Category Archives: Cryptocurrency

Crypto Supercomputers: First Aggregated Ranking

Posted on November 20, 2018 | Leave a comment

Working with OrionX, we have just published the first aggregated list of cryptocurrency supercomputer mining pools, ranked by the economic value generated.

I have recorded a podcast about this list with Rich Brueckner, President, InsideHPC. You can listen here: https://insidehpc.com/2018/11/announcing-new-cryptosuper500-list/

A related slide presentation with a complete set of tables is available here: https://www.slideshare.net/mobile/insideHPC/announcing-the-new-cryptosuper500-list

The list is inspired by the Top500 supercomputer list that is released twice a year at the major supercomputer trade shows and conferences held each June in Germany (ISC) and each November in the US (SC).

That list is based on the performance of Linpack, a floating point intensive benchmark that solves a very large system of linear equations.

Supercomputers are based in a single location. They are very large clusters of general purpose CPU-based nodes, often augmented with GPUs, and frequently employing specialized interconnects.

Cryptocurrency mining is embarrassingly parallel. Many nodes can be racing simultaneously to solve the same cryptographic puzzle for the block reward. Mining pools may be centralized, but more likely they are decentralized to various degrees. Mining pools often have many contributors located in many countries, so even the concept of a host nation associated with the pool is fuzzy.

And the hardware employed is typically specialized ASICs or FPGAs, as well as the GPUs frequently found in traditional supercomputing simulation of science and engineering problems.

With mined cryptocurrencies, we must take a different approach and look at economic value.

For this initial list we looked at the top dozen cryptocurrencies by money supply, which is usually called market cap, and that is simply the number of coins created by a certain date, and the coin price on that date.

Of the top dozen, just half of those or 6 coins, are mined: Bitcoin, Ethereum, Litecoin, Bitcoin Cash, Monero, and Dash. Other coins are generated by premining, airdrops, or consensus algorithms that avoid mining. As a result they are centralized to varying degrees and presumably less secure.

We chose October 30, 2018 to gather prices, supply, block production, and other statistics. This was prior to the Bitcoin Cash fork into two coins, so only the initial coin is considered for the first list.

Among mined coins, a range of mining consensus algorithms are used. Differing cryptographic hashing protocols may be used. Time windows and block rewards vary. Hashing rates have a tremendous range across the set of coins, from MHash/s with Monero to ExaHash/s with Bitcoin.

Thus we cannot compare across coins based on hashing rates and block rewards per se. Instead we look at economic value. For a given coin, one can rank order by blocks produced.

We ask what is the daily value of a certain coin produced by a given mining pool? How many coins at what price? We took daily averages for the prior week, and where we had better data, for the higher value coins, we used the prior month average daily rate instead. We then extrapolated the annualized value based on the average daily rate.

We compiled statistics for the 30 largest pools on a per coin basis. We also aggregated results for pool operators that produced more than one type of coin.

The first table is a table of average daily and estimated annualized production in millions of USD for the top coins. (With the very recent price slump following the Bitcoin Cash fork, the numbers would now be lower by about 1/4 if prices do not recover for a while). About $4 billion of Bitcoin is mined (minted) per year, and around $1 billion of Ethereum. Litecoin, Bitcoin Cash, and Monero collectively contribute around  $400 million (Dash did not make the cut).

Table 1: Top 5 Mined Coins

Coin

# Top Pools

Daily M$

Annualized M$
Bitcoin

17

11.31

4,129
Ethereum

5

2.77

1,010
Litecoin

5

0.64

234
Bitcoin Cash

2

0.38

140
Monero

1

0.10

37
Totals

30

15.21

5,550

Next is a table of the top half dozen pool operators, combining different coin types if they are mining more than one of the top coins. Three are in China, one in Hong Kong, and two in the U.S.

Table 2: Top Pool Operators (aggregated across top coins)

Top 6 Operators (across coins)

# Top Pools

Daily M$

Annualized M$

Country
BTC.com

1

 1.901 694

China
Antpool

2

1.747

 638

Hong Kong
F2Pool

3

1.585

 579

China
ViaBTC

2

 1.329 485

USA
BTC.Top

2

1.222

446

China
Slushpool

1

1.215

 444

USA
Total

11

9.00

3,285

Bitcoin has its own decentralized, open source, version of a central bank and a clearing house system embedded in the Nakamoto consensus. Bitcoin is presently an emerging economy with over $1 trillion in annual transactions (GDP, gross decentralized product), supported by a very economical and efficient seigniorage of about $4 billion in mining block rewards, or less than 0.4%.

The indicated inflation rate at present is about 4% in supply, but in about 18 months the block reward will have its third halving. This will decrease the block reward to 6.25 Bitcoin from its current 12.5 coins. The inflation rate will drop below 2%.

This is not like your Federal Reserve that issues forecasts and goals. Recently the Fed has been pushing to increase inflation to 2%, and happy that they achieved the increase.

