1.
Bringing extensibility and new-uses cases
back to the existing capital stock

2.
 Note: not to scale and
relevant information
located in Chapter 3

3.
 "First, a significant amount of work needs to be built on the “burn”
transaction before it is used to claim the coins on the other chain,
for the simple reason of avoiding DoS attacks. Then there is a
length of time called the quieting period during which the return
transaction and associated proofs are published, but not finalized,
and anyone else can step forward with a reorg proof and rollback
the transaction. Finally, there is a period of time afterwards
analogous to the coinbase maturity where the coins are not
spendable because a reorg could undo the peg transaction. So
that's three different waiting periods, each of which would
probably be in the range of 100 - 144 blocks, if not more. The
exact parameters are not set in stone at this moment, but with that
in mind we should expect a peg transaction to take at least 2-3
days to fully clear, depending on the final choice of parameters."

4.
 “Blockchain 2.0” Sidechain
Plan from Austin Hill & Adam
Back
 Note: In theory sidechains can exist
without integrating through a merged
mining process

5.
*Sidechains may not have
100% of the available hashrate
(NMC has 80-85%)

6.
 Working with mining pools
to discuss further utilization
and expansion of merged
mining
 Merged mining will create
sidechains “firewalled” off
from Bitcoin main
 Two-way pegging via atomic
transactions will enable
movement between
sidechains

7.
 Sidechains might not have blocks,
will include transaction fees to
incentivize miners
 Will take 150-200 confirmations (2-3
days) to move between
 “Reanimate” / “alchemy” / temporary
“burn” / Mario’s green pipe
 Sidechains will be used for
experimenting with expanding
extensibility features including
user-issued assets, smart
contracts, HFT, and a plethora of
financial instruments

8.
 Team made up of several Bitcoin core developers in addition to
other cryptographers and programmers
 Adam Back (adam3us)
 Mark Friedenbach (maaku)
 Greg Maxwell (nullc)
 Business end being developed by Austin Hill
 Looking for practical use-cases of blockchain technology such as
internal uses at enterprises and institutions, not solely related to
bitcoin the cryptocurrency
 Launching website soon and some production code within the next
60-90 days

9.
 Blockchains create a
trustless system of
exchange (e.g., data,
value)
 Yet where it ends,
vulnerabilities (may)
begin

10.
The trials, tragedies and tribulations of
creating a decentralized seigniorage network,
banking system and payments platform

11.
 “To own ledger entry is to posses
knowledge of private key”
 Tabulating publicly reported
bitcoins that were lost, stolen,
seized, scammed and accidentally
destroyed between August 9,
2010 and November 28, 2013:
 803,285 bitcoins
• Note: hard to distinguish between bitcoins
which may have also been stolen from
thieves by other thieves

12.
◦ Since November 28, 2013 through April 1, 2014
 5,800 PicoStocks
 96,000 Sheepmarketplace
 4,474 Silk Road 2
 335 Pony virus
 896 Flexcoin
 1,454 Vircurex
 950 Cryptorush
 1,295 BIPS
 484 Bitcash.cz
 7,500 James Howell’s laptop
 2,130 Proof-of-burn (Counterparty)
 41,928 CryptoLocker ransomeware
◦ New total: 966,531 bitcoins

13.
 Coins stolen from mining pools (operator scalping/skimming)
 Unclaimed or unused promotions and dust tips on reddit and Twitter
 Coins stolen from insecure brainwallets (Naval Ravikant “Hello World”)
 Dust on mining pools, exchanges and wallets
 Intentional spam for taint analysis (1Sochi and 1Enjoy mid-February 2014)
 Does not account for money or undisclosed bitcoins stolen off numerous
exchanges in which only fiat value is disclosed (e.g. GBL platform, $4.1 million
in user money November)
 Ransomeware copycats (CryptoLocker 2.0, CryptoDefense)
 Accidental destruction transferring to temporary addresses (i.e., many
exchanges will issue new deposit addresses, sending tokens to same address
even minutes later could result in permanent purgatory and/or destruction)
 Marginal cases of mining and forgetting key or throwing away laptop (e.g.,
Stefan Thomas, James Howell). Hal Finney remembered to back-up, did you?
 Jaded spouses / OTC

14.
 In February 2014
bankruptcy filing:
 Customers lost 750,000
bitcoins
 Mt. Gox lost 100,000 bitcoins
of its own
 March 20, 2014 announcement
claims they have “found” 200,000
in a wallet the company no longer
used

15.
 By 2013, generally accepted belief that approximately 1
million bitcoins have been lost, stolen, seized, destroyed
 Between 2010-2013 18 of 40 exchanges closed, often wiping out customer
balances
 “Trust-me” silos
 Tabulations on previous slides provide evidence this is the
case
 Adding Mt. Gox estimates brings this to approximately
1,650,000 bitcoins
◦ 13.1% of all bitcoins based on assumption of partial-recovery
 If all Gox coins recovered, then closer to lower bound of
10%, if less recovered then closer to 15%

