Monday, August 31, 2015

Commonwealth Virtual Currencies Working Group Issues Statement about Bitcoin’s Potential

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This week, the Commonwealth Virtual Currencies Working Group made up of Australia, Barbados, Kenya, Nigeria, Singapore and Tonga, together with the International Monetary Fund and World Bank, concluded a three-day conference in London with a consensus: “Member states should consider the applicability of their existing legal frameworks to virtual currencies and where appropriate they should consider adapting them or enacting new legislation to regulate virtual currencies.”

The group has come up with the consensus because it recognizes the benefits and the disruptive nature of bitcoin and other digital currencies in the financial sector. The conference was joined by experts from the banking sector, academia, virtual currency operators, users and law enforcement agencies, to discuss the unique applications and the risks of criminal misuse.

One of the main members of the Commonwealth Virtual Currencies Working Group, Aminiasi Kefu, Tonga’s acting attorney general explained:

“From Tonga’s perspective, virtual currencies are a phenomena that has already arrived. Today, real estate, buildings and businesses held or owned by individuals resident in Tonga are being advertised for sale on the Internet for virtual currency, namely bitcoin.”

The Working Group received presentations from nine groups involved with virtual currencies, including the U.K. Digital Currency Association, BitPesa, Bitt, Bankymoon, Ripple Labs and Minku.

Many experts and representatives explained to other member states that the decentralized nature of virtual currencies, specifically bitcoin, has been the solution to economic inequality and remittances worldwide.

Bankymoon CEO Lorien Gamaroff explained the importance of virtual currencies in severely underbanked regions such as Africa.

“In Africa, around 80 percent of the population doesn’t have access to banks and are mainly engaged in a cash economy,” said Gamaroff.

 

Photo The Commonwealth / Flickr (CC)

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Barclays to Begin Offering Bitcoin Payments for Customers, Beginning with Charities

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Barclays is about to become the first mainstream bank to openly and directly support bitcoin transactions, The Sunday Times reportsThe Daily Mail echoed the news for its huge readership.

Barclays has been experimenting with Bitcoin and working with digital currency start-ups for some time.  Speaking at the Morgan Stanley European Financials Conference in London, Barclays’ CEO Antony Jenkins warned the “banking sector has not yet felt the ‘full disruptive force’ of technology – but it will.” He elaborated on the growing concern among financial institutions that faster, cheaper payment systems will start to seduce their consumer and business customers in the coming years. In June, Barclays signed a deal with Bitcoin company Safello to explore financial applications of the blockchain technology that powers Bitcoin.

Barclays is not the only bank to express interest in Bitcoin’s technology and launch internal experiments and pilot projects. In fact, as recently reported by Bitcoin Magazine, major banks including Citi, UBS, Santander, BNP Paribas, and BBVA are taking serious note of Jenkins’ warning and committing resources to preliminary blockchain studies.

Now, as reported by The Sunday Times, Barclays plans to test the virtual currency, allowing people to make donations to charities in bitcoin. The bank has gone into partnership with a bitcoin exchange and aims to begin the experiment by the end of the year. Derek White, chief design and digital officer at Barclays, said: “Barclays is enabling the bitcoin exchange to help charities accept bitcoin.”

Barclays has two sites in Notting Hill and Old Street, London, dedicated to researching Bitcoin and blockchain technology, with a combined capacity of 75 staff, and is also operating a blockchain workspace in a revamped warehouse in Whitechapel, east London.  The bank “is inviting start-ups, academics, and the government to work at the space to connect with others that are interested in the Bitcoin and blockchain community,” said White.

With this move, Barclays will be the first major bank to help selected customers to receive bitcoin payments directly in their bank accounts, establishing an important precedent. Focusing on charities first seems a very smart decision, which can shield Barclays from the potential regulatory and image problems, giving it time to prove the value of Bitcoin in a context that can’t be easily criticized. It can be expected that, after this first initiative focused on charities, Barclays could consider gradually allowing ordinary business and residential customers to receive bitcoin payments.

The Sunday Times mentions that a Bitcoin company was included in the trade mission to southeast Asia led by U.K. Prime Minister David Cameron a few weeks ago, which underlines the rising status of Bitcoin in Great Britain. On the trade show, Cameron enthusiastically praised the Innovate Finance Manifesto: 2020, issued by Innovate Finance, which aims to advance Great Britain’s standing as a leader in financial technology (fintech) innovation both domestically and abroad and create 100,000 jobs in U.K. fintech.

The manifesto is focused on generic fintech innovation and doesn’t mention Bitcoin- and blockchain-based digital currencies explicitly. However, Great Britain is on its way to becoming a global hub for bitcoin and other digital currencies, with both the government and Bank of England having made recent moves designed to stimulate the development of digital fintech.

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Ukraine May Soon Legalize Bitcoin

Ukraine may soon legalize Bitcoin. The National Bank of Ukraine (NBU) is seriously looking into the possibilities of implementing Bitcoin’s technology into the financial system according to Ukraine’s
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AUG 31 DIGEST: Barclays to Enable Charitable Bitcoin Donations; BTC Businesses Prepare for Next 'Stress Test'

Barclays announced that it will allow people to make donations to charities in bitcoin; bitcoin exchanges and wallet companies are developing strategies to deal with the CoinWallet's upcoming “stress
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Gok!llo: Kickstarter & Indiegogo ‘No Longer Suitable for Modern Crowdfunding’

CoinTelegraph spoke with Ram Budime, the Business Development Manager of Gok!llo, a new bitcoin-powered crowfunding platform, on their innovative approach to crowndfunding
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Sunday, August 30, 2015

FinTech Digest: Bitcoin Transactions In Cuba, The Debut Of Coin 2.0, Coinbase Tests New Service In Europe

The U.S. and Cuba transact in bitcoin, Coin (the all-in-one credit card) has revealed the second iteration of its card, Coinbase allows users to purchase bitcoin with debit and credit cards, and more
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Bitmain Announces Launch of Next-Generation Antminer S7 Bitcoin Miner

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Bitmain, the Bitcoin mining ASIC provider, Sunday announced the release of its next-generation Bitcoin miner, the Antminer S7, using the recently announced BM1385 ASIC.

The company argues that “this machine is not only our most efficient ever, using less than half the energy per gigahash of the S5, but it is also our most powerful miner to enter mass production.” It had released the S5+ in limited supply, which offers nearly 3,000 more GH/s than the announced S7.

“It’s true that the S5+ had a greater overall hashrate, but the S7 squeezes more juice from a smaller, more power efficient package,” said Jake Smith, Bitmain’s head of North America, in an interview with Bitcoin Magazine. “When comparing hashrate to weight, size, or power consumption, the S7 comes out ahead.”

The Antminer S7 is a denser mining rig than previous models. Whereas the S5 used 60 chips per miner, the Antminer S7 uses 162 of the BM1385 chips. Each S7 will be able to generate upwards of 4,850 GH/s while only needing approximately 0.25 J/GH of power.

Part of the reason the chip is so much stronger is because the company went away from using standard design flow methods. “From the BM1385 onwards, we’ll be using full-custom design flow,” Smith explained. While full-custom design flow is more work intensive and does have a greater margin of error, it results in greater efficiency, which is where profit can be found.

“It’s difficult to predict the how long our new chip will take to bring to market, but development on our next chip began almost as soon as this one was completed. Our next chip, the BM1387, will be our second full-custom chip, and our first chip built on a 16-nanometer process node,” Smith said.

With each new chip released miners have to weigh their options on whether to upgrade. Smith said that there has been considerable interest in the S7 by current Bitmain miners, in particular because older hardware may become obsolete. “The inevitable large deployment of S7s will cause network hashrate to rise and some older hardware to be forced offline. More recent hardware like the S5 will still be profitable, but to a lower degree than at present,” Smith said.

‘We’ll continue to make our machines available to Joe Miner …’

Bitmain has deployed a different strategy than other Bitcoin hardware companies has. Other companies have focused their development efforts on creating miners for internal use rather than widespread adoption. For example, Bitcoin Shop (BTCS) announced that it would be merging with Spondoolies-Tech, which would give BTCS access to Spondoolies’ latest miner to give it a competitive advantage. Bitmain, on the other hand, continues to sell its hardware to the general population.

“We’re very strong believers in keeping Bitcoin decentralized. Until recently, most mining was done by so-called average users and not by large mining operations,” Smith said. “It would be a real shame to see this dedicated group left without options for supporting the network in their own way, and perhaps even present a dangerous situation for the network to be secured only by large and well-capitalized firms.”

As mining does continue to get more expensive, only those companies that have the resources to create large operations will be able to survive. The fewer operations that are mining, the more likely it is that one, single source could take a majority of the hashrate, creating potential security problems.

“We will continue to make our machines available to Joe Miner for as long as we are making hardware,” Smith said. “It’s an unfortunate situation that we’re the only big ASIC manufacturer selling directly to consumers right now; we’d love to see more competition in this space and for the miners themselves to have more options available.”

Jacob Donnelly is a full-time product manager and journalist covering finance and bitcoin. He runs a weekly newsletter all about bitcoin and digital currency called Crypto Brief.

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BitPay: ‘Silicon Valley is Becoming a Bitcoin Hub’

Bitpay Chief Commercial Officer Sonny Singh led a discussion about bitcoin, the importance of the block chain technology to banks and the rapid growth in VC investments
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Saturday, August 29, 2015

Bitcoin Block Battle: Top Corporations Support BIP 101 as Debate Rages On

The battle rages on within the Bitcoin community on how to move forward with potential hard fork changes designed to accommodate larger block sizes.
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Andreas Antonopoulos Thinks Bitcoin ATMs Need to Be Completely Redesigned

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Mastering Bitcoin Author Andreas Antonopoulos recently gave at talk at Harvard’s i-lab, spending much of his time in front of a small audience describing the various issues with Bitcoin as a brand. He noted many problems with the terminology[add link to bitcoin terminology is broken and wrong piece] used in Bitcoin, and he also focused on specific products or services in the Bitcoin space that seem to be doing a disservice to potential users.

At one point during the presentation, Antonopoulos turned his attention to Bitcoin ATMs, asking the audience how many of them had used one of the machines in the past. While a few people raised their hands, those hands went down when Antonopoulos then asked how many of them enjoyed their experience with the Bitcoin ATM.

How Traditional ATMs Work

To explain the user experience issues with Bitcoin ATMs, Antonopoulos first talked about the setup of traditional bank ATMs:

“When you interact as a person with an ATM, 1. you have a pre-existing relationship with the bank or financial institution; 2. you have a pre-existing balance; 3. your primary objective is to get in, get cash, [and] get out. Twenty seconds is too long. Three clicks is too long.”

In other words, there is no need for long explanations or user-onboarding with traditional ATMs. Everyone who uses them already has a debit card, and they’ve already interacted with the corresponding bank in the past. The process can be simple because the user already has his or her bank account setup.

