Future Opportunities and Economic Challenges for Cryptoledgers

Trends and speculative possibilities of frictionless trustless asset management

◦ Despite waste of electricity, Bitcoin seigniorage is likely cheaper than fiat seigniorage (this may change in the future)*

◦ In 2010 the US government spent $614,400,000 producing new currency notes just for that year alone (this includes the paper and printing) — a 50% cost increase in two years due to inflation The footprint of 3 billion euro notes in circulation during 2003 was equivalent to 460,000 60W bulbs

switched on for a year USD notes are comprised of 75% cotton and 25% linen.  10,308,370 lbs of cotton were used in 2009

to circulate new USD notes alone (the old ones are removed and destroyed)

Advantages of using Bitcoin vs Metals and Fiat

Bitcoin versus Credit Card and Bank Wire

◦ Bitcoin transaction processed and confirmed in less than an hour

◦ Bank Wire in a matter of days◦ Credit card varies

Estimated cost: ~$15 for Bitcoin* ~$50 for Credit Card ~$40-$80 for Bank Wire

*Not full tx costs

Cannot beat them on speed and confirmations, go where Visa is not

Paypal is not in 60 countries hence WordPress adopted Bitcoin

Goldman Sachs report: $210 billion of savings in three areas:◦ Retail, online merchants, remittances◦ Remittances are $550 billion annually

Average African migrant pays 12.4% in remittance fees

Peer-to-peer payments, not a manifesto

Slow transaction rate ◦ Block speed of ~10

minutes per confirmation◦ 7 per second with BTC

versus 10,000+ per second with Visa

◦ Not adequate for decentralized HFT

M-PESA handles 43% of Kenya’s GDP because it is sent instantly via SMS

Disadvantages of BTC versus M-PESA and Visa

None of the benefits of centralization yet with all of the costly overhead of decentralization◦ CAP theorem

Consistency, Availability, Partition tolerance

ASIC centralization◦ Depreciating capital good provides

incentive to create ‘pumped’ alts after profitable period of BTC mining ends Coiledcoin & Eligius

Hasher versus miners◦ Not transparent (“selfish-mining”)

Mining pool centralization◦ Though efficient payments and

value-added centralization on edges (Coinbase/BitPay)

◦ BIP 70

Additional limitations

5460 satoshi to prevent DDOS and ‘bloat’ yet impacts microtransactions

Dust limit

No financial incentive to be a core developer

No financial reward for contributing code on a regular basis (i.e., a job)

Only 2-3 funded developers (Gavin, Jeff and half of Mike)

Tragedy of the crypto commons, growth by volunteer work

Limitations cont’d

$200 million - $1 billion in hardware for mining* ◦ Funds went to utility oligopolies and silicon

companies, not software developers or ecosystem

‘Regulatory capture’ – miners will not switch to a fork that does not repay their investment (e.g., Proof-of-stake) so status quo remains◦ Network roughly same speed as 5 years ago,

10 minute confirmation times If Visa spent $200 million and was no faster,

CTO would be fired

Allocation of scarce capital

◦ Centralized, managed pools◦ April 1, 2013: 51,925 GH/s◦ March 25, 2014: 37,582,751 GH/s

723x increase in hashrate, yet roughly same network performance

Digital signature superficial illustration of a corporation◦ Blend between stakeholder versus

shareholder Wall separating fiduciary responsibility is

nebulous◦ No clear decision makers, no clear

responsibilities, no governance or accountability determined via private keys Cargo cult handwaving (Vanuatu as seen in

picture)

Is Bitcoin a private company?

Historically: incentive not to build the ecosystem because speculating BTC is less risky than developing services (this may be changing) Buying and burying bitcoins around the

globe instead of building part of the ecosystem Jesse Powell perseverance versus the

free-rider problem Socialize the labor, privatize the gains

SugarCRM, MySQL, MongoDB, Jira, all succeeded in the market due to a dedicated company

Bitcoin as a “public good”?

