Will Lightning Electrify Bitcoin?

Why: Scaling for bandwidth and efficiency

Suppose Bitcoin could scale. Many altcoins were created in the promise of handling more transactions, and with lower fees.

But Bitcoin can scale, and it will, thanks to the Lightning Network which went live in 2018. While small, it is growing rapidly.

Bitcoin is often criticized for lack of scalability, relative to traditional credit card, debit card, and mobile-based payment solutions. Currently it is capable of about 7 transactions per second onto the blockchain, whereas the Visa network can handle tens of thousands of transactions per second.

The implementation of Segwit, separating signature information, has allowed additional transactions to fit within a single block of the blockchain. Segwit was implemented as a soft fork in 2017 and nearly half of transactions currently use Segwit.

Other proposed solutions have included larger block sizes, but these have required hard forks leading to new coins. The overwhelming majority of hash power and of market cap have remained with original Bitcoin.

Bitcoin is in fact worth more than all 2000 plus altcoins combined.

There are many other approaches to scaling implemented by other cryptocurrencies desiring to address the scaling problem. These include non-ASIC friendly mining algorithms, and a variety of consensus algorithms that eschew mining, such as Proof of Stake, and Byzantine Fault Tolerant protocols more generally.

The second most egregious method is the airdrop, the “helicopter money” of the cryptocurrency world. This tends to be worth, in the long run, close to what you paid for it. The most egregious of all is premining, where insiders reward themselves first, while selling a ‘utility token’ that currently has no utility, and may never have, to others in an ICO.

The problem with these easy money solutions is that they can push up transaction rates greatly, but at an enormous sacrifice in security. You want fast transactions, just lower hash difficulty in mining, or eliminate it. Lower difficulty means lower security. And thus, it sacrifices the store of value aspect of their currency. (Think Venezuela or Zimbabwe).

If you want to conduct large numbers of low value transactions, that may be fine. If you lose your Starbucks card, do you worry about replacing it? Probably not. With a credit card, it’s different entirely.

The solutions described above, such as block sizes and different forms of mining or consensus algorithms, are on-chain solutions. The transactions are all on some “original” chain (which may have been a hard fork from Bitcoin).

An alternative way is to keep the Blockchain very secure, but then add off-chain scaling.

What: Payment Channels

Lightning is such an approach with Bitcoin, building payment channels that can handle many transactions within that channel. At some future date, the consolidated transfer of value for the channel is committed as a blockchain transaction.

Back to our Starbucks card. The card accepts fiat currency of a given amount and then is used as a payment channel until the funds are exhausted over some number of days as a result of your mild coffee addiction. The card, or payment channel, can then be topped up with funds added back into the channel.

Wikipedia has a good definition for the Lightning Network as a second layer payment protocol: “It features a peer-to-peer system for making micropayments of digital cryptocurrency through a network of bidirectional payment channels without delegating custody of funds.”

One opens a channel with another party and each makes a funding transaction on the blockchain to establish the channel. The channel can then be used for a series of ‘micropayments’ (not necessarily small, but smaller than the funding amount in the channel) that are handled within the payment channel.

After a few, or very many transactions, the channel may be closed out by either party and the net aggregate balance transferred is recorded onto the blockchain.

For example if I put in 0.3 Bitcoin initially, and you put in 0.2, the channel was opened with 0.5 Bitcoin total. You and I make a series of Lightning-based transactions, possibly all in one direction. (We’ve been betting on the price of Bitcoin at the end of each month, say).

Let’s also say we agreed to close the channel at the end of the year. And suppose, netted out overall, I sent you 0.2 Bitcoin over a number of transactions. In closing the channel we would commit the final balance in a blockchain transaction showing that you now have 0.4 Bitcoin of the original 0.5, and I now have just 0.1 Bitcoin. That closing transaction gets recorded on-chain.

If we wanted to continue to exchange, we would open and fund a new payment channel.

