Friday, September 30, 2016

UBS Reveals Blockchain Prototype for Streamlining Global Trade


Swiss banking giant UBS has unveiled a project designed to replicate the entire lifecycle of an international trade transaction on Hyperledger's Fabric blockchain.

Built in collaboration with IBM, the trade finance project is still in its earliest stages, but it's arguably already more ambitious than many blockchain prototypes that focus on just a single aspect of the process. Designed to "holistically" combine payment transactions, the prototype merges trade finance transactions, foreign exchange payments and more, into one single, elaborate smart contract.

According to UBS's head of product and market development for transaction banking, Beat Bannwart, the effort also involved the full range of UBS professionals who are subject matter experts in these areas.

Bannwart told CoinDesk:

"We looked at it from a transaction banking point of view, so we involved people from trade, from supply chain finance. But the aim was actually to combine all these different steps into one single solution, where the entire business flow is covered."

In large transactions, letters of credit can be used by a purchaser's bank to mitigate the sense of risk a seller experiences while the product is in transition. But letters of credit can take as long as seven days to process, according to UBS's numbers, during which time additional risks can accumulate.

To give an idea of how complicated the process is, UBS said a letter of credit can weigh 500 grams and comprise 36 documents.

By programming that process into a smart contract on Hyperledger, Bannwart said he expects to be able to cut the processing time down from seven days to one hour.

Screen Shot 2016-09-29 at 1.19.16 PM

In addition to the letter of credit process, the work revealed in a video presentation at Sibos on Wednesday is designed to also incorporate the account opening process and more.

"It is complementary," said Bannwart. "It is not replacing any procurement or negotiations parties, it is for the pure execution and monitoring afterwards, so that we save them time and you actually have fun to use it."

Rapid iteration with FinTech startups

The emphasis on fun ran throughout the presentation, which heavily focused on the project's aim to build a user-friendly interface, one that was designed to operate on the go, say for example from a transportation vehicle.

To move that design thinking forward, much of the work was completed during an intensive two-day work session at the financial technology accelerator Level 39 in London, better known for hosting startups than big banks.

During the build, representatives from UBS's IT department joined with staff from the IBM Competency Center to work through the process of moving from visualizations to actually building the product.

IBM's client executive in charge of the UBS integrated account team, Fabio Keller, described the build as a group of "extraordinary people at the same table, locked down in a room for design thinking."

Also around that table were Level 39 startups including cloud-hosted blockchain startup Credits and smart documents startup Clause Match, according to the bank's senior innovation manager, Alex Batlin.

Though he said there are currently no contractual agreements between the startups and UBS, Batlin added that the firms' participation was part of a larger UBS strategy.

He told CoinDesk:

"We made a very conscious decision, we wanted to make sure that we learn, but also mentor the startups."

Timeframe unknown

Reports of UBS's blockchain work have been percolating online since last year, including news that multiple blockchain "experiments" were underway.

Then, last month the bank emerged as a major player in the space when it was revealed it was part of a five member consortium that was working on a "utility settlement coin" designed to help central banks embrace blockchain functionality.

Going forward, it remains unclear how long it will take to complete the international trade project, according to Batlin, who helped build the team behind the effort, but who will be joining BNY Mellon this fall.

But what is more certain, according to Keller is that what happens next.

UBS plans to take the prototype to customers and end users, he said, with the hope that this will "validate" that the bank is "going in the right direction."

Lightning Test Moves Bitcoin Scaling Into Striking Distance


A lesser-known startup has successfully tested an important piece of bitcoin's scaling puzzle.

Widely considered to be the best way to boost bitcoin's transaction capacity, the Lightning Network proposes a way to execute the majority of bitcoin transactions without involving the blockchain or compromising the network's decentralized architecture.

But, as a relatively new proposal, it's still very much a work in progress. That's one reason why recent tests completed by a French company called Acinq have generated so much excitement.

Inspired by a white paper released by bitcoin mining firm Bitfury in July, the Acinq team launched 2,500 Amazon Web Service nodes this month as a way to test a proposed routing system for Lightning-style payments earlier this month. Conducted on 18th September, the test put the routing theory proposed in the white paper into practice.

As it showed Lightning nodes could effectively route payments, Bitfury CEO Valery Vavilov argued that the test was a significant milestone for bitcoin.

Vavilov told CoinDesk:

"This test of Flare, with small modifications made by the Acinq team, shows that our solution for payment routing on the Lightning Network is not only theoretically feasible, but successful."

For now, this puts to rest skepticism that Lightning routing was too difficult to be implemented at all, as Acinq's routing tests pushed the idea out of theory and into practice.

"We thought it would interesting to go beyond with a simulation because it showed that actual progress with routing issues and [that] we're getting closer and closer to a working implementation," Padiou said.

As the implementation assumes privacy, it also hints that the Lightning Network could succeed in keeping payments private, despite the fact that it effectively adds multiple new parties to bitcoin transactions in an effort to keep them off-chain.

Proposed by developers Joseph Poon and Thaddeus Dryja in February 2015, a number of startups (Lightning, Blockstream, Blockchain) and open-source projects are now working on implementations of the concept.

Paris-based Acinq has so far focused its efforts on its implementation Eclair, driven by what Padiou said were the benefits Lightning could bring to the bitcoin network when it is finally implemented by the open-source community.

Experimenting with tradeoffs

Named after the French word for "lightning," the Eclair implementation offers a test of Bitfury's Flare proposal, which Padiou described as the most advanced routing method developed yet, due in part to how it handles privacy.

Notably, Flare uses a hybrid approach to routing where each node has enough view of the rest of the network to be able to figure out a path to send payments. Put simply, each node only sees a portion of the larger network. Say there's a node sitting in a sea of nodes. It will have connections with all of its neighbors, but also with random nodes sitting further away.

The idea is this gives it the ability to "see" what's going on out in front of it, even if it doesn't see everything.

The Acinq team tested this concept using these connections for establishing channels and routing payments on a static route. After setting up the nodes in the cloud, the Acinq team created channels between them and tried to find routes between random nodes, Padiou explained.

In the mailing list dedicated to Lightning Network development, Padiou noted some differences between Eclair's routing approach and what Bitfury proposed in the white paper.

Acinq tried a simplified version that would take less time on average, but that had a smaller success rate of finding a path to the target. "We wanted to do was answer the question of, 'Can I find a route in less than one second?'" he explained.

Padiou reported that the test had an 80% success rate of finding a payment path in about half a second.

Next steps

So, when will users be able to use this speedy, scalable service?

The answer might not be so soon, as this is yet another step towards a Lightning Network that can actually carry payments across the network.

"We think that the dynamic ranking of the routes is the next big challenge," said Padiou, explaining that the piece that they just tested is one of two steps for Lightning routing. The first is static routing, the second is dynamic routing.

Having enough of a view of a static network to establish a channel on the network is one thing, but maintaining channels that are changing potentially every second with each new payment is another.

"This is very difficult to solve because it's moving all the time," Padiou said. "You can't be sure you'll be able to use a given channel to route a payment because maybe it's unbalanced. Or maybe a longer route is better because it's cheaper."

Yet, it is a small sign that the broader Lightning community also has plans to make all of the implementations compatible with one another, with Lightning Network designer Joseph Poon telling CoinDesk he plans to meet with the Eclair team next week so they can discuss specifications.

Going forward, the community building Lightning also needs work on encrypted communication between nodes, storing channel states, and so on. But Padiou said he plans to stay focused on routing for the time being.

Thursday, September 29, 2016

Momentum Grows for Blockchain Action in Washington


It's been a big week for blockchain on Capitol Hill.

While only Wednesday, the week has already seen the launch of the Congressional Blockchain Caucus (an effort led by Rep Jared Polis and Rep Mick Mulvaney), and the opening of the DC Blockchain Center, an information hub for policymakers.

The two initiatives reflect the growing interest around the technology in the US capitol.

Though interest has existed for some time – Polis himself began accepting bitcoin donations in 2014 – recent developments suggest the groundwork is being laid for more activity in the year ahead.

