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All you need to know about Blockchain and Bitcoin

Discussion in 'Sive Morten- Currencies and Gold Video Analysis' started by Sive Morten, Feb 6, 2018.

  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Greeting everybody!

    Guys, by this material we proud to introduce sequence of articles dedicated to Blockchain technology, Bitcoin and other crypto currencies. We have tried to introduce material as simple as possible, so that even non-professional could understand its core. Our task is to give understanding of Blockchain and shed light on some moments that previously were unclear or hidden under some mistery fog.
    Here will be a kind of mini-blog, dedicated to Crypto. First few posts will be reserved for future articles - just to not search them later in your comments :rolleyes:
    Also I will put here technical analysis of BTC, ETH and other Crypto. There will be separate fixed post for it, that will be updated at the same place as soon as it will be neccesary.

    We start from our first article - introduction of Blockchain and basic explanation of its functioning.

    Enjoy!
     
    #1 Sive Morten, Feb 6, 2018
    Last edited: Feb 7, 2018
  2. Sive Morten

    Sive Morten Special Consultant to the FPA

    Joined:
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    All you need to know about Blockchain and Bitcoin

    Since 2009, but especially in last couple of years we hear some curious words such “Crypto currency”, Bitcoin”, “Blockchain”. Every time these words sound around with some mystery feeling, as it is some spell or should mean something magic just for those who in “circle of trust”.

    When you try to find out and understand a bit more about Bitcoin for instance, by asking people around, you just hear enthusiastic epithets that this is “revolutionary” technology, this is “breakout”, “new word” in financial system, “global turning point” etc. But as it is appeared, not many people really understand what Blockchain technology is, how it works, where Bitcoins come from, what adv./disadv. this algorithm has.

    We will try to answer on these questions without any sophisticated maths by using rather simple associations and example. And, as we hope, by the end of the article you will know more about Bitcoins than average person.

    Appearing of bitcoins is a result of Blockchain technology. Although many people think that Blockchain and Bitcoin are the same but just named differently – this is not true. Blockchain is technology that could be used in many spheres – medicine, logistics, banking, defense etc. This is just the method of information keeping and transferring. There is even opinion exists that Blockchain was invented not by Satoshi Nakamoto &Co in 2008 but by Army scientists in 80’s. They were needed technology that could guarantee surviving of information if at least one block will remain after attack, for example during nuclear war. And Blockchain is perfect for this purpose as it suggests existence the same copy of all transactions that have been made ever in system among all blocks (i.e. members, defense points etc.). This is single-leveled net without center, so that any member (i.e. block) of this net has the same information.

    As you understand if even 99% of this net will be destroyed – army and defense will keep necessary information. That’s why it is called as Blockchain – other words the chain of blocks. But let’s go step by step. Now on simple example we will explain you how Blockchain works.

    Let’s imagine that you and your friends have decided to create your private financial system that will be used just by your narrow circle of friends and without real money. You need to create a kind of virtual money – either electronic (in the net) or on paper. You have decided to try it on paper. If it will be OK, you will program it.

    So, you’re come all together on picnic and spending time in the park, enjoying your company, sun, and fresh air. Suddenly you have decided to start realizing your idea of virtual money system. So, you have made table on the ground by piece of chalk, where each person write down his/her surname, number of coins that he has, what transfers where done recently to others and signed it by own hand. Table looks pretty nice. You could walk through the park and nobody could crack your row in the table, because it is signed by your hand. System works – just come to the park from time to time and put changes in the table, that’s all. But suddenly, rain is starting and all data was washed out.

    So you have decided that each person will manage his own log of transactions that he/she has made to other members of the system and coin balance of all friends as a result of these transactions. But how to inform others on transactions that were made by you personally?

    You’ve decided to put each mutual transaction on small paper note and then show this notes to every person so that everybody could put changes in his own log and calculate new balance of coins as a result of transactions have been made. Transaction is personally signed by the owner of transaction. Now it is made by digital signature. Sounds clear, no problems, right?


    How Digital Signature works. Our first technical issue.

    In digital world any person could generate “digital surname” and “digital signature” – public and private digital keys correspondingly. “Digital surname” is visible to anybody, but “digital signature” is kept secret. In result:

    - You can write messages, signed them with “digital signature” and public them in the net;

    - And everybody will see that this message was written by particular person with particular “digital surname” since it was signed by “digital signature”.

    - “Digital signature” is so unique that nobody could forge it.

    - One person could generate many couples of “surname” – “signature” for different purposes in the net.

    How Blockchain transactions organized.

    So we have 10 friends that take part in our game. It means that simultaneously 10 transaction notes will turn around. Also it is unclear who already has put transactions in own log and who’s not. Which notes are already been put by everybody, so they are not needed any more and which ones are not yet? How Andrew could be sure that John indeed has 30 coins for coming transaction or he already has spent them earlier?

    To answer this questions we need to explain our second technical issue – Hashing procedure.

    What Hashing is?
    How hashing works?
    Why we need hashing?


    Hashing makes double work. It is used for compression of information – reduce its volume, accelerates transfer speed etc. Second – it is used for crypto procedure. Sounds sophisticated, but we will explain it very clear on simple example.

    Once we were kids we played in spies, super secret agents etc. So, I and my friend invented a kind of crypto code that we used to make our mailing secret. As there was no email yet, we just put paper notes in post box. We just wrote text in numbers. For example – 1 was appointed for “A” letter, 2 is for “B” … “26” for Z. Thus, when I send note “Hello” to my friend it is written as “8,5,12,12,15”.

    But now, when you send information in digital format – how do you know that your addressee will get precisely the same message that you’ve sent? Or it wasn’t intercepted in a way and modified? So I need be sure that he/she will get it unchanged and original. The simplest way to check this - is to ask reply it back to me, so I could compare. If something will go wrong just on a way back, we will not be able to estimate whether initial message was correct. Besides, it could be rather heavy message – HD video, for example. So, would we send it back every time to understand whether it was sent correct? Definitely not. There is more simple way to do it. And this way is to compress information and encrypt it simultaneously.

    In our example from childhood – if we will multiply all numbers in “Hello” word – 8x5x12x12x15 = 86’400 this is simple example of compression tool. Now, if I send to my friend not just “hello” but 86’400 code – he will be able to check whether my initial message was kept unchanged on a way to him.

    If message was modified by some hacker to “Hey” then my friend will get compression “H(7)xE(5)xY(24)” = 840. He will catch mismatch and we both will know that something was going wrong.

    But compression doesn’t protect information; it just makes it lighter for transferring, “compressed”. That’s why in our simplify example, hackers could mix letters, but crypt will stand the same - for example, if “Hello” will be changed to “Lhelo”. That’s why with compression we need encryption either.

    Modern software uses more sophisticated algorithms of “letters multiplication” when initial message compression code will change at any, even minor intruding. Besides, it is mostly impossible to crack the message or to get same compression (encrypt) code. Or it will take too long time to do. In this case compression method is called as “crypto secured”.

    For instance, if we will apply well-known SHA-1 algorithm that was specially invented to produce compression encrypt codes, our message “Hello” will take the look:

    f7ff9e8b7bb2e09b70935a5d785e0cc5d9d0abf0
    While if somebody will intercept message and modify it to “Lhelo” – my friend will get another code:

    2d99afdcfead08f7301d3009da70edd1b3c97c40

    As you can see – it has nothing similar with “Hello” code.

    Not really difficult, right? So, Hashing – is a procedure of compression and encryption of information to keep it safe and catch any attempt of cracking it.

    So, our story… back to Blockchain organization.

    To avoid mess that we’ve described above - friends should exchange not only with paper notes with personal transactions but with whole pages of the log. For example, somebody (say Jeff) has accumulated a lot of single notes, accurately put them down in his register, put the number of the page, calculated Hash (now we know what it is, right?) and write it down as well on the top of new page. Then he sends this new page to all other friends.

    When I (or anybody) will get this new page, I will check the hash of previous page, check the number of the page – it should be new one but not some old page re-written. Also I need to be sure that all friends have precisely the amount of coins that is specified in new page. To check this, I need to re-read whole log, (i.e. all pages) and re-calculate all transactions. It sounds too difficult but if put this task in computer then there will be no problems.

    As a result, if everything matches – amount of coins on the hands of every person, hash of previous page, I just put Jeff’s page in my own log. Separate notes that already were put down on this page could be thrown out and whole page could be sent to others.

    If something is wrong on Jeff’s page – either coins amount was not confirmed by re-calculation of all transactions, either hash code doesn’t match to previous page, I ignore this page.

    The whole array of numbered pages is a Blockchain. As you can see everything is simple, no magic.

    How new blocks in Blockchain are appearing?
    What does Bitcoin (BTC) Mining means?

    But what will happen if all guys in our company will start to write page #10. So, it will be ten different pages with the same N10 number. So, which one will be correct?

    First – ever new page should be formed not faster than within 10 minutes. This time is needed to inform everybody that new page has been formed.

    Second – there is should be random choice of friends who will take care on new page. But how random choice is made in Bitcoin technology?

    We have decided that we will solve some tasks or riddles. Who first will find solution – he or she will take all paper notes and care on new page in log. Let’s suppose that this will be math tasks, or, say, charades. ;) It is doesn’t matter for illustration. While others still are solving the task – new page will be spread over mates and new task will put for solving. And so on.

    This algorithm works very well, but once we’ve started to recognize that John solves task faster than the others. John has math education and it is much simpler to him to solve tasks from math table book. We start to worry, what will happen, if John will take more than 50% of our company who also solve tasks faster than the others. In this case they will “process” more than 51% of all pages. That will give them opportunity to block attempt of other members for make a money transfer – because they will create majority of new pages and appoint hash. For example, they could meet separately and start writing alternative history log, where it will be thought that John didn’t send money to anybody (i.e. new “fake” history cancels all John’s transaction and restore all his money as they never been spent). Then he could return back to others and present his “longer log”. Blockchain is built so that if any problem with sequence of pages appears – it takes as “correct” longest chain of blocks (pages). This is well-known “51% attack” problem of Blockchain technology. We will talk about it sometime in special article.

    And finally – task solution also should be put down on the page, as in Blockchain it has relation to the particular page. This is done to avoid cracking of pages array, say, from page #10 till current page that were accumulated within a year. In this case too much tasks should be solved in a very short time.

    Here we find out another Bitcoin “mysterious” process – Mining, which is a process of “task solving” in our example.

    How money appears through mining process. Where bitcoins come from?

