S7 Airlines and Alfa Bank Test Blockchain for B2B Payment in Russia

S7 Airlines and Alfa Bank Test
Blockchain for B2B Payment in Russia

Blockchain for B2B

Blockchain, a technology behind the widely known digital currency Bitcoin, is more actively integrating decentralized data storage and secure communication between business partners. Impossibility to steal, change or delete registered data makes platforms built using this magic technology the most secure business solution.

Driving business with smart contracts

Earlier this year, the Bank of Russia has introduced Masterchain, an Ethereum-based Blockchain prototype created specifically to serve the interests of financial market actors. Alfa Bank, along with Sberbank, Qiwi, Banks Tinkoff and Otkritie, was one of the contributors to this newly developed and tested platform.

Alfa Bank finds Blockchain to be the ideal solution for business structures involving plenty of partners. Therefore, financial players have actively been developing and testing the potentials of this technology.

Recently, Alfa Bank has collaborated with S7 Airlines to test an execution of service payment transactions using smart contracts deploying Blockchain technology.

Alfa Bank provided the participants of the deal with special facilities through its Alfa-Business Online electronic system. Using this system the customer applies for the opening of the letter of credit, and the contractor then submits all necessary documentation upon finalizing of service delivery to the bank. Once the application for opening the letter of credit has been submitted, funds can be withdrawn from the customer’s account and first transferred to a special transition account and later to the contractor’s account.

Key steps of the deal – opening and closing of the letter of credit – have been performed as transactions deploying smart contracts using the Ethereum platform, and were registered in the distributed ledger. Records in the distributed ledger contain a hash of the following information: deal’s identification codes, type of services, and terms and conditions. This allows for all participants of the deal to check its status at any time.

Bringing more transparency

Using two smart-contracts simultaneously is a distinctive feature of the deal: one was used only for initiating the letter of credit and the other for completing it. Deployment of two interacting smart contracts is intended to reduce the potential for code errors and therefore protects the interests of the parties of the deal improving its transparency.

Nadezhda Avdanina, Head of the Center for innovations at Alfa Bank commented:

“Using Blockchain in the bank is building a platform that allows handling transactions in the clearest and transparent way. Technology also helps in securing the interests of participants of the deal from any kinds of failures to perform obligations defined by the contract.”

Dmitry Kudelkin, the S7 Group Deputy Director commented:

“S7 Airlines is the most technologically advanced airline on the Russian air transportation market. We traditionally use the newest solutions and technologies not only to develop our passenger service but also to develop business. By conducting the deal, we have tested the efficiency of smart contracts and realized how this technology could help optimizing business processes and improving the effectiveness of document flow. We are planning to continue cooperation with Alfa Bank in this respect.”

Where there’s a will, there’s a way

Blockchain technology is maturing at an incredible speed. A recent report by Deloitte shows that 12 percent of large enterprises with an annual revenue more than $500 mln, 308 Blockchain-knowledgeable companies that participated in the survey have already integrated Blockchain in their business operations. Approximately 25 percent of companies are starting Blockchain projects in 2017.

Deloitte CIS advised S7 Airlines to start the integration of Blockchain technology into their business strategy. Deloitte experts also provided legal support for the project. Artem Tolkachev, Director of Legal Services for Technology Projects Department at Deloitte CIS says:

“We are glad that Blockchain technology is being more actively integrated into business operations at innovative companies within the Russian jurisdiction. We welcome S7 Airlines’ willingness to experiment with smart-contract implementation in business processes and believe that further use of Blockchain technology will help to significantly reduce costs and improve work efficiency. This deal meets all the legal requirements for conducting of such a form of wire transfer as a letter of credit, clearly, demonstrates application options of smart contracts under Russian law.”

Blockchain technology allows solving two important issues, those of trust and the speed of business operations. Both these issues are extremely important in the area of trade financing. Alfa Bank and S7 Airlines are certain that technology will change their products and services in the nearest future.

Chuck Reynolds

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Beppe Grillo’s Bitcoin Blockchain Truth or Joke

Beppe Grillo’s Bitcoin Blockchain
Truth or Joke

Bitcoin Blockchain

The Bitcoin Blockchain has countless and the most different use cases, from finance to real estate, from copyright management to assurance. Now, Italian Five Stars Movement leader Beppe Grillo seems to have found a new application for the distributed ledger.

Hunting party colleagues

You might think that the main problem for the Five Stars Movement is winning political elections or managing the issues of the administration of the Roman capital, but no. The major issue for Grillo’s political party are expulsions, that have become a real obsession for him.