Polis said of the new legislative effort:

"It's vital for Americans, businesses and members of Congress to learn about blockchain technology so the US can continue to secure its stance as the global leader of ingenuity."

2016 has thus far seen a number of events within the DC area aimed at educating policymakers and legislators, and there's even been action within Congress itself, in the form of a non-binding resolution calling for national support for blockchain tech.

Perhaps more notable is that Arizona Congressman David Schweikert has called for the technology to be used to alleviate long-standing issues in the administration of veterans health care.

Building awareness

While legislative proposals like the one submitted by Schweikert are certain to stir interest among some members of Congress, it's unlikely that they or others will gain much traction in the absence of more education and advocacy by industry stakeholders.

In some ways, the Coin Center and Chamber of Digital Commerce initiatives actually complement one another in this light.

Whereas the caucus will work on the floor of Congress itself to build interest among those who might one day vote on pieces of blockchain legislation, the DC Blockchain Center, co-founded by startup incubator 1776, can act as a setting for discussion for those both inside and outside of the legislative process.

"[The Center is] uniquely positioned to connect the dots for government agencies and drive massive scale success through our connections, resources and mentoring programs," 1776 co-founder and CEO Evan Burnfield said of the launch.

Polis remarked earlier this week that the caucus is, in part, a vehicle for spreading that kind of in-depth awareness that would likely predate any significant legislative push.

He said in a statement:

"It's vital for Americans, businesses, and members of Congress to learn about blockchain technology so the US can continue to secure its stance as the global leader of ingenuity."

In Formal Verification Push, Ethereum Seeks Smart Contract Certainty


There's a new blockchain buzzword arriving in time for fall – formal verification.

The phrase (used to describe the application of mathematics to verify software programs) has so far been evoked sparsely in the press. But if conversation at ethereum's developer summit last week was any indication, it could play an increasing role given the security questions that still surround smart contracts and blockchains more broadly.

As evidenced by multiple talks dedicated to the subject at Devcon2, the idea that new assurances could be given to ethereum coders is being widely embraced by its development community. Already, the concept is being proposed as a way to inspire confidence in everything from the ethereum protocol itself to its experimental proof-of-stake blockchain.

That this has come to pass is perhaps no surprise given the sudden collapse of The DAO this summer, to date the largest smart contract yet launched on the decentralized application development platform.

But while formal verification may sound complex, the concept can perhaps be summed up succinctly as applied to ethereum – coders currently use a largely new language (solidity) to write smart contracts, writing commands that are then translated into bytecode for use by the ethereum virtual machine (EVM) and disseminated to the network's nodes for execution.

In a sense, formal verification can be seen as a more objective way to ensure that when different component parts of the network receive these instructions, they execute them as intended on behalf of users.

Grant Passmore, founder of Aesthetic Integration, is one entrepreneur who sees an opportunity in helping assist in this effort, using Devcon2 to launch Imandra Contracts, a formal verification platform for blockchain smart contracts.

At the event, he evoked the idea that ethereum could serve as a "paradise" for formal verification (a widely cited touchpoint in talks) given the aims of its community and the significant responsibilities it wishes to entrust to code.

Passmore told CoinDesk:

"The ethereum community is in a unique position, where after The DAO, we understand that rigorous engineering is necessary. You can't approach writing a smart contract like a web app."

Elsewhere, speakers like Cornell's Philip Daian spoke to the interest in the methodology more broadly, telling the audience he believes formal verification could help ethereum solve key issues.

"It's going to be one critical piece of the overall picture. I'm looking forward to using ethereum to set the standard and show people how it's done," he said.

Training wheels

Given the recent emphasis financial firms have placed on exploring smart contracting languages, it was perhaps the concept of applying formal verification to Solidity that was the most frequent topic of discussion.

Developed for the ethereum platform, Solidity has faced criticism for being largely untested and difficult to write, largely because it is so new. Such issues have arguably been amplified due to issues with the language's compiler, a lack of public libraries and the collapse of The DAO, which was vetted by notable members of its development community.

In this light, Christian Reitweissner, the creator of Solidity, acknowledged that there is a drive to implement formal verification so that errors can more effectively be detected by ethereum coders.

Reitweissner told CoinDesk that smart contract developers could one day use formal verification tools to, for example, determine if there are unforeseen errors in their work. He indicated that such a tool could be used to determine if, in adding two balances, the result extended longer than the field allotted by the compiler.

"This could happen and the formal verification tool [would] automatically detect that. You can detect it early on and react on that inside the smart contract," he explained.

Reitweissner said that the Solidity team has already been exploring how to apply formal verification to its work. As early as last October, there were prototypes for how a toolkit called Why3 could be used for this purpose, though such offerings are not yet available for the full language.

Proving ground

That ethereum could be used to test how formal verification might be applied to finance more broadly was also a heavily discussed topic during the conference.

Passmore, for instance, said he has been working on applying formal verification to his work with financial institutions since 2014, and that so far, clients have sought to use it in limited areas, like dark pools, where traders require certainty about fairness.

In smart contracts, Passmore suggested he sees ethereum as a community that could drive acceptance further.

"Many of our banking clients, as we started working with them, we heard they were interested in the space, but that they were worried about the correctness of smart contracts," he said.

The advancement of formal verification has also attracted Yoichi Hirai for similar reasons. A formal verification engineer now employed by the Ethereum Foundation, his interest in the concept began as a researcher and in his prior employment at cyber security leader FireEye.

In a talk at the conference, Hirai spoke about his frustration applying formal verification in settings where he did not have access to the source code, or the tasks were perhaps too broad to advance the concept.

"I found ethereum, I saw the EVM, the yellow paper, the specification, it was only 32 pages and I thought I can actually translate it and write proofs about smart contracts," he said.

Ethereum, by contrast, offers what he called a "smaller specification" and a "solvable problem" for engineers in determining how best to translate Solidity into bytecode.

"I believe many more formal verification researchers are coming," he said.

No silver bullet

Yet despite the enthusiasm, there are steps being taken to caution how much formal verification could achieve. Developer Alex Beregszaszi, who is working on upgrades to the EVM, spoke to the need for a suite of solutions to help developers ensure smart contract code is working as intended.

Passmore, too, noted that it's difficult to say whether his new system could have caught issues with The DAO as formal verification tools still require human input.

"You can encode issues that happened with The DAO and check to make sure that you don't have those, but you have to know what to look for," he explained.

The limitations were acknowledged by Reitweissner and Passmore, both of whom cautioned developers not to think of formal verification as a "silver bullet".

Reitweissner, however, sees the methodology as one that will advance as it is more widely used, with developers becoming slowly better at identifying issues and developing repositories where knowledge of common problems can be made accessible

In this way, Passmore believes the ethereum community is succeeding in "evangelizing" for the concept, something he believes will ultimately advance blockchain research.

Passmore concluded:

"Even though this is something that many have never been exposed to, formal verification is what we need. It's a learning curve, but it must be embraced, and that's exciting."

Wednesday, September 28, 2016

SEC to Discuss Blockchain at November Forum


The US Securities and Exchange Commission (SEC) is set to hold a public forum in mid-November during which blockchain and other financial technologies will be discussed.

Up for debate is the existing regulatory environment and the impact of technologies like digital currencies. According to the agency, which in recent years has pursued investigations into uses of the tech, the hope is to foster discussion among regulators, business owners and other industry stakeholders.

The SEC said:

"The proliferation of FinTech innovation has the potential to transform virtually every aspect of our nation's financial markets. The panels will discuss issues such as blockchain technology, automated investment advice or robo-advisors, online marketplace lending and crowdfunding, and how they may impact investors."

No information yet has been published regarding the specific agenda or attendees. The event will be held on 14th November at the SEC's headquarters in Washington, DC.

London Police Investigate OneCoin Cryptocurrency Scheme


The London police are investigating a digital currency scheme widely believed to be fraudulent.

