From the Front Page - General

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    Categories: General, LTBCoin
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    Categories: General, Columns

    How Louis C.K. Could Make Millions More by Selling His Specials Via Bitcoin

    September 23rd, 2014 by kyletorpey
    When it comes to monetizing online videos, Louis C.K. is an innovator. In 2011, he decided to [distribute his new standup special on his website](https://buy.louisck.net/purchase/live-at-the-beacon-theater), downloadable for $5. . . . He was able to bring in more than $1 million in sales in less than two weeks during his experiment. . . . It could have turned out even better with the help of Bitcoin. Read More
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    Categories: General, LTB News, Tokenly Blog

    Token Controlled Viewpoint (TCV) Genesis, Characteristics and Early Use Cases

    September 17th, 2014 by adam
    _Edited by Mike Roncone and Denise Levine_ _with input from Xavier Hawk, Matt deCourcelle and Andrew De Gabriele_ #Abstract **Token-Controlled Access (TCA)** is a simple idea. In a given system, different levels of access to that system and abilities within it are granted according to the combination of tokens in a particular users wallet. **What is TCV?** Token Controlled Viewpoint (TCV) is an application of TCA to information content ([forums](http://letstalkbitcoin.com/token-s... Read More
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    Categories: General, Guest Blog

    The Possibility of Alternative Incomes

    September 9th, 2014 by cryptochief
    Surely everyone has considered how incredible it would be to get paid for doing all the things one really wants to do, or at least the things one is already doing. Read More
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    6,638 views
    Categories: General, Legal Activity

    Long-Arm Lawsky, Part II: Interstate Commerce

    September 7th, 2014 by wildjo
    The BitLicense is getting a lot of attention these days because it is the first significant regulatory attempt by a US authority to proscribe activity in the Bitcoin space. Not surprisingly, this first attempt is fundamentally flawed. Last week, I [demonstrated](http://letstalkbitcoin.com/blog/post/the-blockchain-the-bitlicense-and-the-costs-of-compliance) that the regulations proposed by the New York Department of Financial Services (DFS) were unlawful because the DFS lacked the statutory authority to regulate Bitcoin. This week we tackle the constitutionality of the regulations and come to a similar conclusion: the BitLicense violates the Commerce Clause of the US Constitution and is, therefore, unlawful. Read More
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    Categories: General, Columns

    Telephone and the Blockchain

    September 4th, 2014 by therealtwig
    Editor: Chulseapple Original: The security of an individual Bitcoin address is well documented and an awesome [mathematical certainty](http://www.royalforkblog.com/2014/08/11/graphical-address-generator/). But what about the security of sending Bitcoin to somebody? Is there a mythical CEO of Bitcoin somewhere, warding off would-be hackers attempting to steal your funds through a [man-in-the-middle attack](http://en.wikipedia.org/wiki/Man-in-the-middle_attack)? What guarantees the absolute certainty of your transactions? Quite frankly, mathematics! # The Telephone Game Do you remember the telephone game from your childhood? A big group of people, say thirty, sits in a circle. One person whispers a word or a phrase to the person next to them. That person delivers the message to the next person, and so on, until the message goes entirely around the circle. The goal is for the message to get back around to the beginning exactly the same as it started. ![](http://redeapp.com/images/blog/WordofMouth.jpg) # Why the Telephone Game Fails In a telephone game with thirty people, there are thirty separate, singular points of failure. This is a very important point, because even though the players in this game can be honest, all it takes is just one dishonest person to wreck the honest intentions of others. If one of the players decides to be *that guy* and wreck the game by sharing the wrong message, no one will know who threw the game. Since each whisper transaction is peer to peer, each player puts their complete trust in the one person that came directly before them to relay the correct message. #Change the Rules! How could we fix the rules of the telephone game to ensure that it could never fail, keeping in mind the above issues? Instead of thirty people sitting in a circle, let's start the game with only one person in the room. This person creates a message, and then another person is allowed to enter the room and hear the message. We then change the rules so that no whisper will take place between just two individuals. We bring an independent group of 100 observers to assist. This independent committee records on a piece of paper all information possibly related to that whisper, including: * The time the whisper takes place * The individuals involved in the whisper * The actual message that was passed from person to person To incentivize this supervision, $1 USD is awarded for the successful recording of each whisper transaction. Unfortunately, bringing in this independent team would be expensive, especially if we paid every single one of these 100 individuals for each whisper in the game! After all, how much skill does it really take to listen to two people talking, and record the results? Therefore, we will require the winning observer to not only be the first one to record the whisper transaction, but also the first to solve a Sudoku puzzle correctly. I am pretty sure we could have asked them to do anything to prove they were working, but I like Sudoku puzzles, so Sudoku puzzles it is! ![]( http://sudokublog.typepad.com/photos/uncategorized/sudoku4920050829150940clue.png) As soon as the first lucky observer solves the puzzle, all other observers come to a consensus on who won. That person gets paid the $1 reward, and maybe even any tips the two people playing in the telephone game decide to give them for being so awesome at solving Sudoku puzzles. This new process is now not only safe to extend through the end of the telephone game with just 30 people, but also feasibly forever with an infinite amount of participants. In fact, the only way this game could be ruined is if a majority of observers are somehow in cahoots with one another, and decide to transcribe the message incorrectly. In theory, they could pool their puzzle solving power together, coordinate a fake message, and manage to solve the puzzle correctly before the other observers manage to be the wiser. This would be like re-introducing a singular point of failure to the system because a majority of the people in the room would have the power over the message being sent. We can fix this by inviting one thousand ... no ... one million observers to watch the whisper transaction! *Good luck trying to coordinate a majority of that many people evil observers!* ![](http://blog.stackoverflow.com/wp-content/uploads/dr-evil-pinky.jpg) # Would You Trust This Network? If you had to get a message of value from point A to point B, would you trust the telephone game system I just outlined above? You ought to, because what I have outlined is essentially the Bitcoin **blockchain**. The blockchain is the irreversible ledger of all transactions that have ever taken place in the Bitcoin ecosystem, from one account to the next, and quite possibly one of the [most significant innovations in technology of all time](http://www.newscientist.com/article/mg22129553.700-Bitcoin-how-its-core-technology-will-change-the-world.html#.U-lnMfldU0M). From my telephone game analogy, each person trying to get a message to the next person relates to what are called **blocks** on the Bitcoin network. A block in Bitcoin is a combination of three elements: the [hash](http://letstalkBitcoin.com/blog/post/hashing-football-and-Bitcoin) of the previous Bitcoin block, the **Merkle root**, or the hash of all of the hashes of transactions that have taken place from one address to the next in the Bitcoin system, within about a ten minute time span, and the **nonce**, or a completely random number unknown to anyone at the time. ![](https://en.Bitcoin.it/w/images/en/7/75/Bitcoin-simplified-payment-verification.png) The observers of the new telephone game I proposed are what we know in the Bitcoin world as **miners**. Miners earn a **block reward** for their work in the process of hashing together approximately the last ten minutes of each transaction, in addition to any transaction fees from user to user associated with that block. Just like in the new telephone game where merely observing took little to no skill at all, hashing transactions together is just as arbitrary. Therefore, a Sudoku puzzle-like game that mandates the miners to essentially guess a very large random number was created. This very large random number is known as the **nonce**, and it is added to the end of the previous hash to mint a block. This nonce requires the miners to prove they dedicated a lot of computing power to work; and at the same time, introducing a little element of luck to the process. # Where Do Bitcoins Come From? In the beginning, no Bitcoin actually existed. Therefore, there were no coins to actually send from one address to the next, and no transaction messages to be broadcast. Just like the new telephone game, the Bitcoin network could not be started until an initial message existed to be sent. This initial message to be broadcast in Bitcoin is known as the **genesis block**. The reward for the first miner to observe this block, or any subsequent block for the immediate future, was 50 BTC (current value: approximately 27,000 USD). Even though there were no initial Bitcoin transactions in the genesis block, by default, every block that ever gets discovered on the blockchain has an unspent open-ended transaction called the **coinbase**, which is reserved for the miner who eventually wins the nonce guessing game. So, at minimum, there is one transaction that MUST happen every block, even if there are no other transactions on the network. Any other transactions on the network will be added on top of this and hashed down the size of one block. This coinbase reward that goes to the winning miner is known as the **block reward**. This block reward started out as 50 BTC, but subsequently has gone down over time at a [predictable schedule](http://Bitcoinclock.com), to match the idea of the value of Bitcoin eventually rising over time. For the first 210,000 blocks, the reward was 50 BTC, but this reward is cut in half for every 210,000 blocks after that. Currently, we are on [approximately block 315,000](http://blockchain.info), or a reward of 25 BTC per block. # Attack of the 51! The more miners who are playing the Bitcoin game, the more likely someone will randomly be lucky. On average, the difficulty is designed to take about 10 minutes to go block to block. If computing power gets better, difficulty is adjusted to maintain this ratio. What would happen if the majority of the miners pooled their brute force computing power together to attempt to disrupt the network? Could this feasibly happen? Think of it from the miners' perspective. When your Bitcoin wallet says 2 BTC, it does not mean that they are physically there, like paper currency actually sitting in a leather wallet. Instead, those 2 BTC represent a ledger of transactions that is traceable back to the genesis block and that prove the entire history of Bitcoin leads to you having that many BTC sent to your address. If a miner were to pool their power with a majority of bad actors on the network, they would be able to essentially go back in time on the blockchain, and forge forward an alternate history that could fake transactions and swing the ledger to their benefit. This is what is known as a 51% attack, and it can completely destroy the trust anyone has in a [cryptocurrency] (http://en.wikipedia.org/wiki/Cryptocurrency). If you have ever seen the movie [Back to the Future 2](http://www.imdb.com/title/tt0096874/), you have seen an a 51% attack. In the plot of the movie, the chief antagonist, Biff, overhears Marty McFly in the future year of 2015, talking about taking a sports almanac back with him to the past to earn a little extra money by betting on known sporting event outcomes. Thankfully, Doc talks him out of this, but this does not stop Biff from overhearing the idea and thinking to do this himself. Biff famously steals the Delorian time machine, travels back to 1955 with the magazine, and successfully creates an alternate reality past 1955. ![](http://www.wallpaperno.com/thumbnails/detail/20121028/people%20back%20to%20the%20future%20grayscale%20white%20hair%20doc%20brown%20christopher%20lloyd%20blackboard%202048x1303%20w_www.wallpaperno.com_68.jpg) So what exactly stops this from happening with Bitcoin? First, and foremost, there is not just one Biff mining Bitcoins. There are thousands of miners out there. It is true that some do merge their powers to become more powerful miners, but still, there are many of these groups. Thus, there is a distributed workforce working together in the honest process of mining Bitcoins. The probability of a single group, or even a distributed group, of dishonest miners forging past the honest miners to form an alternate reality is [nearly impossible](https://Bitcoin.org/Bitcoin.pdf). Of course, anything is theoretically possible, but very highly unlikely, as long as Bitcoin has financial incentive to a distributed miner workforce. # Why So Revolutionary? The blockchain accomplishes a complete, trusted flow of information that no one person is in charge of, GUARANTEED by mathematics to be genuine. In a world where one does not have to trust just one person to verify that something is true, there are truly no limitations to what can happen, or to the applications that can be created. This is why people truly get evangelical about Bitcoin, and truly believe in the power of cryptocurrency. Imagine any application where central points of failure create controversy: * Voting * Banking * Stock Markets * Government * Corporations * Law Now imagine the rules for these being completely rewritten with blockchain technology. The value of Bitcoin as a currency is important. However, the value of the protocol is limitless! -*Adam Terwilliger* **New to the LTB network? Follow [this link]( http://letstalkBitcoin.com?ref=9de4636b) to let them know I sent you! While here you can earn all kinds of LTBcoin for actions you would already take, like commenting on blog posts, participating in the forums, and listening to podcasts!** Read More
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    Categories: General, Guest Blog