All political parties expel their unwanted members, but no one has managed to invent as many systems to hunt their own party colleagues as Grillo has so far.

Grillo’s Blockchain system

Apparently, Grillo failed to ensure compliance with the rules and has to launch a new system to make decree expulsions unassailable and incontrovertible through the use of an algorithm.

A few days ago, in fact, during an interview about the Federico Pizzarotti suspension from his party, Grillo commented:

“We’re working on a project, the so-called Blockchain for the encrypted information. It is very interesting- you have an algorithm and there are no intermediaries. If the Blockchain could be used in politics that would be very interesting, so if a Parliament Member you voted for does not follow the program he/she would be automatically expelled."

Obviously, it is a joke, but this attests that Grillo knows what Blockchain is, it cannot be excluded that sooner or later the Italian government will use the ledger with political use cases.

Blockchain technology in Italy

The old country has always been interested in Blockchain technology and in the last months a few projects captured their attention. We recently talked about the Italian startup Helperbit, that created a Blockchain-based platform to manage natural disaster donations.

The Blockchain Education Network Italia (BEN Italia) is also working on a law proposal that could encourage the adoption of the Blockchain within the Italian country. Last but not least, Italy proved to be very interested in the distributed ledger thanks to the BlockchainLAB in Milan, the first entrepreneurial effort that brings together the best expertise on the technology.

Bitcoin in Italy

Italy is now demonstrating how Bitcoin could be an easy and faster method of payment in a few sectors, for instance, booking a taxi. In fact, in Rome taxis even started to accept Bitcoin through a platform called Chainside which creates an invoice to be paid in Bitcoin by the final user.

Furthermore, a few months ago Italy decided to regulate Bitcoin as a currency, as the Italian tax agency called  Agenzia delle Entrate published a paper titled “Bitcoin and digital currencies buying and selling: clarification on the tax treatment” about the fiscal regulation of Bitcoin and how VAT would be applied to cryptocurrency transactions.

Chuck Reynolds

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What’s Going On With Coinbase vs. IRS?

What’s Going on With CoinBase vs. IRS?


Most people doing anything with cryptocurrency or Bitcoin have at least heard of the fracus going on right now between the IRS and the popular cryptocurrency exchange Coinbase.com . For those who might not be familiar with the situation or its significance, this is my summary based on the research I’ve done.

The IRS, as the Pursers of the Dark Side, is most assuredly a not big fan of Bitcoin and cryptocurrency. Apparently they recently identified 3 tax evaders who didn’t pay what the IRS thinks they should have in taxes. Since 2 of these 3 were Coinbase users, the IRS is stalking Coinbase now.

Note: (Note: “evasion” is illegal but “tax avoidance” is not)

Almost anybody who deals with government agencies or bureaucrats knows that the often don’t distinguish between what they have the legal authority to do vs. what they have the power to do. Frequently they do what they want anyway.

In the case of the IRS and cryptocurrency, the IRS does have some regulations regarding cryptocurrency reporting but they are muddled and unclear. The regulations (as I understand them) give various reporting requirements to cryptocurrency exchanges but rely on the ‘honor system’ (plus the IRS’s confused and complex regulations thus far) for declarations from the individual taxpayer.

In this case, Coinbase contends that it already complies with IRS regulations as they presently exist and further says that the IRS demand is too broad and burdensome and presumes the guilt of the entire Coinbase customer base.

Note: Looking at this IRS behavior it’s easy to see that Irwin Schiff, was right. Irwin was an expert on the US Constitution and US jurisprudence as it relates to the Federal Income Tax and its enforcement. His contention to his dying day was that was that the federal income tax was totally misunderstood by the average citizen and illegally interpreted and enforeced by the IRS… with the connivance of the US court system. He successfully defended himself from the IRS for years and also assisted many of his students in doing so he yet was eventually arrested and tried in an illegal “show trial”, illegally imprisoned, denied proper medical care, and died after over 10 years in prison.

Irwin’s great book, The Federal Mafia, still downloadable for free in PDF form on his website, www.paynoincometax.com, is a guaranteed eye-opener and gives a better understanding why cryptocurrency is surely something which keeps IRS agents, government fat-cats, and the industrial elite awake at night because it is a direct challenge to their control over the affairs of men and nations.

Many observers agree that the IRS will eventually get Coinbase’s records but it might be a short-lived Pyrrhic victory. If the general public continues to learn about and adopt the cryptocurrency and the blockchain, they eventually simply won’t need ‘big government’.  