Bitcoin ATMs Have Nothing in Common with Traditional ATMs

According to Antonopoulos, many Bitcoin ATM developers have been looking too closely at how traditional bank ATMs work when designing their own machines. He noted that Bitcoin ATMs have “absolutely nothing” in common with the ATMs that are currently used by banks, and he went on to describe the experience an average person has when attempting to use a Bitcoin ATM for the first time:

“The average user of Bitcoin ATM is someone who has never seen bitcoin before. It is a person who doesn’t understand what bitcoin is, and the ATM is their first introduction to this currency. It is a person who does not have a pre-existing relationship with anyone in the Bitcoin space. It is a person who does not currently have a wallet because they didn’t know they needed one – because they don’t know what a wallet is (it’s a keychain). And so they walk up to this machine, and this machine has been designed by engineers to simulate the experience of an ATM, even though the experience shares absolutely nothing with the use case we’re putting it to. So you walk up and the ATM tries to give you bitcoin in as few clicks as possible with a minimum amount of interaction. Is that a way to build brand loyalty? Is that a way to build user experience? Is that a way to introduce new users? I mean, it just throws it at you, and you’re not ready for that. But, ‘Please open your phone and display your QR code.’ Like, what? What’s a QR code?”

In an effort to solidify the point that Bitcoin ATMs should not be operating in the same manner as traditional bank ATMs, Antonopoulos then went through a long list of questions that a user would likely have while attempting to use a Bitcoin ATM for the first time.

The Right Model for a Bitcoin ATM

After describing the problems with currently available Bitcoin ATMs, Antonopoulos explained how he would design such a device:

“If I was designing a Bitcoin ATM, first of all, I’d put it in bodegas. Secondly, it wouldn’t have a lick of English on it. It’d be all-Spanish because I’m going to really push the remittance model. Thirdly, the first function on the ATM would be ‘Send money to Mexico City.’ That’s it. Because I want people to use the bitcoin for something. [Fourthly], I’d have a big button on the front that says ‘Talk to a human.’ I’ve got an Internet-connected device with a forward-facing camera and a tablet screen, and I’m not using it to do video customer service? Are you kidding me?”

It’s clear that the device Andreas Antonopoulos is imagining is completely different from a traditional ATM. In addition to the focus on international remittances, Antonopoulos also expanded on the idea that the Bitcoin device needs to teach the user about the peer-to-peer digital cash system:

“I don’t want to interact for fifteen seconds. I want to interact for two hours . . . And it tells me where I can spend [bitcoin]. It gives me suggestions on wallets, and it can send them directly to my phone. It’s building loyalty, brand and experience. That’s not a 15-second interaction.”

This is a perfect example of how sometimes simply applying the old ways of doing things to Bitcoin will not work. The most impactful innovations in the Bitcoin space have been the ones that created something completely new rather than thinking about how things worked in the past. Developers and entrepreneurs should try to avoid simply replacing the carriage with an automobile. It’s time to get rid of the horse.

 

Photo BTC Keychain / Flickr (CC)

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BIP 100 Support Grows; 21% Attack Worries Remain

Many major mining pools and firms including KnCMiner, Bitfury, f2pool, BTCChina and 21 Inc. have begun to publicly support Jeff Garzik’s BIP 100, by dedicating a huge part of their hashing power to mi
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Friday, August 28, 2015

Coinbase Launches Instant Exchange to Help Users Avoid Bitcoin Volatility

Coinbase users can now send bitcoin payments without being exposed to the digital currency’s volatility.

Users with a fiat wallet (must be verified in order to get it) allows use of Bitcoin’s global payment network without being exposed to the price of the digital currency. Coinbase’s Instant Exchange deducts an equal amount to the bitcoin the user wants to send, effectively exchanging the two. The service is similar to one offered by Coinbase to bitcoin-accepting merchants.

As of today, Instant Exchange is available for users with a USD, EUR, or GBP wallet. After typing the bitcoin address and chosing a fiat wallet, users can hit the “Instant Exchange” button, and then send. A bitcoin amount equal to the fiat selected will be sent instantly, without exposing the user to bitcoin’s notorious volatility. The startup’s standard conversion fee of 15 cents will be deducted from each conversion, but sending payments to other Coinbase users is free.

The bitcoin is deducted from the user’s fiat wallet and not his or her digital currency wallet, meaning it can also serve as a way for users to instantly sell their bitcoin.

A different model

Volatility is a problem all too well-known in Bitcoin and is a chief complaint among people interested in using the technology’s payment network. Many services have looked to solve this problem by offering the ability to “lock” bitcoin to the price of the American dollar, British pound, and various other fiat currencies. Users can then unlock their bitcoin when they want to send them or be exposed to the digital currency’s price.

Latin American bitcoin startup Coinapult was first to launch such a service, but now many bitcoin businesses offer it, including Bitreserve, which designed its whole service around the concept.

One issue with these services is that though it makes storing the currency safer, it does not solve the problem when sending the digital currency. Also, if bitcoin’s price goes down, these businesses offering the ability to peg bitcoin will lose money. And though the price has been more stable in recent months, bitcoin’s price has declined dramatically over the last year, meaning that many “lock” services could be feeling some pain.

Coinbase’s model avoids the potential risk of being on the strong side of a price swing by exchanging bitcoin for dollars instantly, and not operating a one-to-one reserve (peg).

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Bitcoin Market Aimed at College Students, CoinBase Bitcoin Give Away

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The San Francisco-based bitcoin wallet provider has successfully given away free bitcoin to more than 20,000 college students.

CyptoCoins News reported that any student signing up for Coinbase would receive $10 worth of bitcoin. Students were required to verify enrollment by signing up with an email domain ending in “edu.”

At the time Coinbase founder, Fred Ehrsam, announced the limited time offer on Twitter, it was only available to a handful of “edus.”

Now the international digital wallet has posted a list of the top 10 schools with the most signups. The University of Michigan led the way with 941 signups. The University of California, Berkeley wasn’t far behind with 939 signups, the University of Illinois had 873 and the University of Texas ranked number four with 698 signups.

Some users complained via Reddit that they were having trouble signing up. But Ehrsam quickly replied, “It’s because so many people have signed up from Berkeley today (seriously).”

Students at other colleges including Notre Dame and UCLA reported success in signing up.

Coinbase went the extra mile to ensure security by requesting students provide a phone number that could be verified.

“This extra check has greatly reduced scammers trying to take advantage of this promotion. So it allows us to keep this promotion going,” said Coinbase.

College investors

Giving away free bitcoin to college students in order to encourage investment is clever, but not new. Earlier this month, more than 4,000 MIT students enrolled in the 2014 fall semester will receive $100 worth of bitcoin.

The brains behind the program, Jeremy Rubin and Dan Elitzer, were able to launch the program after receiving nearly half a million dollars in donations from MIT alumni and the bitcoin community.

“Giving students access to cryptocurrencies is analogous to providing them with internet access at the dawn of the internet era,” said Rubin.

While many are excited about the giveaway, some are curious about what will happen if they try signing up with a school that’s not yet listed.

Others say the promotion could be taken advantage of by non-students creating an email account with the domain “edu,” which some experts say is relatively easy to do. Drew Cordell of CyptoCoins News wrote, “If the promotion is meant to have a long duration, it will need to be refined significantly in order to prevent abuse and provide full access.”

Despite Ehrsam’s reassurance that abuse will be prevented, Cordell argued, “It is very simple to create an .edu email address for free in minutes. Creating false email accounts could allow users to abuse the system and continually claim the $10 bonus if the system is not well regulated.”

By offering young people a chance to invest in Bitcoin, companies like Coinbase could be key players in expanding the market for digital currencies. This could potentially ensure monetary freedom for the future by allowing bitcoin into the hands of our youth.

Coinbase currently has over one million consumer wallets, 30,000 merchants, 5,000 API applications and U.S. bank integration. They also have a remote team consisting of 35 contractors.

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CardCash Adds Bitcoin Payments for Gift Cards at Thousands of US Retail Stores

gift-cards

CardCash, an American online company that buys and sells discounted gift cards from thousands of national retailers, has begun to accept bitcoin payments. CardCash joins companies like Gyft and Fold that provide ways for Bitcoin users to interact with the massive gift card industry.

“We saw that bitcoin was getting a lot of traction and growing in legitimacy,” CardCash CEO Elliot Bohm said in an interview with Bitcoin Magazine, “but it was slow in getting acceptance in popular brands.” He pointed out that while consumers could use bitcoin to shop at Overstock and Dell, they couldn’t spend their bitcoin at Macy’s, for example.

“We can easily be the bridge,” said Bohm. “People can use bitcoin and save money at the same time.”

In September, CardCash expects to roll out its mobile app that will allow people with a bitcoin wallet to buy gift cards online instantly. “You’ll be able to walk into Wal-Mart, go shopping, go on the app while you’re in line, and buy a gift card right there on your phone,” said Bohm. “When you get to the checkout, you just show them the barcode.”

In a press statement, Steven Weldler, VP of Online Marketing for CardCash, said, “CardCash.com is always looking to bring our service to as many people as possible, especially to the unbanked and people who can use help financially.”

Bohm noted that the Bitcoin community is very savvy when it comes to saving money and is always mindful of conversion rates. Since CardCash customers can get a discount of between 5 and 20 percent on their purchases, he said that connecting CardCash and bitcoiners made a lot of sense.

“We’ve been looking into bitcoin for a long time now,” said Bohm, “but we wanted to do it properly.” CardCash has stringent AML-compliance polices and fraud-prevention measures. Every card is verified and comes with a 45-day balance guarantee. Seller identities are authenticated, and a $10,000 per day purchase limit is in place to prevent money laundering. The company uses BitPay to process their bitcoin transactions and immediately converts to fiat; they also wanted to be sure that their banking partners were comfortable with them allowing bitcoin transactions.

So far, CardCash serves only U.S-.based customers, buying and selling gift cards that can be redeemed in the United States. But there are plans currently in the works, thanks to bitcoin, that will allow international customers to tap into the discounted gift-card scene.

Founded in 2008, CardCash has been included in the Forbes’ list of America’s Most Promising Companies for the last three years, as well as in the Inc. 500 list of the fastest growing private companies in America for the past four years.

 

Photo LaniElderts / Flickr (CC)

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Investors Weight Bitcoin’s Prospects as Fear Levels Rise Across Global Markets

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As weak economic data from China hit asset prices globally, Bitcoin Magazine spoke to a number of experts to assess the impact on the price of bitcoin.

Since its introduction in 2009, soon after the outbreak of the Great Recession, bitcoin has been championed as a more reliable store of long-term value than fiat money given bitcoin’s capped supply and the continued printing of fiat currencies by various central banks, which many fear will continue to cause financial crises across the globe.

However as the CBOE Volatility Index (VIX), often referred to as the ‘Fear Index’, recently trebled from 13.02 to 40.74, and global markets posted their worst week of the year, the U.S. dollar price of a bitcoin fell almost 20 percent from $256.98 to $209.13, suggesting investors are yet to be convinced of the investment case for bitcoin in times of economic turmoil.