    In fact, initially it was possible just to distribute coins among lucky mates just on first page – that’s all. But this is not fair. Thus, to involve more participants, it was an agreement to distribute coins gradually and to those who makes the page, i.e. solve the task correctly. He writes “give me 50 coins from nowhere”. If he will try to sign more coins – this page should be treated as wrong page and is not accepted by others. Also it was agreed that within first couple of years – it will be 50 coins per new page, later - 25 coins and so on. As a result, the total amount of bitcoins is increasing, but ultimately it could be no more than 25 mln. bitcoins. Now something around 15.2 mln bitcoins where issued:

    Source: www.quora.com
    [​IMG]

    Due to this feature more and more people want to join this process to get more coins. Because later there will be less coins for distribution per page. Also people make efforts to solve tasks faster, because as faster you solve task – as more chances that you will get rights to put the new page and hence, to get coins for that. Here is the reason where from large mining farms are coming from. Huge processing power increases chances to solve task faster than the others and get more coins for this.

    Another side of this process is creating of “processing groups”, when a lot of isolated computers united and work as big single processing center. This also increases chances to get coins and solve task faster. Result is dividing proportionally among group members. It calls as “mining pools”. China pools control 81% of the global network rate.

    Source: buybitcoinworldwide.com


    upload_2018-2-6_17-4-47.
    As more people want to keep in hands “currency of the future” as more “crypto fever” around it. But it is distributed just 25 coins per 10 minutes. That’s why exchange trading has started. First it was on MT Gox (this is different story how it has collapsed), now it is on Luxembourg exchange. And just month ago CME Group launched BTC futures trading. This is done for those who wants to taste bitcoin but has no wish or possibilities to mine them – i.e. solve tasks to be involved in new page starting.

    A lot of online stores and other online services start to accept bitcoins as pay currency.

    Now you know more about Blockchain and bitcoin than most people around you.:D Still, as any other technology, Bitcoin has its own advantages and flaws. But this subject demands separate article. :rolleyes:

    To be continued... definitely...:)

    S.
     
    #2 Sive Morten, Feb 6, 2018
    Last edited: Feb 7, 2018
  3. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Blockchain and Bitcoin imperfections

    Hi, everybody! We continue our journey with Blockchain and Bitcoin, and this is our second article. Last time we’ve explained what Blockchain and Bitcoin are. Today we will take a look at significant features of Blockchain and Bitcoin and try to break some myths on them. The dominant trend right now that “Blockchain rules!”, this is “Breakthrough!” and everything in the world soon will use Blockchain as a core.

    This view is supported by multiple publications that point attention to beneficial features of Blockchain – for example “Blockchain: Blueprint for a New Economy” by Melany Swan, “Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World” by Dan and Alex Tapscott, and a lot of others. We do not object to features of Blockchain that could be perfected and used in the future, but at the same time it is too few were said about limitations of Blockchain technology, at least classical one.

    In this article, we will talk about classic Blockchain technology and Bitcoin. Now there are some new inventions and technologies appear that significantly improve technology in general and eliminate some flaws in a traditional algorithm. This will be subject to our next meeting. Here we will go through seven major features and try to estimate the degree of truth there.

    Statement #1. Blockchain has P2P architecture, decentralized, so it can’t be destroyed.

    Theoretically this is a correct statement, but in reality, situation stands quite different. Intelligent services could take under control or even close Blockchain. This is possible because miners right now create pools to accumulate huge calculation power. As we’ve said above bitcoins is a reward for creating of a new block in Blockchain. As there are too many miners, following probabilities – without pooling, each miner could get really big money (the whole reward for one block is approximately 12,5 bitcoins) but very rare – once in 1000 years or even rare. So, creating a pool lets unite powers and get small but stable earning as a reward is distributed among all pool members.

    So, intelligent services just need to control pools. As you can see, 4 largest pools control more than 60% of Blockchain. Our careful readers should recall “Attack 51%” issue and they will be right. Indeed it will be enough to take control of 4 major servers and you could spend your bitcoins again, and again… right, and again. This hurts Blockchain and Bitcoin reputation and acts as a limit factor of its value, I suppose.

    Source: Blockchain.info
    1.
    But we are not finished yet. Situation stands even worse. We already showed this chart in our first article:
    Source: buybitcoinworldwide.com

    2.
    So, it is even simpler to take under control 80% of Blockchain as it stands in one country, and definitely, government publicly or privately could do this…

    Statement #2. Blockchain has open structure and all transactions are anonymous, which is good.

    Well, this is true only at first glance, until you will do your first transaction. Besides, you could recognize “bad guys” just by their intentions. Since Blockchain is open - your counterparty will get access to such things as your old transactions (where did you spend them), your total amount of bitcoins at any moment. It is not a pleasant thing for personals, but imagine what information could be extracted on companies or corporations…

    For “Bad guys” it is also not as smooth as they would like it to be. Once they will sell drugs or will demand a bailout for something or somebody – they could be tracked by wallet number and when they will try to change bitcoins on cash they could be caught. Besides, the vast majority of trading and exchange transactions of Bitcoins to classical money – dollars, Euro are taking on exchanges, such as Bitfinex exchange. But all trading accounts need identification. Any exchange in special cash machines also will need identification.

    Although there some bitcoin “laundries” where “dirt” bitcoins mix with “clear” ones and washed, but this is rather expensive service with solid fees and finally you do not definitely know who controls this laundry.

    So, wide opens of Blockchain is more a flaw (I would say big flaw) rather than advantage.

    Statement #3. Blockchain is infinite, all information can’t be lost and will stay forever

    Indeed, in Statement #2 we’ve estimated that the same information is kept by all Blockchain members. But, it is growing... and it is growing geometrically, especially in last two years. The more members in Blockchain appear the more transactions are taken. Hence, it needs volumes. Now whole history weights approximately 160 Gb. Well, not too much, and if you will get lucky you could download it within 2-3 days, I suppose:

    Total Blockchain Size.
    Source: Blockchain.info

    3.
    So, if we will take a real look on “infinity” of Blockchain, it seems that its growth is limited by hard drive size if of course, somebody will not invent something. Taking the pace of growth and modern hard drive size – 10-15 years is time to reach the limit, I suppose. But, as we’ve said – size is just one concern, the second concern is downloading of this information. Have you ever try to download 1-2 Tb? The Whole Blockchain history also has to be checked before using. Everybody who has tried to deal with it should remember this…

    But why we need to download the same pack of information, what if we will put it on some server? Yes, this is the solution, but in this case, Blockchain will stop to be decentralized. So, here you need to decide whether you would like to have all history on your PC and become a real member of Blockchain, or, you need just its features, wallet and trusts to the server.

    Statement #4: Bitcoin is revolutionary technology and breakout

    No doubts. This is true, despite that some modules and parts of Blockchain technology were known before, mostly the idea of a decentralized system of information transfer, but the way how these known algorithms and modules were compounded in Bitcoin technology – indeed deserves our respect and it is worthy to be called as a breakout.

    For almost ten year history there was only one serious bug in code when smart guy was able to get 92 Bln. Of bitcoins in one account. This problem was cured by the undoing of all financial transactions for last day. Other issues that have relation to Bitcoin, such as Mt. Gox exchange crush, do not have relation to the code directly. Thus, we could acknowledge that system, in general, is somewhat stable and protected. Our PC operational systems work much worse. ;)

    As we’ve already discussed in our previous article, the primary task for Bitcoin and Blockchain creators was to invent the system of information transferring in a situation when no controlled and regulated center exists, nobody knows each other, and nobody trusts each other. So the task was resolved, but not very efficiently. Yes, it might be seen that it is easy to talk on it hindsight, but we do not try to criticize Blockchain, we agree with it unique and revolutionary role and think that it has tremendous future in different social spheres – logistic, medicine, banking, etc. Our task here is just chill out some hot heads that are concentrating only on advantages, chasing and hungry for sensation and revolution and missing some critical issues that stand on an opposite side.

    Statement #5. Blockchain could be scaled (up), and it rather effective.

    … and we will not need real money anymore. Well, I ask you just one question. The blockchain is a single-leveled chain, every computer makes same calculation, what a result of the whole net? I suspect that it equals to result of one computer. Not together of all computers, but just one computer.

    Now let’s go further, how fast Blockchain is? I have to surprise you. It is very slow – just 4-5 transactions per second on average.

    Blockchain transactions per second.
    Source: Blockchain.info

    4.

    But this is not all yet. How long I need to wait for confirmation of my transaction. The chart that you will see below could shock you, so don’t watch if you’re too emotionalJ. So, minimum it stands for 30 min, 50-60 minutes on average, but sometimes, it could last for 2-3 days!

    Blockchain average confirmation time.
    Source: Blockchain.info

    5.
    Visa, Mastercard servers make thousands of transactions per second and they could do it even faster because they could be scaled up. How many people use Blockchain right now, and how many transactions pass every day? Well, around just 200-300K transactions per day, not per minute! This is for the whole Globe. So, with this rather narrow using, Blockchain already meets serious barriers on transactions speed. Are you ready to spend at least hour in a store to buy something? Hardly, I suppose. Even 15-min queue will be a heavy burden, right?

    Statement #6. Blockchain is a giant world supercomputer, -

    a kind, of sky Net from Terminator movie that unites all computers, involving in Blockchain and distribute very sophisticated tasks proportionally among them for fast calculation and getting the solution. We have to disappoint you because this is quite not so. In fact, we have touched this topic in our first article. Recall that all members of our example have logs and they put there absolutely the same information. So every Blockchain computer does…

    So, millions of computers around the world (or, maybe billions now) make same transactions on the same algorithms, make logs in Blockchain the same information, keep a history of all transactions since the beginning. What do we see? No distribution, no contribution, no cooperation – just copying, or better to say multi doubling. Not very efficient, right? But it is necessary function…

    Statement #7. Miners are necessary part of Blockchain that provides security and stability of its functioning.

    If you’re reading this article, you probably have heard about mysterious “Miners”. We will dedicate them a separate article in nearest future. But right now we just will say that miners are those who create new blocks in Blockchain, or better to say – make “proper” shape of new blocks that yet to be included in Blockchain. Creating a new block in a chain is the only way to get a Bitcoin which, in turn, is just a reward for creating a new block. All new bitcoins are appearing by mining.

    As you know, every new block appears only once in 10 minutes. This is done to guarantee distribution of just appeared information about recent block among all members, second – this time is necessary to create “properly shaped” block. Only “proper” block could be accepted as new one and included in Blockchain. So, miners make multiple math’s iterations with a block to get “proper” shape (a lot of zeros at the beginning of hash code). To achieve this and accumulate big calculation power they build huge mining-farms near powerhouses and burn electricity that could be enough for the whole town of middle size:
    Source: slavorum.org
    6.

    They do only one thing – twist and turn block that yet to become a new one in Blockchain within 10 minutes while other history with most recent completed block is distributing among all members.

    So, in reality, if Blockchain would have 10, 20, or even 100 times fewer miners, Bitcoin transactions will continue to work with the same efficiency. In fact, this was at a beginning of Bitcoin fever. But as we can’t be sure in 100% honesty of all miners, big amount of miners is needed to protect Blockchain from other miners, who may be not as honest as others. Here we speak about “Attack 51%” Blockchain weakness. Shortly speaking, if somebody will accumulate more than 51% of all mining power, it could write alternative history (i.e. new Blockchain) of transactions in Blockchain. In fact, this will let him spend his money twice, or even more often, because he could send money in “current” Blockchain, then re-write history and create “new real Blockchain” (and cancel old one) where no transaction has been done and spent bitcoins will be restored on his account.