What has recently rekindled interest in the IRS vs. Coinbase situation is that since the IRS has not thus far been able to intimidate Coinbase into giving up their customer records (because Coinbase knew the law), the IRS is using something it does have the power to do…i.e. Issue a “John Doe Summons”.

A John Doe summons is the type of summons which allows the IRS to force a company to surrender their customer records because the IRS says the suspect somebody (but they don’t know who) within the group is guilty of tax evasion.

Many people interpret the IRSs’ actions as simply a witch-hunt designed to intimidate the general public and virtual currency sellers into the charade of “voluntary compliance” and if the IRS gets away with this tactic with Coinbase, one can only wonder what they might do next.

Note: Irwin Schiff often correctly said that the US tax laws are extortion… not voluntary compliance. Anybody interested in this subject should delve into his excellent and timeless videos on YouTube.

But that what the ongoing saga of the battle between Coinbase and the IRS is about. Now you know. Is it a good idea to be a Coinbase customer right now? IMHO…. Probably not.

Art Williams
Freelance Writer
Case Studies and eMail Copywriting
eMail Me


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Unleashing the blockchain

Unleashing the blockchain

Although action on the state level may have been limited, 2016 saw regulators begin exploring and learning about the technology. Both the Federal Reserve and the SEC, for example, have indicated a willingness to pursue distributed ledger products and have formed working groups to investigate integrations with the technology.

This interest in using blockchains as an alternative to the current system of interconnected, incompatible databases emerged from two relatively recent developments in blockchain technology: the use of smart contracts to automate business processes and the ability to conduct transactions between different blockchains.

Looking forward to 2017, Lewis Cohen, a partner in the intellectual property practice at Hogan Lovells, shared his thoughts on this issue, noting that interconnected blockchains offer regulators the potential to be involved directly in this new wave of innovation. "The biggest surprise of 2017 may be the rise of ‘interconnecting’ blockchains," Cohen said. "The inability to deliver this type of blockchain integration will otherwise prove to be a major pain point for the industry."

Cross-blockchain technologies, such as Polkadot, IBM’s HyperLedger, Overstock's tØ and Ripple, create the possibility of nodes from one blockchain conducting transactions with nodes from another blockchain – potentially those operated by regulators – in real time. This, coupled with privacy-insuring technologies such as R3’s Corda, which allows a node to choose the information it wants to decentralize while protecting the rest, allows for a new way to think about public ledgers.

The DAO's wake

With bitcoin values likely to keep climbing in the short term and ethereum set to continue growing, it may be safe to say that the states will continue to consider legislation and regulations that will make the taxation and the tracking of this new form of wealth easier to manage. However, the impetus for the rule-making of the future may shift towards engineering a proof-of-concept on how this technology can work in real-governance situations, rather than experimenting with ways to track money transfers to and from fiat currencies.

"If 2016 was the year that the blockchain burst into public view, 2017 is the year that blockchain pilots and proofs-of-concept begin to permeate the mainstream of industry,” said Alan Cohn, co-author of the Steptoe Blockchain blog and former Department of Homeland Security assistant secretary.As highlighted by The DAO, while blockchain tech can help to solve some of the administrative problems associated with large-scale data management, it creates new potential problems that must be closely monitored by regulators.

The 18th June hack on The DAO revealed that smart contracts can – if not implemented correctly – be used to drain value from the system, putting consumers at risk. Finding solutions to mitigate the problems that may arise from a blockchain failure may be a priority in 2017. Unlike cryptocurrency networks, a loss on a data-bearing distributed ledger may not just result in loss wealth. Yet, the potential loss of personally identifiable information, the unauthorized access to critical data and the potential for violations of existing security laws all are areas that must be resolved should a public sector blockchain solution be pursued.

Standards as a hedge

2016 saw cryptographic transaction technology emerge from its adolescence and take its first steps as a mature mode of operations. Accordingly, the government has reacted and has taken steps to both understand the technology and come up to speed with it regulation-wise. Yet, there is still the question of incoming president Donald Trump.

With both cryptocurrency advocates and opponents named to his cabinet, it is unclear how the new administration will approach cryptocurrency and distributed ledger legislation. Uncertainty, it seems, is now the biggest roadblock preventing further public experimentation with blockchains.

Mike Massaro, CEO of cross-border startup Flywire, for example, told CoinDesk that he believes regulatory uncertainty will be the largest roadblock against moving past proofs-of-concept forward and that industry-led work on standards may have to take its place.

Massaro concluded:

"I expect there to be some real progress in this area."

