Author: poiresel

Proof of Stake

Proof of Stake finally! It’s a lecture that at least I have some idea about. Ethereum is one public network that has a firm timeline on moving to proof-of-stake. Thus, I’m interested in this lecture, to one understand how one described proof of stake in 2015 and how has the mainstream explainer change since then.

As an update since watching this lecture, it was a fairly light lecture. There have been numerous updates and more thoughts about this subject since this was recorded.

My brain-dump prior to watching the lecture

Proof of Stake is a mechanism for choosing how transaction blocks get appended to the blockchain. Because it doesn’t require people solving puzzles, but instead people essential “staking” some of amount of a base currency, less energy is consumed. Thus, environmentalists would be pro virtual mining over proof of work. With “staking” it is also what drives participants to act non-maliciously since if they break the rules, the amount they “staked” will be removed from them. Proof of Work and Proof of Stake are not the only consensus mechanisms. In addition, several projects have used DPOS which is delegated proof of stake.

Questions answered in this post

  • What is virtual mining?
  • How does it differ from proof of work, ie what other lectures have focused on?
  • What are some benefits?
  • Why does proof of stake decrease the likelihood of 51% attack?
  • Other virtual mining

Virtual Mining: just remove the special hardware + power

The explanation started with taking the Proof of Work mining in a nice flow chart and then removing the step of buying hardware. Instead of purchasing hardware, they use a similar amount to just go into some random selector.

Proof of Work ( Hardware Mining)

  1. Miner spends money on special mining equipment and power
  2. Miner mines by trying to find puzzles and is given block rewards every so often
  3. Repeat

Proof of Stake (Virtual Mining)

  1. Miners “mine” by sending money to a special address in the system
  2. Winners are chosen by a lottery and then the miner gets a block rewards
  3. Repeat

Benefits

  • Less costs both for less harm to environment, and savings distributed to all coin holders
  • Stakeholder incentives since those sending money want the value of the asset to increase
  • No ASIC/ hardware advantage
  • 51% attacks is harder

51% attack prevention

There is less money inside Bitcoin than in the real world. Theoretically, a wealthy attacker could bring the network down if they really wanted to. They currently could use their money to purchase hardware or increase power usage to wage an attack. With proof of stake, the source of miners is kept internal to the system. One is staking that base currency to append blocks. Someone would need to purchase enough Bitcoin to become a majority stakeholder. Because they are doing this purchasing they are signaling demand and thus the price would rise making it even more expensive for them to wage the attack. Also said attack, would also be locking their own wealth inside the Bitcoin network itself. That kinda makes sense, but I have to wonder, if someone really wanted to bring Bitcoin down, and burn their wealth in the process, could they?

Virtual Mining Variations

TypeDescription
Proof of Stake“Stake” of a coin grows over time as the coin is unused
Proof of BurnMining with a coin destroys it
Proof of Depositcan reclaim a coin after some time
Proof of ActivityAny coin might be winner (if online)

Wrap-up

This was a quick lecture. Happy to be finally done with lecture 8 though!

Proof of Useful Work

This lecture describes puzzles that may be socially beneficial. Socially beneficial is a pretty loose definition. Questions answered in this Post:

  • Can the wasted work from Bitcoin be recycled?
  • Protein folding and Alien detection
  • What is Primecoin?
  • Recovering or repurposing wasted hardware: Permacoin
  • Storage Based Puzzle

