Crypto Biz Magazine Issue.03 August, 2014 by CryptoBiz Magazine

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. 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. 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.

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 is more in line with what the consumers wanted. Some advantages that Bitcoin has hasover overwhat whathappened happenedwith with Napster include existence Bitcoin Napster include the the existence of a of a global marketplace, investments and continued global marketplace, ventureventure capital capital investments and continued developdevelopment of the protocol. The switch to digital was something thatconwas ment of the protocol. The switch to digital was something that was confusing for many fansthe andimmediate the immediate resistance fusing and and scaryscary for many musicmusic fans and resistance slowly slowlyaway fadedand away and business opportunities as iTunes and Google faded business opportunities such assuch iTunes and Google Music Music to came to buying make buying music and easier the preferred came make digital digital music easier theand preferred way to way purto purchase song. Bitcoin is controversial now because it’s challenging chase a song.a Bitcoin is controversial now because it’s challenging somesomething thatbeen has been the same a very time. more important thing that has the same for afor very longlong time. It’s It’s more important to to realize that, other technology, it becomes mature and realize that, likelike anyany other technology, it becomes moremore mature and easeasier to use time. ier to use overover time. Some of the smartest and most successful entrepreneurs in the world are embracing Bitcoin. These individuals see the long long term term potential potential ininhow howititcould coulddrastically drasticalreduce payment ly reduce paymentcosts costsasaswell wellasasthe theglobal globalreach reachitit has. has. BitPay BitPay has continued to support andand development of the continued tobring bringcredibility, credibility,excellent excellent support development of platform to the community andand thatthat hashas resulted in being thethe market the platform to the community resulted in being marleader for Bitcoin Payment Processing. We alsoWe hope to continue grow ket leader for Bitcoin Payment Processing. also hope to to continue to grow globally with new offices in San Francisco, New York City, and Amsterdam as well asas a new our continuously growing Argentina and Amsterdam well location as a newfor location for our continuously growing Atlanta office.

ACCEPT BITCOIN www.bitpay.com

CONTENTS

Why Bitcoin Doesn’t Need a Bitcoin Valley

Demonstrating Bitcoin’s Social Value—Charity, Bitcoin, and the BitGive Foundation

by ARIEL DESCHAPPELLES

A State of Mining by DOM STEIL

by CONNIE M. GALLIPPI

Letter from the Editor

Expert Advisory Board .

. .

Crypto Biz Magazine Page.2 August.2014

Bitcoin’s Shroud of Subtlety and Allure

. .

by DANIEL KRAWISZ

CryptoCoin Social

Why Do I Need to Pay for Secure E-mail Services? .

by GERRY BAKKER

Network Security and Proof of Work… Do we Need an Alternative?

by ARIANNA SIMPSON

Working from First Principles to Build Bridges, . Fund Core Development, and Go to the Moon

by RENE-LEE SYLVAIN

Dana.io & The Corporation by MIKE YEUNG

continued on page.6

Issue.03 August.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 Senior VP of Business Development NATHAN WOSNACK Art Director VANESSA KING Social Media Crusader TYLER OMICHINSKI COVER DESIGN Jay Addison CONTRIBUTING WRITERS Oleg Andreev, Sean Comeau, Ariel Deschapell, Connie Gallippi, Daniel Krawisz, Jesse Michek, Justus Ranvier, Johnathan Rumion, Gabriel Scheare, Arianna Simpson, Dom Steil, Rene-Lee Sylvain, Brian Vereschagin, Mike Yeung IN CANADA: VANCOUVER BC Ilya Brotzky Ilya@cryptobizmagazine.com IN THE US: SACRAMENTO CA Brandon Johnson Brandon@cryptobizmagazine.com IN NEW ZEALAND: AUCKLAND Belinda Too Belinda@cryptobizmagazine.com

July in the Bitcoin world showed a downward trend in price from a $650+ US position on the first to a low of $564 on the thirty-first. Pricing had not seen this lower-level since mid June 2014, where we sunk to the $560 marker. What is the cause of this? Some speculate that Miners are mining and immediately selling off the majority of their coins. Others say it is because the “Big Money” Bitcoin wallet holders are dumping some of their coins, and it’s causing a ‘follow the leader’ mentality, where selling is the trend. Others say it is due to the “New Money” being invested into Bitcoin, which is amassed and not put into circulation. Still others say it was directly related to Dell accepting Bitcoin—that they received a huge influx, beginning on July 18th, and then they sold their accumulated coins back into the market, and this dropped the price further. The smartest minds in our Crypto community are constantly speculating as to the price of Bitcoin, yet there really are no concrete numbers to rely on. To an outside observer, Bitcoin may seem like a volatile and uncertain investment. To the insider within the Crypto community, these price fluctuations may be considered as windows of opportunity. If you are newly acquiring Bitcoin, short-term history will tell you this is a good time to buy. Long-term history will tell you that there was never a bad time to buy, except at any price significantly higher than it is today.

TEL 1 844 CRYPTO1 (1 844 279 7861) E-MAIL contact@cryptobizmagazine.com

Speculation will tell you that there is never a bad time to buy, because the

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world expects the price of Bitcoin to soar once global adoption reaches a

subscriptions@cryptobizmagazine.com for a FREE subscription to Crypto Biz Magazine Receive our monthly editions delivered to you in the digital format of your choice.

certain point. When and where is that point? Nobody knows, at least nobody in our crypto circles know. We do know that every day, more and more business are accepting Bitcoin. We do know that there are now over five million wallets open globally, and we know that if history’s valuation of commodities, precious metals or currency is any indication, the price of Bitcoin will continue to rise as the demand for Bitcoin increases. Enjoy! —S

Crypto Biz Magazine

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.

August.2014 Page.3

CRYPTO BIZ MAGAZINE PH3507 1111 West Pender St Vancouver BC Canada V6E 2B4

I AM SOSHI…

Yes,

itâ&#x20AC;&#x2122;s that easy.

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CONTENTS

Blockchain-Based Consensus in a CryptoTown Society

continued from page.2

Cash And Credit in a Cryptocurrency Economy—Part 1 .

by BRIAN VERESCHAGIN

by JUSTUS RANVIER

LastPass Password Manager—Part 3 .

by SEAN COMEAU

What’s Behind The Bitcoin Surge? .

Bitcoin Service Directory .

by JESSE MICHEK

Crypto Biz Magazine Page.6 August.2014

Finding My Calling and Building a Castle; Behold the Magic of Bitcoin

by GABRIEL SCHEARE

Bitcoin Merchant Directory

Austin Bitcoin Meetup . by JONATHAN RUMION

Github Bitcoin Glossary by OLEG ANDREEV

EXPERT ADVISORY BOARD KRISTOV ATLAS KRISTOV ATLAS is a network se-

curity 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 LISA CHENG is the co-founder of

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.

PIOTR PIASECKI, BSc MSc PIOTR PIASECKI 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 cryptocurrencies.

August.2014 Page.7

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

Crypto Biz Magazine

WHY BITCOIN DOESN’T NEED A BITCOIN VALLEY

Crypto Biz Magazine Page.8 August.2014

by ARIEL DESCHAPELL

With VC money being poured into Bitcoin startups, more billion-dollar businesses accepting it, and greater mainstream acknowledgment that Bitcoin is here to stay, speculation on where the future “hotbed” of cryptocurrencies will develop is receiving a lot of attention. The assumptions behind a “Bitcoin Valley” understandably come from an existing expectation of how new technology develops. We seem to be irrevocably attached to the idea that any one area can and should lead the way in Bitcoin adoption and innovation, and this idea has good precedence. Progress and innovation have traditionally been centered in geographic locations, but Bitcoin is a bit different. Thinking in terms of where a “Bitcoin Valley” might form might not necessarily be inaccurate in the short term, but it dramatically understates what Bitcoin is capable of achieving, and the scope of the impact it will have in the long term. Bitcoin is the first time that something with the qualities of a scarce physical object exists only digitally on the Internet. This scarcity allows it to retain an arbitrary amount of value that makes it useful for trade, compounded by the fact that it is able to travel around the world as fast as any piece of information that can travel over the Internet. That it exists only in cyberspace means that the Bitcoin protocol is not operationally tied down to any physical location. It can be used and

mined from anywhere on the planet with an Internet connection, but that much is obvious. However, how about Bitcoin-based businesses? While the United States currently possesses the largest number of Bitcoin startups, they are still spread around the globe—everywhere from Hong Kong to San Francisco, Atlanta to London, and beyond. One characteristic an area logically needs to have to become the “Bitcoin Valley” is favourable regulatory policies. However this only really applies to businesses dealing with the intersection of fiat money and cryptocurrencies. This is obviously a massive niche as new adopters need to get their hands on bitcoins somehow, and all bitcoins are likely to pass through the Coinbases, Circles, and exchanges of the world many times over. Yet as large a financial opportunity as conversion is, it won’t be the main driver of future Bitcoin growth. One of the fundamental features of Bitcoin is that it allows you to act as your own bank, completely sidestepping complicated and expensive payment gateways and fiat accounts. The most massive strives in Bitcoin will come from businesses that leverage it as a payment and banking tool, increasing daily bitcoin transactions and helping to stabilize its fluctuating value. Having companies like Dell and Expedia accepting

it is the first step, but as the ecosystem continues to mature, the biggest contributors will be startups that only accept bitcoin in lieu of dealing with expensive and low quality payment gateways. Payment processors such as Authorize.net charge a host of difficult to calculate fees that can vary widely from merchant to merchant, and are especially hard for small sites and overseas entrepenuers to set up. At the end of the day this is all just to acquire a less than ideal means of payment for both the business and its customers. For this reason, as Bitcoin adoption increases, it will be incredibly advantageous for merchants, both online and off, to completely cut out traditional payment processors. Bitcoin even allows them to operate a business without touching a bank account or going near legacy financial systems. This is already demonstrated by Blockchain.info, which takes all revenue in bitcoins and whose CEO, Nicolas Cary, is also paid entirely in bitcoins. This model will provide a huge opportunity to those in the world without access to traditional financial services, and entrepreneurs who no longer have to deal with expensive and clumsy payment processors or banks.

Bitcoin’s largest potential as a disruptor is not in elevating a few super-massive companies in one geographic area, it’s in leveling the playing field the world over, and opening the floodgates to a truly “flat” world, where location has little influence on anyone’s ability to compete in the global marketplace. It’s in granting more opportunities and control for the vastly unbanked third world, struggling entrepreneurs, and every other individual on the planet. While a geographic center may indeed emerge with many Bitcoinbased companies, it will pale in comparison to the greater global innovation that will be simultaneously made possible under those circumstances. While it’s easy to count the number of new billion-dollar businesses accepting Bitcoin, and all the VC capital being poured into it, the aggregate work of countless nameless individuals is what keeps driving Bitcoin forward. One should remember Bitcoin’s humble beginnings, over five years ago, when it was being mined on a single PC. Its growth from then to now, already an astronomical achievement, is thanks entirely to the efforts of a dedicated, risk-taking, and entrepreneurial grassroots community. And it is that decentralized and grassroots community, not increased regulatory clarity or flashy headlines, that will continue to drive Bitcoin adoption ever forward. —S

ARIEL DESCHAPELL is an

enthusiastic Bitcoin community organizer, analyst, writer, and entrepreneur. Since first hearing about Bitcoin he has been on a mission to correct the vast amount of misinformation circulating about Bitcoin online, article by article. He is a Miami born Cuban-American, and attends Florida International University for finance. In his spare time he enjoys reading, eating, playing Halo, and mountain climbing. Ariel accepts Bitcoin tips: 1D9P94wkZNvaDVei4q8iYS9zKKkHgbRjLG

Crypto Biz Magazine

When all of these factors are in play, startups from any part of the world are able to compete evenly on the same playing field. Why shouldn’t talent follow a similar model, too? Since paying employees via bitcoin has become so easy, and with the growing popularity of sites like Coinality.com, remote work and collaboration only becomes more and more attractive, even if it’s just an initial first step. This allows you to pool talent from around the world, regardless of location, rather than being limited to those in your area, or those who are willing to relocate. While there will always be an undeniable allure and advantage in working closely with a team, the alternatives pulls the focus away from estab-

In developed countries such as the United States, financial services are indispensable. They are a fundamental part of the economy, and its ability to function at the extremely high and complex level that it currently does. Not only will Bitcoin adoption improve upon that financial system, but it will make it available to countless more for the first time. As such, both the largest opportunity for businesses and the greatest source of innovation will be these newly empowered regions, and anyone else who decides to “plug in” to the Bitcoin ecosystem. Because of its purely digital nature, and complementary technological factors in crowdfunding and remote working, Bitcoin’s benefits are available to everyone. Whether you’re in a Harvard dorm or in an apartment in India, the disparity of opportunity between the two is smaller today than it ever has been.

