Tag Archives: Mt. Gox

Stellar & Ripple: Pretender to Bitcoin throne?

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You might know that I am a board member and co-chairperson of CRYPSA, the Cryptocurrency Standards Association. (I write this Blog under a pen name). The organization is brand neutral. That is, we don’t endorse or favor one particular coin over another. Think of CRYPSA standards as the security paper onto which money is printed. The paper can be used for Dollars, Yen and Zlotties. If it prevents counterfeiting then any currency can benefit. Like security paper, the standards we create and the safe practices we promote apply equally to all cryptocurrencies.

But, as with any user network, recognition, adoption and gravitas count! It’s no secret that Bitcoin is the elephant in the room. It is by far the biggest, baddest and most reported new age coin by any yardstick.

ripple_by_Mo

Dollars & cents? Ripple Labs unit = XRP

But Bitcoin has a problem—at least that’s what fifty start up companies want us to believe. The code that validates transactions (also used to mine coins) is transaction bound and hampered by original design. Moreover, alt coin entrepreneurs make a persuasive case for new features that more fully exploit the block chain potential.

Wild Ducks may know of Litecoin, Feathercoin, Dogecoin and Mastercoin, but there are even newer coins attracting the eyes of the crypto and investment community. If you have your ear to the ground, the smart money seems to be betting on digital currency coined by Stellar and by Ripple Labs. The rival companies share an eclectic and storied founder and they are both headquartered in San Francisco.

The New York Observer offers an illustrated history and analysis of the two pretenders in the novel-like style of Wired Magazine. They call it The Race to Replace Bitcoin.

Wow! In my humble opinion, this is a great article! I will assume that you have perused it. Very little recap here—just a Wild Duck commentary and analysis…

Ripple-1Ripple and Stellar co-founder Jed McCaleb has a history. He founded eDonkey, a Napster-like service of the early p2p era and Mt. Gox, the big Bitcoin exchange that collapsed in a spectacular and still-mysterious failure. Another co-founder, Sam Yagan also survived eDonkey and OK Cupid. He is now CEO of dating behemoth, Match.com.

Stelar-1aI know some of the other players, but hadn’t realized that Ripple Labs was making waves (pun intended). McCaleb’s newer venture, Stellar, claims to represent more than just a coin. It is a monetary ecosystem that inter-operates across currencies and boundaries. (Isn’t that what Bitcoin does? It seems that I have a lot to learn)…

I have less programming expertise than these geniuses, and possible less cryptography expertise. But I can outdistance their collective chops on macro economics.

Wild Duck Analysis

It is exceedingly unlikely that any venture will create the next cryptocurrency by design, unless the new coin is directly tied to and sanctioned by a believable and uncontested legacy of Bitcoin prime. In effect, a new coin must be a fork of the original code or at least a proper heir with blood lines and public trust.

Ripple Labs and Stellar have a very bright team. I don’t doubt the need to improve on the Bitcoin protocol, perhaps even with a wholly new technical approach. But the string of failures in McCaleb’s background, the mystery surrounding the first 1.5 billion STRs, and the daffy distribution scheme with Facebook are almost deal killers. This needn’t be an epitaph. There is a path to righteousness…

Cryptocurrency is already hard for the public to understand and harder to accept. For this reason, an heir to Bitcoin needs five things to succeed:

  1. Direct ties to the ownership of all original BTC
  2. Sanctioned by top Bitcoin developers AND blessed by Satoshi in a signed email
  3. The coin must be ZERO growth. It must never fall prey to inflationary economics. It accommodates a growing base and users and transactions by slicing the pie thinner (or ‘mining’ from a capped pool)—never by creating coins out of thin air.
  4. Source code that is transparent, open and without proprietary interests.
  5. A unshakeable commitment to continued decentralization and p2p operation with no mandatory reporting of anything (identities, or anything about transaction beyond date, pseudo-anonymous wallet ID and amount). In short, there must be no authority and no requisite bookkeeping beyond the open and distributed block chain.

There you have it: Our unofficial CRYPSA manifesto of what it takes to dethrone Bitcoin. In short, a successful replacement must be no less than Bitcoin 2. It elevates Bitcoin to the status of emeritus, because it respects the equity of early adopters (and without watering down with ‘newly created shares’)—and it must provably disavow any potential for inflation or manipulation.

Ellery Davies is a founder and board member of CRYPSA. He is also chief editor at AWildDuck.com.

Related: Could Bitcoin be Dethroned by an Altcoin

Trust a Bitcoin Exchange without Regulation

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Yesterday, after the spectacular failure and bankruptcy filing of Mt. Gox, the world’s largest Bitcoin exchange, Peter Finn, an IBM architect, launched a survey within a LinkedIN discussion group. The single question and multiple choice options were:

“In Light of MTGOX what level of transparency should there be for Bitcoin Exchanges?”