Recycling Mining Energy

Per the lecture, Bitcoin consumed 150 MW – 900 MW power approximately in mid-2014. A paper from June, 2019 mentioned that the annual carbon emissions is 22.0 to 22.9 MtCO2 in Nov 2018. They also mentioned the annual electricity consumption of Bitcoin to be 45.8 TWh ( terawatt-hour ). The benefits are obvious in that it may reduce energy costs and reduce the negative environment impact. Prof. Miller mentions some natural choices regarding protein folding and search for aliens. The first one is finding a low energy configuration. The second is find an anomalous region of a signal. They have similar characteristics to the current Bitcoin puzzle in that you’re trying to solve a problem that has a large problem space. There is a website called Fold.it that contains crowd-sourced gamified tasks that allow people to participate in scientific research. Proteins are composed of long chains of amino acids and they have a specific stable configuration. The specific shape means that some amino acids are near the center while others are far apart and this shape is the lower energy configuration they can keep. The hypothesis for why the game exists is that humans’ pattern-recognition and puzzle-solving abilities are more efficient than existing computer programs at pattern-folding tasks. Not sure if this is still an open question or if things like deep mind and deep learning change or disprove the hypothesis. The second option is searching for anomalies in space which can help detect extra terrestial life. Both the protein and detecting proteins are classified as crowdsource distributed computing problems. There is an article from Valentine’s day 2018 on how cryptocurrency mining is actually hampering the serach for ET life. SETI (Search for Extraterrestial Intelligence) uses GPU chips for their research. Radio-astronomers use them because they are processing large amounts of data and looking at many frequency channels to find the anomalous signal types. This issue is not unique to them given that video gamers have also mentioned they’ve now had a higher cost of GPUs. From my basic understanding of mining, when there was a market downterm, some miners turned off their mining rigs because it was less profitable. As the price of cryptocurrencies go up, that makes the mining more valuable. Prof. Miller brings up the notion that there is a centralized administrator for these problem sets and define the exploration space for participants. Bitcoin doesn’t have this and thus instances of the problem need to be auto-generated. There was not a clear way to generate these problem systematically to miners and thus while the problems are good, it’s not feasible to do it in a decentralized fashion. So what else is there?

Primecoin

Prof. Miller brings up Primecoin [[http://primecoin.io/]] which addresses these prevoius problems of needing a centralized resource to choose the problems. Primecoin aptly named involves finding large prime numbers. It’s consensus work is having nodes search for chains of prime numbers, specifically prime chains composed of Cunningham chains and bi-twin chains. A Cunningham chain is a chain of numbers where each number has the form 2^i*a + 1. Each is a large (probable) prime such that p is divisible by H (prev || mrkl_root || nonce). Probable prime classificaiton allows for efficient prime testing algorithms to be run as determining primality for very large numbers can be expensive. To date, most of the largest Cunningham chains have come from the Primecoin miners. He briefly mentions that it could be useful but then dismisses saying that the chains found are overkill. Thus, I’m unaware what it’s usecase is beyond helping science and looking at the distribution of primes. The Bitcoinwiki mentions that there may be a connection between the Riemann zeta function and prime distribution and relevant to other modern sciences. Alas, that is beyond what I was able to understand. The paper [http://primecoin.io/bin/primecoin-paper.pdf] similar to Bitcoin was published by a pseudonym Sunny King. It’s short in that it’s only 6 pages.

Permacoin: using storage-based puzzle

He mentions that upwards of 100 million dollars are spent on customized hardware. The hardware is so specialized that the investment is useless for other application. What if that wasn’t the case? Permacoin is mining with storage. You get massively distributed, replicated storage system. Then we get an example. There is a large file F that we’re storing and this F is chosen globally at the beginning by a trusted deal and then each user stores a random subset of the file. Thus this is where he introduces a new type of puzzle, storage-based puzzle.

What are the steps for the puzzle?

A Merkle tree is used where each leaf is a segment of the file F. Then miners will generate a keypair wich determines a random subset of file segments. Then for each mining attempt, a miner wil select a random nonce and then generate a hash h1 which is H(prev || mrkl_root|| PK || nonce). h1 select K segments from the subset. Then a second hash h2 is generated which is H(prev || mrkl_root || PK || nonce || F). Then they get the block if h2 is less than a certain target value. Thus the participants need to keep storing parts of the file. Permacoin adds a benefit for UTXO storage.

Wrap Up

Useful proof of work could be great. Its benefit must be pure public good. Other puzzles have been explored but none have truly captured mainstream adoption so far.

really useful

Cryptocurrency Puzzle Requirements

This lecture covers a critical component of certain digital currencies which is mining puzzles. This section covers what are the requirements of these puzzles to be good puzzles. Theoretically you could replace the word “puzzle” for any other word and it would have the same meaning. The use of the word puzzle is not within Satoshi Nakamoto’s seminal paper. He merely writes, “The proof-of-work involves scanning for a value that when hashed, such as with SHA-256, the hash begins with a number of zero bits. The average work required is exponential in the number of zero bits required and can be verified by executing a single hash”.