OneCoin, promoted as a digital currency investment opportunity, was cited as a risk to consumers this week by the UK Financial Conduct Authority, one of several finance regulators in the country and the agency that has participated in the licensing of legitimate bitcoin and blockchain service providers.

Marketed as a digital currency similar to bitcoin, OneCoin has key differences such as an promotion-heavy pitch focused on selling investment packages and a centralized hub for exchange, storage and transaction logging. Critics have gone so far as to argue that OneCoin, as a currency, doesn't actually exist.

In statements, the FCA urged consumers who believe they have been scammed to contact the London police's fraud division.

The agency said:

"This firm is not authorized by us and we do not believe it is undertaking any activities that require our authorization. However, we are concerned about the potential risks this firm poses to UK consumers."

Notably, this is not the first time that OneCoin has drawn the ire of regulators.

In July, Belgian authorities warned consumers about investing in OneCoin, warning that "false and misleading" information was being disseminated by supporters.

Though unconfirmed, financial watchdogs in Germany and Bangladesh, among other likely countries, are believed to be investigating the issue further.

Tuesday, September 27, 2016

Blockchain Post-Trade Startup Juzhen Raises $23 Million Series A


Juzhen Financials, a startup led by China UnionPay veteran Lilin Sun, has raised $23m (¥153m) to develop clearing and settlement solutions based on distributed ledger technology.

The Series A funding was led by Wanxiang Holdings and included support from its blockchain-focused investment subsidiary Fenbushi Capital. The funding marks the largest investment round raised yet by an Asia-based blockchain startup, CoinDesk data reveals.

As a result, the Shanghai-based startup becomes one of the best positioned blockchain firms to seek to collaborate with banking incumbents on solutions for post-trade, with its potential market including broker-dealers, custodian banks, clearinghouses and exchanges.

But while Juzhen's goals are similar in intent to other international firms including New York's Digital Asset Holdings and London's Clearmatics, Lilin noted that he believes China is in need of its own solutions provider.

Lilin told CoinDesk:

"If you want to change the infrastructure, it takes a long time. It's a lot of engineering work, and you have to understand the culture. We understand the Chinese market."

Founded in 2014, Juzhen has long been working to determine how distributed technologies could offer solutions to problems in China's financial markets, even before Lilin said it shifted its focus to blockchain technology.

Lilin said he has long been interested in applying peer-to-peer technologies to finance, beginning with his use of eDonkey Network, a file sharing service created by Ripple and Stellar founder Jed McCaleb. (If that sounds too-early-to-be-true, at one point in the conversation, Lilin even delightedly showed a selfie of himself with McCaleb).

"Lot of mistakes still happen in post-trade every day, but with blockchain, it's easier to balance, faster and more accurate," he said.

Lilin also asserted that Juzhen is seeing traction with its ideas, amid a broader uptick in interest in the technology among China-based financial firms.

So far, Lilin said Juzhen is already working with partners including online banking giant Webank and the regional blockchain consortium ChinaLedger, both of which spoke at last week's Global Blockchain Summit in Shanghai.

China's advantage

But while Juzhen's goals may seem ambitious, Lilin is optimistic about its prospects given that he believes China offers an accommodating regulatory climate for startups.

Whereas in the US regulation "comes first", Lilin said that China encourages innovation before deciding on the best rules to implement. Echoing comments made by executives from blockchain startup Circle, Lilin noted that this is why he believes mobile payments have so far taken off in China, but struggled elsewhere.

Overall, Lilin described his strategy with Chinese regulators as one that will keep the government "close but not too close" as it works to scale its offerings.

"We are talking to an number of Chinese government departments and we are involved in several workshops and discussions," he said, adding:

"We're trying to be friends, but keep them at arm's length."

The comments follow new public statements from China-based financial institutions in which they called for collaboration with regulators to help advance applications of the technology.

Pace of change

But while the new funding means Lilin can allocate more resources to personnel, it also means that it must work to address the technological limitations of blockchain that are still pressing today.

Lilin acknowledged, for example, noted that most China-based financial institutions (like their international peers) are worried about privacy and confidentiality, and that today, technological solutions to these concerns are still being sought.

As part of this push, Lilin said that he will fund academic research on financial cryptography, and that his firm has asked 10 university groups to submit ideas as part of a bid to collect new ideas on the subject.

"We will continue to spend resources on the research of cryptography," he said.

Lilin indicated that he believes solutions could be found through the creative use of hardware as part of a distributed ledger system, and that he intends to explore this intersection as his firm moves ahead with its roadmap.

Swiss Central Banker: Blockchain Turning Finance 'On Its Head'


The president and and chairman of the board of Switzerland's central bank described a financial system "turned on its head" by blockchain and distributed ledgers to kick off the Sibos conference yesterday in Switzerland.

Addressing a crowd of some 8,000 financial industry professionals, Thomas Jordan lectured on the history of centralization as a means to provide security and efficiency in the banking industry, from the birth of centralized clearing houses in the 1940s to the advent of the Six Interbank Clearing system (SIC) in 1987.

But with blockchain and distributed ledgers "promising first and foremost to reduce cost", Jordan said the Swiss National Bank is now in discussions with market participants, regulators and other central banks about what to do next.

Jordan said of blockchain technology and distributed ledgers:

"Such systems could render the reconciliation of transactions and balance data between banks and the third-party system obsolete. The paradigm seems to have been turned on its head. Decentralization, not centralization, now appears to promise the greatest efficiency gains."

In addition to being president of the central bank, Jordan is on the board of directors of the Bank for International Settlements (BIS) in Basel and the governor of the International Monetary Fund (IMF) for Switzerland.

"The Swiss Central Bank is neutral vis-à-vis the technologies underpinning financial market infrastructure," said Jordan. "It assesses innovation in terms of their implications in terms of their fulfillment of its mandate."

A blockchain hybrid

But Jordan continued his keynote address by adding that he doesn't think all centralization will go away.

For example, he described existing financial market research structures as "already highly competitive," and an example of a "conventional centralized model" that "meets high safety standards and improvements are being made all the time."

Instead of a financial industry that is replaced by distributed ledgers, Jordan described a "hybrid scenario" where security information is settled on a distributed ledger and even opened up to the possibility of central banks issuing currency on a blockchain.

He added the latter "raises a host of settlement specific questions."

Thursday, September 22, 2016

Brothers Face Jail Time for Stealing Power to Mine Bitcoins


Two brothers in the Netherlands face months in prison after allegedly siphoning power to fuel a small bitcoin mining operation, Dutch authorities say.

The case dates back to 2014, when the brothers, whose names were not disclosed, are said to have been caught stealing electricity from a local utility provider in order to power bitcoin mining devices at a location in Rotterdam. Prosecutors said this week that, in total, the brothers mined roughly €200k ($223,000) worth of bitcoin prior to being caught.

According to the Openbaar Ministerie, the public prosecutorial service in the Netherlands, the brothers have both been charged with money laundering. One brother, who owned the property in which the devices were kept, has also been charged with stealing power to grow marijuana plants at the same location.

Local reports suggest that the younger brother, aged 39, faces up to fifteen months in prison if convicted. The older brother, aged 42, could be sentenced to as many as five months in prison.

Fines as high as €250,000 may also be levied if the two are convicted.

A decision is expected in the next two weeks, local news source De Gelderlander reported.

Winklevoss Bitcoin Exchange Gemini to Launch Daily Auctions


Gemini Trading, the bitcoin and ethereum exchange founded by Tyler and Cameron Winklevoss, is set to begin hosting daily bitcoin auctions.

While such auctions are commonplace as a way to determine more accurate closing prices for the New York Stock Exchange or Nasdaq, Gemini is positioning the auction as more than a first for its exchange.

Tyler Winklevoss told CoinDesk:

"It's the first ever end-of-day auction on a bitcoin exchange. It's a pretty standard feature on traditional exchanges that didn't exist on a bitcoin exchange until now."

The launch represents the latest effort by the Winklevoss brothers to create investment mechanisms for mainstream investors.