“World markets are in commotion with the next leg in The Great Credit Contraction coming from Greece, Puerto Rico, China and anticipated Fed rate hikes despite a strengthening dollar,” Bitcoin investor Trace Mayer explained in an email to Bitcoin Magazine. Mayer believes that while it offers “a potential solution to this intractable global problem … (bitcoin) is not currently viewed as such by the majority of the investment community.

P. Bart Stephens, co-founder and managing partner of Blockchain Capital LLC, believes it is too early in the evolution of Bitcoin for it to be considered a safe haven for investors in times of panic.

“The recent drop in global stock prices is being driven by macro-economic factors …  namely, the slowing Chinese economy and Chinese policymakers’ quixotic responses stock market volatility,” he said. “This puts investors in ‘risk off’ mode and causes a flight to safety”.

Furthermore, Stephens argued, at roughly $3 billion, the entire Bitcoin market is about the size of one small cap tech stock and therefore a small amount of selling in the Bitcoin market can cause dramatic moves in price. As a result, “Bitcoin is still seen as a high-risk investment,” he said.

David Ripley at digital wallet provider Glidera believes it is difficult to predict how weakening markets might affect the Bitcoin ecosystem: “On one hand, a downturn may lead individuals to feel they have less money available to obtain an alternative investment such as Bitcoin. On the other hand, some individuals may actually view Bitcoin as a better alternative investment to the traditional economic system, which could be facing challenging times”, he said

Prominent Bitcoin investor Roger Ver believes that the fall in the price of Bitcoin might even be a symptom of improving adoption.

“I think the price has dropped because people can now spend bitcoins at tens of thousands of locations, but most of the merchants are converting it to their local currency”, Ver told Bitcoin Magazine. “Bitcoin wasn’t (previously) spendable at many places, but more people were just holding it as a speculative instrument.”

Ver’s comments echoed those made by Tim Draper of Draper Fisher Jurvetson that the bitcoin price was bound to come under short-term pressure as miners get more bitcoin, causing selling pressure and less demand to buy as the use cases evolve.

Stephens agrees that the near-term might see further weakness in the bitcoin price.

“Bitcoin is in a bear market and has been for almost two years. … More recently this summer, the weakness in the price is due to the divisions in the Bitcoin development community”, he said. “Markets, and this includes bitcoin, dislike uncertainty”.

However, looking further ahead, Stephens is more buoyant.

“Over the intermediate to long term, we think bitcoin will perform very well, especially in a macro-economic environment characterized by fiat currency wars and currency volatility”, he said.

Despite the concerns around the short-term outlook, the Bitcoin community appears unanimous in its optimism for the longer-term prospects for the digital currency.

“Every time we are reminded of the difficulty of central banks and governments trying to manage currencies, economies or markets, we are reminded of the potential value of an alternative, truly free-market approach to currency and financial transactions,” said Ed Boyle, CEO at payments processing platform Blade Payments.

“Large negative stock market swings remind everyone that volatility is not limited to bitcoin,” Boyle continued. “To the extent that Bitcoin transactions continue to grow as strongly as they have been … bitcoin itself will become more and more stable and more and more valuable.”

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A Closer Look at BIP100: The Block Size Proposal Bitcoin Miners are Rallying Behind

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The block-size limit debate has taken a turn now that some of Bitcoin’s biggest mining pools are publicly endorsing BIP 100 (Bitcoin Improvement Proposal 100) instead of backing a Bitcoin XT blockchain fork. So far, F2Pool, BTCChina, BitFury, KnCMiner, 21 Inc. and several smaller pools have come out in support of this alternative proposal. Combined, this represents well over half of all hashing power on the Bitcoin network.

While these endorsements are just a show of support, and do not trigger a change of the block-size limit or a blockchain hard fork as Bitcoin XT is programmed to do, the mining endorsements do mandate a closer look at BIP 100.

What is BIP 100?

 Over the past weeks most of the attention regarding the block-size issue has gone to BIP 101 and the Bitcoin XT fork, but BIP 100 was really the first BIP to offer a solution for the block-size limit. Drafted and published as a PDF by Bitcoin Core developer and BitPay employee Jeff Garzik in June, BIP 100 does not set any specific block-size limit or program in any sort of predetermined growth. Instead, Garzik’s proposal – which does not exist as code quite yet – allows miners to vote what the limit should be.

The intended purpose of BIP 100, as described by Garzik, is to take the power to set the block-size limit away from the Bitcoin developer community and, instead, hand it to the free market. The Core developer does not believe such a responsibility over the Bitcoin protocol belongs to any select group of people, and argues that the only sensible solution would be to let the broader mining community decide.

In the BIP 100 draft, Garzik writes:

“Economic actors that wish to see the speed limit [block-size limit] at X or Y – thus dictating the free market – will lobby the Chief Scientist and other ‘core’ developers, individually, in private, in public, with carrots, and with sticks. When [the] Bitcoin market cap [grows 10 times] or more, the lobbying [will be] even more intense. Yet there is no single human or commitment on the planet capable of picking a good speed limit.”

Voting procedure

While the details of the voting process are not set in stone yet, the PDF as well as Garzik’s comments suggest it works as follows: First, 90 percent of hashing power on the Bitcoin network needs to accept BIP 100 for it to activate. This is a one-time thing that will trigger a hard fork. Once BIP 100 is activated, miners can include a public message in a newly mined block indicating how big (or small) they want the block size limit to be. For every 12,000 blocks (some three months’ worth), the bottom 20 percent of all votes is discarded, after which the minimum is chosen.

Importantly, however, the block-size limit can be only doubled or halved at most. Thus, if more than 20 percent of blocks vote to lower the limit, the maximum block size is decreased to whatever is the lowest suggestion – apart from the bottom 20 percent. If more than 80 percent votes to raise the limit, the maximum block size is also raised to the lowest suggestion – again disregarding the bottom 20 percent. But miners cannot vote the block-size limit up indefinitely. BIP100 has a hard limit of 32 megabytes, meaning the maximum can be reached in five doublings from 1 megabyte. Whether Garzik’s proposal includes a minimum block-size limit remains unclear for now.

‘21% attack’

While relatively simple, some say that the voting procedure as described above has some flaws. (But note that it is not yet completely certain that this is how BIP 100 will actually function.) One issue that was raised on Reddit is the so-called “21% attack.” This refers to the ability of 21 percent of miners (possibly a single pool) to vote the block-size limit down as much as they want.

There is some logic behind Garzik’s rule, however. It is generally believed that bigger blocks are disadvantageous for smaller pools. Most Bitcoin developers worry, therefore, that left to their own devices, big pools could keep voting the limit upward – indirectly putting smaller pools out of business and further centralizing mining. This is why Garzik proposed the threshold; he believes the block size should be raised only if a supermajority of miners (81 percent) agree. Or put differently: he believes that smaller mining pools representing 21 percent of hashing power should have “veto power” to keep the limit low.

Whether a “21% attack” is really a feature or a bug, therefore, is a matter of perspective. While “block-size conservatives” consider it an important restraint on the power of big mining pools, proponents of bigger blocks – such as Mike Hearn – feel that a minority of miners can hold the rest of the network back.

One last option that should be mentioned, and which is probably why the option has been dubbed a “21% attack,” is that the voting process could allow any entity that controls more than 20 percent of hashing power to decrease the block size so much that is essentially destroys Bitcoin. While this would not be in the self-interest of this entity from a bitcoin-profit maximizing perspective, it does mean the Bitcoin network would be less resilient against outside attacks.

‘51% voting attack’

But, at the same time, the significance of the “21% attack” (or “21% veto”) has been questioned by Bitcoin developers for wholly different reasons. This is because colluding miners can simply ignore any opposition as long as they control any majority of hashing power.

“It would be trivial for any majority of miners to skew the vote,” Bitcoin Core developer Peter Todd told Bitcoin Magazine. “Once a group of miners is convinced they control at least 51 percent of hashing power on the network, they could simply refuse to mine on top of any block that doesn’t vote along with them. They can do that in subtle ways, for instance by just discarding – orphaning – a subset of blocks, something that naturally happens in the protocol anyways. In reality, therefore, miners controlling 51 percent of hashing power would have complete control over the block size under BIP 100.”

Furthermore, Todd argued that a miner vote could – and probably would – be bought by non-mining entities. Payment processors could, for instance, enter into contracts with pools to vote for bigger blocks. And since this would add overhead costs to the equation – lawyers need to be paid – Todd believes it would, again, disadvantage smaller pools, particularly in non-U.S. jurisdictions.

Todd himself offered a solution for this problem:

“If we ever get to the point that BIP 100 does get implemented, these contracts should be programmed onto the blockchain. This would both reduce overhead costs for everyone, creating a more level playing field, and make the vote-buying transparent at the same time.”

32MB Issues

Another point of critique on BIP 100 is that the 32-megabyte limit might be too small in the long run. Proponents of a bigger block size in particular – including Bitcoin XT developers Gavin Andresen and Hearn – believe this is much too low. If Bitcoin becomes widely used, a 32-megabyte limit is expected to be reached sooner or later, which probably means the block-size debate would need to be held all over again – not something they look forward to.

Garzik, on the other hand, believes this upper limit would be a good safety net.

“The 32-megabyte limit is a check-and-balance, to ensure that the system does not ‘go off the rails,'” Garzik said. “It would require a second user ‘vote’ – a second hard fork – to ensure everybody is on board with the levels of decentralization so far, and comfortable with increasing it further. My personal preference is to remove all upper limits, as the system and the free market will naturally find an equilibrium size based on individual miner choices. The 32-megabyte limit is a compromise.”

On the opposite side of the debate, developers who favor a conservative block-size approach worry that the block-size limit could actually be increased much too fast under BIP 100. From the moment of activation, it could take as little as a year and three months to reach the maximum of 32 megabytes. This is much faster than other BIPs would allow, and too fast according to several Core developers.

“BIP100 is somewhat ambiguous, and perhaps the details are still subject to change, but as-is the text allows for up to four doublings per year,” Bitcoin Core developer Pieter Wuille told Bitcoin Magazine. “It’s hard to predict the future, but the ecosystem should not allow such near-unbounded growth.”

Economics

Another problem is that BIP 100 might hand over too much economic power to Bitcoin miners. This issue was first raised by Israeli mathematician and Bitcoin expert Meni Rosenfeld, and later echoed by Hearn.

“The Bitcoin economy is composed of several groups, and no single group should be given complete power over the protocol. Miner interests are not completely aligned with those of users and node operators,” Rosenfeld told Bitcoin Magazine. “Users want transactions to be cheap and plentiful, nodes want blocks to be small and manageable, and miners could want either big or small blocks – whatever maximizes profits. If given the power to vote on the block-size limit, miners are likely to abuse it, disregarding the other groups. In every single market, giving producers the power to artificially limit supply and competition can lead to disastrous consequences, and Bitcoin is no different. ”

Garzik, however, contends that miners will ultimately have an interest to keep Bitcoin users content. The Core developer argues that the mining community would be unwise to abuse its powers, as it would effectively mean that the market would respond. In other words: Users would sell their bitcoin.

