Coinbase has added margin trading
to its bitcoin exchange

GDAX, the cryptocurrency exchange run by Coinbase, has added margin trading to the platform.

Eligible traders can now trade up to 3X leveraged orders on Bitcoin, Ethereum and Litecoin order books. If you’re unfamiliar with trading and exchanges, margin trading is when you borrow money from your broker to buy or sell more stock than you can afford. It’s essentially a short-term loan. By buying or selling on margin, traders can increase their leverage and buying power, potentially generating profits beyond what their own cash balance would have supported. This feature is mainly geared toward institutional investors. That’s because Coinbase has launched the feature attempting to fit within the boundaries of the Commodity Exchange Act.

This means that traders have to certify that they meet one of the qualifications to be allowed to trade on margin. While the full list is here, the requirements include things like being a corporation with a net worth exceeding $1,000,000 and trading on margin in order to hedge risks associated with your business. Individuals need to have a minimum of $5,000,000 invested on a discretionary basis in order to be allowed to trade on margin. By deciding to build their product within the guidelines of the Commodity Exchange Act, Coinbase has at least initially excluded a large segment of their user base. Other exchanges, like cex.io, offers margin trading to all users — but probably wouldn’t stand up to U.S. regulators.

For Coinbase, moving slowly and maintaining a favorable relationship with regulators is necessary if the company wants to stick around. The company explained: “we’re committed to working with regulators as the blockchain space continues to develop, rather than take on unnecessary risk just to get features out more quickly. Some other digital currency exchanges have decided not to do this. For us, the best approach was to carefully design our margin trading feature and engage with the CFTC to make sure that GDAX remains compliant.”

Additionally, the exchange isn’t currently charging interest or fees to access Margin Trading because they “believe that consumer lending laws require specific licenses to do this.” This move should also please Wall Street investors who were waiting on the recently denied Bitcoin ETF application. With the combination of margin support plus the strict regulatory focus, Coinbase and GDAX could be an ETF alternative for investors wanting to safely purchase bitcoin now.

Fears of a network split have shaken bitcoin while boosting ethereum, dash and monero

Call it the schadenfreude trade.

Bitcoin’s price is taking a beating, having shed about one-fifth of its value over the weekend. At the same time, its biggest rivals in the cryptocurrency space are ascendent: The price of a single ethereum token, the second-largest cryptocurrency by market capitalization, touched an all-time high above $50 over the weekend just as bitcoin’s losses were beginning to accelerate.

Bitcoiners have widely attributed the drop to fears that the bitcoin network might split in two, which is ironic: Ethereum suffered that exact fate over the summer when a contingent of its users refused to accept a mandatory software update that would’ve, among other things, amended the ethereum blockchain to return some of the $50 million worth of tokens stolen during the DAO hack. Bitcoin US-BTCUSD  traded as low as $947 a coin on Saturday, down from around $1,260 a coin on Thursday. That was its highest level since March 10, when the Securities and Exchange Commission rejected a proposed rule change that would’ve allowed for the creation of the first bitcoin exchange-traded fund, sparking a brief selloff.

The two moves are likely interrelated: Data provided by CryptoCompare, a company that supplies data and analytics about the cryptocurrency market, suggest that ethereum has largely benefited from bitcoin’s decline: The bulk of trading in ethereum has been conducted in bitcoin, trading volumes show, suggesting that worried investors are swapping their bitcoins for ethereum. Ethereum isn’t the only cryptocurrency benefiting from bitcoin’s selloff: Dash, the third-largest cryptocurrency by market cap, broke to an all-time high above $100 a coin on Monday. Monero, the fourth-largest digital currency, touched an all-time high above $20.

The bitcoin selloff started around the time that AntPool, the largest collective of bitcoin miners, on Friday adopted a controversial software update known as bitcoin unlimited. The proposed update is what's known as a “hard fork,” meaning that, once it receives a certain baseline of support, everyone running the bitcoin software will either need to accept bitcoin unlimited, or risk being shut out of the bitcoin network. As of Monday, bitcoin unlimited has the highest level of support among any of the proposed solutions to what’s known as the scalability problem: The fact that the bitcoin network is extremely limited in terms of the transaction volume that it can handle. Critics of bitcoin unlimited feel it would strengthen the control that a small group of miners have over the network.

Chuck Reynolds
Contributor

Alan Zibluk Markethive Founding Member

Is This Massive Power Struggle
about To Blow Up Bitcoin?

Bitcoin's price plunged 25% over the weekend on rumors conspiracy theory to take over the network. Long-simmering tensions between two factions hardened, with each side threatening the other with everything ranging from lawsuits to software changes that would completely cut off the opposing group.  Twitter, Reddit and Bitcoin forums were aflame with insults and tough talk as each stakeholder vied to ensure that their piece of the cryptocurrency, whose market cap fell from $20 billion to $15.5 billion, remained secure. 

“We’re dangerously close to what could be the death of bitcoin,” said bitcoin developer Andrew DeSantis over the weekend after he posted a tweet storm Friday that set off alarm bells for many in the community. What triggered the widespread panic was the possibility that the network would be controlled by an oligopoly rather than held in an equilibrium of competing interests. From Thursday to Saturday, the value of bitcoin dropped 25%, though it has recovered somewhat to 15% below. That day, Vinny Lingham, an entrepreneur in the space known for his price targets, said, “The smart money left three days ago.”

The alleged bad actors maintained innocence.