There is fraud protection; each party can monitor transactions over a chosen time interval. The party in error can lose (to the counterparty) their funding transaction or more.

The Bitcoin blockchain is highly innovative triple entry accounting (you, me, and the blockchain keep records) whereas the Lightning Network uses good old-fashioned double entry accounting (you, me).

How: It’s not just Channels, it’s a Network of Channels

The Lightning Network is more than just a set of disconnected bidirectional payment channels, it is a network of richly connected payment channels. Suppose Lionel wants to send a payment to Linda, but they have no direct channel established.

If they each have a channel established with Lee, they can route the payment through him as an intermediary and he may collect a small fee.

Or they can route through several unknown intermediaries. The network will tend to develop hubs with many connections and larger funding amounts, including commercial enterprises.

              Representation of current Lightning Network

Rapid Progress

As of late December, 2018, the Lightning Network looks like the above image. There are 15,000 channels and almost 500 nodes. The carrying capacity is modest at $2 million presently, but the growth is exponential. The node count grew a factor of 4 in the month of November alone!

Who: Enabling software and Payment processors

Applications built on the Lightning Network are referred to as LAPPs.

There are several payment processors that merchants can use to enable receipt of Bitcoin payments via Lightning. These include BTCPayServer, CoinGate, GloBee, OpenNode, and Strike.

Implementations of Lightning Network Software include Lit from MIT Media Labs, LND and Neutrino from Lightning Labs, and Blockstream’s c-lightning.

The Future

The Lightning Network has the ability to go places that Visa, MasterCard, and PayPal cannot reach by enabling micro-transactions across the globe with extremely small fees. It is fraud resistant and has rapid verifiable transfer of the most secure cryptocurrency on the network layer, with eventual settlement onto the blockchain.

As a proof point, a work of art known as Black Swan was recently sold at auction to the < Low > Bidder for only 0.001 Satoshi or 4 millionths of a cent. (A Bitcoin is divisible into 100,000,000 Satoshis).

Another, more typical transaction and proof point was established at an Australian car wash with a transfer of over 1,000,000 Satoshis or about $40 US.

You wanted to buy coffee with Bitcoin? Now you can.

(The gory details: “The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments” J. Poon and T. Dryja, 2016 https://lightning.network/lightning-network-paper.pdf)

Central Bank Digital Currency is not Cryptocurrency as Envisioned

Recently the International Monetary Fund produced a research report on Central Bank Digital Currencies, titled “Casting Light on Central Bank Digital Currency”, and available here:

https://www.imf.org/~/media/Files/Publications/SDN/2018/SDN1808.ashx

Even the title is interesting in its omission of the terms cryptocurrency and blockchain.

The basic concept they were evaluating was that of central bank controlled digital currency issued for the benefit of retail users (individuals and non-banking businesses). These would exist alongside existing fiat currencies and be intended for domestic use primarily. Their value would have to be tethered to the related fiat.

The study reached several initial conclusions:

  * CBDC could be the next milestone in the evolution of money.

  * It is a digital form of fiat money, issued by the central bank.

  * The ability to meet policy goals is one major issue.

  * The demand for CBDC depends on the attractiveness of alternatives (cash, e-money).

  * The case for adoption could vary from country to country.

  * Appropriate design and policies should help mitigate risks.

  * Cross-border usage would raise a host of questions.

A number of central banks around the world are studying CBDCs. This table from the IMF report indicates their publicly stated rationales, which include diminishing use of cash as other payment channels e.g. mobile become popular, efficiency gains for payment and settlement, and greater access for the unbanked or lightly banked to financial services.

RationalesforCBDC.jpeg

But the key point is that CBDCs are quite antithetical to Bitcoin and mined cryptocurrencies in general (we exclude in this comparison airdrops, premined, and other largely centralized, but private, forms of cryptocurrency). CBDCs are closest to the tethered cryptos, but maintained by the fiat issuing authority itself.