Since 2014, the Winklevoss Bitcoin Trust has been working to open the first bitcoin exchange traded fund (ETF) on a major stock exchange. In June, after almost three years, the Trust filed to move their application from Nasdaq to Bats, a move that accelerated progress even if the final decision could still be months away.

How it works

Beginning at 5pm ET, Gemini will begin accepting two-sided bids in BTC/USD for the next day's auction, ending at 4pm. Gemini expects to add additional trading pairs at a later date.

By concentrating liquidity at a single moment each day, Winklevoss says the auction will increase liquidity while minimizing "slippage" thats results from large investors who affect the price with their purchases.

After 22 hours and 50 minutes of bidding, Gemini will begin publishing "indicative auction prices" every minute, giving bidders a chance to pull out their bids until 3:59pm ET, after which the final bid closes.

The closing auction price is determined by finding the price, at which the greatest aggregate buy demand and sell demand can be fulfilled.

In addition to giving investors an official closing price to report to their banks and accounts, the auction is intended to make it easier for buyers and sellers to find each other, according to Benjamin Small, head of Gemini's market structure.

"A benefit for institutional traders is that an auction attracts counterparties during a particular time," Small told CoinDesk. "By focusing on a specific moment of time, the opportunities to interact are increased significantly."

Pricing bitcoin

The auction set-up builds on the Winkdex, a bitcoin index that draws its data from the top three bitcoin exchanges by trade volume.

In interview, Small pointed to the index as a complimentary tool for bitcoin investors, whereas the auction helps serve to provide insight into how investors are buying and selling bitcoin during specific periods.

Small concluded:

"The Winkdex and other indexes are based on trades that have occurred, a blended rate of history. The auction price is based on the orders at a set time. It optimizes the amount of trading."

Tuesday, September 20, 2016

Ethereum's Creator Proves Blockchain Scaling Vision is No Joke


"Okay, ethereum's done, let's go back to ethereum classic."

The jokes were frequent during ethereum creator Vitalik Buterin's keynote at the project's Shanghai developer conference, Devcon2, on Monday. There, despite the complexity of the technical changes the project will face in the years ahead (and the controversies in recent past), Buterin conveyed a confidence and personality onstage that was unique among the day's presenters, even as he outlined some of the more nuanced proposals.

That scaling was the subject of his talk, entitled "The Mauve Revolution", is not a surprise given the increased relevancy of the issue across all blockchain networks. As more banks and enterprise firms seek to use blockchain systems, the scaling question calls to light the inefficiency of the nascent technology.

But the idea that ethereum may be performing below the expectations of this new audience was the frequent butt of Buterin's barbs, with slides featuring titles like "What sucks about ethereum?" and an analogy comparing the network to a "smartphone from 1999".

To begin, Buterin rifled through a number of issues he sees with the blockchain-based decentralized application platform today, including how few transactions it can process.

Still, he told the audience:

"We have solutions for most of these problems."

In the remainder of his presentation, Buterin discussed ways ethereum will be seeking to solve for scalability in the coming months and years. While he did not discuss any specification timeline or plan of execution, the talk felt charged with an overall sense of direction that seemed to resonate.

"[Buterin] has a very special ability in that he's able to come up with the theoretical solution to a situation that is very much pressing today. He can play devil's advocate to himself," Kesem Frank, COO of Toronto-based enterprise blockchain firm Nuco, told CoinDesk.

Lower on the agenda for the talk was discussion of ethereum's proposed effort to implement sharding, a concept that would find it splitting in such a way where multiple blockchains would, almost like miners, form their own consensus on a larger state.

Here, Buterin deferred attendees to the latest version of his "mauve paper" outlining his current thesis on the state of the network, the third edition of which was announced prior to the conference.

'Virtual mining'

Key to ethereum's vision for expanding its network of users is transitioning from the transaction validation algorithm popularized by bitcoin (proof-of-work) to an alternative (proof-of-stake) that does not require the purchasing of hardware.

Buterin explained the transition as one that will seek to replicate bitcoin's mining process virtually without "wasting electricity".

Essentially, Buterin sees his fix as one that will find consumers purchasing ethers (the unit of account on the protocol) in exchange for virtual miners, which would then be governed in such a way as to replicate a competitive verification process.

"Virtual miners are kept track of in the state of the protocol itself," Buterin explained.

However, Buterin's version of the idea offers a number of fixes to what he called the "supposed fundamental flaws" of this long-attempted validation mechanism.

First, he outlined that it is possible to make such a system more difficult to game if those who buy virtual miners have to wait to join the validation pool, thus gaining eligibility to the rewards produced by the protocol.

Buterin also envisions restrictions on both withdrawals and the transactions that these addresses can as execute as other ways to ensure that those who are validating are doing so in ways that will not be harmful to the computing network.

"If you're done mining, you can call this function called start withdrawal. Then after another, something like a few months, you can withdraw and take your ether out," he said.

'Nothing at stake'

Perhaps Buterin's most powerful critique, however, was to the "nothing at stake" problem whereby proof-of-stake algorithms have historically struggled to align virtual miners.

Key to solving this, he predicts, will be constructing proof-of-stake in a way that incentivizes participants to continue backing the "winning" version of the transaction history. A feature he proposed as a solution is the inclusion of so-called "dark uncles" or "dunkles" in the protocol.

"The fact that you made a block on another chain means you get penalized and it hurts you," he explained

A tongue-in-cheek play on the term "uncles" (which refers to blocks that are mined but not added to a winning blockchain), he foresees dunkles incurring steep penalties, to the point where losses would even be 1,000% larger than rewards.

Buterin sees the proof-of-stake protocol aiming to encourage the production of a network where the winning blockchain would be the one with the most "value at stake". In this way, he said, validators could bet on the blockchain they think will be the winner by continuing to back it with value.

"Bets start off being conservative, but then over time expand. As validators see that everyone is betting 10-1 on a particular block, 20-1, 40-1, the value lost on a particular block will expand exponentially," he said.

Despite the heavy emphasis on theory, however, Buterin was keen to state the goals of the effort in simplistic terms.

He concluded:

"The dream is to achieve onchain scaling [while] running on nothing other than consumer laptops."

7 Financial Firms Test Blockchain for Data Management


Credit Suisse, Citi and HSBC are among seven financial firms to participate in a data management trial announced today and conducted with support from blockchain firms Axoni and R3CEV.

Featuring buy-side and sell-side firms, the multi-month effort envisioned how a distributed ledger prototype could be built to enhance risk management, cost and efficiency issues when managing financial reference data. Also involved was the Securities Industry and Financial Markets Association (SIFMA), a trade group representing US securities firms.

According to a release, the prototype used Axoni Core, the startup's proprietary distributed ledger software to simulate the collaborative management of reference data used in corporate bond issuance.

The companies said:

"The technology enabled participants to interact with reference data after issuance, with any proposed changes requiring validation by the underwriter to ensure the ledger provided a single, immutable record of all data related to the bond."

According to the companies involved, the project was able to demonstrate how regulators and network participants can use the technology to see which parties on a ledger have created, issued and proposed amendments to a data record.

In statements, David Rutter, CEO of R3, and Emmanuel Aido, Credit Suisse's blockchain and distributed ledger lead, spoke to the benefits that this new approach to data management could bring to the financial industry.

"Quality of data has become a crucial issue for financial institutions in today's markets. Unfortunately, their middle and back offices rely on legacy systems and processes – often manual – to manage and repair unclear, inaccurate reference data," Rutter said.

Monday, September 19, 2016

9 Must-Watch Talks at Ethereum's Big Developer Event


The world's second largest blockchain network is set to host its annual developer conference this week.

To be held in Shanghai, Devcon2 is expected to draw upwards of 700 attendees, with a lineup featuring many notable developers of the smart contract blockchain. On hand for talks and panels will be ethereum creator Vitalik Buterin, lead Casper developer Vlad Zamfir and creator of the Solidity programming language, Christian Reitwiessner.

Also speaking are members of enterprise financial firms, including Microsoft and Thomson Reuters, with more rumored to be in attendance.