“I think it’s conspiracy theorist stuff,” said Roger Ver, one of the most vocal advocates of a new version of the bitcoin software called Bitcoin Unlimited that, if it gains sufficient control of the computing power in the network, could become the main version of bitcoin and be incompatible with previous versions. (Ver is nicknamed Bitcoin Jesus because of his history evangelising bitcoin.) His fellow Bitcoin Unlimited supporter, Jihan Wu, the co-founder of bitcoin chip manufacturer Bitmain, said by phone from Beijing, “Definitely, I don't have such kind of plan.” Whether or not the conspiracy theories are true, over the weekend, what has so far been a two-year-long he said-she said stalemate turned into an incredibly expensive game of chicken.

What They’re Fighting About

The crisis has its roots in a two-year-old debate over how to scale the network, which currently accommodates, on average, about a handful of transactions a second, based on a data cap of 1MB roughly every 10 minutes. On the surface, the argument is that some participants in the ecosystem want to raise that limit, called the block size, to what, under Bitcoin Unlimited, would be a flexible cap, while the developers who have been designing and maintaining the software for the last several years, a team called Bitcoin Core, want to keep the 1MB limit but make the system more efficient so it processes more transactions per block.

The argument stems from philosophical differences. “At the highest level, there are two camps that see bitcoin becoming two different things: digital gold or electronic cash,” says Adam White, head of GDAX, the professional trading platform of one of the most well-known startups in the space, Coinbase. “Neither is right or wrong. They’re just different perspectives on what the network can become.” The developers’ approach is one more of digital gold — not necessarily putting every coffee payment onto the bitcoin network itself, but having them processed by other, faster networks that would later connect to bitcoin’s to provide finality to the transaction. Bitcoin Unlimited’s vision, supported by a number of miners at this point, is of bitcoin as e-cash — a network that has room for every morning coffee to be processed on bitcoin’s network, which would, incidentally, give them more transaction fees.

However, what might, in the abstract, be called a philosophical disagreement has become, on the ground, an all-out power struggle.

To understand the fight, it helps to know the game theoretic aspects of bitcoin. Bitcoin miners are people and companies with computers that process transactions for the network by adding them to the blockchain, or the ledger of every bitcoin transaction since the network launched in January 2009. Miners are motivated by a payout that the bitcoin software makes as it mints new bitcoin with every block of transactions processed. (This so-called block reward is currently 12.5 bitcoins, or about $13,750 at press time.) In addition to newly minted bitcoins, miners also receive small transaction fees paid by every user sending bitcoin. Wu is involved in mining in two ways: He not only manufactures bitcoin mining chips through Bitmain but also runs the biggest bitcoin mining operation called Antpool.

Designing the game, and the incentives in it, are the developers. Their motivations can range from ideological to technical. Many developers simply want to see a decentralised financial system not controlled by one or a few entities, whether it’s a government or a few big miners. But they need the miners. Without miners, the network wouldn’t exist, and without enough of them, it’s not secure. However, if too few of them dominate, then the delicate balance of no one party fully controlling the system falls apart since mining would be run by an oligopoly. Conversely, if the developers don’t do enough for the miners, the miners can retaliate against the developers.

Because of the developers and the miners both needing each other and have opposing incentives, they don’t fully trust each other. “Bitcoin is one of those things where nobody wants to be seen as controlling it,” says DeSantis. The magic of bitcoin has been the ability for various players with opposing interests to engage in a system that has so far led to an optimal outcome for all of them.

There’s one last group important to the game theory of bitcoin, but before we get to them: The detente between the two sides has lasted for a few years because the people who support bigger blocks (now in the form of Bitcoin Unlimited) had too little computing power on the network to take control of it. Also, certain technical upgrades, including a block size increase, require what’s called a hard fork, which runs the risk of creating two versions of bitcoin if not done with the full support of the community. Many consider this type of hostile hard fork a potential nuclear option in bitcoin — one that could destroy, or at least damage, the industry that, until last Thursday, had a $20 billion market cap.

From Impasse To Panic

On Friday, several exchanges announced that, in the event of a fork, Bitcoin Unlimited would not have the ticker symbol BTC. They were effectively preemptively awarding Bitcoin Core the reputation of being “the true bitcoin.” Many people in the community thought that that would deter Bitcoin Unlimited from forcing a hard fork.

But alarm spread when, later that day, DeSantis posted a 28-point tweet thread pointing out that Wu would soon be launching new facilities that would bring a lot more computing power to the network. (One deal was for U.S.-based facilities with John McAfee’s company MGT set to launch in the second quarter of 2017 and called MacPool.) While that wouldn’t necessarily give Wu or his companies more than 50% of the computing power, the worried developers hypothesized that since Wu’s company Bitmain manufactures the mining equipment that many miners use, purchasers of his mining equipment might feel pressure to support Bitcoin Unlimited so as not to have their supply of mining equipment cut off in the future. That could then tip Bitcoin Unlimited over the threshold that could allow them to, essentially, create a new version of bitcoin that cut off control from the current group of developers, which would then put the Bitcoin Unlimited developers in control and, at the very least, sow confusion in the market about which was the “true” bitcoin, if not make their version of it the dominant one.

The clincher? Bitmain owns BTC.com, and Ver controls Bitcoin.com. DeSantis asserts that, through search-engine strategies, Wu, Ver and their affiliates could lead many newcomers to believe that Bitcoin Unlimited is the “true” bitcoin. (The MacPool website, currently under construction, sports a ticker provided by Bitcoin.com; Ver is an advisor to MGT.)

