The problem Bitcoin solves

The problem that Bitcoin solves is the reversibility of electronic payments. In the seminal Bitcoin whitepaper, Satoshi Nakamoto wrote,

Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments…

Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes…

With the possibility of reversal, the need for trust spreads… A certain percentage of fraud is accepted as unavoidable.

These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.

The solution that Nakamoto devised to solve the problem of reversible payments was,

… an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.

Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers.

The result was Bitcoin, which has continued to deliver as a solution to the reversibility problem since it went live over eight years ago. The means by which Nakamoto solved the reversibility problem was by eliminating the need for a trusted third party that could willingly or unwillingly reverse transactions. In place of a trusted third party, Nakamoto used a chain of cryptographically-signed transactions secured by proof-of-work to order and validate payments. And thus, the blockchain was born.

pow

Today, the blockchain is used to securely order and validate more than just payments. People have figured out how to use the blockchain as a way to prove that a digital file existed at a certain point in time, creating a so-called “proof-of-existence“. People are also exploring how to use the blockchain to track ownership of all kinds of digital assets including domain names, game tokens, stocks and other financial instruments, and even real property titles.

The reason that people are using Bitcoin for these transactions instead of any other system for recording ownership information is precisely because of Bitcoin’s security. At the time of this writing, Bitcoin block makers, or “miners”, collectively calculate over 30 billion SHA-256 hashes per second at a cost of approximately $15,000 per block using hundreds of millions of dollars worth of bitcoin “mining” computers. It would thus be extremely expensive to reverse a transaction with even one confirmation, ensuring strong security for transactions that are included in a block added to the most difficult valid blockchain.

For users to benefit from all this security, they must run their own full node and verify that their transactions are included in the most difficult valid blockchain. Then they can decide based on their risk preferences when to consider their payments “settled” based on how many confirmations they have. The more confirmations a given transaction has, the less likely it is to be reversed.

If you need strong assurances that when you receive a payment, that it can’t be easily reversed, then Bitcoin can solve your problem. If you need to be certain that when you create a record of ownership or proof-of-existence, that it will still be there when you go back to find it in ten years, then Bitcoin can solve your problem.  But if your problem doesn’t need sealed-in-stone-forever security, and you can get away with using a plain old database to record your transactions, then Bitcoin – and the blockchain – isn’t for you.

Addendum: what about bitcoin (the currency)?

When Satoshi created Bitcoin, he really created two distinctly valuable products that by necessity are joined at the hip: the first blockchain, and the first cryptocurrency. If the blockchain was created to solve the reversibility problem, then bitcoin was created to solve the blockchain’s incentive problem.

The proofs-of-work that are used to secure the blockchain require energy to create, and energy costs money. Since Bitcoin could not rely on any third parties to operate, no third party payment mechanism could be used to pay miners for the energy they spent generating proofs-of-work. A new payment mechanism had to be created – bitcoin.

By paying miners using a currency that is issued and transferred exclusively by the blockchain, Nakamoto provided an incentive to miners to protect the integrity of the chain. If any miners attempt to subvert the integrity of the blockchain by colluding to reverse transactions, then they would also subvert the value of the block reward, throwing away money on the table and threatening their investment in specialized mining computers.

The bitcoin currency therefore ensures that incentives are aligned between miners and users so that the implicit promise of irreversibility is upheld. Even after all the bitcoin is mined, miners will continue to prefer to be paid in bitcoin for transaction fees because it is a highly liquid digital asset free of counterparty risk.

Although bitcoin solves interesting problems on its own – such as providing a new “safe-haven” asset class to investors – its value is derived entirely from the security of the blockchain and the ability for users to easily verify that security. Without these properties, bitcoin as a currency would be no more interesting than WoW Gold or Linden Dollars. It’s important to remember that bitcoin is a means to an end, and not the end itself: an irreversible electronic payment system.


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Happy genesis block day!

​Eight years ago today, Satoshi Nakamoto mined “Block 0”, the genesis block of the Bitcoin blockchain.

Embedded in this block is the message, “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”, a reference to a headline in the UK newspaper The Times and possibly a hint as to Nakamoto’s motivation for creating Bitcoin.

Bitcoin Block 1 was mined five days later, on January 8, 2009, leading some to believe that Block 0 was back-dated to match the date of the embedded newspaper headline.

Regardless of the exact date of Bitcoin’s genesis, one thing is certain: with the launch of the Bitcoin genesis block, Satoshi Nakamoto succeeded in forever changing the way we think about money, value, and trust online.


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Ten Ways Governments Threaten Bitcoin

Governments are strange beasts. Not quite market, not quite commons, governments occupy a unique space in the economy where societies permit (or tacitly tolerate) territorially-bound corporations that have fiat monopolies on important social functions and institutions. Governments use these exceptional permissions to create and enforce laws and regulations that inhibit the free flow of goods, services, and ideas within their jurisdictions, simultaneously creating and limiting opportunities for entrepreneurs, investors, and workers in the economy. All the while, governments engage in covert campaigns to undermine and neutralize foreign and domestic targets that are seen as threats to “national security” (read: government power and/or the profits of incumbent corporations), creating blowback and bad precedents that have come back to haunt governments and their citizens years later.