With Bitcoin this decrease in inflation will definitely happen, come hell or high water; it’s math, it’s baked in to the Nakamoto consensus. Relative to the US dollar and fiat currencies in general, Bitcoin will be disinflationary going forward.

The next list will be announced in June, 2019, and we can begin tracking developments in the cryptocurrency space over time.

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Will Bitcoin Consume All Electricity?

Posted on July 16, 2018 | Leave a comment

The idea that bitcoin will consume an enormous fraction of the world’s electricity is hysteria.

In a recent article in the Communications of the Association for Computing Machinery, June 2018 issue, Nicholas Weaver (a lecturer in computer science at UC Berkeley) raised this issue, in what was otherwise a good article on the security issues around bitcoin.

Weaver quotes a statistic that cryptomining consumes more electricity than Ireland. This may be based on digiconomist.net, which runs toward the high end. Other estimates are only half as large.

He states “If there is profit in mining, the miners will keep using more and more power until there is no more excess profit available”.

This is true, but he overstates things. He evidences a lack of basic understanding of economics and how businesses operate, ignoring all the complexities that go into cryptomining.

Mining costs are a combination of fixed, and variable costs. The variable cost is primarily the electricity consumed. The fixed costs consist of facilities costs, equipment costs, and people and administrative costs. Equipment costs can run over 1/4 of the total.

Total global Hash rate over the past 12 months has grown from 5 to 38 Exahashes, a factor of 7.5.

Difficulty in the Nakamoto consensus protocol has grown by a factor of 7.

Revenue per Terahash per day grew from $1 to $3+ at the peak half a year ago and with the price collapse is down to $0.30. That is before electricity.

According to cryptocompare.com, with the current BTC price of $6500 and at $.10 per kWh for electricity the profit is just $0.06 per Terahash-day currently, but that is before any of the fixed costs are recovered.

If you are not covering your fixed costs plus variable costs you will not stay in business to consume electricity.

Here’s where Weaver really gets it wrong. He states “a 10x reduction in power consumption per hash for Bitcoin mining would have little real effect on Bitcoin’s power consumption. Instead, there would just be 10x as many hash computations needed to produce a block.”

Difficulty rates depend on the total cost burden.

His statement above completely ignores fixed costs. Whether it is an individual mining rig or a huge mining farm, the fixed costs of location, equipment and labor will generally be of order half the total cost.

Do-it-yourself miners in Mom’s basement or my friend Dan might ignore their location costs and equipment burden on their cooling and they might give away their labor for free. But their rigs aren’t as efficiently operated and their electric costs may be higher. They still have to amortize their equipment costs, at least for added ASICs and GPUs.

Suppose the gross revenue is $0.30 per THash-day and the fixed costs can be held to $0.10 and the electricity cost is $0.2. This is a breakeven business example with a large electricity burden.

Now reduce the power consumption per hash by 10x, in which case the total costs drop from $0.30 to $0.12. There would be incentive to increase total hash power by up to 2.5x not 10x. A factor of 4 overestimate.

In practice, it takes time to ramp up hash power. Supplies of equipment are tight. Data center spaces are limited. System administrators are not always available. There are both practical and regulatory restrictions on power available to mining farms. 

Furthermore, ASICs and GPUs for Bitcoin and cryptocurrency mining are in particularly tight supply. As demand goes up, there is a bidding war with equipment going for premium prices. This drives up the fixed cost component of Bitcoin mining.

Doubling capacity takes many months, and is subject to financial planning scenarios about future crypto prices, equipment delivery time lags, and electricity prices and availability.

According to digiconomist.net on July 5th, Bitcoin is just 1/3 of 1% of global energy usage (1 part in 300). Global GDP is some $80 Trillion and annual transaction flows of Bitcoin are over $1 trillion. So for over 1% of the proportional GDP the related energy requirement is proportionally 3 times lower.

According to an article in ZeroHedge, gold mining is much more energy costly. Per $ of value produced bitcoin and gold are roughly comparable, but there is a lot more gold mined.

https://www.zerohedge.com/news/2017-11-04/bitcoin-vs-gold-which-ones-bubble-how-much-energy-do-they-really-consume

award bars blur business

Photo by Michael Steinberg on Pexels.com

They state that per bitcoin the energy consumption is 6.6 million barrels of oil equivalent per year while the consumption for gold mining is 123 million barrels per year.

There are about 88 million ounces of gold produced per year, with a value of around $109 billion, versus 2/3 of a million Bitcoins, value around $4.3 billion. That’s a factor of 25 in value since bitcoin is 5 times more valuable comparing one coin to one ounce.

It seems that the total energy consumed in gold mining globally is around 19 times that of Bitcoin mining. And the number of bitcoins produced per year is dropping due to the halving every 4 years coded into the Nakamoto consensus.

The whole concept is designed to shift miners’ revenue toward transaction fees as the economy develops over time.

If you want to save the environment, focus on gold mining energy efficiency. Improve it by 5% and you can cover the entire Bitcoin mining energy budget.