August.2014 Page.9

After a new adopter acquires some bitcoins for the first time, and assuming they enter a fairly robust “Bitcoin economy,” they are no longer subject to any effective regulatory oversight. Especially in regards to the web—with no need to deal with any traditional financial institutions, the physical location of a startup dealing in bitcoins in regards to regulation becomes insignificant. Indeed, anyone using Bitcoin is tapping into an ultra-fast payment system that can be used by anyone around the world, regardless of where the customers or business are located. When you level the playing field this dramatically, the only logical reason to relocate oneself anywhere is to access talent and/ or funding. Yet in the 21st century even those two important factors aren’t as magnetic as they originally were. With continuing growth and innovation in crowdfunding—much of which is naturally occurring in cryptocurrencies (Swarm being the prime example)—new models for achieving funding and courting investors are quickly becoming valid options. Again, this works regardless of location, and coupled with online social tools that link investors to potential promising startups, the old methods of seeking capital are no longer the only ones.

lished centers of talent and helps to ensure the deck isn’t so stacked against the little guys.

BITWAGE ANNOUNCES RELEASE OF FIRST FORMAL BITCOIN PAYROLL SERVICE

Crypto Biz Magazine Page.10 August.2014

THE FUTURE OF PAYROLL IS HERE. PRESS RELEASE—As of July 21st, Bitwage has released its private Bitcoin Payroll Alpha Service. This service combines a user-friendly portal for employers and employees with enterprise-quality Bitcoin storage and distribution systems, thereby providing a Bitcoin Payroll service and streamlining the traditional payroll process. The Alpha Service has been designed for smaller businesses, such as startups; it minimizes the time, effort and room for human error in Bitcoin payroll. Using Bitcoin Payroll is easy for both domestic and international employees; simply sign up your employees, and let Bitwage take care of the rest. With payroll taken care of, founders and employees of small businesses can focus on development and generating sales. Based out of Palo Alto, Bitwage is now working with companies inside of the US, with plans to expand internationally in a number of countries that show high demand for Bitcoins. Please contact us at alpha@bitwage.co to be involved. Follow us on twitter for up to date Bitcoin and Payroll industry knowledge.

BENEFITS OF USING BITCOIN PAYROLL

As technologies continue to advance the quality of information and comfort, the traditional financial system remains slow, inefficient and costly. As a result, companies, governments and people alike lose billions of dollars every year. Payroll is no exception to the major financial processes that have been hampered by inefficient financial intermediaries. Processing payroll through banks and the ACH system takes money away from employers and employees through 2 – 4 day processing periods and cumbersome fees. With the advent of Bitcoin, payroll processors can take advantage of financial efficiencies such as faster and cheaper transactions, creating huge savings for everyone involved. Following are the 4 Benefits of Using Bitcoin Payroll.

Increasing Employer Efficiency and Productivity As an Employer, your goal is to increase productivity and efficiency within the workplace. Bitcoin Payroll promotes both elements by decreasing the time it takes employers to pay their employees and increasing the payroll administrator’s time for more innovative and profit generating tasks. With the use of a Bitcoin Payroll Company, employers reduce the time it takes for an employee to be paid through banking institutions from 2 – 4 business days to just 10 minutes. That is a reduction of over 57,600%!

Increasing productivity is an important function of business and one of the ways to do this is to outsource repetitive tasks to a third party. When offering Bitcoin wages, spending time on all the legal components and accounting tasks of paying employees in Bitcoin is working-hours that a startup founder or a payroll administrator could use to grow the business instead. A Bitcoin Payroll company removes this friction from growth and takes on the task of paying employees, freeing up time for founders and administrators to focus on projects that increase sales and revenue.

Paying International Employees Easier, Faster, and Cheaper

Our world is becoming increasingly connected with each passing day. Companies located in the U.S. employing workers in places such as Argentina and India, have a rising need to lower foreign exchange risk and penalties for paying international workers in an easy, fast, and affordable fashion. With the traditional system, transferring currencies requires sending a wire transfer from the employer’s bank through a series of channels that can include up to 3 banks or more, and an exchange rate in favor of the exchanging institution. The average wire transfer fee alone for sending between only two financial intermediaries is $45 per transfer. The various charges on international payroll transactions consume a large percentages of the employees’ overall wage, and it may take 4 – 6 business days for the employee to get access to the funds, unless the employer wants to pay a fee to make it faster. Bitcoin

accounts, costing employees time and money. Now, people have their wages sent directly into their bank accounts. These checks are analogous to the current process of obtaining Bitcoins. Employees currently need to put money into a bank account and then must find the right Bitcoin provider to accept the fiat currency and turn that money into Bitcoin. Bitcoin Payroll gets rid of the extra costs of the time associated with finding the right Bitcoin provider and sending money from a bank to the Bitcoin provider as well as the associated bank fees.

Reaching the Under-Banked

Payroll completely bypasses this system, reducing transfer fees and waiting periods from traditional payroll companies to near zero. With Bitcoin Payroll, not only is the waiting time reduced, the cost for conversion is reduced as well. Traditional Payroll Companies have to go through banks that normally charge two to three percent to convert the employer’s local currency to the employee’s local currency. By using Bitcoin instead of banks as the underlying protocol to pay international employees, the employer can pay in one fiat currency, the employee can receive pay in another fiat currency and the currency conversion rate will be dramatically reduced. This way, employers and employees who have no relation or understanding of Bitcoin, can reap the benefits of Bitcoin without even realizing it.

Employers and Employees no Longer Need to Use Bank Accounts

1⁄3 of US Population

is Under-Banked

Not so long ago, employees received checks in the mail, which then had to be deposited into their bank

Being paid in bitcoins means that these under-banked people in the U.S. and around the world can avoid the entire payroll-card, check-cashing, and money-ordering processes by distancing themselves entirely from the institutions that take a large percentage of their paycheck. Bitcoin Payroll offers a unique opportunity to solve a crisis that has seemed unsolvable for years by providing the under-banked access to a digital form of currency and a future that may finally take away what many deem as “the poverty tax.” —S

Jonathan Chester, Founder & CSO Grant Kurz, Marketing, Bitwage Bitcoin Payroll: made easy

Crypto Biz Magazine

The requisite of a bank account for the payments of goods and services tacks on unnecessary charges in the form of transaction fees and time. For an employer who accepts Bitcoins, there are only three options with your Bitcoin reserves: investment, payment of goods on a small scale and conversion. With Bitcoin Payroll, employers are able to pay their employees as well as their payroll taxes with Bitcoins, thereby providing a new, large-scale option for employer Bitcoin reserves. This reduces the need to spend money on one percent conversions plus banking fees and the need to send payroll payments through the slow, costly banking systems.

According to the TIME article Why So Many Americans Don’t Have Bank Accounts, almost one-third of the U.S. population is considered under-banked. Among businesses in the U.S. that employ this segment of the population, such as Walmart and Taco Bell, there is a growing trend for using payroll cards issued from banks that charge a number of fees to use. These payroll card fees include withdrawal fees, balance inquiry fees, transfer fees, purchase fees, paper statement fees, and card replacement fees (as well as inactivity fees of $7). Payroll cards and other alternatives, such as check-cashing services, and money orders, cost $800 – $900 on average a year out of an average of a $22,000 yearly budget. So how do the underbanked avoid the seemingly endless penalties that traditional banking payroll companies want to charge?

August.2014 Page.11

The World Bank has released an infographic outlining the severity of the under-banked problem worldwide: “Approximately 2.5 billion people do not have a formal account at a financial institution.” Since Bitcoin Payroll removes the need for bank accounts, the under-banked all around the world now have access to global digital marketplaces, and the opportunity to save and hold money digitally, instead of in their wallets or under their mattresses.

DEMONSTRATING BITCOIN’S SOCIAL VALUE—CHARITY, BITCOIN, AND THE BITGIVE FOUNDATION by CONNIE M. GALLIPPI

Little did I know when I set off to the Bitcoin Foundation’s conference in San Jose, California last year that my life was about to change dramatically. The conference was one of the first all-Bitcoin events of this magnitude ever held— hard to comprehend now with the litany of Bitcoin events happening, what seems like daily, around the world.

the story of Bitcoin’s social value. This is the true beauty of Bitcoin and why it will revolutionize our world. It is clear that demonstrating the social value of Bitcoin is a win-win for both charitable orga-

I already knew that the power and the potential of Bitcoin was revolutionary; but things really clicked when I was immersed in the energy of that conference. Surrounded by enthusiastic entrepreneurs, brilliant programmers, and Angel and Venture Capital investors in the heart of Silicon Valley, I knew this was the next dot-com boom.

Crypto Biz Magazine Page.12 August.2014

With my background in nonprofits, my natural inclination was to capture the beauty of

Bitcoin in ways that would allow the community to give back. Practically instantly, and quite magically, the BitGive Foundation was conceived. BitGive focuses on charitable giving and demonstrating Bitcoin’s social value on a global scale. With every opportunity we have to talk publicly about our work, we begin with

nizations and the Bitcoin community. Not only are charitable efforts helping those in need, this type of application of Bitcoin can help bridge the gap from early adopters to mainstream users. Donations provide something that people can relate to and also offer an easy on-ramp to Bitcoin. We are now celebrating our one-year anniversary, and we already have some successful charitable efforts under our belt, including $4,850 (BTC

eq.) raised in one day for Save the Children’s Philippines Typhoon Relief Efforts. Our current campaign for The Water Project has raised over $7,000 (BTC eq.) to provide clean, safe water to a community in sub-Saharan Africa. So, what do we mean when we say the social value of Bitcoin? The Bitcoin community knows well the many benefits that cryptocurrency provides, and I believe those benefits apply even more powerfully to the charitable community. Peer-to-peer transactions, anytime, anywhere, allow us to access the most remote parts of the

a charitable organization already relying on donations to make ends meet is destined to fail. Bitcoin provides a storage of value that remains intact and is not manipulated by the government. It can allow for a more consistent exchange of value in these environments, which would mean more meals or school books for the children of that community. The last—and perhaps most compelling—benefit of Bitcoin for charitable causes is its increase in value over time. Bitcoin’s value has risen from just pennies, to over $600 per BTC at the time

Not only are charitable efforts helping those in need, this type of application of Bitcoin can help bridge the gap from early adopters to mainstream users. Donations provide something that people can relate to and also offer an easy on-ramp to Bitcoin. world directly, with aid and support. Of course the technology is new, and the pieces of the ecosystem are still being put into place, but soon, through SMS transactions, we will be able to reach the needy—directly. This blows open a global donor market, in a single consistent currency, to charitable organizations working in the most remote and impoverished parts of the world.

