Is Regional Currency A Viable Economic Tool?

This is a Brixton Pound. The bill reads “Money that sticks to Brixton”
This is 10 Brixton pounts. There are about 200 stores that take Brixton Pound and about 30,000 people use the currency.
This is a 5-B note from Baltimore, Maryland
This is Witney Webre. He works at Zeke’s Coffee Shop – They’re one of over 200 Baltimore-area businesses that accept the b-note. The B-note has a 10% discount on the face value of a dollar.
These are Berkshares, they’re a regional currency in Berkshire, Massachusetts.
This is Eric Wilska, co-owner of the Bookloft in Great Barrington. You can use Berkshares to buy books,
Rent bikes
Buy pottery
Buy gourmet food.
I’d guess the biggest problem people have with Berkshares is fitting them in their wallet.
This is an Ithaca hour. One half-hour, actually. It’s a local currency used in Ithaca, New York.
The Ithaca HOUR is the oldest and largest currently-operating local currency system in the United States. It’s called an hour, because it’s generally thought to be worth an hour’s worth of work.

Even though it’s the oldest complementary currency in the U.S. – it’s still not that old, it was started in the 90s
This is the Wörgl – It was issued in 1932 during the great depression
It’s from Wörgl, Austria
The funny thing about the Wörgl is that it loses value if you don’t spend it. It carries a demurrage charge for holding on to it. That is, every month, you have to buy a stamp that is worth 1% of the bill. If you don’t buy the stamp then the bill is worth that much less. As a result, near the end of every month people try to spend the bill so that they’re not the one left who has to buy the stamp.

The idea is that this is money you spend and not a store of value.

After the Wörgl was issued, it’s reported that the area had a growth in employment – defying the rest of the country. The town generated enough money to build new houses, a ski jump, and a bridge. Neighboring villages, seeing the Wörgl’s success, started copying the idea.

Predictably, the Austrian central bank terminated the currency after about a year and unemployment shot back to 30% shortly after.

This is a map of complementary currencies in central Japan from International Journal of Community Currency Research (2004)

Why do people create their own currencies?

It’s a response to feeling marginalized by globalization. It’s an attempt at reinforcing community identity. It’s a symbol of solidarity within the community.
The movement is closely associated with the “buy-local” mentality. “Buy-local” sounds nice, but I’m technical and repeating ‘buy-local’ feels abstract and problematic. Often it feels like a marketing ploy; a grocery-store-pastoral narrative without a lot of evidence that what you’re buying actually is benefitting the local economy.
Like this bag I found on Etsy. “Don’t buy from strangers, buy local”. Of course, if you want buy this bag, you have to buy it on Etsy from a stranger. ‘Buy local’ becomes a meaningless mantra.
I think that one of the economic ideas that the “Buy Local” folks are getting at is the idea of the velocity of money.
Generally, when two people transact it’s because we both have something the other wants. We both gain the benefit of exchanging something we have for something we want. One idea behind ‘Buy Local’ is that if you can increase the velocity of transactions and keep that value within your community, the community benefits.
Another argument that is made is an ecological one. These aren’t cartons from a factory farm, these are Todd’s egg cartons and he wants them back. If Todd takes Berkshares then he’ll get your business instead of Whole Foods, we’ll be throwing away less trash, the eggs didn’t have to be transported hundreds of miles in a refrigerated truck, we’ll feel good about supporting someone we know. This all works out well, as long as we need eggs and we know Todd and Todd has enough eggs.
Business accept regional currencies because they believe it gives them an advantage over multinationals.
If the currency is offered at a discount to fiat, they consider the difference an advertising cost. At least with local currency you can recoup some of your cost so long as you have a place to spend it.
For other people, creating their own currency is an act of rebellion and way to some measure of control over their money.
Especially since the Great Recession, there’s a grass-roots discontent with monetary policy. Anecdotally, there’s feeling among many people that national monetary policy isn’t really concerned with the needs of smaller regions.
So, fringe politics aside, this opens an interesting question: could regions have their own monetary policy? It’s hard to say how widespread and and effective that could have been in the past. But maybe with software and data we could make it possible for regions to have some control on their monetary policy even if they don’t have an economist on staff.
I think it’s useful to review briefly why we even need currency in the first place.

Say I’m a fisherman and my family has eaten all the fish they want and I have fish left over. I’d like to exchange that surplus value before my fish go bad. If you’re a farmer you might be in the same situation with corn at harvest time.

If we can find each other then we can trade.

The great thing about barter is that we’re transferring value directly. The bad thing about barter is that it requires double coincident wants.
We often think of barter as an antiquated practice but, it turns out, there are lots of barter networks that still exist today. The International Reciprocal Trade Association (IRTA) is the biggest trade association for that industry and they had about 400,000 businesses in their member networks in 2010.
One of the benefits of using a barter network is that you can conserve cash. “Every trade dollar you spend is a dollar saved”, they say.

The thing is that barter networks are still pretty small when compared to the amount of global commerce. IRTA estimated that the businesses in their network transacted $12 billion globally in 2010. It’s not pocket change, but its still a fraction of the total possible trade.

But one has to wonder if we can use big data to solve the problem of double coincident wants. I expect that the folks at, say, Quickbooks or SAP have the data.

Going back to our example, maybe I’m a corn farmer and I want some fish today, but the harvest won’t be ready for 3 months. I can write an IOU promising that I’ll give you corn later if you give me fish today.

The great thing is something magical is happening – we’re creating money out of thin air almost like a bank. In effect, we’re issuing a “farmer dollar”.

The problem is – every IOU ticket has a different real value. As the IOU gets further from the issuer, you may not trust the person who issued it. The burden of vetting for the issuer of the coupon gets pushed to the users of the currency.

There’s not a good unit of account because the assets backing the notes aren’t directly comparable and some issuers are more likely to fulfill their obligations than others.

This is, essentially, the idea behind the Japanese WAT ticket system. It’s essentially a formalized IOU that is intended to be used within networks of trust.
So can we keep the benefit if being able to issue our own money, but spread the a) risk of defaulting and b) provide a consistent unit of account?
And the answer is “yes”. This is the reason for mutual credit networks. In a mutual credit system, the currency is created at the time of the transaction. A central system keeps track of the debits and credits and the accounts of the system should all sum to zero.

This is different than, say, Paypal where I have to pay dollars first and then I can send you money. Instead, I’m able to create debt from nothing but a promise to pay you later.

When you make a purchase like this, you’re saving your cash and essentially getting an interest free loan.

Additionally, the currency supply can be effectively self regulating. We create debt where it’s needed. As long as you have a public ledger of debtors, then the community can self-enforce and not continue to lend to someone who is too far in debt.

A network of mutual credit is the idea behind LETS. In a LETS system, the money needed is created when a transaction is made. This becomes interest-free local credit. You don’t need to barter goods directly and there are no physical notes: the ledger is stored in a central location.

This idea is really interesting because we’re giving individuals the power to create money, a lot like a bank.

Just to review briefly, as you know, banks are authorized by the federal reserve to engage in fractional reserve lending and this is one of the ways that money is created.
One of the problems with this system is that when interest-bearing credit-money is created, through the production of loans by the banks, there is enough circulating currency to repay the principal of the loan but not to repay the interest. This results in the so-called ‘impossible contract’ and so the economic system relies on further expansion of credit in order to service existing debt
(The Case for Monetary Diversity, 2010)
While borrowing can help the economy grow in the short term, eventually people have to repay the debt plus interest. When people are repaying their debts, they’re spending less than they’re making and this has a contracting effect on the economy
This opens the question: Is it possible to create money without debt?

Probably not – a tool for repaying debts is essentially what money is. Even if you’re engaging in a cash transaction to purchase goods, essentially what you’re doing is immediately paying off the debt you incurred by taking something of value from someone else.

But a case could be made for loans without usury. e.g. no fees on top of the cost required to service the loan.

Usurers extract a lot of productivity from the economy through interest and so maybe we can keep that productivity within the economy instead of paying interest.

A mainstream view of interest is that it is the lenders reward for delaying consumption. But, to me, it feels like getting more money back for lending your money is maybe only one of many possible rewards for lending.

There’s a school of thought that heralds “money as if people mattered”. Their hero is E.F. Schumacher, author of “Small is Beautiful”. But, to be honest, it isn’t taken very seriously by mainstream economists.

Schumacher’s book is a contrast to the idea that ‘bigger is better’. A global payment system like Bitcoin is very efficient in transferring value, but there are second-order effects that undermine the resilience the economic system as a whole.

If you want to build a resilient distributed system you have to design the system to keep running even if individual components fail. If (when?) one currency becomes the global standard, then the entire globe is affected by the same volatility, market trouble, debt crises, etc.

There’s also an open question: can we create ‘moral’ money? Can we create a medium of exchange that is good at encouraging prosperity and less good at encouraging exploitation?

While it’s a great sentiment, people generally act in their own economic self interest so it’s hard to see a purely altruistic model as being practical. So another question might be: can we create moral money that is also in people’s overall self-interest?

While it would be nice to live in an area where people voluntarily put themselves under the authority of a local currency for the common good. It seems to me that the system will have greater success if there is clearly economic self-interest involved.

One promising story of the economic effects of complementary currency is the Bangla Pesa from Kenya
The people in this Kenyan village had goods but they were willing to sell but because they were so poor, many people didn’t have the cash available to trade. So the Bangla Pesa was developed as a village-wide IOU system and it’s essentially considered “slum money”.