Does one-size fit all? Subsidized all you can eat “Unlimited is not

unlimited” with transaction fees

TINSTAAFL FedEx, Disneyland, CDNs Tragedy of the commons

◦ Communal◦ “Public goods” animosity

towards MSC, CC, XCP

‘Bitcoin neutrality’

The incentive to provide this public good (hashing), via a private method (seigniorage via the coinbase), lessens with block reward halving

Hashrate is treated as “public good” (non-scarce/rivalrous) Inclusion of tx is a private good due to block size Incentivize via transaction fees Future: free floating, determined by miners (planned) Supply limitation 1 MB block, have to increase block size

◦ Trade off between block size, speed and decentralization Cost of actual network costs is likely higher, certainly not free Actual costs masked by price appreciation and token dilution

Incentivatization of two markets

What is a financial transaction? Real quotes this past week regarding the OP_RETURN change:

◦ “It’s called a free ride.” ◦ “Too many people were getting the impression that OP_RETURN

was a feature, meant to be used.”◦ “Not acting like bitcoin is your personal property.”◦ “Every full node has consented to download and store financial

transactions.”◦ “The community agrees and the protocol is updated.”◦ “All data storage attempts, even the OP_RETURN stuff, are

technically abuses the protocol was never intended for.”

Cookies, JavaScript, AJAX (unintended uses from original internet protocols)◦ Permissionless invention

Counterwallet uses Insight from BitPay Bitcore fork

‘Get off my lawn, get out of my blockchain’

Dev quote: “Then contact more than a couple of pools. This statement sounds like you wish to force miners to include your transactions; surely you didn't mean it that way?”

How to contact unknown miners? “Hello unknown mining pool, I

would like…” Decentralized, anonymous mining? What if they spoke Putonghua?

How to contact mining pools?

All but 0.000146% of multisig outputs are unrelated to either Mastercoin or Counterparty

March 24, 2014

CoinSecrets.org lists recent metadata embedded in the Bitcoin blockchain using OP_RETURN outputs

UTXO bloat?

“Bitcoin won’t succeed unless there are a lot of Bitcoin companies building the Bitcoin infrastructure / Bitcoin economy. So there seems to be a classic public good / positive externality problem here: People are better off free riding on the efforts of others, but if everybody did that there would be nothing to free ride on.”

Koen Swinkels

Risks and rewards

Next Generation 2.0 Platforms

Colored Coins Mastercoin Counterparty (POB) NXT (POS) BitShares/Invictus (POS) Ethereum (POW/POS) Ripple (Consensus ledger) Open-Transactions (Ledgerless)

Next Generation “2.0” platforms

84 opportunities and counting

How to fund 30 developers working on 8 projects?◦ “IPO” can receive actual financial compensation, no

longer just motivated by goodwill, altruism and ideology 4,700 bitcoins raised by Master Foundation 2,130 bitcoins ‘burned’ by Counterparty

Solve other use-cases:◦ Real estate title tracking (developing countries)◦ Middle office automation (no need to worry about bloat

if it is internal)◦ HMO can share medical records, m-of-n multisignature

transaction to work with health care providers◦ Crowdequity and content rewards (LTBCoin, JoinMyIPO)

Can 2.0 fix some other shortcomings?

If you built the best, most elegant solution, people might still not use it:◦ Stephen Pair noted Betamax vs VHS◦ BeOS◦ Itanium◦ Gentoo

“I want an OS not a hobby” Consumers may just care for simplicity

and “smart fine print”◦ Geeks and early adopters care about

tokens for payments, later adopters may not (i.e., do you know or care how Visa’s transfer mechanism works?)

◦ Android and Mac OS X versus Gentoo and FreeBSD

Perfect is the enemy of the good

Only Ripple protocol (distributed) can today, perhaps POS with fast block times can in the future◦ GeistGeld had 15 second blocks (but many

orphans)◦ Litecoin has 2.5 minutes blocks (max 28

transactions per second)◦ Dogecoin has 1 minute blocks (70

transactions per second)◦ NXT has 1 minute blocks, 255 transactions

per minute (~4 tx/s)◦ Ripple has 5-10 second ledger closings,

100-1000 tx/s Coinbase, Circle, Bitstamp effective and

efficient but centralized (in the long run consumers may be okay with that)

Can decentralized compete against Visa?

Pamela Morgan, Chicago-based smart contract attorney◦ Bloat does not matter if it is internal◦ Proof of existence can be done right now, can maintain

confidentiality -- able to prove the exact copy of the document◦

Preston Byrne – London, based securitization attorney◦ Taking Munibit, developed by Startup Cities Institute (to help

mitigate and prevent leakage of funds in institutions of developing countries) One public input and one output address for all funds (transparent to

public) Use a cryptoledger internally to monitor trading desks

Opportunities for legal professionals

Sometimes good is good enough (e.g., Yamaha vs Steinway piano)

Incentives are being overlooked (e.g., developer pay, ASIC depreciation)

Special interest groups may exert pressure and lobby due to a “public goods” issue

‘Jawboning’ against alts will not work in the long-run (i.e., “Slackware or bust!”)

