps to prevent such transactions from taking place on the protocol level, or stand by their network needing to be completely decentralized.

One could see it as "a Great Filter for the cryptocurrencies" - every sufficiently successful cryptocurrency will have to face it on the road of becoming an ubiquitous, global currency. Whether the system passes the filter and remains a decentralized network or caves in to governmental pressures forces the project to take a stand on either side of the debate - it's not an issue that can be swept under the rug for long.

This test is especially important for the Crypto 2.0 systems that allow you to deal in your local currency directly. One can never expect when a new currency would appear from either a sanctioned regime or an extremist group that is suddenly traded against the more established currencies. Whether the system is then forced to ban the issuance of such currencies or lets the gateways deal with that on a case-by-case basis with their users can be an interesting precedent. If say, someone would send a Gold Dinar from a terrorist organization that then gets swapped for USD and lands in someone's account, would that person be potentially investigated as dealing with the terrorists? What about the trader that set up an order that allowed this transfer of funds? Or more interestingly - what if the trade went like this: Gold Dinar -> native token -> USD? Clearly, the native token - USD trader did not have bad intentions when enabling that trade, but the transaction couldn't have happened without them. It might be possible that suddenly the decentralized network would start requiring KYC on the blockchain for performing any sort of trade. Suddenly, the extra KYC Ripple Labs had to go through for their wallet start to pale in comparison.

All in all, the Regime Test is another gantlet for cryptocurrencies to separate the fragile ones destined to fade away from the antifragile ones that have a potential of standing to the challenge. It would be interesting to see some exchanges in places like Iran and Syria to challenge the status quo and show that in today's decentralized world, the money is like the Internet - it cannot be stopped and it flows around barriers. Similarly, it would be great to see a few cryptocurrency networks like Ripple challenged to take a stance on this issue.

PS: Stop the Bitlicense

Restrictive regimes - Iran, Syria, North Korea and New York ;).

Who stands to benefit from a spam attack on the Bitcoin network?

As discussed earlier, the Bitcoin network has recently been flooded with a lot of spam transactions. While at least some of this was an honest stress test, it brought more attention to the fact that the Bitcoin network can be pushed to its limits with relatively low cost by anyone. While the network should be resilient against zero fee transaction spam attack, putting some money and effort into the attack can make it seem like a lot of honest transactions with relative ease.

Now, since we know how the Bitcoin network could be destabilized, let us ponder who might benefit from such actions.

DISCLAIMER: while I will be mentioning a lot of specific examples of peoples and projects that might benefit from such an attack, please treat them only as illustrative examples. I have no evidence of their involvement in the attacks, nor do I believe any of them would employ such a strategy.

The usuals

Since we're talking about an attack on Bitcoin, lets get the usuals out of the way - governments, big banks, PayPal, etc. wanting to bring Bitcoin down since it challenges "the old ways". There isn't much new to add to these speculations or motivations, so might as well skip this part of the debate for expediency's sake.

The direct competitors

Bitcoin has been copied so many times people lose count. There is never a shortage of copycoins out there. Since Bitcoin has a throughput issue of handling a lot of transactions, you can easily see someone creating an altcoin with higher block sizes and faster blocks to sell itself as the solution to Bitcoin. More ambitiously, you can look at coins that have added some improvements to the protocol to combat spam, like Litecoin for example. Sustain a spam attack on the Bitcoin network long enough to sell your story of being the savior of cryptocurrencies and you might just be able to push up the price of your coin high enough to turn a profit.

The speculators

Just like you can speculate on the price of altcoin alternatives going up, you can also try speculating on the price of Bitcoin being affected by the spam. Alternatively, you could try to cause something similar to "trade engine lag" on the Bitcoin network and try to game some exchanges while other traders would have trouble moving their coins onto the exchange to cash in.

The solution evangelists

Even if we don't look at the altcoin space, we can see a lot of people with an agenda of where the Bitcoin code should move towards. Whether they are doing it for profit or for personal satisfaction, there is a potential for those evangelist of their own solutions to attack the network and push their code onto others.

Below are some examples (again, only illustrative examples, read the disclaimer) of potential solution evangelists.

Sidechains is an interesting concept of how to move a lot of transactions off the Bitcoin blockchain while still having a currency tightly tied into the Bitcoin itself. As (to the best of my knowledge) sidechains are still impossible to fully implement into the Bitcoin network without a soft fork, using the spam attack as an opportunity to push for a fork would be beneficial to them and enable sidechains to come to the Bitcoin network.