Emma Onyango sells tomatoes, kale, and water and she has eight children. She’s one of the founding members of the Bangla-Pesa.
When the Bangla Pesa was issued, trade jumped in the first few weeks it was in use and people were very optimistic about its effects. But before long a news story was written that declared it an attempt to replace the Kenyan shilling. The anti-fraud unit of the Kenyan central bank ordered the police to arrest the people behind it.
Emma and five others were jailed and charged with forgery. Operations of the Bangla Pesa ceased for several months.

They were able to post bail after a few days and after quite a bit of effort, the charges were dropped six months later. The Bangla Pesa is legal again and their 2014 survey showed over a hundred businesses in the area are using it and it accounts for roughly 7% of sales.

We might be tempted that this sort of extreme response could only happen in a third-world country. But it turns out, our central bank doesn’t like competition either.

This is Bernard von NotHaus.
He’s the creator of the Liberty Dollar. The Liberty Dollar was a currency that was backed by gold and silver. It’s possibly the most economically successful physical complementary currency in the U.S.

Between 1998 – 2011, von NotHaus was able to put more than $60mm worth of liberty dollars into circulation.

The idea was an inflation-proof currency for people that wanted a return to the gold standard. It turned out to be extremely popular, especially among libertarians.

They even issued a special-edition Ron Paul coin with the insignia “Vote for Truth”. The thing is, the political platform that helped him become so popular was also probably his downfall.

You see, van NotHaus was the founder of an organization called National Organization for the Repeal of the Federal Reserve and Internal Revenue Code. “NORFED” for short.

He was arrested and convicted for counterfeiting. The jury deliberated for less than two hours. The U.S. Attorney’s office said that “NORFED’s purpose was to mix Liberty Dollars into the current money of the United States.”
The U.S. Attorney Anne Tompkins said that “attempts to undermine the legitimate currency of this country are simply a unique form of domestic terrorism”. (See fbi.gov)
Despite being convicted in 2011, he hasn’t been sentenced yet.

On the one hand, his conviction serves as a warning to anyone who wants to try and create a national complementary currency.

On the other hand, when you see a hippy being labeled a terrorist for helping people trade gold, you have to wonder if he was on to something.

Do complementary currencies work? And by “work”, I mean, do they have the intended economic effect. So far, I think it’s hard to say.

In theory, regional currencies should have a counter-cyclical effect. Particularly in times of crisis, when there isn’t enough national currency available or interest rates are extremely high and so on.

But in practice, regional currencies are all so small. A study from 2007 found no difference in rates of economic growth betweens cities that had regional currencies vs. cities that did not.

But they did say that there might have been income increases for the individuals and businesses that participated. And that’s really interesting to me.
Because it seems part of the reason these systems fail is because they’re expensive and inconvenient. And maybe with new technology, mobile devices, crypto currencies, etc., we can grow (or multiply) regional currency systems to the degree where they can have a significant economic and social impact.
The blockchain also presents brand-new opportunities for community controlled digital currencies. Because the blockchain can be distributed, the company that makes the tools can genuinely claim that the currency belongs to the community (vs. being issued and controlled by a central entity). Obviously, we want to avoid pump-and-dump scams, but I think if local currencies are issued genuinely there are new opportunities here.
Everything I’ve been talking about so far emphasizes physically regional communities. But if you’ve read Balaji Srinivasan’s article “Software Is Reorganizing the World” he talks about the virtual formation of not only cloud networks, but cloud towns or cloud countries. The idea is that groups of people will come together online and have a strong community identity, even though physically they may be all over the world.

The ideas we’re talking about here apply equally to these cloud communities.

And, in fact, maybe they already are. That’s sort of what the alt coins are.
But what I’m talking about here is something different. Most crypto currencies are in a battle with bitcoin to become the new global currency. And that’s not what I’m proposing here.

For contrast, take monetary policy. If you think that the Federal Reserve isn’t appropriately concerned about the needs of your region when deciding how much money to print, Bitcoin doesn’t help because Bitcoin’s ‘monetary policy’ cares about your region even less.

We have these two sets of tools. The old tools of regional currency, mutual credit, and barter. And then we have new tools like strong social networks, ubiquitous mobile devices, and of course cryptocurrencies.

In my mind, we’re still in the very early days of understanding how they can work together.


Credits:

  • Photos copyright of their respective owners
  • Fish Icon Designed by Andrew Heins
  • Corn Icon Designed by Richard Zeid
  • Money Icon Designed by Luis Prado
  • Bread Icon Designed by Irit Barzily
  • Apple Icon Designed by Blake Thompson
  • Bank Icon Designed by Iain Hector

Posted in currency | 1 Comment

Bitcoin 2014 Amsterdam – Day Two Notes

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Future of Bitcoin in China – Bobby Lee

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  • BTC China
  • Continuously operating for 3 years – longest of all exchanges
  • In November China passed US volume
  • Theories about Adoption
    • Nation of Savers
      • High national savings rate:w
      • underdeveloped financial sector
      • a rapidly growing economy
      • undervalued currency – diminishing purchasing power:w
      • significant opportunity to store value
      • Chinese RMB monetary supply has had 3x increase in 7 years
    • Nation of Engineers
      • emphasis on math and science
      • politicians have background in engineering
    • Eager to participate in something new
      • for the novelty or to participate in a trend
      • Get Rich Quick
  • Step 1: Dec 5 2013 – Regulation of Bitcoin in China
    • PBOC Issues written guidance
    • Bitcoin not a legal currency
    • legitimate virtual good/commodity
    • basic right to sell bitcoins
    • individuals are free to buy, sell, trade, exchange
    • bitcoin companies need to follow laws and regulation – exchanges are legitimate businesses
    • a consequence: banks and financial institutions are not allowed to touch bitcoin
    • e.g. stores are not allowed to take euros or dollars
    • Why do you think the gov wanted to regulate bitcoin?
      • Truth is, no one knows
    • Yi Gang, Vice minister of the central bank, PBOC
    • The announcement wasn’t quite effective at curtailing the rise of bitcoin
  • Step 2: Dec 16th
    • Top Payment Processor companies called to a secret meeting with PBOC regulators
    • verbal warning about dangers of bitcoin
    • reprimanded for working with Bitcoin companies
    • required to break off with all bitcoin exchanges
    • no written orders
    • By Dec 18th, all major bitcoin exchanges in china were dumped by payment processors, thus shutting off depositors
    • the prices crashed and recovered
    • bitcoin exchanges switch to using direct bank account transfers
  • Step 2a: March 2014
    • Rumors about another imminent crackdown by PBOC
    • First reported by Caixin, known to have strong connection to governments
    • bitcoin prices fall
    • PBOC issues denial, prices resume
    • Rumor: all banks for bitcoin exchanges will be shutdown by April 15
    • Subsequently known as the “415″ event
    • Leading up, exchanges accounts were closed, but enforcement was selective
    • BTC China wasn’t being closed – they warily thought they were the chosen ones
    • BTC China was not affected at all, CMB and Bank of China still used
  • Step 3: April 24th
    • PBOC calls another secret meeting with top banks and 3rd party payment companies:w
    • iMore warnings
    • CMB and bank of china were specifically called out and reprimanded for working with exchanges
    • Required to public notice and break off with all bitcoin transactions
    • So CMD and Bank of China did that.
    • Still no written orders
    • By early May all major banks published notices on their main website
    • Banks will not allow for transactions made to bitcoin exchanges affecting both corp and personal accounts
    • You’d think that the banks did it themselves, but the messages were all exactly the same
    • Slowly but surely every exchange was affected including BTC China
    • Corporate bank accounts were closed
    • Personal accounts also
  • Situation Today:
    • BTC China is operating normally
    • Some have closed
    • Other had accounts closed
    • Now using Vouchers quick and easy for deposits use offline P2p method for moving money
    • No 3rd party payments
    • No Corp / Personal bank accounts allowed
    • Are vouchers allowed?
    • Cash transaction is last resort, because bitcoin exchange is legal
    • If BTC was classified as something illegal, then the whole system would die off. But because its a legitimate virtual commodity, so at the last resort people can use cash
  • How things work in china
    • How Laws are Written
      • Laws are written purposely filled with ambiguities to leave room for adjustments in the future
    • Interpretation and Verbal Guidance
      • Verbal language may go beyond what is written
    • Enforcement, or Lack of Enforcement
      • Sometimes lack of enforcement is by chance
      • Sometimes its on purpose
      • “One Eye Open, One Eye Shut” – Sometimes I’ll let you get away with it, but if I want to get you I’ll come after you later
    • The Venn diagram of these three things is disperse
      • for good reason
    • Bitcoin is so new, they really don’t know how to regulate it
    • China has always wanted to keep Bitcoin separate from its financial sector. This way if there is a contagion it won’t drag down the financial markets.
    • It’s a good thing for managing risk
    • Typical Regulation
      • 1. What is written
      • 2. Subsequent Verbal Guidance
      • 3. What will actually be enforced?
    • Some of it is cultural, some of it is just the Chinese way
  • Bitcoin today
    • People are spooked; they’re sitting out
    • Chinese Bitcoin consumers (buyers traders) have been shaken by recent regulation
    • We know that bitcoin can’t be stopped or eliminated, but it can be suppressed (by the government)
    • FB / Twitter / Google – practically no one bothers using them in China
    • If the gov is not going to support it then it is going to be hard for BTC to be successful in China
  • Bitcoin is now discouraged – by the state media state
    • State controlled media has reversed position – now purposely covering bitcoin from a negative perspective or disallowed to cover
    • It may take a few moths (years) for the dust to settle for consumers to regain confidence in the bitcoin in china concept
  • There has to be a future for bitcoin in china – his belief
    • may take time
    • store of value will remain important driver
    • speculative trading will be limited – like gold. lots of gold speculators, but generally not in china
    • Payments will be re-examined
  • Questions:
    • Hong Kong is effectively the same
      • Regulators tell banks / payment processors don’t touch bitcoin