“Miner income is in the long-run aligned with users in a cooperative market relationship, even if short-term counter-incentives exist,” Garzik writes. “Users signal economically via the market – or directly via email and social media! – their views on miner behavior, which must be signaled up front, months in advance of any change. While imperfect, miner voting works; it has been field tested.”

Rosenfeld, however, is not convinced.

“Committees and discussions where all groups are represented, though slow and inefficient, are much more likely to result in a decision that is good for the Bitcoin economy as a whole,” Rosenfeld said.

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Bitcoin Businesses Take Steps to Prepare for CoinWallet’s September Stress Test

network

CoinWallet.eu, the U.K.-based Bitcoin mining and wallet business has said it will be running another “stress test” in early September to test the Bitcoin network, according to International Business Times.

The company told the international journal that this round of “test” or “spam” attacks “will likely render most standard wallet software worthless and create nearly a 30-day backlog” in the system.

Bitcoin Magazine reached out to CoinWallet to learn more about the company’s plans but received no response by time of publication.

Stress Test will hammer the Bitcoin network

Much like its previous stress test in early July of this year, CoinWallet’s so-called “dust attack” will flood the network with thousands of small, spam-like bitcoin transactions that are large in data but small in value.

A backlog of thousands of transactions with almost no value (such as 0.0001 bitcoin) waiting to be confirmed can potentially tie up the network for hours.

Making it clear which side of the ongoing blocksize debate it’s on, CoinWallet said that it need to demonstrate that the current Bitcoin blocksize is inadequate and does not meet the needs of a growing bitcoin market.

Bitcoin companies take steps to prepare

As reported previously, exchanges and wallet companies are developing strategies including BitGo’s “surge pricing” to deal with these nuisance attacks and may even at some level appreciate that testing may show the strength of the network.

Mycelium Community Manager Dmitry Murashchik told Bitcoin Magazine:

“Mycelium was hit pretty hard by the last stress test, but we have implemented changes to deal with it. On our back-end we moved to a faster database and linked our nodes so they communicate transactions directly to each other to stay in sync.

“We changed our wallet to automatically connect to another node if the current one fails, added the option to rebroadcast unconfirmed transactions in case some nodes didn’t hear them, and added dynamic fees calculated based on how clogged up the network is to make sure your transaction still gets included in the next block,” Murashchik added.

Alena Vranova, CEO of SatoshiLabs, says that they are fully prepared for the tests and are also gearing up for an increased blocksize noting, “Some companies attempt to cast fear, uncertainty or doubt on their competitor’s products. Let’s wait for the stress test in practice to judge its impact.”

Vranova sees this exercise as just as much about a political statement as about testing the network:

“We strongly feel that the bitcoin community deserves a free and fair debate on the subject: there should be zero censorship around BIP 101 discussions in any forum, including online discussion boards such as BitcoinTalk, /r/Bitcoin, or anywhere else. We stand against any sort of information censorship. A genuinely open approach, with full public access to all available information, is the best way for Bitcoin to proceed.”

QuadrigaCX CEO Gerald Cotten is not really bothered by the upcoming test.

“We use BitGo for our hot wallet, a third-party multi-signature wallet solution,” he told Bitcoin Magazine. One of the ways that we handle this type of thing is that we use a dynamic fee structure which changes based on the network load. Usually, the fee we pay on outgoing transaction is about $0.03. However, when ‘spam attacks’ are taking place we often increase it automatically to as much as $1 per transaction. Basically, we pay whatever is needed to ensure that the transaction will be confirmed within the next few blocks.”

Mycelium’s Murashchik is taking a positive view of all this saying:

“[A]lthough the first stress test was painful, it has shown us whatever weaknesses we may have had, which we have since patched, and we are looking forward to the next stress test to see how well those things we implemented will work. We believe we’re ready for it.”

 

BitPay also released an updated version of their Copay wallet that includes dynamic transaction fees to ensure that transactions are confirmed quickly, even during transaction backlogs. “Now Copay users can count on their wallet to scale fee levels based on the bitcoin network load, ensuring their transactions aren’t delayed,” the company said in a statement.

 

Photo sara marlowe / Flickr (CC)

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AUG 28 DIGEST: Major Mining Pools Support BIP100; Tree Signatures Proposed by Blockstream's Pieter Wuille

Bitcoin mining pools BTCChina, BitFury, KnCMiner and 21 Inc. are now publicly backing Core developer Jeff Garzik's BIP100 block size limit proposal, and more top stories for August 28.
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Life Inside a Bitcoin Mine: Interview with Genesis Mining’s Marco Streng

CoinTelegraph spoke with Genesis Mining head Marco Streng on the current state of the mining industry, the Life Inside a Bitcoin Mine project that aims to make cloud mining transparent, and how he see
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Thursday, August 27, 2015

Case Announces September 21 Shipping Date for Bitcoin Hardware Wallets

case-wallet

Bitcoin wallet manufacturer Case Inc. has concluded the final phase of testing and announced that the company will begin shipping its hardware wallets on September 21.

“Appropriation of parts is complete and the manufacturing process is nearing its end. Everyone at Case is eager to get our device in the hands of our customers who have patiently waited for their bitcoin wallets,” Case announced on its website. “Providing a secure, easy-to-use bitcoin experience around the world has been our mission from the beginning and we’re excited to finally deliver on that.”

The Case team launched its hardware wallets at TechCrunch NY on June 24 and raised $1.5 million in an equity seed funding round led by FuturePerfect Ventures, participated in by RRE Ventures, High Line Venture Partners and the Rochester Institute of Technology Fund. During a presentation at TechCrunch NY, the Case team promised its investors and its customers to ship their hardware wallets by the end of summer.

“As more important assets move to the blockchain (contracts, property and identity), having a completely secure way to store and transfer those assets becomes even more paramount,” Case CEO Melanie Shapiro told Bitcoin Magazine at that time. “We’re interested in not only servicing the consumer holding bitcoin, but also providing the banks using blockchain technology the power to manage who has the authority to execute transactions.”

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Leading Bitcoin Startups Integrate Vogogo’s Risk Management Platform

vogogo

This week, Vogogo announced in its second-quarter financial statements that leading Bitcoin companies, including BitPay, ChangeTip, Genesis Global Trading and Zinger, have integrated Vogogo’s risk management/compliance products onto their platforms.

Vogogo’s services include customer verification, anti-money laundering and counter-terrorism finance compliance reporting, payment and rules engine and fraud mitigation. Global bitcoin payment services provider BitPay has integrated Vogogo’s AML-CTF global compliance, which validates users against global watch lists and protects the platform from money laundering attempts with advanced analytics and decision-making technology.

“We are seeing significant interest in our risk-management services and payment services from alternative markets,” said Vogogo CEO Geoff Gordon. “Capturing those opportunities will help us drive revenue while we continue to move forward with our plan to be the dominant provider of risk management and payment processing services to the cryptocurrency industry. We are huge believers in blockchain technologies and we aim to play a significant role in anchoring that industry for a long time to come.”

Vogogo also has integrated their compliance technologies onto global bitcoin exchange platform Kraken, as a part of its expansion across Canada.

“We see a lot of opportunity for Kraken in Canada, and we’re counting on Vogogo’s expertise in risk management and payment processing to make it possible for Canadians to move their dollars safely and efficiently to and from Kraken,” announced Kraken CEO Jesse Powell.

 

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Princeton University and Coursera Launch Free Online Course on Bitcoin and Cryptocurrencies

princeton

A Princeton University free online course on “Bitcoin and Cryptocurrency Technologies” will be offered by Coursera beginning September 4, 2015.

Coursera is an online education platform for Massive Open Online Courses (MOOCs), which partners with top universities and organizations worldwide, to offer courses online for anyone to take for free. MOOCs give anyone, anywhere, the possibility to acquire a world-class education.  Courses include video lectures, exercises and online interaction with teachers and other students. Some courses offer certification as well.

The Princeton Bitcoin course will last six weeks, with the last lecture on November 1, 2015, but students also will be able to follow the video lectures after that date. That’s part of the appeal of MOOCs –students who prefer to learn at their own pace can follow the video lectures asynchronously, when they want, while students who can adapt their schedules to a course’s official timetable have the added benefit of semi-synchronous interaction with the instructors.

“To really understand what is special about Bitcoin, we need to understand how it works at a technical level,” notes the Coursera website. “After this course, you’ll know everything you need to be able to separate fact from fiction when reading claims about Bitcoin and other cryptocurrencies. You’ll have the conceptual foundations you need to engineer secure software that interacts with the Bitcoin network. And you’ll be able to integrate ideas from Bitcoin in your own projects.”

The Freedom to Tinker website, hosted by Princeton’s Center for Information Technology Policy, notes that a preliminary version of the Princeton Bitcoin course has been publicly available since January, with 11 video lectures, lecture notes and exercises, on the Piazza online educational platform. The new Coursera version includes new lectures, embedded quizzes to test the students’ understanding, and a wider community of students to discuss the lectures with. About 15,000 students already have signed up, and the enrollment is growing fast.

The instructors – Arvind Narayanan, Joseph Bonneau, and Edward Felten from Princeton University, and Andrew Miller from The University of Maryland – are completing the course’s textbook, which will be published by Princeton University Press. The draft book chapters will remain freely available online after the publication of the book, but the instructors recommend buying the book.

The Princeton course is clearly aimed at a technically oriented, hands-on audience of programmers and computer scientists.

“How does our textbook (and course) differ from other books on Bitcoin?” wrote Narayanan in the first Princeton announcement in January. “It’s simple: this is unabashedly a computer science text and course. We connect the ideas we discuss to the rest of computer science, and separate fundamental concepts from implementation details. The hype in the Bitcoin community has sometimes gotten ahead of the technology, and we think that for cryptocurrencies to truly realize their potential, entrepreneurs must go back to the basics, rigorously understand the technology and build on it.”

The course will be very useful to Bitcoin entrepreneurs and job seekers wishing to enter the very hot digital currency sector. In fact, banks and Wall Street companies are rushing to enter the Bitcoin space and fishing for top talent in Bitcoin waters, and online Bitcoin job ads are surging to record highs.

In related news, Stanford University is offering a Cyber Security Graduate Certificate focused on computer systems security, including attack protection and prevention, very important skills in the Bitcoin space. The Stanford course is more intense than the Princeton course and is not free.