Bitcoin (the protocol), despite these shortcomings, will still likely flourish in the near term

Tools are agnostic and open-source, multiple new use-cases by new parties

Let a thousand cryptoledgers bloom

Conclusions

tswanson@gmail.com Ofnumbers.com @ofnumbers

Contact information

Block rewards for Dogecoin were halved on February 14th

LTC hashrate moved back to trend line◦ MiddleCoin, CleverMining, HashCows, WafflePool, Hashbros

Appendix I: Alt hash rate versus rewards

Appendix Ia: LTC price

Appendix Ib: DOGE price

Adam Back, invented Hashcash which is the proof-of-work algorithm used in Bitcoin◦ Designed to prevent spam such

as email and DDOS Bitcore fork of bitcoinjs from

BitPay 0.9 bitcoind / 40 or 80-byte

hash◦ SPV◦ Fund devs with assurance

contracts?

Appendix II: Other considerations

If lowest hanging fruits are securities, how to convince professionals at electronic exchanges to do that?◦ Chris Odom with Open-Transactions is a one man army, perhaps he can

solve it with federated voting pools? Andreas Antonopoulos:

◦ Antonopoulos compares the invention of the blockchain to nuclear fission. "There's the discovery of fission, then there's building an actual nuclear reactor and then there's the electricity that comes out of it. And everybody's focusing on the price of the electricity that's coming out of it, and they're missing the point that fission in itself changes physics, changes energy, changes everything, really. Maybe you can ban electricity, maybe you can regulate reactors. But you certainly can't make people forget that fission exists. And you can't make that discovery disappear."

Appendix III – Labor and focus

Many Western residents have few immediate incentives to use BTC (other payment methods “good enough”)

Users in developing countries have more incentives but capability limitations (few smartphones, unreliable internet connection, shared devices)◦ There are roughly 253 million unique mobile phone subscribers in Africa

(many have two SIM cards) and an estimated 70% of the population on the continent are underbanked or have no access to a bank

Private key storage and usage too complicated for regular user Meaningless string addresses not user friendly Technology advocates in the defense position still –> wait-and-see

easier and less risky

Appendix IV – Other hurdles

In 2013, the 50 top global accounting networks and associations grew by an average 3% in 2013, earning a combined $169.7 billion in fee income

Ernst & Young 12th annual Global Fraud survey:◦ 39% of respondents reported that bribery or corrupt practices occur

frequently in their countries◦ In Indonesia, 60% of respondents consider making cash payments to

win new business acceptable◦ In Vietnam, 36% of respondents consider it acceptable to misstate a

company's financial performance

Appendix V: How cryptoledgers can reduce fees and prevent leakage

Pamela Morgan, Chicago-based smart contract attorney◦ Smart contracts cannot be nullified due to technical limitations◦ Bloat does not matter if it is internal◦ Provide a method for elections (corporate, civic) providing greater

transparency, instant results, unforgeability◦ Proof of existence can be done right now, can maintain confidentiality◦ Able to prove the exact copy of the document

Prove that a Will exists “Documents need to be secured and protected so that they can be delivered to

another party (judge/heir/executor) when they are needed. One issue is ensuring document integrity - that the document presented today hasn't been altered - that it's the exact same document. PDF version of a document uploaded to the blockchain can provide that proof. For around $3. It is so inexpensive, why wouldn’t you do it?"

Appendix VI: Opportunities for legal professionals

Preston Byrne – London, based securitization attorney◦ Taking Munibit, developed by Startup Cities Institute (to help mitigate

and prevent leakage of funds in institutions of developing countries) One public input and one output address for all funds (transparent to

public) Use a cryptoledger internally to monitor trading desks Can be used as an automated accounts reconciliation to compare with

trusted ledgers Traders have trading limits but can game the books since accountants

are 1-2 weeks behind) Subledger.com could be used

Exposure can be controlled, flags raised, books impossible to forge due to digital keys required Use cases: Jérôme Kerviel, Nick Leeson, Kweku Adoboli, LIBOR fraud and

manipulation

Appendix VII: Opportunities for middle offices

70 year leases are often 40-50 year leases

4 million rural Chinese evicted each year

Local gov’t generate 70% of annual income from land sales

120-150 million migrant workers without urban hukou’s

Appendix VIII: Property rights in China

Appendix IX: Tragedy of the commons