As DeSantis puts it, “Most of the hardcore Bitcoiners are not good at talking to the press. They’d probably try to tell you about how the code is not the same and they’d go into some mathematical stuff and it would be a nightmare. You’d have a bunch of guys walking around, talking about math, and then other guys” — Wu, Ver, Bitcoin Unlimited — “saying, ‘We’re Bitcoin.com. Use Bitcoin.’” (DeSantis also notes that McAfee has been accused of murder and Ver is a convicted felon.)

In response, the Core team, DeSantis and other bitcoin developers are contemplating their version of the nuclear option: that they change the Bitcoin software so that it no longer works on the hardware currently running it. It would be as if Microsoft decided to change Office so that it no longer ran on PCs, rendering an entire industry useless. (Such a move would hit Wu, as both a manufacturer of the equipment and a mining pool operator, doubly hard.) But Eric Lombrozo, a Bitcoin Core developer, says, “I’d rather that not happen. I think it’d be dangerous for the network to go down that route. It’s basically a warpath…. But all the players have to consider that these things might actually happen.”

The Defense

Both Ver and Wu deny that they plotted to bring online new mining facilities that would force a fork to Bitcoin Unlimited and then push that as the “true” version of bitcoin. Their criticisms of Core are somewhat similar: Both are unhappy that the team has ignored what they believe is a need for bigger blocks, and both have personal gripes about the developers.

Ver says that Core is ignoring very real problems that currently exist on the network that not only slow transaction times but therefore make transactions less safe altogether. He also says that they treated “horribly” several developers who had been deeply involved in developing the protocol when they advocated for increasing the block size.

Wu thinks that Bitcoin Core’s current proposal to make the network more efficient (for technical reasons, called SegWit) is good technology that solves a number of problems. However, he is angry that about a year ago, a number of Core developers and miners came to an agreement in Hong Kong to adopt both SegWit and a small block size increase. Since then, the developers have proceeded with what they wanted — SegWit — but not the bigger blocks the miners desired.

(Calling the Hong Kong agreement “a diplomatic failure” and “botched,” Lombrozo wrote in an email, “The agreement was not signed by the Core team as a whole…it was signed by a few individual contributors and many of us felt that not only was it impossible to deliver what was expected but that it was contrary to the philosophical underpinnings of Bitcoin. … Ultimately, protocol changes cannot be negotiated behind closed doors by small numbers of people.”)

As for theories that purchasers of his mining equipment would feel pressure to support Bitcoin Unlimited, Wu says, “We have to look at the facts — whether I have ever done this to my customers before. No, I have never. Because the customers give us money to buy equipment. Maybe I can talk to them, maybe I can convince them about what is the best interest of bitcoin miners, but I never force them to do anything because that is anti-bitcoin.”

He also notes that some of the computing power in the new mining facilities will mostly be rented out to other miners (10% of the Chinese facility will be controlled by Bitmain) and so those miners, and not Bitmain, will choose whether to run Bitcoin Unlimited or Bitcoin Core on their individual machines. However, despite a March 1 press release announcing MacPool would go online in Q2, he could not give a launch date for either facility and said both were delayed.

When asked about the possibility of the Core team changing the software so it no longer works on his mining equipment (which involves changing something called the proof-of-work, or POW, algorithm), Wu, who first learned about bitcoin in 2011 and launched his company in 2013, said he remembers the first time he heard this threat in a chat forum in early 2016: “I was astonished. Switching the POW algorithm of bitcoin was never the kind of idea you can think of. If someone disagrees with you, you decide to what? I decided this was very political and was about interests, it’s not only about engineering. If it was only an engineering debate, it would not escalate to this level.” His conclusion: “Since they are doing such threatening, I think it’s OK that we run another kind of software, Bitcoin Unlimited.”

Wu says if Bitcoin Unlimited gets enough network power, the fork will occur. This could create two coins — one with less value than the other, as happened last summer when the Ethereum network split into two, creating Ethereum and Ethereum Classic, the latter of which is worth a fraction of Ethereum even though it is technically the original chain. When asked why he would be willing to risk losing what could potentially not only be a huge sum of money but his entire business, Wu says, “I will reject your assumption” — meaning, he refused to even entertain the possibility that Bitcoin Unlimited would become the chain of lesser value.

Hypothetically, the final touches on the Bitcoin Unlimited nuclear option would be if, after the fork, Bitcoin Unlimited allocated some of its computer power to attacking the other chain so that it was unable to function properly. It would be possible technically since, in order to fork, it would need to gain 80% of the computing power, which means the other side would have a fraction right after the split. (Unlimited has ramped up steeply, rising from about 20% to 37% share over the last month, while Core fell from 80% to 62%. Another miner today announced support for Unlimited.) When asked if Wu would undermine Core, he wouldn’t rule it out: “It may not be necessary to attack it. But to attack it is always an option.” Another way of harming Bitcoin Core would be if supporters of Bitcoin Unlimited dumped all their Bitcoin Core bitcoins, driving down the price for Bitcoin Core coins.

Meanwhile, the Bitcoin Core developers and DeSantis say they are working on a compromise to prevent the various nuclear options. Wu declined to comment on whether he is currently negotiating with anyone. However, just in case, Core is working on new versions of the software that wouldn’t run on current mining equipment.

