Incentivize Bitcoin Miners After All 21M BTC Are Awarded

Individuals who mine Bitcoins needn’t be miners. We call them ‘miners’ because they are awarded BTC as they solve mathematical computations. The competition to unearth these reserve coins also serves a vital purpose. They validate the transactions of Bitcoin users all over the world: buyers, loans & debt settlement, exchange transactions, inter-bank transfers, etc. They are not really miners. They are more accurately engaged in transaction validation or ‘bookkeeping’.

There are numerous proposals for how to incentivize miners once all 21 million coins have been mined/awarded in May 2140. Depending upon the network load and the value of each coin, we may need to agree on an alternate incentive earlier than 2140. At the opening of the 2015 MIT Bitcoin Expo, Andreas Antonopolous proposed some validator incentive alternatives. One very novel suggestion was based on game theory and involved competition and status rather than cash payments.

I envision an alternative approach—one that also addresses the problem of miners and users having different goals. In an ideal world the locus of users should intersect more fully with the overseers…

To achieve this, I have proposed that every wallet be capable of also mining, even if the wallet is simply a smartphone app or part of a cloud account at an exchange service. To get uses participating in validating the transactions of peers, any transaction fee could be waived for anyone who completes 1 validation for each n transactions. (Say one validation for every five or ten transactions). In this manner, everyone pitches in a small amount of resources to maintain a robust network.

A small transaction fee would accrue to anyone who does not participate in ‘mining’ at all. That cost will float with supply and demand. Users can duck the fee by simply participating in the validation process, which continues to be based on either proof-of-work, proof-of-stake — or one of the more exotic proof theories that are being proposed now.


Ellery Davies co-chairs Crypsa & Bitcoin Event, columnist & board member at Lifeboat, editor
at WildDuck and will deliver the keynote address at Digital Currency Summit in Johannesburg.

Bitcoin closes in on (US) $2000; Why it matters

At the beginning of 2016, Bitcoin was fairly steady at $430. Richelle Ross predicted that it would finish the year at $650. She would have been right, if the year had ended in November. During 2016, Bitcoin’s US dollar exchange rose from $433 to $1000. In the past 2 months (March 24~May 20, 2017), Bitcoin has tacked on 114%, rising from $936 to $2000.  [continue below image]…

If this were stock in a corporation, I would recommend liquidating or cutting back on holdings. But the value of Bitcoin is not tied to the future earnings or property value of an organization. In this case, supply demand is fueled—in part—by speculation. Yes, of course. But, it is also fueled by a two-sided network built on the growing base of utilitarian adoption. And not just an adoption fad, but adoption that mirrors the shift in our very understanding of bookkeeping, trust and transparency.

Despite problems of growth, governance and regulation, Bitcoin is more clearly taking its place as the future of money. Even if it never becomes “legal tender” in any country—and is used only as a mechanism of payments and settlement, it is still woefully undervalued. $2000 is not an end-game. It is a beginning.

Ellery Davies co-chairs Crypsa & The Bitcoin Event. He is a columnist & board member at Lifeboat Foundation,
editor at WildDuck and is delivering the keynote address at the 2017 Digital Currency Summit in Johannesburg.

Blockchain can dramatically reduce pollution, traffic jams

The World Economic Forum has posted an article that hints at something that I have also suggested. (I am not taking credit. Others have suggested the idea too…But advancing tech and credible, continued visibility helps the idea to be taken seriously!)

I am not referring to purchasing and retiring carbon credits. I like that idea too. But here is an idea that can enable fleets of autonomous, shared, electric vehicles. Benefits to individuals and to society are numerous. And the blockchain makes it possible early in the next decade. It is not science fiction.

The future is just around the corner. Non-coin applications of the blockchain will support great things. Goodbye car ownership. Hello clean air! The future of personal transportation is closer than you think.

Read about it at the World Economic Forum.


Ellery Davies co-chairs Crypsa & Bitcoin Event, columnist & board member at Lifeboat, editor
at WildDuck and will deliver the keynote address at Digital Currency Summit in Johannesburg.

 

What Fraction of Bitcoin Value is Driven by Speculators?

At Quora, I occasionally play, “Ask the expert”. Several hundred of my Quora answers are linked at top right on this page. Today, I was asked “How much of Bitcoin’s value is driven by speculation”. This is my answer…


This is a great question! While the value of any commodity is determined by supply and demand, speculation is one component of demand. Another is the unique utility value inherent in a product or process. This is sometimes called ‘intrinsic value’.