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World’s First Blockchain-Based Startup Marketplace Set to Launch by Funderbeam

Data intelligence provider Funderbeam is set to launch the world’s first blockchain based investment trading platform over the next few months, through a partnership with colored coins developer Chrom
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AUG 27 DIGEST: Patrick Byrne Brings Bitcoin Tech to Wall St. with $30M Deal; California Seeks to Avoid a Repeat BitLicense Exodus

California is working to stop businesses from moving out of the state in its version of the BitLicense; Patrick Byrne signs US$30M deal to bridge the gap between Bitcoin technology and Wall Street; an
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The Gox Effect: Japan Slowly Turning Against Bitcoin Exchanges (Op-Ed)

Bitcoin and Japan have had an interesting and strained relationship over the last three years.
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Wednesday, August 26, 2015

Tim Draper Speaks on Global Equity Turmoil: “I Expect People to Run to Bitcoin the Way They Do to Gold.”

tim-draper

It has been a rollercoaster of a ride for global equity investors over the past few days. Besides the month-long slide in the Chinese markets, the Dow plummeted from approximately 16,459 on August 21st to 15,446 on the 24th.

When the going gets tough, investors have historically flocked toward assets that are considered safer, including cash, gold, and treasury bills. Often times, the asset of choice is gold because it is considered the greatest store of value. However, some think that Bitcoin might one day trump gold as a means of protecting against volatility.

Tim Draper, founding partner of Draper Fisher Jurvetson, a prominent Silicon Valley venture capital fund, believes that bitcoin might one day be the preeminent store of value for investors.

“When bitcoin is mature, I expect people to run to bitcoin the way they do to gold when the market gets scary,” Draper said in an email to Bitcoin Magazine. “Currently, there is not enough usage to make people feel comfortable investing in Bitcoin when they come out of the market. I expect that to change.”

Draper suggests that currently, bitcoin is far too speculative an investment for it to be a store of value. According to Investopedia, a store of value means, “any form of commodity, asset, or money that has value and can be stored and retrieved over time. As long as a currency is relatively stable in its value, money (such as a dollar bill) is the most common and efficient store of value found in an economy.”

Fundamentally, the reason people run to cash when the stock market falls is because they view the small inflation to be a small loss in comparison to what could happen in the stock market. Even more, they run to gold because, as Investopedia says, “they can be counted on to retain some value in almost any scenario, especially in those cases where the store of value has a finite supply (like gold).”

For bitcoin to be considered an efficient store of value, the price of it would need to start rising and stay relatively consistent rather than having significant volatility. Draper explained that the bitcoin ecosystem isn’t in a place, yet, for this to happen.

“There will be pressure on Bitcoin pricing as there is supply to sell as miners get more bitcoin, and less demand to buy as the use cases evolve,” Draper explained. In essence, miners need to sell their bitcoin more to pay for electricity than hoarders and users need to buy. This results in a drop in the price.

“I expect this phenomenon to turn around in about 6 months as use cases become apparent,” Draper went on to say.

Due to the understood finite supply of bitcoin—there will only ever be 21 million coins released—as usage increases and the supply stays relatively constant, the only place for the price to go is up. As the price goes up, investors will potentially see bitcoin as a functioning store of value, which will perpetuate its value.

 

Jacob Donnelly is a full-time product manager and journalist covering finance and bitcoin. He runs a weekly newsletter all about bitcoin and digital currency called Crypto Brief. 

Photo Disney | ABC Television Group / Flickr (CC)

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Bitcoin Interest Grows in India From Cross-Border Payments and Corporate Support

bitcoin-india

Tech giants including Microsoft and IBM have been supporting Bitcoin startups, conferences, accelerators and developers in India. The efforts of these companies are beginning to pay off, as India has seen a gradual increase in the number of developers and freelancers in the Bitcoin ecosystem.

“There is lot of interest from freelancers in India who suddenly are now getting bitcoins from U.S.-based companies, and then they scramble to understand what is bitcoin,” Indian Bitcoin startup Blockonomics founder Shiva Sitamraju told Bitcoin Magazine.

The increase of Indian freelancers’ and developers’ involvement with Bitcoin startups and organizations has created an efficient environment for local people to buy and purchase bitcoins instantly.

“From publicly available sources that display data transparently, like LocalBitcoins and Coinsecure, we see about $4 million-$5 million USD moving in bitcoin in India every month. Apart from that, the forums see few 100 BTC being traded as well,” India’s prominent Coinsecure founder Benson Samuel explained.

Barriers Toward Adoption

Indians are skeptical toward new technologies. It took years for the Internet and smartphones to take off in the country, and it may take even longer for bitcoin to reach mainstream adoption in India.

But, Sitamraju told Bitcoin Magazine, once bitcoin is adopted by a substantial part of the Indian population, it could really explode across the country, especially in rural and underbanked regions.

“Indians are slow technology adopters, and we are far behind China/U.S. in bitcoin adoption. … [O]nce the early adopters/risk [takers] adopt it and enough user-centric applications [sprout]… this stuff really explodes in India. Indians are second-biggest users of blockchain.info, and today, we are seeing growing merchant adoption,” said Sitamraju.

Some of the Indian population’s skepticism towards bitcoin may be due to the Indian government’s tight regulations and restriction for the finance/banking sector. Currently, fewer than 35.5% of households in India maintain bank accounts, and less than 20 percent of the Indian population owns credit cards or debit cards.

“More education and good press coverage is necessary. India has a tightly regulated finance/banking sector and so people/government is a bit weary of new financial instruments,” explained Sitamraju. “It is important to stress than bitcoin is not evil. Tipping people [in] bitcoin so that they can themselves experience the power of the technology is an easy way. Also if major Internet merchants here accept bitcoin it would be a major driving force, as e-commerce companies like Flipkart, Amazon are now booming in India.”

Bitcoin’s Potential

The number of Internet users has been growing at an annual rate of 32 percent, as the cost of smartphones with 3G and 4G data plans and Wi-Fi access have decreased substantially over the last two years. Today, India has more than 300 million Internet users, and the majority are mobile users.

Because of widespread smartphone penetration in India, many users have begun using mobile bitcoin applications such as Blockchain.info and Coinsecure. To continue to this trend, extraordinary bitcoin startups such as Blockonomics emerged over the last few months, to ease the use of bitcoin for the Indian population.

Blockonomics is a simplified wallet watcher that allows users to track transactions and balance of many public bitcoin addresses at one place. Through Blockonomics, users can receive instant notifications and quick overview of pending and confirmed transactions in their wallets.

However, “We are not planning a wallet service, as we believe that the major strength of bitcoin is decentralization and that people should retain control of their own coins,” Sitamraju told Bitcoin Magazine. “We are planning to be a one-stop destination for managing crypto finances having advanced graphs/analytics and eventually becoming the Mint.com of bitcoin.”

Startups such as Blockonomics in HackCoin or bitcoin accelerators recently have been focused on creating Bitcoin applications that could provide users with advanced analytics and data about Bitcoin.

 

Photo via Coinsecure

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Blockstream’s Pieter Wuille Proposes Tree Signatures for Improved and Flexible Multisig Bitcoin Transactions

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In June, Bitcoin Magazine reported that Blockstream launched Sidechain Elements, a sidechain development framework with open source code, including an experimental sidechain for developers dubbed Elements Alpha. Now, in the first technical post to appear on the Blockstream blog after the announcement of Sidechain Elements, Blockstream and Bitcoin Core developer Pieter Wuille proposes the intriguing concept of Tree Signatures, an efficient multisig method with enhanced privacy.

Blockstream was formed by renowned cryptography experts, including some Bitcoin Core developers, to accelerate innovation in digital currencies and implement the sidechain concept described in the paper “Enabling Blockchain Innovations with Pegged Sidechains,” released in October. In November, Blockstream closed a $21 million seed funding round with nearly 40 high-profile investors.

Tree signatures, which can be coded only in the extended Alpha scripting language, can implement M-of-N multisig transactions (which required more than one keyholder to participate) more efficiently than Bitcoin scripting. Wuille shows how to combine Merkle trees and Schnorr signatures to implement large M-of-N multisig schemes:

“Merkle tree keys support very large 1-of-N. Schnorr signatures support very large M-of-M. This means that if we can write our spending conditions as a 1-of-(N possible M-of-M’s), we can build a Merkle tree consisting of Schnorr combined public keys.”

An interesting feature of the new multisig scheme is that only the keys actually used for signing are exposed to the public. For example, in a 1-of-N multisig policy, only one key is revealed on spending and the other keys stay hidden.

Wuille gave a talk titled “Key Tree Signatures: A Mechanism for Very Large, Compact, Efficient Multisig” at the SF Bitcoin Devs Group.

“In our first sidechain, Elements Alpha, we introduced several improvements to the cryptography and scripting abilities of Bitcoin,” reads Wuille’s abstract. “In this talk, I will discuss how some of these features can be used to build an improved multisig construction that is more efficient, compact, and flexible.”

A video of the talk will soon be posted online. In the meantime, Wuille posted his presentation slides.

Sidechains are a fundamental innovation because they permit separating the codebase and functionality of a blockchain (sidechain) from its currency. A sidechain can implement all sorts of innovative changes from Bitcoin Core, while still carrying bitcoin as a currency by means of two-way pegs that permit transferring bitcoin to the sidechain and back. Therefore, sidechains permit innovating without threatening the stability of Bitcoin or having to introduce ad-hoc altcoins. Elements Alpha is the first experimental sidechain, and, hopefully, it will be followed by operational sidechains.

Sidechains could put private bitcoin transactions back and adapt to anti-privacy techniques as they are developed. One of the most interesting features in Elements Alpha is Confidential Transactions, a cryptographic tool to improve the privacy and security of bitcoin transactions by keeping the amounts transferred visible only to participants in the transaction. Richard Gendal Brown, an executive architect for banking innovation at IBM UK, who wrote a simple but excellent explanation of sidechains, is persuaded that Confidential Transactions are a good step forward.

“Confidential Transactions are a very clever application of cryptography to hide the value of transactions whilst still allowing them to be fully validated by the network,” wrote Gendal Brown. “Without features like Confidential Transactions (or related technology such as ZeroCoin or ZeroCash), [Bitcoin-like] systems may be unsuitable for those with confidentiality and privacy requirements.” He added that perhaps Confidential Transactions aren’t a full solution, but they are a good start.

It’s important to bear in mind that sidechains will be able to operate with bitcoin as a currency only after suitable hooks are implemented in Bitcoin Core, which might encounter some resistance.  A Bitcoin Improvement Proposal (BIP) to allow for bitcoin sidechains is in the works.

Photo by Denise Terry

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Interpol Trains Police Officers to Use Cryptocurrency and the Darknet

INTERPOL Global Complex for Innovation has recently completed a specialized training to identify the methods and strategies used to avoid detection on the Darknet, which often use non-standard communi
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AUG 26 DIGEST: Big Mining Pools Oppose Bitcoin XT Fork; Tor Vulnerability Suspends BTC Black Market Operations

A significant chunk of mining pools has taken a fierce stand against Bitcoin XT; the largest currently operating bitcoin black market has decided to halt operations due to a Tor de-anonymizing vulnera
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Tuesday, August 25, 2015

Announcing The Nov 8 – 11 Mobile Payments Exchange

mpe

Three days of focused, structured business development and information exchange about the state of mobile payments.