Panel: Economic Theory of Bitcoin

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  • Panel Members:
  • Peter: In 2010 I was curious about Bitcoin. I’ve had to do crypto research full time because everything else is boring [laughter]
  • Robin: She’s interested in bottom-up, self organizing systems. Bitcoin, crowd funding, etc.
  • Robert: Critic of central banking, make his career trading on interest rates. Don’t believe that the distributed crypto-currency model needs to be combined with Austrian ideas about scarcity. We need better controls for an elastic monetary supply.
  • Konrad: Interested in how we can relate the fundamentals of economic theory with crypto currencies.
  • Jon: The mainstream economic profession has largely ignored bitcoin and how it relates to greater economic theory. This surprises me, because you would expect that especially the Austrian school of economics would be interested in how Bitcoin works. This panel can almost be thought of a new school of thought. I’d like to cover:
    • Mises’ Regression Theorem.
    • Bitcoin’s transition to pricing.
    • Multiple value standards.
    • Are their room for altcoins.
    • Fractional issuance in bitcoin.
    • Mining economics beyond the bitcoin reward. The effects of built in deflation and how that relates to liberty
    • Peter, why don’t you
  • Jon: I want to start w/ Peter because he helped me understand it
  • Peter: Robert Murphy helped me understand the Mises Theorem. I’ll start with information by Carl Menger because he did the work and Meses build on top of it. Economics had the question: How did money arise? Carl Munger in is book on the origin of money.
    • He studied the rise of liquidity
    • He described about how liquidity can come into the market, when goods have a sufficient level of liquidity e.g. easy to sell at economic prices,
    • When people realize this, they start acquiring the liquid good just because its liquid.
    • There’s no other way for a medium of exchange to arise other than the attribute of liquidity
    • Before people will hold something as a medium of exchange they need to be able to sell it for a market price
    • Economists after him had many ways of interpreting it.
    • Imagine there is no money, only goods you trade on the market
    • It’s hard to build enough interest in . We already have a medium of exchange, so it’s not like we have to rediscover the idea – we’re aware of it.
    • So some of the problems we hypothesized don’t exist anymore
    • Some economists don’t understand liquidity, so they don’t understand currency
    • So when I understood liquidity I studied how it applied to Bitcoin
    • After a while I was able to find that this is what happened to bitcoin.
    • For about 10 months there was no generally available price to bitcoin
    • The price emerged, then the first exchange appeared.
    • It matches what Carl Menger called “organized markets” – it provides liquidity
    • It’s relatively easy to create a crude exchange
  • Konrad: I had some similar ideas and I came across Peter’s ideas. The emphasis on action, the economics are about what people do
    • By applying this principle, I found that we could look at metallic currencies as a technological layer and people discover that they can use it in a particular way
    • We see this with mining, mints, banking, etc.
    • With paper/fiat money we have the institutions that make that work
    • And now there is something different again, which is a crypto currency which has a whole technological layer and people come along and find that they can make use of it.
    • And we can use economic theory to look at that
    • How are people using it? What are they doing? What is it?
  • Jon: Does bitcoin satisfy the regression theorem?
  • Konrad: I interpret the regression Theorem as a theoretical step in economic reasoning. It got around a step in circular about explaining the value of money. In the beginning there had to be some value of a unit, that would not be used as a medium of exchange. If you read the original expositions it had a very specific role. Mises, in particular. Bitcoin became part of a structure of action, but its not yet a medium of exchange. There are very distinct stages of this process out of which the medium of X use emerges.
  • Robert: I’m not convinced that the regression Theorem has anything useful to say about bitcoin. The idea that something has to have a value before it can be used as a medium of exchange is not a requirement of logic, so in that sense its not a theorem but something that has been obviously falsified by bitcoin
  • Jon: When are we going to see pricing priced in terms of bitcoin vs. local currency. Robin, what are the steps that will be necessary before we see bitcoin unit of account
  • Robin: It depends on how you define unit of account and for whom. It has to do with acceptability. How many people already have this in their vocabulary? In networks you get very strong nodes and it spreads, but you also have counter forces who are protecting their status quo. E.g. the dollar. These forces are pushing against the forces of bitcoin
    • If you look at history and ask, when does it become accepted. It’s generally 30-40 years, which is the span of a generation
    • So I’d say, if bitcoin is the one to survive, then a generation
    • We don’t know whats underneath the surface, their might be, maybe not another crypto currency, maybe another medium of exchange that would be an alternative to bitcoin
  • Jon: I read that it may never be possible to overcome the effect of existing leaders in pricing. Maybe the network effect is too strong
  • Peter: This an uncharted area. Usually switching the unit of account, is called dollarization or euroization, when there is failing people switch to a more stable unit of account. Today people would rather switch to the USD than bitcoin
  • Jon: moving to multiple value standards – people say how can their be room for 300 crypto currencies? We don’t have that may ways to measure length and volume, why would we have many ways to measure value?
  • Robert: Eventually there is only room for a handful, maybe 10 competing crypto currencies, each filling a niche that satisfies some area of demand. Maybe some of a richer scripting for smart contracts. The very nature of hash-based proof of work is arrived at by people literally burning money is something that cant be spread over a wide variety of cryptocurrencies. Most of the altcoins will fail, people wont mine them, no exchange value. But there’s room for quite a few. You see them already in the market cap of these things. It’s a power law.
  • Robin: But what about local communities
  • Robert: the smaller the community becomes, the harder it is for it to be protected by hash based proof of work.
  • Jon: Konrad, Is it fair to say litecoin silver to bitcoin’s gold?
  • Konrad: I think there is a very strong role in the network effect in the use of the value. In metals they were very different in weight and density in a way to support circulation.
  • Jon: I’d like to move to the topic of fractional reserve banking. I did an interview with Peter on if it’s possible to see a fractional reserve banking emerge in a bitcoin economy. Peter could you summarize it
  • Peter: One of the prereqs for fractional reserve banking is that people treat the bank-issued instruments as being a medium of exchange on their own. With bank notes / bank deposits, people will treat those instruments as medium of exchange themselves. Its easy to do wire transfers with bank deposits. Banks provide accounting information etc. You can’t wire transfer gold. People can use those things MOX
    • Bitcoin has low transaction costs compared to gold but also traditional financial instruments.
    • Take Mt Gox – when DHS seized their accounts, there was a price change. People valued the dollars on mtgox at a different price. These are some of the risks you’re exposed to today when you’re using btc-denominated medium of exchange.
    • the instruments of bitcoin will be different than instruments of today because they’ll not be changing the size of the money supply
  • Jon: One criticism of the gold standard is that you can eventually not show where the gold is, you can do manipulations in the gold market. Does bitcoin have an advantage. Does a bitcoin reserve standard have an advantage?
  • Peter: as soon as you create a reserve standard, you create a risk that there won’t be enough reserves. You could trade gold directly but that’s kind of a hassle. W/ bitcoin you don’t need a bank, you can transfer directly, so there’s less demand for that.
  • Robin: it demands on the need for money and for the supply. Will entrepreneurs need loans from a traditional bank to start a business? Maybe we’ll use crowd-funding or p2p lending instead of borrowing from a bank.
  • Jon: would there be a bitcoin lending economy that emerges?
  • Robin: we’re already seeing that.
  • Robert: I don’t think its possible to construct fractional reserve banking. It’s based on an illusion in the modern area anyway. You can do that in the analog world because you have this institutional machine to maintain the illusion – insurance. To give the illusion that you’re giving a loan to the bank is the same as cash. The relationship between the lender and the borrower isn’t one of ownership over a pool of loads. It has a floating net-asset value. You can’t use it as a medium of exchange, at a minimum as a credit instrument. I don’t think its possible to express fractional reserve banking in bitcoin and that’s a good thing.
  • Robert: It’s not about just one asset, many assets play a fractional reserve like role. rehypothecation – they get lent and relent throughout the system. A bond might have a factor of 10x. There’s a multiple phase . It crease a systemic instability because there is a discontinuity. When you lend something you think it’s protected by law, but money managers don’t ever know. With crypto there’s no what you can create these rehypothecation arrangements without them being crystal clear. If there’s a lending market in bitcoin i think its likely to be denominated in fiat money. Unless the borrower is using it a vehicle to speculate on the exchange rate on bitcoin.
  • Jon: let’s move on to the topic of bitcoin deflation. We keep our books in bitcoin at the foundation. We have 8 spaces to the right of the decimal point. In Zimbabwe they have decimals at the left of the point. 8 is currently hard-coded, but we could easily move to 12 or 16 right of the decimal point. I wanted to start by going to robin: do yo think that deflation compared to bitcoin, vs. pegging it to the growth rate of the economy. Is inflation good or bad for an economy.
  • Robert: the arguments about don’t really apply e.g. sticky prices, balance sheets effects, debtors being punished. None of those apply in bitcoin because BTC isn’t yet a unit of account. Contracts and prices are expressed in fiat converted to bitcoin
    • a different reason we should be concerned about the appreciate of the exchange rate because if there’s under investment in the goods and services. wouldn’t it be better with instead of people hoarding bitcoin, if people were spending it on the economy.
    • instead we’re getting investment from the normal economy. Silicon valley becomes the equivalent to the peoples bank of china. Venture is like an outside economy investing .
    • There are algorithmic distributed ways of working within cryptocurrency protocol to change th money supply in proportion its exchange value. It doesn’t require a central bank, it could be done in a distributed way. It would have the property of stabilizing the price of the crypto currency
  • Peter: I want to emphasize the role of bitcoin as a unit of account. the traditional arguments do not at this moment apply to bitcoin. There’s not need to change the quantity of money. On a theoretical level I don’t think the 21M coins number.
  • Konrad: I avoid using the words inflation and deflation because they have a lot of confusing meaning attached to them.
  • Robert: should you have a more elastic supply or not comes down to the fact that if you have a fixed supply the only way that a change in demand can be made is a change in price. so expectation of future demand gets expressed in the present price. so this causes fluctuations in the price which prevents it from becoming a unit of account.
  • Questions:
    • Q: Bank to the future – one of the challenges with p2p is that you’re competing w/ banks. They’re allowed to create money but crowdfunding is people lending bank created money. Cryptocurrency is a case of people creating money. Could we end up in a world where people create money rather than banks create money?
      • Peter: yes – there’s a movement underway – limited purpose banking / 100% reserve banking. It’s not just in crypto that we criticize fractional reserve. It’s possible that there could be broad based consensus with the ability of banks replacing money. What could replace that? Well maybe the bank should have the role of issuing currency. There’s an alternative argument from the crypto space in that we don’t need the banking system to fulfill those roles at all.
      • Robin: I think we’ll be seeing that on local levels. The Indians have the maize coins. They don’t want to local dollar. We’re going to be seeing more experiments around that
    • Q: Is buying bitcoins and holding them benefiting the network?
      • Peter: Indirectly people buy and the price goes up and there is interest in the space, but it doesn’t provide as much investment as the alternative world where there was a different money supply rule. My view is that we would see more underlying economic activity in the space.