The Bitcoin network is a relatively young but growing part of the economy, spawning hundreds of businesses and nonprofit groups that support the fledgling technology, fueled by over $1 billion in venture capital and angel funding that has been invested since Bitcoin’s invention. While the Bitcoin network itself is decentralized, transcending government borders and legal jurisdictions, there is an uneven patchwork of government regulations bound by geography and international treaties that are creating centralizing forces and vulnerabilities in various parts of the Bitcoin economy. This is a cause for concern among members of the community that value resiliency and decentralization of power in the network. Unless there is a focused movement to eliminate the government interventions that threaten Bitcoin companies and distort the market to create these centralizing forces, we can expect this drama to continue to play out for years to come.

Note: This is not an exhaustive list of government threats to Bitcoin.

1. Bitlicenses and banking regulations

A “Bitlicense” is a specific license required to operate a business that serves as an exchange or brokerage firm for bitcoin and other “virtual currencies.” This kind of license prevents competition by limiting the number of companies that can legally do business within a jurisdiction, and puts customers at risk by requiring businesses to collect and store sensitive personal identity information.

First implemented by New York, some version of a Bitlicense has been proposed or implemented in states and countries around the world, including tech hubs such as California and growing financial hubs like the Isle of Man. In jurisdictions that have not adopted a Bitlicense, previously existing banking, money transmission, and money services business regulations have been used instead, producing the same cartelizing effects as a Bitlicense.

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2. Bitcoin bans

The alternative to licensing of Bitcoin exchanges has been the consideration or actual implementation of bans on Bitcoin exchanges, which further centralizes power in the remaining exchanges throughout the world and pushes people into underground market exchanges. While not an existential threat to Bitcoin, this concentration of power in regulated exchanges puts pressure on customers to comply with onerous KYC/AML requirements that put them at risk for identity theft and financial surveillance. This added friction slows down the adoption process, excludes people who are undocumented or security-conscious from the exchange market, and pushes people into slow, expensive, and risky gray or black market exchanges.

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3. Energy subsidies

The largely unregulated nature of Bitcoin mining makes it a nearly free market with nearly perfect competition. Miner profitability relies on many factors, including connectivity with the rest of the network, the cost of operating expenses, and hardware quality. The miners that survive these competitive conditions are the ones that are able to reduce their costs while increasing their hashrate and block propagation speeds as much as possible. Electricity is by far the largest operating expense of Bitcoin miners today, and so the miners that are most profitable today are the ones with the cheapest electricity costs – and the lowest cost is “free.”

Energy is highly controlled by governments in most parts of the developed world, either directly through government-run energy companies or indirectly through government-sanctioned energy cartels/ monopolies/ duopolies/ oligopolies. When energy companies have a surplus of electricity, governments will sometimes decide to give this electricity away for free. Governments also subsidize the production of energy by providing preferential tax treatment or direct cash subsidies to energy companies, artificially reducing the costs of certain kinds of energy.

Energy subsidies by governments create an uneven playing field in the energy markets, leading bitcoin mining to consolidate around areas with access to artificially cheap or free electricity. Given that there are only a relatively small number of places in the world with these kinds of subsidies, the hashpower responsible for Bitcoin network security is concentrating in just a handful of legal jurisdictions. This makes it easier for a government or coordinated group of governments to take control of the Bitcoin mining network through nationalization or de facto nationalization by regulation.

[6] [7] [8]

4. Labor and immigration laws

Much of the Bitcoin industry relies on highly specialized knowledge in the fields of ASIC manufacturing, cryptography, computer science, finance, and economics. Labor and immigration laws restrict the movement of workers with this specialized knowledge, preventing a free market for labor from arising. Labor is artificially cheaper in some areas, or more expensive in others, because of government intervention that distorts the supply and demand curves of these markets. This creates concentrations of power in areas where these specialized skills and distorted labor markets exist: China for ASIC manufacturing, Europe and North America for cryptography and software development, London and New York for finance and economics, Silicon Valley for startup capital, etc.

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5. Research grants

Within the past couple of years, governments have become increasingly interested in Bitcoin. In 2015, the RAND Corporation published U.S. government-funded research about the ways that governments can disrupt “virtual currency networks” like Bitcoin. Governments have also become interested in blockchain data analytics, creating a cottage industry of companies devoted to tracing illicit flows of funds and other criminal uses of Bitcoin. In June 2016, the U.S. Department of Homeland Security announced that they had awarded research grants of approximately $100,000 each to Block Cypher and RAM Laboratories for “Blockchain Applications for Homeland Security Analytics.”

These kinds of government grants create incentives to do research that the market might not otherwise demand. They also create incentives for grant recipients to attempt to block certain changes to the core protocol that would impede such research e.g. automatic CoinJoin, Confidential Transactions, ZK-SNARKS, etc, in the case of analytics research. There is no evidence as of the time of this writing that the companies that have been awarded research grants for blockchain analytics are making any concerted efforts to block fungibility improvements in Bitcoin software. The general principle here is that core developers and full node operators will have to remain vigilant about spotting conflicts of interest by those that would seek to influence core protocol development.