USA: Industry leaders are predicting a drastic climb in mobile payments over the next four years. Researchers estimate that Mobile payment transactions will reach $800 billion by 2019, and that number will continue to grow. As customers continue to demand a convenient and seamless mobile checkout process, merchants are scurrying to keep up with those demands.

Organizations have been spending up to six or seven figures on building mobile apps or mobile sites for the company. These companies have been seeing extensive growth in mobile traffic and engagement, but they lack direct ROI from these upgrades. One of the biggest challenges is the checkout process that takes too long to complete and the technology disruptions that continue to occur. Shopping cart abandonment rate is 97% on mobile devices, and if organizations can get 2% of those potential sales to complete checkout processes, online sales would double.

CIOs and senior technology executives are fully aware of the consumer demands and the need to make these upgrades now. Some key challenges that technology executives have addressed when implementing mobile payments include:

  • Integrating technology with legacy systems and determining what technologies will work best with current solutions
  • Converting current mobile traffic into sales by implementing a seamless mobile payment process
  • Building customer trust around mobile security
  • Keeping up with consumers wants and expectations mobile shopping and POS mobile purchases

The Exchange is delivered in a format that is wholly conducive to true peer-to-peer networking. Each Exchange provides opportunities to learn best practices through numerous interactive sessions, listen to in-depth case studies from leading solution providers, and attend one-on-one business meetings.

For Mobile Payment solution providers wanting to increase their presence and truly help these organizations meet consumer demands and drive ROI via mobile technology, the Mobile Payments Exchange is essential.

Visit the Mobile Payments Exchange website to learn more about how to get involved: http://goo.gl/pD7ICL

About IQPC Exchange:

IQPC Exchange is a division of IQPC, which now has offices in major cities across six continents including: Berlin, Dubai, London, New York, Sao Paulo, Singapore, India, Sydney, Tampa and Toronto. Each year IQPC offers approximately 2,000 worldwide conferences, seminars, and related learning programs. IQPC’s large-scale exchanges are market-leading “must attend” events for their respective industries.

 

###

 

For more information:

Alexander Abell

Marketing Manager – Mobile Payments Exchange

813-658-2566

Alexander.Abell@iqpc.com

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Major Mining Pools Make a Stand Against Bitcoin XT Fork, Support for BIP 100 Grows

data-center

It has been little over a week since Mike Hearn and Gavin Andresen included Bitcoin Improvement Proposal 101 (BIP 101) into the alternative Bitcoin implementation Bitcoin XT. BIP 101 is designed to create a hard fork in the blockchain to allow for blocks of up to 8 megabytes, doubling every two years.

Despite a major uproar on forums, chat rooms and in the media, not to mention a significant drop in bitcoin’s exchange rate, support among miners is minimal. Bitcoin XT will need 75 percent of newly mined Bitcoin blocks to trigger a maximum block-size increase, but only some 1 percent of new blocks so far included such a message – all mined by Slush Pool.

Moreover, it seems unlikely that the 75 percent threshold will be reached any time soon. A significant chunk of mining pools have taken a fierce stand against Bitcoin XT, while others are very hesitant to make such a switch.

Furthermore, a rapidly growing amount of hash power is now publicly backing BIP 100, the proposal by Jeff Garzik that grants miners the right to vote the block-size limit up or down. Both F2Pool and BTCChina, as well as several smaller pools, have come out in support of BIP 100 in the past few days.

Below is an overview of all known mining pools that had at least 1 percent of hashing power on the Bitcoin network over the past week, and their stance on the block-size issue.

F2Pool (~21%): BIP 100 / 8MB

The mining pool that is perhaps most outspoken against Bitcoin XT is also the one representing the largest amount of hashing power on the Bitcoin network: 21 percent. Instead of BIP 101, F2Pool currently supports BIP 100, which, of course, makes it the biggest mining pool to do so.

Speaking to Bitcoin Magazine, F2Pool administrator Wang Chun explained that the Chinese mining pool is open to other suggestions on raising the block size as well. Chun does maintain, however, that consensus among the Core development team is a requirement, and made it abundantly clear that switching to Bitcoin XT is not an option at all.

“We do support big blocks if it is implemented in Bitcoin Core. But we believe the whole ‘Bitcoin’ XT thing is manipulation,” Chun said. “While the question whether and how to increase the block-size limit is a technical one, the Bitcoin Core and ‘Bitcoin’ XT issue is political. By introducing ‘Bitcoin’ XT, Gavin Andresen and Mike Hearn are splitting the community. Totalitarianism and dictators cannot co-exist with the free and open-source software spirit.”

Chun’s opposition wasn’t subtle.

“Boycott ‘Bitcoin’ XT. Bitcoin Core forever. Gavin Andresen and Mike Hearn should resign,” he said.

Earlier this year, F2Pool agreed on a block-size limit increase to 8 megabytes, in accordance with other Chinese mining pools. This did not, however, include a doubling of the block-size limit every other year, as implemented in BIP 101 and Bitcoin XT.

AntPool (~18%): 8MB

AntPool, the second-largest ming pool on the Bitcoin network with 18 percent of hashing power, is also part of the conglomerate of Chinese mining pools that proposed a raise of the block-size limit to 8 megabytes in June of this year. Additionally, AntPool includes a message in support for an 8 megabyte limit in their blocks. As opposed to messages that trigger a switch in Bitcoin XT, however, the message merely broadcasts an opinion. Whether the message should be interpreted as support for BIP 101, which apart from a bump to 8 megabytes is also set to double the limit every two years, is not entirely clear.

AntPool does seem a bit more willing to potentially make a switch to Bitcoin XT in the future, compared to most other mining pools. Somewhat confusingly, CEO of AntPool’s mother company Bitmain, Jihan Wu, tweeted that AntPool is willing to make a switch to Bitcoin XT if “a majority” has switched. It is unclear, however, exactly what majority Wu was referring to.

Speaking to CoinTelegraph in June, AntPool indicated support for bigger blocks as well, although the pool also voiced concern about a contentious hard fork:

“We like the idea of increasing the maximum block size, but if Bitcoin XT is too contentious, we also don’t want the community to be divided. Doubling the block size every two years may be too arbitrary, we’d like to see the block size grow according to the real needs of the network.”

Bitcoin Magazine reached out to AntPool, but received no response at time of publication. 

BitFury (~14%)

BitFury is the biggest non-Chinese mining pool on the Bitcoin network, with 14 percent of hashing power. While the pool supports an increase of the block-size limit as well, it is currently not prepared to run Bitcoin XT and vote for bigger blocks. Despite a conservative approach, however, BitFury does not completely exclude the possibility of switching to Bitcoin XT at some point in the future – but only after careful analysis and consideration.

BitFury CEO Valery Vavilov told Bitcoin Magazine: “The Bitcoin Blockchain is not an amateur project anymore – it is becoming a platform for the Global Economy of Things. Changing the base rules can affect a lot of things, thus, any changes should be done very carefully, gradually, and with with tests.”

He added: “The proposed transition to the alternative client raises some concerns about its security: It is well known that key parts of the default Bitcoin Core client were thoroughly checked and sometimes formally verified, which cannot be said about alternative clients – including Bitcoin XT.”

BTCChina (~13%): BIP 100 / 8MB

BTCChina is part of the conglomerate of Chinese mining pools that proposed a raise of the block-size limit to 8 megabytes in June of this year as well. Since today, moreover, BTCChina has started to sign their blocks in support of BIP 100.

Speaking to Bitcoin Magazine, BTCChina’s Mikael Wang made it clear that his mining pool is not prepared to make a switch to Bitcoin XT. The Chinese pool that contributes 13 percent of hashing power to the network maintains that a consensus should be found among Bitcoin Core developers on how and when to raise the block-size limit.

“We will not support Bitcoin XT,” Wang said. “What the Bitcoin community needs now is stability and growth, and we will not do anything to jeopardize this further.” 

BW Pool (~7%): 8MB

BW Pool has not mined any blocks in support of a hard fork switch to BIP 101. The Chinese mining pool that controls 7 percent of all hashing power on the Bitcoin network does, however, include messages in support of 8 megabytes in their blocks. Additionally, BW Pool was also part of the conglomerate of Chinese mining pools that agreed to an 8-megabyte maximum block-size limit in June of this year.

Whether BW Pool’s support for an increase to 8-megabyte blocks includes support for a doubling every other year, as programmed into BIP 101, remains unclear.

Bitcoin Magazine has not been able to reach BW Pool for comment.

Eligius (~5%)

U.S.-based Eligius, accounting for 5 percent of hashing power on the Bitcoin network, is another fierce opponent of Bitcoin XT and has no plans to make a switch. Much like F2Pool, Eligius’ owner who goes by the pseudonym “wizkid057” does not even consider Bitcoin XT a Bitcoin implementation – rather an altcoin.

Speaking to Bitcoin Magazine, wizkid057 said, “I see no reason to mine yet another altcoin: ‘Bitcoin XT’ is not Bitcoin.”

Wizkid057 does agree that the block-size limit should be raised at some point, somehow, but said he prefers a careful approach, and contends that such a step should be taken only when widespread consensus is reached.

“Something should – and will – be done about the block-size limit eventually, but based on real-world data,” Wizkid057 said. “It is definitely not a dire thing to try to force people into today. When a technically sound solution gets at least the most basic of consensus from users, developers, experts, miners and services, then I’ll consider moving in that direction. At this time I see nothing that fits the bill.” 

KnCMiner (~5%): BIP 101

Sweden-based KnCMiner – controlling 5 percent of hashing power – is in favor of raising the block-size limit, and endorses BIP 101 in particular. Through a letter signed by seven of Bitcoin’s leading companies – including KnCMiner – CEO Sam Cole has expressed his support for the implementation of bigger blocks on the Bitcoin network. The letter did not explicitly state that this would entail running Bitcoin XT, but it did indicate that KnCMiner will run software in support of bigger blocks by December of this year.

Earlier this year, expressing his support for bigger blocks, Cole told CoinTelegraph: “We would like to see millions of people using bitcoin. To do that we need transaction fees that everyone can afford and is willing to pay. Putting it simply, that means many more paying transactions in each block, not less paying a higher fee.”

He added: “If bitcoin transactions end up costing the same as regular transfers then most of the world won’t see any advantages at all. Add to the fact that MasterCard’s main argument against bitcoin is the seven transactions per second limit … The sooner we fix it the better.”

KnCMiner has so far not mined any blocks that would trigger a raise of the block-size limit in Bitcoin XT.

Bitcoin Magazine reached out to KnCMiner, but received no response at time of publication.

Slush (~5%): optional

The only mining pool that has come out in support of Bitcoin XT so far is Slush Pool, controlling 5 percent of hashing power. While the Czech-based mining pool does not automatically sign new blocks in support of a block-size increase, it does allow its users to choose to do so individually. Currently, some 10 percent of hashing power on Slush is devoted to mining blocks in support of Bitcoin XT, and these numbers are slowly growing. Additionally, Slush is working to inform miners connected to its pool on the pro’s and cons of Bitcoin XT.

