Month: April 2012

Disclaimer: Bitcoin Magazine has run advertisements for Coinabul before. This article was written independent of this fact. -Ed.

Coinabul, Bitcoin’s first and only dedicated gold and silver selling website, is now celebrating its six month anniversary, offering 1% off gold and 3% off silver purchases. Since October 10 last year, the site has been selling dozens of different types of gold and silver coins and bars for investors and collectors alike, giving money enthusiasts two more types of currency to play with.

The site’s owners had considerable experience in startups before joining the Bitcoin community, its owner Jay Shore working in e-commerce and marketing director Jon Holmquist in customer support and marketing. Money was always Jon’s passion as well; “I’ve always been a fan of precious metals,” he writes, “and I’ve always enjoyed saving my money responsibly.” For them, Bitcoin was the perfect synthesis of all their interests. As Jon describes it, “I’ve also worked with a lot of online startups, which is what drew me to Bitcoin. I feel that the Bitcoin community has a really strong entrepreneurial drive.” And as for Jay, after his experiences coding traditional e-commerce applications using Paypal and Authorize.net he found Bitcoin “much nicer to work with”, and was attracted to Bitcoin’s lack of fees.

It was Jay who originally came up with the idea of a gold-selling site. Explaining his reasons for doing so, he writes: “I’ve been a big metal-bug for years. The concept of saving my Bitcoin earnings in precious metal held great appeal, but there was no option to do so. The process of converting my coins to precious metal meant losing large amounts on trade fees and then losing large amounts on withdrawing to my bank account. On top of that, I’d be constantly losing my opportunity to make the conversion itself due to both the stringent cancellation policies of gold dealers(3 days) and the volatile precious metal/bitcoin markets shifting too quickly. After some extensive market analysis, it was clear that the majority of the Bitcoin community felt the same way.”

Once the idea of Coinabul became clear in Jay’s mind, Jon eagerly jumped on and on October 10, 2011 their dream became a reality. The site grew quickly, and launched a first major sale on October 27. Silver products entered the site’s growing catalogue at the beginning of November, and volume picked up rapidly. On December 3, the site first saw a volume of over 1000 BTC within the span of 24 hours, increasing to 2000 BTC in 2 weeks and 6000 BTC in April.

Another long-time interest of Coinabul was its Bitcoin promotional efforts. So far the site has released T-shirts, stickers and a poster, the latter showing Bitcoin’s great duality of the ideological and the practical. “What makes Bitcoin awesome?” the poster asks. The answer is “easy and secure online purchases” on the left and “privacy from governments and banks” on the right. Since then, the site continued a steady growth, slowly increasing the range of its services at the same time. The site released price charts and even unveiled Teleticker, a little-known service through which anyone can call or send a message and receive a live quote of gold or silver spot prices.

After six months of successful operation, the founders are optimistic. Asked about his future plans for Coinabul, Jay writes: “Our first major goal for the future is 24 hours or less turnaround on all orders that occur on a business day, which would make us by far one of the fastest retailers, let alone bullion dealers, in the world. Additionally, we are exploring the viability of adding the much-awaited MintChip payment method. This should ease the barrier-to-entry for our less tech savvy potential clients, as well as appeal to the gold-bugs being turned on for the first time to digitized payments via the Canadian Mint. There are many more things I’d love to tell you about, but for now I have to remain tight-lipped.”

 

Взяв в соображение появление в США таких инновационных платежных решений как Сквэр и возникновение таких проектов как Биткойн, Королевский Монетный двор Канады решил вступить в игру с собственным проектом цифровой валюты – МинтЧип. Этот проект является попыткой дополнить основные преимущества электронной валюты поддержкой канадского доллара. «До этих пор», – читаем мы на сайте, – «не существовало электронного решения, которое бы предлагало экономически эффективный подход к рынкам очень низкостоимостных транзакций, обеспечивало конфиденциальность, всеобщую доступность, и вбирало в себя характеристики живых денег”. И МинтЧип ориентирован на поиск такого решения. Продукт “работает онлайн и оффлайн, на торговой точке, на мобильных устройствах и позволяет легко расплачиваться между собой физическим лицам”. Нет необходимости во внешней авторизации или посредниках, платежи являются необратимыми, система обладает экономической эффективностью, конфиденциальностью и доступностью, каких текущие цифровые платежные решения не способны обеспечить. Она даже имеет несколько преимуществ по сравнению с Биткойн: мгновенность защищённых транзакций, их обеспеченность канадским долларом и возможность решить проблему двойных платежей даже без подключения к Интернету. На первый взгляд кажется, что Монетному двору удалось реализовать все основные черты Биткойна и даже превзойти его концепцию.