For a variety of reasons, other cryptocurrencies are less energy intensive than bitcoin. They are also less secure, less battle hardened.

Bitcoin is a digital gold alternative that has the advantages of very low cost portability, and lower costs to secure and store.

It is a valid alternative to gold ownership as a store of value, and is a greener solution. There is a great deal of work (pun intended) on alternatives to Proof of Work mining, including Proof of Stake protocols and delegated Byzantine Fault Tolerant protocols. Also the growth of second layer solutions such as Lightning will support a larger economy and shift miners’ revenue more toward transaction fees.

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Is Bitcoin on your Computer? Money in the Internet

Posted on July 6, 2018 | Leave a comment

No, not asking if you own any Bitcoin. Or the IP address.

This blog is prompted by the Nicholas Weaver article “Risks of Cryptocurrencies” in the June 2018 Communications of the ACM.

He writes, rather misleadingly in our opinion:

“This was not because our Bitcoin was stolen from a honeypot, rather the graduate student who created the wallet maintained a copy and his account was compromised. If security experts can’t safely keep cryptocurrencies on an Internet-connected computer, nobody can. If Bitcoin is the ‘Internet of money’, what does it say that it cannot be safely stored on an Internet connected computer?”

Would you leave a gold coin lying around in the open? Lock that thing up in a safe or safety deposit box.

Bitcoin is not really the ‘Internet of Money’ so much as ‘Money in the Internet’. And the cryptocurrency was not on an Internet-connected computer. Those were the keys.

Your wallet holds one or more private keys, not cryptocurrency itself.

Key distinction (pun intended). The money doesn’t move off the distributed ledger. When it moves from one wallet to another what happens is the send process (that you initiate) changes which private key can access it. Namely the designated receiver’s key becomes the only one that works.

The graduate student’s indiscretion was in making a copy of the key that allowed the safe or safety deposit box to be opened by an unauthorized person. And then not properly securing it.

Where is the Bitcoin stored? Why in the distributed ledger, the blockchain, that is simultaneously existing in many places, but has a single verified history from the Nakamoto consensus protocol that committed it into the blockchain. 

That is effectively the bank where all the safety deposit boxes are.

How do you get to your coin? With a key stored in a wallet, the private key. Visit your bank.

That key must be stored in a safe place. It can be in a hardware wallet (USB device typically) which is stored in a home safe. And then it has the same level of security as the gold coins in your safe.

Better, since you can keep another copy in another secure location (safety deposit box, for example).  

The next best alternative is a pass phrase on a piece of paper again stored in a safe or safety deposit box.

There is no need for your private key to be sitting on the Internet.

unnamed.png

If you use an exchange you can use their vault, or cold storage, option for most of your holdings. Then you are relying on their assurances that they are storing in offline devices.

When you do visit your Money in the Internet bank, do so from the privacy of your home, not from some insecure wifi cafe.

You go to the bank and take some gold coins out from your box and they are already less secure, but that is why they have guards at banks. And when you go out to your car with a couple of the coins, they and you are even less secure.

But we are used to doing that. We understand the procedures.

It’s just that there are new procedures that we have to get used to, with digital gold like Bitcoin. It’s rare to be physically mugged for Bitcoin.

Keep only moderate amounts of cryptocurrencies in exchanges with established security reputations, and modest amounts in mobile wallets.

 

 

 

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Blockchains Could be Vital to National Security

Posted on May 11, 2018 | Leave a comment

Last year Tokyo hosted a meeting of the International Standards Organization, including a session on blockchain technology to examine ideas around standards for blockchain and distributed ledgers.

A member of the Russian delegation, who is part of their intelligence apparatus at the FSB, apparently said “the Internet belonged to the US, the Blockchain will belong to Russia.” In fact three of the four Russian delegates were FSB agents!

By contrast, Chinese attendees were from the Finance Ministry, and American attendees were representing major technology companies, reportedly IBM and Microsoft among others.

Let’s unpack this a bit. The Internet grew out of a US military funded program, Arpanet, and the US has been the dominant player in Internet technology due to the strength of its research community and its technology companies in particular.

As we wrote in our most recent blog (http://orionx.net/2018/05/is-blockchain-the-key-to-web-3-0/), blockchain has the potential to significantly impact the Internet’s development, as a key Web 3.0 technology.

Blockchain and the first cryptocurrency, Bitcoin, were developed by an unknown person or persons, with pen name Satoshi Nakamoto. Based on email timestamps, the location may have been New York or London, so American or British citizenship for Bitcoin’s inventor seem likely, but that is speculation.

More to the point, the US is the center of blockchain funding and development activity, while China in particular has been playing a major role in mining and cryptocurrency development.

There are many Russian and Eastern European developers and ICO promoters in the community as well. The Baltic nations bordering Russia and the Russian diaspora community have been particularly active.