Panel Developer Q&A

http://i.imgur.com/mMUr8Q9.jpg

  • Members:
  • Q: What is the future of OP_RETURN
    • Gavin: OP_RETURN is there. You can append 40 bytes. Maybe we’ll increase it.
    • It’s hard to secure a block chain where you can’t add extra data. It’s not that you always want the data to be available but prove that it was published. You can use PTSH2 to prove it.
  • Stefan: A name is a non-divisible asset like a movie ticket. You can’t hold a fraction of it. Ripple is a way of tracking assets, so the asset holder can specify the divisibility.
  • Q: Hypothetical hard-fork coming. Is the idea with side chains / tree chains to relieve this. Will this prevent a hard-fork?
    • Gavin: Maybe. I think we’ll need a hard-fork at some point. It seems simplest to me to increase the block-size.
    • Peter: I’m interested in increasing the block size with tree-chains. [laughter]. We’re seeing much more efficient use of the blockchain: bitcointip vs. changetip on reddit. Bitcointip was a transaction for every tip. changetip is off blockchain and much more efficient.
  • Q: You spoke about a floating transaction fee. Would this be slowly increasing?
    • Gavin: I would like to make changing the block size a soft-fork rather than a hard fork. So the miners can control how large or small to make their blocks.
    • Peter: There was an interesting proposal last summer where you would have proof of stake for increasing the block-size. That should be something the community as a whole allows to happen.
    • Stefan: Jed hates constants so in Ripple everything is adaptive. Validators look at the last consensus round. So the settings are dynamic. We’re collecting some data around adaptive block sizes.
    • Peter: where it matters isn’t the usual use case where people aren’t being malicious but rather how people are abusing it. Like when people put Usenet into the dogecoin blockchain. How does this play out in a real world situation? We risk changing something that we don’t really understand can be exploited and we don’t have an easy way to change it back.
    • Hakim: scaling up might buy us some time short term
  • Q: What scares you the most?
    • Tamas: there are traps people could fall into if their naively using bitcoin
    • Peter: the nature of ASIC hardware – this centralizes where ASIC can be produced. There are political existential threads to bitcoin. We need incentives so that people in business and government are not willing to attack it. If everyone who puts money into bitcoin loses their money then its easier to attack it
    • Gavin: what makes me optimistic about bitcoin is that we’ve had huge bugs but we have fixed it and we’ve moved on. Unless there is a ECDA signatures flat. Also I fear that it could power the worlds largest ponzi scheme.
  • Q: What do you think about services like BitUndo?
    • Gavin: I don’t like BitUndo. It’s a for-pay finny attack.
    • Peter: BitUndo is nearly useless compared to other double spend vulnerabilities. E.g. submitting a low fee vs. high fee double spend. I’d rather that it’s clear to people with a big undo button. People already leave cash on a table in a restaurant and leave.
    • Stefan: whatever exploits are possible should be open as possible. Putting your head in the sand isn’t a good strategy
    • Peter: I’ll pay good money for an android wallet that has double-spend built in. But if you have POS, I’d install security cameras – people generally are more honest in person.
    • Audience: if the risk is greater than 1% or 2% then they’re better off using existing technologies
  • Q: Why not leave the block-size at the same size and increase the freq of confirmations?
    • Gavin: that’s been proposed. We have to talk about it. Standing in line, getting confirmations in 5 sec in line is the only one that matters.
    • Stefan: most of the validators are run by ripple labs. If you have a global network, you need to wait for two round trips.
    • Peter: micropayment channels are very interesting because you can have a hub and spoke model. because we can hand transactions to each other with a little bit of value with them. We’ve seen altcoins push this limit down and it breaks. Sometimes these altcoins have broken without even malicious attacks.
    • Gavin: POS is interesting because even traditionally when you look under the hood the transaction doesn’t actually happen right there.
  • Q: Can we add loops to the operators of the scripting language
    • Peter: the scripting language could use more operators like concatenating schemes. We’re probably going to propose improvements to the scripting language later this year.
    • Gavin: the problem of loops is that there is a denial of service attack where you send an infinite loop. It’s an interesting question to look at a transaction and a fee and determine how profitable it will be
    • Peter:

Panel: Secure Coins: Building Trust in the Digital Economy

http://i.imgur.com/aS5iQPv.jpg

  • Panel Members:
  • Q: What undermines people’s trust in bitcoin most
    • Jason: There’s a negative bias towards digital currencies and I think a lot of it has to do with branding.
    • Frederic: I second that – bad news sells more. As a community we need to be more vigilant to point out bad players
      • Icevault is secure cold storage in a vault in switzerland
    • Mike: are the keys actually stored in ice? Or in a glacier?
    • Luke: I think there is a lack of education about the value that crypto can give consumers. I think there will be clearer value propositions for consumers about the efficiencies for them.
    • Mike: I think it’s easy for us to overestimate the robustness of bitcoin. People get hacked or we just say we’ll have multisig solutions but its very hard to win when you’re always playing defense. One thing that undermines trust is that hackers just try every wallet, every website until they win. This notion that if you store your money in bitcoin you’ll be relentlessly attacked by skilled people or you’ll lose all your money is undermining trust in bitcoin. We can make more secure technology, but I worry that a pure defensive strategy will always be insufficient. People keep reading about how people get their money stolen and that undermines trust.
    • Luke: if you’re not building toward trust then you’re at a disadvantage right away. Technological advances need to be much better explained.
    • Mike: it’s easy to say just meet him but what if you pay him and he walks away – what are you going to do attack the guy? People also don’t talk about the idea of merchant protection as often. E.g. car smart property
    • Ryan: Reputation is another solution to this problem.
    • Luke: if you do your due diligence then many things wouldn’t have happened, but you need th wild west because people only pay attention when bad things happen. How do you make sure reputation is there? Well you need a system and procedures.
    • Mike: when Satoshi launched bitcoin he was working on a p2p marketplace and you would be able to rate buyers and sellers and the weight would be according to how much mining they had done. He realized there were more important priorities.
    • Frederic: we need to provide users of bitcoin today tools that make them feel comfortable with what they were using before
    • Jason: For me, it was important to have the ability to use an exchange in a way that I trusted the exchange.
    • Ryan: is there a technical solution to reputation? I lost faith in Mt Gox eventually because I had news stories, but what about when you interact with someone new?
    • Mike: Distributed reputation, you can do it, but it’s difficulty. BIP 70 has the ability to sign a request, it wasn’t necessarily for reputation but it can be used for that. E.g. we saw a chrome extension that replaced the address in coinbase with their address. Now that you know who I’m paying, you can use it for reputation.
    • Luke: reputation is a qualitative concept. I’m not sure that you want a qualitative driver within the bitcoin community, because we rely on things other than human
    • Mike: right the idea is to exchange without trust. The idea is to reduce human trust as much as possible.
    • Jason: My coinbase was attempted to be hacked and I had two-factor auth. Having that saved me from losing money and I don’t think there enough exchanges that talk about that
    • Mike: there’s a big push for distributed wallets to have that functionality within it. You could have the exchange steal the money. You could have Fred be abducted and then held hostage.
    • Luke: you almost always have an insider during a hack. That’s why traditional exchanges have processes and procedures for access to funds
    • Mike: my guy sense is that no matter what you’re doing, the more money you have piled in one place the harder this problem becomes. But this is unique to bitcoin, take the money for Mark Zuckerberg or Bill Gates, you can’t just walk in and steal all of their wealth. Its in paperwork and in mind of judges and in debt relationships. But with bitcoin you literally could imagine a case where a thief walks away with the entire fortune.
    • Ryan: Copay is a multisignature wallet that we’re developing at bitpay. Instead of being a key-signing service, this is a general m-of-n multisignature wallet. It lets you communicate with people or computers to do m-of-n.
    • Mike: we spout off “banks fail all the time, bla bla” but in practice we don’t actually worry that a bank will be robbed and walk away with all of our money. If someone is taken hostage and they ask for a wire transfer, the bank will just undo the wire. If they want cash then they have to meet in a place controlled by law enforcement. So can we develop digital solutions e.g. a wallet that has a chip that if you could be validated by other chips that could prove that there was a hostage attempt then could you roll back the transaction without changing the underlying protocol?
    • Luke: well we have insurance. We’re now entering an entirely new point where we’re moving away from humans making decisions and codifying them in a structured way. People aren’t going to be considered smart enough to make certain decisions.
    • Mike: its not even about being smart but are you compromised in some way. The problem in bitcoin is the problem is that the computers store the ledger so it would be difficult to resolve the problem where what we know to be true about wealth vs. what is recorded in the ledger.
    • Luke: we’re talking about larger amounts of wealth than ever were historically possible.
    • Mike: if bitcoin is carried on its current path and took over the world, do we end up in a world where it’s dangerous to be rich?