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6. Legal tender laws

Legal tender laws are laws that give special privileges to bank-issued “fiat” currency above all other currencies. Fiat currencies issued in a legal tender regime (such as the U.S.) must be accepted for settlement of debts, public or private, such as a lawsuit settlement or payment of taxes. It’s like if McDonald’s was the only place you could legally eat in your area, and you had to pay for everything with a currency they issued called “McBucks.”

Since everyone who earns income is required to pay taxes, this means that everyone who earns income has an incentive to have at least enough fiat currency at the end of the year to pay their taxes. Since most businesses only accept their local fiat currency, consumers have an incentive to have much more than the minimum amount of fiat currency needed to cover their tax burden so that they can easily make purchases from local businesses without needing to exchange for fiat currency first.

The incentive structure created by legal tender laws privileges fiat currencies and hampers adoption of alternative currencies, even if the alternatives have more desirable characteristics. Such an uneven playing field is bad for bitcoin. The playing field must be leveled for bitcoin to truly compete with fiat currency on its own merits.

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7. Key disclosure laws

Key disclosure laws are laws that require suspects to turn over their decryption keys to police if a court order or warrant demands access to encrypted materials. Failure to comply with the order could result in contempt of court charges and lengthy prison sentences. Bitcoin uses private keys to sign and authorize transactions to transfer bitcoin. Encryption is used to encrypt private keys and messages containing transaction data, protecting this sensitive information from hackers. Courts may one day use key disclosure laws to force suspects i.e. people who have not yet been convicted of a crime to turn over the keys needed to decrypt such sensitive data. Courts may also force the disclosure of Bitcoin private keys so that the court can appropriate the bitcoins on behalf of the government or a plaintiff in a lawsuit.

Key disclosure laws put bitcoin owners at risk by creating a legal avenue by which they may be forced to disclose the private keys that control ownership of their assets and protect their transaction data, even if they are not convicted of a crime. This could open bitcoin owners up to theft by corrupt government agents or hackers who gain access to the private keys that have been involuntarily disclosed to the government.

[13] [14] [15]

8. Intellectual property laws

Intellectual property (IP) laws turn ideas into private property. Such laws grant companies and individuals a government-granted monopoly over unique innovations, such as certain kinds of bitcoin wallets or mining chips. Once this monopoly is granted, the company that owns the IP via copyright, patent, or trademark can send government agents to attack anyone that copies the idea and compel the copier to either stop their IP infringement or pay rents for each copy.

This kind of monopoly on ideas slows down technological progress by making it a crime for people to copy or improve upon already existing ideas, blocking off certain avenues of innovation. While Bitcoin itself is free software, open for all to copy, remix, reuse, and redistribute, the same is not true for innovations built on top of Bitcoin. This has the potential to centralize control of important innovations in Bitcoin in the hands of a small group of people, who can then use this control to extract rents from the ecosystem or even take control of the network itself through e.g. mining centralization.

There is good work being done to counter-act the negative effects that intellectual property laws have on innovation in the technology industry. To fully protect creativity and innovation, intellectual property laws must be abolished so that people are once again free to copy, modify, and reuse ideas and information as has been done since the dawn of our species.

[16] [17] [18]

9. Internet controls

As a peer-to-peer digital currency, Bitcoin is almost wholly dependent on the internet for its existence. In theory, Bitcoin can be used without the internet, but the inconvenience of “sneakernet” transactions makes the technology impractical to use and eliminates the majority of benefits offered by Bitcoin. The internet has become essential in other parts of modern life as well, from academia and business to entertainment and social services.

In recognition of the internet’s importance and power in society, governments have begun enacting various laws that impose controls on the kinds of content that people within their jurisdictions may publish and consume. In China, these controls on the internet are so pervasive and totalitarian that they have been given a nickname: the “Great Firewall of China,” a reference to the famous wall that once separated China from its northern neighbors.

Internet controls have the potential to negatively affect Bitcoin in several ways, including:

  • Privileging or harming miners by manipulating internet speeds in and out of the country.
  • Filtering out Bitcoin transactions passing through unencrypted connections.
  • Limiting the information that locals can find about Bitcoin, distorting their view of the technology in ways that may be good for the government but bad for Bitcoin.
  • Limiting the dissemination of dissenting viewpoints that would question government policies about Bitcoin, alternative currencies, the internet controls themselves, and other relevant issues.

[19] [20] [21]

10. Corporate espionage

Allegations of corporate espionage by governments around the world are among the most troubling revelations to come out of the classified documents leaked by Edward Snowden. Governments have allegedly gone so far as to have their agents infiltrate private companies without the knowledge of those companies to spy on internal processes and interfere with the security of information technology products. In early 2015, it was revealed that spies working for the U.S. and U.K. governments allegedly hacked into the network of a German company called Gemalto, compromising private keys produced by the company for cellphone SIM cards and enabling the spies to decrypt the communications of potentially billions of cellphones without a warrant.