The second most valuable cryptocurrency after Bitcoin is Ethereum, which was invented by a Russian-Canadian, Vitalik Buterin. Buterin famously met with Russian President Vladimir Butin in 2017. Putin is himself of course a former intelligence agent.

The Russians reportedly want to influence the cryptographic standards around blockchain. This immediately raises fears of a backdoor accessible to Russian intelligence. Russia is also considering the idea of a cryptocurrency as a way to get around sanctions imposed by the American and European governments.

The Russian government has a number of blockchain projects. The government-run Sberbank had initial implementation of a document storage blockchain late last year. There is draft regulation around cryptocurrency working its way through the Russian parliament. President Putin has said that Russia cannot afford to fall behind in blockchain technology.

Given the broad array of applications being developed for cryptocurrencies, including money transfer, asset registration, identity, voting, data security, and supply chain management among others, national governments have critical interests in the technology.

China has been cracking down on ICOs and mining, but it is clear they think blockchain is important and they want to be in control. Most of their government concerns and interest appear to be centered around the potential in finance, such as examining the possibility of a national cryptocurrency (cryptoYuan).

China would like to wriggle free from the dollar standard that dominates trade and their currency reserves. They have joined the SDR (foreign reserve assets of the IMF) and have been building their stocks of gold as two alternatives to the dollar.

China’s biggest international initiative is around a new ‘Silk Road’, the One Belt, One Road initiative for infrastructure development across EurAsia and into the Middle East and Africa. One could imagine a trading currency in conjunction with this, a “SilkRoadCoin”. In fact, the government-run Belt and Development Center has just announced an agreement with Matrix AI as blockchain partner. Matrix AI is developing a blockchain that will support AI-based consensus mechanisms and intelligent contracts.

China’s One Belt One Road Initiative, actually has six land corridors and a maritime corridor. (Image credit: CC 4.0, author: Lommes)

The American military is taking interest in blockchain technology. DARPA believes that blockchain may be useful as a cybersecurity shield. The US Navy has a manufacturing related application around the concept of Digital Thread for secure registration of data across the supply chain.

In fact the latest National Defense Authorization Act requires the Pentagon to assess the potential of blockchain for military deployment and to report to Congress their findings, beginning this month for an initial report.

What is clear, is that blockchain and distributed ledger technology have the potential to be of major significance in national security and development for the world’s leading nations.

We encourage the US government to increase engagement with blockchain and distributed ledger technology. This can include funding research in universities, pilot projects with industry across various government agencies including the military and intelligence communities, the Federal Reserve, and the Department of Energy, NOAA and NASA, in particular.

Also the federal government should pursue standards development under the auspices of the NIST and together with ISO. Individual state governments are also promising laboratories for projects around identity, voting, and title registration.

Information has always been key to warfare. But there is little doubt that warfare is increasingly moving toward a battlefield within the information sphere itself. These are wars directed against the civilian population; these are wars for peoples’ minds. Blockchain technologies could play a significant role in these present and future battles, both defensively and offensively.

References :

DARPA https://www.google.co.th/amp/s/cointelegraph.com/news/pentagon-thinks-blockchain-technology-can-be-used-as-cybersecurity-shield/amp

US Navy http://www.secnav.navy.mil/innovation/Pages/2017/06/BlockChain.aspx

2018 National Defense Authorization Act https://www.realcleardefense.com/articles/2018/05/03/could_americas_cyber_competitors_use_blockchain_for_their_defense_113400.html

NIST https://csrc.nist.gov/publications/detail/nistir/8202/draft

https://www.blockchainmagazine.net/u-s-department-of-defense-is-bullish-on-the-blockchain/

http://www.scmp.com/business/china-business/article/2136188/beijing-signals-it-wants-become-front-runner-blockchain

https://www.cbinsights.com/research/future-of-information-warfare/

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Is Blockchain the Key to Web 3.0?

Posted on April 23, 2018 | Leave a comment

Web 3.0 has been around as a meme since early in the century. This writer was formerly with the Sun Microsystems Education business and recalls meetings we sponsored over a decade ago, that were attended by academic computer scientists promoting the concept.

And yet it has been slow to take off, and it remains a somewhat fuzzy catch-all concept. So much so that there is no Wikipedia entry! Some people claim Wikipedia has deliberately censored the term “Web 3.0”.

Wikipedia does have a section within the Semantic Web article. And this notes: “Web 3.0 has started to emerge as a movement away from the centralization of services like search, social media and chat applications that are dependent on a single organization to function.”

To my ear, this matches the desires of many in the cryptocurrency community for decentralized services built on blockchain that challenge the centralization of Facebook and others.

Web 3.0 was initially discussed in conjunction with Semantic Web and with agents. John Markoff of the New York Times supposedly coined the phrase.

Tim Berners-Lee has promoted the Semantic Web, where context and meaning are attached to data, and data structures have rich linkages in support of better data integration.

Cambridge Analytica has famously exploited these kinds of linkages in the Facebook environment to influence the U.S. presidential election and the Brexit referendum.

