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Trends and speculative possibilities of trustless asset
management
◦ The chart does not fully capture the costs of storing private keys
which is increasingly expensive yet necessary for tho...
 Bitcoin versus Credit
Card and Bank Wire
◦ The typical bitcoin transaction
is processed and confirmed
(6x) in about an h...
 Cannot beat them on speed and
confirmations, go where Visa is
not
 Paypal is not in 60 countries
hence WordPress adopte...
 Slow transaction rate
◦ Block speed of ~10 minutes
per confirmation
◦ 7 per second with BTC
versus 10,000+ per second
wi...
 None of the benefits of
centralization yet with all
of the costly overhead of
decentralization
◦ CAP theorem
 Consisten...
 ASIC centralization
◦ Depreciating capital good provides
incentive to create ‘pumped’ alts
after profitable period of BT...
 5460 satoshi to prevent DDOS and
‘bloat’ yet impacts microtransactions
 No financial incentive to be a
core developer
 No financial reward for
contributing code on a regular
basis (i.e., a jo...
 $200 million - $1 billion in hardware for
mining*
◦ Funds went to utility oligopolies and silicon
companies, not softwar...
◦ Centralized, managed pools
◦ April 1, 2013: 51,925 GH/s
◦ March 25, 2014: 37,582,751 GH/s
 723x increase in hashrate, y...
 Digital signature superficial illustration
of a corporation
◦ Blend between stakeholder versus
shareholder
 Wall separa...
 Historically: incentive not to build the
ecosystem because speculating BTC is
less risky than developing services (this
...
 Does one-size fit all?
 Subsidized all you can eat
 “Unlimited is not unlimited”
with transaction fees
 TINSTAAFL
 F...
 The incentive to provide this public good (hashing), via a
private method (seigniorage via the coinbase), lessens with
b...
 What is a financial transaction? Real quotes this past week
regarding the OP_RETURN change:
◦ “It’s called a free ride.”...
 Dev quote: “Then contact more than
a couple of pools. This statement
sounds like you wish to force
miners to include you...
 All but 0.000146% of
multisig outputs are
unrelated to either
Mastercoin or Counterparty
 March 24, 2014
 CoinSecrets....
 “Bitcoin won’t succeed unless
there are a lot of Bitcoin
companies building the Bitcoin
infrastructure / Bitcoin economy...
 Colored Coins
 Mastercoin
 Counterparty (POB)
 NXT (POS)
 BitShares/Invictus (POS)
 Ethereum (POW/POS)
 Ripple (Co...
 How to fund 30 developers working on 8
projects?
◦ “IPO” can receive actual financial compensation, no
longer just motiv...
 If you built the best, most elegant
solution, people might still not use
it:
◦ Stephen Pair noted Betamax vs VHS
◦ BeOS
...
 Only Ripple protocol (distributed)
can today, perhaps POS with fast
block times can in the future
◦ GeistGeld had 15 sec...
 Pamela Morgan, Chicago-based smart contract attorney
◦ Bloat does not matter if it is internal
◦ Proof of existence can ...
 Sometimes good is good enough (e.g.,
Yamaha vs Steinway piano)
 Incentives are being overlooked (e.g.,
developer pay, A...
 tswanson@gmail.com
 Ofnumbers.com
 @ofnumbers
 Block rewards for Dogecoin were halved on February 14th
 LTC hashrate moved back to trend line
◦ MiddleCoin, CleverMini...
 Adam Back, invented
Hashcash which is the proof-
of-work algorithm used in
Bitcoin
◦ Designed to prevent spam such
as em...
 If lowest hanging fruits are securities, how to convince
professionals at electronic exchanges to do that?
◦ Chris Odom ...
 Many Western residents have few immediate incentives to use BTC
(other payment methods “good enough”)
 Users in develop...
 In 2013, the 50 top global accounting networks and
associations grew by an average 3% in 2013, earning a
combined $169.7...
 Pamela Morgan, Chicago-based smart contract attorney
◦ Smart contracts cannot be nullified due to technical limitations
...
 Preston Byrne – London, based securitization attorney
◦ Taking Munibit, developed by Startup Cities Institute (to help
m...
 70 year leases are often
40-50 year leases
 4 million rural Chinese
evicted each year
 Local gov’t generate
70% of ann...
Future Opportunities and Economic Challenges for Cryptoledgers: Trends and speculative possibilities of frictionless trust...
Future Opportunities and Economic Challenges for Cryptoledgers: Trends and speculative possibilities of frictionless trust...
Future Opportunities and Economic Challenges for Cryptoledgers: Trends and speculative possibilities of frictionless trust...
