THE EVOLUTION OF TRANSACTION SOLUTIONS
Bitcoin offers merchants transaction fees that are much lower than other payment solutions With the excitement of all the various cryptocurrencies currently in the space, what in in thethe future of what sometimes sometimesisisunder-discussed under-discussedisistheir theirrole role future transactions. As merchants learnlearn aboutabout the benefits of accepting cryptoof transactions. As merchants the benefits of accepting currencies like Bitcoin, skepticism will be will met be by met the numerous advancryptocurrencies like Bitcoin, skepticism by the numerous tages of using type protocol for payment. advantages of this using thisoftype of protocol for payment. At BitPay we currently have 30,000 merchants, including higher profile clients like Gyft, TigerDirect and the NBA’s Sacramento Kings. While these forward thinking companies immediately saw the benefit of Bitcoin and were quick to jump aboard, the mainstream acceptance of Bitcoin also requires our smaller merchants that sell specialized items or services. Once skepticism and misinformation is quelled, the facts of Bitcoin as a payment method become crystal clear to many merchants. Through or or less of their transaction amount (deThrough BitPay BitPaymerchants merchantspay pay1%1% less of their transaction amount pending on volume) as aasprocessing fee which is significantly less than (depending on volume) a processing fee which is significantly less payment processing options. It’sP2P the nature P2P nature the Bitcoin other payment processing options. It’s the of theofBitcoin netthan other network enables extremely payment processing option. It’s work thatthat enables this this extremely low low payment processing option. It’s also also important to realize Bitcoin is still infancyand andother otherpayment payment important to realize thatthat Bitcoin is still in initsitsinfancy options have had 50 plus years to build their network and infrastructure. Bitcoin has hasbeen beenaround aroundsince since2009 2009and and those years Bitcoin in in those fivefive years thethe useruser exexperience merchants customers become drastically easier. perience forfor merchants andand customers has has become drastically easier. This Thiscontinue will continue to improve asopen the open source platform develops. will to improve as the source platform develops.
SPECIAL ADVERTISING FEATURE
An analogy I quite often make is to the music industry in the early 2000s. Napster forced record labels to change their business model to one that Napster forced record labels to change their business model to one that is more in line with what the consumers wanted. Some advantages that is more has in line withwhat whathappened the consumers wanted. include Some advantages that Bitcoin over with Napster the existence continued of a global marketplace, venture capital investments and Bitcoin has over what happened with Napster include the existence of a development of the protocol. The switch to digital was something that was global marketplace, continuedresistance developconfusing and scary venture for manycapital musicinvestments fans and theand immediate slowlyoffaded away andThe business as iTunes and Google ment the protocol. switchopportunities to digital wassuch something that was conMusic came to make buying digital music easier and the preferred way fusing and scary for many music fans and thenow immediate slowly to purchase a song. Bitcoin is controversial becauseresistance it’s challenging something been the same for a very time. It’s important faded awaythat andhas business opportunities suchlong as iTunes andmore Google Music to realize that, like any other technology, it becomes more mature and came to make buying digital music easier and the preferred way to pureasier to use over time. chase a song. Bitcoin is controversial now because it’s challenging someSome of the smartest and most successful entrepreneurs in the world thing that has been the same for a very long time. It’s more important to are embracing Bitcoin. realize that, like any technology, it becomes more maturedrastically and easThese individuals seeother the long term potential in how it could reduce payment costs as well as the global reach it has. BitPay has ier to use over time. continued to bring credibility, excellent support and development of the platform to the community and successful that has resulted in beinginthe Some of the smartest and most entrepreneurs themarket world leader for Bitcoin Payment Processing. We also hope to continue to grow are embracing Bitcoin. and Amsterdam as well as a new location for our continuously growing These individuals see the long term potential in how it could drastical-
What’s important is for other Bitcoin companies in the space to contribute development time to ensure the protocol can grow properly. At BitPay, Bitcoin Core Coredeveloper developerJeff JeffGarzik Garzik a member of our andconwe Bitcoin is aismember of our teamteam and we continue to contribute to platform the platform through projects as Bitcore. tinue to contribute to the through projects suchsuch as Bitcore. One startups grow able One our biggest hopes as other of ourofbiggest hopes is asisother startups grow thatthat theythey willwill be be able to to expand their development teams to contribute to Bitcoin. expand their development teams to contribute to Bitcoin.
ly reduce payment costs as well as the global reach it has. BitPay has
Bitcoinusers userscurrently currently have various reasons useprotocol; the protocol; Bitcoin have various reasons to usetothe includincluding technological, political, financial and economic. As merchant ing technological, political, financial and economic. As merchant acacceptance grows education subject grows, ceptance grows andand education on on thethe subject grows, the the useruser basebase will will diversify platform become easier to use. aren’t close diversify andand the the platform will will become easier to use. WeWe aren’t close to to widespread acceptability in same the same vein as a credit card, it is widespread acceptability in the vein as a credit card, but it isbut somesomething thatBitcoin the Bitcoin community is currently developing. thing that the community is currently developing.
ue to grow globally with new offices in San Francisco, New York City,
continued to bring credibility, excellent support and development of the platform to the community and that has resulted in being the market leader for Bitcoin Payment Processing. We also hope to contin-
Argentina and Amsterdam as well as aACCEPT new location for our continuously BITCOIN growing Atlanta office.
www.bitpay.com
VeriCoin
50% of the Multi-pool fees will go to the VeriFund, services for VeriCoin will be paid from the VeriFund.
Proof-of-Stake Verified. Proof-of-Work Distributed. Network-Stake-Dependent Interest. www.vericoin.info/verifund.html
Donate:
VRC: VTHZfUg11wEJmSgBLUcmCKGYekuqFcGHQq
BTC: 1LRWAyE3WKwTzXszEmtqKXzikQvoq7NJBa
www.vericoin.info
CONTENTS
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CrowdSales: Regulatory Uncertainty Means Companies Have an Opportunity
Get Gems!
Coined: Semantics, Bitcoin, and Law
by BELINDA TOO
by DOMINIC STEIL
by ANDY BEAL
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Expert Advisory Board . . . . . . . . . . . . . . . . . . .
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The Age of Surveillance and What You Can Do About It . . . . . . . .
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by SEAN COMEAU
Bitcoin Service Directory . . . . . . . . . . . . . . . . . . . Shields Up, Bitcoiners . . . . . . . . . . . . . . . . . . . by ANTHONY DI IORIO
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You Should See the Angel and VC money Pouring Into This Space . . . . by MAX WRIGHT
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Stellar, Bitcoin, and the Psychology of Trust
CryptoCoin Social Crypto Biz Magazine
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Issue.06 November.2014 Published by CRYPTO BIZ MEDIA, a division of CRYPTO BIZ GROUP Editor-In-Chief SOSHI Chief Operations Advisor TRENT NELLIS trent@cryptobizmagazine.com Chief Financial Advisor BARRY MORGAN Chief Technical & Media Advisor JAY ADDISON Art Director VANESSA KING COVER DESIGN Jay Addison CONTRIBUTING WRITERS Oleg Andreev, Andrew Beal, Sean Comeau, Anthony di Iorio, Manie Eagar, Greg Peacock, Arianna Simpson, Dom Steil, David Sutter, Belinda Too, Brian Vereschagin, Andrew Wagner, Max Wright, Mike Yeung IN THE US: NEW JERSEY Josh Gold Josh@cryptobizmagazine.com IN THE US: SACRAMENTO CA Brandon Johnson Brandon@cryptobizmagazine.com IN NEW ZEALAND: AUCKLAND Belinda Too Belinda@cryptobizmagazine.com
CRYPTO BIZ MAGAZINE PH3507 1111 West Pender St Vancouver BC Canada V6E 2B4 TEL 1 844 CRYPTO1 (1 844 279 7861) www.cryptobizmagazine.com Crypto Biz Magazine assumes no responsibility for unsolicited material. Opinions expressed herein are those of the authors and advertisers and do necessarily reflect those of CRYPTO BIZ GROUP, editors, advisors or staff. Readers are encouraged to thoroughly investigate and consult with a crypto financial advisor before embarking on any investment, speculation or financial opportunities. Crypto Biz Magazine makes no warranties or guarantees and we assume no liability regarding advertisements or editorial content or any claims that may arise from them. The contents of Crypto Biz Magazine are Copyright © 2014, all rights reserved. Crypto Biz Magazine may not be reproduced in whole or in part without the expressed written permission of CRYPTO BIZ GROUP.
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If you’ve read corporate sustainability requirements, you’ll know the Brundtland Report defines sustainability as ‘…development that meets the needs of the present without compromising the ability of future generations to meet their own needs.’ Sustainability can be interpreted in different ways. In addition to environmental protection, it refers to global economics, support through equity of resources and wealth, and social satisfaction about the experiences, values, ecosystems, and material needs that make life worth living. Bitcoin could be the answer. It provides human-centric solutions, through a digital economy with interactive value exchange, that’s cryptographically secure and not subject to the corruption of human trust. In this month’s issue, read about organizations like CryptoTown on the Ground, and the Digital Finance Institute, dedicated to empowering communities with decentralized networks, to provide self-reliance, economic participation, and financial inclusion. Teaching personal, and community responsibility for economic growth in a dynamic, global society, will bring sustainability—the survival and future of mankind. This extends to other aspects of sustainability. By bringing a digital economy to all communities, and equal access to wealth, services, and value exchange—without discrimination— sustainability problems in areas that are in cultural, and environmental distress, will be addressed. Those are big picture goals… You can also read about companies who are working on sustainable stepping stones, like RealCoin’s transition towards a decentralized world, by promoting understanding of digital dollars, and Gems’ ingenious incorporation of crypto-currencies into a social network that pays users to participate. Facilitating sustainability is a complex, geopolitical, social, economic and environmental issue. It seems that Bitcoin has a valuable role to play in the transformational change of our global economy. Enjoy this month’s issue. By reading it, you’re participating in our sustainable future. Enjoy! —S
Crypto Biz Magazine
subscriptions@cryptobizmagazine.com for a FREE subscription to Crypto Biz Magazine
Sustainability is a buzzword that has almost compulsory inclusion in corporate discussions, and red-tape creation these days. It has been organically aligned with crypto-currencies because of the desire to step away from bureaucracy and inefficiency, and towards a better future for all. It seems that blockchain technology is the answer to global economic and welfare sustainability problems—traditional corporates, ironically, should look at embracing it, too.
November.2014 Page.3
E-MAIL contact@cryptobizmagazine.com
I AM SOSHI…
CONTENTS
Bitcoin Merchant Directory
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Digital Finance—the Next Five Years . . . . . . . . . . . . . . by MANIE EAGAR
Crypto-Currency is Here to Stay . . . . . . . . . . . . . . . . 40 by BITCOIN RUSH
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Github Bitcoin Glossary . . . . . . . . . . . . . . . . . . . 44
Crypto Biz Magazine
Page.6 November.2014
by OLEG ANDREEV
Startup Weekend Vancouver: . . . . . . . . . . . . . . . . . 55 Cultivating the Crypto Community by GREGORY PEACOCK
Five Uses for RealCoin . by ANDREW WAGNER
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Enlightenment of the Blockchain Masters . . . . . . . . . . . . . 58 by BRIAN VERESCHAGIN
EXPERT ADVISORY BOARD KRISTOV ATLAS KRISTOV ATLAS is a network security and privacy researcher who studies crypto-currencies. He is the author of Anonymous Bitcoin: How to Keep Your Ƀ All to Yourself, a practical guide to maximizing financial privacy with Bitcoin. Kristov is also a correspondent for the World Crypto Network, appearing regularly on the weekly roundtable show The Bitcoin Group, and host of Dark News, a show about un-censorship technologies.
LISA CHENG
MICHAEL PATRYN
PIOTR PIASECKI, BSc MSc P I OT R P I A S E C K I i s a C h i e f S c i e n t i s t a t P rova b l e I n c , a Vancouver-based software development startup. Since discovering Bitcoin in 2011, he became a reputable member of the Bitcoin community under the nickname “ThePiachu.” Piotr wrote his Master’s thesis on the subject of Bitcoin security in Technical University of Lodz, in Poland. He is also a moderator of Bitcoin.StackExchange. com, /r/Bitcoin subreddit, runs a number of Bitcoin-focused websites, such as Vanity Pool and TestNet Faucet, as well as writes a blog on various crypto-currencies.
Crypto Biz Magazine
MICHAEL PATRYN has been working with digital currencies since 2002 in the capacity of financial consultant, market maker, and exchanger. As an Angel Investor, Michael has actively invested with and supported over twenty private companies within the digital currency space. Michael works with numerous nonprofit organizations such as the World BJJ Federation, Vancouver Bitcoin Cooperative, and the Lifeboat Foundation. He provides a wealth of experience, knowledge, and access to the wide network which he has established within the digital currency space. Michael’s primary objective is working with the community in order to build a future where digital currencies, protected private wealth, and innovation are able to thrive.
BRANDEN PETERSEN is the founding Executive Director a n d C h a i r m a n o f t h e B o a rd of yesbitcoin. Along with this work, he serves on the Financial St a n d a rd s Wo r k i n g G ro u p at Th e B i tco i n Foundation. Elected to the Minnesota House of Representatives in 2010 and the Minnesota State Senate in 2012, Petersen currently represents the people of Senate District 35 in Northwest Anoka County. His legislative accomplishments in education policy reform as well as citizen data privacy protections are among the notable items in his body of work as the youngest member of the State Senate. Along with his work in the public sector, Petersen has also been delivering strategic communications solutions for an array of nonprofit and corporate clients as a Senior Counselor at Ainsley Shea Communications in St. Paul, MN.
November.2014 Page.7
LISA CHENG is the co-founder of Distributed.buzz and the CEO of the Vanbex Group. She is the force behind the popular news aggregation site BitcoinRegime. com and a behind the scenes advocate of Bitcoin 2.0 and blockchain technology. She comes from an accomplished background after having worked at Fortune 500 companies and technology startups involved with Big Data, algorithmic trading, and enterprise systems. Lisa’s time is now focused on consulting and planning for new cryptocurrency projects after having worked for the Mastercoin Foundation in leading the Business Development effort. She is located in Vancouver, British Columbia, Canada and you can reach her via Twitter @lisacheng.
BRANDEN PETERSEN
THE AGE OF SURVEILLANCE
AND WHAT YOU CAN DO ABOUT IT
Crypto Biz Magazine
Page.8 November.2014
by SEAN COMEAU
Even though most communication services employ some type of encryption for security these days, operators are still able to read private communication between individual users. This is the case for email, text messages and phone calls, Skype, Facebook, LinkedIn, Reddit, and many, many others.
POLITICAL MADNESS
The reasons for snooping on private, user-to-user messages are varied. Services whose primary source of revenue is targeted ads, Facebook for example, have a vested interest in knowing what their users say to each other. Some services find access useful for policing their services for spam, harassment, or other undesirable behavior in their communities. We, as users, may or may not agree with those policies, but we are free to choose whether or not to use these services.
The simple answer is: because they can. It’s completely natural for powerful people, and groups, to go to any lengths to expand their s p h e re o f i n f l u e n c e . History is full of empire builders and conquering heroes, tyrants and vast, state-sponsored mechanisms of control. Generally, the excuse involves the protection or promotion of an ideology, or set of values: communism over capitalism, Christianity over paganism, fascism over democracy.
The situation has recently become more complicated, however. We’ve learned that Internet services have taken on new silent partners— state security services—who are interested in collecting as much information as possible about the private affairs of others.
In the here and now, the excuse is freedom over terrorism. But in reality, we are seeing the same old story played out again. Knowledge, and the ability to communicate it, are perhaps the greatest forces for individual and social development we possess. An educated population that speaks freely is a grave threat to
National security apparatuses across the world have turned to backdoor monitoring and, in some cases, the arbitrary collection of massive amounts of data from their citizenry. The question is: Why?
‘But… I’m just an average person. Why should I care if my messages are being monitored or recorded? I’ve got nothing to hide.’
anything or anyone desiring control. Ideas and their spread introduce chaos and change. The Internet and mobile telecommunications were a Black Swan, throwing old power structures for a loop and promoting a response of fear and paranoia. They have adapted, and it is time we adapted a response.
LET’S EXAMINE THIS POINT-BY-POINT FIRST, if you consider yourself simply average, you’re not giving yourself enough credit. You’re a unique individual. You’re not the state, nor are you its property.
of a society, and all of humanity, depends upon what people in the present choose to accept, or to resist. Trends in power, in their many forms (empire building and expansion, consolidation and centralization of power, surveillance, etc.), tend to continue on an upward trajectory, until a disruptive crash of some sort brings them down, in an often unpleasant instant. (See the ratchet effect for a more in-depth analysis and explanation of this phenomenon.)
different? Furthermore, information can easily be manipulated. As the 15th century French clergyman, Cardinal Richelieu noted: “If one would give me six lines written by the hand of the most honest man, I would find something in them to have him hanged.” Richelieu is, incidentally, known for helping to crush factions of dissent in 15th century France, and helping to consolidate the power of the French royal family—he spoke from experience.
LASTLY, you probably do have things to hide. You just aren’t seeing them. Do you tell your parents everything? Your children? Your co-workers? Your boss? Is there anything at all you wouldn’t want these people to know about you? Why is a faceless bureaucrat any
‘Of course,’ you argue, ‘we are so much more sophisticated these days,’ and you’re right. The tools of the trade have changed, from swords and hangmen, to packets of electronic information and the threat of defamation.
Crypto Biz Magazine
SECOND, you should care because you have a right to privacy—which you must apparently protect, because no one’s doing it for you. More importantly, you should care because the future
November.2014 Page.9
‘But… I’m just an average person. Why should I care if my messages are being monitored or recorded? I’ve got nothing to hide.’