16.
Mining estimates from ‘rutkdn’ and OnBitcoin:
 1,919,950 bitcoins are stagnant on 38,399 addresses mined
between 2009-2010
 Roughly half of these are known to belong to Satoshi (see
research from Sergio Lerner)
 Other half belong to miners who:
 Hard drive broke, returned-to-manufacture and forgot to backup
 Mining as a hobby on old equipment, hard drive now long gone and/or deleted
 Sent dozens even hundreds of bitcoins to test it out with other hobbyists, then
deleting them because they were “worthless”
 This alone represents 15.29% of all mined bitcoins as of April 14, 2014

17.
 According to Jonathan Levine:
 “Post 2012, the amount of
coins held in addresses
containing between 50 to 100
BTC are above my expectation
and raises the possibility that a
large number of these coins are
lost. This conjecture is backed
up by Bitcoin days destroyed
evidence. There remain
approximately 4 million coins
that have never been spent,
many of which are probably
contained in the red section.”

18.
 As of block 295,000,
approximately 99.08% of
all addresses contain less
than 1 bitcoin
 Actual amount located on
these addresses is
109,119.9 BTC
 This accounts for roughly
0.86% of all bitcoins
mined as of April 12, 2014

19.
 At least 10% are reportedly known to be lost, stolen, seized,
destroyed, scammed and forgotten
 Mt. Gox could add another 5% if all “disappeared”
 Another 15.29% of mining rewards are stagnant or gone
 0.86% reside on over 32 million addresses and most may
never be used
 Thus at least 30% of all bitcoins are either lost, stolen, seized,
destroyed, scammed, “dust” or forgotten (perhaps
intentionally)

20.
 Neo & Bee CEO, Danny Brewster,
absconded with investor funds on
April 2, 2014
 Coinmarket.io accepting deposits
but not processing withdrawals for
weeks starting in March 2014
 CoinEX an exchange got hacked in
March 2014 and customers
refunded
 Cryptorush.io had internal
mismanagement in March and then
got “hacked” in April 2014 leading
to a freeze

21.
 Solutions:
◦ Trezor (2FA)
◦ Proof of reserves from Bitfoo
◦ Insurance from Xapo (via Willis)
◦ Oracle and HDM wallet from
Cryptocorp and BitGo (BIP 32)
 m-of-n/multisig (BIP 11 & 16)
◦ “On-chain” wallet from
Blockchain.info
◦ Armory (near impossible to hack
but need to be a geek)
◦ Sidechains/blockchain proliferation
◦ Paperwallets (*)
 Note: As of April 14, 2014, none of
the Top 500 addresses currently use
multisig on-chain

22.
 When smart contract platforms arise, same type of vulnerabilities exist,
yet stakes are higher.
 Example: Alice goes to bed. During the night, Bob from Hack Island,
breaks into her laptop and email account, stealing her digital keys that
control her bitcoins and most importantly the smart contract “deed” to
her home. During the night, this contract is sold and resold a dozen
times on a decentralized exchange. Alice wakes up, unable to open her
home because the door is synched via wifi to a cryptoledger. What does
she do?
 Go to court, explain that even though there is a perfectly unabused
contract, signed in a cryptographic manner, the “legitimate” bearer has
been robbed and the contract should be ignored. New lock and title
issued and installed.

23.
 What if several days, weeks or months
past before original “legitimate” owner
realizes their boat or summer home has
been resold and sold again and last
owner is an orphanage or church?
 Current case law may exist but in some
cases new precedents could be set.
 Preston Byrne: “Utilize trusted third
parties (TTP) to create trading limits
much like payment processors do
today.”
 Integrating trust – as a variable – into a
decentralized prediction market?

24.
 How to incentivize the use
blockchains or sidechains internally
at Coinbase and other
exchanges/wallets?
 Could exchanges run a sidechain?
 Other uses-cases for securing
tokens and on-ramping new
adopters
◦ UI/UX
◦ Providing real economic growth and
value (e.g., non-illicit activities)

25.
 Email: tswanson@gmail.com
 Twitter: @ofnumbers
 Ofnumbers.com

26.
 Tipping is more like a faucet or ‘interpersonal transfer’
 “Fun” way to redistribute existing tokens yet not linked to
actual utility/value of a service performed (i.e., arbitrary)
 “[T]he hard truth seems to be that tipping does not work. It
does not benefit the customer. Nor, in the case of restaurants,
does it actually incentivise the waiter, or help the restaurant
manager to monitor and assess his staff. The cry of stingy
tippers that service people should “just be paid a decent
wage” may actually make economic sense.”