What's New at the Bitcoin Colony

This week is a busy one for me. In addition to my usual jobs I’m in New York covering the Ross Ulbricht trial which has been interesting to say the least. It’ll be a long trial and I’ll miss most of it but it’s of great importance. In fact I’m inserting some trial coverage at the end of today’s Dispatch in place of the Friday Funnies.

I’ll open however with a discussion of new technologies that are coming out of the Bitcoin community. These may soon become important.

In between my two sections Doug French wonders if Bitcoin may end up as the last currency standing.

A FREE-MAN’s TAKE

with Paul Rosenberg | January 23 2015

What’s New at the Bitcoin Colony

As I’ve mentioned in the past Bitcoin is an invasion into the status quo. It is not a modification of the dominant financial system or even an extension of it… it’s a Klingon colony that dropped to Earth in 2009.

As I’ve also mentioned in the past what matters about Bitcoin is not the technology itself (which is fascinating but not perfect) and it’s certainly not the dollar exchange rate. What matters about Bitcoin are the thousands of young people who have grasped its meaning and who get up every morning excited to do something with it.

So today I want to show you some of the new developments that are coming from the Bitcoin colony. These aren’t the only new developments but they are among the most important of them and they help to paint a picture of what’s emerging.

First however I should extend my thanks to Velas Commerce the Bitcoin and e-commerce consultants who kindly shared material with me.

Ethereum

If all goes as planned Ethereum will become an expanded cryptocurrency. Like Bitcoin Ethereum is a network with its own blockchain (public ledger) and its own currency the Ether.

Unlike Bitcoin Ethereum is designed to interact with other computers. That makes all sorts of automated contracts possible. Internal company data contract specifications outside data inputs time and date and so on can all be coordinated and money (Ethers) distributed automatically. Some of the programs being built for the Ethereum network sound like they’ve come out of a sci-fi movie including decentralized autonomous corporations or DACs.

Ethereum creates self-enforcing contracts. These can get very interesting once you consider the number of devices that can be controlled through an Internet connection. TVs car keys hotel room keys etc. Imagine a rental car where your key simply stops working if you stop paying the hourly fee.

DACs (or sometimes DAOs decentralized autonomous organizations) are businesses or organizations that run themselves. This is essentially a group of people working together for a specific goal but instead of their interactions being governed by a corporate framework they’re governed by code running on the Ethereum network. Such a framework may be too rigid for many uses but a massive time saver for others.

Ethereum is written to be as simple open and flexible as possible to allow for unaccounted future uses which makes it one of the more interesting new technologies.

E thereum can be used now but is still in development and likely won’t be used commercially until sometime later this year.

OpenBazaar

OpenBazaar is eBay the service without eBay the company. Anyone can join and buy or sell goods and services. Like Bitcoin OpenBazaar isn’t owned or controlled by anyone; it’s a network of peers that operates with no middleman.

What makes this technology especially interesting is its use of conflict-resolution technologies. With escrow and legal agreement built in these resolution technologies will encourage trade that likely would otherwise never occur due to concerns over fraud or the difficulties involved with multiple legal jurisdictions.

In addition to escrow and arbitration OpenBazaar uses multisignature (“multisig”) Bitcoin transactions to prevent fraud. This ability has always been built in to Bitcoin but it has seldom been used.

In a multisig transaction bitcoins are sent to a special address that will hold the funds and only release them when a majority of the parties involved sign off on the transaction. Generally these transactions are two or three meaning that two of the three parties involved must agree on where the funds should be sent.

Using OpenBazaar the three parties involved would be the buyer seller and escrow. The funds are sent by the buyer to a unique multisig address and stored there until the buyer and seller have completed the transaction successfully and sign off on the transfer of funds to the seller. If there’s a dispute and the buyer and seller cannot agree on where the funds should be sent the escrow (perhaps influenced by the decision of an arbitrator) has the deciding vote.

This conflict-resolution system along with a reputation system have the potential to give people enough confidence to trade without reliance on existing legal systems.

OpenBazaar is up and running now and a variety of goods and services can be bought there today. However the software is still being tested; a completed version is scheduled for release in early 2015.

SilentVault

One of the biggest concerns with Bitcoin is that it has serious privacy issues. Bitcoin is the most transparent currency ever created. If you don’t take steps to protect your privacy when using Bitcoin anyone anywhere can view your entire transaction history. SilentVault offers a solution to the Bitcoin privacy issue. It also facilitates trade in other currencies including gold and silver.

SilentVault is a wallet application that allows users to bring in cryptocurrencies (currently Bitcoin and Litecoin) then to spend them “silently” or “off chain” (not recorded on the transparent ledger/blockchain).

What you hold and trade with your SilentVault wallet are vouchers representing assets not the assets themselves. While this is obvious for gold or silver which are not digital assets the distinction is important for Bitcoin. The wallet contains vouchers which are cryptographically signed digital bearer certificates that are analogous to coins.