Questions answered in this Post:

      • What is a puzzle in this case?
      • Why are the important?
      • What are the requirements?
      • What is hash power?

    Why are they important?

    Andrew Miller states that “mining puzzles determine the incentive system in Bitcoin”. Thus whatever puzzle is chosen needs to ensure miner participation. In addition, if shortcuts are found, miners will ultimately choose the most efficient path and thus remove arbitrage situations that may occur. If puzzles are one of the few mechanisms that exist to maintain the protocol, it needs to be at the core and encapsulate the work. Miners are not incentivized to “do good” just to ensure the health of the system if they will not be compensated.

    What are the requirements?

    The first two requirements were discussed in earlier lectures and are straightforward. The puzzle needs to be easy to verify and have an adjustable difficulty setup. Bitcoin’s proof of work puzzle is easy to verify since once a valid value is found, all miners can just use that value with the hashing function and determine whether is it a small enough value (has the sufficient number of zero bits). The puzzles get solved at a known reasonable rate ensuring long term participation. Ten minutes is the current rate for Bitcoin. The puzzle is also adjustable because the value looked up is in a range which can be made smaller or larger. As long as the difficulty is set and shared with all miners, this now gives you the adjustable difficulty setup.

    Another new requirements is that the probability of winning is based on hash power. Simply stated, big fish with more hardware have a higher chance of winning. Small players still have a probability to win but it may be smaller. The lecturer makes a distinction using a sequential proof of work which is marked as a bad puzzle. If the puzzle is more like who can complete N steps faster wins, then likely you’ll have a single party who has the fastest computation and always wins. Instead a good puzzle should have a weighted sample and they also bring up the term “progress-free”. Bitcoin is different in that the small and big miners are all computing and while big miners, those with more hardware, have a higher chance of winning, it’s not 100%.

  • I like to think of it more like a dice game where the larger miner has control of faces 1-5 and only 6 is held by the small miner. The small miner still has ~17% chance ie some non-zero chance of winning at every block. In addition, every roll of the die the percentage theoretically stays the same in a perfect world. The die is merely a metaphor but hopefully that point makes sense.

    What is hash power?

    Throughout the lecture, Miller used the term hash power. At some point, he substituted hash power for hardware. Now, I was still unclear on the term so I decided to take a quick trip through Google. I’ve found hash power can be used interchangeably with hash rate. Hash rate is some measurement per second that a miner does work. Examples hash rates are of the order of 16 TH/s (one trillion) hashes per second for mining rigs. This individual hash rate can be compared to the overall network which can be seen in block explorers. The probability creates gives the miner what chance they have of finding the next block as well as some expected value. Here’s a link to one chart at blockchain.com.

    Wrap up

    This lecture was quick. Really excited to find out more alternative mining puzzles that he alluded to.

Yo someone said something about NY BitLicense Proposal… what dat?

Please remember this lecture was uploaded March 2015 however it was filmed August 2014. The lecturer does mention an update for Feb 2015 but again that is still 3 years old. There is an article from Nov 2013 talking about the NYDFS (New York Department of Financial Services) subpoenaing Bitcoin companies in the summer of 2013. The point I’d like to make is, this information is old and so I’ll be updating at the bottom of this what’s the updated the news as of Summer 2018 via news articles. I’m not going to use Twitter or Reddit though I admit that has the most up to date information sometimes.

Questions answered in this Post:

  • General Information
  • What will the license do?
  • What happened from 2014 – 2017?
  • What is the current state June 2018?

NY BitLicense Proposal by NYDFS

As the lecturer says, this is a specific effort by a specific state to introduce specific regulation of Bitcoin. Filling in the blanks like a Madlib. This is the Department of Financial Services (DFS) effort by NY state to introduce the NY BitLicense Proposal regulation of Bitcoin/ virtual currencies. The regulation was presented in July 2014, and I’ve provided a link to the DFS website. It is a slightly different link then the lecturer since this was the one I could find. This proposal was a bunch of rules, codes, and regulations for virtual currencies. In an online Forbes article, one goal states for this proposal was to determine regulatory guardrails to protect consumers and national security. However, other sources seem more focused on whether virtual currency companies registered in NY are money transmitters and thus need to keep consumer to be registered so they can pay appropriate taxes. The main proposal was that to be a virtual currency business you need to get this license. There were five main sections highlight that defined a virtual currency business activity that involved New York or a New York resident.