    So here we have a despair circle – excessive miners can’t stop mining, otherwise, the risk of 51% Attack will become a reality. And conclusion that we could make here – Blockchain will be stable until it is cushy to mine bitcoins, but if either government will put some tax on mining or, say, energy will become more expensive – the situation could change.

    Finale

    So, we have specified most important delusions on Blockchain and Bitcoin. Something you probably heard before, but some things have read here for the first time. In general, we would say that advantages of Bitcoin (if even they do not match to reality) are distributed wider and more actively in mass media by different reasons – some people are too fascinated with new feature, others do not understand Blockchain enough to see it, but mostly - speak on disadvantages is unprofitable for those who understand everything but have got a lot of bitcoins…

    Despite some flaws, Blockchain should get an application in other spheres of mankind life – logistic, medicine, science, banking etc. Besides, now has done solid steps in improvement of this technology and resolving flaws that we’ve mentioned here.

    About these changes, we will talk in our next article.
     
    #3 Sive Morten, Feb 6, 2018
    Last edited: Mar 21, 2018
    Brett Reynolds likes this.
  4. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Blockchain and Bitcoin are not as bad

    So, guys, last time, we have talked about imperfections of Blockchain and Bitcoin technologies and what myths stand around this subject. As we’ve promised, today we will talk what should be done to fix this flaws and what already was done for improvement of Blockchain technology and make to work it more efficiently.


    First of all, we should separate Blockchain and Bitcoin. Although many people think that this is the same, others think that they tightly related to each other, but, in reality, they are two different technologies. According to Satoshi Nakamoto book “Bitcoin: A Peer-to-Peer Electronic Cash System”, Bitcoin technology includes a lot of others, such as transactions, hashing, Blockchain per se, Proof-of-Work, P2P network, members interest, crypto, etc.
    Why this is important - because Blockchain could be used in some other cryptocurrencies, and could work differently. The way how Blockchain is used in Bitcoin technology doesn’t tell that this is the only way how it could be used. At the same time, it is true that while cryptocurrency works on the Proof-of-Work algorithm, features will be mostly the same as Bitcoin. “Proof-of-Work” is a system that prevents fakes and cheats in new blocks creation and, consequently prevents any deceiving in the distribution of rewards among members. Recall what we’ve talked about new blocks, math tasks resolving, etc. All of them are components of PoW (Proof-of-Work).

    Now, what weakness usually increments to Bitcoin technology?

    That’s right - it is too slow.

    In the last article, we’ve mentioned that creation of new block needs approximately 10 minutes while transaction confirmation could take 40+minutes. Bitcoin technology does seven transactions per second, on average – not per member, but just seven transactions for all members. PoW that we’ve mentioned above means that miners will continue to burn electricity and buy new hardware until it is profitable to mine bitcoins. But this breakeven point absolutely doesn’t depend on quality. They could burn all planet’s power, but Bitcoin will not work faster. So, where is the exit?

    Lightning network

    This is technology that lets accelerate the speed of transactions but make them not directly in Blockchain, but outside. Blockchain will get just results of mutual transactions, and this information will be put down on the block. So all members could make transactions on separate information channels and send results to Blockchain. This lets avoid Blockchain’s sloth. Here is how it works.

    In Lightning network, people set private transaction channel, something like private chat where they do mutual transactions. To be sure that counterparty will hold its obligation to transfer – both sides make a security deposit (pledge) in Blockchain and then start to take their transaction directly, isolatedly from major Blockchain net. When all transactions are done, and both sides confirm its truth – private channel is closing, security deposits withdrawn and the final result of transactions will make public and put in Blockchain.

    If somebody has broken the “rules” during these mutual transactions – harmed side will file a complaint with Blockchain and offender will lose the pledge.

    This simple solution makes possible execute millions of transactions per second in “slow” Blockchain.

    The blockchain is too transparent.

    As we’ve mentioned in the previous article – it is not simple to keep secret your bitcoin transactions. Using of a large amount of wallets will not help you, because as soon as you use the wallet – everybody sees that it belongs to you. Besides, when you try to change bitcoins on currency via some exchange – government authorities will know your currency account (USD, EUR, etc).

    Last time we’ve talked about mixers that mix clear and “dirt” money from multiple sources and it becomes impossible to recognize where which money is.

    Former “Darkcoin” developers have tried to put mixer right in currency algorithm, but this was clumsy assistance as all money has become “grey” and suspicious. Using it for legal transactions is not comfortable, and every time you need to wait for barriers from regulatory authorities.

    A real example of privacy is “Monero” cryptocurrency. They use so-called “ring” technology. Here is what they talk about its privacy and traceability:

    “Monero uses ring signatures, ring confidential transactions, and stealth addresses to obfuscate the origins, amounts, and destinations of all transactions. Monero provides all the benefits of a decentralized cryptocurrency, without any of the typical privacy concessions.”

    Simply speaking, “ring” is a group of users. Each user has an electronic signature, and it could sign personal transactions from the name of the whole group. So, when some transaction has done – it is not known who particular done it.

    Monero is untraceable because:

    “Sending and receiving addresses as well as transacted amounts are obfuscated by default. Transactions on the Monero blockchain cannot be linked to a particular user or real-world identity.”

    Monero has two different crypto keys for sending transactions and for coming transactions and balance watching. It means that if somebody knows wallet address, he or she can’t see your balance and your incoming transactions.

    Finally, as Monero as Bitcoin (and all other cryptocurrencies) recommends creating one-off addresses for different senders.

    Ok, we’ve got something for acceleration and privacy, but what to do with Blockchain size – it is too big, remember?

    Total Blockchain Size. Source: Blockchain.info

    upload_2018-4-23_11-17-57.

    To download the whole history, you need few days. That’s not a problem by far, but, before using it, it had to be checked by the system and assured that it is all correct. This will need a few days more. Now take a look at the chart above and try to calculate when it will reach 1-2 Tb value. It seems it should happen rather soon, some years maybe. Have you ever tried to download 2 Tb data from the net, then install it and make a system to check it? Yep. This is work for few weeks probably. And this is a deed for real Bitcoin fans. So if you’re not a purist of Bitcoin and not a fan, what you could do to make it faster and simpler? The answer stands in “trust”. Recall that necessity to download and keep whole history stands due statement that “Nobody trusts no one”. And keeping the whole history on your PC fixes this problem. Here is answer how to escape this problem –

    “All you need is trust; Trust is all you need” as Beatles sang. Indeed, when even puny trust stands, you do not need to download whole massive of information. First, there are web wallet and web money services that keep whole information (all Blockchain history). If nobody complains about particular web wallet, why you should mistrust it too? They make money, based primarily on trusting of their clients and this is against their interests to make fake transaction because they will lose business.

    Using of web bitcoin wallet also lets you change it without any problems because all Bitcoin wallets have the same logs of historical transactions.

    The second solution has been given by Satoshi Nakamoto himself – this is so-called “light wallets.” You could download not the whole history but only blocks header and blocks that relates personally to you. Block headers now weigh around 50 Mb. Besides, you also could start download from some point in the past, not whole history.

    Thus, as you can see, a dash of trust could resolve big problems.

    Miners burn planet resources

    “This averages out to a shocking 215 kilowatt-hours (KWh) of juice used by miners for each Bitcoin transaction (there are currently about 300,000 transactions per day). Since the average American household consumes 901 KWh per month, each Bitcoin transfer represents enough energy to run a comfortable house, and everything in it, for nearly a week. On a larger scale, De Vries' index shows that bitcoin miners worldwide could be using enough electricity to at any given time to power about 2.26 million American homes.”

    Sounds impressive, right? But, the truth stands so that miners will continue to do it until it is profitable. Proof-of-Work is a most popular algorithm to satisfy the interest of all members in Blockchain, but it suggests a long time of calculations for the creation of new block. These long calculations are needed only to protect logs from illegal changing.

    Now there are some other algorithms start to appear – Proof-of-Stake, Proof-of-Authority to name some. Besides, even Proof-of-Work could be used differently – for instance, you could set tasks that could be applied in science – biology, physics, genetics, etc. Other words speaking – put this huge calculation power on serving to science needs.

    Proof-of-Stake has not equal probability distribution for new block creation. It depends on your account and how many coins do you have. The more coins you have, the higher probability that system will choose you to create a new block. In fact, your chances to create a new block (and, correspondingly, to get a reward) equals to the percent weight of your coins in the total amount of all coins. And this is good motivation because as more coins you have as more interest to make the whole system and the net function properly.

    Proof-of-Authority is the more radical approach. It suggests some “Circle of trust” of members who have rights to create new blocks. These members should be approved by other ones. But, net that will be built on Proof-of-Authority will not be decentralized. So, it breaks the initial idea of Blockchain.

    Now we’re coming to more serious problems – Bitcoin can’t be scaled up.

    First – let’s understand what “scaling” means. Some system or algorithm could be scaled if it starts to work faster, more efficiently when we bring more calculating resources to it. For example, add more hardware, faster CPU’s, video cards, more computers in the net, etc.

    From this standpoint, Blockchain can’t be scaled up. It will work with the same speed and efficiency despite on resources.

    A lot of different ways were discussed to solve this problem, one is described above as Lightning network, other solution, for example, is to make blocks bigger, but all of them have their own flaws and do not solve the problem totally.

    Now the best scientist work on this problem and one of the solutions that could be is “Blockchain of Blockchains”. But as it was reasonably argued – “this raises a conundrum: if every Blockchain is on the Blockchain, what will that Blockchain be on?”

    As mentioned in this article - “There must eventually be a final layer to this authentication system, ultimate authority on data validity. For now, this is the Bitcoin network’s Blockchain, being the one with the most nodes and highest mining difficulty rate. The whole point of hashing to a Blockchain is to benefit from its greater security, so we have to use the most secure one available. Bitcoin’s dominance might not last forever, though, due to scalability issues with the protocol. Its Blockchain is too large, transaction speeds are too slow, and the fees are too high to be used for anything except currency.

    The ultimate Blockchain will be one designed entirely for this purpose, a relatively small file intended only to store hash values. Its low resource consumption will make it easy for any device to join the network, and conceivably, almost every device will. It will become the universal judge of truth, capable of resolving any dispute–the Blockchain of Blockchains.”

    Plasma: Scalable Autonomous Smart Contracts

    The solution could be found in “Plasma” technology – the one that was offered by Joseph Poon and Vitalik Buterin, creator of another cryptocurrency – Ethereum. In fact, it was made for Ethereum, but the same technology could be used for Bitcoin.

    The idea has some relation to “Lightning network” mentioned above. Some member of root Blockchain could place the pledge in the root system and create private “smaller” Blockchain where he will be responsible for data and transactions propriety. From time to time “smaller Blockchain” log puts in the root system. All members of this smaller Blockchain control the data propriety and transactions inside “small Blockchain”. They also could complain about counterparty and “master” of this “small Blockchain” if something goes wrong.