The general idea around Web 3.0 has been the semantic web, along with data mining, AI, and natural language providing a more productive web environment for users, with greater inferencing and intelligence.

Here’s a very simple view of how it relates to Web 1.0 and 2.0:

Web 1.0:  Read-oriented, static

Web 2.0:  Read and write, dynamic, interactive

Web 3.0: Read and write and execute, composite services, integration, meaning and agency, and greater decentralization

Now we see that blockchain and cryptocurrency are beginning to have an impact on the definition of Web 3.0.

Why? Well let us consider some major issues:

  • Net neutrality is dead in the U.S. thanks to the state-corporatist position of the FCC
  • The web is increasingly centralized on platforms such as Facebook, Google, Twitter who derive almost all of the financial benefit from data that users provide
  • Cryptocurrencies and blockchain are proving that decentralization can work in a secure fashion, at least for some significant applications

Cryptocurrencies and blockchains provide the opportunity to restore the Web toward its original vision of a decentralized resource. They provide the opportunity to return control and monetization of data to users, instead of it being concentrated in relatively few large corporations.

Semantic_web_stack.svg

Note that the Semantic Web stack shown at right includes trust and cryptography. Well blockchains and cryptocurrencies are built on cryptography and are all about distributed trust. (Sometimes they are called ‘trustless’ but in fact trust resides in the protocols and in the network of blockchain miners, and the developer and user communities more generally).

You can find a presentation here by Ben Gardner on Semantic Blockchains:

https://www.slideshare.net/bengardner135/semantic-blockchain

Blockchains add trust and proof of work to the Semantic Web’s unambiguous data with connections. Ricardian contracts or smart contracts can be implemented.

The Semantic Web template is linked data plus directed graphs built with RDF triples.

And, I ran across this interesting paper:

“A more pragmatic Web 3.0: Linked Blockchain Data”, Hector E. Ugarte R., 2017. https://semanticblocks.files.wordpress.com/2017/03/linked_blockchain_paper_final.pdf

The author writes “Linked Data is proclaimed as the Semantic Web done right…an incomplete dream so far, but a homogeneous revolutionary platform as a network of Blockchains could be the solution..designed to interconnect data and meaning, thus allow (sic) reasoning.”

The Semantic Web is all about linked data with defined attributes and relationships, e.g. graph structures such as with RDF triples as the data model. One can adapt blockchains, including linked blockchains, to this purpose and add smart contracts to provide reasoning.

A Semantic Blockchain is defined in his paper as “the use of Semantic web standards on Blockchain-based systems. The standards promote common data formats and exchange protocols on the Blockchain…Semantic Blockchain is the representation of data stored on the distributed ledger using Linked Data.”

More broadly, Blockchains allow the ability to build a new Web from the ground up, with name services more fully decentralized and file and compute services layered on top. Identity and services can also be fully decentralized. Security is inherently provided by the blockchain’s peer-to-peer decentralized mechanism.

We believe that blockchain and cryptocurrencies will accelerate the development of Web 3.0 while also helping to refine its definition.

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Bitcoin Forks are So 2017

Posted on January 15, 2018 | Leave a comment

“Let a Hundred Flowers Bloom” Mao Tse Tung 百花齐放

Well there are 20 flowers in the Bitcoin ecosystem. And over 1400 in the cryptocurrency ecosystem at present.

Salad forks, dinner forks, shrimp forks, dessert forks, tuning forks, pitchforks… so many kinds of forks..

CompostBinTube_wb.jpg

Image credit: Ellen Levy Finch, CC BY-SA 4.0

Why fork a new cryptocoin? One can fork for technological improvements, one can fork to make money, and one can fork for ego, for the pride of “ownership”.

There were several software forks that occurred mainly in the 2015-2016 timeframe and known as XT, Classic, and Unlimited. Including Unlimited, they have had limited impact to say the least.

But let us look at hard forks, or coin splits, that have been so prevalent since August of last year.

Technology enhancements promoted in these forks are across several main categories:

  • Bigger blocks for scaling, shorter block times
  • Off chain or side chain transactions (Segwit for signature, more generally Lightning, etc.) for scaling
  • Different hashing algorithms for easier mining
  • More anonymity, security
  • Enhanced programmability, smart contracts
  • Increased money supply

How many hard forks and coin splits has Bitcoin had so far? In total there have been 20 such forks to date.

  • August 2017 – 2
  • October – 1
  • November – 1 and Segwit2x proposed, withdrawn
  • December – 14
  • January 2018 – 2 so far

This Cambrian Explosion of bitcoin forks is in large part a result of the increased transaction costs and delayed confirmation times with original BTC, Bitcoin Core. But it is also a sign of a healthy and growing blockchain universe. If cryptocurrencies were not seeing increased success, the rate of innovation, and the number of forks, would be smaller.