It’s ironic that when a high fraction of value is driven by speculation, short-term value becomes volatile and long-term value becomes less certain—and less likely to produce returns for those same speculators.

Editor’s Note: In the past few weeks, a significant spike in Bitcoin’s value and trading volume relates to a pending regulatory decision expected at the end of next week. This activity is certainly driven by speculation. But for this article, I am considering periods in which the demands of individual events are less clear.

The value of Bitcoin is influenced by:

  • Day traders who buy and churn
  • Long-term speculators who buy and hold. This includes me.
  • Criminals who hope that cryptocurrency transactions can be more easily hidden than government backed currencies
  • Early adopters who use Bitcoin as a payment instrument or to send money
  • Vendors who accept the coin in exchange for products and services
  • Vendors who retain a fraction of revenue in Bitcoin (rather than exchanging to Fiat). To avoid a round trip, they seek to purchase materials, pay staff or settle debts with the Bitcoin they earned.

Here’s the rub: Bitcoin will not become a store of value unto itself (i.e. a currency), and it will not gain a significant fraction of the payment instrument market until the transaction volume of the first to user categories in the above list are overtaken by the the ones further down. Likewise, Bitcoin will not enter its biggest growth spurt until the last two items swamps the others as the largest motive for acceptance and use.

Put another way: Long term value must ultimately be driven by organic adoption from actual users (people who buy and spend Bitcoin on other things).

In another article, I expand on the sequence of events that must take place before Bitcoin grows into its potential. But make no mistake. These things will happen. In tribute to the brilliance of Satoshi, the dominoes are already falling.

In response to the question, I estimate that at the beginning of 2017, 85% of Bitcoin value is still driven by speculators. I have not analyzed wallet holding periods compared against the addresses of known vendors. Furthermore, it would be difficult to understand the relationship between the number of speculative transactions and the overall effect on value. Therefore, my figure is more of a WAG than an calculated estimate. But it’s an educated WAG.

The fraction of speculative transactions will drop significantly in the coming months—even as late speculators jump on board. That’s because uptake from consumers and businesses is already taking off. The series of reactions that lead toward ubiquitous, utilitarian applications has begun. Bitcoin’s value will ultimately be driven by use as a payment instrument and in commerce.

Because it is a pure supply-demand instrument, Bitcoin will eventually be recognized as currency itself. That is, it needn’t be backed by precious metal, pegged convertibility or a redemption promise. When that happens, you will no longer ask about Bitcoin’s value. That would be a circular question, since its value will be intrinsic. Instead, you will wonder about the value of the US dollar, the Euro and the Yen.

As a growing fraction of groceries, gasoline and computers that you buy are quoted in BTC, you will begin to think of it as a rock, rather than a moving target. One day in the future, there will be a sudden spike or drop in the exchange rate with your national currency. At that time, you won’t ask “What happened to Bitcoin today? Why did it rise in value by 5% this morning?” Instead, you will wonder “What happened to the US dollar today? Why did it drop in value by 5%?

Distributed Consensus: Beyond POW or POS

At the heart of Bitcoin or any Blockchain ledger is a distributed consensus mechanism. It’s a lot like voting. A large, diverse deliberative community validates each, individual user transaction, ownership stake or vote.

But a distributed consensus mechanism is only effective and faithful if the community is impartial. To be impartial, voters must be fairly separated. That is, there must be no collusion enabled by concentration or hidden collaboration. They must be separated from the buyer and seller; they must be separated from the big stakeholders; and they must be separated from each other. Without believable and measurable separation, all sorts of problems ensue. One problem that has made news in the Bitcoin word is the geographical concentration of miners and mining pools.

A distributed or decentralized transaction validation is typically achieved based on Proof-of-Work (POW) or Proof-of-Stake (POS). [explain]. But in practice, these methodologies exhibit subtle problems…

The problem is that Proof-of-Work can waste an enormous amount of energy and both techniques result in a concentration of power (either by geography or by special interest) — rather than a fair, distributed consensus.