Chuck Reynolds

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A Slow Awakening 2016 in US Blockchain Policy

A Slow Awakening
2016 in US Blockchain Policy

baby, steps

At the PYMNTS' Innovation Project 2013 conference, former US vice president Al Gore made waves by speaking out in favor of bitcoin and the potential of the distributed ledger technology that drives the cryptocurrency. "I think the fact that within the bitcoin universe an algorithm replaces the functions of [the government] … is actually pretty cool," Gore said. "I know that there are a lot of innovators that are out there that are trying to … come up with new models and I look forward to that."

And 2016 saw governments on both the local and national levels come to the same conclusion as Gore for the first time.

From the Federal Reserve's declaration of interest to Illinois's embrace of distributed ledgers, this year saw US governments take big steps in evolving their thinking on financial tech. While no major actions have yet been taken, the governments' apparent interest in blockchain tech has been encouraging, experts have indicated.

"I have been in Washington now for many years and what I have observed is an unprecedented effort to catch up if not get ahead of the curve on blockchain technology," Carol Van Cleef, FinTech specialist and partner at financial services law firm BakerHostetler, told CoinDesk.

Van Cleef added:

"It is impressive, the level of effort being made in many areas of the government to learn about blockchain technology – not just to better inform the regulators but to potentially change the way the government operates internally and fix what many find to be broken about the current system."

In this end-of-the-year review, we'll look into the ways government policy has changed toward blockchain in 2016 and explore what we might be able to expect in the new year.

New York's struggles

The beginning of the year saw some of the more notable attempts to regulate cryptocurrencies suffer growing pains. In particular, New York State's 'BitLicense' – created in an attempt to provide clear guidelines on reporting obligations for cryptocurrency businesses in the state – seemed to prove the most problematic.

Once heralded as an advance for the industry, advocates of the law hoped that having clear expectations would remove the uncertainty of doing business in digital currencies in the state. However, opponents argued it created undue pressures on startups and violated the privacy tenets that are key to the technology’s success.

Nearly two years in, it seems like the opponents might have been right. Due to the hurdles involved, by the deadline for license applications in 2015, only 22 companies had applied. Now it seems fewer are being approved. By June 2016, the state has only assigned two BitLicenses, with the other 20 applicants still operating under the regulation's "safe harbor" provisions.

Uncertain approaches

In the wake of struggles in New York, other US states seemed reluctant to begin enacting regulations for the industry. California, for example, flirted with and scrapped its attempt to issue New York-like licenses. Elsewhere, Connecticut's Substitute House Bill 6800 made virtual currency an equivalent to money, but also made a business that transfered it subject to different regulatory criteria than those that deal with national currencies.

This leaves many elements of regulation at the discretion of the state’s Department of Banking, such as the size of the surety bond that must be filed, allegedly to "address the current and prospective volatility of the market in such currency or currencies". Georgia signed into law HB 811 in April, giving state regulators the power to create rules for all virtual currency businesses. But, as it gives no definition in regards to the scope or intended target of this law – short of excluding “software” and “protocols” from the definition of “virtual currency” – the law is ambiguous.

New Hampshire – like other states on this list – also chose to make cryptocurrency dealers in the state money transmitters, subject to the same requirements and rules applicable to traditional money transmitters. This means that those choosing to sell or trade cryptocurrencies in the Granite State must apply for a state money transmitter’s license and pay a $100,000 bond. This is similar to North Carolina's HB 289, passed in June, which defines a money transmission to include "maintaining control of virtual currency on behalf of others" and set the required bond at $150,000.

New Hampshire did, however, exclude individuals using virtual currencies in private transactions from the licensing requirement and defined virtual currencies as cryptocurrencies that could be converted or redeemed for fiat. Pennsylvania passed its long-delayed HB 850 in November, which defined money to include any form of virtual currency, but the bill was temporarily tabled due to a budget impasse.

Finally, Wyoming failed to pass HB 0026, which would have relieved virtual currencies from the state’s current money transmitter rules that require a reserve to be held equal to the amount of the company’s payment obligations. This regulation has effectively kept exchanges and other cryptocurrency businesses out of the state.

Chuck Reynolds

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What to Look For in Cryptocurrencies

    What to Look For in Cryptocurrencies

Cryptocurrencies use a number of different algorithms and are traded in different ways.
Here are the main characteristics that you should consider.

Market Capitalization and Daily Trading Volume

A cryptocurrency's market capitalization is the total worth of all coins currently in circulation. A high market capitalization can indicate a high value per coin or simply a lot of available coins. Perhaps more important than market capitalization is daily trading volume: the value of the coins that exchange hands every day. A high daily trading volume relative to the market capitalization indicates a healthy economy with many transactions.