These vouchers can be traded and exchanged with other SilentVault wallet users privately securely and in a peer-to-peer fashion. The system can also be used as an exchange as you can trade vouchers backed by different assets (bitcoin gold silver etc.) with fellow users.

SilentVault systems are built using privacy and security-focused software. All communications are made within private servers with no public-facing IP addresses. End-to-end encryption is used so that even SilentVault can’t monitor chats or view the contents of users’ wallets.

SilentVault is available for use today.

Open-Transactions

Open-Transactions and its commercial version Monetas provide tools for what you would think of as normal financial transactions checks invoices etc. in a cryptographically secure and distributed fashion. However it also includes many nontraditional financial transactions such as online cash-like transactions issuing currencies commodity trades and smart contracts.

Unlike Bitcoin or Ethereum Open-Transactions is server-based software. This has some advantages—it’s faster and cheaper—but it’s not as resilient as Bitcoin. The Open-Transactions developers imagine a trustless system of federated servers where there are a wide variety of servers available and they are nearly incapable of fraudulent behavior.

Bitcoin’s and Open-Transactions’ very different system designs make them very complementary to each other. Bitcoin works well but doesn’t currently have the scalability wide variety of features or speed that Open-Transactions can provide. Open-Transactions and Monetas are integrating a number of Bitcoin features such as security features for Bitcoin exchanges. You can think of Open-Transactions as providing financial services around Bitcoin—for example facilitating trades from gold to bitcoin and back or supporting off-chain transactions.

Like all of our examples Open-Transactions exists outside the traditional banking system; however it provides an impressive selection of financial tools. This has the potential to allow someone who is “unbanked” to use banking tools or even become an international commodities trader. As Open-Transactions’ commercial incarnation Monetas says they are “launching the financial inclusion revolution.”

Open-Transactions is an ongoing open-source development project. The commercial version of the software Monetas is currently developing mobile phone apps as well as commercial products that should be available soon.

A Free-Man’s Take is written by adventure capitalist author and freedom advocate Paul Rosenberg. You can get much more from Paul in his unique monthly newsletter Free-Man’s Perspective.

Bitcoin: Currency Canary in the Coal Mine

“Without Drugs What’s the Point of Bitcoin” wonders the Atlantic. I answer author of the piece Matt Schiavenza with two words: central banks. It’s no coincidence “Satoshi Nakamoto” created Bitcoin in 2009 as the financial world dangled on a precipice of the central bankers’ making.

The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.

Schiavenza juxtaposes bitcoin and the battered ruble claiming the Russian currency has held up better because “Moscow can rescue through manipulating interest rates and instituting capital controls.”

But a currency is supposed to collapse if its fundamentals are bad. That’s why Bitcoin was created as an alternative to the government-managed and -manipulated currencies that cloud the honest workings of the economy. “Bitcoin’s lack of a central bank means there’s nothing to stop it from sliding even further.”

What will stop Bitcoin from falling is its “saleableness” or “marketability” as Carl Menger called it. Writing in 1871 the father of the Austrian school of economics was less than politically correct when he wrote “Gold nuggets extracted from the sands of the Aranyos River by a dirty Transylvanian gypsy are just as saleable in his hands as in the hands of the owners of a gold mine provided the gypsy knows where to find the right market for his commodity.”

What Menger pointed out that most people don’t understand—including Nobel prize-winning economists—is that money evolves through an entrepreneurial process. The more savvy individuals determine what goods are or will be most saleable. As the transactions spread among these traders a limited number of goods—the very most marketable—become money. It is economizing interest that leads to this discovery as Menger writes in hisPrinciples of Economics: “[H]e is led by this interest without any agreement without legislative compulsion and even without regard to the public interest to give his commodities in exchange for other more saleable commodities even if he does not need them for any immediate consumption purpose.”

Brute force through central banking can only slow down the inevitable. At a time when the monetary mandarins were thought to be holding the planet’s economic fortunes in their steady hands the Swiss National Bank (SNB) cried uncle and let the franc rise above €1.20 a policy it had kept in place since September 2011. To hold the peg between the currencies the Swiss had to buy lots of euros in an attempt to keep their country’s exports competitive. The SNB took a huge loss but it chose to panic early beating other central banks to the exits.

“Why is Bitcoin so volatile” asks Schiavenza. It’s only been volatile lately. In fact the Bitcoin chart looks like the graph of two government-sponsored currencies. Maybe Bitcoin was the currency canary in the coal mine.

The Atlantic reporter goes on to ridicule bitcoin miners who ramped up mining “a process that involves using supercomputers to solve difficult mathematical equations” by borrowing what he calls “real” money to invest in computing power. This worked dandy in 2013 when bitcoins were going for $1000 apiece. Not so much now.

Yes that’s the way it should work. When money is more valuable whether it be gold silver or the cyber variety the market is sending a signal that more of it’s desired. Money producers get busy and create more. As more is created the market recognizes this and its value drops. Entrepreneurs being entrepreneurs and lenders being lenders too much credit is granted too much product is made and if the market is allowed to work eventually a heavy price is paid.