Cryptocurrency

CBDC

Created by miners running hashing protocols Created by central bank
Predefined monetary policy Variable monetary policy set by central bank committee
Transnational usage Domestic usage primarily
Open triple entry ledger Central bank permissioned ledger
Validation by private computer nodes Validation by central bank

There is very little in common between Bitcoin and mined cryptocurrencies in general, and hypothetical CBDCs. Most existing fiat is already digital; a small portion is cash.

The main new alternative, besides existing fiat cash, for CBDCs are private payment channels (private e-money) such as PayPal and M-Pesa in Africa. These are similar to stored value cards with prepaid fiat balances, but with mobile interfaces. Here the account balances are managed by private companies, usually with a known partner, and a user needs to trust the company holding the balance.

Both new private money channels and CBDCs threaten to disintermediate balances held in bank checking and savings accounts. So do cryptocurrencies, of course.

These balances are used as reserves for banks to issue loans, so if they were moved to a cryptocurrency or a central bank ledger they are no longer available for lending (fractional reserve banking).

A fundamental difference is that cryptocurrencies are assets whereas fiat money is debt-based, created when banks issue loans. CBDCs in their basic form are not available as reserves for bank lending.

CBDCs would in essence just be a different form of fiat, tethered to fiat, and with the same accounting unit and value.

Cryptocurrency represents a challenge to the banking system and to central banks. It seems that the IMF may be encouraging central banks to sacrifice the interests of banks in order to maintain, and even increase, their own power.

The CBDC framework, like cryptocurrency, would move deposits away from the banks. Unlike cryptocurrency, which holds balances on an open ledger, accessed by private keys, CBDC balances would be held for individuals and businesses at the central bank. This means the central banks would be able to restrict access to funds owned by individuals. One can assume they would do this during crises or under court order.

Central banks could even apply interest to CBDC deposits, possibly even with negative interest rates during times of slackened growth.

Fractional reserve banking and the economy as a whole are based on the provision of credit by commercial banks, backed only by a small percentage of reserve balances held with the central bank. If deposits move in large amounts to CBDCs or cryptocurrencies, both of which are assets in the name of the depositor, the system of credit provision in the economy will have to be significantly transformed.

Or a system that allows banks to participate and hold reserves based in CBDC would have to be developed.

CBDCs of the simplest type discussed in this IMF paper seem like a way to protect the prerogatives and increase the power of central banks, and co-opt cryptocurrency. The losers would be traditional banks because their lending power would be decreased. 

Playing Defense

Now is the time to be defensive. First the NASDAQ, then the S&P 500, and now the Dow have broken their 40-week moving averages.

All of the major sector indices are below their 40-week moving averages (similar to 200-day averages).

Industrials? Below. Finance? Below. Technology? Below. Energy? Below. Materials? Below. The new Communications index XLC? Dived from the start.

All of the leaders have broken down. The FAANG stocks have been brutalized and entered individual bear markets. Facebook is down -25% (disclosure: I’m short).

These sections of the market look like they are ready to enter their own bear markets. Certainly tech. Certainly finance.

The whole cryptocurrency sector has been brutalized. Bitcoin is down 1/3 in the last couple of weeks and is selling at 2/3 of its 40-week average.

We could well get a bounce, but expect these sectors to trade back toward a 40-week average that is resistance, not support.

The sectors that remain above their averages include:

  • Utilities
  • Real estate
  • Consumer staples
  • Health care

XLV.102218

And gold may have double bottomed, but is still below its moving average, as is TLT (long-term bonds).

Be careful out there, focus on the defensive sectors. One must assume a downtrend until an uptrend is restored.

There are plenty of options in the four sectors mentioned above, and decent dividends can be found as well, that can rival the 10-year treasury.

This is not investment advice. For informational purposes only.

Crypto Supercomputers: First Aggregated Ranking

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.

Will Bitcoin Consume All Electricity?

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.

Is Bitcoin on your Computer? Money in the Internet

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.

 

 

 

Blockchains Could be Vital to National Security

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/