    Bitcoin Value and Mining Difficulty

    September 3rd, 2014 by Tron

    Original (dhimmel):

    It is no coincidence that the value of bitcoin goes up as the mining difficulty rises.  It is also no coincidence that the mining difficulty goes up as the value of bitcoin rises. There is a very tight linkage between the two.  To understand why, it is important to first understand how mining affects the difficulty.


    Mining for profit is very similar to a regular manufacturing business.  There are capital costs which include the mining hardware (ASICS -- Specialized mining hardware, GPUs -- Graphics cards, CPUs -- regular computers, and perhaps AC -- Air Conditioning).  Then there is the variable cost which is electricity.  The goal is to maximize the profit, which means getting the most out of the hardware, and then knowing when to stop mining and sell the hardware.  Most miners sell their newly mined bitcoin immediately to recoup their costs, which decreases the value of bitcoin because of the market sell pressure.  Those that hold bitcoin do better in most cases, and miners that hold also benefit the long-term value of Bitcoin -- more on this in another article.


    The difficulty goes up as more miners deploy more mining hardware.  The Bitcoin network automatically adjusts the difficulty up or down every 2016 blocks, or roughly every two weeks so that each mined block, worth 25 BTC, takes about 10 minutes to find.  Every machine, even a weak laptop, has a shot at finding the block on a pro-rata basis of how many hashes they calculate.  By joining a mining pool, miners can spread the reward in the same way that office workers get together and buy batches of lottery tickets to get a higher chance of getting a smaller payoff.  In a pool, if one of the miners finds a block, the bitcoin reward is shared with all his fellow pool miners.


    How and why is the bitcoin price correlated with the difficulty?  


    Every miner looks at the cost of equipment, the cost of electricity and then makes two educated guesses.  First, ‘How fast will the difficulty rise?’  And second, ‘How fast will the value of bitcoin rise?’  These two numbers are critically important and impossible to know in advance, but looking back at historical rates and projecting forward gives an idea of what they might be.


    Efficient market theory says that it will eventually be the same cost to purchase a bitcoin as it will be to mine a bitcoin.  Why is this?  Because if it’s cheaper to mine a bitcoin than to buy a bitcoin, miners will buy more hardware, burn more electricity, mine, and sell bitcoin into the market pushing the market rate down until mining is no longer profitable.  If it is cheaper to buy a bitcoin, then the money that might possibly go into mining will instead purchase bitcoin pushing the market price up.   


    Why mine at all?  Because the efficient market theory breaks down at the compressed timescales involved in bitcoin.  Rational market forces haven’t gone away, but they simply can’t adapt as quickly as the bitcoin ecosystem changes.  If you are prepared to mine when the price rockets on speculation and before the difficulty adjusts to compensate, there are significant profits to be made.


    We’ve all heard stories from the early Bitcoin days, literally only a few years ago, when mining bitcoin with a laptop would yield blocks of fifty bitcoin.  We’ve also heard stories of those same people turning off their computers because it just wasn’t worth it.  “WHAT WERE YOU THINKING?!”, you want to scream knowing that those same bitcoins are now worth tens of thousands of dollars.  But those folks were operating logically.  The cost of electricity exceeded the value of the bitcoins at the time.  It was better to buy bitcoin on the open market with the same money that would have been spent on electricity, although few did.