  • receiving Virtual Currency for transmission or transmitting the same
  • securing, storing, holding, or maintaining custody or control of Virtual Currency on behalf of others
  • buying and selling Virtual Currency as a customer business
  • performing retail conversion services, like converting or exchanging of fiat currency or other value into virtual currency, the conversion or exchange of Virtual Currency into Fiat or other value, or the conversion or exchange of one form of virtual currency into another form of Virtual Currency
  • controlling, administering, or issuing a Virtual Currency

What the license does?

Essentially, virtual currency businesses have to keep and maintain the same records as other financial service companies. Businesses that do the above defined activity need to get the license. Getting a license means that these businesses have to share information on ownership, finances and insurance, and their business plan. These businesses also have to pay an application fee. With a license, the companies have to keep provided periodic financial statements. They would need to maintain a financial reserve set by the NYDFS. In addition, there would be rules on custody of consumer assets, anti-money laundering, cyber-security, and disaster recovery, and record keeping. In addition, there would need to be a compliance team with written policies as well as documentation disclosing all risk to consumers. In short, businesses would need to abide by many of the same standards traditional financial institutions like banks/hedge funds/broker dealers have to maintain for their clients today.

The lecturer ends with a final thought.

If companies who get the license are able to solicit more business and trust from consumers because of being regulated, that could be the metric of the success of the Bitlicense…

I agree with those who say companies who make the list of likely the most well funded because they have greater access to the most money, meaning to me they have played the nicest with institutional clients/have large banks backing them.

Companies with the Bit License Aug 2018 (NYDFS website for dates + press releases)

  1. Circle (Sept 2015)
  2. Ripple (June 2016)
  3. Coinbase (Jan 2017)
  4. BitFlyer (Nov 2017)
  5. Genesis Global Trading (May 2018)
  6. Xapo (June 2018)
  7. Square (June 2018)
  8. Bitpay (July 2018)

* Gemini and Paxos have limited charter with DFS that allow them to operate

 Updates in July 2018

As you can see the last 4 licenses were all granted fairly close to each other in 2018. During Consensus conference, Fortune quoted Erik Voorhees for saying “Let’s call the BitLicense what it is – an absolute failure.” The DFS other than granting license in this summer to Bitpay and Square has not suggested anything regarding modifying the current license. DFS did authorize Paxos to expand its services to other currencies ie Ether, Litecoin, Steller Lumens and Bitcoin Cash though. There was quite a bit of hype about an assemblyman Ron Kim though. Mr. Ron Kim proposed a Bill (Assembly Bill A9899A) that would amend the current license by prohibint fees and repealing many of the provisions. I’ve linked the status of the bill and as of Aug 2018, it is still Active. In regarding to other states, Coin Center provides a great tool.  It’s interesting the the site doesn’t talk too much about specific currencies like Bitcoin. Instead, it focuses on states that have ruling regarding money transmitters. Some of these rules apply only to fiat while others now include digital currency. They provide information on a state-by-state level on this tracker. I appreciate all the resources. I do apologize this post has been very United States centric so I’ll give a quick blurb about what I read about India this afternoon.

India

I read an article in quartz India. My understanding was that this summer people have been saying that crypto has been banned in India in that citizens were not supposed to buy or sell it. It looks like the state governments as well as finance ministry are taking a more intellectual approach. They are separating how they treat blockchain, just the technology, from cryptocurrencies. While it is interesting that the governments have been trying to incorporate blockchain into their current tech. Cryptocurrencies or specifically cryptocurrency business, ones that deal with currency transmission seem to have been shut down. The Reserve Bank of India ordered the banks to close all cryptocurrency-related accounts in April 2018. In September 2018, there will be a case with the Indian Supreme Court that may settle the fate for digital currency exchanges.

There are many other countries like South Korea, Japan, Malta, UAE, Germany, Switzerland, China, and etc that have expressed opinions about digital currencies. I hope that some point I can expand and share their views as well as compare and contrast.

 

 

Regulation is necessary???