The Way Forward

Back to our game theory analysis: The last group with an interest in bitcoin are the users, whose motivation is to make bitcoin transactions. (Note: exchanges have a role too, but they will ultimately follow the market, hence, for this discussion, we’ll lump them in with the users.) The way in which the network accommodates more transactions may be immaterial to many of them, making them neutral on the e-cash vs. digital gold question. However, their power over the system is economic: If, say, two versions of bitcoin came out — one that reflected the miners’ preferences and one that reflected the developers’ — the one that would prevail (or at least dominate, if both continued to exist) won’t necessarily be the one that the majority of miners support even though that network might be more robust. Nor would it necessarily be the one that the majority of developers support, even though that network might be perceived as being more technically sound or more decentralised. It would be whichever one the greatest number of investors put their faith in.

Wu suggests a futures contract to determine what the market response would be before any nuclear options are pursued. One currently on offer on cryptocurrency exchange Bitfinex shows Bitcoin Unlimited having a fraction of the value of Bitcoin Core. But Wu says the contract is not structured correctly and instead suggests one with three possible outcomes: Bitcoin Unlimited after a fork; Bitcoin Core after a fork; and Bitcoin Core as it is now, no forks. (The current contract could be lumping together the latter two possibilities into one.)

Whether this death match ends in disaster or a truce remains to be seen. After all, Bitcoin's "death" has been pronounced many times. However, while Bitcoin’s price has been seesawing, the value of Ethereum has more than doubled in the past two weeks and quadrupled since January, giving it a market capitalization of almost $4 billion. Bitcoin’s has now risen to $18 billion by press time, though it was as low as $15.5 billion on Saturday. Still, many cryptocurrency traders talk of what they foresee as “the flipping” — the moment when Ethereum’s market capitalization surpasses that of bitcoin’s. Some industry players surmise that if bitcoin underwent some fiasco around the same time Ethereum gained more validation, the two market caps could cross and never reverse. (Bitcoin's block size debate may have also gotten at least one Ethereum developer contemplating reducing the reward to their miners.)

Lingham no longer even cares about DeSantis’s theory that Wu, Ver, McAfee and company planned to use their new mining facilities to force a fork to Bitcoin Unlimited. “I don’t want to delve into the details of whether this is true or not,” he says. “It’s irrelevant. The point is … this should not be possible in bitcoin.”

Despite the bitter grudges held on both sides, multiple sources said that they thought the most likely outcome was that no hard fork would occur. “My suspicion is these people aren’t dumb enough to try to actually, in such a public way, get control of bitcoin because they know it would lead to a big price drop in general, no matter how good the outcome was,” says Peter Todd, a bitcoin protocol researcher who is aligned with DeSantis and Core. “I think the most likely scenario is that nothing will happen. I really mean nothing.”

Chuck Reynolds
Contributor

Alan Zibluk Markethive Founding Member

Ways To Tell If Bitcoin Is In A Bubble

No one wants to be on the wrong side of a bubble. If you invested in dot.com stocks the end of 1999 or bought a house with an adjustable-rate mortgage in 2008, you know exactly what I mean.When it comes to the cryptocurrency Bitcoin, there's every reason to be cautious. It's not regulated. There's no Federal Reserve behind it. There's no real guarantee for its value, which is determined by software. Forget about deposit insurance like the FDIC.Despite numerous red flags about Bitcoin, it's still all the rage for those championing its role as an alternative currency. I just hope those who love Bitcoin aren't also subscribing to "alternative facts."
 

 

The Basic rules of Behavioural Economics

Even though there's a high degree of machine-oriented determination behind Bitcoin, it's not immune from the laws of human nature. People still get crazy when they start to speculate that the value of something "can only go up." Even though the SEC recently decided not to greenlight an exchange-traded fund based on Bitcoin, let's pause a moment and review some of the basic rules of behavioural economics. Oh, and the same rules that apply to Bitcoin apply to any market, particularly stocks (ahem).

The language of bubbles shouldn't be forgotten. 

Whenever boosters of a speculative investment want to defend it, they always couch it in phrases like "this time is different" or "it's not like real estate or tech stocks." But these phrases only give us emotional insulation. The reality is that anything subject to speculation has a cliff-like downside. They are never like Treasury bonds.

One of the world's experts in bubbles — Prof. Robert Shiller, a Yale economist — said Bitcoin "was an amazing example of a bubble" back in 2014. Prof. Shiller authored the classic Irrational Exuberance, the go-to book on the dot.com and housing crashes. He also won a Nobel Prize in Economics. Prof. Shiller also recently said the U.S. stock market is overpriced.

Animal Spirits Outrun Logic.

When something is the object of speculation, there are more people betting on it than investing in it. If you're investing in a stock like Warren Buffett does, for example, you hold onto it for years to reap the benefits of appreciation and dividends. Speculation is largely based on emotion, or what Keynes called "Animal Spirits." A herd mentality cares almost nothing about relative values, that is if the vehicle is overpriced.

Traditional Valuation Models Don't Apply.

Here's an interesting test. Two ways of judging stock prices is to look at their price to earnings (P/E) or price to book (P/B) ratios. They will tell you, at a glance, if a company is a bargain or highly priced. What's the P/E for Bitcoin? How do we know if it's over- or under-valued? There have been four large run-up/crashes in Bitcoin valuations in recent years. One decline was as much as 93%. Can you imagine losing that much in a mutual fund, bond or single stock? Any real investment strategy involves knowing the potential downside of an investment. If it's all seen as upside, then it's pure speculation.