    So what changed from those easy, breezy, laptop mining days?  The difficulty has changed.  By design, half of all the bitcoins that will ever be mined were mined in the first four years.  Does this mean they were easier to find in the beginning?   Yes, but not because they were just laying scattered around somewhere.  The careful and considered design of the software by its creator, Satoshi Nakamoto, made them statistically easier to mine at the beginning and harder as more miners join the party.   These details are controlled not by smug elite bureaucrats, but by the Bitcoin software, and while software can easily be changed, it’s necessary that all miners use software that follows the same rules.  Since the rules are working well for the miners, it is nearly impossible to change the rules by getting most of the miners to switch software.


    Now there are fewer bitcoins left to mine, and the reduced number of bitcoins are distributed proportionately among the miners based on the resources they marshal for mining.  Add more miners and each miner gets fewer bitcoins until some miners drop out because their mining equipment is not as efficient or their electricity costs are too high.  Efficiency is the reason that mining with a laptop is no longer recommended.


    Mining is a great way to equitably distribute bitcoin and it does two other interesting things at the same time.  First, it takes value away from bitcoin because resources are spent on mining equipment and electricity instead of purchasing bitcoin on the open market.  Second, it increases the mining difficulty making each new bitcoin more expensive to obtain and therefore more valuable.   These two competing forces are in tension.


    In summary, value and difficulty are tightly correlated because when the difficulty rises to the point that mining is unprofitable, it makes more sense to purchase bitcoin which adds buying pressure to the market and vice versa.  The value of a bitcoin is dependent on a high difficulty and the mining difficulty is dependent on a high price.  With a few exceptions, like the recent exponential efficiency gains from improved hardware, the bitcoin value and mining difficulty will both go up, or both go down, but they will not separate - at least for very long.

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    Categories: General, Legal Activity

    Long-Arm Lawsky, Part I: Statutory Authority

    August 30th, 2014 by wildjo
    Editor: Cheryl Original: There are a lot of reasons to dislike the BitLicense regulations proposed by Ben Lawsky and his New York Department of Financial Services (DFS). Two of the more potent arguments that have the greatest potential to strike down the proposed regulations, if they are not first withdrawn or extensively and materially modified, are: 1) lack of statutory authority, and 2) unreasonable interference with interstate commerce. Today, in this Part I, I discuss the issue of DFS statutory authority, or lack thereof, as it specifically relates to virtual currency and bitcoin. In order for a state agency like the DFS to take any action, it must have authority to do so. Typically, such authority comes from state law. If the agency seeks to act outside its statutory authority, it does so unlawfully. That is precisely the situation we face with the DFS and its BitLicense scheme. If you have read the proposed regulations, you may have noticed the phrase at the top (right after the table of contents and before the introduction); Statutory Authority: Financial Services Law, sections 102, 104, 201, 206, 301, 302, 309, and 408. This is a reference to the state law that the DFS believes gives it the power to propose the BitLicense. A closer look at this enabling legislation reveals that the DFS has been far, far too ambitious. Under the flawed proposed regulations, the DFS prohibits any unlicensed Virtual Currency Business Activity (VCBA) that involves a New York resident. VCBA is defined as receiving or transmitting virtual currency; securing, storing, holding, or maintaining virtual currency on behalf of others; buying or selling virtual currency as a business; converting virtual currency to fiat or any other store of value; or, controlling, administering or issuing a virtual currency. However, under its relevant statutory authority, the DFS has only been empowered to regulate financial products or services. We may, at first glance, assume we know what financial products or services means and conclude that virtual currency and VCBA sounds like it might fall within that assumed definition. However, state agencies lack the authority to assume. Instead, they must look to the exact language of their enabling statutes. So, what does this phrase financial products and services really mean? Not surprisingly, the statue is too vague. The phrase is tautologically defined in Section 104 of the Financial Services Law as: any financial product or financial service offered or provided by any person regulated or required to be regulated by the superintendent pursuant to the banking law or insurance law or any financial product or service offered or sold to consumers& Clear as mud, eh? Seeking clarification from New Yorks Banking Law is equally fruitless as it contains no definition of a financial product or a financial service. (it merely defines banks, bank-like institutions, and bank mechanisms such as demand deposits). It neither defines financial product or financial service nor mentions virtual currency or virtual currency business activity. Instead the statute is utterly silent. A common tactic in statutory construction or interpretation is to refer to definitions contained in similar statutes to help define a term used in a law or regulation that is otherwise silent or vague. We dont have to look far to find a relevant definition of a financial product or service under federal law. Section 5481 of Title 12 of the United States Code contains the definitions relevant to federal banking law. Section 5481(15)(A)(i)-(xi) defines a financial product or service as (paraphrasing): 1) extending credit and servicing loans; 2) extending/brokering leases of real or personal property that are essentially purchase finance arrangements; 3) check cashing, collecting, or guaranty services; 4) providing real estate settlement services; 5) providing appraisal services 6) engaging in deposit-taking activities or acting as custodian of any financial instrument; 7) offering stored valued instruments where the offeror controls the terms; 8) providing payments or financial data processing products; 9) providing financial advisory services; and 10) engaging in consumer credit reporting activity. In a nutshell, the definition describes a bank and traditional bank products and services. Since the definition defines the same phrase used in the New York statute and since both statutes regulate the banking industry, it is perfectly appropriate to assert that the DFS statutory authority is limited to this more specific definition. That is, the DFS is authorized to regulate certain traditional banking activity, and nothing more. This assertion is also strongly supported by the statutory purpose contained in New Yorks Financial Services Law. Section 102 is long, but is worth reprinting in full here: The legislature hereby declares that the purpose of this chapter is to consolidate the departments of insurance and banking, and provide for the enforcement of the insurance, banking and financial services laws, under the auspices of a single state agency to be known as the department of financial services and to accomplish goals including the following: (a) To encourage, promote and assist banking, insurance and other financial services institutions to effectively and productively locate, operate, employ, grow, remain, and expand in New York state; (b) To establish a modern system of regulation, rule making and adjudication that is responsive to the needs of the banking and insurance industries and to the needs of the states consumers and residents; (c) To provide for the effective and efficient enforcement of the banking and insurance laws; (d) To expand the attractiveness and competitiveness of the state charter for banking institutions and to promote the conversion of banks to such status; (e) To promote and provide for the continued, effective state regulation of the insurance industry; (f) To provide for the regulation of new financial services products; (g) To promote the prudent and continued availability of credit, insurance and financial products and services at affordable costs to New York citizens, businesses and consumers; (h) To promote, advance and spur economic development and job creation in New York; (i) To ensure the continued safety and soundness of New Yorks banking, insurance and financial services industries, as well as the prudent conduct of the providers of financial products and services, through responsible regulation and supervision (j) To protect the public interest and the interests of depositors, creditors, policyholders, underwriters, shareholders and stockholders; (k) To promote the reduction and elimination of fraud, criminal abuse and unethical conduct by, and with respect to, banking, insurance and other financial services institutions and their customers; and (l) To educate and protect users of banking, insurance, and financial services products and services through the provision of timely and understandable information. In other words, the main purpose of the Financial Services Law was simply to consolidate the banking department and insurance department into a single agency (the Department of Financial Services) and to help these industries remain competitive in the state. Setting aside for now the cynical notion that the DFS just might be meeting these obligations by trying to kill bitcoin with the BitLicense, it is plain that the DFS authority extends only to the banking industry and bank-like financial products and services (as defined above). The authority to regulate virtual currency and virtual currency business activity outside the banking industry is found nowhere in the relevant New York statutes. Even if, for the sake of argument, the DFS did have the statutory authority to enter this new sphere of virtual currency business activity, the proposed regulations still go too far. Those who study bitcoin understand that its use as a virtual currency is only one of a multitude of actual and potential uses that are not inherently financial products or services (e.g. domain name registration, smart contracts, and notary services). Yet, the DFS does not distinguish between these non-financial uses of the technology. Instead, any business utilizing the blockchain could be found by the DFS to be engaging in the transmission of a virtual currency as defined in the proposed regulations. For example, if a New Yorker uses a service that assists him/her in transferring a fraction of a bitcoin to establish proof of existence on the blockchain for some digital creation, they have engaged in a transaction that would require a BitLicense, despite the fact that nothing about the business arrangement is financial in nature. Taking the example a step further, suppose that digital creation was valuable and worth over $10,000.00 at the time the transfer was made. Under the BitLicense scheme, the DFS could argue that the transfer requires compliance under the anti-money laundering provisions of the regulations due to the value ostensibly transferred on the blockchain. There are far more examples of this type of non-bank, non-financial use of bitcoin/blockchain technology than there are for virtual currency uses. Yet, the DFS, through its flawed proposal, is seeking to rake it all in. The DFS cannot unilaterally extend its reach into the virtual currency sphere without the New York legislature first authorizing it to do so through new legislative action. The state agency does not have the subject matter jurisdiction that the BitLicense proposal, as written, would require. Simply put, the DFS is utterly without statutory authority to proceed in the proposed manner, and the BitLicense would be ultra vires and unenforceable. Not only does the DFS lack statutory authority to issue BitLicenses, doing so would be an unreasonable interference with interstate commerce as every transaction on the blockchain is, by its very nature, an interstate activity. I will cover this argument next week in Part II. Read More
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    The Blockchain, the BitLicense, and the High Costs of Compliance