Here is a list of the most significant ones, all in the second half of 2017, and with current pricing, key features, and URL:

August – Bitcoin Cash, BCH, $2413, 8 MB blocks, bitcoincash.org

October – Bitcoin Gold, BTG, $323, equihash, bitcoingold.org

November – Bitcoin Diamond, BTCD, $22, 10 times number coins , X13 hash, btcd.io

December – Super Bitcoin, SBTP, $108, lightning and zero knowledge proofs and smart contracts, supersmartbitcoin.com

If you owned bitcoin prior to block 478558, you in principle own all 20 of the forked coins, including the most valuable one Bitcoin Cash, and mostly in a one-one ratio. Putting your hands on them is trickier.

That is a question as to what support particular private wallets or public exchanges provide. There are guides on the internet and YouTube as to how to retrieve although it seems more trouble and risk than justified in most cases. (This writer has managed to get some BCH and BTG separated out, but it is a somewhat nerve-wracking experience.)

For now it seems we have reached a point of exhaustion for the principal good ideas and the newest forks are more likely to be dodgy, or frauds, or duplicating others, or of limited potential.

Here is an important consideration: while increasing the transaction rate and lowering fees will bring greater utility to users, this does not contribute to the store of value or digital gold aspect. Bitcoin, the original Bitcoin core, is most valuable today for its store of value attribute, much more so than for its medium of exchange attribute.

Now it will be a race between development teams and marketing teams to see which of these forks/coins other than BCH and maybe BTG will have relevance and value going forward, and what value any of them can sustain.

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Information Economy 2.0

Posted on November 16, 2017 | 2 comments

Bitcoin is a Trillion $ Economy

We often hear that we live in an Information Economy. We have an information-based economy, but we don’t have a pure form of “money as information”. Instead we have a hybrid of digital money and paper money with encoded information such as denomination and serial numbers and engraving details.

Money (Money 2.0, ‘paper’ fiat money) today is mostly information, but the modern monetary system was designed long before the Information Economy. Even so, money is mostly held in digital form, on the ledgers of banks, and as monetary reserves at central banks. Physical currency in circulation is a small fraction of the money supply. So today it is a hybrid. One can argue it is not fully suited to our rapidly evolving information economy.

Steven Mnuchin, Louise Linton, Leonard Olijar

Steven Mnuchin, Treasury Secretary, and Wife Posing as Bond Villains, while Enjoying Dollar Bills at the Bureau of Engraving, While Dreaming of Tax Cuts for Multimillionaires

Bitcoin and cryptocurrencies collectively are Money 3.0, a form of money that is entirely digital, entirely information. Even if you have a physical bitcoin wallet or paper wallet, the money does not reside in the wallet, only the keys! The keys release bitcoin money held on the blockchain.

Trying to separate the blockchain from bitcoin or cryptocurrency is like trying to separate the economy from information in the information economy. The blockchain holds the ledger information, the cryptocurrency powers the economy. The term ‘blockchain’ does not appear even once in Satoshi Nakamoto’s seminal paper for bitcoin and cryptocurrency.  See this OrionX.net podcast discussing Nakamoto’s vision and the Nakamoto consensus algorithm: https://youtu.be/ZLS5P7SYcyI

Today, market participants mostly look at the market cap of bitcoin and other cryptocurrencies, as if they were some sort of equity shares. But actually, they are currencies, or perhaps digital gold, and what is somewhat strangely called ‘market cap’ is actually the money supply for that currency. It is simply the price of bitcoin, times the aggregate number of bitcoins in circulation. Here, in circulation means securely committed to the blockchain through a cryptographic hashing algorithm.

The size of the economy for bitcoin is related not only to the money supply, but also how rapidly that turns over. In macroeconomics this is called monetary velocity. In fact GDP = M2*V where the GDP is equal to the M2 money supply and V is the velocity of that money. It reflects how fast money moves through the system per year.

In the US the GDP is about $19.5 Trillion, the M2 money supply is about $13.7 Trillion and the velocity is about V = 1.42. That is, on average, the money supply turns over 1.42 times per year. In fact the Federal Reserve has been worried that the velocity is too low. It has been dropping steadily, which is a symptom of stagnation.

FRED.VelocityM2

Velocity of M2 Money: Federal Reserve of St. Louis

For bitcoin the velocity is much higher. It turns over about 9 times a year, V = 9. Today the money supply or market cap for bitcoin is about $121 billion. With a velocity of 9, that translates to a bitcoin economy that is over $1 trillion. It amounts to around 5% of US GDP and more than the GDP of the United Kingdom. Bitcoin is not usually described in such terms, but this is a measure of the vibrancy of the economy for the cryptocurrency.

Many cryptocurrencies have even higher velocities. Bitcoin Cash, which has only been in existence a few months, has a velocity of 26 and a total economy of over $500 billion, similar to the GDP of Sweden. The world economy of cryptocurrencies exceeds $2 trillion. This is more than the GDP of Italy.