There's no transparency because there's a casino mentality.

Hey, everyone likes to roll the dice or buy lottery tickets every now and then. It's part of our nature. But unless you are gifted with clairvoyance and an uncanny ability to do statistics and probability in your head, you probably won't be able to "beat the house." You simply don't know what the next roll is going to be or what cards they hold. You can only guess.

So I find it a little troubling that there's already an "official Bitcoin casino" and CNBC "is hoping for $3,000" in a Bitcoin price prediction. "Hoping?" What's that based on? It's certainly not based on underlying earnings or dividends. Okay, I'll concede that Bitcoin shouldn't be directly compared with the traditional measures for stocks. We are talking apples and oranges. But you can't escape the fact that Bitcoin is immersed in the language of speculation and is still an opaque instrument for most of us. Those are two undeniable danger signals for me.

Chuck Reynolds
Contributor

Alan Zibluk Markethive Founding Member

Blockchain the perfect data protection tool for banks using mainframes

Once exclusive to Bitcoin security, blockchain can now protect real-world coins for major fiscal players

Technophobic thrillers in popular media are always trying to convince us hackers are just a few malicious keystrokes away from crashing the world economy. And while doing such a thing is more complicated than just “deleting all the money,” one could certainly do a great deal of damage by changing what a computer thinks is true.

Wouldn’t it be great if there were software that could guarantee which data was and was not correct, backed up by the most powerful computer processors available? I give you blockchain, which more and more fiscal institutions are using to protect their data, backed up by the undeniable power of mainframes.

Blockchain first entered the public’s (OK, the techie public’s) awareness in the orbit of Bitcoin, as a means of securing that controversial digital currency’s code against someone who decided to break into the right server and add a couple zeroes to their account. But Bitcoin haters need not close this tab in disgust just yet, as blockchain has come into its own as a reliable security measure for more than just black market storefronts.

This powerful software has emerged from its point of origin to be the toast of the online security community, with giants such as HSBC and Bank of America looking to leverage blockchain to keep their data safe. Fortune predicts 15 percent of banks will use blockchain by the end of 2017, growing to 66 percent in four years.

What blockchain does is link every step of a transaction together into a discrete, secure “block,” with each step visible to each stakeholder. Each stakeholder must receive permission from every other stakeholder involved in each step to change anything about that step in the “chain” (see what they did there?) that forms the total process. Any attempt to make a change without all relevant permissions is flagged and negated. That’s not to say it’s impossible for a malcontent to forget every one of those permissions—any security expert will tell you no system is foolproof—but cracking a system with lots of steps and complexity is sure to discourage all but the most determined invaders.

Blockchain useful, safe for banks

A Blockchain is especially useful and safe for financial institutions because it creates a single ledger of all transactions and interactions rather than relying on cumbersome reconciliations between widespread systems to stay up to date. These reconciliations are a bank fraudster’s best friend, as criminals rely on the time between a fraudulent transaction going through and the system reconciling the discrepancy to get away scot free. This also makes precise, real-time visibility possible for data analytics, which is the driving force of market research in pretty much every field, finance perhaps most of all.

This is where big iron comes in. Not only are mainframes powerful enough to house a blockchain process, but they’re also fast enough to perform all the necessary checks to maintain blockchain’s level of security and perform all the stakeholders’ required analytics. Multiply that power by a whole bank of mainframes, like what most fiscal institutions use, and you’re putting up a big iron wall to stymie any online attackers. Blockchain sets in place which online information is true and mainframes make sure the truth is written in stone.

Chuck Reynolds
Contributor

Alan Zibluk Markethive Founding Member

Could blockchain be the operating system of the cities of the future?

 

Many trends on the horizon offer opportunities that could transform our cities. From self-driving vehicles and the sharing economy through to cloud computing and blockchain technologies, each of these trends is quite significant on its own. But the convergence of their disruptive forces is what will create real value and drive innovations.

Take blockchain and the sharing economy as an example. Bringing these two forces together can potentially disrupt established companies like Uber and Airbnb. The success of these companies is largely due to their ability to make use of existing assets people owned, that had been paid for, but from which new value could be derived.

Effectively, these companies set up digital platforms that harnessed “excess capacity” and relied on other people to deliver the services. The same applies to other so-called “sharing economy” companies that merely act as service aggregators and collect a cut off the top. In the process, they gather valuable data for further commercial gain.

But can this business model be challenged and enhanced for the benefit of those who are delivering the service and creating the real value? Can technology be used to bypass the third party and allow direct peer-to-peer collaboration within a distributed governance structure? What could a “peer-owned” and “peer-run” marketplace look like? Blockchain technology could just be the answer.

What is different about blockchain?

You can think of blockchain as the second generation of the internet — a transformation from an internet of information to an internet of value. Blockchain allows suppliers and consumers — even competitors — to share a decentralised digital ledger across a network of computers without the need for a central authority.

The assets that can be described on the blockchain can be financial, legal, physical or electronic. No single party has the power to tamper with the records — sophisticated algorithms keep everyone honest by ensuring data integrity and authentication of transactions.

But the impacts of blockchain go well beyond financial services and transactions. Its real value is in establishing trust-based interactions and accelerating the transfer of governance from centralised institutions to distributed networks of peer-to-peer collaboration. The impact can be profound: a centralised institution acting as intermediatory in a transaction of value is now at risk of being disrupted because the same service can be provided on the blockchain through peer-to-peer interaction.