Mike Hearn – Taking Bitcoin development to the next level

http://i.imgur.com/Jfs1TmL.jpg

  • Timelag on recent projects
    • BIP 32: ~12 months
    • BIP 70: ~12 months
      • bitpay, coinbase implementing it now
    • BIP 37: Bloom Filtering ~18 months
    • Floating fees: 6 months so far and counting
    • Dispute mediated txns, smart property, etc: 2 years and nobody started
  • Causes:
    • small core team, hardly growing, focused entirely on keeping things afloat
    • decentralized harder than centralized – “Stephan’s law”
    • doing something decentralized is 1000x harder than centralized
    • p2p infrastructure is not startup shaped
    • innovating often requires building a totally new wallet from scratch. This is expensive
  • Hardware is perfect
    • Trezor – it works really, really well.
    • ARMs – they’re slick and work well
  • Web Wallets
    • Common default choice to build a web wallet for a new feature
    • but lots of problems
    • UI is cheaper but now you have an expensive back end
    • being on call is not fun
    • hard to control updates
    • poor privacy
    • no web wallet in a box that people can easily customize – big costs to setting one up
    • servers require a giant database for the full blockchain
  • Two problems:
    • Innovation is too expensive
    • Decentralized solutions tend to be slower and do worse
      • e.g. WhatsApp vs. SMS
  • What can we do:
    • Funding is the main problem
    • Bounties have too many problems
      • no one serious works for bounties
      • and you have to trust the bounty guy
    • Crowdfunding (a.k.a. assurance contracts) is a better approach
    • SIGHASH_ANYONECANPAY – support for this in the bitcoin protocol
      • a bitcoin transaction isn’t generally malliable, unless you choose
      • the traditional economic example is sailors building a lighthouse
        • none of the sailors can afford to build it themselves, but once it’s created every sailor can view it
  • Mike demos the Lighthouse bitcoin crowdfunding app – it looks awesome
  • Vinumeris.com – Strength in numbers – crowdfunding decentralized infrastructure
  • bitcoinj has a template for creating a new app

Alan Reiner (Armory Technologies Inc) – Best Practices in Securing Bitcoin

http://i.imgur.com/oOOsjtv.jpg

  • When you hold your money vs. a bank you’re taking on the responsibility of those entities.
  • Armory for “security at all costs”
    • Sometimes “convenience” is one of those costs
    • Tool tailored to advanced / power users
  • Armory is still one of the only ways for non-experts to use “cold storage”
    • Sign transactions from air-gapped computer
  • Many other features
    • Manage multiple wallets at different security levels
    • Deterministic wallets
    • multi signature wallets
  • With bitcoin data is money
    • money is data
    • a 32-bit secret can control billions
    • raises the stakes computer and network security
    • money now stored directly on phone, computer, paper
    • We’re not use to having so much fluid valuable information on our computer
    • e.g. stealing identity is 5 hours on the phone vs. your money actually being totally stolen
  • Store bitcoin yourself
    • Full control over your money and its security
    • Cannot be seized or stolen if stored properly
    • It’s easy to lose if you’re careless
  • Let someone else hold your bitcoin
    • They may be more diligent about security than you
    • May hold BTC properly but use poor user auth
    • Counterparty risk
    • Few bitcoin insurance options
  • Holding your own bitcoin is like caveman discovering fire
    • extremely useful and dangerous
    • keep your fires small until you’re experienced
  • Sometimes biggest thread is users themselves
    • users aren’t used to irrecoverable data
    • not everyone makes backups
    • no one expects their hardware to fail
  • Educate yourself, learn the tools, learn the risks, and experiment with small amounts
  • Public private key crypto
    • two main concerns:
      • Privacy (encrypt and decrypt)
      • Authenticity (sign and verify)
    • Bitcoin protocol does not use encryption, only authentication
  • Public and Private Keys
    • public key is bank account number
    • private key is signing authority
  • Network
    • bitcoins have a public “unlock” condition
    • most coins have a simple unlock condition, whoever has the signing pen can authorize the moving of these bitcoins
  • Cold storage
    • only public keys are required to receive payments and verify transactions
    • private keys are required to move the coins so keep your private keys on the offline computer
  • Security vs. Convenience
    • nearly all systems become more inconvenient as you increase security
      • easiest usually the least secure
      • to do security right, expect to be inconvenienced
    • A lot of users don’t have the patience for this
      • this is why bitcoin may not be ready for prime time
  • Backup your wallets
    • Risks:
      • most common reason users lose coins is due to not having an unencrypted backup
        • you lose all your bitcoins if your hard drive fails / you forget your password / your family cant get your money
      • it’s critical that your backup is unencrypted
        • encrypted backup is useless if you forget the password
      • For most people the digital security is most important
      • for most people physical security is not a concern
  • Backups digital vs. paper
    • how much are you willing got bet that your CD or USB key will still work in 5-10 years from now?
    • if you use digital backups make multiple copies
      • store together at least one should still work
    • paper fades but the data is available for 100 years
  • Backups – electrum and armory – your backup is a single backup forever – important
  • Wallet passwords are irrecoverable – your password is your encryption
  • Multi-sig:
    • multisig is critical for large organizations
    • wallets are managed by employees who can steal
    • multisig in armory can help
  • Common service is the 2-or-3 with service providing two factor
  • Armories deterministic wallets aren’t using the HD spec.
Posted in programming | 2 Comments

Bitcoin 2014 Amsterdam – Day One Notes

http://i.imgur.com/2BhcuEt.png


Today I attended Bitcoin 2014 in Amsterdam. Below are my notes from the sessions I attended. While I’ve tried to be as accurate as possible, the text below is not verbatim.

Bitcoin: Crossing the ChasmJeremy Allaire, Circle Founder & CEO

  • Everyone feels like we’re on the cusp of something big but there’s a lot of work to be done to bring it to fruition
  • It’s like Pre-netscape 1994:
    • 4000 websites in 1994, immature, insecure, skepticism
  • Just “thousands” of merchants accept today
  • One a million users, very people use it actively
  • But there are 4B devices connected to the internet so there’s tremendous opportunity
  • But how do we cross that chasm?
  • Problems with current global economy
    • Lack of a global standard for money so you have interchange fees
    • Nation-state specific proprietary infrastructure
      • Similar to walled-garden AOL-type of money
    • Significant cost and complexity
    • Interchange fees
    • Surcharges
    • Fraud
  • These problems are a tax on the international economy
  • Existing payment infrastructure is insecure
  • Today every time you make a payment you’re giving over your “private key”
  • Credit card fraud > $10B in 2013
  • These monetary systems were all developed in a pre-internet era
  • We’re accustomed to free and instant communications, content, media distribution
    • But not equivalent for money
  • Current nation-state currencies mean something to people.
  • We have to learn to communicate bitcoin in ways that make sense to people who use traditional currencies.
  • At circle they see bitcoin “wrapping” national currencies
  • There’s a hurdle for regulatory issues
  • Today bitcoin is primarily speculative – people trying to make money on the trade. We have to move beyond this phase.
  • There is regulatory uncertainty and that’s a problem for investment and companies
  • People who want interoperability with existing banks are having trouble because banks don’t want to take the risk
  • Security is a problem – it’s too easy for people’s money to be stolen
  • Normal people think that they can lose their money really easily
  • Immature exchanges give low liquidity
  • Are we on the cusp of mainstream adoption of digital money?
    • We need to build products for a more mainstream audience
    • Current products are too complex
    • The products today are about “buying bitcoin”
    • Too many restrictions converting to fiat
    • There’s an inherent lack of trust in current operators
  • Giving consumers the benefit of using digital money
    • vs. buying selling trading an asset
  • Consumer finance services
  • The rest of the talk was demo / commercial for Circle