Verification Method

One of the major differences between cryptocurrencies is their verification method. The oldest and most common method is called proof of work. To gain the right to verify a transaction, a computer has to expend time and energy solving a difficult math problem. The trouble with this method is that it requires a massive amount of energy to operate. Proof-of-stake systems attempt to solve this problem by letting the users with the largest share of the currency verify the transactions. These systems require less processing power to operate and claim faster transaction speeds, but concern over security means that few coins use an entirely proof-of-stake-based system.

Retailer Acceptance

A cryptocurrency isn't much use if you can't buy anything with it. That's why it's important to know who accepts a currency before you invest in it. A few cryptocurrencies are widely accepted, even boasting partnerships with major retailers. Most, however, have more limited acceptance, and some can only be exchanged for other cryptocurrencies. Some coins simply aren't designed to be exchanged for goods and are built for other purposes.

Cryptocurrencies are an exciting new development in the world of finance. No one is quite sure yet where the technology will lead, but the fact remains that these new currencies offer possibilities that traditional cash can't.

Chuck Reynolds


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Why Use Cryptocurrencies?

Why Use Cryptocurrencies?

Cryptocurrencies are a form of money specifically designed to take advantage of the architecture of the internet. Instead of relying on a standard financial institution to guarantee and verify transactions, cryptocurrency transactions are checked, or "confirmed," by the computers of the users on the currency's network. The computers that verify the transactions usually receive a small amount of currency as a reward. The process of receiving rewards in exchange for verifying transactions is called "mining," and it is the main way that new currency is produced. Mining works differently for different currencies.

Because cryptocurrencies are completely digital, they can be used in ways that ordinary currencies can't; primarily, they are used like the digital equivalent of cash. Unlike credit or debit cards that are issued by banks, you don't need an account or good credit to use cryptocurrencies, yet you can use them to buy goods and services from an increasingly diverse selection of retailers and individuals. For instance, Overstock.com and Newegg.com accept Bitcoin as payment. There is typically a very small fee for almost every transaction, but it's typically much lower than credit card processing fees and interest, and the fees support the network.

Another common practice is to use small amounts of cryptocurrencies to "tip" people on IRC chat, social media, and blogs. For instance, independent developers have designed "tipbots" for Reddit, Twitter and other social platforms that allow you to send money to a friend or anybody you feel has made a tip-worthy comment. The amounts you can send can be very small, like fractions of a penny, or quite substantial.

Cryptocurrencies can be converted at lightning speed or used to represent things that aren't normally currencies, such as domain names or consumer goods. Depending on the currency being used, it is also possible to anonymize transactions, turning cryptocurrencies into a form of discreet online cash. Most importantly, cryptocurrencies can be sent anywhere in the world, almost instantaneously, enabling users to deal directly with each other over the internet, rather than through a third-party financial institution, paying currency conversion fees or waiting for a bank to release funds.

While they are not entirely immune from fraud or theft, they are generally safe to use and difficult for malicious hackers to steal. As with cash, you'll need to take some precautions to protect your coins. For one, you'll want to encrypt your wallet with a very strong password and take regular backups, and it's a good idea to keep the backup and a written copy of your password in a remote location. Never give your password or wallet to somebody you don't trust, and keep the wallet software up to date at all times. Just like cash, if it's lost, damaged or stolen, you can't recover the funds. It's also a good idea to keep the bulk of your money offline, either in a "paper" wallet or on a storage device that may be disconnected from the internet when it's not in use. Three of the top cryptocurrencies are Bitcoin, Darkcoin, and Nxt.

Chuck Reynolds

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The future of cryptocurrencies

The future of cryptocurrencies

The digital currency has caused any number of headaches for law enforcement. Now entrepreneurs and academics are scrambling to build a better version.

Article tools

Bitcoin and beyond

When the digital currency Bitcoin came to life in January 2009, it was noticed by almost no one apart from the handful of programmers who followed cryptography discussion groups. Its origins were shadowy: it had been conceived the previous year by a still-mysterious person or group known only by the alias Satoshi Nakamoto1. And its purpose seemed quixotic: Bitcoin was to be a 'cryptocurrency', in which strong encryption algorithms were exploited in a new way to secure transactions. Users' identities would be shielded by pseudonyms. Records would be completely decentralized. And no one would be in charge — not governments, not banks, not even Nakamoto.