    Now, this system is just a project, but if it is fully operational, it should solve the problem of Blockchain scalability.

    The blockchain is decentralized, and can’t be improved and updated.

    What usually is going on, when producer updates the system. Yes, he just forces users to take update or update is done silently by the system itself. It is not easy to do with Bitcoin. If a developer has full power to update all users by force – this is not pure P2P network. If he has no power to do it, he needs to convince others to take an update or improvement. This is a two-edged sword because if majority deny changes, the network could split into two incompatible parts. This situation calls for “fork” on bitcoin slang. In this case, two different currencies will be in turnover.

    The “fork” could happen due to different reasons of Blockchain members. Miners are interested with a higher reward for block creation; users want to cut transfer fees, fans want to make Bitcoin more popular, others would like to see new features from time to time, etc.

    Forks are already happened as with Bitcoin as with Ethereum. Bitcoin members, by the way, didn't agree on block size increase.

    What ways to escape forks in the future? The simplest way is member’s voting. For example, new “Tezos” cryptocurrency algorithm suggests voting to avoid forks. Voting rights are based on the number of coins that you have. If you’re not an expert on the voting question, you could delegate your voting rights to other member. They call it as “Built-in Governance”. The Tezos protocol rewards community innovation with an on-chain mechanism that seamlessly amends the rules governing its protocol and incentivizes protocol development. That’s why it is based on “Proof-of-stake” basis that we’ve mentioned above. “Tezos’ unique proof-of-stake consensus algorithm enables every stakeholder to participate in the validation of transactions on the network.”

    The weakness of this approach is domination of fat cats that could cut the voting rights of others. But, this probably will negatively impact the currency value, so even fat cats will not be interested in this.

    Summary

    Despite that Blockchain is not new technology; it is easily transformed and improved by smart developers to the modern needs. In fact, we’re mostly talked about Blockchain’s plug-ins, rather than Blockchain itself. But it also could be treated as a positive sign, since it gives talent people inspiration to work on improvement.
     
    #4 Sive Morten, Feb 6, 2018
    Last edited: Apr 23, 2018
  5. Sive Morten

    Sive Morten Special Consultant to the FPA

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    What bitcoin mining is or “hey, where is my video card?”

    macro miner figurines digging ground to uncover big shiny bitcoin (1).

    Source: cryptovest.com


    Today, guys we will talk on mysterious “Miners” and their role in Bitcoin technology. If you’re in touch with computer hardware, you should have heard that fast video cards disappeared, were sold out totally. Price for them has increased by 30% or even greater. I would say even more. In recent time plants in China that make video cards lag behind the demand, but not due to their fault. In fact, they could make more video cards, but video chip producers already work at full capacity and their production power is not sufficient to satisfy total demand.

    And you probably heard that Miners did it and bought all video cards, as people tell – to mine bitcoins on their cryptocurrency farms. At the same time, many people do not understand exactly, why this “Crypto rush” happens right now, what mining is and why is so much noise around some virtual money? Maybe if others have started mining – you also should?

    Let’s find out what this mess is all about.

    Blockchain.

    In the beginning, a just short reminder on Blockchain and Bitcoin. Here we will tell just briefly, but if you would like to get a detailed explanation – please read our first article.

    As we’ve estimated, Bitcoin – is decentralized virtual money. The core idea here is “Nobody trusts anyone” in the modern world, that’s why there is no any central bank or major bitcoin storage. Everybody keeps his bitcoins. Still, money transfers are possible, and they are safe due application of Blockchain technology.

    Blockchain, as it follows from the name is a chain, sequence of blocks, which keeps information of all transactions ever made between members – who, to whom, how many bitcoins transferred and when. As it has a common feature with bookkeeping, it calls as “ledger.”

    Blockchain has a lot of different features, but for our today’s topic we mostly need to recall two of them:

    1. Every member keeps the total chain of blocks on his or her computer, i.e., whole history of all transactions ever made, since the foundation of Blockchain. And this history is the same for everybody. All participants add new blocks as soon as they appear.
    2. The blockchain is based on cryptography. Math’s algorithms guarantee correct functioning of the blockchain.
    Those who create new blocks are named “Miners.” For every new block created they get a reward – now it is approximately 12.5 Bitcoins. This is around $13.5K by the rate on 12th of May 2018:

    Source: Blockchain.info

    miners-revenue (1).

    Here is an important detail that we have to mention – there is the only way to issue new bitcoins is to create a new block in Blockchain. The reward for new block creation is an exceptional way of bitcoin emission. No new blocks – no additional bitcoins.

    Every block takes approximately 10 minutes to be created. This time is used intentionally to achieve two points. First is to be in time to distribute new block through the net among all users. If we would suggest that blocks appear chaotically by all users, then it would be impossible to estimate which one should be added to the end of Blockchain as a new one.

    Second – this time is necessary to adjust block’s header. Block header is the hash code that has to be below target value – also specific hash code.

    The target is a 256-bit number (extremely large) that all Bitcoin clients share. The SHA-256 hash of a block's header must be lower than or equal to the current target for the block to be accepted by the network. The lower the target, the more difficult it is to generate a block.

    It's important to realize that block generation is not a long, set problem (like doing a million hashes), but more like a lottery. Each hash basically gives you a random number between 0 and the maximum value of a 256-bit number (which is huge). If your hash is below the target, then you win. If not, you increment the nonce (completely changing the hash) and try again.

    To not dive into sophisticated math, “target” suggests hash code with many zeros in the beginning. As more zeros are demanded at the beginning of the hash code as the greater difficulty of new block creation is. Thus, miners slightly adjust blocks trying to get the correct hash, which matches to “target.”

    If a number of miners will increase ten times, then the target will become more complicated – also in 10 times, which will mean that more zeros now is demanded at the beginning of the hash code of block header. By this relation new block anyway will appear in the same 10 minutes, but the chance to get a reward for each miner will also drop for ten times.

    But why it is so necessary to have specific hash code for block header? This is done to prevent any scam action and attempt to replace real history with fake one, for example, cancel own transactions that have been done. Nobody could say that “I haven’t sent this 100 bitcoins” (if he did) and “I do not have this transaction in my ledger.” Because all members will accept only new block with proper header (hash code) as the correct one. To get this block - all miners should work for 10 minutes, and one person can’t do this alone.

    That is what miners do – twist and turn blocks hash and try to catch necessary block header to get the reward of bitcoins.

    So, we’ve got the core of mining - now let’s take a look at miners themselves.

    At the beginning of a crypto era, somewhere in 2008-2009, nobody knows about bitcoin, except its creators, probably. It was easy to mine, as there were 50-100 miners probably, and every person once per day could get a reward for the new block.

    In 2013 when the price of bitcoin jumped above 100$, the number of miners jumped so, that every member should wait few months to get a reward. As we’ve mentioned in previous articles, miners start to join in “pools” – this is a type of uniting of calculating power of many computers to increase probability to get a reward. Once as it’s got – it distributes among all pool members proportionally to each member’s contribution.

    But the no-return point has come after appearing of ASIC devices for bitcoin mining. This is devices that were constructed specially for definite purpose, in our case for bitcoin mining. They are so powerful that makes useless ordinary PC’ for bitcoin mining.

    ASICMINER ASIC-based USB mining device

    ASICMINER_USB_Block_Erupter.

    Next step in mining fever is building huge mining farms based on ASICs. Very often they were built underground, to prevent overheating, and near powerhouses.

    Besides, how much bitcoins could be issued totally? Blockchain algorithm makes possible to issue approximately 21 Mln. of Bitcoins, or precisely speaking - 20999999.9769 BTC.

    Every block introduces 50 new coins in the system. This quantity (50) halves every 210,000 blocks. So, getting the limit of coins it is possible to generate is quite easy - it's the sum of a geometric series.

    formula.

    The limit of 21 million bitcoins currently is "hard-wired" into the protocol, and, as it is suggested, there will be no new bitcoins, if, of course, algorithm will not be adjusted. Now there are more and more doubts appear on this subject.

    According to Brian M Lundberg, Information Technology & Services Professional, Founder of Incorporating Bitcoin, the floor amount of bitcoins technically could be changed, by application of fork scenario. But in reality, major holders of bitcoins who particular will have to apply “fork” procedure are not interested in it, because their bitcoin capital will lose value. About “forking” we’ve talked in previous article :

    Here is what Brian said:

    “Yes, it can be changed. It would require that the code be forked and the vast majority, probably unanimous, agrees to run the new code. But ask yourself: why would they? If new bitcoin are created the bitcoin currently in existence are worthless. Bitcoin was created with the hard cap precisely to avoid inflation.

    It’s more likely that, if we're running out of tradable tokens, the code would be forked to create something smaller than a Satoshi. This would create more tokens without inflating the currency.”

    Ok, now we’ve estimated, how many bitcoins could be issued, but how much already stands in circulation?

    Now it is about 17.5 Mln:

    Source: Blockchain.info

    bitcoins-in-circulation.

    So, we see that potential reward is narrowing day by day and major mining power in the hands of large pools with application of ASIC devices.

    This leads us to a sad conclusion - the result of this evolution is simple. Now it is absolutely wasteful to mine bitcoins at home.

    But don’t upset too early. If you have a dream to become a miner – it still could come true. Take a look at alternative cryptocurrency, which shortly calls as altcoins.


    Mining of altcoins and why graphics cards sold out

    Everybody knows that Bitcoin is most well-known cryptocurrency. And, as a rule, someone success attracts rivals. In recent year alternative cryptocurrencies sprout like mushrooms. So, alternative cryptocurrencies are called as “Altcoins,” and now there are hundreds of them. Even governments start issue of cryptocurrency – the last example is Venezuela issued “Petro,” where each coin is backed by crude oil barrel.

    Here are most famous crypto and last quotes for them:

    Source: coinmarketcap.com


    altcoins.

    The major aim of any cryptocurrency creator is popularity. Popularity brings liquidity, amount of coins in turnover, total capitalization. After Bitcoin experience, when mining process is totally controlled by owners of big ASIC mining farms, hardly popularity of bitcoin will increase significantly. Because it is too high barriers to entry in the mining process. And creators of new cryptocurrencies do not want this. They create mining algorithms that significantly postpone applying of ASIC devices or make them impossible to use.

    That’s why mining difficulty is significantly lower for altcoins. It is done intentionally, just to guarantee any person to get a reward for mining on home PC, without ASIC devices. But why video cards are so popular for mining?

    The reason for that is the difference between video chip and CPU calculation power of specific operations. Most tasks for block header targets includes calculations with floating point, and video chip shows significantly better performance in this sphere than CPU. Hence, a chance to get a reward by using video cards instead of CPU is higher. This is the reason why miners of altcoins snapped up all video cards:

    Source: asus.com

    mining_card.