The debate over Bitcoin block size increase has been a hot topic for a few months now. The topic has been pushed most notably by Gavin Andresen, with some people even speculating on "gavincoin" becoming a reality (read more here). More so than Sidechains, the concept is not possible without a hard fork to the Bitcoin protocol, thus pushing the block size increase amid the spam attack would make the core developers more urged to consider going through with the fork to solve the issue.

Finally, something that doesn't require a hard fork - transaction filtering. This approach relies on being able to identify which Bitcoin transactions are spam and which are legitimate use cases and prevent the spam from propagating through the network. If enough nodes in the network would stop spam transactions, the network as a whole could develop herd immunity against spam. However, the same mechanism could be used to deny some Bitcoin businesses' transactions from reaching the miners. Such transaction censorship has been tried to pass unnoticed in the past by Luke-Jr, and could possibly be tried again along with more honest spam filtering.

The off-chain alternatives

Since moving transaction on the chain can be a problem, some people might propose solutions based on transactions being processed off-chain instead. Examples of such alternatives would include the Lightning Network, Ripple, Open Transactions or shared wallet providers such as Coinbase. If the off-chain solution can deliver bitcoins to people faster than the real network and some people don't know or don't care how they receive the coins, they might appear as a legitimate replacement for sending real Bitcoin transactions to some people. This might be also the case when Bitcoin transactions are too pricey to be included in the blockchain.

Crypto 2.0s eliminating competition

There are a lot of Crypto 2.0s out there. A good deal of them rely on the Bitcoin network to function - Colored Coins, Omni or Counterparty for example. There are also some emergent platforms that offer services tied to the Bitcoin blockchain, such as Factom. If the transactions for those networks can't make it into the Bitcoin blockchain, the network itself performs worse and suffers as a result. Their alternatives on the other hand stand to benefit from people potentially switching over. Ripple could benefit if Omni is not performing well, Ethereum stands to benefit from Counterparty being slow, etc. While being on the Bitcoin blockchain has been a selling point for a lot of companies, it can turn into a detriment if the Bitcoin network is overloaded.

Extra: bribing the miners for their compliance

As a side-note, it might be interesting to consider how some parties might want to even further push their agenda onto the network by essentially bribing the miners for their compliance.

Say, if someone wanted to eliminate some "spammy" transactions from the Bitcoin network, whether it's SatoshiDice's dust transactions or perhaps Omni transactions. They could easily set up an anonymous website claiming they will pay every miner X amount of bits for every block they create that complies with their spam filter. As long as they offer more than the miners stand to earn from the transaction fees, there is a benefit to them complying. With the excuse of excess spam, the miners can't be entirely held accountable for some transactions not making it into the block. Since the miners can be paid directly to their coinbase address, everything is transparent and nobody needs to agree to collude.

Conclusions

A stress test of the Bitcoin network can be all about preparing for the higher transaction volumes that are to come in the future, but it can also be a way for some people and organizations to further their agenda. While it might be still really early for such high-level politics to surface around Bitcoin, who knows what the future might hold?

Why fast maturing altcoins are doomed to fail, or why $30 dollars a day is not enough to secure Quarkcoin

Recently I came across Quarkcoin, a Bitcoin-based altcoin with a very fast maturation. The blocks start with 2048QRK reward and halve every 60480 blocks. Each block is set to take about 30 seconds, so this give us roughly 3 weeks of blocks between each halving event. Minimum block reward is 1QRK, and will be reached after 11 halving events, or about 6 months.

A lot of people consider Quarkcoin to be a pump-and-dump premined scamcoin. In some sense, they are right, but in some sense, we are stretching the definition a bit here. QC has been promoted by the likes of Bill Still and Max Keiser, driving its price up a lot. While not falling strictly under the definition of a premined currency (one in which all coins are created in genesis block and subsequent mining reward is insignificant if present at all), it certainly is reminiscent of such schemes.

Looking at the market price of QRK (at the time of writing, each coin is work about a cent, giving the entire market of about 250 million coins the value of $2.5M), a lot of people from the Bitcoin community will recognize it as a pump-and-dump scheme. The currency exists without much of a market - it appears to be traded on 3 small exchanges, there is a lack of tools or documentation for developers, and it appears to be accepted through one obscure payment processor, mainly by shops that will accept any currency. All in all, there is nothing that warrants the current price, asides some key individuals driving its popularity.

However, at the same time Quarkcoin can be an amusing case study for fast maturing altcoins. Just think about it - once blocks will have 1QRK rewards, that will essentially be the baseline of how secure the network is. At the current price, this would equate to $30 per day.