Speaking to Bitcoin Magazine, Slush Pool operator Marek “slush” Palatinus said: “At this moment we’re preparing some online materials and articles to explain for our users what exactly BIP 101 is and why they should vote for or vote against this proposal.”

He added: “The hash-rate is rising, and I expect more to come after we publish our articles on the topic. I see there’s lot of misunderstanding and fears about a hard fork, but I’m sure Bitcoin will resolve it smoothly in any way – even if we’ll continue with 1 megabyte blocks or switch to BIP 101 on the first day of 2016.”

21 Inc. (~4%): 8MB

21 Inc, which controls 4 percent of hashing power on the Bitcoin network, has not been mining blocks in favor of a hard fork switch to Bitcoin XT. However, the American mining pool that received a record investment for the Bitcoin industry worth $116 million earlier this year, has been mining blocks supporting an increase to 8 megabytes. Whether this includes support for a yearly growing block size as included in BIP 101 remains unclear.

Bitcoin Magazine reached out to 21 Inc., but received no response at time of publication.

 Telco 214 (~2%) 

Bitcoin Magazine has not been able to reach Telco 2014, which controls 2 percent of hashing power on the Bitcoin network. The mining pool has not been mining blocks in favor of a block-size increase.

Ghash.IO (~2%)

At time of publication, Bitcoin Magazine has not received a response from Ghash.IO, which also controls 2 percent of hashing power on the Bitcoin network. The mining pool has not been mining blocks in favor of a block-size increase.

 

Photo Tristan Schmurr / Flickr (CC)

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Gem CEO: Bitcoin Regulations are Trying to Fit a Round Peg in a Square Hole

winkelspecht-pierce

Regulation has always been a contentious issue in the Bitcoin industry. Some members of the community wish to avoid any regulation at all costs, while others want to work closely with regulators to bring clarity to the space as soon as possible. A panel on Bitcoin regulation was recently featured at the American Banker Digital Currency Conference, and it was during this discussion that Gem CEO Micah Winkelspecht, Chainalysis VP of Business Development Jonathan Levin, Chamber of Digital Commerce President Perianne Boring, and Bitcoin Foundation Regulatory Affairs Committee Chairman Marco Santori were able to discuss the various challenges for Bitcoin startups in the face of impending digital currency regulations around the world.

Is the BitLicense Too Broad and Flexible?

The BitLicense has been the center of attention when it comes to Bitcoin regulation since it was first announced by Former Superintendent of Financial Services for the State of New York Benjamin Lawsky, so it made sense that it was used as an example piece of regulation throughout the panel discussion. During an early portion of the conversation, Santori offered his thoughts on one of the core issues with the BitLicense, which is the broad nature of the language found in the regulation:

“What is the difference between a pure software play and a custodial wallet? What kinds of exchanges do act as custodians? These are highly fact-specific questions, and the way that the BitLicense is drafted — for better or for worse — it seeks elasticity. It wants to be flexible. I think that’s, on one side, good drafting. On the other side this speaking in metaphor makes it difficult to apply.”

One of the clearest signs that Bitcoin is difficult to regulate is the elasticity with which the regulation was drafted. As Santori mentioned, there may be unique situations where it is unclear whether or not a startup needs a BitLicense.

Fitting a Round Peg in a Square Hole

Winkelspecht took the issue of broad regulation in another direction when he discussed multi-signature addresses. After explaining what multi-sig addresses are and what they can accomplish, he noted how this kind of innovation could force changes in various legal definitions:

“When you think about this new definition of what it even means to own something, it totally transforms the way we think about solving these problems. One of the problems that we have with the regulations the way they’re written is that they’re really geared for trying to fit a round peg in a square hole, in that they don’t take into account the fact that the entire definition of custody and control can change. And so, what does custody or control mean?”

It’s difficult to force Bitcoin into the current legal framework because, as Winkelspecht noted, certain aspects of the peer-to-peer digital cash system may require completely new legal definitions. Winkelspecht provided one such example during the panel discussion:

“We’ve actually pushed — so for the legislation in California — we’ve actually written to the senate to try to get them to add a line, which just defines what they mean by custody or control. That was actually left out of the recent legislation.”

Raising Startup Costs Decreases Innovation

The problems associated with stifling innovation through regulation were also brought up by Winkelspecht during this part of the conversation. The Gem CEO explained some of the issues that small startups face when it comes to regulatory uncertainty in the Bitcoin industry:

“It’s still very, very murky and very unclear, so from a startup company who’s trying to figure out where you fit in the eyes of the law, it’s very difficult . . . Not having that level of clarity makes it extremely hard to do things like raise investment and actually try to build a sustainable business around it . . . We work every day with brilliant developers who are building solutions, and these are the guys who are actually innovating on things. They need the flexibility to try a lot of things and fail at a lot of things. If you raise the bar of what it takes to just get started, you are massively decreasing the innovation that’s going to come out of that space.”

Boring discussed ways in which a nonprofit incubator could bring along smaller new businesses before they had the ability to comply with the BitLicense. The Chamber of Digital Commerce had submitted the incubator idea to the New York Department of Financial Services as a possible solution to the regulatory issues troubling Bitcoin startups during the second comment period for the BitLicense, but the concept was never rolled into the final draft. During his own remarks, Winkelspecht went out of his way to support Boring’s suggestion.

For now, it appears there is plenty of work to be done in creating more regulatory clarity for Bitcoin companies and ensuring that innovation is not halted in the name of various legal costs.

 

Photo BTC Keychain / Flickr (CC)

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AUG 25 DIGEST: 8 Leading Bitcoin Companies Pledge Support for BIP101; Bitcoin Exchange Rate Falls Below $200

BitPay, Blockchain.info, Circle, KnCMiner, Bitnet, Xapo, BitGo and itBit have agreed to implement Gavin Andresen’s BIP 101; F2Pool instead backs BIP100; the bitcoin exchange rate fell below US$200 and
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Stefan Thomas: 'One Day We Will Decentralize Ripple'

Ripple has never been a favorite in Bitcoin circles, although it has grabbed the attention of banks and remittance powerhouse Western Union.
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Global Stock Markets Plunge Up to 10%

In a show of volatility that only Bitcoin users and some third world countries are really used to, markets around the world have seen falls in price of up to 10% over Monday and early Tuesday.
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Monday, August 24, 2015

Government, Central Bankers and Google Are Creating a ‘Fiat Mt. Gox’ (Op-Ed)

Mt. Gox. The collapse. The official story goes that it was hacked many times, starting in 2011.
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7 Leading Bitcoin Companies Pledge Support for BIP101 and Bigger Blocks

sign-letter

Leading bitcoin startups including BitPay, Blockchain.info, Circle, KnCMiner, Bitnet, Xapo and BitGo have come to a consensus to implement Gavin Andresen’s BIP 101, and to expand the current block size to 8 megabytes, after a long discussion with core developers, miners and the companies’ technical teams. A statement of their support was posted on the Blockchain.info blog today signed by Stephen Pair, Peter Smith, Jeremy Allaire, Sean Neville, Sam Cole, John McDonnell, Wences Casares and Mike Belshe.

“We support the implementation of BIP101,” the companies say in the letter. “We have found Gavin’s arguments on both the need for larger blocks and the feasibility of their implementation – while safeguarding Bitcoin’s decentralization – to be convincing. BIP101 and 8MB blocks are already supported by a majority of the miners and we feel it is time for the industry to unite behind this proposal.”

This announcement follows a similar statement released in June by five leading Chinese bitcoin companies, F2Pool, AntPool, BW, BTCChina and Huobi. In this statement, the companies explain their support for 8 megabyte blocks but raise concerns about any larger sizes. These mining pools currently represent over 60 percent of the entire Bitcoin network.

This letter of support follows last week’s announcement by Stephen Pair, co-founder and CEO of BitPay, that the company supports the “Increase maximum block size” or the BIP 101 proposal by Andresen and the merger of BIP 101 into Bitcoin Core.

“Currently, the block size limit is hard-coded to 1mb, which constrains overall transaction throughput. BIP101 proposes to increase that limit to 8mb after January of 2016 when a supermajority (>75%) of the blocks being mined indicate they support the increase. The limit on block size will double every two years after that until it reaches 8gb in 2036,” Pair wrote on Medium.

 

Photo George Redgrave / Flickr (CC)

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Kim DotCom: ‘China in Big Trouble. Buy Bitcoin Now’

Internet industry magnate and financial markets prognosticator Kim DotCom says now is the time to buy bitcoin in light of the Chinese stock market meltdown and a worsening outlook for the global econo
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Buy Bitcoins with Your Debit/Credit Card via New Coinbase Service

How to actually buy bitcoins is one of the most frustrating, trickiest, and most inconvenient parts of getting started with digital currency.
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AUG 24 DIGEST: Stanford Offers Bitcoin Course; Glidera Launches Non-Custodial Bitcoin Buying Service for Wallets

The Californian Stanford University School of Engineering will offer a new course on Bitcoin, Glidera has launched a service that allows wallets to use an API to buy and sell bitcoin directly, and mor
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Bitcoin Price Analysis: $220 Must Hold (Week of Aug 24)

Bitcoin has been in a giant trading range all year. As the chart below shows, it’s been range bound between ~US$220 and ~US$300.
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Sunday, August 23, 2015

Stripe Integrates Alipay; 500 Million New Potential Customers

Stripe, arguably one of the fastest growing fintech startup that allows users to accept payments through several different payment service providers has recently announced its support for Alipay, Chin
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David Seaman: ‘Stop Competing and Just Make Everything Interoperable’

CoinTelegraph caught up with independent journalist and podcast host David Seaman to talk about the Bitcoin blocksize debate, BitLicense exodus, altcoins and gaming, as well as what bitcoin needs to b
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Saturday, August 22, 2015

E-Coin Founders Talk Bitcoin Debit Cards and 50% Monthly User Growth

CoinTelegraph spoke with E-coin founders Pavel Matveev and Dmitry Lazarichev about competition in the bitcoin debit card market, the importance of multi-sig security, and crowd investment with BnkToTh
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FinTech Digest: 25 FinTech Unicorns Ranked; Andreessen Horowitz Adds New General Partner

Business Insider ranks 25 FinTech companies worth over US$1 billion; Bitnet and PAY.ON join forces and more top stories from this week in FinTech.
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Friday, August 21, 2015

Everything You Need to Know about the Proposed Changes to the Bitcoin Block Size Cap

blocksize2

Bitcoin has entered into a new phase of its existence. Prominent developers Mike Hearn and Gavin Andresen have made changes to the alternative Bitcoin implementation Bitcoin XT, designed to fork Bitcoin’s blockchain in order to allow for bigger blocks.

Bitcoin users and – in particular – miners are, therefore, faced with a choice. Will they support Bitcoin XT and vote for an 8 megabyte block-size limit – doubling every other year? Or will they stick to Bitcoin Core with 1 megabyte blocks, limiting the Bitcoin network to a maximum of seven transactions per second?