While the Bitcoin network is not yet large enough to warrant the kinds of expensive infiltration tactics seen in previous government operations, it’s possible that Bitcoin companies may become influential enough in the future to become serious targets for corporate espionage by governments around the world. Bitcoin hardware manufacturers, miners, wallet developers, exchanges, and other influential members of the Bitcoin industry could all be targeted, and will need to prepare accordingly.

[22] [23] [24]

Free Bitcoin

Like all government regulations, these interventions are creating distortions in the Bitcoin economy that prevent the market and technology from growing naturally and organically, instead crippling Bitcoin in some areas and subsidizing growth in others. As Bitcoin’s influence grows, it will become increasingly important that Bitcoiners recognize government interventions that affect Bitcoin’s growth and then work with others in their area to put an end to these interventions so that Bitcoin can grow to its fullest potential without unfair help or hindrance.


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Response to Roger Ver on the “block size blockade”

Comments on a post published by Roger Ver at FEE.org.

‘Miners should always supply enough block space to meet the demands of Bitcoin users.’

It would seem that this statement:

Just as it would be a mistake for Starbucks to intentionally not have enough coffee to meet the demands of their customers, it would also be a mistake for Bitcoin miners to not supply enough block space to meet the demands of their users.

is contradicted by this later statement:

Downward pressure on the block size that miners are willing to create… would still likely [result in] a practical maximum block size.

Should the miners “supply enough block space to meet the demands of their users,” or should miners yield to the “downward pressure on the block size that miners are willing to create”? Are miners making a “mistake” by yielding to this “downward pressure” and building smaller blocks?

There is virtually unlimited demand for cheap, highly replicated, timestamped data storage. Add cryptographic certainty about the integrity of stored data, and we have a powerful tool for digital record-keeping. We should not be surprised if demand for this tool outstrips supply given the “downward pressure” faced by miners.

If Bitcoin is successful, there will always be more demand for block space than supply. Luckily, this demand doesn’t have to be serviced by strictly on-chain transactions. Transactions can be aggregated off-chain via payment channels or merkle trees and added to the blockchain in batches, all without the need for a trusted third party. This takes pressure off the miners while servicing demand for Bitcoin transactions.

‘Inefficient miners will drop off the network’

An important negative externality that you left off your list is that of hashpower centralization. This externality was mentioned in passing throughout your post, but deserves further examination.

The least efficient miners and nodes will drop off the network, just as the least efficient producers in any industry would.

I agree that this would happen, and I find it troubling. Given that so much hashpower is already concentrated behind the Great Firewall of China, I am concerned about any change that would give Chinese miners even more of an advantage than they already have. I would be equally concerned about any change which unfairly disadvantages them and puts their hashpower out of commission. Ideally, changes will grow the Bitcoin mining network and further decentralize it throughout the world. But more likely, this cannot be accomplished with software alone (a topic for another post).

Bitcoin only has value if the miners do not collude to censor or double-spend transactions. If changes are made to the protocol that cause a majority of the hashpower to concentrate in one legal jurisdiction then the risk of the miners being nationalized or de facto nationalized through regulation to attack Bitcoin is significant and, in my opinion, not worth it.

Here is one example of a positive feedback loop that could result from an unsafe* block size limit increase:

  • Well-connected miners in China create large blocks and propagate them to each other.
  • Blocks produced by miners from outside China propagate slowly across the Great Firewall, and are therefore seen by Chinese miners later than blocks built by other Chinese miners.
  • Chinese miners build on blocks from outside China less often, meaning that less blocks from outside China are added to the blockchain.
  • Miners outside China, not winning enough block rewards, have their already razor-thin margins slashed. They eventually go out of business.
  • Chinese miners gain a larger percentage of the overall hashrate.
  • Repeat.

This feedback loop will only intensify as the coinbase reward continues to diminish and miners begin to rely heavily on transaction fees for revenues. At the point that fees become more important than the coinbase reward, miners that can produce the biggest blocks will be the most profitable. The argument that “downward pressure… would still likely [result in] a practical maximum block size” will then be less an argument for a larger block size limit and more an argument for a smaller block size limit, lest we allow this positive feedback loop to spiral out of control and end in disaster.

* Unsafe in this context means a change that would significantly increase the likelihood of a 51% attack. Only a very small number of Bitcoin experts are against a safe block size limit increase (I am not one of them).

There is nothing advantageous to artificially limiting the block size.

The positive feedback loop described above shows that there are serious game theoretical concerns resulting from an unsafe increase or outright removal of the block size limit. Bitcoin was engineered to remain decentralized, and removing the limit on this parameter could break that key functionality. Is it really worth breaking Bitcoin just so a few extra transactions can fit into each block? Maybe these concerns are overblown, but I’m personally not willing to take the risk to find out.