The topic of where can regulation help. The previous article provided precedence for what kinds of pieces of information needed to be monitored and why. I like how the lecturer was like, “Yeah, we all know the reasons why this Bitcoin shouldn’t be regulated but let me know you why maybe it should be”. I

Questions answered in this Post:

  • What are some justifications for having regulation?
  • How can it help lemons market?
  • How can it help price fixing

When markets fail and produce bad outcomes, regulation can address the failure…

Lemons Market

This argument first of all looks at cryptocurrencies as markets. He brings up a few market failure examples. The first example is the lemons market. Support in the market for widgets, some widgets can be low quality and some can be high quality. High quality widgets cost more to make and consumers (should) like them much better. An efficient market would deliver mostly high quality. However, there are ways this can fail. If consumers can’t tell the high from the low, then consumers won’t know to pay extra and sellers won’t sell the high quality items. Thus the better widget won’t prevail. This leads to a scenario where consumers are unhappy and they’re only buying low quality widgets since they don’t know any better.

Now regulation can be added to mitigate this problem. There are three mechanisms given, required disclosures, quality standards, and required warranties. With regulations, some trusted party stamping what is high versus low, this can raise consumer confidence on what they are purchasing. In many cases, there is a secondary party who enforces good behavior and can put in place penalties for not keeping the standard. Thus, now when the seller sells a guaranteed high quality and the consumer is happy, this can allow the seller to make a premium for selling the superior product.

The lecturer also presents issues with just market-based approaches. Reputation which may not require regulations may take time to build up. Thus using just a reputation based system may not work. Warranties have similar problems as well. What is interesting is that many current tokens use things like token based reputation systems to allow for decentralization. The lecturer mentioned that just market based actions may not be sufficient so I’d be curious how these projects would respond to the arguments mentioned.

Price Fixing

The next part looks like price fixing. If all the sellers agree to raise prices, then consumers are at a disadvantage since they are forced to pay more. A similar issue is when different competitors choose not to compete and thus the consumers are forced to take whatever a seller’s price may be. Regulation with antitrust or competition helps to protect consumers.

Anti-money laundering + Bitcoin

Short but sweet. I’m going to just summarize what was discussed since it’s a fairly condensed topic that doesn’t focus too much on Bitcoin technology.

Money Laundering is the process by which individuals try to bring money gained from illicit means into the financial markets. Thus anti-money laundering job is to find and stop iti. It primarily focuses on larger amount of money that are being moved under the radar. However, even when one takes large transaction in banks, these are monitored and banks must comply with the laws.

Know your Customer (KYC) is a common phrase heard in financial institutions. The rules require business that handle money identify and authenticate their customers before handling these large scale transactions for them. It also means per jurisdiction, they need to watch the client for anomalous behavior and risky situations. Sometimes this process hurts legitimate behavior such as for gambling sites or companies that service the adult community. The lecturer presents certain US mandatory rules such as having to report transactions great than $10,000 and if they observe anomalous behavior, they need to file suspicious activity reports (SARs). To tie this to digital assets, people have used digital assets as intermediaries to get around these rules. Thus, on the same thread as the last lecture, people are watching these “fiat ramps”, places where people transition from fiat to digital assets. Banks also have the ability to shut down digital asset establishments because any business that handles large transactions even crypto must abide these rules.

Thus many exchanges or digital assets related corporations that could be classified under money services businesses need to be careful and watch closely to regulations. Law enforcement takes a strong and serious approach.

Governments + Bitcoin

This lecture was quite old (May 2015). It brings up many of the points that I’ve read in current news articles. Also, some of the speculation on how certain countries would have behaved have come true. I’ve chosen not to expand beyond this lecture since that’s a separate post in itself.

Questions answered in this Post:

  • Why governments started to care about Bitcoin?
  • Example of a Illicit Marketplace: Silk Road
  • Lessons from the Silk Road

Why notice digital assets?