    August 22nd, 2014 by wildjo
    Editor and proofreader: Cheryl Copy of original: Since the release of the proposed New York Department of Financial Services (DFS) BitLicense regulations on July 23, 2014, the crypto community has been concerned, but there hasnt been enough discussion of the specific implications such regulation would have. Its about time we put some flesh on those bones. Specifically, what would compliance with the regulations as written actually cost? The goal of this post is to provide some answers, but, first let me tell you a quick story about how I started thinking about it. The other night found me alone, sitting in my favorite chair, watching transactions in the bitcoin blockchain. It was a slow night, but my expectations were low. I pulled up the Blockchain.info block explorer and focused my screen on the flow of current transactions. I have to admit, it was somewhat enchanting to watch the constant stream of bitcoin commerce. Satoshi really gave us something to marvel at here. It wasnt long before the first large transaction rolled through. And they kept coming, and they kept getting bigger. After about an hour, I had seen everything from a $0.00 transaction with a $0.10 transaction fee to a $775,000.00 transaction with a $0.05 transaction fee. The blockchain statistics indicate that $800.00 was the average transaction amount during the twenty-four hour period in which I was watching. This was far higher than I had previously assumed. Clearly, a lot of value is moving effortlessly (e.g. cheaply) through the blockchain, which is precisely why the DFS wants to get involved. And this brings us to one of the meatiest and costliest parts of the proposed regulations. Section 200.15 requires all regulated entities to implement a full Anti-money laundering (AML) and U.S. Treasury Office of Foreign Asset Control (OFAC) compliance program. In subsection (d)(2), the regulations require a licensed entity to report within twenty-four hours all transactions (whether individual or cumulative) that exceed $10,000.00 in a single day. Subsection (g)(4) goes further and requires that a licensed entity track single transactions that exceed $3,000.00, with the implication that such transactions are suspicious. Subsection (d)(3) requires the immediate reporting of any suspicious activity regardless of dollar amount. This may not seem that bad or that costly, but I assure you it is. During my night in the blockchain, I conducted a very informal and unscientific test. I set my timer for three minutes and counted all the transactions greater than three thousand dollars during that time. After multiple rounds, the average was fifteen, with half of those being greater than $10,000.00. This would theoretically translate into a total of 7,200 transactions per day that could be subject of either a Currency Transaction Report (CTR) or Suspicious Activity Report (SAR). Thats well over two and a half million reports per year, and bitcoin is just in beta! Its a staggering amount of paperwork for bitcoin businesses to produce and for the regulator to actually make use of. But what would it cost? There is very little detailed information in the literature regarding AML compliance costs. One 2005 study estimated that regulated entities in the United States spent $1.8 billion (yes, thats a b) in annual AML compliance costs.1 The Financial Crimes Enforcement Network (FinCEN), reports that there were 15.8 million AML compliance reports filed in 2005.2 Doing some simple math for a down & dirty estimate suggests that each report filed in 2005 cost regulated industry $114.00. That kind of makes you feel bad for the banks until you realize that they simply pass those costs on down to us, which is exactly what the bitcoin community would have to do with this potential $820,000 daily bill. While possibly generating the greatest financial burden on the bitcoin space due to day in and day out application, Section 200.15 is not the only section to impose significant costs on BitLicensees. Section 200.5 requires that each BitLicense applicant submit a nonrefundable application fee. The proposed regulations dont state any amount, leaving it up to the discretion of the DFS, but we can make an educated guess. Every other market-entry license issued by the DFS requires a $12,500.00 application fee. Its no stretch to assume that the BitLicense will cost an equal amount. Section 200.4(a)(4) requires background checks for each Principal Officer and Principal Stockholder. In the New York market, these background checks run $650 a pop. Sections 200.14(a) and (b) require the submission to the DFS of quarterly financial statements and audited annual financial statements. It is the latter one that is the most costly. I recently had a moderately sized corporate client contract for their first audited financial statement and the final bill was around $35,000.00. Recall that this would be an annual expense under the proposed regulations. From here on out, estimating costs get a bit more speculative. Section 200.8(a) requires that each BitLicensee be sufficiently capitalized to ensure financial integrity. The sufficient amount of capital is solely determined by DFS. It could be a little number. It could be a big number. Your guess is as good as mine, but only the DFS guess counts. Section 200.9(a) requires that each BitLicensee maintain a bond or trust account in an amount acceptable to DFS. Again, it could be a little number. It could be a big number. Your guess is as good as mine, but only the DFS guess counts. Section 200.13(a) requires that each BitLicensee submit to biannual examinations. It is not quite clear what this would exactly entail, but it is a safe bet that each BitLicensee will want to prepare, which means accountant and legal costs, as well as lost opportunity costs associated with staff devoted to compliance rather than engaged in direct market making activity. Last, but not least, Sections 200.16(c) and (f) requires each BitLicensee to employ sufficient cyber security personnel, including a Chief Information Security Officer. Sections 200.16(d) and (e) require an annual cyber security audit by a qualified and independent third-party. The way these regulations read, one person isnt going to be able to be a jack of all trades and wear multiple regulatory hats. These regs require dedicated cyber security staff and third-party consultants, and both are expensive. We have now covered all of the vaguely enumerated costs of compliance contained in the proposed regulations. These are big, daunting numbers: $12,500 just to apply; $35,000 annually for an outside audit; $114 for each AML report (and you better be liberal in your reporting so as not to miss something and risk being assessed a penalty); $650 for each background check of each executive staff or investor; obtaining sufficient capital; posting sufficient bond; and on and on. But, theres more to it. Each applicant will necessarily incur the general consulting costs of developing all of the policies and procedures required under the proposed regulations, as well as preparing all of the disclosures, background information, business practices and strategy descriptions, marketing plans, advertising samples, etc., etc. that are also required to be disclosed with the application. In other words, there will be significant costs for simply putting the multi-layered application together. Lawyers and accountants will charge a lot of money for their guidance. Industry data shows that the average associate attorney in the New York market charges $400.00 per hour (with partners pulling in $1,000.00 or more). In a specialized field such as bitcoin licensing, you can assume that the fees are going to be above average. Even the smallest of the potential BitLicensees should plan on thousands of dollars to simply put the application together, with larger ventures approaching six figures. These will be sunk costs with no guarantee that the application will ever be approved. It should be clear at this point that the proposed DFS regulations would not simply make business in the bitcoin space do a lot of unpleasant stuff; they are going to make businesses in the bitcoin space pay a whole lot of money to do Them. That will have two consequences: it will set up obstacles to entering the space that only the most resource rich players can afford; and, it will introduce financial friction into the system and increase transactions costs. There is a strong argument that these consequences are antithetical to the fundamental principles underlying the bitcoin protocol. The crypto community has cause for concern. Sources: 1. Yeandle, Mark, et al., Anti-Money Laundering Requirements: Costs, Benefits and Perceptions, June 2005 2. FinCEN Annual Report Fiscal Year 2005 Cover image courtesy of LittleShibe. Read More
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    Categories: General, Guest Blog, Columns
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    We Talk, Share, Create, Exchange, and Resolve: Decentralized Autonomous Society