    Besides, following the popularity of video cards, producers start production of specific cards particularly for mining process, like the one on a picture above, as you can see it has no monitor slot.

    And now miners of altcoins build farms not on ASIC devices, but uniting few video cards in a pool and link them to computer. Here is a very common picture of small home altcoins farm

    Source: coinminingrigs.com

    6-gpu-ethereum-mining-rig-running-amd-rx-480-gpus.

    If you carefully take a look on the table above, with the list of most popular cryptocurrencies, you’ll find Ethereum on second place. This is not occasionally. While it has appeared just recently, in 2015, it has an important difference from Bitcoin. Ethereum’s blockchain lets to include in blocks not only information on payments being made, but smart-contracts – specific interactive objects, a kind of specific programs inside blockchain. It makes Ethereum to become second most popular cryptocurrency and very attractive for mining as it price has jumped from 10$ to 200$ just for six months. That’s why miners have snapped up all video cards J


    But what if miners will stop mining?

    Many people think that if it is not profitable to mine bitcoins, as expenses will increase while reward will drop, miners will stop to work and bitcoin will stop functioning. This is not correct. The task difficulty for a block header depends on total miners number. If the number of miners is decreasing, the difficulty is reducing as well. Besides, dropping of miners’ amount will lead to increasing of reward per miner. Thus, in first four years reward for each block was 50 bitcoins, while right now it stands around 12.5 bitcoins.

    Currently, exchange rate makes mining attractive, but some time vast revenues will be generated by transaction fees, which also miners earn. So hardly they will stop their work any time soon.


    Bottom line

    Now you know what mining is, who stands to gain, why it is necessary, why graphics cards were sold out and why now you can buy a video card without monitor slot.

    Also, we hint at Ethereum unique features but haven’t given any details. Keep watching for new articles, because we definitely will talk about very soon.
     
    #5 Sive Morten, Feb 6, 2018
    Last edited: May 20, 2018
  6. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Ethereum, ICO and smart-contracts.


    Last time we’ve touched the topic of Blockchain, its strength and weakness, we’ve proved that it is not as stagnated technology as many people think it. Bitcoin is most popular cryptocurrency and its popularity is inspired many people to invent alternative algorithms and improve existed one.

    As a result of this hard work, now a lot of alternative cryptocurrencies have been launched. Bitcoin is #1 by far, but who stands in next place? It is Ethereum. In fact, most recent perfections of Blockchain technology and everything that stands around it tightly relates to alternative cryptocurrencies, such as Ethereum, Ripple, IOTA, and others. Now there is more than 1000 alternative cryptocurrencies exist, that’s why they are called as “altcoins.”

    Source: https://coinmarketcap.com/coins/
    Ethereum1.

    It is easy to sign that Ethereum two times greater than the closest rival – Ripple, and it was a moment also where it was very close to Bitcoin in 2017, although right now its capitalization is three times lower. Anyway, it is second popular cryptocurrency after Great and Terrible Bitcoin. What is the secret of this popularity, especially for currency that has been launched only in 2015? Ethereum also is most used currency for Initial Coin Offering (ICO) – the procedure of financing by cryptocurrency for different start-up projects in the net. This is a modern analog of Initial Public Offering (IPO) on a stock market when stock turns public from private and becomes publicly traded on an exchange.


    Ethereum is a new word in cryptocurrencies.

    The popularity of Ethereum is well-deserved and is based on its unique feature. So, what’s an idea, the unique feature of Ethereum that made it second popular cryptocurrency in the world? We already know that Bitcoin and Blockchain technology has relatively simple structure and purposes. There are multiple members with their wallets, ability of money transactions among them. The system itself is smart, decentralized but is created for processing of classic tasks – money keeping and saving, transactions, etc.

    At the same time, it would be nice if people could create special programs codes for the system that could manage wallets, accept wires, decide whom and how many money to send, etc. But all this stuff has to been done with obligation – every member could know principles of how these programs work, similarly and transparent for every member and program code should be well protected and nobody could crack it.

    In fact, this is the idea of Ethereum – ability to create program codes that automatically could manage wallets and transfers. Ethereum algorithm has two types of wallets – those that are managed by a human being and those that are managed automatically by program codes.

    These special program codes are called “Smart contracts,” and they are part of Ethereum Blockchain. It means that smart contract becomes a part of Blockchain, stands there forever and exists as a copy on every member of Ethereum Blockchain (because, as we know Blockchain database is the same for every member of the system). This feature allows using smart contract by any Blockchain member, and it works identically for everybody.

    Maybe this feature was not a revolution, but it significantly widens the applicability of cryptocurrencies.


    What could smart contracts do?

    Almost everything – it could be a lottery, auction, bets and casino, polls and even games. For example, let’s imagine how sports bets contract could look like:


    1. Input initial conditions – time limit for placing a bet, minimum bet value, maximum bet value and types of bets – result (win/lose/draw), number of goals (in soccer), bet coefficients and any other;
    2. While bet time is not finished yet – remember bet sums, wallets where they are sent from, and type of bets.
    3. When bet time is over - stop accepting bets. If any bets have come after time – send them back;
    4. As sports event is completed – choose winner and losers. Keep losers bets and pay out winners bets to the wallets from which bets have come from.

    As you can see – everything is simple. Or, for example, roulette’s smart contract in the casino:


    1. Input stake/reward ratios (red/black), the particular number, multiples numbers.
    2. Collect stakes – remember wallets from which stakes were made.
    3. Run random number generator to estimate result;
    4. Lost stakes are transferred to casino wallet. Win stakes are paid out to wallets from which they were made.

    The big advantage of a smart contract is a Blockchain technology. Everybody sure that it is fair, all members could check the program code and whether it works as it should or not. But some limitations exist here as well.


    Limitations of smart contracts


    - Using random number generator is difficult. There were some cases where smart players were able to calculate a jackpot.

    - It is difficult to hide some information - for example, auction members or casino clients;

    - Blockchain needs some external data or information, say, the current or final result of a sports event in our example. And there should be a trusted person who could do this;

    - To apply smart contracts members have to have Ethereum currency. It is impossible to use smart contracts among those who don’t have Ethereum yet;

    - Smart contracts are slow – 3-5 transactions per hour. This is a common feature of blockchain technology, and we’ve talked about it already in the previous article;

    - Smart contracts usually execute few operations, because any member needs to check the result of execution;

    - If there is an error in the smart contract – it stands there forever. The only way how you could change the situation is to shift on another smart contract. But this will be possible if the initial contract contains money withdrawal and contract shifting in its code. Usually, it doesn’t.

    - Smart contracts could hang-up or work wrong – if users do not totally understand program code. So, a lot of things depend on programmers and its professional skills – as in any other sphere.


    The major purpose of smart contracts

    Everything that we’ve mentioned above – polls, lottery, bets, etc sound good, but it was found that smart contract is extremely useful for the financing of startup projects. The smart contract could automate all routine bookkeeping work – control what member and how many shares have bought, processes shares trading, etc. No bustle with mail addresses, credit cards, regulatory authorities, investors’ authorization, taxes, etc.

    Besides every user of this smart contract could see how many shares were issued initially and how they were distributed. Blockchain will prevent any illegal additional shares emission and duplicated sell of shares that already have been sold.


    Initial Coin Offering (ICO)


    This feature was invented not in 2015 when Ethereum has been started, but a bit later. Once people have discovered this feature Ethereum price has shown furious rally, demand for this cryptocurrency has risen hugely from just 8$ in 2017 to almost 1400 year later. One of the reasons for explosive demand is a large amount of ICO and desire of investors to put ethereums in projects. This significantly increases demand for ethereum itself.

    Source: https://www.tradingview.com
    Ethereum2.

    Let’s take a look at ICO in details. Most common view of any ICO is as follows:

    - You have an idea. Usually, it has relation to cryptocurrencies and Blockchain (but not necessary);

    - You need money to finance this project;

    - You spread information among potential investors about your project and sell shares or tokens by some smart contract;

    - By advertising your project, you get the necessary sum of money.


    As you can see ICO has a lot of similarity to IPO (initial public offering) of common shares, which we already have mentioned above and crowdfunding, but investors get financing not in common but in cryptocurrency.

    Here is the only thing that we need clarify – what is token? The token is an analog of shares in the common financial market. When somebody gives ethereums to the owner of the startup project, he needs to get something instead and identify rights on the part of the business or part of the income of this project. These rights are identified by tokens. Tokens, in this case, become a representation of a particular asset or utility. Tokens can represent basically any assets that are fungible and tradeable.


    So, usually, ICO value (startup project) stands for $10-20 Mln. on average. This money could be collected very fast –from few hours to few days. Since ICO has ceil either on the sum or on time, this creates some rush among those who want to take part in startup project.

    Sometimes you could meet cases that stand beyond common sense. Since Blockchain works slow and makes just a few transactions per second, investors were paying huge fees ($6000+) for the transaction to be on time and not to miss ICO. This is more an exception of course, but, millions of dollars are collected in few seconds when ICO is really interesting and has miracle perspectives by investors’ opinion.


    It is easy to invest, but what is about return


    What will happen with tokens that you’ve got depends on project conditions. Some investors pay dividends, others accept tokens as payment for products/goods, produced by a startup, but some investors promise nothing. As a rule, after ICO has been completed tokens add to crypto exchange listing, similar to common share on stock exchanges. Those who have taken part in ICO just for token speculation could sell them on exchanges. Others, who were not in time to take part in ICO and would like to make long-term investments, could buy them.

    Sometimes ICO has a feature of a bubble when the project has an only idea and working team at best but doesn’t have any real product. Nevertheless, its price on the crypto exchange could rise explosively.

    Crypto exchanges have no regulators, for example, as SEC (Security and Exchange Commission) or NFA (National Futures Association). That’s why the owner of the project could by his own tokens (buy back) on exchange and artificially rise price for them on money that he has got on ICO. This is legally forbidden on share market, but it is possible on crypto exchanges.

    ICO results look impressive. As ICO smart contracts mostly have started in 2017 – by the end of 2017 total value of ICO has reached $3Bln.

    Ethereum3.

    But, to get the money it is not difficult, but to lead a project to success – this is the challenge. Still, investors keep fingers crossed…
     
    #6 Sive Morten, Feb 6, 2018
    Last edited: Jun 25, 2018
  7. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Risks and flaws of cryptocurrencies

    Source: www.bitcoin.com

    Bitcoin_stealing_1.

    In this article, we will try to step aside a bit from romantic of Bitcoin and Blockchain technology, come down to earth and point out some risk factors that any person could meet dealing with cryptocurrencies. They are virtual money that’s why problems a and flaws that could appear are common to any other electronic online services dealing with virtual money, for example, Web Money. At the same time, cryptocurrencies are a relatively new feature. While limitations of virtual money are known more or less, the world of cryptocurrencies is still full of surprises and has some nuances. They have some specific algorithms which could increase the odds of problems and make consequences of these problems harder. Besides, crypto currencies have some own specific risks that are unique for them.