Future Opportunities and Economic Challenges for Cryptoledgers: Trends and speculative possibilities of frictionless trust...
Future Opportunities and Economic Challenges for Cryptoledgers: Trends and speculative possibilities of frictionless trust...
Future Opportunities and Economic Challenges for Cryptoledgers: Trends and speculative possibilities of frictionless trust...
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Future Opportunities and Economic Challenges for Cryptoledgers: Trends and speculative possibilities of frictionless trustless asset management

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[Video: https://www.youtube.com/watch?v=pyuCJkLF2Jo ]
[Paper: http://www.ofnumbers.com/wp-content/uploads/2014/04/Bitcoins-Public-Goods-hurdles.pdf ]

Presentation given at the Institute for the Future on March 27, 2014. Note: there are numerous footnotes containing additional quotes and references of each slide. It covers the technical and economic limitations of Bitcoin in its current state, the financial incentives for operating a mining pool, the financial incentives for working as a developer and the various public goods issues surrounding a communal effort including special interest groups and lobbying.

Published in: Education

Future Opportunities and Economic Challenges for Cryptoledgers: Trends and speculative possibilities of frictionless trustless asset management

  1. 1. Trends and speculative possibilities of trustless asset management
  2. 2. ◦ The chart does not fully capture the costs of storing private keys which is increasingly expensive yet necessary for those uninterested in hosting the keys locally ◦ Furthermore “payment clearing” is not cheap as the costs to maintain the network shift in relation to the market price of bitcoins themselves
  3. 3.  Bitcoin versus Credit Card and Bank Wire ◦ The typical bitcoin transaction is processed and confirmed (6x) in about an hour ◦ International Bank Wire can be a matter of days ◦ Credit card varies  Estimated cost:  ~$15 for Bitcoin*  ~$50 for Credit Card  ~$40-$80 for Bank Wire  *Based on costs of running the network divided by number of transactions
  4. 4.  Cannot beat them on speed and confirmations, go where Visa is not  Paypal is not in 60 countries hence WordPress adopted Bitcoin  Goldman Sachs report: $210 billion of savings in three areas: ◦ Retail, online merchants, remittances ◦ Remittances are $550 billion annually  Average African migrant pays 12.4% in remittance fees
  5. 5.  Slow transaction rate ◦ Block speed of ~10 minutes per confirmation ◦ 7 per second with BTC versus 10,000+ per second with Visa ◦ Not adequate for decentralized HFT  M-PESA handles 43% of Kenya’s GDP because it is sent instantly via SMS
  6. 6.  None of the benefits of centralization yet with all of the costly overhead of decentralization ◦ CAP theorem  Consistency, Availability, Partition tolerance
  7. 7.  ASIC centralization ◦ Depreciating capital good provides incentive to create ‘pumped’ alts after profitable period of BTC mining ends  Coiledcoin & Eligius  Hasher versus miners ◦ Not transparent (“selfish-mining”)  Mining pool centralization ◦ Though efficient payments and value-added centralization on edges (Coinbase/BitPay) ◦ BIP 70
  8. 8.  5460 satoshi to prevent DDOS and ‘bloat’ yet impacts microtransactions
  9. 9.  No financial incentive to be a core developer  No financial reward for contributing code on a regular basis (i.e., a job)  Only 2-3 funded developers (Gavin, Jeff and half of Mike)  Tragedy of the crypto commons, growth by volunteer work
  10. 10.  $200 million - $1 billion in hardware for mining* ◦ Funds went to utility oligopolies and silicon companies, not software developers or ecosystem  ‘Regulatory capture’ – miners will not switch to a fork that does not repay their investment (e.g., Proof-of-stake) so status quo remains ◦ Network roughly same speed as 5 years ago, 10 minute confirmation times  If Visa spent $200 million and was no faster, CTO would be fired
  11. 11. ◦ Centralized, managed pools ◦ April 1, 2013: 51,925 GH/s ◦ March 25, 2014: 37,582,751 GH/s  723x increase in hashrate, yet roughly same network performance
  12. 12.  Digital signature superficial illustration of a corporation ◦ Blend between stakeholder versus shareholder  Wall separating fiduciary responsibility is nebulous ◦ No clear decision makers, no clear responsibilities, no governance or accountability determined via private keys  Cargo cult handwaving (Vanuatu as seen in picture)
  13. 13.  Historically: incentive not to build the ecosystem because speculating BTC is less risky than developing services (this may be changing)  Buying and burying bitcoins around the globe instead of building part of the ecosystem  Jesse Powell perseverance versus the free-rider problem  Socialize the labor, privatize the gains  SugarCRM, MySQL, MongoDB, Jira, all succeeded in the market due to a dedicated company
  14. 14.  Does one-size fit all?  Subsidized all you can eat  “Unlimited is not unlimited” with transaction fees  TINSTAAFL  FedEx, Disneyland, CDNs  Tragedy of the commons ◦ Communal ◦ “Public goods” animosity towards MSC, CC, XCP