Как же работает такая система? Внешне, модель безопасности сходна с Биткойновской: оплата производится путем отправки “стоимостного сообщения” с МинтЧипа отправителя на МинтЧип получателя, причём сообщение снабжено уникальным ID получателя и цифровой подписью в доказательство того, что оно пришло от отправителя. Как только МинтЧип отправителя создаёт стоимостное сообщение, баланс МинтЧипа уменьшается на соответствующую величину.

Вопрос, немедленно возникающий у любого апологета Биткойна: каким образом эта система предотвращает двойные платежи – что предохраняет пользователя от того, чтобы отправить платёж, вернуть чип к исходному состоянию и отправить платеж снова? Здесь, однако, ответы становятся все менее удовлетворительными. В основе Минтчипа  “находится интегральная схема, которая содержит электронные значения и передаёт значения с одного чипа на другой в безопасном режиме”, то есть по сути, патентованное, защищённое от входа в него и надёжное электронное устройство. Этот чип будет хранить баланс пользователя и управлять транзакциями изнутри, но должен быть разработан так, чтобы пользователи не могли войти в него и собственноручно изменить баланс. Подобные системы не являются новшеством, и время показало, что на них, как и на прочих формах цифрового управления правами собственности, слишком небезопасно строить окружающую экономику. Около двух лет назад чип Инфинео, считавшийся неприступным, был взломан Кристофером Тарновски с помощью электронного микроскопа, игл и кислоты, и можно представить, как скоро такой подвиг повторится, если на кон будет поставлена неограниченная возможность печатать по сути деньги. Выглядит как парадокс наделение устройства пользователя способностью односторонне видоизменять его баланс, с одновременным отказом в такой возможности самому пользователю, даже когда устройство находится в его руках. Такой парадокс представляется куда менее убедительной основой для здоровой и сильной системы цифровой валюты, чем алгоритмы криптографической цифровой подписи и проверенный в действии распространённый и публично доступный блокчейн.

Есть и другие аспекты системы, против которых пользователи Биткойна могут возразить. Модель создания валюты является централизованной: значение стоимости изначально введено в систему Королевским Монетным двором Канады, а клиент приобретает стоимость для затрат через доверенных брокеров. В систему запроектирована способность форсировать обновления, что даёт монетному двору власть при желании периодически вводить обременительные функции отслеживания. О таких инновационных средствах стоимостного хранения, как бумажный и мозговой кошельки, не может быть речи, так как ничего нельзя предпринять без физического чипа, а использование электронного кошелька не может не базироваться на доверии поставщику услуг.

Тем не менее, многое в системе работает правильно. МинтЧип – массивное улучшение по сравнению с существующей финансовой моделью, основанной на банковских и кредитных картах, поскольку подтверждение платежа базируется на модели цифровой подписи Биткойн, а не идёт от центральных поставщиков. Легкость в использовании по образцу Биткойн, незначительность платы за перевод, необратимость и другие свойства живых денег, всё это здесь в наличии. Уровень конфидениальности можно сравнить с Биткойновским, поскольку, хотя операции хранятся в чипах, различные устройства МинтЧип можно будет покупать, не предъявляя удостоверения личности, и они достаточно дешевы, чтобы люди могли закупать несколько “кошельков” для дальнейшей защиты своей финансовой безопасности. Кроме того, если пользователи готовы принимать необеспеченные валюты, а Биткойн показал, что они к этому готовы, система теоретически даже может просуществовать без иных доверенных посредников, кроме производителя микросхем.