    August 19th, 2014 by lainfinity
    New Editor: Crystal Editor: Cheryl Decentralized autonomous society empowers individuals by rewarding innovation through sharing, distributed ownership and abundance. By sharing innovative ideas we can build a much better, fair, transparent and innovative society which is based on group consensus rather than a society enforced by rules and regulations. Therefore for any society to operate on complete autonomy, it should have these 5 major components or in other words the 5 pillars as its foundation. I would like to explore these components and provide a bird's eye view of how decentralized autonomous society can thrive. * **Decentralized Communication to talk** * **Decentralized Collaboration to share ideas and designs** * **Decentralized Creation to manifest goods and services** * **Decentralized Exchange to barter goods, services and resources** * **Decentralized Arbitration to resolve conflicts** ###Decentralized Communication and Privacy Establishing privacy in our communication channels is the first and foremost priority in order to be self-autonomous and free. Without private correspondence we cannot strive to build a free autonomous society. Privacy enables an individual to be free as a self autonomous entity and thus empowering the society as a whole to be self autonomous. ####Why mass surveillance is a violation of Article 12 of Universal Declaration of Human Rights of United Nations? >No one shall be subjected to arbitrary interference with his privacy, family, home or correspondence, nor to attacks upon his honour and reputation. Everyone has the right to the protection of the law against such interference or attacks.[Source](http://www.ichrp.org/en/article_12_udhr) Mass digital surveillance in any form is an arbitrary interference of privacy and correspondence. Therefore it is a gross violation of human rights. On December 19 2013 the United Nations passed a resolution backing the right to digital privacy. >Deeply concerned that electronic surveillance, interception of digital communications and collection of personal data may negatively impact human rights, the United Nations General Assembly has adopted a consensus resolution strongly backing the right to privacy, calling on all countries take measures to end activities that violate this fundamental tenet of a democratic society.[Source](http://www.un.org/apps/news/story.asp?NewsID=46780#.U-vXmaJX-uY) we can hardly trust any third party to keep our information safe and secure because of conflicts of interest such as maximizing profits and legal obligations to local jurisdiction. The E-mail privacy can only be achieved through decentralized peer to peer communication. ####How does Bitmesssage enable E-mail privacy? >Bitmessage is a P2P communications protocol used to send encrypted messages to another person or to many subscribers. It is decentralized and trustless, meaning that you need-not inherently trust any entities like root certificate authorities.[Source](https://bitmessage.org/wiki/Main_Page) Bitmessage protocol implements two major features which are storing the information in peer nodes for a limited period of time and encrypting the message end to end. Thus it is extremely difficult for anybody to intercept the information. Bitmessage is not the only open source tool that enables digital privacy as there are many other tools which serve similar purpose. One such tool is known as Tox which fascilitates instant messaging and video calls. >Tox is a free and open-source, peer-to-peer, encrypted instant messaging and video calling software. The stated goal of the project is to provide secure yet easily accessible communication for everyone. ###Decentralized Collaborative Sharing vs Centralized Hiding Let us imagine a cave man discovered how to make fire to keep him warm and cook food. If he did not share his discovery and decentralized the concept of light and warmth but instead claimed intellectual property right on how to make light and heat, I do not think I would be able to type this article in a markdown format and share my vision with all of you today. The moral of the story is to let your light shine. It would be nothing but an absurdity for anyone to claim a patent right on how to make light and heat because inventions and discoveries are nothing but an innovative improvisation of a priori. There is nothing wrong in awarding compensation for inventions and discoveries. But it should rather be awarded to the collective for decentralized collaborative sharing than compensating global monopolies such as corporates for centralized hiding. >In 1742 Benjamin Franklin invented a new type of stove for which he was offered a patent. Franklin refused it arguing in his autobiography >we enjoy{ed} great advantages from the inventions of others, we should be glad of an opportunity to serve others by any invention of ours. [source](http://www.economist.com/blogs/freeexchange/2014/08/innovation) In similar veins Linus Torvalds could not afford to buy propriatiary Unix so he created Linux kernel and released the source code under GPL Licence so that it can be used for similar purpose and to empower others. ####Why is Linux kernel a success story even though it defied the conventional knowledge of the academic paradigm? Decentralized collaborative sharing enabled the success of Linux kernel.Thousands of ordinary people shared small pieces of code known as patches. Linus Torvalds designed and developed a tool known as git. This open source tool enabled the decentralized collaborative sharing by managing a distributed revision control archive and Linus along with his team merged the patches with the kernel. But the irony is that thousands of ordinary people who contributed to the Linux kernel walked away without a penny and the monopoly corporates such as Redhat and Google reap billions of dollars today in profits thanks to Linux kernel. It is neither fair nor ethical but it bootstrapped the open source movement because they don't want to kill the goose that lays the golden eggs. ####Open source tools that enables decentralize collective sharing Even though there are many tools that enable decentralize collective sharing I would like to highlight only two tools. One is git which enables to develop open source software by means of decentralize collective sharing and contribution of source code which I have discussed before. And the other one is Twister which is a hybrid of two peer to peer technologies such as Blockchain from Bitcoin and DHT from Torrents. Twister is a social microblogging peer to peer network such as twitter but is based on decentralized peer to peer network. It enables decentralized sharing of ideas and concepts without being tracked or compromising your digital privacy. It creates and authenticates users using Blockchain and stores the data using Distributed Hash Table (DHT) ####What is the issue with Centralized Hiding? By enforcing centralized hiding such as intellectual property rights on the masses, it leads to a situation where the benefits are funneled to the 1% at the cost of 99%. It also impedes innovation resulting in stagnation and scarcity thus empowering the few to control the many. For example if there are 7 different brands of cars and there is a billion of each brand, controlling and manipulating one of each 7 brands will be easier than controlling each of the 7 billion different cars. Control, manipulation and corruption are applicable to finite sets of numbers. They are of no relevance to infinite set of numbers. An example of a centralized hidden archive is the vault below the Vatican which runs for more than 52 miles and hoards vast collection of knowledge dating back 10000 years from various libraries from around the world such as Alexandria. **Knowledge is power when applied, but is wisdom when shared. Power corrupts but wisdom redeems.** ###Decentralize Creation and Abundance Let me clarify the key difference between creation and cloning. Creation is the process of manifesting our shared ideas and design into a physical or readable form. Cloning on the other hand is a process of producing photocopies of someone's design using it as a template. Creation can also be compared to writing your own book or novel but production is photocopying a book written by someone else. In a decentralized creation the value is based on network effect and abundance. Let us consider LTBcoin for example, the value of the coin will increase provided more people use the LTB network and the network creates higher quality content. Thus the value is not based on scarcity but is based on abundance. The decentralized creation operates on the principle of abundance, the more the better as we do not produce but we create. On the other hand, centralized production operates on the principle of scarcity of innovation, the lesser the better. This is because we do not create but we clone someone's design which resides in a centralized hidden archive. We are forced to pay a patent fee for the clone even though someone has the knowledge to design and create their own car. For example if we consider a centralized car manufacturing industry, the value of the car is directly proportional to the quantity that has been produced.Ford is a cloned mass produced car based on a single template.Even though there are million clones they have less value because they are not original, creative or innovative. Let me give you another example even though someone has the knowledge to use one of the open source software distributions like Ubuntu, every time he buys a new laptop or computer he is forced to pay the license fee for Windows which has its source code residing in the centralized hidden archive which the buyer has no access to. ###Decentralized exchange of goods, services and resources Any exchange involves two major transactions. We sell what we create and we buy what we need.Peer to peer payment system enables individuals to pay directly to the producers bypassing the middlemen. This enables the producers to have a better profit margin and the consumers to have better value for their money. One such example is OpenBazaar. >OpenBazaar is an open source project to create a decentralized network for peer to peer commerce onlineusing Bitcointhat has no fees and cannot be censored.[Source](https://blog.openbazaar.org/what-is-openbazaar/) Lets say that you would like to sell vegetables from your garden. Using the OpenBazaar, you create a new listing on your computer with details of the vegetables and quote for the price in Bitcoin. When you publish that listing, it is sent out to the distributed p2p network of other people who use OpenBazaar. Anyone who searches for the keywords such as local vegetables will find your listing. They can either accept your price, or offer up a new price. If you both agree to a price, OpenBazaar creates a contract with your digital signature and sends it to an entity called a notary. In the case of a dispute an arbiter can be brought into the transaction. There is no third parties involved. The notaries and arbiters are also part of the distributed p2p network who the buyer and seller trust in case something goes wrong. The notaries and arbiters witness the contract and create a multisignature Bitcoin account that requires two of three people to agree before the Bitcoin can be released. Decentralized distributed exchange can also empower individual innovation at a personal level through crowdfunding. Crowdfunding in turn enables decentralized distributed ownership. >Crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large number of people, typically via the Internet. One early-stage equity expert described it as the practice of raising funds from two or more people over the internet towards a common Service, Project, Product, Investment, Cause, and Experience[Source](https://en.wikipedia.org/wiki/Crowdfunding) ####How decentralized distributed ownership is different from stocks and bonds? Decentralized distributed ownership enables individuals to directly own a company but not through third parties like stock brokers or banks. The dividends are paid directly to the individual owners of the company. Distributed ownership can enable all the 7 billion people of this planet to own one single company directly without any major issues or downsides. The funds raised through bonds are invested in public infrastructure projects such as roads, rails, bridges etc. The decentralized distributed ownership enables individuals to directly participate in the public infrastructure projects without the need for bonds. ###Decentralized Arbitration We as individuals each one of us is a sovereign. We are not a person but a sovereign, which is a basic right granted by the Creator. We exist simultaneously in a parallel multiverse which has many domains or dimensions that exist in parallel but we are aware of only one domain. These are some of the practical implications of the Multiverse hypothesis. We can only be tried in any jurisdiction as a person. We consent to be represented as a legal person to be tried in a court of law in a temporal domain. A person is a legal entity such as a limited liable company which can be tried by any jurisdiction. The purpose of a legal entity such as a person is to limit the liability to this temporal domain. We can create our own rules without involving any third parties to arbitrate and abide by them as a sovereign as long as the rules are consented by the counter party and are not violating the common law or natural law. This is made possible by the application of smart contracts. >Smart contracts are computer protocols that facilitate, verify, or enforce the negotiation or performance of a contract, or that obviate the need for a contractual clause. Smart contracts usually also have a user interface and often emulate the logic of contractual clauses.[Source](https://en.wikipedia.org/wiki/Smart_contract) ####What is Temporal Jurisdiction? As a sovereign, if anyone prefers litigation rather than decentralized arbitration, then they should be at liberty to exercise their freedom to choose their temporal jurisdiction in order to resolve their conflicts. When Ethereum started the first round of crowd funding the funds are managed by a company incorporated in Switzerland. The developers of Ethereum had the freedom to choose their legal jurisdiction of sale and thus are accountable to the laws of Switzerland but not accountable to the temporal jurisdiction of Canada or USA. This is a classic example of exercising their freedom to choose their temporal jurisdiction in order to resolve their conflicts in future. ####Disclosure This article is meant for informational purposes and is not an endorsement. Articles published on the LTB network are the authors personal opinion and do not necessarily represent the opinions of the LTB network. ####Further Reading https://en.wikipedia.org/wiki/Email_privacy https://bitmessage.org/bitmessage.pdf https://en.wikipedia.org/wiki/Tox_(software) https://en.wikipedia.org/wiki/Git_(software) http://twister.net.co/ http://www.youtube.com/watch?v=9vZpNQUIqIg https://en.wikipedia.org/wiki/Multiverse https://www.ethereum.org/ Read More
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    Categories: General