Any mining-based altcoin can essentially be brought to a standstill by a 51% attack. This means that the total computing power of an attacker would equal to the computing power of the entire network. As long as the miners on the network are rational according to game theory (they mine the coins for profit and stop mining when they are not making a profit), the cost to mine the block should be roughly equal to the amount of money earned by mining the block. Since the block reward will level out at 1QRK per block, or 2880QRK per day, this is about as much it would cost to perform a 51% attack on the network in electricity costs.At the current exchange rate of 1 cent per QRK, this is a cost of $30. This is all that will stand between someone being to transact in Quarkcoin, and having their coins sit idly for a day not getting confirmed. Imagine what could happen in that time...

A malicious party could spin up a lot of Amazon EC2 instances, or otherwise rent some server farm time to be able to efficiently mine Quarkcoin without having to pay high upfront costs. It might cost them more than $30 per day, but even spending $1000 would be nothing in comparison to bringing down $2.5M market. They could buy up some QRKs beforehand and position them at online exchanges that do not require KYC verification and are not AML compliant. They start the 51% attack, sell all of their coins and announce what is happening - Quarkcoin is under 51% attack. The attack will persist as long as QRKs have value. No transactions will be confirmed, so nobody will be able to get their money into the exchanges and sell them until it is too late. All the big players that don't hold their money on the exchanges essentially lose all of their money. Panicked people do their best to dump their coins. The attack persists for an hour, a few hours, a day or more as needed. Those that were not convinced at the start change their mind sooner or later.

People holding a lot of money in Quarkcoin would probably do their best to fight against the attack - perhaps sending transactions with high fees to incentivise miners to mine, getting as much computing power as they can onto the network to counter the attack. The question is - how prepared would such people be for this situation in comparison to the attackers? One would have as much time as they need to prepare themselves and streamline the process, the others would have to catch up if they haven't done their lesson in advance. One could also go after the exchanges, performing DDOS attacks on them to bring them down and cause more panic - even if someone was able to get their money in, they might not be able to trade.

Of course, the network could be hardened against such attempts by the people with a lot to lose running their own miners beyond profitability and artificially increasing the difficulty. This would make a 51% attack harder, but at the same time it would destroy the healthy network of miners that would otherwise be interested in profiting from the currency.

All in all, what a lot of people that use fast maturing altcoins don't understand is that unless adoption is driven as fast as the reward is dropping, the currency will develop a big vulnerability to 51% attacks. High transaction volume with appropriate fees would solve this issue, but this requires people to start using the currency, not just buying it and holding it.

As it stands, it looks like Quarkcoin is headed in one of two directions - either it will be just another pump and dump coin and will end up in a number of people losing their money, or it will be destroyed in a more spectacular 51% attack on the network. Anyone holding a grudge against the coin or people that have a lot of their assets tied to the currency can be a potential attacker. A Bitcoin or Litecoin purist could wish to destroy it to prevent people from diverting their money from their currency of choice. Anonymous might do it for the lulz.

We'll have to wait and see whether Quarkcoin will go out with a bang or a fizzle, or perhaps persist against all odds. We will probably see in the following few months what the future will bring.

On the subject of altcoins

Recently I created a FAQ/Guide for /r/Bitcoin and I was asked to expand it by adding information on altcoins and their merits. Since such a discussion is a big subject onto itself, I decided to devote a whole blog post to this.

If you want the quick and easy version - if you are starting your adventure with Bitcoin and crypto-based currencies, stick with Bitcoin and don't look at other currencies. Most of them exist only to speculate on their value and don't offer anything in return. All the technical innovation is happening in the Bitcoin space, all the merchants are there, this is where you should focus your attention. Come back here once you feel confident in operating in Bitcoin securely if you want to learn more.

Getting dirty

Now, lets quickly talk about a few characteristics of Bitcoin:

• Bitcoins are very divisible. Currently 1BTC can be divided up to 8 decimal places. This means that Bitcoin can handle very very small transactions (at the current price of about $1000/BTC, we are talking about the precision of 0.001 cent). If the need arises, this precision can be increased further. There will always be enough units of account to handle even the smallest payments in Bitcoin.
• The way Bitcoin operates is very wasteful, but it is pretty much the only way such a system can operate. Bitcoin solves two very hard problems - decentralized money creation and decentralized money transmission. Both of those problems are easy to address for centralized currencies, but the decentralized nature of the system requires the process of block mining. As discussed previously, this means that bitcoins have an intrinsic value, since they cost money to create.
• Because of the high cost of mining involved, any attack on the Bitcoin Network is very costly. Anyone trying to steal bitcoins through the means of double-spend or Finney attack will have to overcome the entire Network working against them.

There are many misconceptions being spread around that try to fool people into thinking that altcoins solve those problems. Let me address some of the more popular claims.