In a quasi-formal paper, C.V. Alkan describes a fresh approach to Blockchain consensus. that he calls Distributed Objective Consensus. As you try to absorb his mechanism, you encounter concepts of Sybil attacks, minting inequality, the “nothing-at-stake” problem, punishment schemes and heartbeat transactions. Could Alkan’s distributed consensus mechanism be too complex for the public to understand or use?…

While I have a concern that time stamps and parent-child schemes may degrade user anonymity, the complexity doesn’t concern me. Alkan’s paper is a technical proposal for magic under the covers. Properly implemented, a buyer and seller (and even a miner) needn’t fully understand the science. The user interface to their wallet or financial statement would certainly be shielded from the underlying mechanics.

Put another way: You would not expect a user to understand the mechanism any more than an airline passenger understands the combustion process inside a jet engine. They only want to know:

• Does it work?  •  Is it safe?  •  Is it cost effective?  •  Will I get there on time?

So will Alkan’s Decentralized Objective Consensus solve the resource and concentration problems that creep into POW and POS? Perhaps. At first glance, his technical presentation appears promising. I will return to explore the impact on privacy and anonymity, which is my personal hot button. It is a critical component for long term success of any coin transaction system built on distributed consensus. That is, forensic access and analysis of a wallet or transaction audit trail must be impossible without the consent and participation of at least one party to a transaction.


Ellery Davies co-chairs Cryptocurrency Standards Association and The Bitcoin Event. He is columnist & board member at
Lifeboat Foundation, editor of AWildDuck and will deliver the keynote address at Digital Currency Summit in Johannesburg.

Blockchain Scalability: Proof-of-Work vs BFT Replication

Research can seem bland to us laypersons. But, Marko Vukolić shares many of my research interests and he exceeds my academic credentials (with just enough overlap for me to understand his work). So, in my opinion, his writing is anything but bland…

Vukolić started his career as a post-doc intern at IBM in Zurich Switzerland. After a teaching stint as assistant professor at Eurecom and visiting professor at ETH Zurich, he rejoined the IBM research staff in both cloud computing infrastructure and the Blockchain Group.*

As a researcher and academic, Vukolić is a rising star in consensus-based mechanisms and low latency replicated state machines. At Institut Mines-Télécom in Paris, he wrote papers and participated in research projects on fault tolerance, scalability, cloud computing and distributed trust mechanisms.

Now, at IBM Zurich, Vukolić has published a superior analysis addressing the first and biggest elephant in the Bitcoin ballroom, Each elephant addresses an urgent need:

  • Scalability & throughput
  • Incentivize (as mining reward withers)
  • Grow & diversify governance & geographic influence
  • Anonymize transactions to protect privacy
  • Recognize & preserve ownership

Regarding the first elephant, scalability, Bitcoin urgently needs to grow its Blockchain dynamics into something that is living and manageable. To that end, Vukolić refers to a transaction bookkeeping mechanism that works as a “fabric”. That is, it does not require every miner to access the history-of-the-world and append each transaction onto the same chain in serial fashion. Rather than growing an ever bigger blockchain—with ever bigger computers—we need a more 3D approach that uses relational databases in a multi-threaded, transactional environment, while still preserving the distributed, p2p trust mechanisms of the original blockchain.

While clearly technical, it is a good read, even for lay enthusiasts. It directly relates to one of the elephants in the room.

I have pasted Marko’s Abstract below. The full paper is 10½ pages (14 with references).


Bitcoin cryptocurrency demonstrated the utility of global consensus across thousands of nodes, changing the world of digital transactions forever. In the early days of Bitcoin, the performance of its probabilistic proof-of-work (PoW) based consensus fabric, also known as blockchain, was not a major issue. Bitcoin became a success story, despite its consensus latencies on the order of an hour and the theoretical peak throughput of only up to 7 transactions per second.

The situation today is radically different and the poor performance scalability of early PoW blockchains no longer makes sense. Specifically, the trend of modern cryptocurrency platforms, such as Ethereum, is to support execution of arbitrary distributed applications on blockchain fabric, needing much better performance. This approach, however, makes cryptocurrency platforms step away from their original purpose and enter the domain of database-replication protocols, notably, the classical state-machine replication, and in particular its Byzantine fault-tolerant (BFT) variants.