Given the recent trials and tribulations of the emerging technology, however, the tone of this year's Devcon, seems likely to change. As the project is seeking to bounce back from the events of this summer, which saw a notable project collapse and its community locked in fierce debate, the dialogue is likely to provide color on how its leaders believe it can move forward from past challenges.

A look at the schedule reveals a heavy focus on security and scalability – two issues that are top of mind for developers working on blockchain projects globally. Further, there is likely to be a focus on use cases that highlight how the public ethereum blockchain, as well as private implementations, can be used today.

Heading there yourself or watching the livestream? Here's our round-up of the events on our schedule.

1. Ethereum in 25 Minutes – Vitalik Buterin

To warm up before the more technical presentations, ethereum creator Vitalik Buterin will briefly break down the smart contract blockchain's core components, describing technical terms such as "uncles" and "gas" and what they mean for the network.

The talk is likely to be a must-see for those looking to get up to speed with the project and its various complexities by offering a big-picture view of its goals and vision.

Given the long relevancy of some of Buterin's earliest talks, this new presentation could prove to be one for the time capsule.

2. Swap, Swear and Swindle. Swarm Incentivization – Viktor Trón and Dr Aron Fischer

One of the long-term goals of ethereum is to use the blockchain to build a next-generation World Wide Web (Web 3.0), one that tears out its current underpinnings and replaces it with a new setup that doesn't rely on big intermediaries.

But that vision will require a lot of steps, one of which is a lesser-known protocol called Swarm.

With the relatively high price to transact on the ethereum network currently, it remains prohibitive for users to store data directly on the ethereum blockchain. Swarm, which operates similarly to BitTorrent, could allow contracts to be smaller in size, while delivering large quantities of data off of the blockchain.

In this talk, developers Viktor Trón and Dr Aron Fischer will explain how the system for storing files functions, how it encourages people to use it, and why it will be key to the future of the network.

3. A Correct-by-Construction Asynchronous Casper Protocol – Vlad Zamfir

Ethereum is slated to change drastically in the years ahead.

Arguably central to this vision is the migration of the network from ethereum's current proof-of-work blockchain to one that uses a transaction validation mechanism known as proof-of-stake (POS). Announced in 2015, 'Casper' is the nickname for the technology, one that promises to resolve historical issues with POS validation and that remains a big question mark on the network's roadmap.

Here, ethereum developer Vlad Zamfir is likely to shed light on a process that has mostly occurred behind closed doors.

4. State Channels: Systemic Security Considerations and Solutions – Joseph Poon

Continuing with the focus on scaling solutions, two presentations will explore 'state channels', networks that live a layer above the blockchain that aim to expand the volume of transactions and smart contracts that ethereum can handle.

The talk is likely to be notable as it is slated to be given by the creator of the Lightning Network, the best-known off-chain payment channel network, but one that is envisioned for use on the bitcoin blockchain.

In interview, Poon said his talk will outline security concerns that ethereum developers should watch out for when building their own similar off-chain micropayment networks, as well as his recommendations for how similar ethereum projects can advance harmoniously.

Poon told CoinDesk:

"My intention is to facilitate cross-chains so that cryptocurrency exchanges can be further decentralized."

As it remains one of the rare slots on the schedule that promotes cross-blockchain developer collaboration, this talk could prove one to watch.

5. Panel: Smart Contract Security in Ethereum

Given the collapse of The DAO, this panel could prove one to watch.

There's been particular emphasis of late on designing smart contracts that are more secure and easier to use, and much of the blame (at least in the public's eye) has fallen on ethereum's new smart contracting language, Solidity.

Following The DAO's collapse, big banks like Barclays and smaller startups have been investing time and energy in alternative smart contracting languages.

As such, while the panel will focus on the "implications and developments" of smart contracts, panelists including Solidity creator Dr Christian Reitweissner and ethereum creator Vitalik Buterin may be best served by making the case for the continued development of their open-source tools.

6. Formal Verification for Solidity – Dr Christian Reitweissner

'Formal verification' – keep your eyes on the term, as it's likely to be a buzzword as we head into the fall and winter months.

Given the problems with smart contracts mentioned above, there's ample interest in developing ways of determining if the technology is secure before it's deployed. With the interest and money of large financial institutions on the line, it's safe to say that ensure formal verification for ethereum's Solidity language is top of mind for the network.

Here, Solidity creator Dr Christian Reitweissner will be presenting on formal verification for the smart contracting language, and any new developments here are likely to impact decision-making in the industry in the months ahead.

7. Imandra Contracts: Formal Verification for Ethereum – Dr Grant Passmore

See, we told you it was a hot topic!

We don't know a lot about "Imandra contracts" (other than they use artificial intelligence), or how they could help mathematically verify ethereum's code , but given the background above, the talk is likely to be focused on shaping the discussion of the security of the network and its tools.

8. Mist Vision and Demo – Alex Van de Sande

The browser of the ethereum network, Mist, has perhaps been overlooked given the emphasis on the inner-workings of ethereum.

However, as decentralized applications seek to hit the market, they'll need a user-friendly interface, and this Mist demo is likely to show how far the ethereum community has come in making progress toward this goal.

9. Ethereum Blockchain Initiatives at Thomson Reuters – Dr Tim Nugent

One of just a few enterprise institutions at the conference with a solo speaking slot, this talk from Dr Tim Nugent will shed light on internal R&D at the mass media firm.

As mentioned in past interviews, executives at Thomson Reuters are bullish on use cases including data delivery and digital identity.

As more institutions open up about their creations on ethereum, this will certainly be one to watch, providing insights into how enterprises believe they could leverage ethereum and its technology in the months and years ahead.

Ethereum's 'Holy Trinity' Takes Shape As Swarm Testnet Arrives


A big piece of ethereum's decentralized "world computer" will be launching its first public testnet in the coming weeks.

With the launch of the Swarm testnet, the network will be open for any developer to test the new file storage system and identify and fix potential issues. Developers can also use any ethereum client (whether geth, parity or the python client) for their work.

According to developers involved, the move that takes the project one (small) step closer to making its full vision a reality.

On the Internet today, centralized servers owned by for-profit companies hold most of the world's data. But Swarm wants to shake this up by building on an old idea – file sharing.

You might be familiar with BitTorrent, a similar way of file sharing over a peer-to-peer network. The problem with the network, according to the Swarm team, is that it relies on the generosity of its users, that and it's too slow to use as the base for a new web.

Swarm lead developer Viktor Trón told CoinDesk:

"[BitTorrent] never really caught on to the point where they can serve real-time interactive web applications."

The updates were part of a talk at the ethereum developer conference Devcon2 today, entitled "Swap, Swear and Swindle. Swarm Incentivization", given by its team leads, Trón and Aron Fischer.

Decentralized versions of photo albums, file managers, corporate storage platforms and GitHub are a few ambitious examples for how Swarm could come to be used.

"The result would be a much more decentralized Internet, both in terms of service provision and in terms of wealth distribution," Trón said. "It's just as much a social objective as it is a technical project."

'Holy Trinity'

So, how exactly does this fit into ethereum's "world computer" idea?

The big picture vision is to use ethereum's "holy trinity," as Trón called ethereum, Swarm and a messaging system called Whisper, to build the low-level groundwork for this new World Wide Web.

Ethereum already puts the computational part into place, but it provides limited space. Swarm adds a storage layer to the system. Essentially, it remains too costly to store everything on a blockchain. In this way, Swarm allows data to be referenced on a blockchain, but stored elsewhere.

Yet, in the talk, the developers indicated that incentivizing a file sharing network remains a work in progress. As noted in the presentation, Swarm enables content to be retrieved, but there is no guarantee it will be available.

Trón outlined how Swarm is seeking to create a system based on what he called "proof of custody", one whereby users would commit a payment to store data, which could be paid incrementally to the person storing it.

"The proof of custody construct makes it so actually you could have a very good level of security that your content is being stored by the storer," he said.