Bitcoin is scaling on- and off-chain

Thanks to the tireless efforts of dozens of contributors from around the world, the Bitcoin block size blockade (if that is what we are calling Satoshi’s decision to implement the 1MB limit) is coming to an end. Capacity increases are coming to Bitcoin Core, the reference implementation of Bitcoin. A byproduct of the recently-merged Segregated Witness proposal is an effective block size limit increase to 1.6MB – 2MB. Some Core developers have also agreed to submit a hard fork proposal for an increase to 2MB for the non-witness data shortly after SegWit is activated. Other Bitcoin client developers are experimenting with their own methods for increasing transaction capacity, some of which may make it into Core.

If Bitcoin does not scale, then it will lose out to a competitor. This would invalidate hundreds of millions of dollars that have been invested into bitcoin mining equipment, and further billions that have been invested in bitcoins. The stakeholders behind these investments have a large financial incentive to cooperate to find mutually agreeable solutions. I am confident that solutions will be found and that these solutions will enable Bitcoin to maintain its position as the leading cryptocurrency.


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How to Decentralize Uber

It has been an oft-cited example that Ethereum can be used to create a “decentralized Uber,” and there have been several (as-yet unsuccessful) attempts to do just that. But what does creating a decentralized Uber actually entail? In this post, I propose that a) Ethereum is overkill for the task at hand, and b) decentralized Uber is not as sexy as it sounds, and may or may not actually make sense in the real world.

What Uber Is Today

Uber is a business that bundles several services together to create a seamless transportation application:

  • Technology development. Uber employs engineers and designers to make sure that all of Uber’s technology works to their standards, including server- and client-side applications for drivers and passengers. Uber also does R&D to test new business models, new app features, and new products.
  • Order matchmaking. When people press the button on their Uber app to catch a cab, their GPS location is broadcast to Uber’s servers where the order is algorithmically matched with a driver whose own Uber app is also broadcasting their GPS location to Uber’s servers. Once the order is matched and the driver accepts the order, the driver is told where the passenger is located. The passenger can also see where the driver’s car is at and follow their movement to the passenger’s location. Both are provided a communication link to each other via a proxy phone number so they can resolve any issues while the driver is en route to pick up the passenger.
  • Payments. Once the ride is over, credit/debit card payments are processed through the Uber application using a third-party payment processor called Braintree, a subsidiary of PayPal.
  • Insurance. While drivers are required to carry their own valid insurance with minimum coverage amounts, Uber also provides an umbrella insurance policy that covers any gaps while passengers are riding in the vehicle. In some states, companies like Uber and drivers that use their network are mandated by law to carry an insurance policy that meets certain minimum coverage levels.
  • Quality control. Uber checks to make sure drivers have a valid driver’s license, runs background checks to make sure drivers do not have a violent criminal history or a poor driving record, verify that drivers have valid insurance with enough coverage, and monitor both driver and passenger ratings to ensure that quality standards are being met by members of Uber’s network.
  • Customer service. If the driver or passenger has a serious problem with the transaction, they can escalate the issue to Uber customer service for resolution. Customer service is also responsible for following up if the driver or passenger reports a forgotten item in the vehicle.
  • Ancillary benefits and services. In addition to all the core services mentioned, Uber also uses its scale and reach to negotiate bulk discounts on many ancillary services for drivers such as healthcare, automotive maintenance, cell phone plans, and other products and services. Uber helps drivers obtain vehicle financing so that they can acquire a car to drive for Uber, and also lobbies governments to enact policies that are favorable for Uber (and usually, by extension, drivers and passengers) or oppose policies that are not favorable.

What Decentralized Uber Is Not

Decentralized Uber is not everyone broadcasting their location onto a blockchain and getting matched up by algorithmic oracles based on location proximity and bidding on the best price for a ride.

  1. Putting people’s current location and destination on a public blockchain is bad for privacy and personal security. People already get upset when they’re faced with the realization that Uber can track all of its users in real time.
  2. Putting people’s current location and destination and bids for fares on a public blockchain does not scale well and will be really expensive.
  3. Ridesharing is an inherently local service, so orders do not need to be broadcast to the whole world.
  4. Bidding for fares is a concept tried by the failed ridesharing startup Sidecar and has proven to add too much friction to the process. It is also an inherently different model than the intentional simplicity of Uber’s “press one button to hail a cab” model.

In short, Ethereum is not needed to build a decentralized Uber because most user interactions in a decentralized Uber app would happen off-chain, and Bitcoin supports all the on-chain interactions needed today.

What Decentralized Uber Could Be

Decentralized Uber – let’s call it “Doober” – is an unbundled Uber, with the possibility for redundancy in some areas to prevent there from being a central point of control or failure. Different companies can each be used for app development, background checks, GPS monitoring, insurance, matchmaking, payments, customer service, and additional benefits and services, and then aggregated together with the Doober app. These services could be re-bundled where it makes economic sense to do so, though it is possible many parts of the system will remain decentralized for economic or practical reasons.

Blockchain?

The blockchain is indeed a key component of the Doober application, but not in the way that has been previously envisioned. Doober uses the blockchain only for identity and payments, delegating the task of order matchmaking to a network of private servers called Matchmaker servers. Drivers and passengers can then choose which servers they trust with their location data.