1. None. Exchanges Can do as they please
2. All Public Keys Disclosed and Signed
3. Show Public Keys, Source Code, Processes
4. Fully Regulated, Monitored, Audited

One day after it was published, respondents were decidedly negative on the option #1 (no regulation). They responded like this: 1–14%, 2–28%, 3–28%, 4–28%. I am among the 14%: No regulation. But only because Peter failed to cover all the bases. There is a far better option than regulation. But I am getting ahead of myself…

Regulation in a Decentralized, P2P
market, with Open Source Tools 

Suggesting that Bitcoin be “fully regulated” is like demanding that feral cats be licensed to procreate. Perhaps the point can be better illustrated by a metaphor closer to home: Perhaps we should regulate the use of file encryption or bit torrent clients. After all, they can both be used for circumventing copyright law or transmitting illegal content.

Governments are inevitably weakened by legislating against what cannot be regulated. The US has already tried to regulate encryption (PGP/Zimermann and Clipper chip) and they tried to legislate against the use of torrents (Actually, it was a prelude to torrents. Who remembers Napster?)

You can enact laws and regulations, but when you ignore motives, access and facts in evidence, you promote bureaucracy with a head-in-the-sand morality. Feral cats don’t read edicts. Their compulsion to reproduce is strong and they possess the tools they need to procreate. The same is true for bit torrent, encryption and a fully-distributed, low-cost, p2p payment mechanism that is adding users like a wild fire.

Considered in another light, Bitcoin was created to circumvent—or at least—transcend regulation. For many legitimate users, the whole point of a distributed, p2p network built upon open source tools is to unfetter users and disentangle government.

So the real question is not whether we should engage in useless legislation that ignores the facts on the ground. A better question is “How can we make the Wild West a bit safer?” I understand the need for public trust. ! But trust comes from transparency, accountability and outside audits. It doesn’t come from government regulation. Peter alluded to this in the very last sentence the text accompanying his sruvey. He said:

Certified-01

“Will users decide through consensus that
exchange XYZ chooses to fully disclose?”

Bingo! Create standards and practices—especially for security and transparency. Then, make it simple for anyone choosing an exchange or entering into a transaction to determine if the organization complies with industry best practice. Finally, offer a modest level of consortium insurance (to the user, or at least compliant exchanges), so that public trust can be tied to something tangible.

On Feb 25, one day after championing a joint statement from the few credible Bitcoin exchanges, Coinbase took a big step toward this goal when then invited a research analyst from a competitor to audit their internal security practices and randomly compare a customer transaction log to the public blockchain. The report includes an explanation of the test conditions and the results.

Laws are meaningless in a market that cannot be regulated. But industry standards, audits and certification can certainly step up to the task. They can build trust, confidence and stability. Just as importantly, they won’t interfere with the fraction of users who demand personal, private, p2p transactions without auditing or oversight. After all, we must never forget that these individuals started the revolution from which we will all benefit… even the “legitimate” commercial transactions that require transparency, security and an audit trail.

So, let’s revisit Peter Finn’s survey: What level of regulation should be mandated for Bitcoin exchanges?…

I propose Option #5: None. Exchanges can do as they please. But establish an easily verified, independent certification of standards & practices that can be tested at the URL throughout user interaction. Users can avoid the tool, add the tool, or ignore its warning. The certification (and a gut-simple way to see it & test it), empowers the user instead of the government. It also avoids entangling a new technology with unimaginable potential in red tape.

Incidentally, a group of individuals from this discussion group is working toward this goal right now. Although they have barely completed introductions, the Virtual Currency Collaborative Cryptocurrency Standards Association [CRYPSA] has hammered out a charter that will lead to a set of voluntary standards and practices to facilitate open, transparent, safe and auditable transactions within a community that often takes pride in their inherent freedom from regulation. Taming the Wild West will not be too difficult. And it won’t even be necessary to restrict gunslingers from walking into the saloon at high noon.

Mt. Gox: Comeuppance for a Bitcoin king

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Feb 24 Update: Coinbase, Blockchain.info & other execs issue statement:

■  Refer to Mt. Gox ‘insolvency’.  ■  Web site vanishes.
■  Mysterious loss of more than 700,000 Bitcoins.

I have never been a fan of Mt. Gox, the big Bitcoin exchange based in Japan. From early in their history, I have complained that they lack the standards, oversight and methodology to hold their position as de facto linchpin in an emerging field.

Glitch —vs— Catastrophe

I used to run a large email service. We earned all the top Editors’ Choice awards and were featured in every tech publication.

Like any service provider we had occasional glitches that prevented a fraction of users from accessing mail in a timely fashion. Occasionally, a denial-of-service attack or an upstream peering dispute would degrade service to all users. But, there was one time that all users were locked out of our servers. It happened at the worst possible time — during a summer holiday. Imagine the gooey stuff hitting the fan as our clients started their holiday without email.

Even though we posted service updates to our web site, our phones were under siege from the very beginning. After all, email is the primary communication medium for many individuals.