Bitcoin and other cryptocurrencies are enabling the Information Economy 2.0, where whole new forms of efficient exchange of value can be implemented with fewer or even no middlemen and at lower cost.

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Bitcoin: Like Gold or Like a Currency?

Posted on November 9, 2017 | Leave a comment

Valuing the various bitcoin forks

Breaking News: Segwit2x fork has been postponed indefinitely

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Some say bitcoin acts more as digital gold then as a currency, more as a store of value than as a medium of exchange. It is very interesting to look at the various bitcoin forks with this question in mind.

Everything in life and in finance is a tradeoff. Gold works well as a long term store of value, but not so well as a medium of exchange. The US dollar works very well as a medium of exchange, but not well as a store of value in the long term. Even the Federal Reserve and other central banks hold gold as a reserve asset. It represents the bottom of the inverted money pyramid.

Now bitcoin is from its beginning more like gold in the sense that it is an asset with limited, predetermined supply. Dollars and other fiat currencies are debt-based since they come into existence when new loans are made, and their continual supply growth is rather assured; usually inflation occurs to varying degrees. See the Money 3.0 article for a longer discussion of this point.

Image: Silver ice cream fork, De Young Museum

There are 4 versions of bitcoin, 3 currently, and one possible fork. That was scheduled later this month as Bitcoin 2x (or B2X) a possible fork due to partial adoption of Segwit 2x, but it has now been indefinitely postponed due to lack of support.

As of today, approximate values for the 3 existing forks are:

Bitcoin BTC $7200

Bitcoin Cash BCH $630

Bitcoin Gold BTG $140

And Bitcoin 2x B2X had future values around $1600 before plunging on the announcement that it is now postponed.

All these cryptocurrencies have a supply of around 16.6 million accounting units, and all are limited to 21 million as the ultimate supply. And yet their prices are very different. Bitcoin has a first mover advantage but is that the whole story? How does one value BCH and BTG relative to BTC? In principle the various versions have both asset and currency characteristics.

Each of the alternatives to the original bitcoin is designed to facilitate faster, less expensive transactions. And this makes it more like a currency than a reserve asset.

BTC can be looked at like a large denomination bill, not as easily spent, although it is much easier to break into change than large bills are. Bitcoin Cash differs from BTC because it has a much larger blocksize, 8 MB. Bitcoin Gold differs in adopting a GPU-friendly mining algorithm, Equihash, rather than SHA-256 used by the others, which requires custom ASICs.

Bitcoin 2x adopts Segwit2x with a larger 2 MB block size.

Each of these three alternative coins is designed so that the system can process transactions more quickly and at lower cost, and so, along the spectrum of digital gold to currency, each is closer to a currency than the original BTC.

And that, somewhat counter-intuitively, is why original BTC retains a higher value.

In particular, the Bitcoin Gold is actually least like gold of all of these, since it will have the most accessible and thus fastest mining algorithm, and presumably could end up with the lowest transaction fees.

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Image credit: bitcoingold.org

The respective values of the 3 or 4 types of bitcoin reflect this view. Bitcoin is the “slowest” and has the lowest velocity (slowest turnover) and highest value. Bitcoin Gold appears to be the most rapid and with lowest transaction fees, and thus has the lowest value.

Bitcoin Cash and a possible future Bitcoin 2x are between the two extremes. Since Bitcoin Cash has much larger blocks it has substantial miner support. Bitcoin 2x is favored by the user community that wants to facilitate more efficient transactions.

If you have a gold coin and some fiat currency, which do you spend first? You bought the gold coin in expectation that it would preserve its value and increase in terms of the number of currency units per coin.

So HODL (hold on for dear life) BTC, and spend or convert BTG and BCH seems the way to go for now. As always one should monitor how the different cryptocurrencies are developing in comparison to each other, in this very dynamic and volatile marketplace.

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Evolutionary Forks and Dividends

Posted on October 18, 2017 | Leave a comment

What is a fork?

It is early days in evolutionary terms for cryptocurrency. Bitcoin has not been around even a decade. Ethereum has only been here for a few years. The respective economies of these and other cryptocurrencies have been growing at triple digit percentage rates.

A given blockchain can be thought of as a continuing line of a particular species. A new blockchain, e.g. Ethereum with new attributes is a new species of cryptocurrency. A fork in a blockchain, such as the recent Bitcoin Cash, is also a new species, but perhaps one can say that it belongs to the same genus.

Mayr’s concept of species is that of representatives of the same breeding population. They are in some sense on the same continual chain.

A fork is an evolutionary branch in response to environmental pressure. The pressure arises due to the developing needs of the ecosystem for cryptocurrencies overall and for individual cryptocurrencies.

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Pressure

The pressure that gives rise to evolution in the cryptocurrency ecosystem arises from the need to scale cryptocurrency to higher transaction rates and to more diverse use cases. For example, there is the very general use case of smart contracts, that led to the creation of Ethereum.

How new currencies are created or are forked results from the technological requirements and how those are interpreted and implemented by particular members of the development community. This is a political arena since miners, developers, exchanges, merchants, and other groups have different interests.