    Issue #1. Wire instructions spoofing and phishing


    When you’re dealing with online money transaction most common crime is trivial theft. Yes, despite advertised super-duper Blockchain protection, Bitcoin and other cryptocurrencies become an object of thievery crime. But not always this is the weakness on Blockchain algorithm. Sometimes, or better to say, as a rule, hackers use more simple ways to grab your money. For example - a trojan virus. Let’s imagine a situation when you intend to send some BTC to your friend, or, say, pay for food. Your counterparty sends you BTC wallet that looks like a long random chain of numbers. Of course, you will not reprint it manually but copy it in the buffer. Bingo! If you have trojan virus code in your PC memory, for example – CryptoShuffler, it will replace your friend’s wallet number by hackers’ one in your PC buffer and you! (Not the virus) send money in unknown direction. People are not careful enough to check number twice before copying and after pasting. And this is scammers’ bread & butter.


    The second way is well-known, it's phishing. Some fake site of the popular online store, baseball team, or even charity fund where the client could put the order for some goods that he never will get, donate by filling the form with wallet number and password. Bingo again, your billing details in the hands of scam.


    You could argue and say - so what. Even classic bank transactions or operations with a credit card could become an object of the same crime. Yes, this is true. But dealing with classic bank or credit card transactions there is a chance to cancel it and return the money because the receiver has definite bank details where is money going. You do not have this option in Blockchain – transactions that have happened in Blockchain, stay in Blockchain forever and becomes history as soon as the block is closed. You can’t cancel it, and you even have no authority to appeal to and send a claim. It is sad but true as Metallica sings.

    Issue #2. Hacking and taking control over client-side wallet systems


    This is not unique for cryptocurrencies and stands common as for banking as for virtual money online payment services. This happens when hackers get control of payment domain hub, such as https://classicetherwallet.com/. In 2017 it was hijacked with social engineering tools. Hackers were able to convince domain’s registry that he’s an owner of the service and have got control over it. Clients’ payments were split into small parts and redirected to multiple hackers’ wallets using tumbler" service to hide their tracks. According to Reddit portal, they have stolen ~$300K within few hours. And it was big luck that they had started redirect transactions immediately. It was easier to catch and stop them. If they would act silently – hack the wallets but withdraw money a bit later, irregularly and occasionally, they could stay undisclosed for a long time.

    And this was not a single case. They were many of them of different scale. Some of them were prevented, some were not.

    Still, we have to keep it real and say that the same things (or even worse) could happen with the classic bank. Last year hackers have taken control of all electronic bank services and payment system in Brazil bank. The wildcat costs ~$250 mln, and it was even tougher than stealing of 3.5 tones of real paper bank notes in 2005.


    Issue #3.Transfer details mistake

    This one is not unique for cryptocurrencies, but specific of crypto makes this common case to be special. When you send money using classic banking, you have definite payment details, and bank tracks your payment on a way down to the receiver. If it was a mistake in details, you could cancel the transaction, or at least you definitely know who will get your money because banks have full data on their clients.

    There is quite a different thing in cryptocurrencies. As you know payment details is a wallet code that looks like this: “1BoatSLUHtKBngkdFEeobR76b53LETtpyT”. If you make a mistake just in one symbol or miss it, you will send money in space and never know who has got it. There are a lot of examples when people have sent money by mistake and now still searching them with hope to return them back. Return is possible only in one situation – if the person who occasionally has got it will be honest enough to connect with you and be ready to return this money. It seems possible when you’ve sent small sum, but as you understand, the odds are tending to zero, when you’ve sent few millions of dollars (by current BTC rate).

    Still, it is necessary to mention here that control technologies, to avoid such typos become better year over year. Now it is really difficult to confuse wallet address because BTC wallet domains have a built-in function of wallet’s validity control.

    But it is possible in another currency, say Ethereum. Its wallet address consists of numbers – something like this “0x1234567890123456789012345678901234567800”. Occasionally it was found out that shorter address will be accepted by the payment system, but it will change the amount of money transferred. This was called as “ERC20 short address attack”. Just to explain the effect of this – if you would like to send 1000 dollars in ETH equivalent, but forget to place final zero in address – you will send $256K instead. This is a unique situation for cryptocurrencies, and it is not possible in classic banking.

    And these issues are just a few to mention here. But, to be fair, there were some cases when the sender was able to return wrongly sent money. You need to be an “advanced user” in cryptocurrency technologies, but this is possible, at least iOS/C++/Blockchain developer was able to do this (LOL).


    Issue #4. I lost my wallet!

    According to Chain Analysis and Fortune.com, approximately 4Bln of Bitcoins are lost forever. Now it is “just” puny $24 Bln. while it was three times greater a half year ago. You could suggest that maybe they were stolen, but not – the vast share of lost bitcoins are due to forgotten wallets. I do not need to search for an example, because it was in my sight. My wife’s brother likes everything new in the technology sphere, and he was among Bitcoin pioneers who have tried mining on old PC. He had an account in Blockchain (as no wallet services were yet) and mined some Bitcoins (reward for mining was solid in the beginning). After some time he forgot about this topic and when it has become popular again – he recalled, but it was too late. Yes, he has lost number and password for the account and does not remember where are this old computer and its hard disk now. It seems that his Bitcoins will stay in this Chamber of Secrets forever and this is the very typical situation.

    Source: fortune.com and Chain Analysis
    lost_bitcoins.

    The vast majority of people keep their wallet files on PC. It means that they either could be stolen or lost due to HDD failure. That’s why advanced users and those who have a solid sum in cryptocurrencies write down secret key on paper or, have hardware USB wallets, such as Trezor.

    Another tune is with centralized services that provide access to your virtual wallets. Here, as in common banking, they use SMS confirmation with one-off code in addition to login/password combination. Sometimes, if sums are really big, USB token or security token hardware could be used. This is a very cool thing (I had one to get access to my Bloomberg anywhere account). This was small, approx. As a flash drive, a device with a 6-digit display. Numbers there were randomly changing every 5-8 seconds. When I log in to my account, I need to add this 6-digit code from security token device in addition to a password. As you understand it is impossible to get access to your account occasionally in this case. It looks like this one:

    Source: www.salamancatodonoticias.es
    Tokens.

    Issue #5. Unreliable ICO

    ICO – Initial coin offering has become popular with running Ethereum, and it has become a fever in 2017. What is ICO and how it works we’ve discussed already in our previous article. Here we just say that ICO is a way of crowdfunding but in the sphere of cryptocurrencies, when the owner of the project provides an idea, some explanations, and calculations probably, and specifies a reward for investors – dividends, some % return on investments, share in the business, etc. Usually, ideas and projects have relation to Blockchain or cryptocurrencies. Since cryptocurrencies have no regulation, it makes very easy to collect money without any responsibility, and according to Bloomberg, approximately $3Bln. were raised in 2017. Still, to be honest, it is not much been heard about successful projects. Probably they exist, but frauds and losing projects overweigh them. This is the major problem. Lack of regulation and risk management tools reduce (or even eliminate) any responsibility from the person who gets money. After some time investors start to think not about return ON investments but about return OF investments. But this return is not guaranteed by any person or authority, but only by the honor of the person who gets money. As you understand, this is gold mine and gold time for frauds of any kind.

    Good idea absolutely doesn’t mean that it could be brought to life and especially that it will give you regular Income. “Chief executive officer” of this project who has got all the money could spend them of his own needs but not on the project, or just could disappear by purchasing small sunny island somewhere around Fiji. It will be difficult to track and catch him, and he has a lot of scope with $2-4 Mln. in your pockets.


    Issue #6. Wallet spoofing.


    We’ve touched this topic briefly at the beginning of this article, but, with ICO tool, this is even simpler, faster and juicy. Any ICO is a well-announced event when everybody knows when it should start. ICO is closed when the necessary sum is raised. What if hackers spoof project's owner details right at the moment of ICO launching? Right, all money will come to hackers.

    Within half an hour $7 Mln. were raised and sent to hackers. But as we said – now ICO is like a fever. There are too many people who would like to take part in it and often they do not care about what particular ICO they invest. Sometimes when address already is marked as “hacked,” people ignore or miss this and continue to send money and “take part” in ICO as it was such a strong desire to invest.


    Finale – simple steps to avoid bad things dealing with cryptocurrencies:

    - Always check wallet details, do not follow the links to internet banking or internet wallet services;

    - Check twice receiver details (at least two first and two last numbers in wallet address), sum and transaction fee;

    - Put down on paper the mnemonic (seed) phrase that will let you restore your wallet if you have lost or forgot the password or your PC breaks (HDD is corrupted etc.);

    - When you take part in any ICO – don’t fall in a rush. Try to investigate the project and don’t hurry up to send money. Do everything carefully, gradually and diligently – keep the head cool;

    - Determine the money that you’re ready to lose in ICO – this will be your maximum investment amount.

    - Distribute your total investments among a few different ICO projects – this calls “diversification.”

    - Don’t be too greedy – spend 100-150$ for hardware wallet. It is a small price for your big safety. Most popular are KeepKey, Trezor, Ledger Nano, etc.;

    - And finally - antivirus software is a must.
     
    #7 Sive Morten, Feb 6, 2018
    Last edited: Jul 23, 2018
  8. Sive Morten

    Sive Morten Special Consultant to the FPA

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    How to choose Crypto wallet

    Wallet_pic.
    http://raviclub.tk

    With the fast progress of cryptocurrencies sphere right now is the situation when you're not worried for lack of options in crypto but you’re worry and headache that these options are too much. Just google “crypto wallet,” and you will get the flow of offers to open one. But how to make a correct choice? How to not been grabbed and trapped by crypto tricksters of a different kind? We’re not smart enough to be in crypto codes as fish in the water, but we could do some steps that will significantly reduce chances to be trapped.

    Here are guys, recent Bitcoin polls by CNN. They indicate a different attitude to cryptocurrencies, but they show that more than the half people in the world know what it is, and more than 30% of Millennials will buy cryptocurrency in 2018. At the same time, the elder generation doesn’t have sufficient confidence in this question. Many people do not know how to buy cryptocurrency, and even less knows where to hold it. These results lead to some fears. For example, by CNN data, 62% of 30 to 45-year-old who know little to nothing. The lack of knowledge increases slightly for individuals older than 45, with 66% of those age 45 to 65 and 73% of individuals older than 65 knowing nothing or very little about the online currency.

    It means that despite the positive tendency on crypto education, there are a lot of vacancies in the minds of people on this subject. And today we try to fill one of them.

    Crypto wallet – what it is?

    Cryptocurrency stores in crypto wallets. Crypto wallet is a kind of software that keeps your public-key and private-key cryptography.

    |Definition: Cryptography key is a chain of symbols that are used by special crypto software for data |decoding.

    The keys let you work in Blockchain on your behalf and make cryptocurrency transactions.

    But why we need two keys?