The fact that Bitcoin holds its value in places where there is a government-controlled currency is also of significant importance to the charitable sector. In countries such as Argentina, where inflation rates are well over 20 percent,

CO N N I E M . G a l l i p p i i s t h e Founder and Executive Director of the BitGive Foundation. She has a strong background in working with nonprofit organizations for over 14 years and is based in Sacramento, California. Ms. Gallippi took an early leadership role in Bitcoin philanthropy, founding BitGive in mid-2013. She is also a spokesperson for the social value if Bitcoin, elevating female leaders in the community, and helping to bring more women into Bitcoin. Follow her on Twitter @conniegallippi or @BitGiveOrg Donations can be made to the BitGive Foundation: www.bitgivefoundation.org Wallet address: 1PEoUKNxTZsc5rFSQvQjeTVwDE9vEDCRWm

Crypto Biz Magazine

Bitcoin also provides an avenue of freedom to give to causes and organizations that are of personal importance—when you may not feel comfortable having your charitable gifts be public knowledge, for a variety of reasons. We face a number of issues today that are politically charged or polarizing; and yet many are extremely important issues that must be addressed. Bitcoin offers a way to support such causes without public scrutiny or backlash.

Building on this, the BitGive Foundation is developing a long-term fund that will function similar to an endowment. Bitcoin holdings that increase over time will provide a sustainable and robust fund from which to give back. Our current holdings are already at six times their original value, yet we still have a long way to go. Support us in moving the needle on the important issues facing our world today, leveraging the power of Bitcoin for social good. —S

August.2014 Page.13

Reduced fees and the ability to transact directly, without governments or banks interfering, means more of the funds actually go to the cause, and make micro-donations more feasible and effective. Often, traditional philanthropic channels cannot reach remote areas; and when they can, the many stages in the support process open the opportunity for fraud, and funding may not get to where it was originally intended.

of this writing; and as a deflationary currency, is expected to rise in value over the long term. This allows charitable organizations to have that much more of an impact.

Crypto Biz Magazine Page.14 August.2014

BITCOINâ&#x20AC;&#x2122;S SHROUD OF SUBTLETY AND ALLURE by DANIEL KRAWISZ

ATTACKS ON BITCOIN

successful attack on Bitcoin means attacking Bitcoinâ&#x20AC;&#x2122;s value. There might well be a bug that could be exploited to put the network out of commission temporarily, but would soon be fixed, and the network would be up and running shortly thereafter. To destroy Bitcoin permanently means to end the profit opportunities available with it, and that means either a malicious hashing attack on the network, making mining impossible; or such a malevolent policy against Bitcoin trade that even the black market abandons it. Both of these require spending resources in proportion to the profits that Bitcoin enables.

In this article, I will discuss three reasons why such an attack is unlikely to succeed: antifragility, subtlety, and attacker defection. The interplay of these three defenses makes Bitcoin into a kind of wave that rewards those who ride it and drowns those who resist it. The first of these, antifragility, is exemplified in the fact that malicious hashing is impossible up to a certain fraction of the network. Below the point that selfish mining becomes possible, additional hashes per second are almost certainly beneficial because they increase the security of the network. Any potential attacker, therefore,

must weigh in the possibility that he may end up benefiting the network instead of destroying it. A similar risk accompanies a legal attack on Bitcoin. Bitcoin can adapt to half-hearted attacks. It would move deeper into the black market where it would become permanently strengthened. Furthermore, a legal attack could be easily corrupted into one that brings as many bitcoins as possible to the government agents instead of one that destroys it (see below).

BITCOIN’S SUBTLETY Bitcoin adoption happens one person at a time, and this is true for potential attackers as well as the rest of us. It takes an entrepreneurial mindset to be able to imagine what Bitcoin could become, given how comparatively small it is now. It takes time and meditation for people to take Bitcoin seriously because most of its value is in the future. By the time this happens, Bitcoin has become much more expensive than when they first learned of it. Thus, Bitcoin is protected from attackers by being initially beyond their understanding. When Bitcoin was very small, it was very stealthy and was completely unknown to the establishment. Now they laugh at it, just as it has begun to grow bold. Of course, we don’t know who really dismisses it and who is deliberately trying to draw attention away from it.

BITCOIN’S ALLURE

Even those who might resist the temptation to defect would have to think about the defection of his fellows. How quickly is adoption happening? Is there time to mount an attack before Bitcoin becomes too powerful? How easily could the resources for such an attack be amassed, given both the ignorance and treachery

Bitcoin is like Invasion of the Body Snatchers. Bitcoin attracts inside men to act as covert saboteurs. There have long been predictions from both bitcoiners and naysayers of impending government attacks, but I think there is a possibility that Bitcoin could win without suffering much resistance. Moreover, although I said above only that any legal bitcoin attack could be perverted, the considerations discussed in this section tend to make such diffusion very likely. Bitcoin defends itself by being obscure, but once it has attracted someone’s attention, its best interest is for that person to understand the logic presented here. For then he will also understand that his best course is to deny Bitcoin’s threat to his superiors and quietly to become its willing slave. FOOTNOTES—Right now Bitcoin Core does not follow the proper strategy to protect against selfish mining even at very low hashing rates, but the fix would be extremely easy to implement and would make selfish mining impossible up to twenty-five percent of the hash rate. —S

DANIEL KRAWISZ graduated with his Master’s degree in physics from The University of Texas at Austin in 2010. He is a founder of the Satoshi Nakamoto Institute and is now its Director of Research. Daniel accepts Bitcoin tips:

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Nearly any government agent who begins to see Bitcoin as a potential threat must also simultaneously see it as an opportunity. He, too, can invest in Bitcoin. And why shouldn’t he? Bitcoin may be a threat to his livelihood, but it may well be making him an offer he can’t refuse. How can an organization that stands to lose by the adoption of Bitcoin provide its members with a better opportunity for staying loyal than Bitcoin provides for defection?

Potential Bitcoin attackers are in a Prisoner’s Dilemma. In the same way that the people cannot easily rebel against the king owing to a lack of coordination on their part, governments cannot rebel against Bitcoin for the same reason. The government puts the people in a Prisoner’s Dilemma against one another, and Bitcoin does the same to government agents.

August.2014 Page.15

Furthermore, potential attackers are at a disadvantage for another reason: Bitcoin tends to oppose organizations rather than people. Even someone who stands to lose from Bitcoin by not reacting to it, such as a banker or government agent, stands to gain a great deal by buying now. Only the very wealthiest people might reasonably expect to be worse off attempting to buy up as much as possible now than if it were gone. (This could happen if their attempt to buy caused the price to rise too fast relative to their ability to acquire additional bitcoins, to the point that they ultimately had less influence over the future Bitcoin economy than they have over the economy of today.) Thus, the agency problem with Bitcoin affects bitcoin competitors as well as Bitcoin holders.

of the other agents. If such an attack is unlikely to succeed, then buying now would be the only intelligent action. Regardless of whether he liked Bitcoin, it would be futile to continue pursuing a doomed cause.

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WHY DO I NEED TO PAY FOR SECURE E-MAIL SERVICES?

Crypto Biz Magazine Page.20 August.2014

by GERRY BAKKER

t’s a fact that companies like Google and Microsoft offer free e-mail services. So why use a paid e-mail service?

THE NEED FOR MORE PRIVACY

Individuals and businesses increasingly require a high level of privacy in online communication, to prevent their data from being monitored, or accessed inappropriately. The right to privacy is an important principle, protecting a person’s private sphere, which in our modern society includes e-mail communication. Intelligence agencies utilize surveillance technologies to monitor e-mail communication, in the supposed interest of national security. Some e-mail providers screen e-mail communication in order to display targeted advertisements to the end user, or store message contents and personal data in order to extract information that may

be shared with third parties for commercial gain (so-called “data mining”). For all you Gmail, Yahoo and Outlook365 e-mail users out there that are getting a bit uncomfortable with the NSA reading every one of your e-mails, you should find a secure e-mail service in Canada, where the NSA can’t force them to reveal your e-mail contents. You should also be using secure and encrypted connections when you access e-mail with webmail, POP, IMAP, and SMTP. Preferably, use desktop apps like Outlook, Apple Mail, Thunderbird, etc., to download your e-mail from an e-mail server, using POP3 instead of IMAP.

IMAP is a wonderfully convenient feature that many of us think we just have to have, with synchronized copies of all e-mails, on all devices, at the all times. The only problem with this convenience is that it exposes our e-mail contents—in equal measure, on all devices. If you lose one of these devices, or it is stolen, then the person who finds it, or the thief, has the ability to view your e-mails, and even delete them in synchronous fashion, from all of your other devices, as well. POP3 pops into your e-mail server account and downloads your e-mail to your desktop, and your other devices if you have each device set to leave e-mails on the server for 3 – 5 days— enough time to open each device and download your e-mail. After that time, it deletes them from your server only—freeing up space for more e-mail, and erasing any trail of their existence on the web server. IMAP or POP3? The decision is yours, but consider the consequences and the trade-offs of each method.

WHAT ABOUT PRIVACY?

A secure e-mail provider should be committed to protecting their customer’s privacy.

SECURE TRANSFER OF E-MAIL

1. Between you and your e-mail provider

2. Between your e-mail provider and other e-mail services

e-mail

The only way to ensure that your messages are completely private is to encrypt the contents of each message, before you send or receive it through a secure e-mail provider. This means that you’re not relying on any technology that e-mail services employ, and that your message will remain private and secure between you, and the people you correspond with. To do this, you’ll need to use some kind of encryption system, such as PGP (Pretty Good Privacy). When using this, you and your recipient will both need to generate encryption keys, which you use to send e-mail to each other. Keys are used to encrypt messages before they’re sent from your computer, and then used to decrypt messages once they’ve arrived at the destination computer. PGP is very secure, and as far as the industry knows, has not been compromised. However, the need for senders and recipients to both use encryption keys means it’s not very convenient, and therefore, most people don’t bother to use PGP, or other similar methods. Your e-mail supplier should integrate PGP into their services, to allow you to facilitate the use of this kind of security. A final thought: For all you Wix and Weebly users, paid e-mail providers offer the perfect solution for all your e-mail requirements. Now you can have your fancy website, and matching e-mail accounts, in a safe environment that’s completely transparent to your site’s visitors.

GERRY BAKKER has been involved in network security and web hosting since 1983. Communication started at 300 BAUD with Compuserve and eventually the new internet in 1995. Today the internet is a big scary place with attacks on everyone’s privacy and theft of their identities. My daily routine is spent fighting off DDOS attacks, identifying and fixing hacker’s attacks on client sites and constantly battling spam or email spoofing.

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Whenever your e-mail provider’s servers send and receive e-mail for you, they try to use a secure, encrypted connection between your e-mail server and the e-mail service used by the other person. The secure e-mail server “asks” the server at the other e-mail service if it can accept a secure connection. If it “replies,” saying it can, then the transfer of your e-mail will be done over a secure, encrypted connection. This prevents your e-mail being read even if it’s intercepted during transmis-

3. Securing/encrypting the contents of your

August.2014 Page.21

If you’re using webmail, any e-mail that you send or receive, between your computer and your provider’s e-mail servers, should be encrypted while it is transferred. This is the case for e-mail you send and receive. Similarly, if you are using an e-mail client like Windows Live Mail, Outlook, Thunderbird or Apple Mail with your e-mail server, then your e-mail will be encrypted while it is transferred between your computer and your e-mail provider’s servers. Your e-mail won’t be encrypted while stored on those e-mail servers, but the servers should be located in a high-security facility in Canada.

sion. If the receiving server is unable to support a secure connection, then e-mail will be transferred using the standard protocols that all e-mail services use. Unless you’ve encrypted the contents of your e-mail, (see part 3, below), it’s possible that, if it was intercepted during transmission, it could be read. Your e-mail provider has no control at all over whether other e-mail services use secure connections, so while this is a very useful facility, provided by secure e-mail providers, it’s not something you can rely on entirely to keep your e-mail private. Your secure e-mail provider will have no control over how the people you correspond with connect to their e-mail service.