Что касается внедрения, Монетный двор делает систему доступной для разработчиков с самого начала, выпуская API в языках Java, NET и Javascript и предлагая призы общей стоимостью более $50,000 для разработчиков инновационных платёжных приложений для МинтЧипа.  МинтЧип является не образцом того, как будет выглядеть цифровая валюта в её окончательно зрелом варианте, а скорее знаком тех изменений, что на подходе. Этот проект показывает, что канадское правительство выражает желание двинуться в зону электронной валюты, и другие правительства и компании теперь вероятно проявят гораздо больше желания последовать такому примеру, возможно, даже поспособствуют законному принятию самого Биткойна.

  

Recently, a new Bitcoin startup called Coinlab attracted considerable attention from the community, raising $500,000 startup capital from Silicon Valley angel investors. Operating under the tagline “All your gamers are gold”, what the startup intends to do is to help game companies monetize “that 80% in the middle” – those users who have a significant commitment to the game but not enough of one to buy a monthly subscription or spend heavily on virtual goods. Of course, the method that they intend to employ is Bitcoin mining.

The idea of Bitcoin mining as a means of paying for software is nothing new. About a year ago, Javascript miners attracted considerable buzz as some proclaimed that background browser mining could even replace Adsense as a means of web content monetization. However, that project never got off the ground, and its creator quickly gave up, explaining that “Javascript is just too slow to mine bitcoins. The recent difficulty increases have made this an impractical idea.” This was predictable; since Javascript only has access to a computer’s CPU, and not its much more powerful GPU, now that GPU mining has become mainstream it will never again yield significant profits. Coinlab, however, is much more optimistic. According to their calculations, “the average gamer will generate 50 cents to $2 per day for the game companies by making that computing power available, working out to more than $15 per gamer per month.” According to this estimate, a non-paying customer of a game using Coinlab’s service would generate more revenue than a paying customer for a conventional MMORPG like World of Warcraft.

On the surface, the estimate is sound. Assuming that a computer has 300 MH/s (a reasonable estimate, judging by an informal poll taken last summer), since the mining factor (USD per day per 100 MH/s) is currently about $0.33, a gamer running Coinlab’s background software might be able to earn the company $30 per month. However, there are serious problems with this estimate as it is.

First of all, the business model is not scalable. At a price of $5, Bitcoin mining generates a total of $36000 per day, or $13 million per year, for all miners no matter how many there are, and this figure will fall to $6.5 million per year by the time Coinlab gains substantial momentum due to the upcoming mining reward change in December (although an argument can be made that the change will simultaneously increase the Bitcoin price, undoing some of this loss). If Bitcoin mining is to become the source for even 0.01% of the $65 billion per year video game industry’s revenue, the number of gamers the industry needs to attract to grab each additional dollar would in the worst case scenario approach infinity – in order to capture 90% of the pie, you need to have enough hash power to match 900% of the size of the pie as it currently is (an equilibrium at which each individual user would be generating a mere $3 per month rather than $30), and capturing 100% of the pie or more is impossible. One reply to this is that the size of the Bitcoin economy, and therefore the Bitcoin price, will increase, but even as this happens the mining reward will continue to fall, so it is unlikely that mining revenue will ever exceed a few billion dollars per year even if it Bitcoin does become a significant global currency.

Secondly, the assumption that gamers will be playing on computers that are running 24 hours a day is unlikely to last. Desktop computer sales are on an irreversible decline, and by 2015 the overwhelming majority of users will be on a combination of notebooks, netbooks and tablets. Most worrying of all, it is the computationally weakest category of them all, tablets, that are overtaking the desktop, as the middle categories are remaining constant. Laptops, netbooks and tablets are much weaker than desktops in terms of GPU hash rate, and even the hash power that they do have often cannot be used. Suspend and hibernate mean that they are off for a significant portion of each day, and Bitcoin mining on a computer that is not connected to a power source will quickly drain the battery, which will lead many portable users to reject the software.