Panel: Blue Sky Thinking

  • Panel members:
  • People tend to think of bitcoin as either a: currency, commodity, or a payment rail
  • Jeff: what interested me was the technology underneath – distributed consensus. We have smart contracts, multisig, etc. But when you stack these layers bitcoin becomes a catalyst.
    • The core of the excitement comes from the fact that we now look at every system and ask “how can we decentralize that”
    • Bitcoin is the example of how we’re going to decentralize most everything
  • Jacob: digital identity is also having a problem moving from paper documents into the digital realm. How can we use the blockchain and public ledger to solve identity problems beyond what we have with paper systems.
  • Audience A: In Sweden you can get a BankID – the bank issues you are card and you download a file which you can use on your computer to identify yourself
  • Audience B: Here in the Netherlands they also have a digital id DigiID which you use to sign your taxes
  • Jacob: DigiID is only for communication between the citizen and their government. Bitcoin-like technologies will help you identify yourself without sharing any information about yourself greater than is necessary for the exchange
  • Jeff: Bitcoin is more like layers of an onion. Once you have decentralized currency you can have a decentralized market. But once you have a decentralized market you need decentralized identity
  • Ron: we’re not just decent for sake of decent, but rather to solve problems of centralized organizations.
  • Audience: What are the next layers after identity?
  • Johann: decentralization started before bitcoin. The printing press removed the monopoly of the state to control what you think and read. A lot of progress in decentralized law. Today we’re talking about decentralized finance. Finally decentralized production (e.g. 3d printing). The focus on decentralization is important, but its a means to an end, not the goal.
    • Bitcoin is described as being decentralized, but in some sense its centralized: there’s only one code base and we don’t want a fork.
    • Key problems of centralization: abuse of authority and failure of systems
    • Decentralized can be anti-fragile
  • Jeff: Decentralized systems are often less efficient but often provide resilience
  • Ron: There’s a new wave of decentralized applications coming online that are like bitcoin. We’re going to see a lot more of these over the next few years.
  • Audience: don’t we see the centralization of everything? Particularly law, many companies are all writing contracts according to UK law. There are 190 currencies and you’re not trying to create another currency that is a “centralized” global currency. In order for companies to use bitcoin they’re going to need law.
  • Johann: The question to ask is it centralized or a standard? Metric system is a standard. Bitcoin is a standard. You can choose to use it or not. Standardization is an efficient thing. We’ll see this year the emergence of standardized payment platforms. What you want is a single platform, like the internet, [to make payments].
  • Ron: one way to think of it is in terms of monopoly. As long as bitcoin is the best currency there is, it will have users. The best one will win.
  • Jacob: They’re all competing on merit vs. people using it because they have to.
  • Jinyoung: Let’s talk about stocks and bonds
  • Ron: stocks and bonds have huge regulation around them so we’re phrasing these coins as a token because this is legally safe
  • Jeff: A bitcoin is just an entity for which you are the owner. Now its value, but it could be a Mastercoin transaction. This applies to any digital property. Stocks and bonds, car, house (smart property). We like to talk about issuing USD on the block chain. [laughter] You could have options on the block chain.
  • Ron: You laugh, but there are several companies creating USD coin. This is already happening.
  • Johann: We’ll see the emergence of universal transaction platforms. We have the internet for information, but we don’t have similar for financial transactions. Examples: obviously payments, but also financial instruments, basket currencies, futures and options, any financial instrument can be put in that platform. The fundamental component is the smart contract.
  • Audience: what about regulation?
  • Jacob: regulation always follows reality. Regulators can’t regulate unless it exists and people are using it
  • Ron: regulators haven’t figured out bitcoin yet, it will take years before they understand everything we’re talking about in this room
  • Jeff: the buzz phrase is “permission-less innovation”.
  • Johann: we can’t wait for the regulators. We need to be proactive and develop the laws we want ahead of time and say “this is what we propose”. We’re doing this in Switzerland.
  • Ron: if the world had one government, they could shut it down. Thankfully there is competition among regulatory environments.
  • Audience: I work for a bank. People will have to work with banks if they’re going to use bitcoin. We [banks] are regulated. If we [banks] are going to work with bitcoin we have to follow regulation. The regulators are saying they won’t regulate bitcoin. So we’re in a hard position. If we start working with bitcoin then they’ll say “why are you doing all this unregulated business? We’re going to take away your license”. So we can’t just wait for regulators or try to avoid regulation, we need to actively get regulation if we’re going work with bitcoin.
  • Other Audience: Regulators aren’t neutral anymore – they have a stake in the system so they will defend the system from bitcoin innovation. Think about the postal system, it was very regulated years ago. I wouldn’t look forward to regulators regulating this.
  • Jeff: I don’t think anyone is looking forward to regulation [laughter], but its a reality of living.
  • Jinyoung: what are some of the other applications of bitcoin?
  • Jeff: smart contacts. One of the tenants is that you’re replacing human rules with mathematical rules. If your contract can be defined in terms of math rather than humans, then it can be enforced digitally.
  • Ron: on mastercoin we weren’t satisfied with multisig – so we created safe funds, which is a reversible transaction within one week.
  • Jacob: you can program the rules about the meaning of a transaction
  • Ron: Imagine you asked Alan Turing “what are you going to do with a computer? You just have two tapes here.”
  • Audience: can you explain the difference between mastercoin and colored-coin and color-party.
  • Jeff: mastercoin is on bitcoin blockchain itself. A sidechain is linked to the main blockchain.
  • Johann: off-blockchain transactions. You need to pick the right tool for the right job. Blockchains are perfect for distributed consensus. This is great for voting, etc. But sometimes you need another tool. Disadvantages of blockchain: slow and expensive. It’s in their nature. In off-blockchain systems can be faster and cheaper. Secure property and decentralized consensus is good for a blockchain. High speed transactions / micro-transactions are better for off blockchain.
  • Audience: Where is the volume for crowd-funding right now?
  • Ron: they’re all so new – we have to build them. They’ll be 1000 by this time next year [and it takes time for it to work out]
  • Jeff: Bitcoin is like Google in the 1980s. It takes time.
  • Johann: decentralization is not a binary problem. It’s a continuum. Take the internet, we say it’s decentralized but many parts are centralized. DNS is centralized, central trunk lines, routers, etc.
  • Audience: How do you show the health of the blockchain
  • Jeff: payment channels are an example: You can fit 4B intermediate transactions that setting on 2 transactions on-blockchain. It’s a continuum of solutions.
  • Audience: Facebook is going to do a currency, what do you think about that?
  • Jeff: Large companies are always going to want to do Amazon coin, Facebook coin.
  • Johann: at the end of the day its about economic sense. Its up to us to build better economic systems.
  • Audience: Who is the arbiter of trust when we want to exchange?
  • Ron: you choose your own arbiter. There’s a market for trust.
  • Johann: There’s two levels here: technological level and a human level. You can eliminate trust by mathematics, but there is a human element. There’s a transition phase first – that’s where we need banks, insurance companies, etc.
  • Ron: People can’t even secure their own computers
  • Jeff: One of my personal interests are Africa. In Africa you don’t have 24/7 internet or credit cards. If you have a feature phone w/ SMS then you can send bitcoin transactions. I’m going to be sending satellites into space that will store the blockchain.
  • Johann: for the first time in history we have a global delivery system: the mobile phone. If you can get your application on a mobile phone in a usable way, then anyone can use it. The vision I have is that you have a guy in the middle of nowhere who wants to have a business. Imagine a few years from now, you make a few clicks, you have a legal entity that is able to operate globally. A click later you’ve got your payment built in, you’ve got your legal framework built in. To idea to legal entity to getting customers to be minutes.