NETWORK SECURITY AND PROOF OF WORK… DO WE NEED AN ALTERNATIVE?

Crypto Biz Magazine Page.22 August.2014

by ARIANNA SIMPSON

The Bitcoin protocol is designed using a proof of work mechanism, which determines who is permitted to sign the transactions that need to be verified. A proof of work (PoW) is a piece of data which is computationally difficult to achieve, meaning that it required a lot of either time or hashing power (or both) to find the solution, but it’s easy to verify that this work was actually been completed. Bitcoin uses a proof of work algorithm called hashcash, which has been around a lot longer than Bitcoin itself, and was created with the purpose of being an anti denial-of-service (DOS) measure. Hashcash is fairly versatile and can be implemented with a number of functions; bitcoin uses hashcash-SHA256^2. The proof of work consists in finding a target number that is below a certain target value, and in doing so the miner essentially “proves” that she performed a certain amount

of “work” in trying various inputs. If I input a string into the SHA-256 hash function, there is no known way of determining what the output will be. Trial and error is the only way to find an input that will generate a hash that fits the desired criteria. In theory, you could nail it on the first try, but the probability of this happening is very small. Given the current combined hashing power of the network, on average a solution is found every 10 minutes, at which point the block has been mined and the bitcoins are released as a reward. Every 2016 blocks, which ends up being approximately every two weeks, the algorithm moderates itself and either increases or decreases the difficulty of the problem. In practical terms, this means that it either increases or decreases the target value, so it’s easier or harder to find a value below it. This ensures a relatively smooth rate of release

for newly mined bitcoins, and avoids flooding the market with coins at any given time. It doesn’t matter whether I am using a supercomputer or a laptop to do the proof of work, it’s simply that with a supercomputer I can go through the attempts much faster, which means I have a higher chance of solving the problem before anyone else and therefore claiming the reward. The only thing that is important is how many hashes I can go through per unit of time, which is why the power of mining hardware is measured in MH/s, GH/s or TH/s (mega, giga and terahashes per second). Some people in the cryptocurrency community have voiced the concern that miners may not be incentivized to continue mining if the price of bitcoin plummets, or simply because the reward for solving a given block decreases over time. Both are valid concerns but deserve to be addressed separately. In the first case, the assumption is that the reward amount would be too low for it to be worthwhile financially, and once all 21 million bitcoins have been mined this reward goes away entirely. Currently, miners are primarily incentivized by the coinbase reward rather than the transaction fees, which is why many blocks end up with few transactions. Miners profit from the transaction fees, and the more transactions they include in a block, the more money they can make, but the opportunity cost of continuing to work on that block rather than go after a new one is high, as a competing block may win, rendering their work a waste of time and computing power.

The likelihood that we see a huge drop in the price of Bitcoin also decreases substantially over time, as it becomes less probable as the network expands. One of the main reasons Bitcoin prices have been fairly volatile to date is that the network (by which I mean the number of consumers with wallets and merchants who accept Bitcoin as a form of payment) is still relatively small. Bitcoin’s market cap has been hovering between 7 and 10 billion dollars, which means that any hedge fund worth its salt could take a position and dramatically swing the market. Bridgewater Associates, for instance, is the world’s largest hedge fund with $150 billion in global investments under management. In theory, they could buy ALL the bitcoins that have been mined to date 19x over, and still have enough left to throw six Instagram acquisitions in for fun… and that’s only one of the top funds. Because the market cap is small, bitcoin to date has been subject to the whims of large actors; as the cap increases, there’s a strong chance that this will change. There’s also the issue to consider that even in the absence of a price crash, incentives to mine naturally decrease over time as the amount of bitcoin received as a reward for mining a block is halved every 210,000 blocks, or approximately every four years. There is reasonable cause for concern that without the incentives provided by block rewards the network will no longer be secured, in that the transaction fees will not be sufficient to support the cost of securing the network. This is a manifestation of the game theory concept of the “Tragedy of the Commons” in which no individual actor wants to perform work or contribute to the community because he believes that she can reap the benefits regardless, but when everyone behaves this way, the system ends up collapsing and leaves everyone worse off. No one wants to pay transaction fees, but if everyone avoids paying them, the miners will have no incentive to keep security levels high, which could result in a systemic collapse. continued on page.36

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Based on a comparison to the ideal value, the algorithm either increases or decreases the difficulty of the problem to solve, essentially recalibrating to try and get as close to 1,209,600 seconds as possible. To date, the difficulty has increased as more and more advanced ASIC miners continue to be developed, and more computing power is needed to have a chance at being the first to solve a block. However, the algorithm can also self-regulate in the opposite direction, making it easier to solve the problem by increasing the target value. Difficulty can be decreased by as much as seventy-five percent. This component of the protocol is

Even if the bitcoins they are mining are worth substantially less post-crash, if the miners believe that the expected future value of their bitcoins is significantly greater than it is at present, then it would make sense to continue mining. Alternatively, if a large percentage of miners quit because they didn’t anticipate the future value of bitcoin to make their present expenditure worthwhile, the new environment could still attract a new class of miners who are not currently mining because they don’t have the hashing power needed to make it lucrative, but if competition decreased dramatically, it would be. Presumably, at this point other miners, who had been mining previously, would also see this and start getting back into the game, which would ultimately increase competition and start driving things in an upward direction again.

August.2014 Page.23

Let’s assume that, for whatever reason, the price of Bitcoin collapses, and therefore it’s significantly less lucrative (net negative, once you factor in the cost of electricity) to mine. If miners are rational actors, most of them will stop mining, which is a problem for the network. The unintended consequence, however, is that mining would become dramatically less competitive, and therefore substantially more lucrative for those miners who continue to mine—at least in the short term. As I mentioned earlier, the algorithm self regulates to keep the average pace at which blocks are solved at around 10 minutes per block. As the bitcoin developer guide explains, Every 2,016 blocks, the network uses timestamps stored in each block header to calculate the number of seconds elapsed between generation of the first and last of those last 2,016 blocks. The ideal value is 1,209,600 seconds (two weeks).

particularly brilliant in design, as it basically guards itself against market shocks that could be produced by sudden swings in the mining power being inputted at any given moment.

continued from page.21

Crypto Biz Magazine Page.24 August.2014

To some extent, the point in time at which this problem becomes a reality will depend on the price of Bitcoin, and no one can accurately predict when the network will reach that point; but even if prices continue to grow, this is likely only a case of delaying the inevitable. If a bitcoin today is worth $600 and I receive 25 when mining a block, and in ten years I only receive 6.25 bitcoins for doing the same work, yet each one is worth $100,000, mining still makes a lot of sense. Even considering the investment in mining equipment, assuming that the amount of electricity I will have to expend will be higher, and discounting for two to three percent annual inflation, there’s still a substantial potential upside. There are a number of external factors (exact cost of electricity, price of ASICs or other mining equipment, etc) that will play into this and influence whether the network incentives to mine remain high enough, so it’s worthwhile considering other mechanisms, prominent amongst which is proof of stake. Proof of stake (PoS) is an idea that came about as an alternative solution to proof of work, primarily as a safeguard to some of the original protocol’s perceived shortcomings. Apparently it was first proposed in 2011, in the bitcoin talk forum by “QuantumMechanic.” and since then, several models for implementation have been developed. A proof of stake scheme is similar to proof of work in that it is also a mechanism for determining who will sign the transactions in a given block, but instead of relying on hashing power, it uses ownership as the deciding factor. Simply put, if Alice holds five percent of all coins, she has the ability to mine five percent of the blocks. Theoretically this should increase network security by making it more difficult to mount a 51% attack. In order to do so, someone (probably a mining pool) would have to control over half of all coins in existence, which is much harder to do than controlling fifty-one percent of the hashing power. It’s worth considering that this isn’t impossible, as a large centralized pool could form and come to control over half the coins in circulation through a combination of owned coins and loans, for example. Realistically, however, in a proof of stake situation it wouldn’t make much economic sense to mount this type of attack. It would substantially reduce confidence in the network’s security, and likely cause the price to plummet. By crashing the value of a coin in which it is so heavily invested, the malicious mining pool would essentially be shooting itself in the foot. To some degree, this is also true in a PoW scenario, but the disincentive is much stronger where PoS is being applied. Although there’s no way to know exactly if and when an alternative to proof of work will become necessary due to a lack of mining incentives, a proof of stake scheme could also be a desirable solution, for environmental and efficiency reasons. Since the proof of work process does not actually solve real-world problems, the energy is essentially burned without a real return, which is suboptimal. Implementing PoS, either in the form of a fork from the main proof of work blockchain or via the use of an altcoin that uses

it (i.e., Peercoin, or something similar) could be significantly less costly than bitcoin mining as it currently stands, because the current system gobbles up a huge amount of electricity. Because PoS uses far less energy, as almost none is expended in the mining process, it would be substantially cheaper to make a profit mining than in a PoW scenario. It would also meaningfully reduce transaction fees in the long run, as miners wouldn’t have to charge high fees in order to cover their power and hardware costs. We still lack a perfect solution to all these issues, and PoS is not a panacea either. One problem I see with implementing a PoS mechanism is that it could cause illiquidity in the market and lead to great concentrations of wealth. Miners would be incentivized to hold their Bitcoin in order to be allowed to mine more, and therefore large concentration pools of currency would accumulate. Currently, miners have an incentive to convert some of their mined bitcoins into dollars by selling them, but this is largely true because of a) price volatility—it is still risky to hold everything in Bitcoin, and b) there are still many assets that cannot be purchased using Bitcoin. If PoS were implemented, and as both a) and b) become less relevant as the network expands, this could lead to a vast majority of coins being held by very few. Despite the considerable improvements that proof of stake offers over proof of work in certain spheres, ultimately, neither proof of work nor proof of stake offer a perfect solution to long-term network security concerns. Still, both clearly have useful characteristics which, applied in conjunction, could help overcome some of their own shortcomings. Just as I was wrapping up this writeup, Ryan Selkis passed along a fascinating paper by Bentov, Lee, Mizrahi, and Rosenfeld which proposes a third option, called Proof of Activity (PoA). PoA is predicated on the belief that neither PoS nor PoW are flawless, and seeks to pull in some of the better aspects of both. I’ll write about the PoA paper separately in a future article. The paper, titled Proof of Activity: Extending Bitcoin’s Proof of Work via Proof of Stake, is fairly technical, but it’s very thorough, and for those who are so inclined, I definitely recommend a read. —S A s a B i tco i n e n t h u s i a st a n d i nve sto r, A R I A N N A SIMPSON is particularly passionate about helping women get involved in the Bitcoin community. She is now at Facebook, working out of the New 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.