Finally, the viability of mining on general-purpose hardware is at the same time threatened from the other direction: that of specialized mining chips. The era of CPU mining is long over and even GPU mining is now entering its twilight as customized hardware like FPGA takes over and custom-built ASIC (that’s application-specific integrated circuits, chips designed for the sole purpose of mining) looms over the horizon, threatening to make all lower-grade mining technologies obsolete. In a year’s time, mining on general purpose hardware is doomed to suffer the same fate that Javascript mining did before it was born.

While Bitcoin mining may make software developers some small change in the near term, it is ultimately not only useless for this purpose but highly environmentally irresponsible. If the business model is to survive longer than a year at all, it will be by deception, relying on users’ ignorance of the cost that they are paying for the electricity that the mining software is consuming overnight. The Bitcoin network, already criticized for what many see as a waste of electricity, would become even more so, spending perhaps an extra $50 million per year mining on inefficient hardware only to increase the investment required by an attacker to overpower the network by a mere $1 million. If we are to be paying for our games with bitcoin, perhaps we should work on developing a microtransaction-friendly Bitcoin economy and helping users buy bitcoins quickly and easily so that they can buy the games directly.

 

As little as five years ago, virtual currencies only had a very niche role in the internet ecosystem. You might see one used to maintain the internal economy of a massively multiplayer online game, but that was just about it. There was simply no need for them, as video game purchases cost more than $40 and were generally done in retail stores. The other form of monetization was subscriptions, and these cost more than $10 per payment, an amount high enough that the transaction fees involved in transferring money through credit cards were bearable.

Then, however, something happened. As the smartphone revolution took over the digital world, a new market for casual games appeared, games which are made by independent developers making a few hundred thousand dollars at most and close to nothing on average and which rely on quantity to earn their largest gains – one of the most popular titles so far, Angry Birds, sells its different versions for $1-$2. The same happened in social media, releasing a completely new class of games based on playing them with your friends and relying on a different model to generate their income: micropayments. The core game would be free, but players who wanted to get ahead could buy additional in-game content or equipment for a low price per piece. Even in the traditional video game market, developers who could not compete with major game production studios for quality adopted microtransactions as their main business model. And such models work; the gamers that are drawn into such games the most may end up spending hundreds or even over a thousand on them, one small item at a time.

However, there is a problem: the credit card fees. Online money transmission services like credit cards and Paypal have a two-part fee structure, with a percentage component of 2-4% and a fixed fee component of 20-30 cents. For a $10 purchase, for example, paying with Paypal (2.9% + $0.30) requires a total fee of 69 cents, giving $9.41 to the payee. For a $2 purchase, however, the fee is 36 cents, or 18% of the purchase price, and for a $0.99 app that figure would almost double. For this reason, Apple’s App Store and social media gaming companies have come up with the same solution: pay into an account in lump sums and spend from there. With social media companies, since players would not necessarily know ahead of time which game they were going to spend their money on and might even want to only spend $2 on each of ten or twenty games, the “accounts” became virtual currencies.

Apple, meanwhile, went with the centralized solution: require all apps sold for their platform to go through Apple’s centralized payment system, which generates considerable revenue as they take a 30% cut of all revenues. Some developers tried to bypass this restriction by sending their users to make in-app purchases elsewhere, but Apple eventually banned the practice. And Facebook, with its new Facebook Credits system, is seeking to do the same. Replacing the choice of competing virtual currencies with a mandate to use their own, they intend to extract the same 30% tax that Apple does from all revenues made within their ecosystem. Also, the move serves to help lock users in to Facebook itself, as independent currency providers would have gladly allowed users to spend their money at any social media platform they prefer while now quitting Facebook entails leaving your deposit behind. Also, much like credit card merchant agreements, Facebook’s new terms of service also prevent game developers from offering discounts to users making purchases outside of Facebook. The end result is that Facebook wins, and everyone else loses. In fact, as any economist would quickly point out, the harm to the users, developers and competing social media platforms is much greater than the gain to Facebook as the policy isn’t just a money transfer – it’s also a deadweight loss dampening the incentive for innovation. Some are so frustrated by this move that they have set up a website, stopfacebookcredits.com, to criticize the move and are even considering filing an antitrust lawsuit.