State of Bitcoin by Gavin Andresen

  • We are all early adopters.
  • People think about bitcoin as this thing that has been around for a while, but we’re at the beginning.
  • But what are we adopting? A giant laser disc? Or is this the beginning of the internet?
  • I tend to think that we’re at the beginning of the internet: bitcoin as a protocol
  • I want to get this out of the way: Can we pretend that February never happened?
  • One thing that’s surprised me about bitcoin is how resiliant it is
  • It turns out we can survive the largest bitcoin exchange going broke. We all want it to succeed
  • Bitcoin Core:
    • Wladimir takes “Core Maintainer” hat
    • +Cory Fields == 3 paid by Foundation
    • Slow, steady, safe progress
    • GUI is likely to be spun out
    • Daemon is likely to lose wallet -> including accounts
  • Why did I give Wladmir core maintainer?
    • I had a lot of hats
    • I was a bitcointalk moderator
    • I ran the bitcoin press mailing list
    • I just start taking off these hats as the project gets bigger
    • I’m going to be spending a lot more time talking to academics and talking where bitcoin should be years down the line
    • and less about “should we accept this growing up”
  • Cory Fields is being paid to work on bitcoin full time – he’s doing great cross platform work.
    • He’s going to make the mac builds deterministic
  • Primary goal: network processes transactions reliably
  • Sitoshi gave us a bit of a hairball: consensus / PTP / wallet / GUI code all together
    • As we grow, we want to specialize
    • Most recent daemon can be compiled without a wallet, for instance
  • Boring is good
    • BIP process – is mostly drama free
    • Core release process is working well
      • We have an innovative way of building it. We have it building on many people’s virtual machines guaranteeing its the same version bit for bit
    • Download security
      • moved to bitcoin.org with https protection
    • P2P network
      • Pretty stable
      • 0117 days since last DoS bug
  • Communication
    • Can someone solve the “forums work great until they get popular” problem?
    • There’s not a good forum for having discussions about big changes to bitcoin
    • It’s hard to solve the internet troll problem.
    • It’s hard to discuss changes without people going on attack about speculation
  • Beyond core
    • Multisig wallets are finally appearing
    • Privacy++
      • Darkwallet – takes functionality that is in bitcoin and makes it more private
    • Hardware wallets
      • Will your phone be your wallet? We’ll have to see how it plays out.
    • Mature other implementations
      • One True implementation is not ideal – because if that person is evil then bad things happen and middle earth is destroyed
      • Two is probably worse than one because that leads to consensus failure and bitcoin is all about consensus
      • Ideally we want 3 or more
      • How do we get from where we are today to many implementations?
  • Mining
    • I don’t really care about mining.
    • I don’t really care who gets those bitcoins. If one miner is more efficient then they get more bitcoins, great.
    • I do care about how mining affects users of the network
    • Getting to 1MB
      • The avg block size is 250kb
      • We haven’t seen block sizes rise, which is a mystery. Why? Probably because miners are concerned about orphan blocks
    • Once we get to 1mb we must optimize for larger blocks or transactions fees will continue to rise – and I don’t want to see that
    • How is tricky – how far should we increase it, should we have rules to increase it in the future?
      • Multiple solutions exist
      • If we don’t increase the block size, then maybe we decrease the time per block
    • Simple is better than complex, but maybe multiple solutions are possible.
    • ASICs today are like an old giant cell phone that only rich people can afford.
    • Tomorrow they’ll be a lot cheaper.
    • “Who is mining” is changing in waves
    • Today it’s centralizing to places where power is cheap
    • Tomorrow it could be a usb stick
  • What do you think about smart contract alt coins?
    • what about colored coins master coin etherium or what
    • Securing code is hard
    • You don’t know if your security is working until its securing something valuable
    • Sitoshi released code in 2009 and it was horribly insecure
    • So you have this problem with any new project until it has some value.
    • So you don’t want to promise things and have people invest people money in it until you know
    • But some systems will bootstrap past that
  • Identity / reputation is hard
    • and crypto might not help
    • I trust bitcoin because I can read the code and understand it
    • Do I have to read the code to understand the contract?
    • Do I trust the person who wrote the smart contract? If so, then why not trust the person in the first place.
    • We’ve seen in dark markets people take away the trust they’ve built up
    • Becoming mainstream is really hard, even if you have spiffy technology
  • Where will bitcoin be in 2015?
    • Bigger and better looking – nicer wallets, UIs polished, multisig:w
    • More secure
    • More diverse
    • More mainstream
    • More regulated
      • The infrastructure build on top of it
    • Less volatile
  • We’re going to split out the wallet from btc core so that will allow developers to implement other features like CoinJoin into the wallet once it’s split out.
  • Regulation doesn’t really matter at a high level because regulation changes and so does the software
  • There’s a danger in doing too many things at once. You increase risk that there is a bug in one that causes the whole network to fall down.

Removing impediments to Bitcon’s Success by Jim Harper

http://i.imgur.com/zrpVSaM.png

http://i.imgur.com/L9xmPT7.png

  • Jim performed a risk study for the bitcoin foundation. It’s fantastic and you should check it out: https://bitcoinfoundation.org/blog/wp-content/uploads/2014/04/Bitcoin-Risk-Management-Study-Spring-2014.pdf
  • For about 10 years I’ve been with the Kato Institute
  • One of the things I’ve done quite a bit of is criticising US federal government agencies for not being concerned about the costs of the systems they put in place.
  • The XRay scanners don’t pass the risk-benefit test. It doesn’t pass a cost/benefit analysis
  • Foreign visitors are required to have their fingerprints scanned and stored for 75 years in a database
  • Agencies aren’t considering right from wrong or cost/benefits
  • Bitcoin is an opportunity to think carefully
  • Think carefully about what we’re going to build and how we’re going to build it
  • Let’s choose a path for the foundation that’s most likely to produce success
  • What is success for the foundation?
  • What is the asset you’re trying to protect? What is it you’re trying to do?
  • What makes bitcoin bitcoin?
    • Decentralization
  • Four dimensions along which bitcoin is decentralized
    • Decent. software development
    • Decent. of mining
    • Decent. of nodes (connecting to the network)
    • Decent. of payments – anyone can use the network to make payments and transfer value
  • Of course people can build centralize business to provide value and services
    • But, the network is essentially decentralized
  • Adoption is key – Bitcoin should be widely adopted
    • Advanced services
    • Hackers aren’t uncomfortable with hexcodes and qr codes
    • But average consumers are uncomfortable with it
  • Business are an interface between the protocols and the consumers
  • Consumer acceptance is key
    • do they think about security, opportunity
    • or drugs, crime, and risk to their children
  • Outcome goals:
    • #1 held was global financial inclusion
      • it’s sentimental but motivating to every member of the foundation
    • #2 human liberty and dignity
      • Its undignified to not be able to control or keep your own assets
    • #3 improved privacy
      • today your privacy is decided by two entities you can’t control: government and businesses
    • #4 stable money supply
      • there is a continuous loss of value in major currencies such as euro and dollar due to inflation
  • We need to do a threat assessment in any risk analysis
    • We also need to evaluate threats and hazards
    • To know what threat to respond to, evaluate likelihood and consequence
    • This floats to the top the threats that are most important
    • If something us unlikely or has small consequences, then you just accept the risk
    • Prevention changes the circumstances so that the threat is impossible
      • Prevention, when you can do it, is almost always cost-effective
    • Interdiction facing head on the party creating the threat
    • Mitigation – dealing with the consequences
  • [Jim talked about the risk analysis of his document - it's fantastic you should take a look]
  • A big risk is that banks close the account of anyone who uses bitcoin
  • Regulation causes financial services providers to be risk adverse
    • At best, they want advance permission to work with bitcoin providers
  • Bitcoin having a good reputation is very important
    • it will help banks come into the btc ecosystem
    • it will reduce the likelihood that regulators attack banks for doing this
  • The Bitcoin Foundation should educate users about the privacy consequences of payments
  • The idea is to repeat this study in a year and see how the landscape changes