Blockchain gives service providers a means to collaborate and derive a greater share of the value for themselves. Smart agents on a blockchain could do just about everything provided by a service aggregator. The technology’s trust protocol allows autonomous associations to be formed and controlled by the same people who are creating the value. All revenues for services, minus overheads, would go to members, who also control the platform and make decisions. Trust is not established by third parties, but rather through an encrypted consensus enabled by smart coding.

The transformation has already begun

We already have examples of this technology in action. Arcade City, a global community of peer-to-peer services, is planning to offer a ride-sharing service on the blockchain. To catch a ride, the user buys digital currency (known as tokens), creates an offer and commits funds for the ride. A driver claims the offer, matches the funds to signal their commitment to provide the service, and picks up the passenger. The blockchain releases the funds as soon as the user acknowledges completing the ride. Arcade City has a city council, which will overlook the system for three years until it is fully decentralised and up and running.

The same concept of using distributed public record technology can be applied to a wide range of urban applications. For example, an energy startup in Perth is looking to trial a peer-to-peer technology solution that would allow consumers to offer excess energy, available through their solar panels, on the blockchain. A clever code matches the suppliers with consumers without the need to go through the energy provider.

Still more questions than answers

The blockchain technology and ecosystem around it are evolving rapidly, and are probably raising more questions than answers. How do we establish a system of transparent governance to ensure the longevity of the blockchain? What about security, speed, cost and, more importantly, regulations? As with other disruptive technologies, there will be winners and losers. If the technology is successfully managed for scalable growth, it could very well disrupt established norms and transform our societies. Large layers of data generated by consumers today, which are controlled by hubs, can become public. In a world driven by blockchain, consumers can monetize their own data to derive greater value.

By knowing when and how to take advantage of this technology, we have an opportunity to transform the digital platforms for tomorrow’s cities. The blockchain becomes the city’s operating system, invisible yet ubiquitous, improving citizens’ access to services, goods and economic opportunities. Today, the technology is yet to mature. It remains to be seen if the expectations can live up to reality. But, in many ways, this is quite reminiscent of the internet in the mid-1990s. Not many people would have predicted its significance back then. Had we understood the impacts of the internet 20 years ago, what could we have done differently to create more value?

That is where we stand today with blockchain. The power of this transformation will become more compelling as the hype settles down and we begin to unleash the possibilities.

Chuck Reynolds
Contributor

Alan Zibluk Markethive Founding Member

A new bill filed in the Nevada Senate would, if passed, prevent local authorities from imposing fees or taxes on the use of a blockchain. Nevada Senate Bill 398, filed yesterday and introduced by Senator Ben Kieckhefer, seeks in part to create a legal basis under state law for the use of blockchain-based records and contracts. Notably, the bill would also prohibit local governments from taxing the use of the tech or requiring the use of a licensure for that purpose.

The proposed legislation states:

"A local governmental entity shall not: (a) Impose any tax or fee on the use of a blockchain or smart contract by any person or entity; (b) Require any person or entity to obtain from the local governmental entity any certificate, license or permit to use a blockchain or smart contract; or (c) Impose any other requirement relating to the use of a blockchain or smart contract by any person or entity."

The bill’s impact wouldn’t be limited to those potential economic costs, however. Kieckhefer's proposal would prohibit the exclusion of blockchain records in "proceedings", noting at one point that "if a law requires a record to be in writing, submission of a blockchain which electronically contains the record satisfies the law".

"A smart contract, record or signature may not be denied legal effect or enforceability solely because a blockchain was used to create, store or verify the smart contract, record or signature," the bill goes on to state. "In a proceeding, evidence of a smart contract, record or signature must not be excluded solely because a blockchain was used to create, store or verify the smart contract, record or signature." The proposal is similar to a bill put forward in Arizona last month, constituting a further move to legitimize the use of blockchain records at the state level, with a previous effort also being pursued last year in Vermont.

Chuck Reynolds
Contributor

Alan Zibluk Markethive Founding Member

When will blockchain technology
deliver on its promise?

  

How Blockchain Technology might be useful as a Security Tool

This week, the International Telecommunications Union is holding a workshop to see how blockchain technology might be useful as a security tool. It’s a good indicator of the technology’s ongoing success. Eight years after the original bitcoin blockchain emerged, efforts are well under way to push its security benefits into multiple industries. What strengths does it carry, and what challenges will it face, as a next-generation security tool?

We explained basic blockchain operations here. The technology’s biggest security benefit is its ability to cut out the middleman. Instead of transacting via a trusted arbiter, parties get to transact with each other directly and seal the outcome so that neither can dispute it in the future.

Why is this useful, if trusted third parties promise to do all that work for you? The problem with trusted third parties is that you can’t always trust them. Just look at what happens if your trusted third party happens to be Wells Fargo, or Bank of America, say.  Or Deutsche Bank, or Barclays, UBS, Rabobank, and the Royal Bank of Scotland. We could fill an entire article with links like this. You get the picture.

Secure all the things

The second security benefit complements the first; blockchain technology allows participants to “seal” transactions so that they are visible but immutable, which keeps everyone honest. Different implementations use different techniques. Bitcoin chews up the computing power of a small city to preserve its transactions in digital resin. Other techniques include proof of stake. Each has its own technical and economic implications. No wonder, then, that people are experimenting with blockchains for security reasons. Some, such as the Danish Liberal Alliance and Australia, hope to use it for voting, perhaps misunderstanding some of the bigger security concerns with online votes.