In this paper, we contrast PoW-based blockchains to those based on BFT state machine replication, focusing on their scalability limits. We also discuss recent proposals to overcoming these scalability limits and outline key outstanding open problems in the quest for the “ultimate” blockchain fabric(s). Keywords: Bitcoin, blockchain, Byzantine fault tolerance, consensus, proof-of-work, scalability, state machine replication

* Like Marko, Blockchains, Cloud computing, and Privacy are, also my primary reserach interests, (GMTA!). But, I cede the rigorous, academic credentials to Marko.

BFT = Byzantine Fault Tolerant consensus protocols

Related—and recently in the news:

Ellery Davies co-chairs Cryptocurrency Standards Association and The Bitcoin Event. He is columnist & board member at
Lifeboat Foudation, editor of AWildDuck and will deliver the keynote address at Digital Currency Summit in Johannesburg.

Getting your first Bitcoin; Choosing a wallet

There are at least four ways to acquire Bitcoin and three ways to store it…


Acquire Bitcoin: You can trade Bitcoin in person, accept it as a vendor, mine it, or buy on an exchange.

Store Bitcoin: You can keep your Bitcoin in an online/cloud service (typically, one that is connected to your exchange account), keep it on your own PC or phone, or even print it out and store it on a piece of paper. Like a physical coin, the piece of paper has value. It can be placed in your lock box or under your mattress.

Let’s look at the market for Bitcoin Wallets (all of these are free), and then we shall talk about Bitcoin exchange services. This includes my personal recommendation for the typical consumer or coin enthusiast…

1. Choosing a Wallet

You can start your search for a wallet on this page at Bitcoin.org. Use the drop down tabs to refine your search by platform: Mobile, Desktop, Hardware gadget or Web. Don’t overlook the web option. For many users, the wallet (and VAULT) included with an online exchange account is all you need.

Each wallet platform is further distinguished by operating system. For example, you can find a smartphone wallet for Android, Apple, Windows Mobile or Blackberry. Some popular apps are listed under more than one OS or platform.

When you click on any of the app logos, you will see a checklist of five key traits, according to reviewers at the Bitcoin Foundation:

  • Control over your money
  • Simplified validation
  • Basic transparency
  • Secure environment
  • Weak privacy

These are not necessarily critical traits/features. It depends on your needs and preferences. For example, everyone wants good privacy and security. But not everyone wants to control their private keys. That places the risk of loss, backup and/or the burden of inheritance issues on you, rather than a standardized recovery process. The feature comparison simply helps you to begin your own comparison and evaluation.

For Android users, my personal recommendation is Bitcoin Wallet by Andreas Schildbach (the logo is a tilted orange ‘B’). It is simple, secure, well maintained and very popular. (iPhone users: See my my suggestion in the recommendations, below).

2. Portable –vs– Online

Despite the simplicity and low cost of spending or sending Bitcoin between individuals and vendors, getting your first Bitcoin can be confusing, complex and even risky. For this reason, I suggest that Newbies open an account at a very established and trustworthy exchange.

In the near future, this will include most big banks. But for now, the safest and most reputable exchange is Coinbase in San Francisco. They are also the one with the highest level of regulatory compliance. Bitstamp of Slovenia and Great Britain is a close second. In my opinion, using either of these organizations as a currency exchange or a secure place to park your digital currency is a safe bet.

Both of these exchanges include a cloud wallet service that—when used properly—is safe and secure. But, because Bitcoin is still in its infancy, you will need to learn about sweeping funds into a ‘vault’ (to better protect against hacking) and you should also learn about portable backups and multi-sig (to protect your assets, in the event of forgetfulness, death or incapacitation).

With either type of wallet—device storage or online with an exchange—I recommend that you install and play with a portable wallet on your phone, just to get the hang of a few basic functions: Display wallet address for incoming money, Send money, Request money (i.e. send an invoice), and Pay with the QR-camera feature. All wallets serve these basic and critical needs.

Recommendations:

  • Coinbase is a most reputable exchange for buying/selling & storing Bitcoin
  • Bitcoin Wallet by Andreas Schildbach is an excellent choice for portable, secure storage. This app is available for Android phones only. Apple iPhone users may wish to try Bitcoin Wallet by Blockchain. I have not reviewed it. It has a slightly less friendly user interface but it is stable and very popular.

Related Reading:

Ellery Davies co-chairs Cryptocurrency Standards Association. He produces The Bitcoin Event, is board mem-
ber at Lifeboat Foundation and will deliver the Keynote Address at Digital Currency Summit in Johannesburg.