Panel: Bitcoin – The Wish List

  • Panel members:
  • Peter: Gavin, what would you change?
  • Gavin: Let me be clear, I don’t want to be king of bitcoin. OP_CHECK_MULTISIG pops an extra argument off the stack and there’s a bunch of little things like that I would like to fix.
  • Oleg: The consensus mechanism works very well. We’ve spent some energy fixing hard forking bugs, but really adding value to the network. For instance, adding contracts and high-level operations on the network will add value.
  • Jeff: A lot of the development today is not going to be in bitcoin but on bitcoin. We have the stable core layer. Bitcoin itself, if I was king for a day, I would mention coinbase commitments. You look at all the unspent bitcoins and you generate a hash value for that and you submit that to the coinbase. It’s valuable because you don’t necessarily have to download the whole blockchain to validate trust. Blockchain pruning is the most interesting change I have an idea for bitcoin
  • Thomas: I’m still amazed that bitcoin works [laughter]. One thing that doesn’t work yet is to have an efficient and reasonable fee market. There’s no fee market right now. You need to have software that makes the decision about fees. The minimum fees for propigation in the network has been slashed recently and we’ve been seeing a decrease in money that the miners make. So the reward mostly comes from new coins. The transaction fees have to take over. If we keep slashing the propigation fee the miners won’t have incentive.
  • Gavin: well we decreased the fee, but if you send a transaction with that small fee it just won’t be mined. We’re adding an RPC method to get an expected minimum fee value. It will tell you how much to get it confirmed in the next block on average. Or in the next 6 blocks. Miners are choosing to make their blocks 256kb. We reduced the defaults but we haven’t seen the block size increase. There’s a lot we have to do to change incentives to include fees in the blocks. But we have to get the transactions to the miners, thats why we slashed the relay fee.
  • Audience: miners are choosing to make blocks smaller, how much slower is 256k block vs. 1mb block.
  • Gavin: there was a paper about the cost per byte of adding data per block. Matt Peralo has a mining backbone that the pools are connected to, so maybe that changes the dynamics. I tend to be a wisdom of crowds market kind of guy. Usually the knowledge is out there for groups to make near optimal decisions. Even if people don’t really know the reason, they might be just selecting it on intuition.
  • Jeff: many of the miners aren’t super familiar with bitcoin. Miners also blindly upgrade to bitcoind with whatever new release is out. They don’t really have programmers. They might be profitable but they’re not investing in developers. The blocksize itself is interesting. Some people say if you remove the limits, then it will automatically converge on the optimal balance between the speed of light and the rate of orphan blocks.
  • Peter: I like the blocksize debate, but lets move on to something knew. [He suggests sidechains.] Mastercoin got people thinking about it. Are you into this idea?
  • Jeff: it’s all experimental at this point. One way and two way pegs, if you destroy a bitcoin and move it to the other chain, thats a one way peg. If you move value out and then back then that’s a two way peg. Etherium, altcoins, etc. all reduce the pressure for everything to be inside the primary blockchain itself.
  • Oleg: there is one blockchain in the universe, one hashrate of the universe. I don’t worry about this. I’m not worried about writing a chat application on the blockchain. The main problem with the alternative chains is consensus. If we go to the beginning about the Bz Generals problem, you figure out if everyone is on the same page if you have the biggest amount of energy amount dedicated to this. It only works when you have everyone on the planet invested towards one effect. This is the concern for any altcoin because it has the vulnerability that a certain amount of money exists that can compromise it. It bitcoin succeeds it is just a bubble that never pops. Security isn’t about the algorithm but about the amount of money that can be spent to disrupt the network.
  • Audience: I’m concerned about the incentives of miners once the reward drops to zero. Will the network be secured when this happens? Should we change to proof of stake?
  • Peter: Ed Falton: double spending possible. Dogecoin as example?
  • Gavin: we think of a strict separation between people who want to mine and people who want their transactions secured. If people want their transactions to be secure and they need to invest in mining, they’ll do it. If coinbase or bitpay want more security in the transactions then they will invest in mining. There isn’t a chinese wall between miners and people who want secure transactions.
  • Oleg: People who want to own bitcoins are basically hiring miners. The economics of block size and block fees are theoretically correct, but people don’t have much interest in doing everyday transactions in bitcoin (most is speculation). Right now the incentive to mine is there. When transaction fees start to matter then miners will recognize that. E.g. future distributed clearinghouse mesh networks. So then the miners will have faster communication, shared memory pools or whatever.
  • Audience: 120 BTC/day is enough to jam the network, what do you think about that?
  • Jeff: Well that is a linear estimation, not taking into account that the community could respond. Right now the transaction fees are so small that it’s like tipping vs. the coinbase transactions. So we can’t read too much into the existing fee behavior because there isn’t an active bidding market yet. If people see that they’re being outbid they’ll take appropriate action. In general, right now we don’t have a functioning fee market.
  • Gavin: you can spend a bunch of money and jam the network, but so what? Maybe it would be a successful attack once and it would be very expensive. I have a pull request to estimate the fees. Eventually by default you’ll just pay what the going rate is.
  • Peter: I’m dubious that no mining operators look at what the fee is.
  • Jeff: That would only make the network stronger. You would have spent a lot of money and the community would respond.
  • Peter: Payment protocol came out in 0.9. There are a lot of interesting, innovative proposals. The payment protocol was a lot of hard work to get it right, but there’s almost no user interface on top of that. What do we need more of in this area?
  • Thomas: we have an implementation of the payment protocol in electrum, but we’ve been working in a lot of directions so it just takes time. Payment protocol has an SSL certificate, it would be nice to decentralize that.
  • Jeff: Usability – only now are we seeing multisig wallets. We’re just now seeing apps that make it easy enough for my mom. The payment protocol assists in usability. Right now its all about bringing it out to the average user.
  • Audience: MULTISIG data bloats the transaction size. OP_RETURN too. Is there a plan to charge more for transactions that add data to OP_RETURN?
  • Jeff: The plan is “listen to the users”. It’s really all about the future use. I’m a big “no roadmap” kind of person. Let’s not dictate decisions from up high.
  • Gavin: There’s some thought about making raw multisig in a P2SH, but it would break mastercoin and counterparty because they want to see it right away. We can do a better job like white papers on how not to store data in the blockchain.
  • Audience: Director of multisig. We’re using multisig but we want to use OP_RETURN. Our problem with multisig is that some people are saying its not standard.
  • Gavin: transaction fees should drive your thinking. Space in blocks is getting more precious.
  • Audience: Gavin you said that the community should do what they can to improve bitcoin themselves and not wait for the foundation to make all of the changes. Despite this, we don’t see a large increase in contributors to the open-source project. What can we do to increase the contributor base?
  • Gavin: the number of people submitting patches seems to increase after every price bubble. We’re still learning to deal with that bottleneck. I don’t know how that compares with Linux.
  • Jeff: The kernel community is different in that they have 5000 developers. They have a mentorship program. Bitcoin needs a bitcoin newbies project for developers. Because you have to understand all of the parts to get the big picture to contribute in a meaningful way. Don’t look at us to solve your own problems.
  • Gavin: To Thomas: do you see Electrum getting enough contributors?
  • Thomas: not enough.
  • Peter: I’d love for the foundation to have a fellows program to get people into developing bitcoin. If you’re interested in that, let us know.
  • Jeff: I’m into mentoring so anything I could do to bring in new developers I’ll do that.
  • Oleg: Bitcoin is boring to read carefully, so every person that succeeds in reading it carefully or creating another implementation they read the code and translate it into another language and then they make other people more easily able to understand how it works.
  • Audience: couldn’t we break the codebase into smaller services?
  • Jeff: its not a huge codebase but a huge knowledge base.
  • Oleg: I’ve never modified core bitcoin, the C++ code is really scary to edit.
  • Gavin: it’s scary for us too [laughter]
  • Oleg: so many people start from scratch primarily to have a clean slate and know how it works. I tried to keep the API nice in CoreBitcoin
  • Peter: which is going to be first, bitcoin over satellite or a formal paper protocol spec.
  • Audience: could you change the protocol to give the developers a portion of the transaction fees?
  • Peter: why don’t you try submitting that pull request but you’d better move to a place where no one knows your address. We have jobs for someone who wants to get paid for bitcoin development. The community would never go for that transaction fees.
  • Gavin: People come to me and say “Gavin I want to give you money, but I don’t like the foundation.” For whatever reason, but I don’t want to be the king of bitcoin. If the money went to the foundation someone still has to decide how to spend it. The community would never go for that.
  • Peter: there’s good reasons for the programmers who are paid for implementing bitcoin should work for different organizations
  • Audience: couldn’t you have another blockchain just for merkle roots? It could be very simple.
  • Gavin: You need transaction fees to prevent spam on the blockchain.
  • Peter: that’s why you need sidechain pegging.
  • Audience: what do you think about usability
  • Peter: there should be more single use wallets. There should be an accounting interface over bitcoind.
  • Oleg: your grandmother can barely secure here own computer. Idea: creating a social multisig where you have to sign off on your grandmothers transactions.

Panel: Technical Solutions for Going Mainstream

  • Panel Members:
  • Mike: what does it main for bitcoin to be mainstream. How can we ask ‘we finally made it’
  • Fred: broad consumer adoption – some majority of people are using it for everyday transactions. Could I reasonably send this to my mom and she gets some utility of it. People who are not necessarily technologically advanced but they’re getting utility out of it. E.g. have you used this or has one of your friends.
  • Marc: if my neighbor who is 60+ uses bitcoin. If I go anywhere that accepts credit cards. If it was being used as broadly as credit cards.
  • Eric: we want every merchant in the world to accept bitcoin and we won’t stop.
  • Mike: if you actually get every merchant in the world I’m going to start a new company that won’t accept it
  • Gavin: mainstream adoption would be for everyone using a distributed blockchain for the everyday business. Not necessarily just for payments, but to “decentralize everything”
  • Will: We’re not going for mainstream adoption but ubiquity. You don’t look at the internet and say “when is everyone going to use Yahoo as their homepage”
  • Mike: Bitcoin is clearly not mainstream today, but what is the growth rate of some of your companies.
  • Will: We launched our multisig in August. With our enterprise product, hedge funds, family office investors, we’re not really teaching the market how to use bitcoin. I’ve been amazing at how deep the knowledge for bitcoin as a capital asset actually is.
  • Eric: we’re seeing about 1,000 new merchants per week. We’re seeing mostly inbound. Our transactions track wit the price.
  • Fred: we’re seeing the same – much inbound merchants. On coinbase we have 1.2M users. There’s definitely influx corresponding to the exchange rate.
  • Mike: it feels like merchants are beating down our doors, but buyers aren’t really spending. For merchants it’s a no brainer, but how can we make it compelling to buy something with bitcoin.
  • Fred: on the merchant side, its a no brainer. But on the consumer side you face the volatility risk.. It might make sense in micro payments, e.g. things that weren’t possible before. E.g. cases where you pay less than a dollar. It’s great to get big retailers, but we need to give incentives to spend. There are a few gaming companies, Big Fish Games. Step function of read partial article vs. pay $12/mo in reading.
  • Mike: if you could make one change to the core bitcoin technology what would it be?
  • Fred: the change address causes a lot of problems.
  • Mike: and thats coming, it’s part of BIP 70
  • Mac: I’d change a better address form
  • Eric: the consumer case is pretty clear. We’ve be spoiled with a fairly stable currency. Our team in Argentina wants to get paid in bitcoin because bitcoin is more stable than their local currency. Top change: refund addresses need wider adoption. Dispute mediation is critical, but it needs to be another service.
  • Will: its cumbersome for consumers, so how do you take the credit card fee and fraud savings and pass them on to consumers? E.g. gyft. Some systems are whale-driven economies and you just need to convince the whales to use bitcoin. BIP 16, BIP 32, BIP 70 – lets pick these standards and move forward.
  • Mike: how much do you think unusual ways of paying will contribute to bitcoin adoption.
  • Fred: i think credit cards will go away. Although, credit card experience is very easy, easier than QR code scanning. Though that’s US focused, here we have to put in a pin. Microtransactions for gas or wifi in real time. The idea is payments can become less of an active activity and more of a passive activity. E.g. sending email or reading an article.
  • Marc: paying your rent with bitcoin, but the problem is the exchange rate is changing every month
  • Eric: what if you car knew how to pay for you. What is an interface? What’s going to drive bitcoin forward is when its faster and simpler than using cash. Almost entirely invisible.
  • Will: auction-based payment modals between machines is where i see the future going
  • Mike: Many of the places that accept bitcoin are small merchants. Ultra low-tech, they don’t take any electronic point of sale they only have a paper point of sale.
  • Eric: [some comments that half repeat what everyone else is saying and half don't really make sense]
  • Fred: you have to have an accurate fee structure. E.g. $5 minimums on credit cards is annoying for everyone. Merchant acquirers are boots on the ground that are trying to sell the processing. But with bitcoin the technology is so low you can just print a piece of paper.
  • Will: I bought a piece of coffee with bitcoin at coupa cafe and it took 45 minutes and that cup of coffee probably cost $300 by now.
  • Audience: how many ever and how many active bitcoin users?
  • Consensus: about 5mm people ever, probably 500k active.
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