ABOUT COINFEST… CoinFest is the world’s FIRST decentralized currency convention! Not the first convention about decentralized currency, but rather the first currency convention to itself be decentralized in concept, organization and form. We book venues all across the globe for a simultaneous extravaganza of cryptocurrency, hosted in a non-profit fashion by various partners. CoinFest is not owned by any person or company, and all domain names and other assets will eventually be turned over to a decentralized autonomous organization. Anybody can start a CoinFest of their own, so long as they uphold the spirit of CoinFest. One may not charge admission for a CoinFest event, as it is intended for public outreach. CoinFest is also intended to incentivize cryptocurrency adoption, and thus one may not host a CoinFest at a venue or business that does not support alternative currency, barring extreme circumstances. All currencies are allowed, but use of state-backed currency (within the state backing said currency) is discouraged, except for the purpose of purchasing alternative currency.

CONFIRMED LOCATIONS FOR COINFEST 2015

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Vancouver, Canada, the birthplace of CoinFest. It will once again be organized by CoinFest founder Andrew Wagner Winnipeg, Canada, brought to us by returning organizer Josh Nekrep. Check out his website Montreal, Canada, home of Canada’s Bitcoin Embassy. Now joining us thanks to Francis Pouliot, chief executive of the Canadian chapter of the Bitcoin Foundation

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Renaca Beach in Vina Del Mar, Chile. Major thanks to our anarchist friend Gabriel Scheare from Galt’s Gulch

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Mexico City, Mexico, spearheaded by Bitso co-founder and Bitcoin Co-Op member Pablo Gonzalez

Donate to CoinFest CoinFest is entirely funded by donations and sponsorships, and charges no fees to event venues or guests. If you like what we’re doing to spread currency innovation and freedom, you can support the movement by donating to one of the following addresses, or by using CoinOS!

BITCOIN ADDRESS:

LITECOIN ADDRESS:

FEATHERCOIN ADDRESS:

13SH6sEaETA5Ca7Gb5kb1Yv5SjqxauvKdm LNUh9955nADhfT43WL8YsuwwJ6uR9nEjto 6sifxgAmyoBhXQCrRYpZko1tz4J3hRVSE5

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DOGECOIN ADDRESS:

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WORKING FROM FIRST PRINCIPLES TO BUILD BRIDGES, FUND CORE DEVELOPMENT, AND GO TO THE MOON

Crypto Biz Magazine Page.26 August.2014

by RENE-LEE SYLVAIN

There is a seemingly inevitable chance that a financial system like Bitcoin will get adopted worldwide. If this occurs, we believe there should be a process which is similar to what governments currently refer to as “economic stimulus.” For this reason, we wanted to build and test SatoshiVote, which—in simplified terms—is monthly crowd-funding on a global scale. In more complex terms, SatoshiVote allows us to choose where our value goes, instead of forced inflation of our savings. This is far different from our current economic system, where a central bank prints money, calls it “economic stimulus,” and chooses which bridges to build or wars to fight. With SatoshiVote, we’re proposing that people cast a vote that transfers value and in turn pays for their collective hopes for the future, creates jobs, and stimulates the economy. With this global funding method, we feel these votes will be far more effective and efficient than political ones. The most exciting part of this process is its potential to achieve so much more than we thought possible.

Our funding method will hopefully begin to address that question. It will seamlessly encourage and allow people to send one to two dollars per month to whichever “campaigns” are listed on our site. These campaigns can be anything: environmental projects, medical research, or expeditions like manned missions to Mars. Historically, these initiatives were very hard to get funding for, but with Bitcoin, you have access to 2.6 billion people on the Internet, and one to two dollars a month is painless for a significant number of those people. That’s an enormous potential pool of continual monthly funding. Some people will associate SatoshiVote with traditional crowdfunding, but it is fundamentally different. The requirements for these campaigns include unknown costs and extremely long timelines. They cannot be accomplished with large one-time donations; which is exactly what previous crowdfunding methods provide. To build infrastructure, or pay for large transformative undertakings, you need continuous monthly funding, and a lot of it. This is why we think SatoshiVote will fill an unmet need for the Bitcoin economy and give it some insane purchasing power.

In the past, governments and their corresponding central banks were the only ones capable of funding expensive, long, and risky undertakings. After governments are elected, they have the ability to print money on a regular basis, allowing them to pay people over long periods of time to perform work. The type of work this funding has created in the past has included industrial development, moon missions, military conflicts and more. These types of projects require expensive, continuous funding, affect populations globally, and—when funded in this manner—cause inflation, basically forcing citizens to pay for spending they aren’t even aware of. This ability to inject printed money into the system, and essentially “choose” what people do for work, is responsible for some of the greatest accomplishments in history, as well as some of the most terrible ones. In a monetary system like Bitcoin, where the money supply is fixed and held by the people, how will we create jobs, stimulate the economy, and decide what infrastructure to build?

Given this information, we’re compelled to test out this funding method even though the odds of initial success are low. At first we’re listing Bitcoin-specific campaigns because we think those are most likely to get funded; but in the future, all types of campaigns can be listed. Having a platform where society can combine value towards a common goal—in a truly democratic way—will be an essential part of any frictionless, deflationary, and global financial system. To take a look at what we’re building, please go to SatoshiVote. —S RENE-LEE SYLVAIN studied Finance and Accounting in uni-

versity, with a healthy dose of Computer Science. After graduating, during the recession, he worked in the oilfields instead of finance. At the same time he completed the 4th Class Power Engineering course at NAIT. Three years later, and with lots of money saved from MWD technician work, he started investing in Tesla Motors and Bitcoin. His goal now is to work in the finance and cryptocurrency field while working as much on SatoshiVote as possible.

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DANA.IO & THE CORPORATION (2004) COULD BRING BITCOIN TO 1,000 HIGH SCHOOLS by MIKE YEUNG

Crypto Biz Magazine Page.28 July.2014

International hit documentary The Corporation is celebrating its 10th anniversary with its ‘Get Up #OffTheCouch Crypto Challenge’—a cryptocurrency-only crowdfunding campaign to re-release a shorter cut of the film, to be distributed to one thousand schools. $35,000 has already been raised in a campaign that accepted both fiat and cryptocurrencies. The film is still looking to raise another $15,000 to reach their original funding goal. Campaign creator Kat Dodds is making this a race to the top for a special thanks section of the film, that will feature the logos of the contributing cryptocurrencies, with special prominence for the cryptocurrency in which the campaign receives the largest total amount of donations. “All cryptocurrency donations will be kept as and used as cryptocurrency as well,” says Dodds. Released in 2004, The Corporation stunned the world with its revelations of an out-of-control business model, legally protected as a “person” and tasked to pursue profit above all else. While cryptocurrencies were not around when the film was first released, they’re salient to the film’s message. Just as The Corporation has shed light on how these companies dominate our lives, Bitcoin has exposed our financial system as unstable, unjust, and unfair.

Current version of the film above, and the 2004 film below.

You can find the campaign here: dana.io/cryptochallenge Information about the film can be found at the following: www.thecorporation.com www.imdb.com/title/tt0379225 —S MIKE YEUNG (@saitoshee) is also the CEO of Saftonhouse Consulting Group, a cryptocurrency consultancy based out of Vancouver. He has explained Bitcoin on Global TV, CBC Radio, The Vancouver Sun, Huffington Post, and other publications. Michael is also the founder of the S i m o n F ra s e r B i tco i n C l u b, C a n a d a ’s f i r s t s t u d e n t a d vo c a t e g r o u p for Bitcoin. SFU sits alongside Stanford, MIT, and Berkeley in the College Crypto Network.

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BLOCKCHAIN-BASED CONSENSUS IN A CRYPTOTOWN SOCIETY

by BRIAN VERESCHAGIN

The implications of blockchain-based consensus reach far beyond the integrity of our currencies. Individuals have never had the ability to independently verify the integrity of the information networks and hierarchies that compose their society. Even further still, we have never had a viable alternative to the profit motive, which is based on the consume and multiply model seen throughout nature. Technology threatens to put an end to scarcity at the same time our civilization careens toward the end of a parabolic rise in resource exploitation. Blockchain technology allows for the cooperation required to transition our society from the destructive motivation of profit, to those of human needs and sustainability. This awakening may be put into context by studying the different ways in which we have shared information in the past. Spoken language has a limited proximity and spreads slowly while residing in the volatile minds of our early ancestors. Written language provided reliable storage and the geographical reach to enable expansive societies. The invention of the printing press brought broadcast media, capturing the knowledge of the world to book and leading us to the radio and television. The Internet brought us instant worldwide interactivity and collaboration between participants. With each revolution, the amount of information available to each individual has exploded.

The process of decentralization is like a swinging pendulum, finding balance between hierarchies and networks. Some things may transition to a network model of cooperation like cryptocurrency, yet we may still try to pass the responsibility of protecting our private keys to centralized exchanges and wallet ser-

Real-time global interaction of culture and ideas, coupled with the authentic persistence of the blockchain, provides individuals with equal access to the vast structures of society. As we develop the ability to interact directly with the uncensored contours of our collective will, wild phenomena such as the blockchain itself may emerge. Manipulation-free access to our peers may awaken a new consciousness which is aware of The Game, and may cooperate to become self-sustainable. We are born innocent and taught by society how to react to each situation with programmed aversions and desires. We each believe most strongly in our own experience of what constitutes a normal society and culture. Awareness of this programming is required to transcend the fearful grouping and exploitation behaviors of a system that has nearly run its course. If we are to believe that currency is the most potent blockchain application, we may overlook the possibility of obsoleting the very concept of money and economics. â&#x20AC;&#x201D;S

BRIAN VERESCHAGIN Brian

is 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 gain better insights into complex systems. The CryptoTown project embraces open collaboration and community empowerment where permission and trust are not required. Get creative! Find out more at http://www.cryptotown.org Brian takes tips at 15zRQWgNkzHjHTjnMHrQGzZp3uLMbmgyg6

Crypto Biz Magazine

The CryptoTown On The Ground project was launched to encourage collaboration between crypto pioneers, development talent, and expert guidance on the critical path toward mainstream adoption of crypto. A grassroots approach acknowledges that existing institutions are ultimately motivated to create scarcity and dependence and will not help us. Independence is achieved through the cryptomall model of local support networks and the continual refinement of tools and methods employed. Although most of the crypto crowd is currently focused on cryptocurrencies, they are just a part of the global shift towards decentralization in which new elements of society are emerging from cryptographically secured trust.

The profit motive, which underpins the whole of our society, emerges from basic trends observed amongst the diversity of life on planet Earth. In the absence of a natural predator, we can observe the exponential growth of a species, and the collapse of its underlying resources. When the underlying motive for each individual is profit and growth, the end result is a catastrophic depletion of carrying capacity. The exploitation of every last opportunity fuels a pervasive resistance to obsolescence, resulting in artificial scarcity and an obsessive aversion to solving problems. Institutional hierarchies built of human trust may feel threatened by the prospect of transparency, where exploitation of opportunities for personal gain may be the glue of the operation.

August.2014 Page.31

The kind of information shared within and amongst societies ranges from cultural ideas to financial accounting and ownership. Access to and control of such information has been traditionally trusted to hierarchical institutions such as government, corporate media and central bank. This system ultimately relies on individual human trust, which is the reason that our exploits manifest themselves in the direction of our civilization. Blockchain-based consensus allows us to construct, and voluntarily participate in, systems of rules designed to augment or replace critical points of trust within all levels of society.

vices. Throughout history we have tried many methods of societal organization, but until now, every facet has been subject to the exploitation of human trust. The profit motive, enshrined to law, is a cultural relic of an environment of scarcity and exploitation where technology now threatens sustainability and abundance. Crypto may help to form the bridge between a civilization forged in the fires of scarcity, to one ultimately motivated by human needs and sustainability.

