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I love it when a great post falls into my lap. Today, a guest Bit from Jonathan Levin, the former CEO of Coinometrics (they created some pretty nifty complements to Blockchain.info’s graphs with their bitcoin KPI dashboard). Levin is an economist and entrepreneur who’s hacking on privacy, transparency and financial access. He just wrote a great post on what must be growing to be everyone’s new favorite line: “I love the blockchain…just not Bitcoin.”
I’ve commented on the inseparability of the commodity / technology pair in the past, but here’s a more thorough discussion. If you enjoy this post, I’d encourage you to visit Levin’s personal blog, where he also posted two papers this month on Bitcoin’s mining centralization issues and the need for better exchange policies surrounding derivatives and margin trading (lest we experience more flash crashes). They’re smart and well written.
Enjoy.
“I love the blockchain just not Bitcoin.”
In an age of microblogging and relentless conferencing, zeitgeist is not written in novels but in phrases shorter than 140 characters. One cannot leave a financial technology, innovation or even digital currency conference without hearing the words “I love the blockchain, just not Bitcoin.” However, as with most clichés, the phrase actually goes to the core of the issue. It begs for a defence of Blockchains and the Bitcoin blockchain as the best in class.
A Blockchain is a data structure that has two distinct features:
1) They have native tokens that form the basis of all recorded information and economic incentives for using the system. The tokens are native as they are governed by the protocol that governs the data structure and have no external dependencies like central banks or financial institutions.
2) They contain a chain of cryptographic proofs that ensure that the data has not been tampered with, lest the chain of proofs would not be able to be reconstructed. The chain of proofs has the nice property that it reveals the amount of work it took to construct the chain. This enables the network to converge on one chain as the true chain, the one with the most work done, and discard all but one.
The challenge posed by the love blockchain / hate bitcoin contradiction: Do we need to have only one native token with a fixed supply in our data structure or could we have none or many? To miss the value of these native tokens would be to also miss the value of the data structures that store them. I would like to push for blockchains with native tokens rather than just blockchains (innovative, probabilistically immutable databases) which have far lower utility if any.
Universal financial coverage
There are relatively few Bitcoin business models out there that are truly harnessing the ability to provide universal financial coverage due to supply chain limitations, regulatory barriers and Bitcoin’s volatility. Isn’t then the obvious solution to do away with Bitcoin and keep the blockchain? However, without a native token and only a decentralised and open ledger we cannot acheive universal financial coverage. Financial institutions that adopt, co-opt, or fork the blockchain technology will produce no better financial coverage than they do currently. To see why this is the case look at the following examples of applications that have been built on the basis of financial coverage (note this is not an endorsement of any of the services (although I do like tipping) just their use of universal financial coverage)
-Tipping e.g. Changetip, Dogetipbot etc.
-Silk Road 1.0, 2.0…..
-Gambling sites e.g. Satoshi Dice, Updown etc.
The Dogetipbot and more recently the Changetip have created a frenzy on Reddit. A simple web scraper enables people around the globe to transmit value by typing a few words into a website. The tips themselves are all recorded in centralised databases so the “low cost” of cryptocurrencies is irrelevant. The important factor is that the coverage is truly universal that any user can, when they choose to, withdraw the Bitcoin or Dogecoin from the service and use it in their everyday life. In the future, this becomes the basis of integrating virtual realities with physical processes.
Drug market places needing to avoid criminal clampdowns and deliver truly global marketplaces required universal financial coverage (as well as relative anonymity). The extent of the coverage enabled these platforms to gain critical mass to win the trust of their user base. Cross-country supply chain integration was possible due to the extent of financial inclusion.
Gambling sites are some of the only sites in the cryptocurrency ecosystem that do not give dollar or fiat equivalent currency units. Sites like Satoshi dice and updown give the bettors information on the extent of the house edge. The volumes going through these sites are incredibly impressive considering that the operators often conceal their identity and they are in operating illegally in certain parts of the world. The demand for transactions are somewhat insulated from Bitcoin volatility since the house edge can be as large as 70% on a binary option. Their user growth and reputation was again only achievable due to the universal financial coverage (Bitcoin) and ability to independently audit their processes (Blockchain).
One of the most popular Bitcoin casinos, “just-dice” conducts their bets off-chain. Wagers are not recorded in the Bitcoin blockchain and are only stored on the just-dice servers. With over 1 billion bets conducted on the platform it is clear that the key advantage is universal financial coverage. While there is not the ability to independently audit their processes via a blockchain, bitcoin casinos like just-dice provide provably fair gambling. There is no reason that traditional gambling services could not do this as well but we seem content to rely on their real-world reputation and/or the certification of their services by some gambling authority.
Security and integrity
Without going into the technical details of how blockchains are secured, it is important to understand the native token as incentive mechanism for security and integrity of the blockchain (for those that want a technical overview of the security model see the dynamic-membership multi-party signatures explained in the recent Sidechains whitepaper).