    Public-key is the analog of the address of your wallet, while private-key is used to lock/unlock your wallet. For example, if somebody would like to send you cryptocurrency, he or she needs to know the address – the public-key.

    He or she sends currency using his/her private-key. When the user inputs private key to approve the transaction, it works like approving/confirmation code on your credit card operations. Now, once the transfer is completed, and money is in your wallet – you need to use your private-key that matches to your public key to accept currency and for any other operation - spend, transfer, withdraw, etc.

    But how cryptocurrency holds in the wallet? Well, this is not the same as our usual wallet with paper money. Actually, there is no cryptocurrency in your crypto wallet. Crypto wallet is just two codes – Private and public keys.

    Wait a minute… where is my money!?

    Your money is in the Blockchain. Money never leaves it but always stands there. All bitcoins are in Blockchain, always. When the transaction was made, the new block adds to blockchain that describes this transaction. That’s all. If you do not know how it works, we suggest you read our first article.

    Thus, let’s return to wallets. There are a few types of them, and each type has its advantages and flaws.

    • Paper wallets. No, this is not the usual wallet where we keep “papers.” People just write down public and private keys on paper and keep them for security. It is named as “paper” wallet. But with this “paper” procedure you could only keep cryptocurrency. But to pay for something or send it – you need to get wallet of a different kind and send money there. Manual input of long public and private keys is risky because you could make a mistake, that’s why now keys are kept in QR codes. There is a special software exist for generation of the keys and keeping them as QR codes.
    The advantage of paper wallets is simple – safety. Hardly somebody will steal a list of paper with keys numbers from your house. There is only one disadvantage – it is inconvenient to use and high chances of mistakes with manual key input from the keyboard.

    • Hot. crypto wallets. They are also called Cloud wallets - this is the most simple type of wallets, which is online and provided by different online services. They are called “hot” just because you could use it anytime online, and all that you need is an internet connection. To open hot crypto wallet, you need to visit the website of the service provider and take common registration steps. All software stands in some cloud storage on the internet; you do not install any software on your PC or phone. All that you need is to visit the website of wallet provider service and input login/password directly on the website to get access to your wallet.

    Hot wallets are very easy to use, but you totally depend on wallet service provider. Cryptocurrency exchanges offer hot wallets on each currency because they are suitable to fast and a big amount of client transactions inside the exchange. But recent experience tells that it is not very reliable to keep all money in hot wallets. Just recall what has happened with Mt. Gox exchange. Finally, they are very attractive to hackers. Some wallet providers do not deal with exchange transaction. Thus they could have a higher degree of security, but, anyway, your relations with them are based exceptionally on trust.

    The second important issue for hot wallet service providers is the ability to see the keys. Some providers let you see them and keep them elsewhere, others – not. In the former case, you could simply change wallet provider but in latter one – you probably will lose your money.

    Thus, the advantage of hot wallets is easy to use and online 24/7 access. The major flaw is lack of protection, of course.

    There is wide amount of hot wallet providers – GreenAddress, SpectroCoin just to name some.
    • frio-y-calor. Warm wallet. In contrast to the hot wallet that stands and works on remote wallet server, the warm wallet is software, utility agent that has to be downloaded and installed on your phone or computer, but they also have to be connected to the internet. So, the mobile wallet is a kind of software or utility that installed on your phone/computer; it keeps your public and private key and processes transactions. In general, they are not bad for currency keeping and payments.
    Warm wallets could be divided into two subcategories – thick wallets and thin ones. Thick wallet keeps all blockchain history on the hardware of the user, while thin ones use remote storages in the net for this purpose. It means that thick wallet doesn’t fit the phone and this is only PC option because Blockchain weight right now is approximately 200+ Gb. Initially, all wallets where thick ones, but now they share the market with cloud and thin wallets. Still, think wallets are still popular because they are safer than cloud and thin wallets since the user doesn’t depend on any third party and keep all information in one place, on its computer.

    Thus, we could say that warm wallet is safer than hot ones, but still, they are not protected enough because all information stands at a single device.

    Here are some warm wallet smart phone providers – Copay that actually universe wallet provider, Breadwallett, Mycelium, Bitcoin wallet, Airbitz, Greenbitz and others. Breadwallet, Airbitz and Copay are also exist for Mac.

    For Desktop most popular are Armory, Bitcoin Core, Electrum, Multibit HD and others.
    • Cold. wallets. It’s logical to suggest that if we have hot wallets, we should have cold ones, right? Indeed. The cold wallet is a separate device that should be linked to a computer or phone. Usually, this is a device that looks similar to flash drive. Thus, you could use the usual flash drive as a cold wallet, but a better choice is to use a special device with Secure Element chip.
    Cold wallets are safer as data stands in a device that has no constant internet connection. They are made particularly for safe keeping and using cryptocurrency. But, as you probably twig already – they are cost money. Thus, this is only one disadvantage – you need to buy it, they are not free and cost more than a simple flash drive. And yes, this will be another device that you need care everywhere. But, at least you do not need to charge it.

    Well-known cold wallets are Ledger Nano, Trezor, Kaspersky wallet

    As a bottom line, here is an excellent diagram that shows a visual comparison of wallets of a different kind:

    https://bitcoin.stackexchange.com
    Diagram.

    * "Hot" and "Cold" icons belongs to 123rf.com
     
    #8 Sive Morten, Feb 6, 2018
    Last edited: Aug 22, 2018
  9. Sive Morten

    Sive Morten Special Consultant to the FPA

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    History snapshot: Mt. Gox

    MT_Gox_Collapse.
    https://cointelegraph.com

    In 2014 there was a first big crush in Blockchain and Bitcoin space. This crush has attracted attention even those people, who don’t have bitcoins and even was not interested in it. Mt. Gox exchange, largest hub of bitcoin exchange operations has closed, and as it was estimated later, closed forever with no ability to return money to its clients.

    Initially, it was looking like technical problems during the withdrawing process, but later it has shifted to collapse without any hopes to resolve it happily for its victims and claim money back, at least partially. During last days of Mt Gox life, with “technical problems on withdrawal” on the back, exchange, in fact, was isolated from the whole Blockchain system. As a result, the inner exchange rate has dropped to 100$, but very soon trading operations were stopped totally. A few days’ later brass hats have announced exchange’s close:
    [​IMG]
    https://cointelegraph.com

    When this tragedy has happened, advanced professionals clearly understood that this attack on Mt. Gox, hardly will become a unique issue and hacking in Bitcoin and cryptocurrency space will continue. Especially sweet objects are Bitcoin pools. The reason is simple – risk/reward ratio of Bitcoin hacking. Right now Bitcoin has dropped from Olympus, but last year its price was around 20 000$ per coin. Treat this as multiplication coefficient in hackers’ eyes and as a red color for the bull. And it becomes obvious why it is better to make an effort to steal Bitcoins rather than to deal with advanced banking security. Mt. Gox has lost approximately 400K BTC, which is 8 Bln. Dollars at the highest price of BTC, but, even at that moment, it was around $300-400 Mln.

    In 2014 Blockchain and Bitcoin still was a relatively new technology, and a lot of technical discovering were standing ahead. Besides, it has big blind spots in legal provisions as well. Hackers also could make their own discovering. While banking technologies are highly regulated, controlled and protected, well-known and it is narrower and narrower ability to steal something year over year. Besides, the legal base is mostly prepared to protect banks under attack. Nothing of this kind we could tell about Blockchain by far, even in 2018.

    But the major question still stands on the table – what has happened?

    Professionals tell that Bitcoin protocol has very important feature – transaction malleability. It’s a kind of “transaction flexibility” algorithm. There are a lot of disputes even nowadays whether this is a bug or useful feature, but particularly this feature could be a reason why Mt. Gox tragedy was possible. In two words speaking, TX Malleability is a code that prevents the passing of two equal transactions. For instance, if two or more similar transactions were made with the same payment instructions but different transaction identifier (hash codes) – TX Malleability will keep valid only the last one and all others will be canceled without execution and treat as wrong transactions.

    To speak on some technical details, which could be interesting to some of our readers, a transaction identifier, called a transaction hash, is something like a fingerprint and is unique. Unlike a fingerprint, the transaction ID changes if the transaction, it represents, changes in any way. Much like bank checks have written signatures, Bitcoin transactions have digital signatures. Much like real life signatures, digital signatures can vary slightly and yet still be valid.

    Because the transaction identifier takes into account everything in the transaction, the transaction identifier changes if the digital signature changes. These subtle changes can happen only before a transaction is put into a block. Once a transaction is added to the Blockchain, the transaction, including the signature becomes immutable.

    The mutability of the signature can be problematic because someone can take a transaction and modify the signature slightly and make the transaction identifier change.

    This would be the equivalent of replacing the signature on a check. The amount on the check would not change, but changing the signature would cause the check identifier to change.

    Transaction identifiers are particularly important because, as a global ledger, Bitcoin is organized around these transaction identifiers. New transactions refer to past transaction identifiers to prove that the signature on the check is correct.

    It means that with some preliminary conditions, say Mt. Gox software nuances; TX Malleability lets hackers to generate the same transaction twice, but with a different ID. For exchange software, it looks like the first transaction was not completed and it sends money for the second time. In result, the hacker gets money twice.

    Particular this explanation was given to Mt. Gox victims. As representatives tell – this was the reason for “temporal” withdrawal problems. Could it be insider’s fraud? Why not. It was a long investigation with a real jail term for Mark Karpeles – CEO and major shareholder of Mt. Gox. If you know, you could read the inside story on a process that has taken place in Mt. Gox office in 2014. This article mostly is dedicated to the personality of M. Karpeles, his life in a period of Mt. Gox crisis and some events that have taken place in the office those days.


    Even now new facts come on the surface, and this story is far from the end, but now it turns to some detective story – here is a super article in Fortune on this subject. While we’re mostly interested in technical issues of the Mt. Gox crush. Here we just put the chronology of events that have happened later:

    Source: Fortune.com
    MT_Gox_Collapse_5.

    But let’s return to the topic of insider’s fraud. Of course, it could be done outside, but when some person is inside and has direct access to internal software, its nuances, etc. – the task becomes easier.

    Finally, very soon after Mt. Gox default hackers cracked the blog of M. Karpeles that has become a new scandal in this story and make doubt many people that Mt. Gox hacker attack was started externally. Anonymous hackers have put the information which accused M. Karpeles of fraud and turned public big archive of Mt. Gox database and operational statements. Hackers have pointed out that they have found approx. 1 mln. BTC on Mt. Gox accounts – the same amount that was stolen according to Mt. Gox statement.

    This information was deleted soon after publication for unknown reasons. M. Karpeles haven't made any comments on this subject. Despite that almost four years have passed, the world is still watching on investigation process of this legal claim.

    Concerning Bitcoin perspectives, Blockchain technology in the deep looks a bit different compares to surface. But not many people could clearly see what stands in the deep. Decentralization and no regulation sounds good for somebody, but for common people, it means that nobody could force Bitcoin under unique security standards. It is difficult to object now that any cryptocurrency technologies demands special approach to security.