CASH AND CREDIT IN A CRYPTOCURRENCY ECONOMY PART 1

by JUSTUS RANVIER

The success of Bitcoin has created the possibility of a new, free-market, cross-border, online economy with Bitcoin serving the role of base money (cash). There’s certainly room for optimism on this point, however it’s not going to happen on its own. Bitcoin is the new cash, or base money, for this economy. Cash by itself is not enough to meet all the needs of an economy, so building that future economy will require additional, supporting technologies. Open-Transactions is one of those supporting technologies, and the this article will explain how and why it fits into the new economy we’re building.

CASH AND CREDIT IN A CRYPTOCURRENCY ECONOMY

This article is part of a series describing the complementary relationship between Bitcoin and OpenTransactions as tools for creating a new, digital economy. This is the first article, describing the legacy financial system. Other articles in the series are Open-Transactions, and Practical Applications of Open-Transactions. Before we can talk about what the future of money will look like, it’s important to establish some context by talking about the present, and how it got to be this way.

Crypto Biz Magazine Page.32 August.2014

A BRIEF HISTORY OF CURRENCY

Modern currencies started with gold and other precious metals. Over the past few thousand years, people in a variety of cultures around the world discovered gold and decided to trade it as a commodity. Over time, as finance and commerce became more sophisticated, the concept of a unit of account emerged, and gold generally became the default unit. Much has been written regarding why gold fell into this role, but for the purpose of this article, it’s sufficient to note that it did. The next major step in the evolution of currency came when people trading with gold coins realized that gold isn’t a particularly good medium of exchange when it comes to transactions that involve either high or very low denominations, or long distances. They discovered that it was more efficient to store their g o l d w i t h a t h i rd party who specialized in that service, and trade information about their ownership of the gold, rather than the gold itself.

This arrangement was the beginning of both banks and paper currency. Banks were trusted third parties to whom depositors would hand over their gold for safekeeping, without relinquishing their claim of ownership. The proof of their gold ownership came in the form of paper notes with a specific face value that the bank promised to redeem for gold on demand. This arrangement can be thought of as a custodial relationship, and it can also be thought of as a loan. Depositors loaned their gold to the bank, in exchange for a promise to return it. The promises represent the bank’s liability (debt), which depositors could use as a medium of exchange. The invention of banks and paper notes was also the invention of debt trading. This basic structure has been preserved to present-day, even though modern government-issued currencies are no longer promises to deliver gold from a vault. For example, other than coins, every form of the U.S. Dollar is a debt instrument. Federal Reserve Notes are liabilities of the Federal Reserve, redeemable in U.S. Dollars (theoretically). Bank account balances are liabilities of the banks. Every other financial instrument (stocks, bonds, CDs, checks, futures, etc.) are liabilities of the issuer. Every transaction involves the transfer of liabilities from one party to another, with the exception of some physical cash transactions. Financial instruments, in all of their various forms, are contracts between the issuer and the bearer, which represent the issuer’s promise to redeem the instrument for some specified form of value.

CASH IN THE CRYPTOCURRENCY ECONOMY

Once we understand where our modern financial instruments came from, and if we know something about the features of Bitcoin, it should be clear that in the future the role for financial instruments which represent money will be diminished. Bitcoin is like what gold would be if it came with built-in teleportation. It is almost as easy to move a representation of a bitcoin as it is to move a bitcoin itself—after all, both are just information. With that ease of movement, the need to hand over bitcoins to third parties custodians for easier transactions is nearly eliminated. Nearly eliminated, but not totally. There are two areas in which there is still room for trading representations of Bitcoin: CURRENCY TRADING PLATFORMS: Transactions on the Bitcoin network are fast, compared to something like a bank wire or ACH transfer, but still take an average of ten minutes to finalize. In certain applications, where individuals want to rapidly exchange bitcoins, the exchange needs to happen out-

NET BILLING

Businesses of all sizes are constantly issuing and redeeming liabilities in the form of trade credit—it’s part of their daily operations. However, many individuals are not familiar with this concept since they may not be directly involved with B2B finance. For that reason, a brief explanation of net billing is in order.

side the blockchain. This means recreating the same custodian-representation model, using a suitable mechanism. TRADE CREDIT: Trade credit is a form of B2B (business to business) loan that is critical to the smooth flow of commerce in an economy. Few people who are not directly involved with the B2B financial dealing are aware of it, but it represents the largest use of capital for businesses of all sizes in developed economies.

TRADE CREDIT

Consider the businesses which might operate in a small town. If the town is reasonably-sized, then one of these businesses will be an auto repair shop. Where there are auto repair shops, we would also expect to see an auto parts store which would act as the repair shop’s supplier.

There are two ways: either the repair shop keeps enough cash on hand to pay for everything up front, or the parts store gives them the alternator immediately, and allows them to pay later. The latter option is trade credit. Suppliers of a business typically set up accounts with their businesses that allow for delayed billing, typically with 30-, 60-, or 90‑day delays. The effect of this delayed billing is exactly equivalent to a short-term loan of currency.

The parts store and the repair shop will probably have many outstanding invoices open at any given time. The repair shop might pick up parts several times per day and issue a single payment each week. The parts store will typically take incoming payments and apply them to the outstanding orders from oldest to newest. It is beneficial for businesses to operate in this way for two reasons. First, because prior to the invention of Bitcoin, paying invoices tended to be a slow and manpower-intensive operation. Being able to write a single check that covers many invoices at the same time is a great way to reduce overhead. This reason will be less urgent in a cryptocurrency economy. The second reason is that this billing arrangement allows businesses to better manage their cash flow, especially for those businesses operating on thin margins. This reason remains relevant in a cryptocurrency economy. It’s much easier for a business to pay its suppliers after the customers have paid. The ability of businesses to issue running loans to one another acts as lubrication for the machine we call the economy. Now that we’ve explained the basics of legacy financial instruments the series will continue with a description of Open-Transactions. —S

(Originally published on Open Transactions News. Reprinted with permission.)

Crypto Biz Magazine

How common is trade credit? Collectively it represents the largest P2P loan market in the world. How large is that, exactly? To take Walmart as an example, the capital they have in trade credit exceeds the amount of shareholder equity by a factor of eight. Trade credit is the largest and most important facilitator of modern commerce that you’ve never heard of.

Imagine the alternator cost a hundred dollars, and was picked up on the second of the month. The shop can pay the invoice with a ninety-eight dollar payment, as long as the payment was received no later than the twelfth, or the full amount if paid between right after the twelfth and before thirty days have elapsed. If the payment is late, usually other terms in the contract between the parts store and the repair shop would contain a monetary penalty. The time-based system of discounts and penalties in the billing contract are equivalent to an interest rate, if we’re viewing the arrangement from the point of view of a short-term loan.

August.2014 Page.33

Suppose a customer arrives at the repair shop with a car that requires a new alternator. Typically that customer isn’t going to pay until after the job is done. The repair shop needs to obtain an alternator from the parts store, but does not yet have the customer’s payment for the repair. How do they resolve this chickenand-egg problem?

Suppose the parts store has created a charge account for the repair shop with the following terms: “two percent, ten, net thirty.” This means the part store expects every invoice to be paid in full within 30 days from the date it was created. If the repair shop pays early, no later than ten days after the creation of the invoice, they can take a two percent discount.

LASTPASS PASSWORD MANAGER PART 3

Crypto Biz Magazine Page.34 August.2014

by SEAN COMEAU LastPass was founded in April of 2008. The name is based on their slogan, “The last password you have to remember.” The program is available for download at the LastPass website. It is available in free and premium versions. The premium version is one dollar per month with no minimum required. A premium subscription adds the following features:

 remove ads

 access to faster support

 use of all of the mobile clients

from one account

 additional multi-factor authenti-

cation options

 LastPass for Applications: allows

log-in to non-web applications such as Skype

 IE-Anywhere: use with Internet

Explorer from a USB drive on any computer, no install to that computer needed

EXTRA SHARING FEATURES: manage and synchronize sharing with up to five other LastPass users. An enterprise version of LastPass is also available.

The Windows version downloaded and installed to a Vista 64-bit computer very easily. The installer p u t s b rows e r ex te n s i o n s i n to F i re fox , C h ro m e, a n d I n te r n e t Explorer. On the next run of each browser, one click got the extension activated. During the account creation an option was given to keep a history of logins and form fills. The location where this history is kept was not specified. On Mac OS X, taking a browser to the LastPass site will offer an install of the extension for that browser. Firefox and Chrome had one-click activations. Safari required a download. Clicking on “show all downloads for this platform” shows a universal OS X installer that installs for Safari, Chrome, Firefox, and Opera. All were activated with one click. LastPass is cross-platform and multi-browser. Windows, Mac OS X, and Linux are all supported. Mobile apps are available for iOS, Android, Blackberry, Windows Phone, and Windows Surface. Internet Explorer, Firefox, Safari, and Google Chrome are fully supported with browser plugins Opera and Konqueror using “bookmarklets,” with reduced

functioning. The database is stored encrypted on the LastPass server, so data is available from any device with an internet connection. A checkbox option to “replace password manager” for Firefox, Chrome, and Internet Explorer was given during the install. If this is deselected, later an option is given to “detect insecure items,” meaning the passwords in the browsers. There is an option to import them from the browser and a separate option to erase them from the browser. LastPass imports from other password managers. This was incorrectly reported as a premium-only feature in one review. The process involves exporting from the other manager into a supported format. Support for 24 other managers is listed, as well as generic CSV files. The import from Roboform has been complicated by changes to Roboform 7. A prior version must be installed to fully transfer the logins. Import of a database from KeePass worked flawlessly. Note that exported databases from any program are not encrypted. The file should be securely erased after being used for an export-import operation.

When LastPass is installed in a browser, it can be accessed through a small icon in the address bar. Once you are signed in, any site in the database will have the same icon in its username or password field. A simple click on this icon is all it takes to populate the field and get you in to the site. If the site is not in the database, a small window appears with the login, with the option to save that site. You will have to enter your credentials one last time. LastPass will capture them and remember them from then on. LastPass can fill forms online. You can create profiles for each type of form you are likely to encounter.

The Lastpass website states that encryption is AES 256 bit with increased PBKDF2 iterations. The data is encrypted and decrypted

locally before leaving the device to sync with the LastPass server. The encryption key never leaves the device. LastPass warns you that there is no way they can recover for you if you lose your master password. Several multifactor authentication options are available. The free version supports Google Authenticator, the Microsoft Authenticator App, Duo Security, Toopher, or Transakt. It also supports a custom method called

Other security features include automatic log-offs, virtual keyboards to thwart keyloggers, the ability to disable logins by country, the ability to disable logins from Tor networks, and a feature that notifies you of changes to your credit status. There is a security check that evaluates your existing passwords and can check online to see if there

have been breaches where your passwords are used. LastPass has a secure password generator so that a unique random password can be given for each site. It includes a security challenge that evaluates existing passwords both by strength and whether they are reused. The master password is evaluated by a bar display as you enter it. A 14-character password continued on next page

Crypto Biz Magazine

LastPass has multi-user capabilities. There can be multiple users on the same machine, each with their own database. More significantly, it is possible to share one or more passwords with other LastPass users. There is an option to send them only the encrypted version and not let it be shown in plain text. This is the “share” versus the

The premium version allows sharing and syncing of passwords with up to five others, with a shared family folder. Only the creator of the folder has to be a premium member. It is not specified how the syncing is done, whether it is record-level or not.

Grid Multifactor Authentication. This is a wallet-sized card with a grid of random numbers. Lastpass will ask for numbers from certain positions of the card during the login. The premium version adds fingerprint, Sesame, smart card, and Yubi key multifactor authentication methods.

August.2014 Page.35

Lastpass also features encrypted storage of notes and attachments.