While some are only concerned about this specific application of Facebook’s near-monopoly power, moves like these are ultimately symptomatic, a mere part of a larger ongoing trend toward the proprietarization of the internet. The internet’s original infrastructure, largely developed by Tim Berners-Lee, was designed to be open and public so that anyone could use it, and it was this strength that caused protocols like HTML to win out over proprietary alternatives. Everyone was equal on the internet, and you did not need anyone’s permission to participate. For the first few years of the internet, this paradigm largely remained. Email was designed from the start to be federated, people maintained personal webpages under their own control and online forums were accessible to everyone. Now, however, the situation is slowly sliding in the opposite direction. The focus of our online activities drifted away from the internet to proprietary “walled gardens” built on top of the internet, accessible to no one but those who are already inside. In 2011, Google lost its position as the most visited site on the internet to Facebook, and its response was to build yet another walled garden, Google+. As the internet began to be monetized, there were no decentralized or federated protocols in the spirit of HTML to do so; instead, we rely on credit cards and Paypal. And these new giants are waking up to the potential to turn their newfound power into profit. Each individual move may be protested, fought and perhaps even banned, but the problem will only persist and grow as long as we deny the core principle that made the internet so strong in the first place: that the basic infrastructure on top of which everything else relies must be open and accessible to all.

There are signs of hope, as OpenID has become a fairly successful standard for authentication to online services, Diaspora has appeared as an alternative to Facebook and Google+ and credit cards and Paypal are under attack by Bitcoin. Indeed, if Bitcoin succeeds the very motivation behind the battle over Facebook Credits may cease to exist as no one would be willing to pay a central provider 30% of their profits. Once free is the norm, for better or for worse changing it is a steep uphill battle. But it is situations like these that remind us why such efforts are necessary in the first place, and why it does not suffice to simply shame the business or petition the government into giving users a temporary reprieve or marginal improvement. The internet is the greatest laboratory of innovation and driver of technological progress that the world has ever seen, and the reason for its initial success is not any central body pushing its development to extract a profit but the sheer openness and freedom of it all, and such freedom must be defended in order for it to survive.

 

 
 
Joining the recent outburst of new Bitcoin-related articles in mainstream media, BusinessInsider has written an article with an anti-Bitcoin view. Unfortunately, though, the article contains quite a few flaws, both blatantly incorrect and highly misleading statements and misplaced fears about potential “problems” that the Bitcoin community has had solutions to for over a year.
 
 
 