Yet the idea caught on. Today, there are some 14.6 million Bitcoin units in circulation. Called bitcoins with a lowercase 'b', they have a collective market value of around US$3.4 billion. Some of this growth is attributable to criminals taking advantage of the anonymity for drug trafficking and worse. But the system is also drawing interest from financial institutions such as JP Morgan Chase, which think it could streamline their internal payment processing and cut international transaction costs. It has inspired the creation of some 700 other cryptocurrencies. And on 15 September, Bitcoin officially came of age in academia with the launch of Ledger, the first journal dedicated to cryptocurrency research.

What fascinates academics and entrepreneurs alike is the innovation at Bitcoin's core. Known as the block chain, it serves as the official online ledger of every Bitcoin transaction, dating back to the beginning. It is also the data structure that allows those records to be updated with minimal risk of hacking or tampering — even though the block chain is copied across the entire network of computers running Bitcoin software, and the owners of those computers do not necessarily know or trust one another.

Many people see this block-chain architecture as the template for a host of other applications, including self-enforcing contracts and secure systems for online voting and crowdfunding. This is the goal of Ethereum, a block-chain-based system launched in July by the non-profit Ethereum Foundation, based in Baar, Switzerland. And it is the research agenda of the Initiative for CryptoCurrencies and Contracts (IC3), an academic consortium also launched in July, and led by Cornell University in Ithaca, New York.

Nicolas Courtois, a cryptographer at University College London, says that the Bitcoin block-chain could be “the most important invention of the twenty-first century” — if only Bitcoin were not constantly shooting itself in the foot. Several shortcomings have become apparent in Bitcoin's implementation of the block-chain idea. Security, for example, is far from perfect: there have been more than 40 known thefts and seizures of bitcoins, several incurring losses of more than $1 million apiece.

Cryptocurrency firms and researchers are attacking the problem with tools such as game theory and advanced cryptographic methods. “Cryptocurrencies are unlike many other systems, in that extremely subtle mathematical bugs can have catastrophic consequences,” says Ari Juels, co-director of IC3. “And I think when weaknesses surface there will be a need to appeal to the academic community where the relevant expertise resides.”

Academic interest in cryptocurrencies and their predecessors goes back at least two decades, with much of the early work spearheaded by cryptographer David Chaum. While working at the National Research Institute for Mathematics and Computer Science in Amsterdam, the Netherlands, Chaum wanted to give buyers privacy and safety. So in 1990 he founded one of the earliest digital currencies, DigiCash, which offered users anonymity through cryptographic protocols of his own devising.

DigiCash went bankrupt in 1998 — partly because it had a centralized organization akin to a traditional bank, yet never managed to fit in with the financial industry and its regulations. But aspects of its philosophy re-emerged ten years later in Nakamoto's design for Bitcoin. That design also incorporated crowdsourcing and peer-to-peer networking — both of which help to avoid centralized control. Anyone is welcome to participate: it is just a matter of going online and running the open-source Bitcoin software. Users' computers form a network in which each machine is home to one constantly updated copy of the block chain.

Nakamoto's central challenge with this wide-open system was the need to make sure that no one could find a way to rewrite the ledger and spend the same bitcoins twice — in effect, stealing bitcoins. His solution was to turn the addition of new transactions to the ledger into a competition: an activity that has come to be known as mining.

Chuck Reynolds

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The BitCoin Game

The BitCoin Game

Mining starts with incoming Bitcoin transactions, which are continuously broadcast to every computer on the network. These are collected by the groups or individuals who choose to participate — who start competing for the right to bundle transactions into a new block. The winner is the first to broadcast a 'proof of work' — a solution showing that he or she has solved an otherwise meaningless mathematical puzzle that involves encrypted data from the previous block, and lots of computerized trial and error. The winning block is broadcast through the Bitcoin network and added to the blockchain, with the proof of work providing an all but unbreakable link. The block chain is currently almost 400,000 blocks long.

In principle, this competition keeps the blockchain secure because the puzzle is too hard for anyone miner to solve every time. This means that no one will ever gain access to the encrypted links in the block chain and the ability to rewrite the ledger.

Mining is also a way to steadily increase the bitcoin supply: the miner who wins each block gets a reward, currently 25 new bitcoins. That is worth almost $6,000 at today's prices. Nakamoto's design controls the supply increase by automatically adjusting the difficulty of the puzzle so that a new block is added roughly every ten minutes. In addition, the reward for creating a block decreases by half roughly every four years. The goal is to limit the supply to a maximum of 21 million bitcoins.

The network cannot determine the value of bitcoins relative to standard currencies, or real-world goods and services. That has been left to market forces, with people trading bitcoins on online exchanges. One result is that the market price has gyrated spectacularly — especially in 2013, when the asking price soared from $13 per bitcoin in January to around $1,200 in December. That would have made the first real-world products ever paid for with the cryptocurrency — a pair of Papa John's pizzas, purchased for 10,000 bitcoins on 22 May 2010 — worth almost $12 million.