“give” option, where the recipient can see the actual password. LastPass does warn that an adept recipient can use the capture techniques in LastPass and possibly be able to see a “shared” password.

continued from previous page

with one uppercase letter, four numbers, one special character, and one letter repeated three times was given a full bar display and rated as extremely secure.

Crypto Biz Magazine Page.36 August.2014

The website has details about the encryption methods, but they are buried in the online user manual. AES 256 is an open-standard encryption method, and PBKDF2 is a well-known key derivation function from RSA technologies. LastPass was given a highly favorable review by Steve Gibson in 2010. The process he described is summarized as follows: “The goal for LastPass is to store an identifier on their server that is derived from your master password, but has arrived at their server in an unrecoverable state. First, on your device, the cryptographic key is derived from your master password. It combines your username, email address, and password and runs that through a oneway hashing function, creating the 256-bit key. This stays on your device. The key is then (still on your device) combined again with your password and again sent through the one-way hashing function, so the key is now not recoverable from this new hashed blob.” At the time of Gibson’s review the hashing function was SHA-256. The LastPass site does not specify the hashing function used now. Gibson does not explain how he determined all of these details. It is this hashed blob that goes to the LastPass server. At the server, a random number generator is hashed into a 256-bit token that is saved with your account. This is then combined with the hashed blob that came from your device, hashed again, and stored. Every time you log in, a disguised token is generated from the password you enter, sent to the server, where it is recombined with the random number, the token is recomputed, and compared with what is on file. If you

got the password correct, the results will match. Your key and password cannot be recovered on the server, because what is stored there is the result of three oneway hashing operations. This was put to the test in an incident in early May of 2011. Lastpass noticed anomalous traffic on one of their servers, and after they could not explain the traffic they thought it possible that data was stolen. They alerted users in a blog post. In an interview with PCWorld, LastPass CEO Joe Siegrist reported that the amount of data that was potentially lost would amount to a few hundred accounts. The company forced some users to change passwords, but advised anyone who used non-dictionary passwords that their data was safe. They enacted precautions such as requiring email verification if the user was logging in from a previously unused IP address. They never determined that data definitely was stolen, but acted as if it were since the network traffic was unexplained. Other commentators, such as Steve Gibson and his followup comments, and Robert L Mitchell at Computerworld, agreed with the assessment that strong passwords were safe. The data, if it was indeed stolen, would need to be attacked with brute-force guessing methods, which would be impractical on strong passwords. The reporting by the company seems fairly open; they initially reported the problem themselves and their blog post describes several areas where they judged themselves in need of improvement. This incident shows the risk of having important data stored at a remote server. It also shows that individuals must take responsibility for fundamentals of secure practices, such as using secure passwords. Each individual must weigh the potential risks and the convenience of online storage when considering this product. —S SEAN COMEAU is a computer security and cryptography enthusiast based in Vancouver, BC, Canada.

BITCOIN SERVICE DIRECTORY WALLETS BLOCKCHAIN

COINBASE

blockchain.info

COINKITE

coinkite.com

MULTIBIT

coinbase.com

HIVEWALLET

hivewallet.com

XAPO

multibit.org

xapo.com

EXCHANGES BTC-E

btc-e.com

CAVIRTEX

cavirtex.com

MINTPAL mintpal.com

CRYPTSY

cryptsy.com

QUADRIGA CX

SWISSCEX

quadrigacx.com

swisscex.com

INDEXES BITCOIN AVERAGE

BITCOIN CHARTS

bitcoinaverage.com

BITSTAMP

bitstamp.com

bitcoincharts.com

BRAVENEWCOIN

COINMARKETCAP

bravenewcoin.com

COINDESK

coindesk.com

coinmarketcap.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 youâ&#x20AC;&#x2122;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.

BITCOIN EXPO 2014

Crypto Biz Magazine Page.38 August.2014

PRESS RELEASE—BitcoinExpo 2014 is the melding of the emerging power of the growing nation of China, and Western traditions and innovations in technology. Organizers of the Central European Bitcoin Expo, which was held in Vienna at the end of May, have already proved that they have the ability to connect people in the Bitcoin industry globally. They created a very friendly and informal atmosphere, which resulted in added value, and helped to create and support new business projects in the industry. These are only a few of many positive impacts of these expos. Organizers promise that BitcoinExpo 2014 will be even better, and yet still different from other conferences. China is the biggest market with the highest exchange volumes, the largest producer of miners, and dominates in many other fields. Then there is the Western part of the world, which offers the biggest personalities. The BitcoinExpo 2014 will combine both of these unique features of the East and the West. SHANGHAI’S EXPO WILL MAKE A DIFFERENCE BitcoinExpo 2014 will be a three-day event that will start on Friday, September 19th, with a party. “It will be the best opportunity for networking and building relationships, and will also help attendees enjoy this event more than any other” says main event manager Andrej Sebesta, and concludes “it will be a great chance to introduce and get to know Chinese culture better.” Saturday will start with both conference and expo. After the official start of the expo—an assembly for all

participants—attendees can enjoy inspirational speeches, covering a wide range of crypto currency topics, and up-to-date information presented by local experts, and experts from all over the world. Then there will be an exhibition, were everyone can enjoy the presentation of new and innovative products and services, and talk to many interesting company representatives. Whether you want to meet with some of the most respected local business representatives, or you just want to gain reliable information about the Chinese Bitcoin community, buy your tickets now to take advantage of the early-bird prices found here.

WHO, WHEN AND HOW MUCH ? Entrepreneurs, investors, startups, legal professionals, advisors, enthusiasts, students and everyone else is welcome. The Bitcoin Expo 2014 will take place in Shanghai from September 19 – 21, 2014. You can purchase an early-bird ticket up until August 8th, a two-day full ticket for ONLY 169EUR/ RMB 1488, or a VIP three-day ticket for ONLY 299 EUR/ RMB 2588. BitcoinExpo 2014 will not only be one of the biggest Bitcoin-related events, but one of the most accessible, too, with a lot to offer to the whole crypto community, so do not hesitate—join, and help grow the community worldwide. —S

WHAT’S BEHIND THE BITCOIN SURGE?

Crypto Biz Magazine Page.40 August.2014

As Bitcoin continues its surge through 2014, it doesn’t take new adopters of this little crypto to realize what all the fuss is about. And if you still haven’t heard of Bitcoin yet, then we’ll just let a few Fortune 500 companies do some of the talking. Apple, Dish Network, and Amazon are among the three companies that have recently sent a spark throughout the Bitcoin community in what has already been an explosive year for this coin.

by JESSE MICHEK

However, Bitcoin wouldn’t have the lure it does if it was only tailored for merchants. Fortunately, the everyday, average Joe can hop onto this crypto wave and vastly improve their daily lives with it, including the lives of other people around them.

At first, Apple and Amazon turned a blind eye towards Bitcoin. Apple even went as far as to remove all Bitcoin wallet apps from their apps store, sending fans of Bitcoin into a rage by smashing their iPhones and switching over to Androids. Amazon simply said that they had no future plans to adopt Bitcoin into their payment network, but in

Because Bitcoins can be sent instantly to anywhere in the world, parents can send their children funds should they be attending a college or university overseas. If you wish to support a charity or sponsor a child in poverty, you can send them Bitcoins with the confidence that every bit is getting to its destination, without being gouged by exchanges and extensive time delays. You can crowd-fund social projects, support political parties or even tip an independent artist who is looking for a little support.

saying this, they had inadvertently put Bitcoin into the spotlight, which only seemed to increase its popularity.

But above all else—and this is my favorite feature—Bitcoin is completely decentralized. This means that no governing body controls it. Much like no one controls the Internet. Because of this feature, you will never see a counterfeited Bitcoin, inflationary economic bubbles, or fraud committed through its usage. One could even argue that we will see a crypto currency become the world’s reserve currency someday, maybe even Bitcoin. But that is a topic of discussion for another day.

Now, both of these companies have seemed to come around and change their original stance towards Bitcoin. Last week, Apple had their policies changed, which will now allow iOS apps to handle Bitcoins. And Amazon is now managing a new patent, which specifically deals with a payment service, centered on Bitcoin. eBay and Paypal have been rumored to be sniffing around the Bitcoin hype as well. So what is it about this coin that has merchants, big and small, so excited for it? Well, for one, Bitcoin transactions are secure, irreversible, and do not contain customers’ personal information. This prevents losses from fraud or chargebacks due to identity theft. This will make denied or red-flagged credit cards a thing of the past. A past which merchants will soon happily forget. On average, merchants lose up to thirty percent in revenue a year through electronic payments, due to fraudulent or flagged credit cards. Bitcoins can also be sent almost instantaneously to anywhere in the world, with little or no fees. This allows merchants to expand into larger markets with fewer administrative costs. And with Bitcoins protocol being cryptographically secure, this makes it impossible for any individual to manipulate or control it. As a merchant, adopting Bitcoin is a no-brainer.

Yes, Bitcoin is quite astounding to say the least, however it is still in its infancy. The reason for this is because its spending features are limited, people have never heard of a Bitcoin, or if they have, they tend to associate it with the Mt.Gox or Silk Road fiascos; none of which had anything to do with the technology of Bitcoin. So, until crypto currencies become widely accepted by the populous, and it is inevitable that it will, we can only sit back and wait, as this little wave shifts and shapes itself into a massive tsunami, which will soon engulf the entire world in its wake. The more we see it grow and expand, the more we will slowly see a brand new world start to materialize and take form, as this paradigm shifts from an old and corrupt monetary system, into a decentralized utopia. —S JESSE MICHEK was born in a s m a l l tow n i n n o r t h e r n B r i t i s h Columbia called Quesnel. He spent the better part of 25 years there before moving to the beautiful city of Vancouver. Jesse came to the lower mainland to attend school for film and television but has since shifted his attention towards Bitcoin and other crypto currencies. He is now a Bitcoin entrepreneur and has many aspirations inside of the crypto world. His goal is to enrich as many people’s lives as possible with the aid and knowledge of crypto currencies. Jesse also accepts Bitcoin tips:1J6HMSDosSm59z5RRwv9sX2yDsvs6w3JSe

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A STATE OF MINING

Crypto Biz Magazine Page.42 August.2014

by DOM STEIL

There’s something about setting up a computer that prints out a digital currency while you sleep. It could be knowing that you are turning electricity into a globally tradable commodity. It could be knowing that you have established your stake in a global socio-economic experiment much larger than yourself. Whatever it is, the concept of digitally “mining” something is captivating by nature. This incentivized distribution and transaction verification mechanism is the backbone of the Bitcoin network, and all blockchain-based transfer of ownership protocols. The open-source nature of mining has created a competitive and volatile market that has evolved dramatically over the past two years. Although the mining industry has flourished, concerns have risen with the network’s current state: Vulnerable to Centralization: The “51% attack.” if some entity were to acquire a majority of the hashing power of the network it could uproot the time-stamping verification mechanism that prevents double-spending transactions, it could reverse transactions, and ultimately make its own blockchain the longest, effectively destroying the transaction security of the protocol. Last month, Ghash.io, currently the largest mining pool, controlled over fifty percent of the network for a few days. They have stated that they will do everything they can to stay in control of under forty percent of the network, but can we still consider the network decentralized?