    An Overview of Applications that Could Be Empowered by Bitcoin

    August 18th, 2014 by CrimsonRoze
    edited by denise 8/8/2014
    Please note that author wants to submit recording to release simultaneously with blog.

    "After editing, before publication, I would like to have the article recorded so it an be released with an audio recording attached. Please do not publish it before I have had a chance to get it recorded. (but you're more than welcome to do all edits so I get a final version to record.)"
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    Categories: General

    Counterparty, Dogeparty, and Why the Term 'Burning' Gives the Wrong Impression

    August 18th, 2014 by Rob

    The world of cryptocurrency has progressed so that now anyone can create their own cryptocurrency. With only basic experience using Bitcoin or Dogecoin, it is easy to create blockchain-based tradable digital tokens, thanks to the Counterparty protocol, and its brand new implementation called Dogeparty.
     

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    Categories: General, Legal Activity

    Death and Bitcoin

    August 15th, 2014 by wildjo

    Editor: Edward
    Proofreader: Cheryl

    For too many people, the answer to the question "What happens to your bitcoins when you die?" will include some variant of "lost." Of course, that does not have to be the case if we use the legacy estate law of our home jurisdictions. These legacy systems, however, have the same disadvantages of the financial system we are trying to make obsolete with cryptocurrencies: trusted third parties and gatekeepers.

    There are alternatives within and on top of the Bitcoin protocol that can overcome these legacy estate law disadvantages. This article identifies two and suggests a mechanism in which they may be employed to provide simple estate-like planning in a decentralized, autonomous way without the time cost and monetary expense of traditional strategies.

    [The above was written by the original author. I assume it was meant to be used as an excerpt/preview for the article. I made some minor edits.]

    ----------------------------------------------------------------------------------------------------------------------------

    What happens to your Bitcoin when you die?

    For some of us outliers in the U.S. cryptocurrency communitythat is, those of us who didnt grow up with a computer in the home and are old enough to have learned how to type on an actual typewriterthe twin certainties of death and taxes are on our minds more than others. In this regard, crypto presents unique challenges. How do we pass on our Bitcoin wealth and legally avoid unnecessary estate expenses, while also protecting our private keys while we are still alive?

    The world of estate law (the law governing the management of a persons assets, with an eye to how they will transfer after he or she dies) has some ideas, but, not being crypto devotees, those ideas center around how to wrangle crypto into their non-crypto world.

    For example, the proposed Fiduciary Access to Digital Assets Act (FADAA) would simply give trusted-third parties enhanced rights (and liability protection) to force a software or hardware company to provide anothers private information. That may be necessary in some situations, but Im sure the crypto community can come up with a better and more generally applicable decentralized and autonomous solution that minimizes the need for trusted third-parties and gatekeepers (and their associated privacy risks and fees).

    Why is the status quo unsatisfactory? The main problem with legacy estate law is that it requires the disclosure of private keys to trusted third-partiesexecutors, trustees, agents operating under a power of attorney, conservators, and personal representativesso that they may access the decedents wallet and distribute the decedents digital assets. Thus, we reintroduce the trust factor back into an area of the cryptocurrency arena that was doing just fine without it. Not only must we trust that these third-parties wont access our wallets while we are living, but we must also trust that they will keep the private keys secure and provide continuity of care in the event they predecease us. Continuity of care requires the introduction of even more third-parties, but is necessary, if not required under some state professional responsibility codes, when attorneys and other professional fiduciaries are involved.