You need coin X to allow for small transactions

No, you don't. The Bitcoin Network is capable of handling transactions with 0.00000001BTC precision and the blocks are big enough to handle the traffic. You don't need an altcoin to handle small transactions or more transactions.

You should look into coin X - you can mine it and make a lot of money!

There is no easy money to be made. Mining bitcoins is a specialized industry where one needs to invest a lot of money to be competitive on the market. Mining altcoins is hoping that your small effort is in fact big and will make you rich. Again, mining is wasteful - unless you have the right equipment for the job, it will cost you more in electricity and computer parts than it will earn you. Unless you know what you are doing, there is no money to be made there.

Coin X has blocks generating Y times faster than Bitcoin, this means that your transactions are Y times faster!

No, not really. The amount of computing power behind Bitcoin dwarves any altcoin. At the current time getting 1 confirmation is enough to secure most commercial transactions. The hassle of someone trying to scam you while buying coffee from you is not worth it. In most cases seeing a transaction appear in your client with a proper fee will be enough to transact - altcoins don't offer any advantage here.

Buy coin X and diversify your portfolio!

Bitcoin is not a system set in stone. If there will be an important problem or security vulnerability Bitcoin needs to address, it can change itself to keep up with the world. This means that unless Bitcoin fails abruptly (for example someone suddenly discovers a major vulnerability in ECDSA algorithm and can steal everyone's coins), its failure will mean that other altcoins will fail as well. If government cracks down on Bitcoin, other coins will follow. If the Internet is shut down and Bitcoin Network dies, other coins will follow. Diversifying into altcoins will not save your portfolio.

And remember...

If someone claims their altcoin is really something, take a look at the list of all cryptocoins. There are hundreds of them. Almost all of them without merit.

The exceptions

There are a few altcoins that have a merit of their own. I would not recommend them to anyone starting with Bitcoin, but they deserve a mention as an exception to some of the rules.

TestNet Bitcoins

I think this quote of mine explains TBTCs well:

"TestNet coins are worthless, but useful. They are useful because they are worthless. If you will add value to them, they will be useless, therefore worthless."

TestNet Bitcoins are not used as a normal trading currency, but are created for software developers wanting to test their software in a Bitcoin-like environment without losing their money getting lost or them messing with the Bitcoin Network. If you are a software developer and need some TestNet Bitcoins, you can visit my faucet.

Ripple

Ripple is an entirely new beast onto itself. It is a combination of decentralized currency, payment network, exchange and peer to peer lending. The system is still in early development, but since it operates completely different from how Bitcoin works, it is worth looking into at some point. Do be warned, the currency that fuels how Ripple functions - ripples, was all created upfront and a vast majority of it is being held by one or two companies. Some people take issue with that, so be warned.

Namecoin

Namecoin is not only a Bitcoin-like currency, but also a distributed Domain Name Service. The project recently experienced some major bug in its system that made it pretty much useless. If the developers address the issue, it will continue to be a very interesting project to follow due to the extra utility of the created coins (although there is also an issue with Namecoin possibly not being future-proof).

Everything else

Coins other than the ones mentioned above don't offer anything beyond what Bitcoin does. Some people may claim that some altcoin has an innovative block generation algorithm that doesn't require much computational power, or contributes to some prime number research, but in the end that doesn't make them better than Bitcoin, only different. Unless you know what the differences mean and wish to support them, don't buy them.

And remember, some people just want your money

A big number of altcoins are promoted only for one reason - to get your money. Some people were too late to the Bitcoin party, so they decided to start their own and get rich with it. They hope that their coin will grow and become a system like Bitcoin, so they paster a lot of people to devote their time/work/money to make that happen. The most prominent offenders I have come across are the Litecoin supporters. I have seen them asking people working on Bitcoin projects to create projects for their coin, to beg exchange owners to allow their coin to be traded on the exchange, and trying to convince a lot of people new to Bitcoin that they can earn a lot more money by investing into Litecoin. Recently their coin's value has risen along with Bitcoin, but the darnest thing is - there has been no major innovation taking place in the Litecoin ecosystem. There are no new big merchants accepting it, no new services have been created to make Litecoin use easier or anything like that.

So far, Litecoin is a big speculation currency.

There are many other ones like it, but this is probably the first you will come across. Unless speculation is your thing, don't give them your money.

To sum all up

If you are new to Bitcoin, don't look further than Bitcoin - there is a lot of people that will confuse you.

If you are confident in using Bitcoin and want to see what else is out there, check out Ripple and Namecoin.

If you are a software developer and want to program something yourself, check out Bitcoin TestNet.

Every other altcoin - keep away unless you know what you are doing and are certain you are doing the right thing.