Unfortunately the world’s central banks are allowed to operate indefinitely (so far) oblivious to market signals. In fact central bankers equipped only with equations graphs and theories think they control the market. For the moment they have their way: rock stars who win awards and accolades while on the job and earn six figures for speeches in retirement.

The Federal Reserve quadrupled its balance sheet and gunned the money supply—the primary buyer of its nation’s debt that can’t possibly ever be repaid and the world inexplicably considers the dollar a Grade A choice currency at least at this writing.

The Bank of Japan has tried to create inflation for decades and recently stepped up its money-printing efforts. “We decided to expand the quantitative and qualitative easing to ensure the early achievement of our price target” BOJ Governor Haruhiko Kuroda told a news conference reaffirming the BOJ’s goal of pushing consumer price inflation to 2% next year.

Never mind that economists Carmen Reinhart and Kenneth Rogoff—who wrote the book on modern financial meltdowns—consider a 90% debt-to-GDP ratio (a measure of a country’s ability to make future payments on its debt) troubling. Japan’s debt-to-GDP ratio is now 227%. Reasonable people would call that a bankruptcy waiting to happen. Yet the 10-year JGB yields all of 19 basis points. The Japanese government can borrow for 30 years at a rate of 1.06% as I write this.

It’s hard to know who is more trapped by hubris: central bankers or investors who risk everything based on what they think central bankers are capable of. Some investors “apparently just assumed the Swiss would let the franc go down with the Eero ship and sold short the currency at leverage ratios up to 20 to 1” writes Joseph Calhoun. Bankruptcies ensued. Calhoun writing for Alhambra Investment Partners uses the bet on the Swiss central bank to point out first of all “The dollar index is up almost 18% since last summer and there is at last estimate approximately $9 trillion in outstanding dollar denominated debt outside the US.”

We like to think that the rise in the dollar is due to our virtues but it could just as easily be others’ vices that are driving the dollar higher. Dollar liquidity is drying up as the Fed’s QE has ended and oil prices have dropped. So keep an eye on the dollar and if it starts to rise rapidly brace yourself because the dollar lever is a lot longer than the Swiss franc one.

And needless to say both of those levers are exponentially longer than the leverage used to mine bitcoin (if there was leverage used at all). After all only so many bitcoins can be produced per hour. More computing power simply allows a miner to create them before competitors do.

Will the last currency standing be of the government fiat variety It will be an historical first if it happens. All governments (and their central banks) have ultimately sent their money to currency heaven. It’s more likely to be a product of the market that survives as Menger explained. It could be the same yellow metal prized by gypsies and aristocrats alike. Or in this age of technology it will likely be gold 2.0: Bitcoin.

Byline New York City: The Ross Ulbricht Trial

Ross Ulbricht’s trial began on January 13 following a string of pretrial rulings that were in my opinion nearly 100% pro-prosecution. The first two days were as expected save for the admission that Ross really did create Silk Road and the possibility that Mark Karpeles (of Mt. Gox infamy) may have had a stint as DPR (Dread Pirate Roberts)… and may have set Ross up for the takedown.

On Thursday January 15 however the prosecution suffered a disaster. The defense went after the state’s first witness the young DHS agent who moled in to Silk Road and worked as an administrator undermining all the site’s security as he went. This is the man who set up Ulbricht’s takedown… Silk Road’s rat.

In their questioning the defense got him to agree that anyone could have been DPR at various times. That was the original meaning behind the DPR name after all.

Tuesday Morning Judge Forrest shocked everyone with what is to me at least a novel invention: she announced that the prosecutor should have objected more during the cross examination of the agent. But since he didn’t Forrest went back and struck all the testimony that she could have ruled against. In other words she fixed the case on behalf of the prosecution after the fact.

The judge took a great deal of time Tuesday Morning trying to explain why it is okay that she did this.

Then over the lunch break on Tuesday the defense received an email detailing how they could or could not question witnesses… including the witness who was already on the stand. Mr. Dratel of the defense team complained that he couldn’t be expected to change everything he was doing on 20 minutes’ notice. The judge’s response (which I don’t recall verbatim) amounted to “tough luck.”

Wednesday (the day I am writing this) the DHS agent finished by explaining that he went looking for identification on Ross and DPR by looking around at the Mises.org site looking for anyone talking about Agorism Rothbard or Konkin.

Then came Agent Kiernan of the FBI and a long explanation of the arrest and the documents found on Ross’ computer. This reading of Ross’ files was fascinating to me (it was a history of the founding of Silk Road) though it helped the prosecution’s case against Ross.

On the other hand it gave the jury a look at Ross the man. I’m pleased to say that Ross was as it appeared a hell of a decent guy. At one point the documents showed his concern for the security of an employee; and in another as they discussed whether they should or shouldn’t allow a certain product to be sold an employee says “Well this is a black market” to which Ross replied “We are bringing order and civility to it.”

That’s It for This Week

Have a great weekend and remember that the status quo always seems eternal during its time but both archaic and foolish in retrospect. Greece Rome and Egypt are all gone and what their masses “knew” died with them.