This mad rush to capitalise on new technology fuels the early curve of the Gartner Hype Cycle, leading to an inevitable crash as the technology fails to meet expectations. It’s happening with AI right now, and also with blockchain technology, some argue. We can see this as the blockchain moves to the cloud. Decentralization was an important characteristic of the original blockchain, but Microsoft’s Project Bletchley runs blockchain middleware and application marketplaces in Azure. IBM does something similar on its Bluemix cloud platform.

All this stuff will be cryptographically protected, of course, but it’s still facilitated by a single trusted party, and in effect turns the blockchain into something else. Marketing types at Microsoft are already playing with the inevitable, depressing moniker “Blockchain as a Service”, which pretty much negates the whole idea of a decentralized, independent network.

Once the tech industry stops being so breathless about the blockchain and the blue chips have reinvented it in their own image, it will face other problems. Standardization is one of them. There are many different approaches to blockchain technology, each claiming its own advantage. It will be important for these to work well together. Standardization efforts are now  in the works; The International Organization for Standardization (ISO) already has a committee looking at it.

Good concepts and bad code

The other problem for blockchain technology revolves around software security. Just because blockchain’s underlying concept offers security doesn’t mean that the implementations follow suit. China, which has its own interest in cryptocurrency, recently analysed 25 of the top blockchain-related software projects, and found significant software security flaws in many of them. Most of the software tools related to input validation.

These issues aren’t just theoretical. They’re antithetical to what many blockchain projects are hoping to achieve. Coding flaws in blockchain implementations are serious, and lead to financial losses, such as the $400,000 theft of Zcoins last month. As blockchain software becomes more sophisticated, the attack surface and scope will expand. A key factor here will be smart contracts. Whereas the original bitcoin blockchain only holds records of digital transactions, more recent efforts have bigger ambitions. Smart contracts are in effect programs designed to run on the blockchain.

Imagine replacing a legal contract with a computer program. Instead of paying a lawyer to govern the contract, all parties can run it independently, and the blockchain makes the program’s output immutable and transparent. The program checks external conditions and executes its clauses accordingly. Let’s say Bob and Jane both own equal shares in a company. If the share price hits a certain threshold, they get a bonus dividend based on the number and class of their shares. Normally, a lawyer would have to take care of that, charging handsomely for the privilege. A smart contract with access to company funds would do it automatically.

That whole access to company funds thing is a bit scary, though, given that a smart contract is just a computer program, and computer programs have security flaws. The DAO, a company created entirely from smart contracts on the Ethereum blockchain, lost the equivalent of $50m or so last year in Ethereum’s Ether cryptocurrency. An enterprising hacker found a flaw in the smart contract code and flushed it all into another account.

Ethereum had to fork its own blockchain — going back to rewrite history — to get the cash back. Several developers didn’t like that idea, and retained the original Ethereum code, thus creating Ethereum and Ethereum Classic. We wonder if the Coca Cola Company would have approved? None of this sounds like the basis for a bright, secure future. What it means in practice is that we must get much better programming this stuff before we begin trusting huge swathes of our economy with it or enthusiastically using it to organize the Internet of Things.

Vinay Gupta, one of the original members of the Ethereum team and author of this HBR article on the blockchain’s security promise, has said that we should look to more rigorous disciplines like functional programming to avoid costly screw-ups in the future. The problem is that few people have that rigour. Raise the bar for blockchain coding, and half of the startup projects lining up for their virtual crowdsales would probably disappear. The blockchain holds promise, but it might have to go through Gartner’s trough of disillusionment before it becomes a major item in the security industry’s toolbox. We might have to keep revising our coding practices, too.

The blockchain is today where the web was in 1994. Two decades later, the web is the Justin Bieber of tech — recently come of age, hugely successful, but addled and tarnished by its runaway success. It’s is a beautiful but insane place let down by a dystopic mixture of dodgy Javascript and rampant cybercrime, and ruled by privacy-eating monoliths. Wouldn’t it be nice if we could learn from our mistakes while priming the Next Big Thing?

Chuck Reynolds
Contributor

Alan Zibluk Markethive Founding Member

IBM unveils Blockchain as a Service based on open source Hyperledger Fabric technology

IBM unveiled its “Blockchain as a Service”

Yes, IBM has unveiled its “Blockchain as a Service” today, which is based on the open source Hyperledger Fabric, version 1.0 from The Linux Foundation. IBM Blockchain is a public cloud service that customers can use to build secure blockchain networks. The company introduced the idea last year, but this is the first ready-for-primetime implementation built using that technology. The blockchain is a notion that came into the public consciousness around 2008 as a way to track bitcoin digital currency transactions. At its core blockchain is a transparent and tamper-proof digital ledger. Just as it could track bitcoin’s activity in a secure and transparent fashion, it’s capable of tracking other types of data in private blockchain networks.

This could allow any private company or government agency to set up a trusted network, which would allow the members to share information freely, knowing that only the members could see it, and the information couldn’t be altered once it’s been entered. Jerry Cuomo, VP of blockchain technology at IBM, says his company is offering a set of cloud services to help customers create, deploy and manage blockchain networks. This fits in with IBM’s broader strategy to offer a wide range of cloud services to its customers.

Although the blockchain piece is based on the open source Hyperledger Fabric project of which IBM is a participating member, it has added a set of security services to make it more palatable for enterprise customers, while offering it as a cloud service helps simplify a complex set of technologies, making it more accessible than trying to do this alone in a private datacenter. “Some time ago, we and several other members of the industry came to view that there needs to be a group looking after, governing and shepherding technology around blockchain for serious business,” Cuomo told TechCrunch.