Doesn’t the use of an encryption that law enforcement agencies can’t break help terrorists and pedophiles? In response to Apple’s recent development of iOS 8 software that disallows even Apple to access users’ data, Chicago Chief of Police, John J. Escalante said: “Apple will become the phone of choice for the pedophile,” and FBI Director, James Comey remarked that Apple is “marketing something expressly to allow people to place themselves beyond the law.” A slew of fallacies run through these statements. First and foremost, it’s law enforcement’s responsibility to catch criminals and prevent crime. It will continue to be their responsibility, regardless of how technology and society evolves. In a free society, law enforcement must balance the rights of citizens with their responsibility to fight crime. Citizens have a right to privacy. Removing that right—in the effort to fight crime—is unacceptable, and law enforcement must simply find other ways to do their job.
Crypto Biz Magazine Page.10 November.2014
In response to Director Comey’s comments, protecting one’s own privacy does not place one beyond the law. If that were the case, building a fence around one’s property would place a property owner “beyond the law.” As would installing blinds, or issuing NDAs to new employees and contractors, and a range of other things. Sunglasses? Baseball hats? How absurd can we be?
E2E CRYPTOGRAPHY AND SELFPROTECTION
The developers of SecureCom Mobile feel strongly about the importance of digital privacy, understand the need for truly secure mobile communication, and have created mobile apps to conform to all of the requirements of strong E2E encryption. Their encryption methods and technology are battle-tested and unbreakable with known technology, and acknowledged by some in the industry as the best currently deployed. SecureCom Mobile’s encryption software is completely open-source and available, in its entirety, to the public. For code-savvy users, or interested parties willing to hire code-savvy consultants, the code can be examined and scrutinized to verify that no backdoors exist and no dubious code has been integrated. If this changes, it means that SecureCom Mobile has been compromised from the outside and users should discontinue its service. SecureCom Mobile uses a short-authentication-string (SAS) in the form of two words. For voice calls, both users should see both words displayed on their devices and be able to verify, between them, that the words are the same. This ensures that the users’ call data is being routed through a SecureCom Mobile server. SecureCom Mobile offers apps for voice, text, and data transfer. Android and BlackBerry versions are available and Apple, OS X, and Windows versions are currently in development. Download SecureCom Mobile today. It’s free. —S
End-to-end (E2E) cryptography is the tool for self-protection in this Age of Surveillance. But what constitutes a well-designed E2E system?
First, the basic principles of cryptography are well known and trusted, having been scrutinized by industry experts, reviewed, and repeatedly and rigorously tested.
Second, the user, and no one else, controls the devices that perform the cryptography.
Third, protocols are public, and open-source.
This allows for outside verification and scrutiny.
Fourth, the crypto keys are known and controlled by the user.
Accept nothing less than these requirements. SEAN COMEAU
is a computer security and cryptography enthusiast based in Vancouver, BC, Canada.
BITCOIN SERVICE DIRECTORY WALLETS BLOCKCHAIN
blockchain.info
COINKITE
coinkite.com
MULTIBIT
multibit.org
COINBASE
coinbase.com
HIVEWALLET hivewallet.com
XAPO
xapo.com
EXCHANGES
BTC-E
btc-e.com
CRYPTSY
cryptsy.com
QUADRIGA CX
SWISSCEX
quadrigacx.com
swisscex.com
INDEXES BITCOIN AVERAGE
BITCOIN CHARTS
bitcoincharts.com
BITSTAMP
BRAVENEWCOIN
bravenewcoin.com
COINDESK
COINMARKETCAP
coinmarketcap.com
bitcoinaverage.com
bitstamp.com
coindesk.com
CoinMarketCAP
This is a list of merchants, and their websites, that accept bitcoins for their services. If you know companies that are now accepting bitcoins and who you’d like to see added to this list, please contact us at directories@cryptobizmagazine.com. Additionally, let us know if you find that any of these companies has stopped accepting bitcoins, or if you have any difficulty using bitcoins with them.
CROWDSALES: REGULATORY
UNCERTAINTY MEANS COMPANIES HAVE AN OPPORTUNITY by ANDREW BEAL
Widely covered, of late, has been the growth of public “crowdsales,” where companies sell a branded digital coin as a way to finance the early development of their projects. The popularity of many of the early crowdsales has sparked a conversation about where the burden of consumer protection lies.
Crypto Biz Magazine Page.12 November.2014
As Danny Bradbury suggested, in his May 28th article on Coindesk, the burden—at least for the moment—falls on the consumer to do their own analysis of a project’s legitimacy, team, technology, and its likelihood of success. I think we can all agree that the burden, in some form, will eventually land on the companies, or the platforms that support them (e.g. Counterparty), but we aren’t there yet. The legality of crowdsales is also uncertain. To avoid classification as a security, the coins sold are often said to represent future access to the company’s technology. Unsurprisingly, participation in crowdsales is largely motivated by a desire to earn a profit from trading in secondary markets. How these coins are eventually classified will remain a question mark for the time being. The interesting, and often predictable, thing about an industry that lacks legal and regulatory clarity, is that the participants in that industry will often do the bare minimum to protect themselves from liability. This is not surprising, as establishing measures and policies to protect consumers (called compliance, in a regulated industry) costs money, and affects a company’s bottom line. This is short-sighted however, because regulation—particularly in the financial services industry—is generally a reaction to current problems in the market. Rules are written to address problems that exist today. Put differently, how an industry does business today has a direct result on how that industry will be regulated, and required to conduct business in the future. By way of example, let’s look at the prepaid card industry. Prepaid debit cards are the fast-
est growing form of non-cash payment to-date. For years, particularly in the early to mid-2000s, prepaid card programs were largely unregulated, and issuers were able to essentially write their own rules. Card programs imposed fee structures that punished cardholders for inactivity, charged them each time the card was used, and allowed for premature expiration if the card was not used regularly. These fees were included in card agreements that accompanied the physical cards, but the terms were often printed on the inside packaging, and not accessible to a consumer prior to purchase. As the market developed, legislators took notice of the developing inequities, and began crafting laws to address them. A formal reaction came in 2009, with the passing of The Credit Card Accountability Responsibility and Disclosure (CARD) Act. The CARD Act restricted dormancy or inactivity fees, and prohibited expiration dates of less than five years. The fees also had to be clearly and conspicuously outlined, so the consumer could easily view them prior to purchase. We saw a similar reaction from legislators after the 2008 financial crisis. Wall Street was over-leveraged, and deeply entrenched in an experiment with exotic financial products. When the markets went sideways, the walls came crashing down. Too many people depended on the strength and stability of the US financial system, and the government was quick to react with the Dodd Frank Wall Street Reform and Consumer Protection (Dodd Frank) Act, which sought to, among other things, bring about increased transparency of the derivatives markets, and reduce the amount of speculative investment on large-firm balance sheets. Our own industry is not devoid of similar reactions. It can be argued that portions of the New York Department of Financial Services’ proposed BitLicense program were “inspired”
Regulation is a direct reaction to the problems that exist in the market. Armed with this foresight, entrepreneurs in this space have an incredible, and unique, opportunity to establish best
For the time-being, you are the de facto regulators for this burgeoning industry. Crowdsales have generated over $33 million dollars for their companies, and that number will continue to grow as more, and more projects seek financing. As the virtual currency industry matures, crowdsales become an important piece of the puzzle.—S
ANDREW BEAL is an associate at Crowley Corporate Attorneys. His practice focuses on mergers and acquisitions, venture capital financing, and advising clients in the virtual currency space on state, and federal regulatory issues. Andrew is a mentor at Plug and Play’s Bitcoin Accelerator Program in Sunnyvale, CA, and a legal advisor to a number of leading virtual currency projects.
Crypto Biz Magazine
History tells us that—like the prepaid companies, investment banks and first-generation Bitcoin companies—the crowdsales of today will inevitably shape the narrative on this new model of financing, and any shortcomings will most certainly be used as data points by legislators.
practices—practices that protect the participants without stifling growth.
November.2014 Page.13
by the shortcomings, and spectacular collapses, of MtGox and other first-generation virtual currency companies. These companies lacked adequate compliance programs, measures to combat security breaches and fraud, and disaster plans, all of which contributed to the demise of those companies, and all of which were thoroughly addressed in the first draft of the BitLicense program.
Crypto Biz Magazine Page.14 November.2014
SHIELDS UP, BITCOINERS by
ANTHONY DI IORIO
In 1992, the Internet was emerging as a game-changing force. Early adopters were eager to build the network and create the next “big thing.” This is where we are with Bitcoin today. For anyone looking to hitch their wagon to a rising star in the Bitcoin space, there are certainly plenty of worthwhile ventures. There are also plenty of less reputable, or poorly managed projects, which will return nothing but headaches, and empty wallets. Startups fail all the time, and for any number of reasons, and everyone involved loses out: CEOs, developers, managers, and customers. These businesses, the good and not-sogood, are easy to find but hard to distinguish. From exchanges, to Bitcoin wallets, to crowdfunded products… How can you know who to trust? Nascent innovations like Bitcoin attract all sorts of people. Some are in it for the long haul. They’re driven by a desire to improve society, by bringing decentralized technology to the masses, developing apps that make Bitcoin adoption simple enough for the average person. At the other end of the spectrum, you’ll find
all sorts of con artists and thieves, whose main goal is to separate you from your money. Within those parameters, there are a vast array of people who are working in the space with varying degrees of ethical responsibility, business acumen, and technological competence. The tricky part is determining who, exactly, is worth entrusting with your funds. Do a quick Google search about various projects and companies in the Bitcoin space, and you’ll see words like “scam” and “Ponzi” thrown around a lot. Not to diminish the fact that there truly are bad actors out there, who fully intend to rob you—there are—but it’s important to understand the distinction between truly nefarious characters, and businesses that simply fail to deliver.
WHAT IS A SCAM? A scam is run by someone whose entire, and original intent is to defraud you of your money, by misrep-
resenting themselves, their product, their intentions and their operations. They prey primarily on the misinformed neophyte, who is less likely to see through their machinations, and who is—more than likely— overly optimistic about the potential profits of getting in on the ground floor of a new venture. Ponzi Schemes and Pyramid Schemes A Ponzi scheme is built on a few key characteristics: 1. It promises high rates of return, with little risk to the investor; 2. Earlier investors actually see some of the promised returns, as long as there are more new investors; 3. Older investors’ returns are “earned” by funds acquired from new investors; 4. Usually there’s no real product or investment being backed—it’s all a mirage; 5. The scheme’s founder holds all the funds, and recruits members at all levels. Ponzi schemes tend to collapse when the source of new investors dries up, and there’s no more money coming in, or when investors try to cash out large portions of their investments. Pyramid schemes are similar to Ponzi schemes, with some structural differences. Money flows to the top of the scheme as each level of investor directly recruits new investors. There’s usually a registration fee, and a requirement to sign up new investors in order to see any sort of return.
The most notorious Ponzi scheme in Bitcoin history has led to the arrest of Trendon Shavers, aka Pirate40, in July, 2013. The rise and fall of the Bitcoin Savings and Trust investments scheme followed the classic pattern of a Ponzi scheme. Pirate40 promised incredible rates of return—one percent per day, or seven percent per week—with zero risk to investors’ bitcoins. He was secretive about his investment strategies, claiming that no one could know his techniques, lest others try to copy them. As the well of new investors began to dry up, Pirate40 decreased his weekly interest rates, from seven percent to five percent, sparking investor panic.
High investment returns with little or no risk Investing is risky. Typically, investments with high return potential also carry the greatest amount of risk. Be suspicious of anyone offering a “guaranteed” return with no risk. Overly consistent returns Markets fluctuate. Some periods will be better than others, so expect investment values to go up and down. Returns that do not reflect overall market conditions are unlikely to be authentic. Secretive and/or complex strategies Make sure that you know, and can understand, what you’re dealing with. Anyone who cannot explain their project or investment, or who brushes you off with excuses of “proprietary” information, or overly complex systems, is unlikely to be acting in good faith. Issues with paperwork If someone is so disorganized that he or she can’t manage to give you material to review, or if there are inconsistencies in their account statements, it doesn’t bode well for the company’s competence, let alone its honesty. Difficulty receiving payments Investors who complain about not receiving a payment, or suddenly have difficulty cashing out, may be victims of a scam. Ponzi scheme operators, for example, often ask investors to “roll over” their investments in order to keep funds in the scheme, with promises of higher payouts down the line. Unregistered businesses Check that the business is legal and registered. Go to the website and ensure that it’s substantial and substantive. It ought to have an address, and working contact information. Scams are usually ephemeral, flyby-night operations, with no fixed address or reliable means of contact. Invisible principals If you cannot find the real names of the principal operatives, or cannot contact them, it’s probably because they want to remain hidden. Sure, their privacy is important, but it doesn’t trump your responsibility to ensure that you’re entrusting your money to someone who isn’t trying to take you for a ride. Not quite a scam, but… Then there is outright theft. This is what we seem to be seeing in the demise of some high profile crypto-currency exchanges. While we don’t know exactly what happened in the case of MtGox, Bitcoin Trader, and Moolah, we do know two
Crypto Biz Magazine
Eventually, Pirate40 disappeared with a reported 700,000 bitcoins. While approximately 500,000 BTC were returned to investors, the remaining 200,000 were not.
If you’re looking at an investment, and the following points sound familiar, then you’re probably looking at a scam.
November.2014 Page.15
In both of these types of scams, there are almost never clear and tangible products or investments. The entire proposition is designed to make the perpetrator at the top rich, while defrauding investors the entire time.
KEY FEATURES OF A SCAM
things: thousands of bitcoins have disappeared, likely because of criminally irresponsible—at best—or just plain criminal behavior on the part of principal players.
3. Previously established processes and checks are being removed
Typically, the blame has been laid at the feet of “hackers,” who managed to break through the exchanges’ security systems and steal all the funds, but the Bitcoin community voiced a good deal of skepticism over this explanation.
5. Poor communication between the exchange and its customers
Similarly, there have been cases of suppliers of Bitcoin products, such as Bitcoin ATM machines or mining machines, whose customers have complained that they never received the products that they paid for, or where suppliers have been unable to deliver on their promises. Butterfly Labs, for example, was shut down in September, 2014, and is facing charges of fraud, after failing to deliver its Bitcoin mining machines to its customers. Nor has it been able to deliver refunds on customer payments. The company is arguing that the anticipated shipping dates were inaccurate, but not intentionally misleading. The FTC argues that Butterfly Labs engaged in “unfair, or deceptive acts or practices in, or affecting commerce … in connection with the advertising, marketing, promotion, offering for sale, or sale of Bitcoin mining machines and services.”
Crypto Biz Magazine Page.16 November.2014
When a customer pays for a product in advance of production, there’s an element of risk, to be sure, but at the same time, paying for something isn’t quite the same thing as investing in something. When you buy something, you have a reasonable expectation of that item being delivered, even if it doesn’t physically exist yet. People do that with condos all the time, for example. They look at the plans, and trust the builder with their down-payment. In the case of an investment, whether it be in gold, pork bellies, or Bitcoin, you assume that there’s an element of risk, but are willing to take that risk in hopes of realizing some financial gain.
WHERE ARE YOUR BITCOINS? There are two places people are likely to entrust their bitcoins: wallets and exchanges. Exchanges Online exchanges are the most popular way to buy and sell Bitcoin; however, to do so you must entrust a third party—the exchange—to hold onto your bitcoins. A strong exchange will be efficient, reliable, and consistent. Any minor technical difficulties will be rare, and dealt with quickly, with good communication throughout. It will be transparent and all transactions will be verifiable. When you’re looking into using any online exchange, beware the following warning signs: 1. Withdrawing funds takes longer than anticipated 2. Orders are being canceled, especially when the value of the assets are dipping down
4. There is a change in transparency policies
6. Technical difficulties Remember that an exchange is not a bank. Keep only funds that you need to trade in an exchange—exchanges are not meant to be long-term repositories. Wallets Wallets, on the other hand, are the most common choice for storing bitcoins. There are many types of wallets to choose from, depending on your needs and level of third-party trust. Hosted wallets like Coinbase will hold your bitcoins on your behalf. If you prefer to avoid third parties, you can choose a user-held wallet, like a paper wallet, or Blockchain, Mycelium, or Kryptokit. In the case of a hosted wallet, look into who is holding your funds, and how they’re securing them. Any time you allow a third party to hold onto your bitcoins, you’re exposing yourself to higher levels of potential risk. For user-held wallets, research the level of encryption and ease-of-use. A properly secured wallet is essential. The best part? The chance of anyone being able to cheat you out of your funds is extremely low. If you’re able to examine the open source code behind the various wallets yourself, make sure that there isn’t a back-door security flaw that would make your wallet vulnerable to attack. For those of you who aren’t coders, a good way to choose a safe wallet is to rely on reputation. If a wallet has been around for a long time and has many users, chances are that enough people in the security arena have had the opportunity to review it, and it’s likely a safe choice. Crowdfunding and Pre-sales What do startups need more than anything? Funds—and developers, but that’s another article for another day. Ideally, a new business will put together a bulletproof proposal, and get financing from a venture capitalist, or angel investor who has researched the business thoroughly. However, depending on the scope of the project and the needs of the business, crowdfunding and pre-selling are becoming a popular option. The everyday Bitcoin enthusiast can get in on the ground floor of an opportunity, or can be an early adopter of a yet-to-be-developed product. The danger of the crowdsale is that people often don’t completely understand what it is they’re buying into, and what they can expect to get out of it.
If available, read the white paper and look for proofs of concept, and be sure that it’s backed by reputable people. Also, make sure that you understand all of the terms and conditions.
chains. It’s one thing to have a fantastic vision or idea, it’s another thing to be able to prove the project is workable, and that the suppliers crucial to the success of the operation are also viable.