Puzzle solutions

It did not take long for the problems with Bitcoin to become apparent. For example, because users are allowed to mask their identity with pseudonyms, the currency is perfect for screening criminal activity. That was behind the success of the online black market Silk Road, which the FBI shut down in 2013; its founder was sentenced to life in prison in May this year. But Bitcoin also had a key role in funding the whistle-blowing website WikiLeaks — an outcome that some would call beneficial. It is difficult for society to work out a legal framework to differentiate between good and bad uses of this technology, says Arvind Narayanan, a computer scientist at Princeton University in New Jersey. “How do you regulate around Bitcoin without banning the technology itself?” he asks.

Working together


Intensified Bitcoin mining has also led individual miners to pool their computational resources. Last year, the largest mining pool, GHash.IO, briefly exceeded 50% of total Bitcoin mining power — which is problematic because anyone who controls more than half of the mining power could start beating everyone else in the race to add blocks. This would effectively give them control of the transaction ledger and allow them to spend the same bitcoins over and over again. This is not just a theoretical possibility. Successful '51% attacks' — efforts to dominate mining power — have already been mounted against smaller cryptocurrencies such as Terracoin and Coiledcoin; the latter was so badly damaged that it ceased operation.

To reduce the threat from mining pools, some existing cryptocurrencies, such as Litecoin, use puzzles that call more on computer memory than on processing power — a shift that tends to make it more costly to build the kind of specialized computers that the pools favor. Another approach, developed by IC3 co-director Elaine Shi and her collaborators4, enlists a helpful kind of theft. “We are cryptographically ensuring that pool members can always steal the reward for themselves without being detected,” explains Shi. Their supposition is that miners would not trust each other enough to form into pools if their fellow pool members could easily waltz off with the rewards without sharing. They have built a prototype of the algorithm, and are hoping to see it tested in Bitcoin and other cryptocurrencies.

Another problem is the profligate amount of electricity used in Bitcoin mining. To reduce wastage, researchers including Shi and Juels have proposed a currency called Permacoin5. It's proof of work would require miners to create a distributed archive for valuable data such as medical records, or the output of a gene-sequencing center. This would not save energy, but would at least put it to better use.

The security of cryptocurrencies is another huge concern. The many thefts of bitcoins do not result from the block-chain structure, says Narayanan, but from Bitcoin's use of standard digital signature technology. In digital signatures, he explains, people have two numeric keys: a public one that they give to others as an address to send money to, and a private one that they use to approve transactions. But the security of that private key is only as good as the security of the machine that stores it, he says. “If somebody hacks your computer, for example, and steals your private keys, then essentially all of your bitcoins are lost.”

Security is such a concern for consumers that Narayanan thinks Bitcoin is unlikely to find widespread use. So his team is working on a better security scheme that splits private keys across several different devices, such as an individual's desktop computer and smartphone, and requires a certain proportion of the fragments to approve a payment6. “Neither reveals their share of the key to each other,” says Narayanan. “If one machine gets hacked, you're still OK because the hacker would need to hack the others to steal your private key. You'll hopefully notice the hack happened before they have the chance.”

Other thefts have occurred because the private key needs to be combined with a random number to create a transaction signature. Some software — such as Bitcoin apps developed for Android smartphones — has generated random numbers improperly, making them easier to guess. This has allowed hackers to steal somewhere between several thousand and several million dollars worth of bitcoins, says Courtois, who has been investigating such vulnerabilities7. “It's embarrassing,” admits David Schwartz, a chief cryptographer at cryptocurrency developer Ripple Labs in San Francisco, California. “We as an industry just seem to keep screwing up.”

Into the ether

The block chain is a remarkably powerful idea that could be applied to much more than just transaction records, says Gavin Wood, co-founder of Ethereum and chief technology officer of its foundation. One use might be to develop computerized, self-enforcing contracts that make a payment automatically when a task is complete. Others might include voting systems, crowdfunding platforms, and even other cryptocurrencies. Wood says that Ethereum is best used in situations for which central control is a weakness — for example when users do not necessarily trust one another. In 2014, to make it easier to develop such applications, Wood, and fellow programmer Vitalik Buterin devised a way to combine the block chain with a programming language. Ethereum raised 30,000 bitcoins through crowdfunding to commercialize this system.