  15. 15.  The incentive to provide this public good (hashing), via a private method (seigniorage via the coinbase), lessens with block reward halving  Hashrate is treated as “public good” (non-scarce/rivalrous)  Inclusion of tx is a private good due to block size  Incentivize via transaction fees  Future: free floating, determined by miners (planned)  Supply limitation 1 MB block, have to increase block size ◦ Trade off between block size, speed and decentralization  Cost of actual network costs is likely higher, certainly not free  Actual costs masked by price appreciation and token dilution
  16. 16.  What is a financial transaction? Real quotes this past week regarding the OP_RETURN change: ◦ “It’s called a free ride.” ◦ “Too many people were getting the impression that OP_RETURN was a feature, meant to be used.” ◦ “Not acting like bitcoin is your personal property.” ◦ “Every full node has consented to download and store financial transactions.” ◦ “The community agrees and the protocol is updated.” ◦ “All data storage attempts, even the OP_RETURN stuff, are technically abuses the protocol was never intended for.”  Cookies, JavaScript, AJAX (unintended uses from original internet protocols) ◦ Permissionless invention  Counterwallet uses Insight from BitPay Bitcore fork
  17. 17.  Dev quote: “Then contact more than a couple of pools. This statement sounds like you wish to force miners to include your transactions; surely you didn't mean it that way?”  How to contact unknown miners?  “Hello unknown mining pool, I would like…”  Decentralized, anonymous mining?  What if they only spoke Putonghua?
  18. 18.  All but 0.000146% of multisig outputs are unrelated to either Mastercoin or Counterparty  March 24, 2014  CoinSecrets.org lists recent metadata embedded in the Bitcoin blockchain using OP_RETURN outputs
  19. 19.  “Bitcoin won’t succeed unless there are a lot of Bitcoin companies building the Bitcoin infrastructure / Bitcoin economy. So there seems to be a classic public good / positive externality problem here: People are better off free riding on the efforts of others, but if everybody did that there would be nothing to free ride on.”  Koen Swinkels
  20. 20.  Colored Coins  Mastercoin  Counterparty (POB)  NXT (POS)  BitShares/Invictus (POS)  Ethereum (POW/POS)  Ripple (Consensus ledger)  Open-Transactions (Ledgerless)
  21. 21.  How to fund 30 developers working on 8 projects? ◦ “IPO” can receive actual financial compensation, no longer just motivated by goodwill, altruism and ideology  4,700 bitcoins raised by Master Foundation  2,130 bitcoins ‘burned’ by Counterparty  Solve other use-cases: ◦ Real estate title tracking (developing countries) ◦ Middle office automation (no need to worry about bloat if it is internal) ◦ HMO can share medical records, m-of-n multisignature transaction to work with health care providers ◦ Crowdequity and content rewards (LTBCoin, JoinMyIPO)
  22. 22.  If you built the best, most elegant solution, people might still not use it: ◦ Stephen Pair noted Betamax vs VHS ◦ BeOS ◦ Itanium ◦ Gentoo  “I want an OS not a hobby”  Consumers may just care for simplicity and “smart fine print” ◦ Geeks and early adopters care about tokens for payments, later adopters may not (i.e., do you know or care how Visa’s transfer mechanism works?) ◦ Android and Mac OS X versus Gentoo and FreeBSD
  23. 23.  Only Ripple protocol (distributed) can today, perhaps POS with fast block times can in the future ◦ GeistGeld had 15 second blocks (but many orphans) ◦ Litecoin has 2.5 minutes blocks (max 28 transactions per second) ◦ Dogecoin has 1 minute blocks (70 transactions per second) ◦ NXT has 1 minute blocks, 255 transactions per minute (~4 tx/s) ◦ Ripple has 5-10 second ledger closings, 100-1000 tx/s  Coinbase, Circle, Bitstamp effective and efficient but centralized (in the long run consumers may be okay with that)
  24. 24.  Pamela Morgan, Chicago-based smart contract attorney ◦ Bloat does not matter if it is internal ◦ Proof of existence can be done right now, can maintain confidentiality -- able to prove the exact copy of the document ◦  Preston Byrne – London, based securitization attorney ◦ Taking Munibit, developed by Startup Cities Institute (to help mitigate and prevent leakage of funds in institutions of developing countries)  One public input and one output address for all funds (transparent to public)  Use a cryptoledger internally to monitor trading desks
  25. 25.  Sometimes good is good enough (e.g., Yamaha vs Steinway piano)  Incentives are being overlooked (e.g., developer pay, ASIC depreciation)  Special interest groups may exert pressure and lobby due to a “public goods” issue  ‘Jawboning’ against alts will not work in the long-run (i.e., “Slackware or bust!”)  Bitcoin (the protocol), despite these shortcomings, will still likely flourish in the near term  Tools are agnostic and open-source, multiple new use-cases by new parties  Let a thousand cryptoledgers bloom
  26. 26.  tswanson@gmail.com  Ofnumbers.com  @ofnumbers
  27. 27.  Block rewards for Dogecoin were halved on February 14th  LTC hashrate moved back to trend line ◦ MiddleCoin, CleverMining, HashCows, WafflePool, Hashbros
  28. 28.  Adam Back, invented Hashcash which is the proof- of-work algorithm used in Bitcoin ◦ Designed to prevent spam such as email and DDOS  Bitcore fork of bitcoinjs from BitPay  0.9 bitcoind / 40 or 80-byte hash ◦ SPV ◦ Fund devs with assurance contracts?