Sometimes a failure is just a failure Most businesses start out with good intentions. The people involved in the product or opportunity believe they have a viable business model, but—for whatever reason—the business fails. In the case of an honest, failed venture, everyone loses: the founders and management teams, the developers, and the customers.
Don’t put all of your eggs in one basket. Manage risk by spreading it out over a variety of places. Similarly, avoid keeping your bitcoins with a single third-party host. Unless you’re actively trading bitcoins, the safest place to keep your funds is in a properly secured wallet, rather than in an exchange, and you certainly don’t want to have all of your funds in any single exchange.
Sometimes, however, it becomes clear to the business managers that their company is about to go down in flames, and rather than go down with the ship, they abscond with any remaining funds and disappear, leaving those who have entrusted money to them, to sink or swim on their own.
Some good sources of information Reading online magazines and interviews, and listening to podcasts can be helpful, especially in terms of letting you know what else is out there, what’s performing well or sinking fast, and why. Knowing as much as possible about what’s going on in the Bitcoin space, who the major influencers are, and what the market is doing, is crucial. When it comes to entrusting your bitcoins with a third party, you can never get enough information.
At the end of the day, when you’re left with an empty wallet and wondering if you’ve been the victim of a scam, the important question to ask is: Was I misled or lied to? If yes, then you were scammed. If not, then you were just unlucky, or you made a bad decision.
SO, WHAT CAN YOU DO TO PROTECT YOURSELF AND YOUR BITCOINS?
Crypto Biz Magazine Page.18 November.2014
The best thing you can do is inform yourself. You should read up on the project or product as much as possible. You also want to research the key players in the business. Keep in mind, anyone who is heavily into technical, or Internet-based projects, is likely to have a significant online footprint. Scrutinize their backgrounds and qualifications: LinkedIn is a good start. Then Google every company or project that they claim they were involved in. Check out the company website. Is everything clearly laid out and explained? Is there a white paper that describes the concept? Are the key personnel listed along with their—working—contact links? Beware of any company that doesn’t tell you up front who is behind the project. Who else is backing the project? If a proposal has the endorsement of successful, high-profile investors, or Bitcoin advocates—people with bona fide credentials in the crypto-currency space—then it’s likely to have met reasonably high standards of acceptability. Be sure there’s evidence that the company has done its due diligence, and they’ve put the necessary time and effort into preparing the project. Check the legal implications of the product, especially in your own jurisdiction. Look into what sort of security the project has behind it, and research the companies assisting in that security. Other things to check include proofs-of-concept, working models, and evidence of reliable supply
What about Reddit? The Bitcoin community is vibrant, vocal and engaged. That can be a very good thing. However, it can also be very noisy. A Reddit forum gives a voice to anyone and everyone, and those voices can either be expert or uninformed, and many are anonymous. As a result, it can be difficult to sift through all of the opinions and information, in order to discover the truth. However, it can be a good place to start if you’re looking for consumer feedback about a supplier, an exchange, or a wallet provider. A good alternative to Reddit is ZapChain. This site will post targeted questions and invite members to provide answers. All members are identified, along with their credentials. Readers can approve comments and commenters by giving “hearts,” thus adding an extra level of credibility. If there are Bitcoin meetups in your area, consider going to one and chatting with others from the community. In Toronto, Decentral hosts a weekly meetup on Wednesday evenings, and there’s always a lively discussion on any number of peer-led topics. Ultimately, you’re responsible for your bitcoins It’s tricky but it’s up to you. Be prepared to do a lot of research, and try to talk to the right people. In the long run it will be time well spent. If you find the right project, you have the potential to make a difference in the Bitcoin space. In return, you could benefit financially, but you could also help the community as a whole. —S
ANTHONY DI IORIO is the Co-founder of the Ethereum Project and KryptoKit; a founding member, Executive Director & Board member of the Bitcoin Alliance of Canada (BAC); founder of Toronto Bitcoin Meetup; and founder of Decentral, located in the downtown Toronto, Canada. Decentral is a co-work/incubator/event space and home to tech startups and innovative entrepreneurs that focus on disruptive and decentralized technologies.
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STELLAR, BITCOIN, AND THE PSYCHOLOGY OF TRUST Crypto Biz Magazine Page.20 November.2014
by ARIANNA SIMPSON
The summer after my junior year of college, I landed an internship at a marine and reef conservation non-profit in LA. I was in school in Pennsylvania at the time, which meant I’d be jetting off to a city on the opposite side of the country, where I knew exactly one person. I’ve always had a rather laissez-faire approach to travel, so it didn’t occur to me until about two weeks prior to my start date, that I didn’t actually have a place to stay. I certainly would have been in good company had I joined the ranks of Venice Beach’s homeless population for the summer, but I opted for a more mainstream approach, and started scouring Craigslist.
Short of using an escrow service, which would have cost me a large chunk of the total amount, there wasn’t much I could’ve have done in that situation. I went with blind trust, hardly a solid foundation for a modern digital economy.
When I finally found an apartment that seemed suitable, I set up a Skype call with the woman who would be subletting it. She gave me a virtual, highly-pixelated, tour of the place (which could have been literally anywhere), and, in light of this rigorous analysis, I wisely decided to wire her several thousand dollars as an advance on the apartment.
As Marc Andreessen put it, “Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer.” Bitcoin’s real differentiating factor is the blockchain, which enables geographically distributed parties—who do not trust each other—to transact in a virtual environment, without needing a third party.
Once I’d finished congratulating myself for being such an adult, it occurred to me to ask her how I’d be getting the keys to the place. “Oh, don’t worry!” she said. “They’ll be under the flower pot on the porch.” Reassured in the way that only a naive twenty-year-old could be, I packed my things and hopped on a plane.
Bitcoin has the potential to build a much more solid foundation, and that’s what makes it so revolutionary. Its value is not that it’s an exceptional payments protocol. Yes, there are small cost savings, but, particularly in more mature markets like the US, it’s debatable whether a replacement is even needed.
The media has been all aflutter recently with commentary on Bitcoin’s plummeting price, but I’ve long been of the mind that this doesn’t matter that much. Bitcoin is much more useful as a payment rails, an en-
abler of transactions on an open, global network—in other words, an “IP layer” for this type of payment system. Stripe CTO and Stellar Foundation advisor Greg Brockman described the concept in this blog post, which I recommend. Stellar is a distilled version of Bitcoin, optimized for the specific use of transferring value between pairs of currencies. While Stellar has a market value, its core utility is serving as a conversion path between other currencies. The network is composed of gateways, and users hold balances with gateways of their choice. As a user, I can make a deposit with a gateway and, in return, I receive an amount of credit, which I can then use to send money in various currencies to other people on the network. This means that, using Stellar as an intermediary, I can make a deposit to a gateway in USD, and then send euros to my grandmother in Italy without ever actually having any Euros. The network will pair me with another user who wants to convert euros to dollars and fulfill both sides of the exchange order. One of the major differentiating factors between Stellar and Bitcoin is that the former requires trust, while the latter does not. This might seem trivial, but it’s actually a huge difference. Stellar users have to trust the gateway cold wallet, which is how they receive funds.
I see two main causes at play: a preference for convenience over security, and a deeply-ingrained inclination to trust. Society is predicated on such an inclination. As David DeSteno writes in The Truth About Trust, “…the potential benefits from trusting others considerably outweigh the potential losses on average. The ever-increasing complexity and resources of human society—its technological advancement, interconnected social capital, and burgeoning economic resources— all depend on trust and cooperation. … More can be achieved by working together than by working alone. That’s why we trust—plain and simple. The need to increase resources—whether they be financial, physical, or social—often necessitates depending on others to cooperate.” Amazingly enough, for the most part, this strategy is actually successful. When I got to the apartment in LA, I found the key under the pot, exactly as promised. Being distrustful is a consistent psychological burden, one which consumers generally reject. If we can’t be convinced to do something as simple as change our passwords in the face of known security breaches, it’s unlikely that concern for a hypothetical scenario, in which a gateway doesn’t pay out, will keep us from adopting Stellar. Right now, the number of people using Stellar is too small to make any claims about the network’s long term fungibility, but I’m looking forward to seeing the ecosystem develop. —S
Bitcoin relies on mathematical proof, rather than faith and goodwill. In the financial world, you don’t want to hope that someone can be trusted, you want to know so. It’s entirely rational, and in that sense—that it doesn’t require trust—Bitcoin is superior. Ultimately, however, what matters is not just whether something is theoretically superior, but whether it works in practice. If it does, and it actually provides value to its users, they will be willing to look past its shortcomings and use it regardless. Stellar has the potential to make this happen; reliance on trust will not necessarily be a hindrance to its adoption, nor an indicator that the project will fail.
Crypto Biz Magazine
Countless studies indicate that people are inherently bad at evaluating risk. In the past few months, a series of security breaches affecting traditional payment networks have given consumers every reason not to trust them. Personal data of between 70 – 110 million people was stolen from Target. Fifty million credit card numbers were stolen from Home Depot. Just last week, JP Morgan Chase announced it suffered a monumen-
As a Bitcoin enthusiast and i nv e sto r, ARIANNA SIMPSON is particularly passionate about helpi n g wo m e n g e t i nvo l ve d i n t h e B i tco i n co m m u n i ty. She is now at Facebook, wo r k i n g o u t o f t h e N ew York office, where she organizes the Bitcoin meetup group. In her previous lives, Arianna did ecology research for the National Science Foundation in South Africa, co-founded Tigervine, lead sales & boutique operations at Shoptiques.com, and spent several months backpacking through Southern Africa. Her Bitcoin address is: 1DLBeB2NxcGNsCAFyLa6ateQqtBc1o1LJh.
November.2014 Page.21
You can choose the amount of trust you place in a given gateway, denominated in the balance you hold with it. Still, you have to trust when the gateway tells you it will allow you to withdraw a certain amount of money, in a given currency, in exchange for your credits, it will actually do so. If not, it’s completely irrational to use the system in the first place. The network’s ability to operate is a function of whether this kind of trust is present.
tal data breach, in which the data of approximately 76 million households, and seven million small businesses was stolen. Just this year, there have been 579 data breaches, yet most consumers seem entirely unphased, and haven’t changed their behavior at all in response.
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YOU SHOULD SEE THE ANGEL AND VC MONEY POURING INTO THIS SPACE by MAX WRIGHT
By now, you’ve probably heard about Bitcoin, the decentralized currency and payment network, that advocates believe will change the world. Now matter where you stand on Bitcoin, there’s no question… money is pouring into the space. By the end of April, 2014, Bitcoin venture capitalists invested more than $113 million, all in the first four months of the year. This is a 29% increase over the total for all of 2013, which stands at $88 million. And in 2012, Bitcoin startups raised just two million dollars.
Crypto Biz Magazine Page.28 November.2014
Bitcoin startups are on track to receive more than $250 million in venture capital, by the end of 2014. That’s not bad, considering Bitcoin is just five years old—that’s the exact amount of VC money that poured into all internet startups in 1995. There’s no question, the Bitcoin ecosystem is maturing very quickly… but what the hell is it? At its core, Bitcoin is a payment network. Just like checks from banks, Visa, Paypal, and Western Union. It allows person A to send money to person B. For the most part, it has some incredible features that the legacy systems simply cannot compete with. Bitcoin allows anyone to send any amount of money, instantly. For example, at near-zero cost, it’s now possible to instantly send one million USD from person A, in Brazil, to person B, in China. There are no minimums, or maximums, and the location and identity of the sender and recipient is irrelevant. Sounds awesome! A disruptive technology to the world of payments, that has the potential to create mind-blowing efficiencies. So, what’s with all the controversy? Well, here’s where it gets tricky. The way in which Bitcoin achieves this is
unlike any other payment network the world has ever seen. The ramifications touch on politics, liberty, privacy, economics, and much more. Bitcoin is built on a technological innovation called the blockchain. Whether you love Bitcoin or hate it, I don’t think there is anybody that would argue that the invention of the blockchain is an incredibly positive invention, that will dramatically change our lives. Bitcoin is merely the first implementation of blockchain technology. We will most certainly see the blockchain disrupt many industries, not just currency and payment networks, in the next ten years. Perhaps I will cover that in a future article, but I mention it here because—from an Angel’s perspective—I think this reason, above all others, is the most important reason to pay attention to Bitcoin. There are tremendous profits to be made by Angels, in the blockchain space, over the next decade—even if Bitcoin were to fail miserably. Understanding
Bitcoin fully is the first step to identifying opportunities in these future spaces. But let us return to Bitcoin. The blockchain is simply a way to manage a ledger in a trustless, decentralized way. Think of your bank or Paypal account. When you send a check to someone who uses the same bank you do, all that’s really happening is that the bank deducts from your balance, and adds it to the balance of the person you’re paying. It’s just a ledger entry. We rely on banks, as trusted middlemen, to manage that ledger. As we’ve learned, many times throughout history, sometimes banks aren’t all that trustworthy, and depositors can lose their money. Bitcoin solves this problem, by making the ledger public. You can, in fact, download the entire Bitcoin ledger, and see exactly how much money is in every single account, and you can watch the ledger being updated in real time, as people pay each other. To protect people’s privacy though, names are not associated with anyone’s account. Think of it like watching withdrawals and deposits from numbered Swiss bank accounts. You can see the balances and transactions, but you don’t know who owns what.
In Bitcoin, this secret password is called the private key, and the accounts are called Bitcoin wallets.
Depending on your political tastes you may perceive that as a good thing, or a bad thing. But the controversy does not end there. Unlike Visa, Paypal and other payment systems, Bitcoin does not use a government-backed currency as the unit of account in its ledger. Instead, Bitcoin created its own currency (and confusingly called it bitcoin as well—the same name as the payment network), to be the unit of account. The number of bitcoins available are preset, and hard-coded into the Bitcoin software. That number won’t change.
ENTER CONTROVERSY NUMBER TWO Governments and banks are used to being able to change the money supply. Through its country’s central bank, a government can simply create or destroy money. They argue that this flexibility allows them to smooth out the economy, and help facilitate economic growth. The counter-argument… that this is false, that a government changing the money supply is extremely destructive to the economy and growth. Again, your political beliefs will determine whether or not you think this is a good thing. No matter what your beliefs, Bitcoin is most certainly here to stay. The Bitcoin software and blockchain are already on millions of computers all around the world. It would take a policeman in every home to stop Bitcoin now. Governments can make regulations that either slow, or speed up Bitcoin’s adoption, but in the end, Bitcoin is a new reality that the world must learn to deal with. I suspect it may wind up like the gambling industry. Some governments will be friendly to it, and some will not. The investment dollars, and the jobs, will go to countries friendly to it, and consumers can participate from anywhere in the world, in the privacy of their own home.
THIS IS WHERE CONTROVERSY NUMBER ONE COMES IN
Either way, the Angel and VC profits in this space should be electric over the next few years. It will be an interesting ride. —S
Governments and courts are used to being able to confiscate people’s money by simply asking the bank to adjust the ledger. They argue that this helps them fight crime, and reduce tax evasion. Because Bitcoin does not rely on third par-
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All of this is controlled by simple, open source software that anyone can download for free. In this way, Bitcoin is truly a trustless environment. You can review the code and know that it does exactly what it claims to do.
November.2014 Page.29
The integrity of the ledger is maintained because only certain people are able to send money from particular accounts. Through a branch of advanced mathematics called cryptography, it’s possible for the public to confirm whether or not the sender has the secret password, giving them permission to send the funds in that account, without actually knowing the password itself.
ties, there is no one for the government to call to take funds. Only the holder of the private key can move bitcoins. Bitcoin takes power away from governments, and puts it back in the hands of the people.
GET GEMS!
by BELINDA TOO
If gamifying social networks with a financial payout seems like a pretty good idea, read on! We’re all part of multiple networks, which we need for our promotional purposes and interests. We begrudgingly share our personal details, knowing that our metadata is being sold to advertisers who will use it against us. Then we grumble as social networks rake in unbelievable profits, and buy other networks for billions of dollars. We know this money is only possible because of our individual involvement, and we wonder why we don’t see a cent of it.
Crypto Biz Magazine Page.30 November.2014
Social-crypto company Gems have come up with a way to disruptively monetize social networks, and share the profits with the users. What social media user would turn this opportunity down? After all, it’s because of us this money is generated in the first place. Our daily curation of content and contacts makes it interesting to be a part of social media. Yet, until now, we’ve done it for free—as in, we haven’t been paid to do it! It’s fun, and useful, and relevant, and we want it. It’s time to put a price on that—stop scowling when we think of how all this work generates financial gain for others. Gems want to take people’s love for social media, and its necessity in modern life, and introduce the next modern-day must-have: social crypto-currencies. Combining social and crypto is ingenious—why hasn’t it been done before? Our digital lifestyle of communication is instant, can be sent to anyone in the world, and is frequently micro-transaction-like. We want our financial transactions to act in the same way. Adding a crypto feature to social makes sense, because our contacts are already there, all in one central hub. Isn’t that what social networks are supposed to be about? Creating a central place for everything you like—the people you like, the information you want, the advertising for products you like… Essentially, a personally-curated information center just for you, that you never have to leave if you don’t want to. The only thing missing, the financial tool.