To prevent the basic cryptography-related mistakes that have plagued Bitcoin, Ethereum has recruited academic experts to audit its protocol. Shi and Juels are looking for ways that Ethereum could be abused by criminals8. “The technology itself is morally neutral, but we should figure out how to shape it so that it can support policies designed to limit the amount of harm it can do,” says Juels.

Like Bitcoin, Ethereum is not under anyone's direct control, so it operates outside national laws, says Wood. However, he adds that technologies such as music taping and the Internet were also considered extralegal at first, and seemed threatening to the status quo. How Bitcoin, Ethereum, and their successors sit legally is therefore “something that, as a culture and society, we're going to have to come together to deal with”, he says.

Juels suspects that Bitcoin, at least, will not last as an independent, decentralized entity. He points out how music streaming has moved from the decentralized model of peer-to-peer file-sharing service Napster to commercial operations such as Spotify and Apple Music. “One could imagine a similar trajectory for cryptocurrencies: when banks see they're successful, they'll want to create their own,” he says.

Courtois disagrees. He calls Bitcoin “the Microsoft of cryptocurrency”, and maintains that its size and dominance mean that it is here to stay. As soon as any new innovations come along, he suggests, Bitcoin can adopt them and retain its leading position. Whatever the future holds for Bitcoin, Narayanan emphasizes that the community of developers and academics behind it is unique. “It's a remarkable body of knowledge, and we're going to be teaching this in computer science classes in 20 years, I'm certain of that.”

Chuck Reynolds

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Bah! Who Needs These Pesky Humans Anyway!?

Bah! Who Needs These Pesky Humans Anyway!!??

I think it’s ironic that we are seeing such a rise is labor-saving technology, i.e. Blockchain, and that we’re also in times when so many people need jobs. Seriously now…how many people really think blockchain is going to put more of those people to work?

I’m a bit skeptical. It might turn out that the people who lost their jobs from all the McDonalds automation will now be able to meet the very same in the unemployment office lines that they used to service at the drive-through window at McDonalds.

It was just today that I became conscious of this aspect of the dawning blockchain revolution. Although cryptocurrency is the area that most people associate with blockchain technology, when one looks deeper into the news, one finds that the banking and finance industry loves blockchain too.


Because it’s not only going to make much of their work more secure and accurate, it’s also going to allow them to eliminate a lot of jobs. One quote I pulled from the internet phrased it this way:

“a way to validate transactions through little or no human intervention.”

Yeah sure….humans are known for being terrible interventionists, right?

Undoubtedly there are reasonable applications of blockchain technology to provide better value to the consumer. Everybody complains about paperwork and bureaucracy in finance…and government.

Waitta minute!! Did I just say…GOVERNMENT??

Now there’s a niche that’s ripe for elimination of waste and bureaucracy!! (not to mention good ol’ “corruption”.

In fact, there probably is a dividing line somewhere… a demarcation between where blockchain is a net improvement vs a net detriment to the employment situation. But I don’t think anybody is putting much consideration into where that line is…right now.

But for the number crunchers in the financial services sector, blockchain comes at a good time. Their industry has become extremely competitive. It has been forced to become very service intensive because they’ve pretty much long since reached the limits of what they can do with bland numbers.

They all work with the same commodity and within the same mathematical system and to a large degree they even work with the same data. So, their only recourse (other than ‘inside deals’) is to try to focus on internal efficiency and creative branding.

Blockchain is good for them but not necessarily for the thousands of people who will be ‘liberated’ from the drudgery of their mere “jobs”.

Blockchain is specifically attractive to bankers because it tends to alleviate what they call their “Liquidity” challenges.

The term liquidity refers to the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's price and this is a growing concern in financial product trading activity. Blockchain technology can alleviate liquidity challenges by providing a way to reduce friction.

What is ‘friction’?

Friction simply refers to the limitation or resistance injected into a process by another factor, i.e. from paper-shuffling or other bureaucratic processes. Blockchain, because it automates so many of these processes, reduces ‘friction’ and improves the bottom line of the company.

Money (or Value) is everywhere, therefore buying and selling is (potentially) everywhere, therefore transactions are (potentially) everywhere. Thus, because blockchain is a decentralized technology, it can reside in decentralized devices much closer to where the actual work is being done and increase the speed that work is processed (and verified).

Thus allowing everyone more time to wander to…whatever.

Some very complex transactions might still require more humans in the loop. In fact, this whole process might go ‘full circle’ and human verification might eventually turn out to be an extra added service.

But the reality of blockchains and how they’re being used points to a future in which human third-party transaction validation and recordkeeping could be the exception rather than the rule.

Ain’t technology wonderful?



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