  29. 29.  If lowest hanging fruits are securities, how to convince professionals at electronic exchanges to do that? ◦ Chris Odom with Open-Transactions is a one man army, perhaps he can solve it with federated voting pools?  Andreas Antonopoulos: ◦ Antonopoulos compares the invention of the blockchain to nuclear fission. "There's the discovery of fission, then there's building an actual nuclear reactor and then there's the electricity that comes out of it. And everybody's focusing on the price of the electricity that's coming out of it, and they're missing the point that fission in itself changes physics, changes energy, changes everything, really. Maybe you can ban electricity, maybe you can regulate reactors. But you certainly can't make people forget that fission exists. And you can't make that discovery disappear."
  30. 30.  Many Western residents have few immediate incentives to use BTC (other payment methods “good enough”)  Users in developing countries have more incentives but capability limitations (few smartphones, unreliable internet connection, shared devices) ◦ There are roughly 253 million unique mobile phone subscribers in Africa (many have two SIM cards) and an estimated 70% of the population on the continent are underbanked or have no access to a bank  Private key storage and usage too complicated for regular user  Meaningless string addresses not user friendly  Technology advocates in the defense position still –> wait-and- see easier and less risky
  31. 31.  In 2013, the 50 top global accounting networks and associations grew by an average 3% in 2013, earning a combined $169.7 billion in fee income  Ernst & Young 12th annual Global Fraud survey: ◦ 39% of respondents reported that bribery or corrupt practices occur frequently in their countries ◦ In Indonesia, 60% of respondents consider making cash payments to win new business acceptable ◦ In Vietnam, 36% of respondents consider it acceptable to misstate a company's financial performance
  32. 32.  Pamela Morgan, Chicago-based smart contract attorney ◦ Smart contracts cannot be nullified due to technical limitations ◦ Bloat does not matter if it is internal ◦ Provide a method for elections (corporate, civic) providing greater transparency, instant results, unforgeability ◦ Proof of existence can be done right now, can maintain confidentiality ◦ Able to prove the exact copy of the document  Prove that a Will exists  “Documents need to be secured and protected so that they can be delivered to another party (judge/heir/executor) when they are needed. One issue is ensuring document integrity - that the document presented today hasn't been altered - that it's the exact same document. PDF version of a document uploaded to the blockchain can provide that proof. For around $3. It is so inexpensive, why wouldn’t you do it?"
  33. 33.  Preston Byrne – London, based securitization attorney ◦ Taking Munibit, developed by Startup Cities Institute (to help mitigate and prevent leakage of funds in institutions of developing countries)  One public input and one output address for all funds (transparent to public)  Use a cryptoledger internally to monitor trading desks  Can be used as an automated accounts reconciliation to compare with trusted ledgers  Traders have trading limits but can game the books since accountants are 1-2 weeks behind)  Subledger.com could be used  Exposure can be controlled, flags raised, books impossible to forge due to digital keys required  Use cases: Jérôme Kerviel, Nick Leeson, Kweku Adoboli, LIBOR fraud and manipulation
  34. 34.  70 year leases are often 40-50 year leases  4 million rural Chinese evicted each year  Local gov’t generate 70% of annual income from land sales  120-150 million migrant workers without urban hukou’s

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