Your Gems username doubles as your Bitcoin wallet address, making it so much easier to get your friends to pay their share of the pizza bill. No need to remember any pesky banking details! Within your social network is an in-app token called ‘gems,’ which you can send to friends, or use to access features. For example, advertisers must trade or buy gems to send unsolicited messages, and users who opt in to receive this type of advertising will be paid to read it. The gems can be exchanged for Bitcoin, or for standard currency. Users help create the value, so users share in the profits, and network ownership is decentralized. Users are paid to build the network by inviting their friends, and completing various actions, and get paid to do things we already do as part of our online life—this really is game-changing. It’s clear, by the billions of dollars floating around social networks, that there’s a lot of money in this ‘industry’ of communicating with our friends online. Users are the assets, and have a dollar value in terms of potential advertising dollars and tar-
get markets, but users see none of that money in return. Time to turn that model on its head! Gems is enthusiastic about rewarding users with incentives. This is a new model for social media apps, one in which the user is rewarded for their activity. Up until now, social participation has been taken advantage of, but this Crypto 2.0 tech seeks to remedy that disparity. Gem user accounts have a built-in Bitcoin wallet, making Bitcoin transactions as easy as sending text messages, and the learning curve very short. No intimate knowledge of Bitcoin—of what it is, or how the technology works—is necessary. It’s a part of the social system, and is that easy to use. It’s not much different to in-game money, but in this case, the money is real.
This should translate to a decent-sized uptake of new Bitcoin users, expanding the Bitcoin network and its economy. Getting social network users to use Bitcoin, by being paid for their online activity, is an excellent way to drive audience acquisition, and build mainstream interest in the future of crypto-currency. Gems is built on the CounterParty protocol, which is a peer-to-peer decentralized exchange— useful for issuing assets and trading, and perfect for secure micro-transactions on a social site. Overstock have already recognized its potential, and are using CounterParty developers to build a platform to issue crypto-securities to the public. Because it’s all run as part of the Bitcoin network, there’s no mining component to worry about. Gems founder and CEO, Daniel Peled, assures users that privacy is optimal, an important factor to consider these days. He explains that ‘encryption is performed client-to-client, making secure messages indecipherable by the Gems infrastructure. This is the only real way to achieve 100% privacy because it does not entrust third parties.’ This service will be available on iPhone and Android in mid-November. A beta version of Gems is available at getgems.org, and early adopters can get in on the action by buying into the pre-launch of the Gem in-app tokens, opening November 15. Koinify is facilitating the crowdsale, and you can register at koinify.com
November.2014 Page.31
Hurry up and check it out! Put your social skills to work for you, and get paid, at last! Think of all those productive hours lost to social media. Gems will make it all worthwhile… worth money. Your time, no longer wasted—it’s a gem! —S
Crypto Biz Magazine
COINED: SEMANTICS, BITCOIN, AND LAW
by DOMINIC STEIL
SEMANTICS ARE THE HUMAN WINDOW INTO THE LANGUAGE OF THOUGHT Existing financial terms are in place as ideals, and generally accepted principles, that businesses are supposed to know and abide by, in order to provide consumer protection. The proposed BitLicense by the NY Department of Financial Services (NYDFS) is a perfect example of the way in which existing financial terms overlook the capabilities of blockchain technology.
Crypto Biz Magazine Page.32 November.2014
Businesses and customers involved in “Virtual Currency Business Activities” do, in fact, need to be protected. However, the proposed rules and regulations in Part 200 (Virtual Currencies), will undoubtedly stifle innovation, and the proposal completely ignores the underlying applications and functions of this new blockchain technology. In an effort to classify this technology using existing terms, the IRS classifies Bitcoin as an asset, however FinCEN classifies companies in this space as money transmitters. So, which one is it? How would you describe Bitcoin? A digital currency/commodity/network that enables the digital transfer—and store—of value, over the Internet? How would you describe the Internet? Really, what IS the Internet? A global network that enables the transfer of bits of data? A digital medium that facilitates connection and communication? The value in Bitcoin, and in blockchain technology, is in its transparent, and equal cryptographic nature. Application Programming Interfaces (APIs) with blockchains, and sidechains will create an unlimited range of financial tools, and protective measures for consumers and businesses to:
Ensure compliance with domestic and international laws, rules, and regulations
Augment the ability for anti-fraud, anti-money laundering, cyber security, and counter-terrorism finance
Protect consumers from privacy and information security events, fiat insolvency, and—ultimately—financial instability
Bitcoin calls the bluff of existing financial terms. Software built on top of blockchain technology does not allow default. The third party needed in so many of our trust-based models is replaced by code. The escrow is software, built in the form of mathematically-bound hedges. Multi-signature cryptographic keys predetermine outputs, based on met, or unmet inputs. The blockchain provides a perpetual, and irreversible universal balance sheet, with the most recent, time-stamped state of ownership. This universal ledger is a digitally-stored value technology that will bring everyone onto the same financial grid. The existing lexicon doesn’t seem to fit. We understand entities in terms of four things:
who or what brought it about
what it’s made of
what shape it has
what it’s for
There’s this idea to get across, a huge, complex idea: Value can be transferred as fast as bits of data travel over the Internet. There’s this narrative: It’s an unwritten script. It’s a public ledger. A universal, digital ledger. Mathematically open for anyone to build on top of. An API for transferring assets—without a trusted third party. There will only be twenty-one million coins, and these coins are divisible down to eight decimal places, 2.1 quadrillion units. It’s radical, the network is universal. It augments the ability to check, store, and transfer value—human or machine. The wordsmith, Satoshi Nakamoto, coined the word in a way so that others could relate it to what they already know. Language evokes meaning—it’s what we use to form the metaphors that bring literal meaning from one dimension to the next. The correct choice of words means everything.
Bit = Data = Internet
R Transfer Data
Coin = Currency = Exchange
R Transfer Value
To ease the listener’s understanding of the phrasing, we create a metaphor that reminds them of the idea, and hope it evokes a similar idea in their mind. Then, at some point, the metaphorical ladder is kicked it out, and it just is. At this point, everyone agrees on, and understands, what you mean.
People following Bitcoin are becoming more cognizant of this. People dismissing it still see a fake Internet currency. The Facebooks, Googles, Twitters, and Amazons are the conventions and abstractions that we’re trying to imagine, created on top of Bitcoin.
To understand it, we’re relating it to things we already know, when it’s so much more profound than that. So, if the listener comes from a financial background: you own shares, and mining is like doing the accounting. If they come from a computational background: talk about the merkel trees.
Why should the businesses that are building the wallets, exchanges, and financial tools, that are laying down the foundation for these abstractions be subject to such a strict regulatory environment? How could these regulations affect our advancement, if the proposal is used as a guide for future legislation in the US?
If someone asked you “What is the Internet?” You may respond, “What do you mean, ‘What is the Internet’? It just is.”
There’s a definite need for a new payment system. Credit cards were not made for the Internet. Look at the huge security breaches at retailers like Home Depot and Target, and financial institution JP Morgan. Information that leads to identity, such as name, physical address, and card numbers, all compromised.
If someone today said, “I’m going to start an Internet tech company,” it would sound redundant. Information technology has really almost upended the meaning of tech as a whole. “What type of Internet tech company,” you would ask. This will be analogous for fintech companies in the next 20 years. They won’t be saying ‘I’m starting a Bitcoin company,’ they’ll build something on top of the Bitcoin network and technology, similar to all of the huge, venture-backed companies built on top of the Internet. Nevertheless, the lexicon we currently use when dealing with Bitcoin could range from riches to crimes. Crypto Biz Magazine Page.34 November.2014
Then you take the blockchain—the universal ledger that allows for trustless transactions, an irreversible history of every transaction, and an exponentially-growing network, and there’s this whole new realm of applications. It’s a truly technological advancement.
Let’s say I’m mining bitcoin, and then I use the bitcoin—in an app called Gyft—to buy an Amazon gift card, then I redeem it for my purchase at check-out. I’m printing out a digital currency that I can use to purchase gift cards, and then using these gift cards to buy things on the Internet. In existing financial terms it, sounds a lot like counterfeiting, and money laundering. HERE’S ANOTHER EXAMPLE: “A crowdsale of digital tokens” is a lot different then “Initial coin offerings”
Existing terms fall short of the potential of the underlying blockchain technology of Bitcoin. The recent FinCEN update suggested that all companies in this space are money transmitters, when use cases for decentralized blockchain technology go far beyond just money. They need to trust the trust-less network, and what it’s backed by. As Galileo once said, “Our universe is a ‘grand book,’ written in the language of mathematics.” Bitcoin is the next chapter, waiting to be written. So, in closing…
If you’re going to build a Bitcoin business, do not involve the transmission of money
If you are going to transmit money, get a transmission license (Federal and State)
Apply for a bank account
KNC and anti-money laundering reporting is a necessity
Use the right vocabulary, and make it well-documented
Find someone with a talent for cooperation —S
One sounds like Kickstarter, the other sounds like unregistered securities offerings. There’s a disconnect between what we know we can use Bitcoin for, and what this technology has everyone excited about. Yeah, we know, we can send an unlimited amount of money to anyone, anywhere, with a Bitcoin wallet. But this already exists, Bitcoin just makes it much more efficient.
DOM STEIL
is an entrepreneur from the Silicon Valley. He is well-versed in a variety of technological fields and has experience as a business analyst at the international enterprise level. For more information, visit his blog at www.dominicsteil.wordpress.com. Dom also accepts Bitcoin tips to: 1FiYresjQP7GV9EUxr9fudWm3Xz7WC2VMC
BITCOIN MERCHANT DIRECTORY ADORMO
COINRX
EXPEDIA
adormo.com
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BITFARE
DISH NETWORK
bitfare.org
dish.com
expedia.com
NEW MEXICO TEA CO. nmteaco.com
JRT PROPERTY
jrt.com
JRT Property International Real Estate NEW EGG
OVERSTOCK.COM
SIMPLY TRAVEL s implytravelonline.com
newegg.com
overstock.com
This is a list of merchants, and their websites, that accept bitcoins for their products. Please contact us at directories@cryptobizmagazine.com if you know merchants who are now accepting bitcoins and who you’d like to see added to this list. Additionally, please let us know if you find that any of these merchants has stopped accepting bitcoins, or if you have any difficulty using bitcoins with them.
DIGITAL FINANCE
—THE NEXT FIVE YEARS DESIGNING THE FUTURE OF OUR MONEY By MANIE EAGAR, FOUNDER AND CHAIRMAN, DIGITAL FINANCE INSTITUTE
As we mull all the latest innovations in digital finance—from mobile payments, to digital banking, to cryptocurrency plays—a discordant picture is emerging.
Crypto Biz Magazine Page.36 November.2014
First, however, our current reality Whether we’re in a financially ‘developed’ environment, flooded with credit card options, and numerous mobile payment choices thrust upon us; or in an emerging market, where direct access to our money is intermediated by a mobile phone company, we all want pretty much the same thing when it comes to our money. We want our money to be readily accessible, and we don’t want the value to be siphoned off or diminished by fees. Simply put: user-friendly, frictionless, flexible, and almost free—things we all want, and have come to realize are still a long way off. It is, after all, ‘our money,’ as any sane consumer will argue. It’s difficult to understand why money, that you’ve earned, must be kept safe and secure by a third party—while not providing access to it, whenever you wish, and for whatever reason. When is your money really your money? It’s a highly relevant question, as we hear about ever-tighter regulations, more hoops for us to jump through, and the latest and greatest fintech inno-
vations, to deliver us our money, whenever and wherever we need it. This is a refrain I hear repeatedly at cryptocurrency conferences, with the overall message, ‘we need to take our money back, as well as the means by which we earn it, and wish to distribute it.’ But is this feasible? Consumers have been cajoled into paying fees for literally everything—to access money at point-of-sale, to share money or invest it, or to save it for the future; and if you try to remit or transfer money, it can cost an arm and a leg— up to 40% fees have been recorded by diaspora African, Asian and Hispanic communities to support their families at home, from abroad. If we want the digital economy to flourish globally, reaching all communities—urban and remote, not to mention areas of strife and cultural and environmental distress—we will need seamless and inexpensive solutions that provide equal, and affordable access to all. The emerging markets don’t need more banking, regulations or fees—they need simple access, to be able to spend or distribute their money, and exchange the value of their goods and services. Currency was adopted as a medium of exchange thousands of years ago, as a substitute for the transfer of physical goods and services, to ex-
change and store value, and simply get on with the business of life, and the life of business. One has to spend some time in an emerging economy to understand the vast, untapped wealth that is already transacted, through informal trade, barter, and a variety of exchanges. No one wants to be anonymous in any of these environments. We want to be known. It’s good for business, to build trust and reputation, increasingly, as we build our global platforms of exchange. This ensures our identities and money remain secure and private, protected from theft and abuse, and their store of value is still there, and theirs, tomorrow. It’s a misnomer to talk about the ‘unbanked.’ The digital economy will be one of interactive value exchange, digitally and cryptographically secure. Any device, especially mobile, will be the means of access, storage, distribution and transfer. Current offerings are so-called ‘walled gardens.’ The world still awaits, open yet secure, and transparent digital finance innovations, fit for all.
There’s currently a lot of marketing hype, proclaiming a Utopian model for the franchise of digital value exchange solutions, that are yet to prove sustainable. The focus should be on human-centric design of these solutions, from the ground up (grassroots initiatives), and engaging directly with the users that it’s intended for. It must take account of the dynamics of geographic boundaries, cultural leanings, and territorially defined protectionism, all with their own regimes, currencies, networks, regulations, jurisdictions, etc.—and yes, the ‘central authorities’ who want to underwrite and control it all. As we’ve seen, in leading economies in the world, from Russia to China, and now even the USA, how easy it is for any country to decree whether or not emerging crypto-currency and fintech solutions are welcome in their territories, or fit their incumbent regimes, service providers, stakeholders, and legacy gate-keeping systems.
Fast forward to the future
One could say, as with the spate of new alt-currencies—let a thousand flowers bloom. In the end, we need consistency, sustainability and fair exchange of value everywhere. We need it in
Crypto Biz Magazine
Then along came Bitcoin. There are many ambitious projects, currently under development, which promise that Bitcoin, and Bitcoin-related innovations, can address everyone’s value exchange challenges in a ‘frictionless and almost free’ manner. It aims to offer new and innovative ways to do all of the above, in a manner that delivers some modicum of control back to the consumer, but only to the extent that we can all agree in a fair and equitable form of exchange, that the value remains stable, and—like money under the proverbial mattress—it’s still there tomorrow to buy a meal, or a car, or a house, as we had originally intended.
November.2014 Page.37
Without stating the obvious, what most legacy service providers want to achieve is to stay in the game, and gain an even stronger foothold in this highly lucrative—and growing—world of money/value exchange, while new financial technologies are looking for points of entry. They all want to move your money from A to B, for a fee.
the marketplaces, streets, and homes of the future producers of goods and services, especially digital economy offerings. In principle, no one should be left behind.
The levers of change In 2013 alone, private fintech companies raised nearly $3 billion in funding. With this rapid investment-fueled innovation—Marc Andreessen of Andreessen Horowitz predicts that digital finance will expand faster over the next five years, than the Internet did over the past fifteen—and increasing scale, and range of investment, what will it take to provide the platform for the future of our money, and the digital economy that we all wish to embrace? There are three key areas that, hand-in-hand, will form the cornerstones, for digital finance specifically, and the global economy in general:
INNOVATION
Crypto Biz Magazine Page.38 November.2014
Globally, support is growing for digital finance ecosystem startups, entrepreneurs, and investor communities that are integrating distributed digital banking, mobile transactions, and crypto-currency solutions and delivery platforms; and participation in the emerging digital economy market areas, such as carbon emission credits, environmentally motivated initiatives, and other sectors.
A point of convergence, between legacy financial systems and fresh innovation in the financial sector, will drive the new business models that will fuel the digital finance future. The challenge will be favorable regulatory regimes, and compliance rules that don’t ‘throw the baby out with the bathwater,’ and restrict or redirect development—especially in areas where it could be most beneficial, reach the poorest of the poor, and a broad range of excluded communities.
TRANSPARENCY Transparent processes lead to trust, and increase the bandwidth of value exchange. As with the digital marketplaces that constitute the share economy, success doesn’t just hinge on providing a service, but on the quality of the experience; and, most importantly, is it affordable, secure, and accessible? There must be broader involvement, greater development of international collaborations, and initiatives
for standardized and balanced regulation. Regulation over digital payments and remittances, and emerging technology issues. There’s also the need for monitoring regulatory performance, and reform for effective consumer and investor protection in digital finance. For instance, assessments and compliance directives need to be ‘light touch,’ micro-finance, crowdfunding, peer-to-peer lending of nominal amounts, especially in emerging economies. Full-scale business activities and investments could fall under a more stringent tier of regulations.
INCLUSION Financial inclusion is a key driver of any future, sustainable, global society with fair and equitable access to resources, wealth, value exchange, and affordable and relevant financial services. The availability of banking and payment services to the entire population, without discrimination, should be the prime objective of any financial inclusion public policy. The development of innovative solutions is required to solve the problems of financial inclusion, to support sustainable economic growth, and to advocate for greater participation of women, and excluded communities, in financial technology, and the digital economy. Globally, an estimated 2.5 billion working-age adults have no access to the types of formal financial services delivered by regulated financial institutions. One in twelve American families don’t have banking. One million Canadians—specifically, first nations—don’t have banking. Increasing access, for more people, across both geographies and incomes, drives greater equality of opportunity in society. For example, in sub-Saharan Africa, only 24% of adults have a bank account, even though Africa’s formal financial sector has grown in recent years. It’s argued that—as banking services are in the nature of public good—the availability of banking and payment services, to the entire population, without discrimination, is the prime objective of financially inclusive public policy. The United Nations defines the goals of financial inclusion as follows: Access, at a reasonable cost, for all households, to a full range of financial services, including savings or deposit services, payment and transfer services, credit and insurance; Sound and safe institutions, governed by clear regulation, and industry performance standards; Financial and institutional sustainability, to ensure continuity and certainty of investment; and
Competition, to ensure choice, and affordability for clients.