Or at least that is the choice as it is often presented. In reality, the possibilities are not binary. At the time of publication of this article, two other Core developers have proposed three more Bitcoin Improvement Proposals (BIPs) to increase the block-size limit, and an even wider spectrum of ideas has been suggested on the development mailing list, forums, chat rooms and other media. This article presents an – undoubtedly incomplete – overview of these ideas, categorized in six types of solutions.

Solution 1: No Cap on Block Size

A first option is a full removal of the block-size limit. Such a cap on the block size, after all, constricts the number of transactions on the Bitcoin network, which could become a barrier to adoption or utility at scale.

Satoshi Nakamoto originally implemented the block-size limit as a quick fix to avoid denial-of-service (D0S) attacks on the Bitcoin network. But since Bitcoin’s creator has gone silent, most of Bitcoin’s developers have come to believe that the block-size limit might actually serve more purposes than just the prevention of DoS attacks. The arguments to keep a block-size limit today are diverse, but can be divided into two main categories.

First, a block-size limit might be needed to avoid centralization of the Bitcoin network, and, in particular, further centralization of mining. Perhaps most importantly, bigger blocks would take longer to propagate to other miners when first found. A longer propagation time should lead to a higher orphan rate, as more miners would be mining on older blocks, while newer blocks are still finding their way through the network. That would, in turn, incentivize miners to join larger miner pools, as they find blocks more often, and therefore don’t need to wait for the propagation of new blocks as often.

Second, facing a diminishing block reward, and barring radical alternative solutions, scarcity in the blocks might actually be needed to secure a long-term income for bitcoin miners. After all, miners effectively sell the space in blocks to fill them with transactions. But if the space in these blocks is not scarce, competing miners could always undercut other miner’s fees in a race to the bottom, until fees reach a near-zero level and miners earn close to nothing to reinvest in hashing power. The end result could be an insecure network.

Solution 2: A Fixed Cap on Block Size

The simplest and current solution to solve this problem is the implementation of a fixed cap; a block-size limit set by Bitcoin’s core development team and embedded in the Bitcoin protocol. This fixed cap is currently still 1 megabyte, as set by Satoshi Nakamoto, but is slowly coming within reach as the number of transactions on the Bitcoin network continues to increase.

In order to prevent blocks from filling up, several other limits have been proposed. As a last-ditch effort before shifting his efforts to Bitcoin XT, Andresen suggested raising the block-size limit to megabytes– although this was never formalized into a BIP. A conglomerate of Chinese mining pools later indicated that 20 megabytes might be problematic, as “the great firewall of China” could limit the propagation of Bitcoin blocks over the network, and instead proposed a compromise to 8 megabytes. And since consensus was still not reached, Core developer Jeff Garzik recently submitted BIP102 to double the maximum block size to 2 megabytes in order to buy time to come up with better solutions. Naturally, every other size could be picked as a possible limit as well, whether it’s 4 megabytes or 400 gigabytes, or even a decrease in size as Core developer Luke Dashjr suggested.

A slight variation to this idea, as recently proposed by Core developer Sergio Lerner, is to hold onto the 1 megabyte limit, but speed up the block interval. If 1 megabyte blocks are found every five minutes instead of 10, that would allow for double the amount of transactions on the network while also decreasing confirmation times.

Solution 3: A Growing Cap

Arguably the biggest problem with a fixed cap – any fixed cap – is that it is hard to change. A change of the block-size limit requires a hard fork, meaning all users need to make the switch in order to not be left behind on the old blockchain. This is no easy feat on a decentralized network, especially if different participants of that network vary in their preferences. Furthermore, since the number of transactions on the Bitcoin network is optimistically expected to keep rising, while the cost of bandwidth and hardware is optimistically expected to keep falling, it is broadly assumed that the block size should grow over time.

This is why Andresen proposed a growing block-size limit. Based on Moore’s Law and Nielsen’s Law, his first public suggestion was to automatically increase the limit by 50 percent per year, which he later readjusted to 41 percent per year – or 100 percent per two years. Combined with an initial bump to 8 megabytes (a number picked in accordance with Chinese mining pools), he formalized this proposal in BIP101. Since it was not adopted by the Bitcoin Core development team, Andresen has programmed BIP101 into Bitcoin XT, to be triggered once 75 percent of hashing power has expressed support.

Another Core developer, Pieter Wuille, thinks Andresen’s preferred growth rate is much too progressive. Based on research by Blockstream colleague Rusty Russell, Wuille believes average internet connection speed will not be able to keep up with Andresen’s proposal. Wuille has, therefore, proposed to increase the block size limit by 17.7 percent per year starting in 2017, which he formalized in BIP103.

But much like the fixed cap, any set growth rate can theoretically be picked. Perhaps Russell’s revised figures – he now suggests 30 percent yearly growth should be OK – will lead to another BIP in the near future?

Solution 4: A Dynamic Cap

Regardless of the preferred figures, a set growth rate has its own problems. Most importantly, it typically includes predictions about the future – and no one can reliably predict the future. The growth of Bitcoin usage has proved to be rather unpredictable over the past years, and historic technological improvement rates defined by Moore’s Law or Nielsen’s Law are in reality not laws at all – rather, trends.

This is why some suggest that Bitcoin might need a dynamic cap instead of a fixed cap or a cap based on a set growth rate. A dynamic block-size limit would, much like the mining difficulty, readjust itself automatically, based on a pre-defined rule set. And again, there have been multiple ideas on how to define this rule set.

Another of Andresen’s suggestions is to readjust the block-size limit on the basis of the size of recent blocks. This in itself can be done in multiple ways, and Andresen agreed to take the average size of the last 144 blocks (about a day’s worth), and double it to represent the new limit. If the blocks of the past day were an average of 1 megabyte in size, the limit would automatically be set on 2 megabytes.

A similar proposal entailed to adjust the maximum block size once a certain threshold is reached. For instance, when a series of blocks would on average reach 90 percent capacity, the block size limit could automatically readjust upward. Or, if a series of blocks would not even reach 50 percent of the maximum allowed block size, the limit could automatically readjust downward.

But it’s also possible to use parameters not even directly related to the block size. The block-size limit could, for example, be linked to the total amount of fees in a block. Or it could be based on the mining difficulty, as proposed by Core developer Gregory Maxwell. As long as it’s an internal parameter, Bitcoin’s block size limit can be tied to it.

Solution 5: A Cap Chosen Through Voting

Almost all interesting dynamic cap suggestions, however, seem to have one common weakness: The data that informs the new dynamic cap on the block-size limit can often be manipulated. For instance, miners could send transactions to themselves in order to fill up blocks or to increase fees.

Therefore, a more transparent solution could be a direct vote, possibly on some kind of regular interval. This solution begs another question: Who gets to vote? An obvious option would be to allow all Bitcoin users a vote. But unfortunately, it’s not really possible to determine who Bitcoin’s users are, while it’s easy to game elections by posing as multiple entities.

However, it is possible to vote with bitcoin. This could easily be done by setting up burn-addresses as voting booths. Anyone could partake in the elections, though it would cost money to do so, as the bitcoin used to vote would be lost forever. This way, the side of the debate that is prepared to spend most bitcoin on its desired solution wins. Elections would literally, and intentionally, be up for sale.

It’s also possible to organize a one-bitcoin-one-vote election without the need to burn bitcoin. As endorsed by Core developer Peter Todd, bitcoin holders could vote on the block size with the bitcoin they control, meaning the biggest stakeholders in the Bitcoin economy would have most of the influence on the block-size limit.

And lastly, of course, there is the voting method that is already used to determine consensus within the Bitcoin network: hashing power. Hashing power currently gets to determine what the longest chain is, and it also could be used to vote on the block-size limit. This idea was formalized by Core developer Jeff Garzik in BIP100. BIP100 transfers the power to set the block-size limit from the Core development team to the Bitcoin miners by allowing miners to include a message into freshly mined blocks indicating they want to mine bigger – or smaller – blocks. If 90 percent of hashing power endorses either bigger or smaller blocks, the block-size limit will double or halve each 90 days.

As a possible downside of BIP100, miners – and especially large mining pools – would of course gain even more power over the network than what they have today. But at least it would be transparent.

Solution 6: Extension Blocks

A completely different solution is conceived by hashcash inventor and Blockstream CEO Adam Back. In what is perhaps the most advanced idea to date, Back proposed allowing so-called “extension blocks” on the Bitcoin network. In essence, extension blocks would be an opt-in solution. The 1 megabyte limit could remain intact, while users and miners who’d be willing to handle bigger blocks – say 10 megabytes in size – could run software to process these as well. This would introduce a new dimension to Bitcoin usage, as it would essentially create multiple blockchains with the same bitcoin – the 1 megabyte blockchain would simply be more secure than the 10 megabyte blockchain.

Furthermore, it would still be possible to accept, store and spend bitcoin on the 10 megabyte blockchain, while running only a full node for the 1 megabyte blockchain – or even no full node at all. Users could, for instance, run a full node for the 1 megabyte blockchain on which they store the bulk of their money, while using an SPV wallet for the 10 megabyte blockchain for day-to-day payments. Bitcoin would, of course, be transferable from the 10 megabyte to the 1 megabyte blockchain, though the decreased security on the 10 megabyte blockchain would suggest to wait for some extra confirmations before trusting the payment on the 1 megabyte blockchain.

Bonus Solution: Flexible cap

Finally, flexible caps deserve a mention. While not really a complete solution to the block-size issue as a whole – some type of limit still needs to be set somehow – flexible caps could relieve the Bitcoin network from a lot of stress. Separately proposed by Core developers Meni Rosenfeld and Gregory Maxwell, flexible caps don’t really have a hard limit on the maximum block size, but, instead, penalize miners for producing bigger blocks. As such, a sudden influx of new users, or a surge in transaction volume, would not lead to a severe backlog of transactions that could potentially crash the network. Instead, flexible caps would allow room for growth, while at the same time indicating the limit should be adjusted to improve network performance.

The Good News and the Bad News

The good news is that the block-size issue is being widely discussed by smart people coming up with inventive solutions. A number of new ideas have been proposed, while it’s also possible to combine different solutions into new proposals. A dynamic cap, for instance, could easily be combined with a voted cap. Or a flexible cap could be attached to a fixed cap. Or an extension block joined with set growth. It’s even possible to mix three or more solutions to construct a completely unique approach. And, who knows, maybe some genius mathematician or programmer will come up with an entirely novel long-term solution for the block-size issue.

The bad news, however, is that this long-term solution has probably not yet been conceived; every single possibility so far seems to effectively “kick the can down the road.” All sides of the debate acknowledge that Bitcoin will ultimately need additional scaling solutions built on top of the protocol layer, and possibly a revision of the funding structure to reward miners. Bitcoin is still an experimental work-in-progress, with no clear-cut solutions. In an often heated debate, that is the one thing practically everyone agrees upon.

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