• “At the moment, the average Bitcoin transaction fee is .99%, while Square and PayPal’s processing apps charge 2.75% and 2.7% per swipe of your credit card.” – According to blockchain.info charts, about 150000 BTC is sent per day with transaction fees totalling 4 BTC, so the “average” transaction fee is actually 0.00267%. Transaction fees in the Bitcoin network are entirely voluntary and are only needed to make your transactions process slightly faster.
• “Unlike your credit card, Bitcoin currently provides no protection or compensation in the event of fraud” – I addressed this point in detail in my article on non-Western consumer economies here, and a solution has been available for over a year. The solution is called escrow. Basically, if party B wants to sell a product to party A but both have low trust for each other they can find an escrow provider C that they both have high trust for to mediate the transaction. Then, rather than A paying B directly, A would pay the money to C. If A receives the product, he would send a message to C saying that the transaction was successful and C would release the funds to B. If the product turns out to be defective or never comes, then C would either return the funds to A, keep them or donate them to charity (the tradeoff is that the first two solutions are cheaper for the parties involved but the third removes any perverse incentives for A or C to lie to try and claim to money). Bitcoin’s advanced transaction features actually offer improvements over this that reduce the level of involvement and trust required for the escrow provider even more, so escrow services will only get better over time as more Bitcoin-accepting merchants appear.
• “Recently, a hacker managed to raid several Bitcoin ‘bank’ accounts – the credit and debit accounts of ‘rich’ Bitcoin users – around the world and got away with $228,845.” – I also already addressed this point in detail here. Standard advice for Bitcoin users is to keep such large amounts in offline or brain wallets and even keep the wallets in multiple pieces so that releasing the funds takes considerable effort. If this is done securely, taking away someone’s life savings would be impossible at best and require breaking into someone’s house and searching through their personal possessions and hard drive or torturing them at worst. Bitcoinica only lost so much because they are a financial services business, meaning that they have to have large quantities of money available for automatic withdrawal, and even they can, and now have, improved their security to make even the Linode hacker’s attack impossible.
• The developers “have a skeleton key that gives them control of the whole machine, any time they want.” – the “skeleton key” described is the alert mechanism that the original Bitcoin developer Satoshi Nakamoto put intothe official Bitcoin client in version 0.3.11. The system allowed Satoshi (now Gavin Andresen since Satoshi left) to send a message signed with his private key which would cause clients to display an alert message and go into safe mode, not accepting or sending any transactions until the safe mode was turned off. The idea was to have a mechanism for quickly containing the damage caused by a bug or exploit before someone could empty out thousands of Bitcoin wallets with it. However, the description of this mechanism as some kind of master key to a user’s whole machine is wrong in four ways:
  1. It never did give them control “over the whole machine”; the extent of its power even at its height was simply to temporarily disable the Bitcoin client.
  2. It had an override right from the start. Running Bitcoin with the -disablesafemode switch would allow your client to run normally regardless of what Satoshi or Gavin or whatever more nefarious agency managed to take control of the key wants.
  3. Motivated in great part by concerns that the feature would be interpreted as a backdoor off switch, the disable mechanism was removed in version 0.3.19. Now, all the “skeleton key” can do is display alerts.
  4. The official Bitcoin client is not the only client in existence. There is a whole host of wallet options that users can choose from, and some are even compatible with the official client’s wallet.dat file so you can instantly migrate from one to the other.
• “In the U.S., the Federal Reserve handles the printing and regulation of the dollar. If the bitcoin is to become a widely accepted global currency, a regulating agency more complex and thorough than the Fed is required.” – the claim that central banks like the Federal Reserve are necessary at all is far more controversial than this statement implies. Opponents of central banking believe that the machinations of central banks are in fact responsible for a great part of our present financial woes, and cite the fact that most central banks were born not out of a desire to help stabilize the monetary system for the benefit of the people but rather through underhanded political maneuverings by mercantile and banking elites seeking to enshrine for themselves a legal right to profit. Describing the foundation of the Bank of England, David Graeber writes in Debt: The First 5,000 Years: “In 1694, a consortium of English bankers made a loan of £1,200,000 to the king. In return they received a royal monopoly on the issuance of banknotes. What this meant in practice was they had the right to advance IOUs for a portion of the money the king now owed them to any inhabitant of the kingdom willing to borrow from them, or willing to deposit their own money in the bank-in effect, to circulate or ‘monetize’ the newly created royal debt. This was a great deal for the bankers (they got to charge the king 8 percent annual interest for the original loan and simultaneously charge interest on the same money to the clients who borrowed it), but it only worked as long as the original loan remained outstanding. To this day, this loan has never been paid back.”
• “The market price for Bitcoin has been plummeting since 2011” – False since November. In fact, since the last major fall on February 14 the price has only been about twice as volatile as gold.

Also unfortunately false, however, is the article’s claim that Bitcoins are now used in Africa as an alternative to unreliable local currency. Rudiger Koch is trying to achieve Bitcoin adoption in Africa, but it’s far too early to claim any successes. However, Bitcoin is being used in more places than just the shadow economy; it’s being used to trade game codes on Ogrr.com, there are informal experiments like Bitcoin Gone Wild and some are even using it to bypass international money transfer fees and delays. We can only expect that more legitimate uses for Bitcoin will appear in the future.