A study commissioned by the Gates Foundation, A Digital Pathway to Financial Inclusion states “…a growing body of evidence which indicates that connecting
poor people to a digital financial system will generate sizable welfare benefits.” The authors argue that “…digital financial inclusion will accelerate when stakeholders step outside their comfort zones to test new commercial and regulatory models. Banks, for example, are unlikely to cultivate “bank-led” pathways to digital payments in poor and rural communities if they try to maintain a tight grip on all aspects of their distribution channels. Instead, they will have to give their distribution partners (e.g. mobile operators, retail distributors) enough compensation and branding space to incent them to do the heavy lift of building a national cash-digital conversion network.” “Mobile operators are unlikely to facilitate the migration from payments to financial services unless they loosen their grip on the user experience. Indeed, we suspect mobile operators will have to convert their closed application programming interfaces (APIs) into open platforms that make it easier for banks and other application providers to integrate with their payment systems. And policymakers are unlikely to see material gains in digital financial inclusion if they cling to regulatory models, which fail to distinguish between the risks posed by payments from those posed by financial intermediation.”
An additional study, by the Bill and Melinda Gates Foundation and McKinsey & Co., found, in countries where more than 70% of people can pay digitally, that financial inclusion is over 85%.
Crypto-currency innovations, initiated by the Bitcoin protocol and later iterations, have opened up a range of applications, and potential solutions for an increasingly globalized economy. It invites further exploration. Emerging digital finance models, and technologies for financial inclusion, can positively impact those who are ‘unbanked’ or excluded, and create greater access, equality and efficiencies, in established markets. Then, just maybe, a digital finance future, where money is ‘flexible, frictionless and—almost—free’ might just become a reality for all. —S
They conclude “…those willing to revisit long-held assumptions in financial regulation, telecommunications, and banking will indeed carve the digital pathway to financial inclusion.” One could add to the new crypto-currency innovations. As Bill Gates himself recently stated, in an interview on Bloomberg Street Smart TV, “Bitcoin is exciting, because it shows how cheap it can be.” November.2014 Page.39
“Bitcoin is better than currency in that you don’t have to be physically in the same place and, of course, for large transactions, currency can get pretty inconvenient.” Gates felt that, in the future, financial transactions will “…be digital, universal and almost free.” “The customers we’re talking about aren’t trying to be anonymous, they’re willing to be known, so Bitcoin technology is key and you can add to it or you could build a similar technology where there’s enough attribution where people feel comfortable that this is nothing to do with terrorism or any type of money laundering.”
He went on to predict, “Digital money will catch on in India, and parts of Africa, and help the poorest a lot.” over the next five years.
MANIE EAGAR is a global investment and mergers and acquisitions advisor, and marketing and business development executive with over 30 years of driving new wealth creation, business growth and strategic innovation. The past two years he has focused on deal shaping and making in the new world of digital value inter-exchange, mobile media delivery platforms and digital finance 2.0 futures, inspired by the Bitcoin protocol phenomenon
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Gates said that his organization is “…involved in digital money, but unlike Bitcoin, it would not be anonymous digital money.”
BITCOIN RUSH CRYPTO CURRENCY IS HERE TO STAY Crypto Biz Magazine Page.40 November.2014
by BITCOIN RUSH If only the world knew: crypto-currency is here to stay, a new gold has been released, and it’s digital. I believe that. That’s what I feel in my gut. My body tells me a lot when I simply pay attention. The body is made up of 37.2 trillion cells, completely decentralized and cooperative, no organ is trying to put its purpose onto the other. What we have instead is an abundant, instant transmission of information. Selfinterest is based on communal survival. Molecules and cells are the basis of biological life—we’re decentralized beings by nature. Anything going against this notion serves humanity in a counterproductive way. Again and again, evolutionary biology proves to us that decentralized systems are a wonderful place to be, living in peaceful cooperation. Like ancient bacteria for example: they coexisted for two billion years on earth. Six- to ten thousand-year-old cities have been excavated with no defensive walls having been found: a complete cooperative design for a peaceful community. Let’s not forget that these types of societal structures support less energy consumption.
Life is really a decentralized open system; it gets rid of waste all the time for its own survival. Crypto-currency is no different. The current financial system has been stagnating for the last 35 years. Decentralized information, like crypto-currency, is speeding around the globe, seamlessly and without borders. Now it’s time to move on, rediscovering the ancient wisdom of true communal living. Today, the trance state of kingship is crashing its dark wings. Borders can never prevail the decentralized digital light. Cryptographic technology brings us programmable trust. A free economy has been born. Welcome to the world of cooperation! Bitcoin Rush cannot be happier to be part of this amazing community, a true 37.2 trillion cell experience, indeed. —S
BITCOIN RUSH started out in March of 2014 forming Crypto News Media for the purpose of bringing knowledge about cryptographic technological developments to the community. He produces weekly crypto news shows introducing all types of crypto related businesses and innovations. His broadcasts include The Open Minute, a great platform for the community to participate live in the show. Please support BitcoinRush on Twitter @Bitcoin_Rush
Crypto Biz Magazine Page.42 November.2014
SFU MEETUP
by MIKE YEUNG If Bitcoin has taught me anything, it’s that passion and perseverance are important keys to overcoming any obstacle. When my friends and I formed the Simon Fraser Bitcoin Club in early 2013, the mentors and Bitcoiners that we talked to were supportive, but dubious that a student advocacy group for Bitcoin would amount to anything. At no point did I doubt Bitcoin’s ability to transcend boundaries, and make for a better world. I knew that what Satoshi left for us was ultimately a force of good; regardless of how many times Bitcoin crashed and how much negative press it received. However, because open source projects don’t come with marketing budgets, it’s up to true believers to push these innovations forward. So I too had to ask myself some tough questions— would Bitcoin ever take off at universities? Are there any tangible overlaps between controversial open source innovations, and academia? For institutions like SFU, what kind of opportunities and risks are in-
volved when dealing with such a fundamentally radical invention? After a year’s worth of educational events, workshops, media interviews, community outreach, and networking—among other things—our club can now be considered one of the public’s go-to organizations for expertise on Bitcoin in Canada, particularly at the university level. The concept of creating student clubs for crypto-currencies seems to have spread far and wide across North America and beyond. What is most exciting is that our efforts have led SFU to consider adopting Bitcoin in various ways. I’m often asked about the club’s most prominent milestones. Last November, we raised $1,400 in Bitcoin donations at one of our events, where we held the world’s first in-person Bitcoin fundraiser. Donations went to Schools Building Schools, a Canadian NPO that provides vocational training in Uganda for impoverished youth. The beginning of this year, we ran a couple of Bitcoin workshops that covered topics such as wallet set-up, security, trading, and mining. Since then,
we held several follow-up workshops in spring and summer, with increasing public interest and success. We held a conference for CoinFest 2014 in February, that featured insightful presentations, and a discussion panel by key players in the Canadian Bitcoin space. This past July, SFU held its first official Bitcoin event, which featured a Bitcoin presentation by David Andolfatto, VP of Research at the St. Louis Federal Reserve, and— coincidently—an economics professor at SFU. I had the pleasure of being on a Q&A panel with David to answer some really tough questions from the audience. Later on in the summer, the club’s efforts resulted in SFU becoming the first-ever university to accept Bitcoin donations. SFU received 12 bitcoins— from our club, and Scott Nelson, our mentor and co-founder of Dana.io. Two health-science students from SFU, Laurie Macpherson and Lauren Shandley used the donations to help their humanitarian co-op project. The pair went to Kolkata, India, where they’re spending the fall term working for Destiny Reflection, a social enterprise that empowers victims of human trafficking.
Running the club and engaging the community has been an amazing journey. However, I still feel that the Bitcoin scene in Canada has a lot of room to grow. The focus should now be on getting this technology to be fully understood, in a relevant way, by different professionals such as lawyers, accountants, educators, institutional investors and those involved in banking and government regulation.
Our first client is also our biggest supporter—Simon Fraser University. We have several projects underway with SFU. We hope to see the school start accepting bitcoin at all three of its bookstores, and its dining services in the very near future, as a progressive way for students to pay for goods and services. Students could
I recently attended a special event held by SFU, which featured Richard Florida and Ray Kurzweil. The topic of which was whether innovation can save humanity. Florida uttered something amazingly simple and resoundingly true, “innovation will save us, but it’s up to us—the people—to drive innovation forward, rather than wait for innovation to come to us.” So I urge everyone who is involved in Bitcoin, and— more importantly—everyone who isn’t, to make a closer examination of crypto-currencies in relation to the world around them, and ask themselves what they can do on a personal level to push Bitcoin forward. I want to end this with a big thanks to CryptoBiz magazine for this wonderful opportunity to showcase our club, SFU, and our company. And I’d like to shout out to Mark McLaughlin from Simon Fraser University, the Bitcoin Co-op, and everybody who has stood by my team and made things possible. Make sure to stay tuned to www.sfu.ca/bitcoin and www.saftonhouse. com to keep up with our exciting developments! —S
MICHAEL YEUNG is the founder of the Simon Fraser Bitcoin
Club and has explained Bitcoin on Global TV, and CBC Radio, and in The Vancouver Sun, Huffington Post, and other publications. SFU sits alongside Stanford, MIT, and Berkeley in the College Crypto Network. Michael is also the CEO of Saftonhouse Consulting Group, a crypto-currency consultancy, and a member of the Bitcoin Foundation. His goal is to make Bitcoin accessible, practical, and useful for everyday people. Follow him on Twitter: @saitoshee
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With that in mind, we started Saftonhouse Consulting Group at the beginning of this year. The company was founded by seven members of the SFU club, and our mission is to advise businesses, non-profits, and individuals on how to leverage Bitcoin and related technologies. Our current focus is to provide high-level customized integration of Bitcoin for our clients.
If SFU takes a leap forward and jumps in with both feet, the result would be more than just Bitcoin adoption on campus. The hope is that, through Bitcoin initiatives, a whole new level of dialogue will be created on campus, regarding innovation and sustainability. It would give Bitcoin another level of legitimacy, while also helping to improve SFU’s profile, and fulfilling the school’s mission to engage the world. As for Saftonhouse, we’ve got a busy year ahead of us. That’s why we’ve recently expanded our team to include four talented crypto-currency gurus. We’re also a sponsor of Startup Weekend Vancouver, happening in November—an event that local startups here in Vancouver should definitely check out.
November.2014 Page.43
What’s next for the club? We’re currently building a new executive and ambassador team, to support SFU’s upcoming Bitcoin initiatives. For those interested, you can apply here.
potentially buy bitcoins without ever leaving the school grounds, as SFU is considering placing several Bitcoin ATMs in place—one on each of their Burnaby, Surrey and Vancouver campuses. There are also plans to hold a Bitcoin expo at SFU next spring. This is in addition to several other exciting projects involving Bitcoin and SFU that we can’t reveal just yet.
GITHUB BITCOIN GLOSSARY Some unusual terms are used in Bitcoin documentation and discussions about tx or coinbase, or words like scriptPubKey fly around, without reference or context. Help is here! This glossary will help you understand the exact meaning of all Bitcoin-related terminology—both words and phrases.
0-CONFIRMATION (ZEROCONFIRMATION)
See Unconfirmed Transaction and Confirmation Number.
51% ATTACK
Crypto Biz Magazine Page.44 November.2014
Also known as >50% attack or a double spend attack. An attacker can make a payment, wait till the merchant accepts some number of confirmations and provides the service, then starts mining a parallel chain of blocks starting with a block before the transaction. This parallel blockchain then includes another transaction that spends the same outputs on some other address. When the parallel chain becomes more difficult, it is considered a main chain by all nodes and the original transaction becomes invalid. Having more than a half of total hashrate guarantees possibility to overtake chain of any length, hence the name of an attack (strictly speaking, it is “more than 50%,” not 51%). Also, even 40% of hashrate allows making a double spend, but the chances are less than 100% and diminish exponentially with the number of confirmations that the merchant requires.
This attack is considered theoretical as owning more than 50% of hashrate might be much more expensive than any gain from a double spend. Another variant of an attack is to disrupt the network by mining empty blocks, censoring all transactions. An attack can be mitigated by blacklisting blocks that most “honest” miners consider abnormal. Under normal conditions, miners and mining pools do not censor blocks and transactions as it may diminish trust in Bitcoin and thus their own investments. 51% attack is also mitigated by using checkpoints that prevent reorganization past the certain block.
ADDRESS
Bitcoin address is a Base58Check representation of a Hash160 of a public key with a version byte 0x00 which maps to a prefix “1.” Typically represented as text (ex. 1CBtcGivXmHQ8ZqdPgeMfcpQNJrqTrSAcG) or as a QR code. A more recent variant of an address is a P2SH address: a hash of a spending script with a version byte 0x05 which maps to a prefix “3” (ex. 3NukJ6fYZJ5Kk8bPjycAnruZkE5Q7UW7i8). Another variant of an address is not a hash, but a raw private key representation (e.g.5KQntKuhYWSRXNqp2yhdXzjekYAR7US3MT1715Mbv5CyUKV6hVe). It is rarely used, only for importing/exporting private keys or printing them on paper wallets.
ALTCOIN
A clone of the protocol with some modifications. Altcoins usually have rules incompatible with Bitcoin and have their own genesis blocks. Most notable altcoins are Litecoin (uses faster block confirmation time and scrypt as a proof-of-work) and Namecoin (has a special key-value storage). In theory, an
altcoin can be started from an existing Bitcoin blockchain if someone wants to support a different set of rules (although, there was no such example to date). See also Fork.
ASIC
Stands for “application-specific integrated circuit.” In other words, a chip designed to perform a narrow set of tasks (compared to CPU or GPU that perform a wide range of functions). ASIC typically refers to specialized mining chips or the whole machines built on these chips. Some ASIC manufacturers: Avalon, ASICMiner, Butterfly Labs (BFL) and Cointerra.
ASICMINER
A Chinese manufacturer that makes custom mining hardware, sells shares for bitcoins, pays dividends from on-site mining and also ships actual hardware to customers.
BASE58
A compact human-readable encoding for binary data invented by Satoshi Nakamoto to make more user-friendly addresses. It consists of alphanumeric characters, but does not allow “0,” “O,” “I,” “l” characters that look the same in some fonts and could be used to create visually identical looking addresses. Lowercase “o” and “1” are allowed.
BASE58CHECK
A variant of Base58 encoding that appends first 4 bytes of Hash256 of the encoded data to that data before converting to Base58. It is used in addresses to detect typing errors.
BIP
Bitcoin Improvement Proposals. RFC-like documents modeled after PEPs (Python Enhancement Proposals) discussing different aspects of the protocol and software. Most interesting BIPs describe hard fork changes in the core protocol that require a super-majority of Bitcoin users (or, in some cases, only miners) to agree on the change and accept it in an organized manner.
BITCOIN
Refers to a protocol, network or a unit of currency. As a protocol, Bitcoin is a set of rules that every client must follow to accept transactions and have its own transactions accepted by other clients. Also includes a message protocol that allows nodes to connect to each other and exchange transactions and blocks. As a network, Bitcoin is all the computers that follow the same rules and exchange transactions and blocks between each other. As a unit, one Bitcoin (BTC, XBT) is defined as 100 million satoshis, the smallest units available in the current transaction format. Bitcoin is not capitalized when speaking about the amount: “I received 0.4 bitcoins.”
GITHUB BITCOIN GLOSSARY BITCOIN CORE
New name of BitcoinQT since release of version 0.9 on March 19, 2014. Not to confuse with CoreBitcoin, an Objective-C implementation published in August 2013. See also Bitcore, a JavaScript implementation for Node.js by Bitpay.
BITCOINJ
A Java implementation of a full Bitcoin node by Mike Hearn. Also includes SPV implementation among other features.
BITCOINJS
A JavaScript toolkit. Allows signing transactions and performing several elliptic curve operations. Used on brainwallet.org.
BITCOINQT
Bitcoin implementation based on original code by Satoshi Nakamoto. Includes a graphical interface for Windows, OS X and Linux (using QT) and a command-line executable bitcoind that is typically used on servers. It is considered a reference implementation as it’s the most used full node implementation, especially among miners. Other implementations must be bug-for-bug compatible with it to avoid being forked. BitcoinQT uses OpenSSL for its ECDSA operations which has its own quirks that became a part of the standard (e.g. non-canonically encoded public keys are accepted by OpenSSL without an error, so other implementations must do the same).
BITCOIND
Original implementation of Bitcoin with a command line interface. Currently a part of BitcoinQT project. “D” stands for “daemon” per UNIX tradition to name processes running in background. See also BitcoinQT.
A Bitcoin utilities library in Ruby by Julian Langschaedel. Used in production on Coinbase.com.
BLOCKCHAIN
A public ledger of all confirmed transactions in a form of a tree of all valid blocks (including orphans). Most of the time, “blockchain” means the main chain, a single most difficult chain of blocks. Blockchain is updated by mining blocks with new transactions. Unconfirmed transactions are not part of the blockchain. If some clients disagree on which chain is main or which blocks are valid, a fork happens.
BLOCKCHAIN.INFO
A web service running a Bitcoin node and displaying statistics and raw data of all the transactions and blocks. It also provides a web wallet functionality with lightweight clients for Android, iOS and OS X.
BRAIN WALLET
Brain wallet is the concept of storing private keys as a memorable phrase without any digital or paper trace. Either a single key is used for a single address, or a deterministic wallet derived from a single key. If done properly, a brain wallet greatly reduces the risk of theft because it is completely deniable: no one could say which or how much bitcoins you own as there are no actual wallet files to be found anywhere. However, it is the most error-prone method as one can simply forget the secret phrase, or make it so simple that someone is able to brute force and steal all the funds. Additional risks are added by a complex wallet software. E.g. BitcoinQT always sends change amount to a new address. If a private key is imported temporarily to spend 1% of the funds and then the wallet is deleted, the remaining 99% is lost forever as they are moved as a change to a completely new address. This has already happened to a number of people.