The Hyperledger Fabric project was born around the end of 2015 to facilitate this and includes other industry heavyweights such as State Street Bank, Accenture, Fujitsu, Intel and others as members. While the work these companies have done to safeguard blockchain networks, including setting up a network, inviting members and offering encrypted credentials, was done under the guise of building extra safe networks, IBM believes it can make them even safer by offering an additional set of security services inside the IBM cloud.

While Cuomo acknowledges that he can’t guarantee that IBM’s blockchain service is unbreachable, he says the company has taken some serious safeguards to protect it. This includes isolating the ledger from the general cloud computing environment, building a security container for the ledger to prevent unauthorized access, and offering tamper-responsive hardware, which can actually shut itself down if it detects someone trying to hack a ledger.

What’s more, IBM claims their blockchain product is built in a highly auditable way to track all of the activity that happens within a network, giving administrators an audit trail in the event something did go awry. In addition to the blockchain service itself, IBM announced a customer, Secure Key Technologies, a digital identity and attribute sharing network. The company has been testing a consumer digital identity network built on top of the IBM blockchain technology with banks in Canada.

If it works as advertised, it could end up greatly simplifying and securing how we maintain and share our identities in a digital context, allowing us to expose only the information the requesting authority requires (and no more), while enabling us to revoke those sharing privileges at any time.

Chuck Reynolds
Contributor

Alan Zibluk Markethive Founding Member

The First "Commercial Application"

Tech giant IBM is set to unveil what it's calling the first "commercial application" of Hyperledger’s open-source Fabric codebase. Previously released in beta and scheduled for official release today, the offering — dubbed "IBM Blockchain" — is formally debuting in front of a group of 20,000 developers at the Interconnect conference. There, its first two major deployments will also be detailed.

One of those is a blockchain identity solution built with SecureKey, in which it will power a public-private partnership that saw six Canadian banks invest $27m. In addition, it will be revealed that a Chinese energy company is using the IBM Blockchain to create an exchange for trading carbon credits. In conversation with CoinDesk, Jerry Cuomo, IBM's vice-president of blockchain technologies, described how the company used Hyperledger's open-source code to create a series of new features, which are now in use as part of its IBM Blockchain product.

Cuomo said:

"Hyperledger Fabric is the operating system for IBM Blockchain, and the IBM Blockchain built an environment to develop, govern and operate a production, permissioned blockchain."

Currently available on IBM's BlueMix cloud computing store, the commercial blockchain application will be available on a graded price scale based on the size of the implementation, with startups being charged less than enterprise builders. The announcement comes after Fabric became the first of several open-source projects to emerge from the Linux Foundation-backed Hyperledger's "incubation" period into "active" status.

Secured using IBM hardware security modules that cost on average about $10,000 per month for four nodes, IBM Blockchain gives users the ability to spin up blockchain networks with tailored governance models for onboarding new customers, supporting about 1,000 transactions per second, according to a statement. Previously revealed clients that we now know are also using IBM Blockchain include the Bank of Tokyo-Mitsubishi UFJ, Everledger, Maersk, Northern Trust and Walmart.

Identity for banks

At the conference, Toronto-based SecureKey will discuss an identity network built in partnership with Canadian banks BMO, CIBC, Desjardins, RBC, Scotiabank and TD Bank. Using the platform, the banks will be able to share information about onboarding clients with one another — for a fee — while potentially also saving money by paying one another less than they currently pay credit agencies for the same information. The idea, according to Cuomo, is to create a blockchain identity solution that would make it simpler to verify identities while also reducing the amount of data shared.

To develop the identity network, a group of regulators, including the Digital ID and Authentication Council of Canada (DIACC), the Command Control and a research center funded by the US Department of Homeland Security, took part in the project. Notably, Cuomo said the group has solved the problem of adhering to the "right to be forgotten" requirements of some governments that don’t want their citizens permanently recorded, while still using the immutable Fabric blockchain. "We do have a patent pending, so I don’t want to go into too much detail," said Cuomo. "But we solved it without deleting from the blockchain, which is pretty cool."

Carbon credits

The second commercial-scale deployment revealed today involves Beijing-based Energy-Blockchain Labs Limited. The firm announced what it described as the "world’s first blockchain-based green assets trading platform," built with Hyperledger Fabric and deployed using IBM Blockchain. The so-called "cap-and-trade" system allows companies a certain amount of carbon emissions and lets them exchange those allowances with one another to incentivize the creation of policies and technologies that minimize emissions. But a lack of transparency in the system has resulted in fraud concerns, both in China and elsewhere.

Cuomo told CoinDesk the blockchain-based carbon credits exchange is designed to make it easier for companies that generate pollution to trade credits as part of the build-up to China’s transfer to a unified national market later this year. It's an application that has won the support of the Chinese government as well. The director of China’s National Climate Change Strategy Research and International Cooperation Center, Li Junfeng, said in a statement:

"We must work to limit high energy consumption and high emission industries, encourage clean energy development and further promote energy saving and emission reduction. These tasks are not only necessary for China’s own sustainable development, but for the welfare of the entire human family."

Chuck Reynolds
Contributor

Alan Zibluk Markethive Founding Member

Full Disclosure of Your Salary:
Blockchain Remuneration Models

  

Alan Zibluk Markethive Founding Member