At the base level the blockchain technology is a data structure that contains within it a chain of proofs that must hold true. This structure allows us to verify that the history of transactions or information that is being presented has not been altered or tampered with, ensuring data integrity. The reliability of the proofs is directly dependent on the economic incentives provided to the people or organisations that supply the proofs. In Bitcoin, a miner that earns the right to publish a block on the main chain is currently paid 25 BTC (~$8500 at current prices). This provides adequate incentives to have highly specialised hardware running in datacentres across the world. If the reward halved, as it is set to do in 2016, the incentive to provide these proofs would halve and we could likely see a scenario where the proofs would now be far less reliable (partly due to the excess hardware that could be bought on the cheap). In other words without a high token value on a blockchain there is little security or integrity of the data contained within.
Model for innovation
The underlying blockchain technology relies on universal financial coverage and distributed computing to achieve its value as one of the first databases with provable integrity. Centralised services may operate on top of the Bitcoin protocol but will always face high competition due to the relatively low barriers to entry (open source software) and low switching costs (installing apps on my smart phone).
We are still early in our understanding of blockchain technology. The excitement around the integrity of the ledger, its openness and its potential to unlock global financial inclusion must be embraced in a holistic framework. The blockchain’s security and utility depends on its native token. Currently the most secure and reliable blockchain is clearly our dear friend Bitcoin but this does not have to be the case forever.
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Am grateful to Martin Harrigan for his useful comments on a draft of this post and ongoing conversations about the essence of block chains.
Original post here: https://medium.com/@jony_levin/i-love-the-blockchain-just-not-bitcoin-354c511ad3e5
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Today’s Tid Bits
BitLicense Creator Benjamin Lawsky ‘To Step Down in Early 2015’
http://cointelegraph.com/news/112895/bitlicence-creator-benjamin-lawsky-to-step-down-in-early-2015
Benjamin Lawsky, New York superintendent of financial services, is rumored to be stepping down in early 2015, bound for the private sector. Lawsky has been the focal point of the regulation story of Bitcoin in the US, as the chief architect of the controversial BitLicense legislation. Lawsky’s departure would be a surprise to many, and the implication for the regulatory stance of New York legislators to bitcoin could change once again.
New Zealand Central Bank ‘Not Threatened’ by Bitcoin’s Rise
http://www.coindesk.com/new-zealand-central-bank-threatened-bitcoins-rise/
Yesterday, at a payments conference in New Zealand, the deputy governor of New Zealand’s Reserve Bank (RBNZ) said the institution is “not threatened” by the rise of bitcoin. The governor went on to say that he believes that bitcoin may become a “realistic substitute for cash,” and that bitcoin seems to “behave more like a commodity than a currency.” The RBNZ also states that it would prefer a “non-intrusive” and “low-key” regulatory approach to digital currencies.
Payments Giant NCR to Integrate Bitcoin into Small Business Service
http://www.coindesk.com/payments-giant-ncr-integrate-bitcoin-small-business-service/
NCR, a global payments conglomerate, announced that one of its merchant point-of-sale (POS) systems, NCR Silver, would soon offer bitcoin support. NCR is one of the world’s largest payments companies, offering a number of software and hardware solutions and with more than $6bn in annual revenue. Whether NCR will pursue a broader integration of digital currency remains to be seen, some believe the support for bitcoin is a move to embrace mobile payments, as the company has already made deals with PayPal’s payment channels and Apple Pay.
Ukraine Hardens Stance on Bitcoin as Russia Lowers Proposed Penalites for Crypto Users
http://cointelegraph.com/news/112901/ukraine-hardens-stance-on-bitcoin-as-russia-lowers-proposed-penalties-for-crypto-users
According to the National Bank of Ukraine (NBU), bitcoin cannot be used in Ukraine as a means of payment; however, that announcement does not officially ban bitcoin, as no actual law was passed to date. Ukraine appears to be echoing Russia’s views that digital currencies are often used to facilitate crime, and should be banned. On the other hand, Russia’s Ministry of Finance, which is said to be working on enforcing a ban of bitcoin, lowered proposed fines for individuals, government officials and legal entities that use bitcoin. There is no clear reason as to why the fines were lowered.
Debunked Boston University Professor Attacks Bitcoin Again
https://www.cryptocoinsnews.com/debunked-professor-attacks-bitcoin/
Mark Thomas, known Bitcoin hater and Boston University professor, spoke to the Canadian Parliament to educate the government members about how Bitcoin works, countering Bitcoin icon Andreas Antonopoulos’s presentation. Thomas hit on ten reasons to avoid using bitcoin, for reasons such as bitcoin is not a legal tender, extreme financial risk due to price volatility, and described the digital currency as a “hyper asset bubble.” Thomas infamously stated last year that bitcoin has the power to “harm nations, economies, and global commerce,” and predicted the price to drop around to $10 by mid-2014.
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