  
 

While the Bitcoin community has been quick to replicate many industries found in the real world, so far one has been rather lacking: business-to-business services. Bitcoin venture capital has existed in some form for a long time now with various GLBSE-based assets like the (now defunct) LIF-A fund and, more recently, muBit as well as the more professional Islamic Bank of Bitcoin, and many Bitcoin businesses rely on BitPay for their payment processing, but outside of the financial industry business-to-business services have been rather lacking, with only a few abortive attempts in 2011 that even most hardcore Bitcoin users have never even heard of. Helpcoin.com seeks to change this. The site seeks to do for B2B what Bitmit is doing for auctions and Coindl is seeking to do for digital downloads: do what has already been done before, but do it right.

The site offers support in three areas: consulting, support and marketing. “A lot of sites have attempted to create their own support teams,” the site’s front page explains, “but end up getting discouraged because of the high overhead.” When the Bitcoin community was much smaller than it is now, marketing was not a problem as two forum posts would reach almost everyone. More recently, however, as the Bitcoin forum sees 1500 posts a day establishing a brand name in such a vast swamp is much more difficult, and the barriers to entry have been raised considerably due to the competition. The issue of support has also undone many; it’s no longer feasible to see and reply to every forum post as it once was, and in the Bitcoin community a business with inadequate support leads to quick associations with MyBitcoin and scams. As HelpCoin’s own website states, “the best form of marketing is customer support.” The need for a Bitcoin business to offer professional service and professional support has never been greater, and will only continue to rise, and to that end Helpcoin offers a compelling solution: leave it to the experts.

The business is so far only starting, and as of April 8 its team of experts is only one in number: Stefan Thomas. Nevertheless, his credentials are more than adequate. He is the developer of bitcoinjs, a Javascript Bitcoin library, and WebCoin, a Bitcoin wallet based on bitcoinjs, created WeUseCoins, the famous Bitcoin introductory site and spoke at the Bitcoin Conference in Prague in November. It already boasts two clients: WeUseCoins itself, which uses HelpCoin’s live help project, and Coinabul, the Bitcoin gold and silver selling site. As for what happens beyond that, their success or failure hinges on one key factor: as a business that sells not a clear, fungible product for a fixed price but a vaguely defined service where their customers have no idea what to expect, can they create a service that matches the Bitcoin business community’s needs and can they convince the Bitcoin community to give them a chance? In short, this budding crew of marketing experts’ greatest challenge will be to market themselves.
  
 

Of all the formalized monetary systems that have ever been used by mankind, Bitcoin is unique in the fact that it exists entirely as pure information. The blockchain, the database storing Bitcoin transactions so the system can figure out who owns what, it stored simultaneously on tens of thousands of computers and servers around the world. The system’s equivalent of “accounts”, Bitcoin addresses, are also really nothing more than 160-bit numbers, and the private keys that allow withdrawal access are 256-bit numbers themselves. The result of this is that we can literally store our money in whatever way we want, and people have picked up on this: we have QR code wallets, paper wallets, coins with private keys hidden behind a hologram, etc. However, the most interesting of all the alternatives is the place where humans have been storing most of our information for the past 100,000 years: in our brains.

A “wallet” is a collection of two types of numbers: addresses, typically rendered as 33 or 34-character strings like “13ignD31FysQbaBBVJUzffcQoFxxEuEcbE“, that allow deposit access to the address’s associated account and private keys, slightly longer numbers that allow withdrawal access. Technically, you do not need to remember your address as you can always derive it from the private key, but it is better to as you do not want to be typing in your private key all over the place. Thus, the simplest wallet that can be memorized is just one address and one private key.