It’s nice to see the lecturer provide historical context for when the government noticed Bitcoin. At this point, both the SEC and CFTC have released several statements on how they view Bitcoin and digital assets. He states, “untraceable digital cash defeats capital control”. Money under most circumstances has traditionally been created by central institutions, usually governments. Governments control the total capital, how much cash and how it is valued. With Bitcoin, the country cannot stop people from moving it in and out of the country. Whole economic groups would have no way to track a country’s wealth or economic success if this took of. thus, the idea of finance becoming borderless does not sit well with governments. Some countries have taken strict countermeasures such as disconnecting Bitcoin from fiat currency financial institutions. This only works when the country has a strong control over its citizens and currency.

It is not just lack of total capital though, there is also a security concern present. With untraceable currency, people immediately think of crime and national security. Digital assets in the hands of criminals is dangerous. This money can be used for terrorism, money laundering, and tax evasion. If these crimes were to happen to a nation’s citizens how would law enforcement be able to track these criminals. White collar crimes are already difficult and adding increased technology would make it near impossible. Silk Road is one example of an anonymous marketplace that facilitated the transfer of illicit items. It took many man hours to capture Ulbricht, the man behind the site.

Silk Road: Illicit Market for Drugs

Apologies for the redundancy, this is the second time, the course has talked about the Silk Road. The Silk Road is a prime example of what government institutions fear. It was a large online market for illegal drugs, essentially a black market can was run pseudo-anonymously and theoretically borderless. It was run as a Tor hidden service thereby adding more difficulty in tracking the website. Payment as in Bitcoin and the site held the BTC in escrow while goods were shipped. This is not a trustless system, but ran with more of a reputation system as well as trust in the Silk Road site to not steal funds. Nontheless, it was successful. It operated from Feb 2011 to October 2013. The creator was caught via entrapment where they had an FBI agent befriend the creator and force his hand. The site had 174K worth of Bitcoin which was auctioned off to the public. He received life in prison excluding the previous mentioned crimes and even in 2017 that sentence has been upheld.

Lessons of Life after Silk Road

The lecturer points out three main lessons. The first is the difficulty of keeping a real an virtual life private. This uploads the idea that a Bitcoin address is pseudo anonymous. In addition, it also adds value to the number of identity projects via a blockchain. People realize that having a digital entity may be just as important as your physical one. In addition, your digital entity, is not completely separate from your physical one. It’s hard to stay anonymous because transactions will be tracked via both the blockchain as well as information about how the transactions are sent. Federal officers while new to this type of crime will follow the money. They’re good at what they do and while adding technology makes it harder, it doesn’t make it impossible. Also one of the worse things they could do is just make the money untouchable. If they mark a certain address as a black (criminal address), then anyone who submits a transactions is immediately under suspicion. Law enforcement can block transactions or the movement of money. This is similar to what they can do with banks. From what I can tell, it also makes cash still king when carrying out an anonymous crime.

History of Bitcoin

This post is pretty sparse. I just posted it given that this topic was covered. I do think there are better resources to get a general background that I hope you do look into if you find this general article interesting.

Questions answered in this Post:

  • How did Bitcoin get started?
  • What was the first forms of digital cash?
  • What is some lore about Satoshi Nakamoto?

Precursors of Bitcoin

There are two main precursors that the lecturer touched upon. The first one was the cypherpunk movement. Libertarianism (bare government control) + Strong cryptography -> Cypherpunk. He mentioned with strong online privacy and cryptography, people could protect themselves without interference with government. The cypherpunks also cared about how one would deal with money in this new society. David Chaum’s digital cash work played a pretty big inspiration with anonymity and privacy. New forms of money that were not backed by central government bodies and could be transacted digitally were popular.

Bitcoin White Paper

The bitcoin white paper is pretty famous by now. It came out in 2008, titled Bitcoin: A Peer-to-Peer Electronic Cash System. This one white paper speaks about the initial technical design and philosophy. There was also open source code to run this system. It’s author is Satoshi Nakamoto, a modern day legend and mystery.

Satoshi Nakamoto

There are some facts listed about him. The key things are he’s been rarely heard from since 2010 and yet mined quite a bit of the initial coins and thus is incredible rich. His coins have not been used because his use would spark people to find his identity. In addition, his action could cause large spikes in the price given that he can make large market movements. Journalists like making articles about this.

Transactions on the Network

Bitcoin has had exponential growth since its start in 2008. The lecturer showed a graph from 2009 – 2014. Clearly now in 2018, that trend has continued and may even be greater. With the advent of lightning, the bitcoin community understands that they need to scale and that the protocol is quite popular.