Blockstack is a key-value store database that uses the blockchain as a decentralized mechanism for determining the order of database updates. Think of it like a global file directory with a trusted root in the blockchain e.g. alice.id/zonefile/apps/gps/link or alice.id/zonefile/apps/reputation. Blockstack is the glue that binds all of our unbundled services together in a decentralized way where the user remains in control.

Blockstack would be used to register a unique identity on the blockchain – called a “blockchain ID” – and link that identity to: public keys for message authentication and encryption; reputation ratings from other drivers and passengers; official endorsements for statements like “I have a valid driver’s license,” “I have valid insurance with this much coverage,” “I do not have a violent criminal history,” etc; and a link to a GPS API endpoint – all the components needed for a Decentralized Uber-like system.

How Decentralized Uber Could Work

  1. Register a blockchain ID like “alice.id” then link the blockchain ID to the Doober application.
  2. Link a public key, called an “ID Key,” to the blockchain ID and use the corresponding private key to sign and decrypt messages linked to the blockchain ID. This is how messages from the blockchain ID owner are authenticated. The ID key will go into Blockstack like alice.id/zonefile/id-key-fingerprint/public-key.
  3. Have an identity verification service sign tokens indicating that the person who controls the blockchain ID has provided proof of a valid driver’s license, insurance with adequate coverage, and no history of violent behavior or car accidents. Link these tokens to the blockchain ID. These tokens will go into Blockstack like alice.id/zonefile/apps/endorsements.
  4. Register for a unique GPS API endpoint service with the blockchain ID and link the unique GPS API endpoint to the blockchain ID. This endpoint will go into Blockstack like alice.id/zonefile/apps/gps/endpoint-url.
  5. Register an account with a Matchmaker server. The account will be linked to the blockchain ID and is authenticated with the ID Key. Each Matchmaker can have different policies regarding driver and passenger requirements e.g. background checks, insurance, minimum reputation ratings, etc. Drivers and passengers can register with multiple Matchmaker servers, and servers could federate for redundancy and scale. Users will give permission to each registered Matchmaker to access the user’s GPS location only when the Doober app is on and waiting to give or receive a ride.
  6. Passengers can broadcast orders to multiple servers at the same time. If an order is matched on multiple servers, then the customer can either manually choose which order they want to commit to, or they can set automated policies to choose for them. Drivers will then get pinged by the Matchmaker server(s) when they get a ride request, and can accept or deny the request.
  7. Payments can take place on-chain or (more likely) using a Layer 2 system like the Lightning Network. The Matchmaker or other pre-determined arbitrator could be a signatory on a multi-sig transaction between the driver and passenger to prevent either from getting ripped off. Of course, they could also use any other agreed upon payment method.
  8. Issues are resolved either by insurance companies or Matchmaker customer service (or both, or some other third party – this can all be negotiated manually or automatically beforehand via the Doober app). Matchmaker servers can broker reputation exchanges and keep track of the complete reputation history to ensure that quality standards are met. Drivers and passengers can link their reputation history to their blockchain ID so that it is easily portable. If the reputation rating of a driver or passenger falls below a pre-determined threshold, the Matchmaker can suspend or delete their account. Matchmaker servers can gossip the reputation ratings of blockchain IDs with other Matchmaker servers to help prevent hit-and-run/exit scam scenarios.

As you can see, there are quite a few steps involved, but really not that much more than is involved with signing up for Uber today. Whether decentralizing Uber like this is worth the extra friction for customers or actually solves any real problems is up for debate.

I think there’s value in giving people more choice about who they share their data with, and breaking people out of silos and proprietary networks gives them more leverage to control their online relationships. The fact that there can be redundancy between Matchmaker servers via federation could make the Doober network more resilient against censorship in jurisdictions that do not have a favorable view of companies like Uber. Then the targets of regulators will have to be drivers and passengers instead of big companies like Uber, the same way end-users of BitTorrent are the target of copyright enforcement instead of BitTorrent Inc. Is this is a good thing or a bad thing? Maybe time will tell.

Anyways, that’s how I would decentralize Uber.


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The Key Decision-Makers in Bitcoin

Over the past year, there have been intense debates about the future of the Bitcoin network. These discussions have mostly revolved around the topic of scaling Bitcoin, and several proposals have been put forward to address the question of how the Bitcoin network will scale to be used by the billions of people and machines we have on this planet. These scaling proposals are not all mutually exclusive, but nearly all of them involve a fundamental change to the Bitcoin protocol that would require what is called a “hard fork.” A hard fork is a change that would cause there to be multiple competing Bitcoin networks, all but one of which would die off as a majority of users decide to use the strongest network.i

Because of the potential to split the network, such fundamental hard fork changes are not deployed often. Planned hard forks require an orchestrated software upgrade by multiple stakeholders in the Bitcoin network. Since Bitcoin is a decentralized system that is not controlled by any central authority, whether or not such an upgrade is deployed and adopted by the network is determined by several key decision-makers that must agree to the change: Bitcoin developers, economic Bitcoin nodes, bitcoin-holding users, and bitcoin miners.