Swarm then uses a "judge contract", a smart contract that would ensure that the data won't be paid if what they have agreed to watch goes missing.

Swear and swindle

However, Swarm also needs a system to ensure that the users storing its data are penalized if they break a promise.

This is where a "Swear contract" comes in, as the smart contract allows nodes to register by posting a security deposit. Registered nodes, the developers explain, can sell promissory notes guaranteeing long-term data availability, which would be exchanged for receipts.

If the data that is overseen by the contract is lost, a feature called a "Swindle" contract comes in. Should a user with a receipt find that their data is no longer available, they are allowed to start a process Fischer likened to litigation.

Here, Tron used the analogy of a babysitter to set the scene for the stakes involved in the high-tech dispute.

"Once it gets to this stage, the only way a peer can defend themselves against a challenge is to say, 'Your baby is here, it's OK'," Tron explained.

Toward a Web 3.0

But if it all goes according to plan, users will have a similarly easy experience using Swarm.

Of note is that Web 3.0 isn't a term that ethereum owns, rather it's a concept that its developers are rallying around. Trón argues that the blockchain was the "missing puzzle piece" to making this reality and that there are "no more excuses" for big intermediaries (think Facebook or Google) to be the only companies able to provide Internet services.

The second Swarm code proof-of-concept was released in May, and if all goes well, they say they will migrate the testnet to the official ethereum testnet, Morden.

Trón said they already have plans for a third and fourth code proof-of-concepts, which will include more comprehensive internode communications, data streaming and decentralized database services.

When asked whether he thinks the file program will work in the end, Trón responded that he doesn't know, but that "we came up with something that we think is pretty good."

Pete Rizzo contributed reporting.

Sun through clouds image via Shutterstock

Friday, September 16, 2016

Vitalik Buterin to Debut Ethereum Scaling Paper at Devcon


Ethereum creator Vitalik Buterin will present a new version of the project's 'mauve paper' at a developer conference in Shanghai next week.

Scheduled for 19th September, a talk called "Mauve Revolution" will focus on scaling features still in development on the decentralized application platform, including sharding and proof-of-stake.

The third version of the paper, it is likely to keep a similar spirit as past editions, which have seen Buterin use a tongue-in-cheek tone to discuss the big-picture developments the project is seeking to enact as it approaches key development milestones.

In interview, Buterin said that the talk will discuss the planned transition of ethereum's current code to a new, upgraded version of the platform dubbed "ethereum 2.0", a transition he estimates is about one-third complete.

Buterin said it is this "second stage" that the paper will discuss, telling CoinDesk:

"The ethereum roadmap now has what I would consider three main stages. The first stage is already finished, the second is [about] getting PoS out the door and adding in economic finality and basic sharding."

However, Buterin indicated that ethereum very much remains a work in progress, and that he sees this stage of its development lasting until 2020 or later. Should the network reach version 3.0, he said he's still considering how it would move forward.

"I think the third stage will be much more challenging," he said, adding:

"[It] will require heavy involvement from people who have been thinking about problems like p2p network design, distributed hash tables, distributed systems concurrency for decades and are smarter than myself."

Big Banks Invest $55 Million in Blockchain Startup Ripple's Series B


Distributed ledger settlement startup Ripple has raised $55m in venture capital from a mix of financial industry heavyweights.

Participating in Ripple's Series B round are Standard Chartered, Accenture Ventures, SCB Digital Ventures, the venture arm of Siam Commercial Bank and SBI Holdings. Additional investors include Santander InnoVentures, CME Ventures, Seagate Technology and Venture 51.

With a growth trajectory that will soon force the settlement startup out of its San Francisco headquarters, much of those funds will be spent on expansion projects including sales and marketing. However, the investment is distinct for Ripple in that some of the funds could also fuel new acquisitions.

Ripple president and COO Brad Garlinghouse told CoinDesk:

"This gives us a strong balance sheet to also consider acquisitions. There are a lot of small players doing something interesting. Historically, we wouldn't be interested, but going forward we may be."

In total, Ripple has raised $93m venture capital including earlier investments from Google Ventures, Andreessen Horowitz, IDG Capital Partners and Jerry Yang's AME Cloud Ventures, a figure that makes it one of most-funded blockchain firms.

While Garlinghouse wouldn't give any details about which startups the company might have in its sights, he did reveal new information about how it would seek to evolve its strategy in the months ahead.

Customer acquistion

When Ripple was founded in 2012, the company emerged virtually without competition in its efforts to explore blockchain technology. At the time, most startups were focused solely on the bitcoin protocol, and the use of cryptographic code as currency.

But, Ripple (then called OpenCoin) was already working to distinguish itself to its potential customers, bringing to the table a novel take on the technology as well as experienced financial executives in the form of CEO Chris Larsen, who joined in 2013.

Unlike bitcoin, Ripple's consensus ledger is permissioned, meaning banks don't have to worry anonymous entities are validating transactions. Further, Ripple's distributed ledger products and services can operate without its native currency, XRP.

But, success hasn't been overnight. It took a year for the distinctness of these dual offerings to net Ripple's first customer, German Internet bank, Fidor. Four months later, the company signed its first two US banks, and within six months, the firm had signed a dozen more, according to Garlinghouse.

But Garlinghouse credits last year's Sibos banking conference for a recent burst of new customers formally announced today.

"It was one of our largest expenses," he said. "But it was also our best ROI."

Bank partners grow

In addition to today's funding news, Ripple announced its largest batch of banks will formally join its network: Standard Chartered, Westpac, National Australia Bank (NAB), Mizuho Financial Group (MHFG), BMO Financial Group, Siam Commercial Bank and Shanghai Huarui Bank

Each financial institution has successfully transferred actual money on the Ripple network, according to the company, and all are currently building commercial products, though specific use cases vary.

As an example, Garlinghouse told CoinDesk that one of China's rare privately-owned banks, Shanghai Huarui Bank, is working with Ripple on a new commercial cross-border payment service so its retail customer base can send money internationally in real-time.

Initially, Shanghai Huarui Bank is targeting Chinese families that want to give money to students studying abroad in the US.

In total, Ripple's network now includes 15 global banks, with 10 banks in commercial deal phases. Further, it claims it has now completed 30 pilot projects.

Growth spurt

Along with the new crop of paying clients, Ripple has been experiencing other forms of growth, according to Garlinghouse.

Currently, the firm employs about 150 people and it's hiring 25 more.

Over the past quarter, more than 50% of Ripple's hires have been engineers, he said. And he estimates that his compliance department is larger than most of the startups Ripple competes against. "Banks need that support," said Garlinghouse.

Among the more notable hires this round of investment will facilitate is a lead to manage the joint venture launched earlier this year with Tokyo-based SBI Group to sell Ripple products in Japan.

Within the next six months, Garlinghouse said Ripple will outgrow its San Francisco offices and sign a deal at a new location twice the size.

He concluded:

"We are out of office space."

Thursday, September 15, 2016

One of Bitcoin's Biggest Miners is Launching a Second Pool


As if running the third-largest bitcoin mining pool wasn't enough, China-based Bitmain announced the launch of its second mining pool yesterday.

Unlike the other large mining pools, though, the new offering (launched through its subsidiary will be open sourced to its community of users. According to Bitmain, the pool is not meant as a replacement for its popular Antpool platform (which has roughly 13% of the network's market share) but rather to enhance the stability of the bitcoin network.

In interview, Nisthant Sharma, international marketing manager at Bitmain, explained that the goal is to use this software to "promote decentralization of the bitcoin mining network".

Sharma told CoinDesk:

"We hope that this open-source mining pool will set new benchmarks in terms of stability, efficiency, and service for all mining pools."

Sharma explained that, by utilizing the global community, the company believes it can set new technical standards for mining.

Profit, profit

A key focus for the software is on reducing "orphan rates", a metric that has a material impact on miner profitability.

In bitcoin mining, it's not uncommon for two separate miners to find the same block almost at the same time. This results in the creation of two blockchains, but only one can become the longest chain that is accepted as official by the network.