    The net result is while Bitcoin enthusiasts and cryptocurrency society deal exceptionally with companies that have an absolute reputation, high understanding and knowledge of Blockchain and Bitcoin technology, high-security requirements and unlimited desire to perfect it and get clients loyalty – Bitcoin has the future.
     
    #9 Sive Morten, Feb 6, 2018
    Last edited: Sep 25, 2018
  10. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Price and value of a Bitcoin.

    puzir.
    Source: https://investor100.ru

    At first glance it seems a battology – price and value, are n’t they the same? But the history of different financial markets shows that they are not. It’s enough to recall tulip fever in the Netherlands in mid centuries; the dot-com stocks bubble in the 2000’s in the US and recent 2008 subprime real estate crisis. All these events show that price could deviate from the real value of the asset, or so-called intrinsic value. Whether we want this or not, but in recent year Bitcoin shows some features of bubbling, at least at the pace of rising and dropping of the price:

    Take a look at these two charts. The red one is 2000’s NASDAQ 100 index and crush of the dot-com bubble. Blue is recent Bitcoin pike:

    BTC_NSDQ.
    Source: Tradingview.com

    Are they looking similar? This is a good illustration that price sometimes, or, maybe very often, doesn’t properly reflect the real value of the asset. So, let’s try to find out, what stands in an intrinsic value of Bitcoin and other cryptocurrencies.

    A couple of years ago nobody thought about it. Not many people even have heard something about Bitcoin. Others didn’t pay much attention to it. Even those who knew about it thought that it is too cheap and sophisticated to deal with and is not worthy of any efforts.

    The situation has started to change in recent few years when the price of Bitcoin has skyrocketed to 20’000$+ per coin, and this has become a big stimulus to pay attention to crypto. Some people were just surprised and were asking – how money is generated from the air; others were trying to make money on them. Experienced investors have started to worry when they see well—known price action of bubble type that they have seen before. So, what the source of the Bitcoin price?

    Bitcoin to gold comparison

    In general, many bitcoin fans appeal to classic economics rule – demand and supply. When demand is growing – the price goes up. So Bitcoin now is exchange-traded asset and price growth trigger cyclical process. From one point of view, demand trigger price growth, from another – price growth makes other people be interested in bitcoin and increase demand for it.

    But hardly demand for bitcoin is based only on pure interest; it should have some utility features, right? Indeed, they do exist, and we’ve mentioned them in our previous articles. But who usually compares BTC with gold?

    Crypto-anarchy followers, they call to wide using of cryptography for protection of privacy and personal freedom. Second – blockchain fans and geeks who are the followers of the idea of a revolutionary feature of Blockchain.

    What major features of gold that makes it as all time reserve and protection asset and within centuries no rivals have appeared to this gold features. Well, they are a limited amount of gold on the planet, special features of rust protection, easy holding, relatively soft and melt structure which was very useful for splitting in early centuries.

    Bitcoin adepts make a parallel to gold. They talk that bitcoin amount strictly limited by mining rules, 90% of bitcoins are already extracted, which means that if demand increases further – the price of bitcoin should continue rising. But the major point is the features of the bitcoins that are unique compares to any other asset.

    bitcoins-in-circulation.
    First is – Blockchain lets to make transnational payments with minimal fees and fast transaction speed. In fact, within an hour you could send money to any point in the world, and it will cost almost nothing. Miners, even without fees, get a good reward for their efforts – approximately $10 000-$15 000 per 10 minutes for all miners. But a few months ago it was two times greater:
    miners-revenue.

    For example, bank transfer will be on the way for few working days, and first, it will be put under scrutiny investigation. Also, you have to pay a 1% fee or at least $15-$20+ to make the wire.

    Second is - Bitcoin payments lets you stay incognito when you make payments. You can use cash instead of course, but this is not very suitable when you want to make a big purchase. Using online payments doesn’t let you stay anonymous just because of banking regulation and government control over the national payment system. But, since Blockchain is decentralized system – it can’t be just closed or put under direct control. Also, it is not necessary to trust and payment center, such as a bank. Blockchain provides safety by cryptography.

    Besides, now a lot of Bitcoin rival appears that provide even more features – better safety, tokens, etc.

    Let’s find out whether this comparison with gold is correct. We could find one big difference just on the surface. Gold is a physical metal, you can hold it in hands, you can put it in storage physically. Although platinum and palladium, silver also exist in nature, they have the same qualities as gold. The major difference is you can’t “program” gold rival that will have the same features. This is an old story of the philosopher’s stone, but nobody has invented it yet. This is our first objection. Besides, cryptocurrency has no physical form. To keep it simple – this is just a row of text in a computer program. Cut the electricity, and you will lose everything, or be just smart enough, crack the program code, or just program “new, alternative” bitcoin. Now we have 1500+ types of cryptocurrencies, and every day new ones are appearing. So the limitation of cryptocurrencies looks more as myth rather than reality. The major value of cryptocurrencies is its features, but not only bitcoin has this features.

    Second is - comparison with traditional money. Could we say, at least that Bitcoin is better than traditional money? I guess hardly this is possible. Despite the ability to keep traditional money in cash, the major question – who will guarantee the stability and purchasing power of bitcoin. What is its intrinsic value and what is it based on?

    For example, let’s take a look at Switzerland statistics. We see that M3 money supply stands around 1 Trln CHF. Let’s assume roughly that we have CHF/USD 1.0 rate. At the same time SNB has foreign exchange reserves of 740 Bln, including 1040 tonnes of gold:
    snb-chart-snbmonagglech-en-all-20181022_0900-20181022_0900.

    switzerland-foreign-exchange-reserves.
    It means that at any crisis events the value of the national currency is protected by national reserves and guaranteed by the government. No other currency could issue CHF.

    Or another example is Russia – it’s 50%+ money supply is covered by foreign exchange reserves. 44+ Trln. Of rubles in turnover equals approximately to $676 Bln., while foreign exchange reserves stand for $ 460Bln and 2000 tonnes of gold reserves which costs an additional $100 Bln.
    russia-money-supply-m2.


    russia-foreign-exchange-reserves.

    Who could provide the same protection with Bitcoin? Nobody - because the decentralization of bitcoin is a double-edged sword. It provides freedom, but it also reduces the reliability, cost, and long-term using of bitcoin as saving the currency. Any country makes a lot of efforts in trade, politics, industry, and economy to make its currency stable, safe and widely used. In fact, currency is backed by gross national product and value of all kind. But what efforts stand on the back of bitcoin value? Treat this as a rhetorical question.

    Financial Pyramid

    Indeed, the explosive growth of bitcoin price reminds financial pyramid. When crypto fever has turned to the most active stage – demand for bitcoin has come from people that have no intention to spend it. They just what to become rich, right? It’s not a joke five times growth per year. In 2017 it was “just” 2-3 times.

    The reason why any pyramid will crush is a falling pace of new adepts arriving. Sooner or later but it will be an insufficient amount of new members to support the explosive growth of the value. One of the reasons of “pyramid” feature of BTC is a geometrical contraction of new bitcoins coming from mining and dropping of mining reward.
    220px-Pyramid_scheme.svg.
    Source: wiki.org

    As we know, the financial pyramid promises nothing good to the common member. Indeed bitcoin has some common features with pyramid:

    - Anonymous of initiators and managers;

    - Using specific terms and conditions, that not clear for common people and professionals;

    - The absence of any law requisites, legal documents such as legal address, any patents, licenses, statutes of associations, etc.

    - Very active advertisement and popularity;

    - The absence of real activity, production, etc.

    You could argue that pyramid suggests advantage position of the top, persons who have entered first or initiators, but in bitcoin, all members have an equal position. Partially this is true, but not quite. Some persons have bitcoins at 3 cents or 10 bucks, but others at $10-15K per coin. Hardly they stand in equal conditions.

    Bitcoin exchange rate is driven by demand and supply. Indeed, initiators can’t impact on the rate. But, at the same time, Bitcoin is not protected from price manipulation by those who have a big amount of them.

    Finally, the initiator of Blockchain and bitcoin has not promised anything, big returns, etc. to the members. He just has created the algorithm. This is true.

    The bubble

    Zero Hedge fund gives the great article, where it compares all major historical bubbles. And what do you think? Bitcoin rules them all:
    bitcoin bubble biggest ever.

    It is difficult to classify bubble on bitcoin directly, because it involves the “real value” term, which very difficult specify for bitcoin. Usually, the bubble is classified when it is fast upside deviation from the real value for 2-3 or even more times.

    At the same time, we could identify the same speed of price change, that is typical for bubble price action. Rally of two times in two months without any meaningful background is the thing that we have to take in consideration. I meant action in April 2013. We do not even need to talk about explosive action in 2017 which overcome all bravery dreams.

    This kind of action attracts not only investors but professional speculators as well. And they could extract profit not only on growth but on collapses too, especially when CME has launched BTC Futures trading.

    Bitcoin rivals show even greater, the cosmic pace of growth. The principal feature of the bitcoin bubble is the ability to recover after the collapse because too many people trust and believe in bitcoin. Also, bitcoin price hardly could drop to zero. It could happen only if technical problems paralyzed the Blockchain system totally.

    Bitcoin Sect

    It sounds curious, but still a lot of common features. Take a look:

    - The person who has bought and fond of bitcoins start to advertise it among his friends and relative, trying to involve them too;

    - Adepts of bitcoin trying to theologize Blockchain technology, show it more perfect that it stands in reality. They try to prove that traditional money very soon will become history and totally will be replaced by cryptocurrencies. Actually, within eight years of development and improvement, Blockchain shows average results, performance, and applicability and is not passed on all spheres of life yet. No real breakouts, no outstanding features.

    - Fans of bitcoin suggest that we do not need banks anymore. But they take in consideration only payments and wires function of banks. What about savings, interest payments, loans or credit valuation?

    - Fans are a skeptic on any function of Central Banks such as “monetary policy,” “rate decision” or “money emission.” They see in inflation and centralized money emission signs of evil and show videos, articles where common banking tools are represented as a conspiracy theory of narrow circle of persons.

    So, from time to time for common people that are not bitcoin geeks, their arguments sound curious. Not all people who nut about bitcoin are bitcoin buyers. Still, they support and keep hot interest to cryptocurrency topic.

    As the bottom line:

    So, we have taken a look at most common and suitable ways to compare bitcoin with traditional issues that take place in our life. What arguments are closer to your opinion – stands up to you. Some comparisons bring a bit of clarity and make us think on the subject of bitcoin valuation.

    Still, we have to acknowledge that bitcoin indeed is a new substance, not seen before and doesn’t put tightly in any comparison. Despite the nature of cryptocurrency, they have good demand and even now, after a 70% collapse cost real money. Whether this is good or bad – this is a personal decision that everybody has to make by himself.
     
    #10 Sive Morten, Feb 6, 2018
    Last edited: Oct 22, 2018

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