Bitcoin Developers

Bitcoin developers are the first group that must be convinced that a hard fork change is necessary. If the maintainers of popular Bitcoin implementations do not accept a proposed change, the only remaining options are to fork an existing Bitcoin node software repository or start developing a new implementation from scratch. Convincing developers of an existing implementation can be politically challenging, and starting a new implementation from scratch is a herculean task. Forking an existing project is the easiest route, but still requires convincing a majority of the network to use the fork in order for the change to be adopted by all Bitcoin users.

Economic Bitcoin Nodes

Economic Bitcoin nodes are full nodes that accept Bitcoin in exchange for other forms of value and include Bitcoin exchanges, wallets, payment processors, and businesses that accept Bitcoin in exchange for goods, services, and other currencies. If economic nodes do not upgrade their full node software when a hard fork change is introduced, then blocks that are produced by miners who do choose to upgrade will not be considered valid by nodes that have not upgraded and the blockchain will split. To everyone on the old chain, miners producing blocks with the new software will lose the block reward to a competitor producing valid “old chain” blocks. The economic majority will only choose to upgrade their software if they believe the change is a) beneficial for the long term value of Bitcoin and/or b) acceptable to most of their bitcoin-holding customers.

Bitcoin-Holding Users

Bitcoin-holding users that rely on the services of economic Bitcoin nodes have a choice of where to take their business. If an economic node such as an exchange, wallet, or merchant upgrades their Bitcoin node software to implement changes that their customers do not agree with, then those customers may choose to do business with another economic Bitcoin node instead. However, it is not always obvious what version of the Bitcoin software an economic Bitcoin node is running and so the best way for bitcoin-holding users to have influence over changes to the Bitcoin protocol is to run and rely on their own Bitcoin full node for block verification and transaction broadcasting. If a hard fork upgrade is proposed that a bitcoin-holding user does not want implemented, then they may voice their concern to the economic Bitcoin nodes they do business with in hopes of dissuading them from implementing the upgrade. Similarly, bitcoin-holding users can lobby the economic Bitcoin nodes they do business with to implement a hard fork change if that change is beneficial to them.

Bitcoin Miners

In the early days of Bitcoin, economic Bitcoin nodes were either nonexistent or not that important, and the roles of “full node” and “mining node” were largely bundled together. Bitcoin miners would use low-power laptop and desktop computers and did not have much of a reason to sell the bitcoin they mined to cover operational expenses. Since then, the price of bitcoin has risen dramatically and bitcoin mining has evolved to become a large-scale industrial operation. Bitcoin miners now rely on economic Bitcoin nodes to convert bitcoin into value that is then used to cover the costs of bitcoin mining. While a hard fork change will never be implemented if miners do not upgrade their software to support the change, miners will only upgrade their software if a majority of the economic Bitcoin nodes have also implemented the change.ii

It is a common misconception that Bitcoin miners are the final decision-makers about what version of the Bitcoin software is the “dominant” version that drives consensus in the Bitcoin network. The reality is that Bitcoin miners are just one of many stakeholders which must be convinced to upgrade their software, and for game theoretical reasons are actually most likely to be the last to upgrade their software in the event of a hard fork change being introduced. Most Bitcoin miners operate on thin margins and are therefore very conscientious of their revenue and costs. They will only run software that produces blocks that are accepted by a majority of the economic nodes in Bitcoin, who in turn will only upgrade their software if the change supports the long-term value of Bitcoin and/or is acceptable to most of their bitcoin-holding customers. Coordination is therefore required among all of these stakeholders to debate the merits of proposed hard fork changes and make hard but necessary decisions to ensure that the Bitcoin network continues to grow to support widespread usage.

Making Progress

If the Bitcoin protocol does not evolve to accommodate growing demand and new use-cases, then growth could stall and the unmet demand will be serviced by another competing network instead, potentially harming the long-term value of bitcoin and bitcoin mining equipment. It is therefore in the best interest of Bitcoin developers, bitcoin miners, bitcoin holders, and economic Bitcoin nodes to implement changes that support the growth of the Bitcoin network while maintaining Bitcoin’s key innovation as a decentralized solution to the double-spending problem.

iThe alternate networks may not die off if the hard fork change proposed is a change to the mining algorithm itself. In this case, there is a possibility that the miners on the old chain will continue mining and serving the users who prefer the status quo to the new mining algorithm.

 

ii A hard fork change could be implemented without miner support if the change is a change to the mining algorithm itself that renders the previous network of miners obsolete.


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Many Blockchains, One Cryptocurrency

Since the introduction of Namecoin, the first serious attempt to build a public blockchain network separate from Bitcoin, there has been an explosion of so-called “altcoins” – bitcoin competitors – which have sought to unseat bitcoin from its throne atop the cryptocurrency charts. So far, none have come close to matching the market demand for bitcoin, with bitcoin commanding about 92% of the market share in the $7.1 billion cryptocurrency market at the time of this writing. This despite the numerous advanced features offered by its competitors: private transactions in protocols like Dash and Monero, cross-currency transactions in protocols like Ripple and Stellar, energy-efficient consensus algorithms in protocols like Bitshares and NXT, and fully-programmable smart contracts in protocols like Ethereum.