Bitcoin Open Source Software + Stakeholders

I’m just merging the next two lectures together. They’re short one is regarding the open source Bitcoin developers and the other is the stakeholders. Unsurprisingly, these topics are interconnected and thus I’ll quickly cover them since it seems pretty cut and dry. Not boring and dry just simple and quick.

Questions answered in this Post:

  • What are BIPs?
  • Explain the roles of the Bitcoin developers,
  • What happens during a hard fork
  • Who has power in Bitcoin?

Bitcoin Open Source

As everyone knows, you can just go GitHub, and look at the Bitcoin repository. Thus the Bitcoin core is the de facto rule book. It’s interesting that the lecturer mentioned that even those who are building new cryptocurrencies will look to it as guidelines for their own rules.

In addition to the core, there is also Bitcoin Improvements Proposals (BIPS). This is a formal proposal for changes to Bitcoin. Essentially, since everything is public and people need to be in consensus, this is the way to formally propose changes to Bitcoin including the technical specification changes and rationale. They are usually referred to like BIP32/BIP39. I personally have spent the most time looking at the BIPs related to mnemonic code for generating deterministic keys. This is because there is crossover between Ethereum and Bitcoin for how the deterministic keys are generated for each chain. I highly recommend people technical or nontechnical to read at least one BIP. They are clear, well formatted, and easy to read even if they are not that easy to understand. Each BIP has a champion to evangelize for it. Other projects have something similar such as Ethereum which has EIP (Ethereum Improvement Proposals) and Ripple which has RIP (Ripple Improvement Proposal). There was a repo for lips (Litecoin Improvement Proposal) but given that acronym perhaps they moved it elsewhere. Enough of this tangent, essentially if Bitcoin were a government we now have the Constitution (rulebook) and a Legislative system (way to make/lookup laws).

There are five main lead developers on Bitcoin. One of them Gregory Maxwell has been discussed in earlier lectures who proposed coin tumbling strategies i.e. CoinSwap. The lecturer points out that even though they are the lead developer their power is muted and they tend just to “lead the parade” because anyone can fork the software at any time. This gives power to the individual users which is more than what you would get in a centralized currency. With a centralized currency users have the right to exit. However, if there is only a single bank, exiting the bank would be detrimental to your everyday life. Life would become more difficult. Beyond that maybe you can join another if it exists but there isn’t a mechanism to make it better. With Bitcoin, users can fork the rules i.e. meaning more empowerment. Thus the right to fork ensures that the community retains more power as opposed to the central deploying entity. What exactly is a fork though?

Hardforks with Developers

I’ve discussed hard forks before. However, the lecturer goes more in depth of users behaviors. If the fork was mean to start an altcoin then the altcoin goes its separate way and branches coexist nicely. Otherwise, forks could reflect a fight to the future. Thus when miners fork, it means there needs to be mass adoption of a new set of rules and that eventually takes over the entire network of Bitcoin nodes. If mass adoption doesn’t occur, or it’s only a small subset that want to fork, well that becomes it’s own currency ie Bitcoin Cash. Now we segue to the stakeholders.

Stakeholders in Bitcoin

There are several individuals in the Bitcoin. If there is BIP or negotiation about rule setting what happen which I’ll expand on below which some thought experiments.

Claiming the Bitcoin developers have the power

This seems obvious to me because they write the rule book. Almost everyone users their code and follows their rules. In addition, for some of the technical details, they may be the only ones knowledgeable enough to make informed assessments about changes. However if they do something that only benefits them, they run into the case that people ie miners and users just stop using this blockchain. They perceive that they are at a disadvantage and because Bitcoin is not the only chain, they can move their business elsewhere. As we talked about behavior, this empowerment is something you don’t find in centralized currency.

Claiming the miners have the power

Miners are powerful. They write the history and without them, the blockchain doesn’t move forward. History has to be consistent with the future.

Claiming that investors have the power

Investors have power. They determine whether Bitcoin has value and with hard-forks they investors can decide which branch prevails by keeping or buying the successful currency. However again, they are relying on the developers to build code and miners to mine their transactions.