BRAINWALLET.ORG
U t i l i t y b a s e d o n b i tco i n j s to c ra f t t ra n s a c t i o n s by hand, convert private keys to addresses and work with a brain wallet.
BITCORE
BTC
A Bitcoin toolkit by BitPay written in JavaScript. More complete than Bitcoinjs.
The most popular informal currency code for 1 Bitcoin (defined as 100,000,000 Satoshis). See also XBT.
BLOCK
CASASCIUS COINS
A data structure that consists of a block header and a merkle tree of transactions. Each block (except for genesis block) references one previous block thus forming a tree called the blockchain. Block can be thought of as a group of transactions with a timestamp and a proof-of-work attached.
BLOCK HEADER
BLOCK HEIGHT
A sequence number of a block in the blockchain. Height 0 refers to the genesis block. Several blocks may share the same height (see Orphan), but only one of them belongs to the main chain. Block height is used in Lock time.
CHANGE
Informal name for a portion of a transaction output that is returned to a sender as a “change” after spending that output. Since transaction outputs cannot be partially spent, one can spend 1 BTC out of 3 BTC output only by creating two new outputs: a “payment” output with 1 BTC sent to a payee address, and a “change” output with remaining 2 BTC (minus transaction fees) sent to the payer’s addresses. BitcoinQT always uses a new address from a key pool for better privacy. Blockchain.info sends to a default address in the wallet.
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A data structure containing a previous block hash, a hash of a merkle tree of transactions, a timestamp, a difficulty and a nonce.
Physical collectible coins produced by Mike Caldwell. Each coin contains a private key under a tamper-evident hologram. The name “Casascius” is formed from a phrase “call a spade a spade,” as a response to the name of Bitcoin itself.
November.2014 Page.45
BITCOIN-RUBY
CONTINUED
GITHUB BITCOIN GLOSSARY A common mistake when working with a paper wallet or a brain wallet is to make a change transaction to a different address and then accidentally delete it. E.g. when importing a private key in a temporary BitcoinQT wallet, making a transaction and then deleting the temporary wallet.
CHECKPOINT
A hash of a block before which the BitcoinQT client downloads blocks without verifying digital signatures for performance reasons. A checkpoint usually refers to a very deep block (at least several days old) when it’s clear to everyone that the block is accepted by the overwhelming majority of users and reorganization will not happen past that point. It also helps to protect most of the history from a 51% attack. Since checkpoints affect how the main chain is determined, they are part of the protocol and must be recognized by alternative clients (although, the risk of reorganization past the checkpoint would be incredibly low).
CLIENT See Node.
COIN
An informal term that means either 1 bitcoin, or an unspent transaction output that can be spent.
Crypto Biz Magazine Page.46 November.2014
COINBASE
An input script of a transaction that generates new bitcoins, or the name of that transaction itself (“coinbase transaction”). Coinbase transaction doesn’t spend any existing transactions, but contains exactly one input which may contain any data in its script. Genesis block transactions contain a reference to The Times article from January 3rd, 2009 to prove that more blocks were not created before that date. Some mining pools put their names in the coinbase transactions (so everyone can estimate how much hashrate each pool produces). Coinbase is also used to vote on a protocol change (e.g. P2SH). Miners vote by putting some agreed-upon marker in the coinbase to see how many support the change. If a majority of miners support it and expect non-mining users to accept it, then they simply start enforcing the new rule. The minority should either continue with a forked blockchain (thus producing an altcoin) or accept the new rule.
COINBASE.COM
US-based Bitcoin/USD exchange and web wallet service.
COLORED COIN
A concept of adding a special meaning to certain transaction outputs. This could be used to create a tradable commodity on top of Bitcoin protocol. For instance, a company may create 1 million shares and declare a single transaction output containing 10 BTC (1B satoshis) as a source of these shares. Then some or all of these bitcoins can be moved to other addresses, sold, or exchanged. During a voting process or a dividend distribution, share owners can prove ownership by simply signing a particular message by the private keys associated with addresses holding bitcoins derived from the initial source.
CONTINUED
COLD STORAGE
A collective term for various security measures to reduce the risk of remote access to the private keys. It could be a normal computer disconnected from the Internet, or a dedicated hardware wallet, or a USB stick with a wallet file, or a paper wallet.
COMPACTSIZE
Original name of a variable-length integer format used in transaction and block serialization. Also known as “Satoshi’s encoding.” It uses 1, 3, 5 or 9 bytes to represent any 64bit unsigned integer. Values lower than 253 are represented with 1 byte. Bytes 253, 254 and 255 indicate 16-, 32- or 64-bit integers that follow. Smaller numbers can be presented differently. In bitcoin-ruby it is called “var_int,” in Bitcoinj it is VarInt. BitcoinQT also has even more compact representation called VarInt, which are not compatible with CompactSize and used in block storage.
CONFIRMED TRANSACTION
Transaction that has been included in the blockchain. Probability of transaction being rejected is measured in a number of confirmations. See Confirmation Number.
CONFIRMATION NUMBER
Confirmation number is a measure of probability that transaction could be rejected from the main chain. “Zero confirmations” means that transaction is unconfirmed (not in any block yet). One confirmation means that the transaction is included in the latest block in the main chain. Two confirmations means the transaction is included in the block right before the latest one. And so on. Probability of transaction being reversed (“double spent”) diminishes exponentially with more blocks added “on top” of it.
DIFFICULTY
Difficulty is a measure of how difficult it is to find a new block compared to the easiest it can ever be. By definition, it is a maximum target divided by the current target. Difficulty is used in two Bitcoin rules: 1) every block must meet difficulty target to ensure 10 minute interval between blocks and 2) transactions are considered confirmed only when belonging to a main chain, which is the one with the biggest cumulative difficulty of all blocks. As of September 5, 2013, the difficulty is 86,933,018 and grows by 20 – 30% every two weeks. See also Target.
DENIAL OF SERVICE
A form of attack on the network. Bitcoin nodes punish certain behavior of other nodes by banning their IP addresses for 24 hours to avoid DoS. Also, some theoretical attacks like 51% attack may be used for network-wide DoS.
DEPTH
Depth refers to a place in the blockchain. A transaction with 6 confirmations can also be called “6 blocks deep.”
DETERMINISTIC WALLET
A collective term for different ways to generate a sequence of private keys and/or public keys. Deterministic wallet does not need a Key Pool. The simplest form of a deterministic wallet is
GITHUB BITCOIN GLOSSARY based on hashing a secret string concatenated with a key number. For each number the resulting hash is used as a private key (public key is derived from it). More complex schemes uses elliptic curve arithmetic to derive sequences of public and private keys separately, which allows the generation of new addresses for every payment request without storing private keys on a web server. More information on Bitcoin Wiki. See also Wallet.
DOS
See Denial of Service.
DOUBLE SPEND
A fraudulent attempt to spend the same transaction output twice. There are two major ways to perform a double spend: reverting an unconfirmed transaction by making another one which has a higher chance of being included in a block (only works with merchants accepting zero-confirmation transactions) or by mining a parallel blockchain with a second transaction, to overtake the chain where the first transaction was included. The Bitcoin proof-of-work scheme makes it incredibly difficult to double spend transactions included in the blockchain. The deeper transaction is recorded in the blockchain, the more expensive it is to “reverse” it. See also 51% attack.
DUST
A transaction output that is smaller than the typical fee required to spend it. This is not a strict part of the protocol, as any amount more than zero is valid. BitcoinQT refuses to mine or relay “dust” transactions to avoid uselessly increasing the size of unspent transaction outputs (UTXO) index. See also UTXO.
CONTINUED
FEE
See Transaction Fee.
FORK
Refers either to a fork of a source code (see Altcoin) or, more often, to a split of the blockchain when two different parts of the network see different main chains. In a sense, fork occurs every time two blocks of the same height are created at the same time. Both blocks always have the different hashes (and therefore different difficulty), so when a node sees both of them, it will always choose the most difficult one. However, before both blocks arrive at a majority of nodes, two parts of the network will see different blocks as tips of the main chain. Fork or hard fork also refer to a change of the protocol that may lead to a split of the network (by design or because of a bug). On March 11, 2013, a smaller half of the network running version 0.7 of bitcoind, could not include a large (>900 Kb) block at height 225430, created by a miner running version 0.8 or newer. The block could not be included because of the bug in v0.7 which was fixed in v0.8. Since the majority of computing power did not have a problem, it continued to build a chain on top of a problematic block. When the issue was noticed, majority of 0.8 miners agreed to abandon 24 blocks incompatible with 0.7 miners and mine on top of 0.7 chain. Except for one double spend experiment against OKPay, all transactions during the fork were properly included in both sides of the blockchain.
FULL NODE
ELLIPTIC CURVE ARITHMETIC
GENESIS BLOCK
ECDSA
EXTRA NONCE
A number placed in coinbase script and incremented by a miner each time the nonce 32-bit integer overflows. It is not necessary to continue mining when nonce overflows, one can also change the merkle tree of transactions or change a public key used for collecting a block reward. See also nonce.
The very first block in the blockchain with hard-coded contents and an all-zero reference to a previous block. Genesis block was released on 3rd of January, 2009 with a newspaper quote in its coinbase: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks” as a proof that there are no secretly pre-mined blocks to overtake the blockchain in the future. The message ironically refers to a reason for Bitcoin existence: a constant inflation of money supply by governments and banks.
HALVING
Refers to reducing reward every 210,000 blocks (approximately every 4 years). Since the genesis block to a block 209,999 in December 2012 the reward was 50 BTC. By 2016 it will be 25 BTC, then 12.5 BTC and so on, until it’s only 1 satoshi around 2140, after which point no more bitcoins will ever be created. Due to reward halving, the total supply of bitcoins is limited: only about 2100 trillion satoshis will ever be created.
HARD FORK
Some people use the term hard fork to stress that changing Bitcoin protocol requires overwhelming majority to agree
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A set of mathematical operations defined as a group of points on a 2D elliptic curve. Bitcoin protocol uses predefined curve secp256k1. Here’s the simplest possible explanation of the operations: you can add and subtract points and multiply them by an integer. Dividing by an integer is computationally infeasible (otherwise cryptographic signatures won’t work). The private key is a 256-bit integer and the public key is a product of a predefined point G (“generator”) by that integer: A = G * a. Associativity law allows implementing interesting cryptographic schemes like Diffie-Hellman key exchange (ECDH): two parties with private keys a and b may exchange their public keys A and B to compute a shared secret point C: C = A * b = B * a because (G * a) * b == (G * b) * a. Then this point C can be used as an AES encryption key to protect their communication channel.
November.2014 Page.47
Stands for Elliptic Curve Digital Signature Algorithm. Used to verify transaction ownership when making a transfer of bitcoins. See Signature.
A node which implements all of Bitcoin protocol and does not require trusting any external service to validate transactions. It is able to download and validate the entire blockchain. All full nodes implement the same peer-to-peer messaging protocol to exchange transactions and blocks, but that is not a requirement. A full node may receive and validate data using any protocol and from any source. However, the highest security is achieved by being able to communicate as fast as possible with as many nodes as possible.
GITHUB BITCOIN GLOSSARY with it, or some noticeable part of the economy will continue with original blockchain following the old rules. See Fork and Soft Fork.
INPUT
See Transaction Input.
HASH FUNCTION
KEY
Bitcoin protocol mostly uses two cryptographic hash functions: SHA-256 and RIPEMD-160. First one is almost exclusively used in the two round hashing (Hash256), while the latter one is only used in computing an address (see also Hash160). In addition to Hash256 and Hash160, scripts may also use SHA1, SHA-256 and RIPEMD-160.
Could mean an ECDSA public or private key, or AES symmetric encryption key. AES is not used in the protocol itself (only to encrypt the ECDSA keys and other sensitive data), so usually the word key means an ECDSA key. When talking about keys, people usually mean private keys as public key can always be derived from a private one. See also Private Key and Public Key.
HASH, HASH256
KEY POOL
When not speaking about arbitrary hash functions, Hash refers to two rounds of SHA-256. That is, you would compute an SHA-256 hash of your data and then an SHA-256 hash of that hash. It is used in block header hashing, transaction hashing, making a merkle tree of transactions, or computing a checksum of an address. Known as BTCHash256() in CoreBitcoin, Hash() in BitcoinQT. It is also available in scripts as OP_HASH256.
HASH160
SHA-256 hashed with RIPEMD-160. It is used to produce an address because it makes a smaller hash (20 bytes vs 32 bytes) than SHA-256, but still uses SHA-256 internally for security. BTCHash160() in CoreBitcoin, Hash160() in BitcoinQT. It is also available in scripts as OP_HASH160.
TO HASH
To compute a hash function of some data. If hash function is not mentioned explicitly, it is the one defined by the context. For instance, “to hash a transaction� means to compute Hash256 of binary representation of a transaction.
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HASHRATE
A measure of mining hardware performance expressed in hashes per second. As of September 5, the hash rate of all Bitcoin mining nodes combined is around 647,000 Gh/s. For comparison, AMD Radeon graphics cards produce from 200 to 800 Mh/s depending on model.
HASH TYPE (HASHTYPE)
A single byte, appended to a transaction signature in the transaction input, which describes how the transaction should be hashed in order to verify that signature. There are three types affecting outputs: ALL (default), SINGLE, NONE and one optional modifier ANYONECANPAY affecting the inputs (can be combined with either of the first three). ALL requires all outputs to be hashed (thus, all outputs are signed). SINGLE clears all output scripts but the one with the same index as the input in question. NONE clears all outputs thus allowing changing them at will. ANYONECANPAY removes all inputs except the current one (allows anyone to contribute independently). The actual behavior is more subtle than this overview, you should check the actual source code for more comments.
HEIGHT
See Block Height.
Some wallet applications that create new private keys randomly keep a pool of unused pre-generated keys (BitcoinQT keeps 100 keys by default). When a new key is needed for change address or a new payment request, the application provides the oldest key from the pool and replaces it with a fresh one. The purpose of the pool is to ensure that recently used keys are always backed up on external storage. Without a key pool you could create a new key, receive a payment on its address and then have your hard disk die before backing up this key. A key pool guarantees that this key was already backed up several days before being used. Deterministic wallets do not use a key pool because they only need to back up a single secret key.
LIGHTWEIGHT CLIENT
Comparing to a full node, lightweight node does not store the whole blockchain and thus cannot fully verify any transaction. There are two kinds of lightweight nodes: those fully trusting an external service to determine wallet balance and validity of transactions (e.g. blockchain.info) and the apps implementing Simplified Payment Verification (SPV). SPV clients do not need to trust any particular service, but are more vulnerable to a 51% attack than full nodes. See Simplified Payment Verification.
LOCK TIME (LOCKTIME)
A 32-bit field in a transaction that means either a block height at which the transaction becomes valid, or a UNIX timestamp. Zero means transaction is valid in any block. A number less than 500,000,000 is interpreted as a block number (the limit will be hit after year 11,000), otherwise a timestamp.
MAINNET
Main Bitcoin network and its blockchain. The term is mostly used in comparison to testnet.
MAIN CHAIN
A part of the blockchain which a node considers the most difficult (see difficulty). All nodes store all valid blocks, including orphans, and recompute the total difficulty when receiving another block. If the newly arrived block or blocks do not extend existing main chain, but create another one from some previous block, it is called reorganization.
MERKLE TREE
Merkle tree is an abstract data structure that organizes a list of data items in a tree of their hashes (like in Git, Mercurial or ZFS). In Bitcoin, the merkle tree is used only to organize
GITHUB BITCOIN GLOSSARY transactions within a block (the block header contains only one hash of a tree) so that full nodes may prune fully spent transactions to save disk space. SPV clients store only block headers and validate transactions if they are provided with a list of all intermediate hashes.
MEMPOOL
A technical term for a collection of unconfirmed transactions stored by a node until they either expire or get included in the main chain. When reorganization happens, transactions from orphaned blocks either become invalid (if already included in the main chain) or moved to a pool of unconfirmed transactions. By default, bitcoind nodes throw away unconfirmed transactions after 24 hours.
MINING
A process of finding valid hashes of a block header by iterating millions of variants of block headers (using nonce and extra nonce) in order to find a hash lower than the target (see also difficulty). The process needs to determine a single global history of all transactions (grouped in blocks). Mining consumes time and electricity and nowadays the difficulty is so big, that energy-wise it’s not even profitable to mine using video graphics cards. Mining is paid for by transaction fees and by block rewards (newly generated coins, hence the term “mining”).
MINING POOL
MINER
A person, a software or a hardware that performs mining.
MIXING
A process of exchanging coins with other persons in order to increase privacy of one’s history. Sometimes it is associated with money laundering, but strictly speaking it is orthogonal to laundering. In traditional banking, a bank protects customer’s privacy by hiding transactions from all third parties. In Bitcoin any merchant may do a statistical analysis of one’s entire payment history and determine, for instance, how many bitcoins one owns. While it’s still possible to implement KYC (Know Your Customer) rules on a level of every merchant, mixing allows you to separate information about one’s history between the merchants.
M-OF-N MULTI-SIGNATURE TRANSACTION
A transaction that can be spent using M signatures when N public keys are required (M is less or equal to N). Multi-signature transactions that only contain one OP_CHECKMULTISIG opcode and N is 3, 2 or 1 are considered standard.
NODE
Node, or client, is a computer on the network that speaks Bitcoin message protocol (exchanging transactions and blocks). There are full nodes that are capable of validating the entire blockchain and lightweight nodes, with reduced functionality. Wallet applications that speak to a server are not considered nodes.
NONCE
Stands for “number used once.” A 32-bit number in a block header which is iterated during a search for proof-of-work. Each time the nonce is changed, the hash of the block header is recalculated. If nonce overflows before valid proof-of-work is found, an extra nonce is incremented and placed in the coinbase script. Alternatively, one may change a merkle tree of transactions or a timestamp.