It took over a year to find out if bitcoin could withstand competition from a coin using the same mining algorithm (namecoin), and it took almost four years to find out if bitcoin could withstand competition from a coin which didn’t need mining at all (ripple). Bitcoin has met these challenges, and has continued to meet additional challenges from coins with varying feature-sets, parameters, consensus algorithms, and user-base demographics. Despite bitcoin’s perceived shortcomings – the lack of protocol-level features, the lack of governance structure, the poor branding and marketing – it has a strong network effect that is owed in part to its first-mover advantage and is supported today by a large community of developers, investors, miners, and end-users, a global exchange network, and widespread merchant integrations. In short, bitcoin is unlikely to be overtaken by a competing cryptocurrency any time soon.

Scaling Up and Out

To further fan the flames that are fueling bitcoin’s rise to dominance as the world’s standard for electronic cash, an innovation has been developed that would allow bitcoin to be transferred to and from other blockchains that have their own independent feature-sets and consensus algorithms, providing a way for bitcoin to scale both up (in terms of transaction capacity) and out (in terms of features) without having to make risky changes to the main bitcoin blockchain. This innovation, called a “sidechain,” is currently being prepared for production use.

An implementation of sidechain technology called Liquid has already been adopted by a consortium of bitcoin exchanges to increase liquidity in the bitcoin trading market. Liquid allows traders to transfer bitcoin almost instantly between participating exchanges and payment processors without having to wait for confirmations on the main bitcoin network. This is just one variation on sidechain technology and shows what is possible even with the limited feature-set of today’s Bitcoin protocol. In the future, there will be bitcoin-denominated sidechains that can replace all of the useful functionality of even the most popular altcoins (see Rootstock for one such example). And as in the altcoin market, there may be dozens or hundreds of sidechains competing for business – all backed by bitcoin.

There are other cryptographic off-chain methods for scaling bitcoin transaction capacity that have been proposed, including the Lightning Network and Open Transactions voting pools. These methods make use of Bitcoin’s native scripting capabilities to lock-up bitcoin for a period of time, track transfers off-chain using payment channels in the case of Lightning Network and triple-signed receipts in the case of Open Transactions, and then redeem the locked-up bitcoins and transfer them back to an on-chain address when the recipient is ready to take full custody of their coins. Like sidechains, these methods will never provide the exact same kind of security as on-chain transactions, but the benefits gained with the security trade-off can include speed, privacy, and cost-efficiencies that make it more than worth it for users to temporarily move low-value or short-term bitcoin transactions off-chain.

Software advancements like sidechains, the Lightning Network, and Open Transactions hint at what the future holds for bitcoin, both in terms of how new features will be added and how bitcoin will continue to scale to meet market demand for a fully digital currency that can be transferred without counterparty risk to anyone anywhere in the world at the speed of light.

The Highlander Coin

The total addressable market for a cryptocurrency – made up of not only all liquid and fungible stores of value and mediums of exchange, such as currencies and precious metals, but also all use-cases that require access to a tamper-proof ledger of record – is in the tens of trillions of dollars. Bitcoin, by comparison, has a “market cap” of “just” $6.5 billion at the time of this writing (current price times number of mined bitcoins).

While difficult, a competitor would only have to convince current bitcoin investors (and the rest of the world) that their decentralized solution to the double-spending problem and/or their coin’s “monetary policy” was superior to bitcoin in order to overtake bitcoin as the most valuable cryptocurrency. Since cryptocurrency competition is a zero-sum game, in this hypothetical scenario the liquidity in the current cryptocurrency market would eventually leak out of bitcoin and other altcoins and into the superior competitor until it had the same monopoly position in the cryptocurrency market that bitcoin holds today. From there, it would grow into the total addressable market, eventually commanding a market cap in the tens of trillions of dollars. It remains to be seen if any in the existing stable of altcoins is up to the challenge, or if a dark horse competitor will emerge that is better-funded and more well-organized than their counterparts in the Bitcoin ecosystem.

Given the technological advancements like sidechains and cryptographically-secure off-chain transactions that extend bitcoin functionality and scale bitcoin transaction capacity to match or surpass that of competitors, it is increasingly unlikely that another cryptocurrency will ever even come close to matching or surpassing the market cap of bitcoin. Instead, we will continue to see bitcoin on top of the charts as the most valuable cryptocurrency, with new innovations being tested and rolled out as sidechains, soft-forks, or even hard-forks on the Bitcoin network.

Over time, altcoins will be widely accepted as either scams or curiosities of a bygone era, a time when it was realistic to imagine a cryptocurrency that could compete or coexist with bitcoin. Until then, we will continue to see serious (and not so serious) attempts at launching altcoins, with millions of dollars invested to fund further experimentation in blockchain technology and consensus protocols, all of which will continue to benefit bitcoin as it learns from and builds upon these innovations in its own unique ways.

The end result? There will be many blockchains, but only one cryptocurrency.


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