We developed expertise in preserving good will. Most importantly, we informed users about the problem, updated them frequently, and learned from our mistakes. But, we sometimes deflected blame. When problems were related to an upstream provider or a situation ‘beyond our control’, we learned that with selective disclosure, we could avoid the full brunt of user frustration. It was a bit was disingenuous, because, in most cases, the problems could have been avoided with a more robust fail-over implementation.

Calamity Hits Mt. Gox

mtgoxBy now, anyone who dabbles in Bitcoin is aware that the exchange purported to be the biggest, baddest gun in the west is blocking all withdrawals. That’s right. You can put money in, but you can’t take it out. The excuse: “We have identified suspicious transactions.”

Of course, with millions of dollars of client assets in the balance, even an unregulated organization cannot rest on that explanation for long. And so, Mt. Gox has clarified their radical move, claiming that there is a bug in core code maintained by the Bitcoin Foundation. They refer to this bug as “transaction malleability”.

Mt. Gox implementation protocol: Serious risk to customers

Not only does Mt. Gox blame the Bitcoin Foundation for transaction malleability, they conclude that “Bitcoin is a very new technology in its early stages.” Yeah, sure! That’s another way of saying that some companies lack the resources to keep up with a reference design or to practice due diligence in testing proprietary implementations. Read between the lines, wild ducks: The problem is not with Bitcoin prime, it is with Mt. Gox’s convoluted attempt to create sidecar code in an effort to achieve scale and proprietary advantages.

Mt. Gox tossed the reference code and developed their own wallet process. Then, they failed to keep up with published changes to the reference standard—many related to security, distributed reporting and scaleability! If Mt. Gox thinks that they have an edge on these issues, they should reconsider their complaint about the early nature of the art. Instead, they ought to join established working groups and improve the process from within. In that way, they can avoid forking far from the tracks and throwing customers under the bus.

Coinbase_Logo

It’s no surprise that the Bitcoin foundation turned the table on Mt. Gox, blaming them for the problem. Likewise, here is the response from Coinbase, the San Francisco based exchange (also pasted below). As for me, I will bite my tongue and withhold further commentary. Suffice it to say that I agree with the Coinbase position and that

I have never felt that Mt. Gox was deserving of trust or of being the heavyweight in the room.

Was a spectacular failure inevitable?

Glitches are an inevitable result of new technologies—especially when the technology relates to a dramatic shift or emergence of a new mechanism, like cryptocurrency. But fiascos of this magnitude are typically avoided in a shakedown that occurs early on. In this vignette, I the ‘glitch’ is the uncanny survival of Mt.Gox as a credible entity through the first months of 2014.

Stacks of BitcoinWhat does it mean for Bitcoin?

In the days after the Mt. Gox fiasco, the Bitcoin exchange rate retreated 48% to $480. Clearly, many stakeholders were shaken and there a sufficient number of them have sparked a panic, heading for the exit door.

So what does this mean for Bitcoin? Is the fat lady rehearsing the closing aria? I have never considered Bitcoin be an equity play—Ultimately, it is a currency and not an investment. In fact, it is a near perfect exchange medium and adoption is growing like a weed. As such, those with a BTC in their wallet will almost certainly see an increase in value. That’s the inevitable fallout when you factor the intersection of increased adoption and fixed supply cap.

For individuals sitting patiently on the sidelines, waiting for a good moment to fund a their transaction kitty, this current event makes for a spectacular buying opportunity. There is every reason to believe that Bitcoin will be a respectable world currency, despite objections over its lack of intrinsic value. And with permanent market cap of 21 million units, the a value under $500/coin will one day seem to be an incredible bargain.

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Coinbase Response to Mt. Gox problems…
Bitcoin’s Transaction Malleability Issue  (Feb 10, 2014)

Earlier today, Mt.Gox released a press release highlighting the “Transaction Malleability” issue with the Bitcoin protocol.  Gavin Andresen, Lead Developer of the Bitcoin protocol later released a statement confirming that this is not a problem with the Bitcoin protocol, but is a challenge for creators of bitcoin wallet software (like Coinbase).

The malleability issue would allow an attacker to change the identifier of a transaction (but not the sender or recipient of bitcoin, amounts, or other information).  If not accounted for carefully, this could lead some wallets to duplicate transactions.

After conducting a review of our wallet software, we could not find any instances of such an attack being used. We also looked into the technical details of the transaction malleability issue and just this morning added additional security measures to our software to further prevent such an attack. From our current analysis, there weren’t any users affected by this issue, but we’ll continue to monitor transactions to make sure.  If you have any questions about a transaction on your account you can contact support.

Bitcoin is a truly exciting space to be in. Every day, more and more consumers and merchants are experiencing the value of bitcoin – simple, instant transactions – exactly what payments should be in the age of the Internet. With nearly 1M consumer wallets and over 23,000 merchants on our platform, Coinbase will continue to stay vigilant and do everything we can to make Bitcoin as easy as possible for customers.