    Another deficit of the legacy estate system is that it necessitates the inclusion of gatekeepersprobate courts/judges, magistrates, executors, attorneys, and state agencies (e.g. vital statistics departments). In even the simplest of situation where all the necessary information is known and all the heirs are getting along, these gatekeepers impose costs in terms of both time and money. Where information is absent and heirs disagree, those costs can be extraordinarily high. Sadly, the latter scenario is far too common.

    Estate law is a required course in law school. I suffered through it and swore I would never practice it when I became an attorney because it can capture the human species at its very worst. The cases usually have the same last name on each side of the v., as in Jones v. Jones and Smith v. Smith, because some relative feels they got the short end of the inheritance stick and decides the only way to be vindicated is to blow up the family. These fights rage on because both sides are empowered by a legal system and legal profession that stands to profit from the dispute. Family relationships are devastated and family assets dwindle in the process. Insert the technological difficulties and relative unfamiliarity of crytpocurrency and you are simply adding heavy fuel to those fires; fires that can only be snuffed out with the loss of additional time and money.

    No. Satoshi was right. We need to continue to keep trusted third-parties and gatekeepers out of our digital financial lives as much as possible, both during our lives and after our deaths. The problem is, however, that there is no clear way to accomplish this within the Bitcoin protocol. Or is there?

    Im no coder, and my computer competency is just deep enough to make me dangerous. Still, we need to start considering this question, so allow me to kick it off and allow other, more sophisticated, members of the community to take it further.

    In my view, what we are looking for is a mechanism that allows a wallet holder to send a percentage of their wallet balance, whatever that balance may be at some indeterminate time, to another wallet(s) upon the death of the first wallet holder. There are a couple elements here that we need to parse out.

    First, the transaction needs to take place in the future. As I understand it, this function (or something very similar to it) already exists within the protocol. It is called LockTime and is a major feature of distributed blockchain contracts that allows a payment to be made from one address to another after the specified period (n) has passed. Without more, such a function could be used as a crude estate planning tool by selecting a date beyond which is the reasonable life expectancy of the initiating party. However, that means that the initiating party could never change their mind and that the beneficiary might have to wait years before they receive the asset. A lot could happen in that intervening period to make such a transaction unpalatable.

    To make this function better for autonomous estate planning purposes, we would need to modify the LockTime functionor build on top of itto allow us to modify the transaction date repeatedly. If this were possible, we could set up transactions to our heirs on New Year's Day of each year to be distributed, for example, on January 1st of the following year. If we pass away within that period, then transaction propagates. If we dont, then we modify the transaction on New Years Eve to take place in another year, repeating the process until we are no longer around to do so and the transaction kicks in. In the meantime, this flexibility allows us to adjust who our beneficiaries are, the amount they would receive, or to suspend the transaction altogether at any time. In other words, it gives us the flexibility of the existing estate law system (e.g. rewriting a will) with the autonomy of the Bitcoin protocol.

    The second element to address is the amount transferred. With the current LockTime function, the amount of the coin transferred must be specified and it is removed from the wallet. However, in the new estate planning space we are creating for ourselves, while we want our heirs to inherit what is left over, we might want to spend some of our Bitcoin in the meantime. Having to deplete our wallet balance, even if temporary, in order to make a contingent LockTime transaction, could be inconvenient. But, what if we could modify the function to allow for a percentage of the then existing wallet balance to be transferred? For example, I set a transaction to my daughter to be completed a year from today and the amount is set at twenty-five percent of the balance existing in my wallet at that specific time. I could then accommodate multiple heirs with set percentages and not have to worry about changing the transaction each time my wallet balance changed.

    In this scenario, I could set up empty wallets for each of my beneficiaries, teach them how to use the technology, make sure the private keys were preserved (e.g. in a safe), and instruct them to get their own wallets and move their distribution out of that interim wallet and into their own, secure wallet upon my death. This prevents the private keys to my account from being compromised, while minimizing the period of time that the interim account is vulnerable (it will not be used except on the moment the contingent LockTime transaction is ultimately made and then transferred out to the beneficiaries' own wallet) while also ensuring that the LockTime transaction can be recovered (private keys kept in safe place known to me and relevant beneficiary). All of this accomplished autonomously, with only me and my beneficiaries playing an active role.

    Another use of a system of this nature would be to safeguard wallets in the event of lost private keys. For example, on my birthday each year, I could create a TimeLock transaction that would transfer my balance (0-100%) to another address on my following birthday, unless I rescinded it at any time before that magical date arrives. In the interim, if I lost my private key, there is a contingency in place that would allow me to recover my balance in the new wallet and all I would need is a little patience.

    Getting back to our estate planning use, an autonomous system of this nature is similar to the legacy estate planning systems pay on death (POD) or transfer on death (TOD) account. There, an account holder designates a beneficiary and informs the institution holding the account of their identity. During the principals life, the beneficiary has no right to the account, but title and right vests immediately with the beneficiary at the moment of the principals death. This allows the account to be distributed to an heir(s) (the designated beneficiary) outside of probate. The drawback, of course, is that the beneficiary has to obtain and present a certified copy of the death certificate to the bank in order to take possession. This can waste time and money.

    A contingent TimeLock % balance transaction is clearly superior as it accomplishes everything a POD/TOD account does, while keeping the gatekeepers (in this case, the institution issuing the death certificate and the institution holding the account) out.

    There are a lot of nuances to any given jurisdictions estate law and a lot of complexities that go into a persons estate plan. This discussion is, by no means, an attempt to cover any of that ground or to provide legal advice to the reader. Rather, the goal here is to kick off a discussion of a basic wallet/protocol function that could be one strategy in an overall estate plan, and, most importantly, one that minimizes the drawbacks of the legacy estate planning system and its trusted third-parties and gatekeepers.

     

    In other words, Im hoping we can answer the question, What happens to your Bitcoin when you die? with, No worries. Its in the blockchain.

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    Categories: General, Guest Blog, Fiction

    Grandpa, Tell Me 'Bout the Good Ol' Days

    August 14th, 2014 by Tron

    Editor: Cheryl

    “Hey Jimmy what do you have there?  Oh goodness, I haven’t seen that shoebox since I was teenager.  Were you in the back of my closet?   Bring it here.  Open it up and let's take a look.  It’s my box of old paper dollar bills.  I thought they might be worth something someday.  Boy!  Was I wrong!”

    "When I was kid, back in 2014, people used to trade this paper for housing, food, gas, and cell phone service. Yes, believe it or not -- paper.  I know, it’s bizarre and still makes me chuckle. And they had these big machines called ATMs back then that were bolted to the sides of buildings we used to call 'banks'. These ATMs would spit out these green paper slips with pictures of dead presidents on them.  And then, for whatever reason, other people would trade these slips of mostly green paper for things they wanted. Surprisingly it worked. Sure, it seems archaic now, but people didn't think so at the time.”


    “What?  Oh, banks? Yeah, they would store and track your money like your Samsung S27 bitcoin wallet does now, only they were entire buildings staffed with real people. In fact that social center down on Main Street where they have that little room with the ice cream machine and the big steel doors -- that was a bank.  If memory serves, Bitcoin existed back then, but I guess it just took some time to adjust to the new way of storing and sending value.“


    “What happened to paper money?  Oh, that’s a long story.  It started a long, long time ago in the early 1970s when President Nixon decided that the paper money was accepted well enough that it didn’t need to be backed by anything, so he just stopped allowing convertibility to gold.  Looking back with 20/20 hindsight, it was a really stupid thing to do, but it worked for a while.  Nobody thought much of it at the time.”