The blockchain that is eliminated is called an orphan, and each time one occurs, some member of the mining network misses out on the revenue that would come from official recognition.

According to analytics provider Blockchain, it's not uncommon for there to be three to five orphan blocks in any given week. Though this is only 0.5% of the total blocks produced every seven days, bitcoin mining has become a low margin business.

To combat this, one of the primary features associated with the pool is a "PoolWatcher" function.

As Bitmain explains it, this looks for signals that another pool has found a block. Rather than continuing to mine on a potential orphan, it will instead, immediately switch to that block.

Sharma explained that Bitmain is spinning up clusters of servers around the world to help with latency of new block discovery. If another miner finds a block, these clusters will transmit that data faster, allowing the pool to switch to the next block.

Though the software is open-source, only users of the pool will have access to these server clusters, Sharma said.

Centralization possible

While Bitmain is touting this new software as a way of decentralizing bitcoin mining, it certainly does carry with it the risk that the firm will accumulate an even greater market share with two mining pool services.

Yet, in the short-term, the gain might be neutral. Because it already runs Antpool, it's likely that users might migrate from Antpool over to the new pool, especially in the short-term.

Accoridng to Sharma, this is "not something Bitmain is thinking about". However, the pool's payout mechanism, "pay per share (PPS)", could help it to quickly accumulate market share.

PPS simply means that a miner receives a percentage of the mining reward proportional to the hashrate they contributed to that block. For example, if the miner contributes 1% of the power needed to uncover a mining reward, it would receive 1% of the revenue.

However, a situation could present itself in the future where Antpool keeps its hold and users from other pools, or entirely new miners, join'sl.

As mining pools share the reward based on pooled resources, the bigger the pool, the more likely that a reward will be paid out. This results in miners joining larger pools because it maximizes the likelihood that they'll earn something for their efforts.

Because of this, and the 0% fee that Bitmain is charging until the end of the year,'s pool has the chance to quickly gain market share, a move that could further centralize mining under Bitmain.

Romanian Bitcoin Exchange Shuts Down


Romania's first order-book exchange is closing down.

Statements on the BTCXchange website informed users of a possible sale of the service on 18th August, and on 4th September, users were asked to withdraw funds ahead of an expected 12th September shut down.

According to Romanian news source Bihon, it remains unclear whether the exchange, the first of its kind in Romania, is still for sale. Owners originally said they would accept offers on the platform through 16th September.

In past statements, owner Horea Vuscan expressed his hope the exchange would be acquired as he said it was "highly profitable", though he expressed reservations about continuing in the face of the Bitfinex hack and continued worries about the security of bitcoin exchanges.

Vuscan wrote:

"I believe that Romania needs a local exchange but I want to retire in this area of business. In conclusion, in respect of clients and community BTCXchange announce that is for sale."

The decision marks the second time the bitcoin exchange has shut its doors, following a service stoppage in late 2014. However, it's unlikely many customers will be affected by the decision.

Data shows trading volumes on the exchange were low prior to its closure, with the exchange seeing just 19,000 RON (roughly $48,000) in trades over the last seven days

Tuesday, September 13, 2016

EU's Top Cop Launches Digital Currency Working Group


Europol, the European Union's top law enforcement agency, has co-founded a new working group dedicated to digital currencies.

The initiative is being co-led by Interpol, the intergovernmental organization focused on law enforcement issues, and the Basel Institute on Governance, a non-profit group focused on financial crimes in the public and private sectors.

The working group, according to an announcement last week, will involve the organization of collaborative workshops and a global network comprised of subject matter experts.

Europol said in a statement:

"Internet technologies become continuously more advanced, and so do the ways in which criminals utilize them for their illicit and illegal activities. Among these technologies, digital currencies are already transforming the criminal underworld."

Europol and Interpol have spent much of the last year collaborating on digital currency issues, a partnership that has seen the two groups organize conferences and training sessions directed at global law enforcement representatives.

More recently, Europol inked a deal with blockchain startup Chainalysis in a bid to expand its capacity for tracking digital currency transactions.

In Race for Bitcoin Mining Profits, Fortune Favors the Old


New research has found that unless the price of bitcoin goes up, there will be little room for new miners to compete.

In "Minting Money With Megawatts", released this September, Sveinn Valfells of Flux, Ltd and Jón Helgi Egilsson of the University of Iceland conduct a broad analysis of the health of transaction processing on the open public blockchain, ultimately finding that the network could be headed toward further consolidation and centralization.

Once a hobby for tech-enthusiasts, the aim of the study was to determine the profitability of bitcoin mining following July's halving, a scheduled network change at which the rewards given to bitcoin miners dropped from 25 BTC to 12.5 BTC.

Notably, the researchers found that it is now only possible for new miners to profit when the price of bitcoin is above $600, a figure that was nearly double what it was before the halving.

To determine this figure, the researchers analyzed whether a new mining operation could remain small while still generating profit.

Profitability gap

Because the addition of new hashrate to the network alters how hard it is to generate the reward, the researchers also analyzed how much hashrate could sustainably be added to the network.

In this case, new miners can only add about 16% before difficulty increases would make them unprofitable. This worries the researchers, as this narrow gap for profitability doesn't impact incumbents nearly as much as new miners.

The writers explain that legacy miners have already made a capital investment to build out their mining operation. Therefore, a reduction in revenue only becomes a concern if their operational costs are greater than the amount of money they're bringing in.

They write:

"Existing miners have no reason to turn off their equipment even after the block reward has halved to 12.5 BTC … incumbents enjoy a clear advantage over new entrants."

While a new miner has to worry about the cost of both the new hardware they've purchased as well as their operational costs, legacy miners only need to worry about the latter.

This gives legacy miners the ability to operate in a low-margin environment that might not support a new miner.

Spectre of centralization

In sum, the researchers view this development as problematic because it could ultimately lead to further consolidation by incumbents, which the authors believe could open the network to consolidation and attack.

If new miners can't participate in the network, the larger operations become an increasingly larger part of the total network, creating the opportunity for mining operations to do harm to the network.

Fortunately, the researchers believe that Moore's Law may be able to prevent this problem.

Because electricity is one of the biggest costs for any bitcoin miner, if hardware power efficiency can double every three years, the researchers predict the minimum required price for new entrant profitability could drop to $530.

This increase in power efficiency would also make it possible for the network to support an additional 25% of hashrate before difficulty made new miners unprofitable, rather than the 16% it currently can handle.

Should Moore's Law continue beyond just the next doubling of power efficiency, it appears that there might be a market for new entrants for some time.

Monday, September 12, 2016

Two Big Factors Are Driving Up Bitcoin Prices


The price of bitcoin rose close to 10% this week, pushing higher as bullish market sentiment and low liquidity created an ideal environment for gains.

The digital currency enjoyed notable increases during the week, surpassing $600 on Sunday, 4th September, while largely avoiding any significant pullbacks or corrections.

Sentiment is so strong "players are not willing to bet against the rise of BTC/USD," according to Petar Zivkovkski, director of operations for Whaleclub.

He told CoinDesk:

"New short position openings are almost at all-time lows, [which] indicates that the market expects a continued rise."

Tim Enneking, chairman of cryptocurrency investment manager EAM, sees similar forces propelling the current market.

"Sentiment is generally bullish," he added.

Fast start, bullish sentiment

Bitcoin prices had a fast start during the week, opening at $571.68 on 2nd September before surging 4.9% to $599.60 the following day, according to CoinDesk USD Bitcoin Price Index (BPI) data.

While the digital currency tested $600 and failed to break through that resistance, it surpassed that key psychological barrier on Sunday, 4th September, before rising to an intra-day high of $612.39, additional BPI figures reveal.

The digital currency's price surged more than 6% over the weekend of 3rd and 4th September. Market sentiment was strongly bullish during these two days, data provided by leveraged bitcoin trading platform Whaleclub reveals.

Long exposure – as measured by the size of open positions – was 88% on Saturday and 87% on Sunday.