Claiming that merchants and consumers have power

While the populus has power, the lecturer also claims that they generate primary demand for Bitcoin and drive the long-term price. I’m still unclear what sets the price for Bitcoin so I’m a little more skeptical on this argument. He then claims that investors have to guess where the merchants and customers will go. Then you can think of the payment services who handle the transactions.

However, all have some power. For success, there needs to be some relationship across these different slivers for the blockchain to exist and be stable. If anyone gains too much power, the other I’m sure will be able to impact them negatively to almost enforce this balance.

Bitcoin Foundation

The last group which should be a category of their own is the Bitcoin Foundation. it began in 2012 and has the mission “standardize, protect and promote the use of bitcoin cryptographic money for the benefit of users worldwide.” They pay the developers. They evangelize Bitcoin to governments. While it’s not fully powerful, they do have quite a bit of support. There are controversies among the foundation which is interesting. Each of the members clearly have their own agendas. Roger Ver wanted to start his own nation this year. Additionally, whenever each of the foundation members speak about price movement, they have the ability to shift sentiment positive or negative.

Wrap Up

I spouted out a lot of facts. Not much of this is relevant to the every day user. I still recommend reading a BIP. I also recommend considering who has power when looking at Bitcoin are any other token. In the orders of Ron Swanson, I should have started off with, “I’ll be delivering a speech of facts.”

Consensus in Bitcoin

This lecture began to put the ideas of cryptographic functions and how they interact with the humans who create/use/interface with them. However, before talking about policy and regulations, the lecturer began with the idea of consensus in Bitcoin. Note, this is a very short section that has some important concepts. While there is nothing difficult discussed, after thinking about these concepts for a while, I’ve had a new found respect for their foundational value. Also, there’s been a craze in the blockchain ecosystem about HashGraph. HashGraph is an alternative consensus protocol that is much faster and therefore scalable than Bitcoin. I’ll need to spend more time on it but I’ve put two links here and here that will explain more to those interested. Also next lecture will likely be more meaty.

Consensus, by definition, just means general agreement. It’s tame, more like the French phrase “D’accord”. However, “chill” the word suggests, it’s the crux of what makes the Bitcoin network functional and consensus takes place in many types.

Questions answered in this Post:

  • What are the three types of Consensus discussed?
  • What does consensus of rules mean?
  • What does consensus of history mean?
  • What does consensus of value require?

Rules, History, Value

I gave the answer right in the header. The three types of consensus discussed related to the block rules, blockchain history, and the value of Bitcoins.

Consensus about rules means there needs to be agreement on the technology and infrastructure. People need to know what makes a transaction valid and what makes a block valid. It also gives structure to how P2P nodes behave and the protocols and formats. Without consensus in this layer, none of the nodes would be able to communicate with each other and they each may validate different blocks. Thus there would be no consistent way for the system to move forward without this. One real world thing I think about is hard forks. During a hard fork, there is a division with the nodes and certain nodes become incompatible with others. Thus all the nodes need to move to one standard eventually to persist.

Consensus of history means one needs to agree on the contents of the blockchain. Furthermore, this means which transactions have occurred, which coins exist, and who owns them. Bitcoin can be simplified to being a store of value and thus everyone needs to agree on this distributed ledger. While it seems so simple ie one big shared database, that has to be true for people to remove trust from central parties and apply trust to these systems.

Lastly, there is consensus of value. Having looked at the price fluctuations of Bitcoin, it’s hard to deny there is value. Coins have value and currencies need this. However, likely in 2009, people needed to believe. The lecturer then speaks about the “Tinkerbell Effect.” It’s a circular argument that you get value from something because someone tomorrow will also see the value. It’s clear the the rules and history are closely tied because rules determine which blocks and transactions come into existence. History and value are tied because to claim ownership is due to having consensus on the history. It’s a two way relationship because block reward means miners expect value for maintaining rules to the correct input of transactions and blocks.

I think this statement was important since he calls it “Genius of Bitcoin.” The “Genius of Bitcoin” was that it’s extremely difficult to get any consensus by itself. I’m curious if other protocols rely on these three pillars. While HashGraph may have a different consensus protocol, do they still need people to believe in them?

PHP Code Snippets Powered By : XYZScripts.com