    “What happened next?  Oh, not much at first, but in 2008 the first problems started.  It wasn’t so much because of Nixon’s bone-headed decision, but because those ‘banks’ I was telling you about were allowed to loan out more than they held in deposits.   They created more money by making loans, and they could create as much as they wanted as long as they could find people to borrow.  They started loaning to everybody, and I mean everybody.  ‘No job, no problem, here’s your loan.’  Sure, looking back, it seems insane, but I don’t think people in that era really understood money.”


    “Then, the banks had this brilliant idea to insure against loan defaults and sell the loans as investment grade.  The banks used some clever, but ultimately self-destructive methods to hide the bad loans and pretend they were investment worthy.  Well, as you’ll soon learn in your history class, and what should’ve been obvious at time, those with no jobs couldn’t pay their loans, so they didn’t.  There were so many of these bad loans that the insurance companies couldn’t make good, so the whole system was at-risk.”


    “Well, as you can imagine, this was a pretty scary time for those that benefitted from creating money out of nothing.   What were they to do?  What could they do?  They figured they could make more money out of nothing and use it to try to save the system, so that’s what they did.  They just started creating money like crazy to buy Treasury bonds.  This helped the political class back then because they could spend this new money to create programs and buy votes.  There were dozens of different programs to get the money out into the economy.  It didn’t matter how crazy the idea.  We were even sending money to other countries to buy their cooperation.”


    “It worked for a while.  They just kept pumping more ‘free’ money into the system, and people didn’t seem to care.  If you were poor, you got free stuff. Why complain?  No job? -- free money.  If you were rich, you got even richer since borrowing costs were super low so you could borrow cheap and invest in the stock market.  If you were a CEO, you couldn’t lose because you could just borrow cheap, buy back your own stock and get rich.   But, if you were a saver back then, you got crushed.”


    “Jimmy, would you hand grandpa that drink of water? Thanks.”


    “It wasn’t until 2017, when things turned bad for almost everyone.  There weren’t enough people working to keep the system going.  The defaults started again, and surprisingly they hadn’t learned anything the first time.  They ramped up the printing presses again to buy even more Treasury bonds.  Only now, there was so much interest owed it was like running on an accelerating treadmill.  We could loan ourselves more money out of thin air and be the only buyers with an infinite imaginary bank account, or we could offer more interest to get other interested buyers, but only at our own peril because increasing interest rates on our massive debt was crippling.  We were trapped.”


    “Even the Wall Street guys could see the writing on the wall and started looking for safe havens.  What’s Wall Street you ask?  Ah, funny story, there was this guy from New York named Ben Lawsky.  He started Wall Street’s woes, but that’s a story for another time.  I’ll take you to the Wall Street museum sometime.”


    “Anyway, they were desperate to get dollars into the economy, so dollars were easy to come by.  If you had something that had real value, you could get lots and lots of dollars, but saving dollars was futile.  Savers were again getting crushed.  People wanted anything that couldn’t be conjured out of thin air.   It wasn’t only bitcoin that people wanted, it was also food, gold, real estate, and farm land.  Bitcoin was the easiest to store, and transmit, so it worked best when trading for food and other daily needs.”


    “Once the ball was rolling, it picked up speed.  Some say it made the Weimar Republic look tame by comparison.  Since nobody wanted the green slips of paper, but wanted bitcoin instead, the transition happened very quickly.  Thankfully, your grandma and I did fine because we already had some bitcoin before the rush started.  I kept that shoebox full of dollars, partly as a reminder, and partly because I really thought they might be worth something someday.”


    “Well, off to bed."




    The events depicted in this story are obviously fictitious -- there’s no way paper money can last ‘til 2017.  Any similarity to any person living or dead is merely coincidental - except for Ben Lawsky - he’s real and couldn’t be reached for comment because he’s too busy shooting NY in the foot.

     
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    Categories: General, Guest Blog, Columns

    Bitcoin and Intrinsic Value

    August 6th, 2014 by Tron

    Warren Buffett, generally a shrewd investor, surely knows the financial definition of intrinsic value, but inexplicably he does not understand Bitcoin. How do I know he does not understand Bitcoin? Because he called it a "mirage," said it had “no intrinsic value,” called it “a joke,” and compared it to a check. A check? Bitcoin, the network, can be compared to the entire banking system that processes a check, which includes the clearing system, the image scanning system, the ATM network, the credit and debit system of the Automated Clearing House, the SWIFT financial messaging system, and ultimately the institutions that we trust to safely track our balances and return our deposited funds upon request.


    Warren’s uninformed and off-the-cuff remark sparked a conversation about the intrinsic value of Bitcoin. We need to begin by defining "intrinsic value," because it has a different definition for a financial investor than it does for most noninvestors. Investors look at the book value and add the discounted cash flow to arrive at the intrinsic value, which is often different from the market value. Most noninvestors think of intrinsic value as the value of a thing itself. Noninvestors often cite the example of gold, or of a knife that can cut, splice, and dice. Gold can be used for industrial purposes. It is extremely malleable, shiny, and contains other unique physical properties. I posit, however, that gold’s real value lies in its scarcity and in its worldwide acceptance as a store of value. Knives, on the other hand, are great tools of utility value.


    Mr. Buffet’s ability to calculate the difference between intrinsic (or fundamental) value and market value gives him a real investing edge. I respect his investing acumen and I mean no disrespect for him when I declare he is wrong about Bitcoin.


    Perhaps if Warren thought about Bitcoin differently, he might come to a better conclusion. He regularly purchases stocks, so he understands that market. A stock, based upon the investor's definition of intrinsic value, represents partial ownership in an ongoing business that holds assets (book value) and makes money, which can be included in its value when discounted for time. Once Mr. Buffet learns a bit more about Bitcoin, I hope he will realize that upper-case Bitcoin, the network, holds tremendous value because it can be compared to a banking system, or a worldwide collection of banks and all of their systems. While lower-case bitcoin, the currency, can be compared to an index fund or an exchange-traded fund, which would indlude all the bitcoin companies in the Bitcoin ecosystem.


    Value is subjective and contextual. It is subjective because it depends on the feelings and opinions of the person doing the valuing. It is contextual because it depends on the circumstances and setting of that person.


    Let’s explore this with a simple example. Imagine you are stranded alone on a desert island with no internet connection. You are hungry, thirsty, and you cannot get off the island. Three things wash ashore -- a laminated-paper bitcoin wallet that gives the private key for an address that holds 100 BTC, a shoebox full of freshly printed US $100 bills, and a crate containing a knife, some flint, nine hens, a rooster, and several large sealed bottles of crystal-clear purified water. Which has the most value -- to you?  


    Now change the context, and imagine you just polished off a meal at a five-star restaurant and you ate too much dessert. You’re faced with the choice between the same items, but now you might want to count the $100 bills and check the public bitcoin address to decide whether you would rather take the bitcoin or the shoebox full of cash.  


    OK, one last example. This time you have eaten a nice meal while reading about China and Russia striking a deal to use their native domestic currencies to settle trade and purchase energy in the form of gas, oil, and coal. You are faced with the same choice of food, bitcoin, or dollars. But now you’re rattled. You think, “What if the dollar is losing its status as the global-reserve currency? What if dollars come flooding back to the United States as other countries choose not to hold them? What if government numbers for inflation are being blatantly manipulated?” You give it more thought, and you reason that you could take the dollars and buy stock in global companies in order to protect yourself. Then it hits you: “This is why the stock market is doing so well. It is not in recovery at all. People are shifting to stock assets in the face of a manipulated and devalued currency.” Your choice now comes down to buying global stocks, or taking the bitcoin. You look at the history of Bitcoin over the last few years, compare it to the S&P 500, and you make your choice without even needing to count the dollars in the shoebox.
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