Confidence, which measures the percentage by which a particular day's position sizes were larger than average, registered 86% on 3rd September and 87% on 4th September, according to additional Whaleclub figures.

Additional figures from BFXData reveal that during the period, the value of long bets, as measured by USD margin funding, significantly exceeded the value of short wagers as measured by BTC and LTC margin funding.

Priming the pump

Bitcoin enjoyed these sharp gains and bullish sentiment after the digital currency ranged sideways for several weeks following the hack of exchange Bitfinex, Zivkovkski told CoinDesk.

During this time, trading volume was limited as many market participants took a pause in the aftermath of the Bitfinex hack. Bitcoin transactions totalled 7.82m in the seven days through 8th September, Bitcoinity data revealed.

This period of range-bound trading "lasted for several weeks, during which the market was 'powering up' – behind the scenes, traders were opening positions, betting almost equivalently on a price rise vs a price decline, often on margin," he said.

These substantial speculative bets, coupled with low trading volume, left the market highly susceptible to short and long squeezes. In this environment, a purchase of less than 600 BTC, executed by one or more market participants, was all that was needed to trigger a short squeeze, Zivkovski stated.

Jacob Eliosoff, a cryptocurrency investment fund manager, emphasized that the sharp rally that took place over the weekend required both a notable purchase and short squeeze which forced speculators to close out short positions.

"This weekend's rise was much too sharp to represent just gradual recovery," he told CoinDesk. "A short squeeze can turn a small rise into a big jump, but it can't turn a flatline into a jump."

After bitcoin's sharp gains over the weekend, the digital currency traded between $600 and $615 on 5th, 6th and 7th September, BPI figures reveal.

During this three-day period, the market was 86.3% long on average. Confidence was also high, averaging 84.3% over the three days.

Bitcoin breakout

The digital currency broke out of this malaise on Thursday, 8th September, when it surged more than 2% to a weekly high of $628.75, BPI data show.

Once again, a short squeeze was the likely culprit, stated Zivkovski, emphasizing the price movement took place during a time of low trading volume and did not coincide with any notable news catalysts.

In the near-term, the market could experience further short squeezes, as Zivkovski told CoinDesk on 9th September that "the current market is quite illiquid."

"Existing short positions are being cleared out as price continues to rise. Shorters are closing their positions at a loss and re-opening longs or simply staying out of the market for a while," he said.

Because the market is so illiquid, the situation "places price at the mercy of players with larger firepower"

The Trend Towards Blockchain Privacy: Zero Knowledge Proofs


One of the bigger trends in the blockchain world, particularly when it comes to financial services and specifically capital markets operations, has been a need for privacy and confidentiality in the course of daily business. This has meant that blockchain solutions are being designed with this primary need in mind. This has led to all the private blockchain solutions being developed today.

When you build for privacy and confidentiality there are tradeoffs that come with that. Mainly you lose transparency, which was the major feature of the the first blockchain: bitcoin. As originally designed, a blockchain is a transparency machine. In this system, the computers are distributed and no one entity controls the network. Not only this, but anyone can be a validator and anyone can write to or read from the network. Clients and validators can be anonymous and all the data gets stored locally in every node (replication). This makes all transaction data public.

The security of bitcoin is made possible by a verification process in which all participants can individually and autonomously validate transactions. While bitcoin addresses the privacy problem by issuing pseudonymous addresses, it is still possible to find out who's addresses they are through various techniques.

This is the polar opposite of what is happening in the private blockchain world, where decentralization and transparency are not deemed as necessary for many capital markets use cases.

What is important is privacy and confidentiality, latency (speed) and scalability (able to maintain high performance as more nodes are added to the blockchain). Encrypted node-to-node (n2n) transactions mean only the two parties involved in the transaction receive data. In many of these systems there are opt ins for third party nodes (regulators) to be a part of the transaction.

Other systems being developed for similar purposes, which have been written about on this blog, have one designated block generator which collects and validates proposed transactions, periodically batching them together into a new-block proposal. Consensus is provided by a Generator that applies rules (validates) agreed to by the nodes (chain cores) to the block and designated block signers.

In these systems, decentralization is simply not necessary because all the nodes are known parties. In private blockchains the nodes must be known in order to satisfy certain regulatory and compliance requirements. The focus has been on how to preserve privacy and confidentiality while achieving speed, scalability, and network stability. Therefore, there are ways for legal recourse even between parties who don't necessarily trust each other.

Strong, durable cryptographic identification

What are cryptography and encryption?

As noted above with privacy and confidentiality being pivotal, encryption has become a major focus for all blockchains. Many of these solutions are using advanced cryptographic techniques that provide strong mathematically provable guarantees for the privacy of data and transactions.

In a recent blog post titled "A Gentle Reminder About Encryption" by Kathleen Breitman of R3CEV, she succinctly provides a great working definition:

"Encryption refers to the operation of disguising plaintext, information to be concealed. The set of rules to encrypt the text is called the encryption algorithm. The operation of an algorithm depends on the encryption key, or an input to the algorithm with the message. For a user to obtain a message from the output of an algorithm, there must be a decryption algorithm which, when used with a decryption key, reproduces the plaintext."

If this encryption uses ciphertext to decrypt this plaintext, you get homomorphic encryption and this (combined with digital signature techniques) is the basis for the cryptographic techniques which will be discussed in this post. Homomorphic encryption allows for computations to be done on encrypted data without first having to decrypt it. In other words, this technique allows the privacy of the data/transaction to be preserved while computations are performed on it, without revealing that data/transaction. Only those with decrypt keys can access what exactly that data/transaction was.

Homomorphic encryption means that decrypt(encrypt(A) + encrypt(B)) == A+B. This is known as homomorphic under addition.

So a computation performed on the encrypted data when decrypted is equal to a computation performed on the encrypted data.

The key question being asked is: How can you convince a system of a change of state without revealing too much information?

After all, blockchains want to share a (change of) state; not information. On a blockchain, some business process is at state X and now moves to state Y, this needs to be recorded and proved while preserving privacy and not sharing a lot of information. Furthermore, this change of state needs to happen legally, otherwise there is a privacy breach.

Cryptographic techniques like zero knowledge proofs (ZKPs), which use different types of homomorphic encryption, separate:

1) reaching a conclusion on a state of affairs

2) the information needed to reach that state of affairs

3) show that that state is valid.

The rest of this post will discuss how the trend towards privacy has led to cryptographic techniques, some old and some new, being used to encrypt transactions and the data associated with them from everyone except the parties involved. The focus will be on Zero Knowledge Proofs, zk SNARKs, Hawk, confidential signatures, state channels and homomorphic encryption.

The privacy problem on a blockchain is the main gap for deployment for all of the cryptographic solutions talked about below.

Outside of a blockchain, there are examples of homomorphic encryption in practice. CryptDB is an example of system that uses homomorphic encryption and other attribute preserving encryption techniques to query databases securely. It is used in production at Google and Microsoft amongst other places.

It does have limitations though: you have to define the kinds of queries you want ahead of time and it is easy to leak data. CryptDB provides confidentiality for data content and for names of columns and tables; however CryptDB does not hide the overall table structure, the number of rows, the types of columns, or the approximate size of data in bytes. One method CryptDB uses to encrypt each data items is by onioning. This allows each data item to be placed in layers of increasingly stronger encryption.

Confidential signatures

Gregory Maxwell designed a cryptographic tool (CT) to improve the privacy and security of bitcoin-style blockchains. It keeps the amounts transferred visible only to participants in the transaction. CT's make the transaction amounts and balances private on a blockchain through encryption, specifically additively homomorphic encryption. What users can see is is the balances of their own accounts and transactions that they are receiving. Zero knowledge proofs are needed to demonstrate to the blockchain that none of the encrypted outputs contain a negative value.

The problem with Confidential Transactions is that they only allow for very limited proofs as mentioned above. zkSNARKs and Zero Knowledge Proofs (ZKPs) which will be described in detail below, allow you to prove virtually any kinds of transaction validation while keeping all inputs private.