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Sidechains and Bitcoin security

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[Video: https://www.youtube.com/watch?v=JZrwIlB6SVA ]
[Paper: http://www.ofnumbers.com/wp-content/uploads/2014/04/Learning-from-Bitcoins-past.pdf ]

Tim Swanson discusses sidechains, merged mining, blockchain 2.0, bitcoin information security. bitcoin thefts and potential use-cases for the network. First presented at Stanford on April 28, 2014 for the Symbolic Systems 150 course. Citations and references in the notes section. More information at: www.ofnumbers.com

Published in: Education, Technology, Business

Sidechains and Bitcoin security

  1. 1. Bringing extensibility and new-uses cases back to the existing capital stock
  2. 2.  Note: not to scale and relevant information located in Chapter 3
  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. 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. 5. *Sidechains may not have 100% of the available hashrate (NMC has 80-85%)
  6. 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. 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. 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. 9.  Blockchains create a trustless system of exchange (e.g., data, value)  Yet where it ends, vulnerabilities (may) begin
  10. 10. The trials, tragedies and tribulations of creating a decentralized seigniorage network, banking system and payments platform
  11. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 25.  Email: tswanson@gmail.com  Twitter: @ofnumbers  Ofnumbers.com
  26. 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.”

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