We have just had the Bitcoin Cash fork and are now facing possible forks for Bitcoin Gold and Segwit2x (Segwit was adopted without a fork in August).

It is difficult to determine which fork or species will be the most successful in the long run; but the original or main branch can have an advantage. Overall forks can be seen as strengthening the ecosystem as a whole since total value seems to rise after forks. After the Bitcoin Cash (BCH) fork the original Bitcoin (BTC) increased in value, and one could also collect the BCH on a one per one BTC held basis as a dividend. 

More generally, this has been borne out by the continually increasing market capitalization of the set of cryptocurrencies, currently having reached around $160 billion (roughly a Buffet plus a Gates).

For investors in cryptocurrency one can view forks as special dividends. Those who held Bitcoin through the Bitcoin Cash fork received a dividend of several hundred dollars per BTC. Sometimes numbered prints or copies are valuable as well.

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Above is not our view, but that of @BitcoinWrld

What you do (hold, sell all, sell half) with your dividends is up to you and your views on individual forks; we make no recommendations here. But the dividends are there to receive, along with possible capital appreciation as the cryptocurrency economy continues to grow rapidly.

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Ethereum: Smarter than a Fifth Grader?

Posted on October 12, 2017 | Leave a comment

Ethereum is described in Wikipedia as an “an open-source, public, blockchain-based distributed computing platform featuring smart contract functionality“.

How does it differ from Bitcoin? Well Bitcoin is open-source, public, distributed, and block-chain based. The difference is principally found in the terms “computing platform” and “smart contract functionality”. And there are other differences as well.

Ethereum is only two years old. It was the brainchild of wunderkind Vitalik Buterin, a Bitcoin developer, and while initial funds for the project were raised in mid-2014, the network went live in mid-2015. A foundation under Swiss law manages Ethereum.

The motivation was to have better scaling than Bitcoin, both horizontally, in terms of transaction speed, and vertically, in terms of use cases supported (implemented via smart contracts). It also has a better specified development plan, with 0, 1, and 2 versions of the software having been implemented, and version 3 (Metropolis) currently in testing.

It has been a great success, and Ether, the coin of Ethereum, now has the number two market cap among all cryptocurrencies at around $29 billion. Its value has risen dramatically during 2017, rising from $8 to $300.

 

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Ethereum logo CC-BY-3.0

Contracts

There are two types of accounts in Etherland. One can have a regular cryptocurrency account, or an account can represent a smart contract. There is a virtual machine (EVM) that is said to be “Turing complete” and that supports multiple scripting languages in which contract rules can be specified.

The idea of smart contracts has been around for over two decades; blockchain with broad programmability on the chain provides a very useful technology for their implementation.

Smart contracts allow value to be exchanged between agents without existing trusted relationships. Sort of like escrow, but much more streamlined. The basic idea is to cut out the expense and complications associated with middlemen.

Use cases being explored for such smart contracts include:

  • Real estate leases or purchases
  • Securities settlement
  • Supply chain management
  • Governance, including voting
  • Intellectual property protection

The number of currently existing use cases is few at present, however, and they tend to be simple and related to the Ether coin itself. Some have argued that smart contracts are much harder to implement in practice than many imagine. A recent interesting one is Prism Exchange, which allows you to hold a variety of altcoins across multiple exchanges from a single application.

Mining

Ether is much quicker to mine than Bitcoin, and can process 25 transactions per second. Transaction fees are also much lower than Bitcoin, around 8 times lower currently. Blocks are generated every 12 seconds, as opposed to the 10 minute target with Bitcoin.

Like Bitcoin, Ether is mined via Proof of Work, but the intent is to move to Proof of Stake (some measure of ownership) over time. A different cryptographic hash problem, Ethash, is solved, and with this hash Ether does not benefit greatly from mining with ASICs and is therefore accessible to CPU and especially to GPU mining. “Ethash PoW is memory hard, making it basically ASIC resistant.”

Basically the algorithm is designed to consume memory bandwidth and to be GPU-friendly. So it is good news for Nvidia and AMD and Intel.

Enterprise Ethereum Alliance

The Enterprise Ethereum Alliance has grown to over 150 organizations as members and includes some of the most important technology companies and largest banks. Its purpose is to address enterprise requirements for smart contracts and blockchains. The founding members are shown in the graphic below. Mastercard and Cisco are two major companies who have also joined recently.

Banks, in particular, have interest in permissioned blockchains, so that they can retain control of their customer relationships. There is a natural tension between open distributed trust of the blockchain and centralized trust that banks provide today.

It is an exciting time. How blockchain will be deployed by the financial industry, and how it will disrupt the industry are open questions. Smart contracts allow blockchain to be even more disruptive because they provide the tools for disintermediation. Jamie Dimon may not want his traders to trade Bitcoin, but he sure wants a seat at the Ethereum “smart contracts” table.

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