NON-STANDARD TRANSACTION
Any valid transaction that is not standard. Non-standard transactions are not relayed or mined by default BitcoinQT nodes, but are relayed and mined on testnet. However, if anyone puts such transaction in a block, it will be accepted by all nodes. In practice it means that unusual transactions will take more time to get included in the blockchain. If some kind of non-standard transaction becomes useful and popular, it may get named standard and adopted by users (like it). See also Standard Transaction.
OPCODE
8-bit code of a script operation. Codes from 0x01 to 0x4B (decimal 75) are interpreted as a length of data to be pushed on the stack of the interpreter (data bytes follow the opcode). Other codes either do something interesting, are disabled and cause transaction verification to fail, or do nothing (reserved for future use). See also Script.
ORPHAN, ORPHANED BLOCK
A valid block that is no longer a part of a main chain. Usually happens when two or more blocks of the same height are produced at the same time. When one of them becomes a part of the main chain, others are considered “orphaned.” Orphans also may happen when the blockchain is forked due to an attack (see 51% attack) or a bug. Then a chain of several blocks may become abandoned. Usually a transaction is included in all blocks of the same height, so its confirmation is not delayed and there is no double spend. See also Fork.
OUTPUT
See Transaction Output.
Crypto Biz Magazine
Most important reasons for mixing are: 1) receiving a salary as a single big monthly payment and then spending it in small transactions (“café sees thousands of dollars when you pay just $4”); and 2) making a single payment and revealing connection of many small private spendings (“car dealer sees how much you are addicted to coffee”). In both cases your employer, a café and a car dealer may comply with KYC/AML laws and report your identity and transferred
amounts, but neither of them need to know about each other. Mixing bitcoins after receiving a salary and mixing them before making a big payment solves this privacy problem.
November.2014 Page.49
A service that allows separate owners of mining hardware to split the reward proportionally to submitted work. Since probability of finding a valid block hash is proportional to miner’s hashrate, small individual miners may work for months before finding a big per-block reward. Mining pools allow more steady stream of smaller income. Pool owner determines the block contents and distributes ranges of nonce values between its workers. Normally, mining pools are centralized. P2Pool is a fully decentralized pool.
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GITHUB BITCOIN GLOSSARY P2SH
contain public keys or addresses in the output scripts and signatures in the input scripts.
PAY-TO-SCRIPT HASH
REFERENCE IMPLEMENTATION
See Pay-to-Script Hash.
A type of script and address that allows sending bitcoins to arbitrary complex scripts using a compact hash of that script. This allows payer to pay much smaller transaction fees and not wait long for a non-standard transaction to get included in the blockchain. Then the actual script matching the hash must be provided by the payee when redeeming the funds. P2SH addresses are encoded in Base58Check just like regular public keys and start with number “3.”
BitcoinQT (or bitcoind) is the most used full node implementation, so it is considered a reference for other implementations. If an alternative implementation is not compatible with BitcoinQT it may be forked, that is, it will not see the same main chain as the rest of the network running BitcoinQT.
RELAYING TRANSACTIONS
A form of cold storage where a private key for Bitcoin address is printed on a piece of paper (with or without encryption) and then all traces of the key are removed from the computer where it was generated. To redeem bitcoins, a key must be imported in the wallet application so it can sign a transaction. See also Casascius Coins.
Connected Bitcoin nodes relay new transactions between each other on best-effort basis in order to send them to the mining nodes. Some transactions may not be relayed by all nodes. E.g. non-standard transactions, or transactions without a minimum fee. Bitcoin message protocol is not the only way to send the transaction. One may also send it directly to a miner, or mine it yourself, or send it directly to the payee and make them relay it or mine it.
PROOF-OF-WORK (POW)
REORG, REORGANIZATION
PAPER WALLET
A number that is provably hard to compute. That is, it takes measurable amount of time and/or computational power (energy) to produce. In Bitcoin it is a hash of a block header. A block is considered valid only if its hash is lower than the current target (roughly, starts with a certain amount of zero bits). Each block refers to a previous block thus accumulating previous proof-of-work and forming a blockchain.
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Proof-of-work is not the only requirement, but it’s an important one to make sure that it is economically infeasible to produce an alternative history of transactions with the same accumulated work. Each client can independently consider the most difficult chain of valid blocks as the “true” history of transactions, without need to trust any source that provides the blocks. Note that owning a very large amount of computational power does not override other rules enforced by every client. Illformed blocks or blocks containing invalid transactions are rejected no matter how difficult they were to produce.
PRIVATE KEY (PRIVKEY)
A 256-bit number used in ECDSA algorithm to create transaction signatures in order to prove ownership of a certain quantity of bitcoins. Can also be used in arbitrary elliptic curve arithmetic operations. Private keys are stored within wallet applications and are usually encrypted with a pass phrase. Private keys may be completely random (see Key Pool) or generated from a single secret number (“seed”). See also Deterministic Wallet.
PUBLIC KEY (PUBKEY)
A 2D point on an elliptic curve secp256k1 that is produced by multiplying a predefined “generator” point by a private key. Usually it is represented by a pair of 256-bit numbers (“uncompressed public key”), but can also be compressed to just one 256-bit number (at the slight expense of CPU time to decode an uncompressed number). A special hash of a public key is called address. Typical Bitcoin transactions
An event in the node when one or more blocks in the main chain become orphaned. Usually, newly received blocks extend the existing main chain. Sometimes (4 – 6 times a week) a couple of blocks of the same height are produced almost simultaneously, and for a short period of time, some nodes may see one block as a tip of the main chain which will be eventually replaced by a more difficult block(s). Each transaction in the orphaned blocks either become invalid (if already included in the main chain block) or become unconfirmed and moved to the mempool. In case of a major bug or a 51% attack, reorganization may involve reorganizing more than one block.
REWARD
Amount of newly generated bitcoins that a miner may claim in a new block. The first transaction in the block allows miner to claim currently allowed reward as well as all transaction fees from all transactions in the block. Reward is halved every 210,000 blocks, approximately every 4 years. As of September 5, 2013, the reward is 25 BTC (the first halving occurred in December 2012). For security reasons, rewards cannot be spent before 100 blocks are built on top of the current block.
SATOSHI
The first name of Bitcoin’s creator Satoshi Nakamoto and also the name of the smallest unit used in transactions. 1 bitcoin (BTC) is equal to 100 million satoshis.
SATOSHI NAKAMOTO
The pseudonym of the author of the initial Bitcoin imple mentation. There are many speculations on who and how many people worked on Bitcoin, of which nationality or age, but no one has any evidence to say anything definitive on the matter.
SCRIPT
A compact turing-incomplete programming language used in transaction inputs and outputs. Scripts are interpreted by a Forth-like stack machine: each operation manipulates data on the stack. Most scripts follow the standard pattern
GITHUB BITCOIN GLOSSARY and verify the digital signature provided in the transaction input against a public key provided in the previous transaction’s output. Both signatures and public keys are provided using scripts. Scripts may contain complex conditions, but can never change the amount being transferred. Amount is stored in a separate field in a transaction output.
SCRIPTSIG
Original name in bitcoind for a transaction input script. Typically, input scripts contain signatures to prove ownership of bitcoins sent by a previous transaction.
SCRIPTPUBKEY
Original name in bitcoind for a transaction output script. Typically, output scripts contain public keys (or their hashes; see Address) that allow only owner of a corresponding private key to redeem the bitcoins in the output.
SEQUENCE
A 32-bit unsigned integer in a transaction input used to replace older version of a transaction by a newer one. Only used when locktime is not zero. Transaction is not considered valid until the sequence number is 0xFFFFFFFF. By default, the sequence is 0xFFFFFFFF.
SIGNATURE
A sequence of bytes that proves that a piece of data is acknowledged by a person holding a certain public key. Bitcoin uses ECDSA for signing transactions. Amounts of bitcoins are sent through a chain of transactions: from one to another. Every transaction must provide a signature matching a public key defined in the previous transaction. This way, only the proper owner of a secret private key, associated with a given public key, can spend bitcoins further.
A scheme to validate transactions without storing the whole blockchain (only block headers) and without trusting any external service. Every transaction must be present with all its parent and sibling hashes in a merkle tree up to the root. SPV client trusts the most difficult chain of block headers and can validate if the transaction indeed belongs to a certain block header. Since SPV does not validate all transactions, a 51% attack may not only cause a double spend (like with full nodes), but also make a completely invalid payment with bitcoins created from nowhere. However, this kind of attack is very costly and probably more expensive than a product in question. Bitcoinj library implements SPV functionality.
SECRET KEY
SOFT FORK
Sometimes the soft fork refers to an important change of software behavior that is not a hard fork (e.g. changing mining fee policy). See also Hard Fork and Fork.
Incorrect peer-to-peer messages (like sending invalid transactions) may be considered a denial of service attack (see DoS). Valid transactions sending very tiny amounts and/or having low mining fees are called Dust by some people. The protocol itself does not define which transactions are not worth relaying or mining, it’s a decision of every individual node. Any valid transaction in the blockchain must be accepted by the node if it wishes to accept the remaining blocks, so transaction censorship only means increased confirmation delays. Individual payees may also blacklist certain addresses (refuse to accept payments from some addresses), but that’s too easy to work around using mixing.
SPENT OUTPUT
A transaction output can be spent only once: when another valid transaction makes a reference to this output from its own input. When another transaction attempts to spend the same output, it will be rejected by the nodes already seeing the first transaction. Blockchain as a proof-of-work scheme allows every node to agree on which transaction was indeed the first one. The whole transaction is considered spent when all its outputs are spent.
SPLIT
A split of a blockchain. See Fork.
SPV
See Simplified Payment Verification.
STANDARD TRANSACTION
Some transactions are considered standard, meaning they are relayed and mined by most nodes. More complex transactions could be buggy or cause DoS attacks on the network, so they are considered non-standard and not relayed or mined by most nodes. Both standard and non-standard transactions are valid and once included in the blockchain, will be recognized by all nodes. Standard transactions are: 1) sending to a public key; 2) sending to an address; 3) sending to a P2SH address; 4) sending to M-of-N multi-signature transaction where N is 3 or less.
TARGET
A 256-bit number that puts an upper limit for a block header hash to be valid. The lower the target is, the higher the difficulty to find a valid hash. The maximum (easiest) target is 0x00000000FFFF0000000000000000000000000000000000000000000000000000. The difficulty and the target are adjusted every 2016 blocks (approx. 2 weeks) to keep interval between the blocks close to 10 minutes.
TESTNET
A set of parameters used for testing a Bitcoin network. Testnet is like mainnet, but has a different genesis block (it was reset several times, the latest testnet is testnet3). Testnet uses a slightly different address format to avoid confusion with main Bitcoin addresses and all nodes relaying and mining non-standard transactions.
TESTNET3
The latest version of testnet with another genesis block.
Crypto Biz Magazine
Either the Private Key or an encryption key used in encrypted wallets. Bitcoin protocol does not use encryption anywhere, so secret key typically means a private key used for signing transactions.
SPAM
November.2014 Page.51
SIMPLIFIED PAYMENT VERIFICATION (SPV)
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GITHUB BITCOIN GLOSSARY TIMESTAMP
UNIX timestamp is a standard representation of time as a number of seconds since January 1st, 1970, GMT. Usually stored in a 32-bit signed integer.
TRANSACTION
A chunk of binary data that describes how bitcoins are moved from one owner to another. Transactions are stored in the blockchain. Every transaction (except for coinbase transactions) has a reference to one or more previous transactions (inputs) and one or more rules on how to spend these bitcoins further (outputs). See Transaction Input and Transaction Output.
TRANSACTION FEE
Also known as “miners’ fee,” an amount that an author of transaction pays to a miner who will include the transaction in a block. The fee is expressed as the difference between the sum of all input amounts and a sum of all output amounts. Unlike traditional payment systems, miners do not explicitly require fees and most miners allow free transactions. All miners are competing between each other for the fees and all transactions are competing for a place in a block. There are soft rules encoded in most clients that define minimum fees per kilobyte to relay or mine a transaction (mostly to prevent DoS and spam). Typically, the fee affects the priority of a transaction. As of September 5, 2013 average fees are below 1 BTC per block. See also Reward.
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TRANSACTION INPUT
A part of a transaction that contains a reference to a previous transaction’s output and a script that can prove ownership of that output. The script usually contains a signature and is called scriptSig. Inputs spend previous outputs completely. So if one needs to pay only a portion of some previous output, the transaction should include extra change output that sends the remaining portion back to its owner (on the same or different address). Coinbase transactions contain only one input with a zeroed reference to a previous transaction and arbitrary data in place of script.
TRANSACTION OUTPUT
An output contains an amount to be sent and a script that allows further spending. The script typically contains a public key (or an address, a hash of a public key) and a signature verification opcode. Only an owner of a corresponding private key is able to create another transaction that sends that amount on to someone else. In every transaction, the sum of output amounts must be equal or less than the sum of all input amounts. See also Change.
TX
See Transaction.
TXIN
away, find it in the blockchain, or include it in the blockchain itself (if it’s a miner). See also Confirmation Number.
UTXO SET
A collection of Unspent Transaction Outputs. Typically used in discussions on optimizing an ever-growing index of transaction outputs that are not yet spent. The index is important to efficiently validate newly created transactions. Even if the rate of the new transactions remains constant, the time required to locate and verify unspent outputs grows. Possible technical solutions include more efficient indexing algorithms and more performant hardware. BitcoinQT, for example, keeps only an index of outputs matching user’s keys and scans the entire blockchain when validating other transactions. A developer of one web wallet service mentioned that they maintain the entire index of UTXO and its size was around 100GB when the blockchain itself was only 8GB. Some people seek social methods to solve the problem. For instance, by refusing to relay or mine transactions that are considered dust (containing outputs smaller than a transaction fee required to mine/relay them).
VARINT
This term may cause confusion as it means different things in different Bitcoin implementations. See CompactSize.
WALLET
An application or a service that keeps private keys for signing transactions. Wallet does not keep bitcoins themselves (they are recorded in blockchain). “Storing bitcoins” usually means storing the keys.
WEB WALLET
A web service providing wallet functionality: ability to store, send and receive bitcoins. User has to trust counter-party to keep their bitcoins securely and ready to redeem at any time. It is very easy to build your own web wallet, so most of them were prone to hacks or outright fraud. The most secure and respected web wallet is Blockchain.info. Online exchanges also provide wallet functionality, so they can also be considered web wallets. It is not recommended to store large amounts of bitcoins in a web wallet.
XBT
Informal currency code for 1 Bitcoin (defined as 100,000,000 Satoshis). Some people proposed using it for 0.01 Bitcoin to avoid confusion with BTC. There were rumors that Bloomberg tests XBT as a ticker for 1 Bitcoin, but currently there is only ticker XBTFUND for SecondMarket’s Bitcoin Investment Trust. See also BTC. —S
See Transaction Input.
TXOUT
See Transaction Output.
UNCONFIRMED TRANSACTION
Transaction that is not included in any block. Also known as “0-confirmation” transaction. Unconfirmed transactions are relayed by the nodes and stay in their mempools. An unconfirmed transaction stays in the pool until the node decides to throw it
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GITHUB bitcoin Glossary by OLEG ANDREEV (oleganza@gmail.com). Twitter: @oleganza. Send your Bitcoin tips to:
1CBtcGivXmHQ8ZqdPgeMfcpQNJrqTrSAcG.
Vancouver has been one of Canada’s startup hubs for many years. Celebrated names such as Hootsuite, Clio, and Mobify were born, and still live here, amongst many others. There’s no lack of drive or creativity here, and lately, we see much of this energy focus towards the nascent crypto-currency space. Our bragging rights todate include the first Bitcoin ATM, a relatively dense merchant adoption, and a plethora of scrappy startups, including CoinOS, Bex.io, Quadriga CX, and more.
BITCOIN HAS ARRIVED… SORT OF While this is great news for the Vancouver tech scene, decentralized technology is still not well-understood by many entrepreneurs. Too few have had an ‘aha!’ moment, because Bitcoin still hasn’t directly affected their lives. Many see it only as a digital version of money, a pseudo-anonymous medium for buying things online, and only accessible to geeks. What’s lacking is real exposure—the chance to interact with this new technology, and the people that are creating it. In many cases, it may be that this is all it takes for someone to realize how incredible this technology can be for our future.