The Incentive for Miners: As more hashing power is added to the network, the network difficulty increases (to sustain the distribution rate) and therefore more investment in mining equipment is needed to make mining profitable. The entire network gains about 800 TH/s every day. Even early adopters with access to capital and ASIC Machines still have small margins when taking into account all of the costs associated with mining. Will miners continue to make investments in the next generation miners needed to make a profit? The Need for More Full Nodes: One of the main concerns regarding the network is that there are not enough fully validating Bitcoin client nodes. By running a full client P2P node like Bitcoin Core, you are actually becoming a node on the network. If you are running an ASIC Miner most likely you are not running a full node. It is important to distinguish between full nodes versus ASIC miners. Full node clients take time to load the entire blockchain history as it is almost 20 GB. There are currently around 7,000 reachable full nodes in the world (according to getaddr.bitnodes.io). How can you create incentive for people to download and setup a full node core client versus just buying an ASIC Miner? Is the solution a new proof of “x” mining algorithm in the open-source bitcoin core software or will the Bitcoin network fix itself overtime?

THE EVOLUTION OF MINING HARDWARE

Bitcoin mining is a combination of hardware, software and networking. Originally, mining was done by CPU processing power, then it was augmented with GPU graphics cards, and in the past year, hardware built specifically for mining Bitcoin—ASIC Miners—have come to dominate the network. The first ASIC Miners came in the form of USB Miners. These rigs were comprised of a couple of 336 M/ Hs USB workers, a powered USB hub and a Raspberry Pi to run the mining software. At one point these USB ASICs were going for around $100 apiece. However, with the exponential increase in difficulty over the past few months, these miners have dropped in price significantly and have become obsolete in regards to mining to make a profit. The more powerful miners that once were thousands of dollars also dropped in price with the increase in difficulty. This made investments in more powerful hardware (Block Erupter Cubes running 30 – 38 GH/s, Antminers 100s of GH/s, and Terra Hash Miners) more affordable for miners. The drop in the price in mining hardware has been driven by the price of Bitcoin and the difficulty of the network. The price has gone from roughly $1,000 in January down to around $450 and has been between $600 and $650 for the past month. Over the past year the difficulty and hash rate has increased at an exponential rate. The hashrate has doubled in size every three months effectively making existing miners less of factor in comparison to the network as a whole. It is important to note that if the price of Bitcoin increases, and the difficulty and hashrate decrease, the price of all mining hardware could increase substantially. However, if the current pattern of the difficulty and hashrate increasing continues, then the price of mining hardware per GH/s will continue to decrease over time.

THE FUTURE OF SELF-MINING AND BUSINESS MINERS

The downside is that these businesses would have to download and set up full nodes. These core clients require more initial setup, bandwidth, and computational power. There has to be a way to incentivize setting up these types of core nodes. If you could effectively download a full node and mine from mobile devices, there would be a more significant increase in the number of core nodes in the network. Although the difficulty and hash-rate is being driven up by ASICs, the number of reachable nodes with full transaction history is still small at around 7,000. This, in essence, means that there is a disconnect between the core client, and the machines running the majority the network. One of the ways to fix this problem would be to change the Bitcoin core proof of work algorithm. The tough thing about this is that every change has to be tested in use. This is why a lot of altcoins are considered the test beds for new block release times, proofs of X, and different amounts of coins per block released. No matter what the core change is, the end goal is to build the volume capacity, efficiency, and security of Bitcoin as a global payment protocol. For mining to continue to be decentralized, it is essential to create incentive for people to setup full nodes. Some have even suggested putting full Bitcoin nodes in orbit. Mining has the robust combination of unstructured simplicity and limitless potential for worldwide adoption. A ton of applications will be built on these types of global decentralized networks over the next couple years. Ultimately, no matter what titled asset is being transferred and recorded in the blockchain, there needs to be incentive for miners to keep hashing. —S

D O M ST E I L i s a n e n t re p re -

neur 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

Crypto Biz Magazine

One way to achieve this, freemining, gives miners the ability to select their own block content. This will dramatically affect the mining industry and possibly bring it back to a decentralized state. If every small- and medium-sized business around the world had their own miner running a freemining fully validating P2P node, they could process and validate their own transactions in their own blocks. It could become a customary piece of office hardware in any office. This would give small- and medium-sized business the capacity to process their own transactions autonomously and instantly, at zero to little cost, anywhere in the world. Business Miners would enable access into global e-commerce markets and increase revenues on per-international users. Currently the largest customer base for

Bitcoin mining enables business around the globe to enter the digital market at very minimal capital costs. This is not only incentivizing them to accumulate Bitcoins but it will also increase adoption among customers and competing merchants. Businesses will see they can avoid the costs that current payment processors charge, per swipe, or at a monthly premium. They can bypass the fees, and delays in international wire transfers. Business-tobusiness miners could send, verify, and record anything over the blockchain.

August.2014 Page.43

So can mining be profitable? Yes, but it really depends on the time when you buy the hardware, your electricity and spacial capacity, and ultimately the price of Bitcoin. You could mine ten bitcoins over a six-month period, and the price of those ten bitcoins could double overnight, and you’ll have made a profit on your capital investment. On the other hand, the difficulty and hashrate could increase to where your once very effective miner that would make daily pool payouts now takes maybe a few days, even weeks to payout. There needs to be a way for miners to validate their own blocks and be compensated in proportion to their hashrate without having to join a mining pool.

internet companies represents a lower portion of revenue per user. This enterprise problem could be solved by using micro-transactions, processed by business miners. This industry could open revenue streams in developing markets that could completely change supply-side logistics, remittance markets, and transfer records, given the right integration with global mobile payment applications.

FINDING MY CALLING AND BUILDING A CASTLE; BEHOLD THE MAGIC OF BITCOIN

by GABRIEL SCHEARE

Crypto Biz Magazine Page.44 August.2014

A year ago, I came across a website promoting a new real estate project in Chile called Galt’s Gulch. Based on a fictional location of the same name in Ayn Rand’s novel, Atlas Shrugged, it offered a beautiful place of gathering and refuge for libertarian-minded people such as myself. Besides the physical, philosophical and political appeal, it also stood out in another very important way; they accepted Bitcoin. I decided I was going to move to this Chilean promised land and quickly set about finding a way to make it happen. I didn’t have much money and had just barely enough of an income to support my modest lifestyle in Vancouver, but there was a will, and indeed, a way to match it. I partnered up with a couple of friends to invest in a bitcoin miner that ended up paying for itself in the first ten days of its operation. After that, it didn’t take long to accumulate the funds I needed to make the big move. I even had enough to enroll in an entrepreneurship program called Exosphere that was soon to be hosted in Chile as well. I offered to pay my tuition in Bitcoin and they happily accepted it. It was right around that point when the magical feeling started to really kick in. It felt as if the universe was aligning, and it was meant to be smooth sailing from here on out. I sold my worldly possessions, bought a plane ticket, and flew directly from Canada to Chile, soaring thankfully over the United States and its legions of rapey airport security personnel. I landed in Santiago and spent a couple of weeks relaxing and soaking-up the local culture, before proceeding to the beach resort town of Renaca to begin the Exosphere program. I was pleased to find that not only the staff, but the rest of the participants were interested in Bitcoin also, and other revolutionary technologies. It lasted three months, during which time, we worked hard, played hard, and found our respective callings in life. I realized that my true passion was in de-

veloping and providing options to those without any. I wanted to introduce competition into markets dominated by abusive monopolies, and the project I have just launched is the result of that realization. As Exosphere came to a close, I turned my gaze back to Galt’s Gulch, Chile, and wasted no time in moving there. That was a month ago and since then, the big idea has been well received by the Gulch’s founder, who generously provided a plot of land by the main clubhouse to build the project upon. I wanted to build a castle and this is where it was going to be. I knew that a lot of young freedom-seekers like me wanted to live here in this particular valley, too, but couldn’t afford the land prices. My intent was to build this castle to be filled with a multitude of compact living chambers, like the ones used in Japanese capsule hotels, so that even we of modest means might be able to own a home in the land of our dreams. And so, development is now underway. Fort Galt is becoming a reality. No longer do you need to be a seasoned captain of industry to own a home in such an idyllic locale, and more than ever before, young, ambitious dreamers like me will be able to strike out on their own and establish themselves without drowning in debt. Even visitors passing through will soon be able to stay in the castle, but if you haven’t already guessed, there’s a catch... they’ll have to pay with Bitcoin. —S GABRIEL SCHEARE Born and raised on an organic family farm in Canada, Gabriel has spent the majority of his young life seeking challenges and opportunities to learn and grow. In 2013, after serving on the BC Libertarian Party’s board of directors, he invested in a bitcoin miner and used it to generate the funds he needed to leave Canada and move to Galt’s Gulch Chile, where he now resides. He studied entrepreneurship at Exosphere and is now focused on the effort to develop his new community into beacon of light worthy of its name.

AUSTIN BITCOIN MEETUP

Most recently, in the past several months, we’ve found a home at Brave New Books in Austin, a Libertarian/ Agorist/Conspiracy-themed store that has done nothing but support us, along with The Crypto Show, a CryptoAnarchist-themed radio show that broadcasts from the same building. When Lyn Ulbricht (Mother of Ross Ulbricht, who is accused of being behind the Silk Road) was invited to our Meetups, the bookstore was quick to put together a fundraiser for Ross, and even Cody Wilson donated items for it. Jeffrey Tucker and Amir Taaki have also made inperson appearances, and most recently we’ve had

Whenever a local business gets involved in Bitcoin or any Crypto Currency, we will try to go out of our way to support them with Bitcoin, and invite them to be part of our Meetup so that they can see the impact they’re having on the people passionate about this technology. Kevin Ludlow, a local candidate for Texas House of Representatives, District 46, has even started accepting Bitcoin/Dogecoin/Litecoin donations and put some of those proceeds into a massive billboard about Crypto Currencies thanking /r/Bitcoin on Reddit. Nobody can say where this is all going, but when I look at all the faces in the community and think about all of the people we’ve educated, it’s hard for me to believe that we’re not helping to change the world for the better, even if in a small way. —S JONATHAN RUMION a founder of The Austin Bitcoin Meetup, graduated from college at 17 with a degree in Information Security. He recently quit his job at Hewlett Packard to become a Senior Software Engineer for Monetas working on Crypto Currency exchange software in C++ (Open Transactions), and can be found on Twitter @WillNavidson. The Austin Bitcoin Meetup accepts donations at 1Austin558GixJR3WuxoKCF4vFvd12vyQa, and uses proceeds to cover the costs of food and drink every Sunday (which are provided for free to our attendees).

Crypto Biz Magazine

It would be unfair to say that I could have managed the fast-growing Meetup alone, almost in line with the rise of the Bitcoin price in late 2013. However, without the help of people like Justus Ranvier and Napoleon Cole, working within the Meetup; along with Daniel Krawisz and Michael Goldstein, working with the Mises Circle and the Satoshi Nakamoto Institute, I’m not sure that we would be where we are today.

Jeremias Kangas (founder and CEO of Local Bitcoins) join us via webcam for a quick presentation.

August.2014 Page.45

The Austin Bitcoin Meetup was founded by myself, Jonathan Rumion (aka Yamamushi), in April of 2013 as a direct response to the rise of Bitcoin, to $260, and subsequent fall shortly thereafter. What started as a small meeting between five developers quickly grew into weekly meet-ups of from 30 (on average) to over 150 attendees, interested in topics ranging from Economics to Trading, and creating new technologies to support this growing ecosystem.

BITCOIN MERCHANT DIRECTORY ADORMO

COINRX

EXPEDIA

adormo.com

coinrx.com

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 youâ&#x20AC;&#x2122;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.

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.48 July.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.

Crypto Biz Magazine

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.

August.2014 Page.49 July.2014 Page.49

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.50 July.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

Crypto Biz Magazine

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.

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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, â&#x20AC;&#x153;to hash a transactionâ&#x20AC;? 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.

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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.

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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

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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.

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:

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