Crypto Biz Magazine Page.54 November.2014
ENTER STARTUP WEEKEND VANCOUVER Since 2007, Startup Weekend has been the first step for many future entrepreneurs. An ideal way to experience the intensity of a startup first-hand, Startup Weekend builds the perfect storm: An exciting new idea, and 54 hours to prove, and communicate, its potential. Attendees show up on the Friday, and a pitch competition ensues. Each individual has 60 seconds to pitch any idea they want, as long as it’s only an idea. No existing businesses allowed. From here, teams are formed and the race begins. By 3pm on Sunday, each team must have a clearly defined business case, and the means to communicate it to a panel of judges, comprised of celebrated executives and entrepreneurs from the Vancouver tech scene.
seed which will grow into crypto-currency and decentralized technology innovation. Each participant will be guided through the creation of a Bitcoin wallet, and will receive about five dollars’ worth in the process, graciously provided by the Vancouver Bitcoin community. Willing participants will also have the opportunity to ‘spend’ their recently-acquired bitcoin in several ways. In most cases, otherwise free items (such as food and drink) will be available “for purchase” with Bitcoin, but only for those eager to try it out for themselves. There’s no obligation to use Bitcoin at any point, but we’re certainly going to try and convince participants to give it a go. In addition, we’ve rallied the support of the Vancouver Bitcoin community, including the Bitcoin Co-op and Decentral Vancouver, to help us spread the word, and provide opportunities for dialogue on anything from Bitcoin mining, to Decentralized Autonomous Organizations using Ethereum. Participants will have regular opportunities before the Friday pitch competition to engage this small, but growing, community of developers and enthusiasts. THIS IS REALLY HAPPENING Roughly 30% of participants have registered their Bitcoin wallets, and the feedback we’ve received is extremely positive. Almost none of participants have used Bitcoin before, and most are intensely curious—if not excited—about the chance to engage on the subject. It may take a while for this seed to grow, but I think we’re off to an excellent start. Find out what kind of ideas are being cultivated this year at Startup Weekend Vancouver, by following us on Twitter at @VanStartup. The event runs November 14th – 16th, and we’ll be tweeting live, throughout the weekend! —S
Although this sounds like a competition, the goal is really to provide a tangible, educational experience, and the chance for participants to interact with existing entrepreneurs and new technology. STARTUP WEEKEND VANCOUVER ATTENDEES WILL RECEIVE SOME BITCOIN This year, we’re bringing Bitcoin to Startup Weekend Vancouver, and will hopefully plant a
GREGORY PEACOCK is co-organizer of Startup Weekend Vancouver 2014 and has been active in the Vancouver startup community since 2011. By day, Gregg manages customer-experience strategy at TELUS and spends his free time writing code, cultivating decentralized technology innovations and traveling.
STARTUP WEEKEND VANCOUVER: CULTIVATING THE CRYPTO COMMUNITY by GREGORY PEACOCK
November.2014 Page.55 Crypto Biz Magazine
FIVE USES FOR Crypto Biz Magazine Page.56 November.2014
REALCOIN
The knee-jerk reaction many people have to RealCoin is understandable. We took refuge in crypto-currency to get away from the perils of the fiat world, and RealCoin seems to bring them back to us. At the end of the day, it still requires trust in a central authority to preserve its value. RealCoin was never intended to be a one-stop crypto-currency solution. Some currencies function better, or worse, at various tasks. Bitcoin’s dwindling money supply makes it better for long-term storage, for instance, while Freicoin’s use of demurrage—a tax on those who hoard coins—would have the opposite effect, theoretically stimulating investment. Coins with advanced anonymity features are ideal for private consumers or persecuted minorities, while we might prefer our governments use a more traceable solution. In the end, the free market will decide. So, there’s room for more than one crypto-currency in the world, but what is RealCoin good at? As it turns out, it has a few important uses, which gives it a niche place in the land of crypto-currency.
FIVE EXAMPLES OF REALCOIN’S STRENGTHS
1. There’s no doubt that crypto-currencies will go up in value over time, relative to govern-
ment-issued currencies. However, many national currencies will always go up or down in value, relative to others. Someone has to issue the buy and sell orders that drive these fluctuations, and that someone often makes a serious profit. Without fiat-backed crypto-currencies like RealCoin, this requires the use of traditional, centralized, FOREX exchanges, which are expensive and trust-addled. Now, fiat currencies can effectively be traded in a decentralized manner.
2. Despite the long-term inviability of the dol-
lar, it’s bound to increase in value relative to Bitcoin, from time to time. Just as in traditional FOREX trading, someone—referred to as a “market maker”—has to buy and sell, hopefully at the right time, for the prices to fluctuate. RealCoin allows one to do this, in a decentralized, and trustless manner, via the Mastercoin protocol, which is secured via the Bitcoin blockchain and mining network. It’s faster, cheaper, and operational 24/7.
3. Inevitably, the value of the dollar is going to
collapse. When this occurs, someone is going to want to short sell it on the market. For those who aren’t familiar with trading, short selling is the act of borrowing an asset,
with the promise to return it later, plus a small fee. The dollar, once received, is immediately sold for another currency—ideally, Bitcoin or another crypto-currency—and repurchased later, when the price is lower. The short seller then returns the dollars to the lender, who is left with relatively worthless paper if he or she went “long” too long (waited too long to sell).
Using RealCoin, one can ef-
fectively do this without interacting with a traditional stock exchange or bank, or suffering any of its encumbrances. Borrow RealCoins from someone, and their value will go down with the value of the dollar. Sell them immediately for bitcoins, then buy them back later—at a substantial discount—and return them to the original lender.
4. All of that will take time, however. For now, Bitcoin is not widely accepted enough to overtake the dollar. In the meantime, it’s likely that there are businesses that will be willing to handle RealCoins, that will eschew bitcoins, making RealCoin a means of interacting with more merchants outside of the traditional banking system—although backed by it in value.
amount necessary for occasional use, or you could develop a program to exchange and send RealCoin automatically. It’s not as good as using Bitcoin, but for the time-being, it will be the most trustless option.
5. Among businesses that may feel more comfortable transacting in RealCoin are banks, and as the Wall Street Journal has noted, RealCoin has signed a contract with a major banking partner already. What this will inevitably mean is more liquidity for the cryptocurrency industry, thus reducing both fees and volatility.
Those five uses for RealCoin, to begin with, will lead to increased Bitcoin adoption. It’s difficult for the mainstream public to accept a new idea as radical as crypto-currency, but decentralized digital dollars may be easier for them to comprehend. Once they’ve accepted the concept, they’ll be in a better position to see the world from Satoshi’s perspective. Think of it as a stepping stone. It’s likely that similar crypto-currencies will arise, backed by other national currencies—probably starting with major ones like the dollar, or euro, where the government is more tolerant. Various Latin American and small island nations are also poised to consider such a move, and gradually, all FOREX trading will be decentralized—except for currencies backed by the most dictatorial of states. Adoption will spread further. Inevitably, RealCoin will fall to obscurity, along with the dollar itself. It’s not meant to be a final solution, but rather a tool to help ease the transition to a decentralized world. It won’t have much use to those saving for retirement, but their potential for use by day-traders, market-makers, and in the back end of advanced multi-currency digital wallets, is undeniable. Appreciate RealCoin for what it is. —S
ANDREW WAGNER is a Bitcoin advocate, based out of Vancouver. He writes for Bitcoin Magazine, is a Project Manager at VanBex, a director at the Bitcoin Co-op and North American President of the Cryptor Foundation. He’s also the founder of CoinFest, the first decentralized decentralized currency convention.
Crypto Biz Magazine
RealCoin promises to always be able to re-
deem RealCoins for equivalent dollars, providing a means of converting to fiat by proxy for those lacking in banking connections. As long as the RealCoin company can pass audits—which they claim it will do—then others
November.2014 Page.57
You don’t have to keep more than the small
will be willing to do so as well, which will help decentralize fiat conversion in general.
ENLIGHTENMENT OF THE BLOCKCHAIN MASTERS
by BRIAN VERESCHAGIN
Crypto Biz Magazine Page.58 November.2014
If wisdom was easy to come by, we might be colonizing space by now. We have been conditioned to believe that this higher intelligence is beyond the average person, and allow ourselves to go through endless cycles of ignorance and destruction. It’s important for us to open our mind to the possibilities of our own psychology, and the world it may create. We will use a scientific method of exploration to allow each of us a chance to listen quietly for experience that cannot be told. Exploring the relationship between the blockchain and the real world is a primary concern to the CryptoTown On The Ground project. This project grew out of the consultancy culture in practice, amongst the community of its primary supporter, Cryptogenic Bullion (CGB), a crypto committed to higher-level thinking. The intent of this article is to empower each individual to participate in meaningful collaboration, a challenge for so many reasons, as we will attempt to explore. The blockchain phenomenon introduced itself through the release of Bitcoin (BTC), a global digital currency with no central point of control. The function of the central bank has been replaced by a network-based, cryptographically-secured currency. To sweep aside our debt-based, centrally-planned currencies, is only the first, most obvious opportunity. Blockchain technology has a much bigger role to play, in a much bigger story, than most would ever dream. The effects of pervasive deception and exploitation can be seen throughout nature. This is a primary reason why blockchain-based consensus is so important to building a society that deserves our trust. It seems that every opportunity to corrupt human trust, where
significant power is involved, has been met with the appropriate deception and exploitation required to command—preferably—permanent benefits. This expedition will take us through our environment, into our past, and to new worlds of the future. Life requires the ability to reproduce, or it would not proliferate or evolve. This is interesting to consider because it allows an exponential growth pattern, seen in all life where resources are abundant and predators are absent. What is often not understood about the exponential function is how suddenly the end comes, quickly devouring what once seemed like so much. All life has to acquire necessary resources to sustain life, or it would not exist. This is the reason exponential growth may lead to exponential exploitation, and collapse of ecosystems. It’s also the reason for competition under conditions of scarcity. This competition, also known as survival of the fittest, has led to refined offensive and defensive abilities amongst species, as well as a healthy fear of this competition. Over time, fear has proven to be necessary to survival, as it can be seen throughout higher life. In addition to our here-and-now danger response, a fearful mind may also be consumed with future possibilities. The extent to which we have excelled at deception and exploitation has forged this powerful defense mechanism. This is of key importance, because fear seems to be the most powerful trigger to automated behavior. We are all born innocent, and what happens after that cannot be blamed on anyone. While considering potentially disturbing implications of this journey, it’s important not to think in terms of division. Everything
the human race does, it does to itself, because it’s uncoordinated overall, with each one of us bound by the same isolated subjective experience. We haven’t yet figured out how to build a truly peaceful civilization, but we can do it if we realize the futility of division and polarization.
erarchies, while the Internet grants equal participation to all. The Internet enables global coordination in networks, just as the printing press enabled global coordination in the hierarchies of modern society.
Going over some possible reasons to expect pervasive deception and exploitation, we can appreciate how grouping behaviors, based in fear, would provide advantage to their members. It seems evident that intelligent coordination within nature has been utilized for both offensive, and defensive operations, amongst and within all higher species. This phenomenon has been crafted to great complexity in human societies, through our technology and our culture. If we imagine a simplistic model of communication, technology and societies throughout our history, we can start with spoken language. It enables complex tribal societies, but knowledge is easily lost and distance is challenging. Written language and its technology allows for coordination over long distances, and better preservation of knowledge. We’re going to look at the flow of ideas, and the competition amongst them as the self-domestication of our species.
Each individual is built upon by the specifications of its society. We become isolated from the responsibilities and direct experience of existence, and become dependent on society. In dominance hierarchy societies, this dependence can even isolate us from our community. It’s important to try our best to remain neutral when applying theory to reality, understanding that forces out of our control have shaped our entire environment, and us.
A strong sense of self-confidence is the only necessary goal of education to such a society. From here, desires and aversions can be crafted into levers of control, known as views and beliefs. The subconscious can be woven into the very fabric of society, to create the structure know as the matrix, the wall, the ego, the personality. The true individual will remain subdued behind these structures, enraptured by the spectacle, so long as the inner world of the mind remains unexplored. This exploration can be called meditation, and it’s the only foundation on which to discover and know any truth for yourself. If we can stomach a little more
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The printing press industrialized the broadcasting of information. Vast hierarchies (and networks) enabled by written language have greatly leveraged printed media, to extend the reach and convergence of their respective ideologies. Books and newspapers, however, remained wrapped up in capital costs, and politics beyond the reach of most individuals. The nature of print is one-way and authoritative, enabling massive hi-
The organs of society have come about through the development of obstructions, between the individual and their direct connection to existence. Religions of power have exploited our direct experience of love, and of the divine, replacing knowing with symbolic metaphor, mere echoes of the truth. Government and corporation manage our safe access to food and water, and provision our shelter. Responsibility for most aspects of life, including order and security, has drifted away from community-based networks, and toward hierarchies.
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We’re all in a similar situation when it comes down to it. We would like to organize into societies to coordinate labor and supplies, provide safety, and live fulfilling lives. There are many different views on the best way to do that, and a very complex battle amongst them in the minds of us all. This competition starts with the education system, where we receive the programming necessary to function.
We have almost laid the foundation upon which blockchain technology can be appreciated, but a final look inward, each into our own mind, will be needed to experience the wisdom behind what’s being said. The ego will be examined as the nexus of control, which occupies our time according to society. It may be uncomfortable to read, but please consider it as a possible model, while trying to avoid personal interpretations or reactions.
Crypto Biz Magazine Page.60 November.2014
abuse, we will try to show how such a society enables its coordination. We’re pushed towards the left, processing brain known as mind, where behavior is automated in the subconscious, and away from the right, creative, brain known as heart. Where life appears to be composed of routine functions of society, learning to do instead of to think, working jobs that could one day be automated, using prescribed emotional reactions, this is where the autopilot function of the ego can be seen. We collect and repeat knowledge, which supports ideologies, and have even developed defense mechanisms against wisdom. If this exercise so far has made you bored, uncomfortable, or possibly even angry, this is because it has approached the uprooting of something bound in the subconscious. Through meditation, we can begin to peel away our views, and reconnect with the heart, where a quieted mind reveals wisdom. This should not be mistaken for a religious experience. Science has long observed the observer, to reveal experiences of direct knowing, which can be discovered by anyone.
of equal justice. Where justice is not maintained, confidence is shattered by the specter of terminal looting. The system, at that point, became twisted enough to make whistle-blowing an existential threat. The blockchain, at its core, is not subject to the corruption of human trust. Elements of programmable, network-based trust will bring automation to government, finance, education, anything. It’s important not to polarize on the perceived duality of hierarchy and network, or we will miss the middle path. A mix of both, which—compared to today’s extremes—will look like decentralization, with the sharing of crowd wisdom, and the meeting of needs through local coordination. When the profit motive has completely saturated all opportunities for growth, little remains but the final collapse of resources. Civilization becomes bound in deception; fixing symptoms, never causes. The transition from a profit-based economy, to a resource-based economy, could preclude this global outcome.
The survival mandate of deceive and exploit can be seen manifesting throughout history as corruption. We don’t often realize that the profit motive, enshrined into law in our society, is how we have sanctioned this type of behavior. Human trust has always been subject to exploitation, and this often proves to mean the end of our collective efforts, large or small.
Even with the corrupted mismanagement we apply to our collective natural heritage, we still encounter the prospect of abundance and automation, which threatens to put us all out of work. The Venus Project explores the workings of a resource-based economy and society, as an alternative to profit-driven resource allocation. The blockchain has tremendous potential, in a resource-based economy, to imbue the very plumbing of society with our collective wisdom.
Religion and government have both tackled the problems of corruption, through concern for just weights and measurements of commerce, and the maintenance
The networked world simply unfolds around us, as seen in projects like Transition, Open Source Ecology, and the RepRap self-replicating 3D printer, which aim
to empower communities with self-reliance and sustainability. We may see programmable blockchains, and automatic decentralized exchanges replace the finance industry. Network-secured public voting and discussion, as explored by BitCongress, an Ethereumbased app, could change the very way that we govern ourselves. The CryptoTown On The Ground project provides guidance and resources for crypto-collaborators, both online, and offline, through grassroots consulting, and local organization. It uses a cryptomall structure, to connect the crypto-currency development community with strategic insight, and feedback gained through on-the-ground collaboration with participating communities. Collaborative guidance will be available for the transition to localized blockchain apps like public audit, currency, exchange, resource allocation, discussion and voting. This relies only on the participation of individuals like you. As the network becomes more aware of itself, it will organize to express our creative nature towards each other. Society will become a matter of public participation and audit, but also of individual autonomy. We will apply the latest technology to become self-sustainable, and responsible for our future. Through development of automated, renewable abundance on the local level, the profit motive can be replaced with blockchain-secured management of the common bounty.
Start discussing wisdom and forget the news. Become a supportive, and self-reliant peer, in the new frontiers of the networked world. Let the consultancy culture flourish in your communities! —S
GREAT Wisdom GREAT CryptoTown on the Ground GREAT Blockchain—Bitcoin GREAT Deception/exploitation corruption
C trust
GREAT Exponential function, terminal sustainability GOOD Consumption/competition GOOD Fearing mind
C fear
GOOD Equanimity, no judgment GOOD Grouping coordination masters GREAT Spoken/written, self domestication GOOD Common goals GOOD Isolation from peers and nature, education GREAT Printing press/internet, hierarchy/ network GOOD Intro to the ego GOOD Isolation—clarify experiences of life GREAT Ego mechanism, look inward controls GOOD Meditation, autopilot processor GREAT Ego defense, direct knowing GOOD Corruption (deceit and exploit), profit motive, collapse GOOD Corruption and terminal looting GOOD BLOCKCHAIN trust, decentralization GREAT Resource-based management GOOD Transition, self-reliance, self-sufficiency GOOD CryptoTown on the Ground GOOD Self-sustainability GOOD Broadcast
C virus, education
GREAT Parting thoughts
an Information Technology professional with an affinity for communication networks. His logical approach and attention to detail has provided him with the tools and experience necessary to discern the way forward. “When we understand that teaching is not only knowing a concept, but also knowing your student and forming the understanding based on that, we can then take these technologies forward with logic and reason to a wider audience. Consider holding a bit of Cryptogenic Bullion (CGB). To find out why, read on and ask some questions; experience the consultancy culture.” Brian takes CGB tips at 5d8i3zuAugZXLnouJnhFPcZJCLuQPjXkRP
Crypto Biz Magazine
BRIAN VERESCHAGIN
November.2014 Page.61
Where the hierarchy relies on productive task-executers to obey authoritative broadcasts, the new world will find people ill-prepared to act intelligently, or even to survive. In the network, broadcasts take on the self-replicating nature of life, with the individual acting as an intelligent traffic router. The individual is the main actor in this new world, and today’s education system will need to stop teaching producers and doers, and start teaching creators and thinkers.
ENLIGHTENMENT OF THE BLOCKCHAIN MASTERS
DECENTRALIZED CROWDFUNDING www.swarmcorp.com
Yes,
it’s that easy.
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