The major insight that gives us all the various different options to help us remember an address and private key is that addresses and private keys are ultimately not strings of digits and letters – they are numbers. A number is a mathematical entity that we can choose to represent in our traditional base 10 (called “base 10” because it relies on ten symbols to represent all of our numbers: 0123456789) as, for example, “3022885”, in base 16 (“2E2025”), in base 2 or binary (“1011100010000000100101”), as a product of prime numbers (5 * 89 * 6793), in base 58 (“GVbi”) or in any other way that we see fit. Bitcoin uses base 58 because it is a reasonable compromise between brevity and readability – lower bases are longer since you can pack less information into each symbol, but upgrading to a higher base like 60 would introduce distinctions between the letter O and the number 0 and capital I and lowercase l and thus potentially lead to mistakes. You can memorize an address or private key in any base you see fit, provided that you have a base converter to bring it back to base 58 when the time comes to give out your address or use your private key.

Base 58 is the easiest option, and will have you memorizing a fairly reasonable 51 characters for the private key and 34 more for the address, although if you do not want to memorize the address you can also just memorize the first few characters and let firstbits.com retrieve the rest for you (paste the address into firstbits to find out just how much you need to memorize; usually it’s 6 characters). Note that firstbits recovers the address by searching for the chronologically first matching address in the blockchain, so you will need to have sent a transaction to the address, but the upside of firstbits’ algorithm is that your firstbits abbreviation will be valid forever. In terms of raw information content (or, as information theorists refer to it, entropy), the simpler solution is equivalent to memorizing fourteen 7-digit phone numbers, something which those of us who have not yet been drawn in by the seductive allure of storing everything on our smartphones have likely aready done anyway. The full solution of memorizing all 51+34 brings that up to 21 phone numbers. However, the nature of base 58 makes this job considerably easier for us as the presence of letters and numbers triggers auditory and visual memory at the same time, and the pronounceable letter combinations, short words and acronyms that sometimes pop up trigger a mental phenomenon known as clustering where we remember multiple symbols as one unit – think of how you remember “Smith”, not “S…M…I…is that D or T again…H”.

Smaller bases are more difficult to use because of how many characters you will need to memorize, but if you prefer a mix of more numbers and some letters base 16 is a reasonable option, and it has the advantage that private keys can be imported from that format automatically just as easily as base58 keys. Another possibility is, interestingly enough, base 1751, using not letters as digits but words. Grondilu’s Bitcoin Bash Tools convert back and forth for you automatically, giving you a string of words like this:

THE BLOT SET TWIT BARE LEER WAGE LILT LIND CORK GOAL OFT REAR VOTE FLEW WAD KEYS GAVE SEES WAGE EAR YOGA VAST POT BIRD FAKE BEE

It’s up to you to decide if this form of base 1751 is easier than base 58 by a sufficient margin to warrant having to deal with an extra non-standard software package.
There is, however, another solution that is even easier to memorize. In the ECDSA cryptographic system that Bitcoin relies on almost any 256-bit number can be a private key, so you can make your private key as memorable as you want – you can even make your private key “0101010101010101….” and generate a bitcoin address from the key and everything will work just fine, although you can’t control what the address looks like so you will have to memorize at least 6 random base-58 characters for firstbits to do its job. For security purposes though, it’s better not to make the private key itself memorable but to make the private key generated using a standard function using a phrase or password as a “seed”. The SHA256 cryptographic hash function is generally preferred for this, as it outputs pseudorandom data of exactly the right size from any input and online utilities to compute the SHA256 of any string are easy to find (note that if you’re using the Linux command line, use echo -n rather than echo to pipe into sha256sum; otherwise, you’ll get a different result from other utilities since echo adds a trailing newline by default). After hashing, the seed “correct horse battery staple”, for example, becomes:

“c4bbcb1fbec99d65bf59d85c8cb62ee2db963f0fe106f483d9afa73bd4e39a8a“

Then, go to bitaddress.org in private browsing mode, turn off your internet and input the private key that you just generated into the box under the “Wallet Details” tab to get the address out: 1JwSSubhmg6iPtRjtyqhUYYH7bZg3Lfy1T. Notice how little you really need to memorize to have a brain wallet with this method: following the same process with a much smaller seed and using an address shortener, ("123","1Bfvq2ap") is a brain wallet all by itself.

Next comes the question of how you can actually use a brain wallet once you have created one. Seeing how much your balance is is fairly easy: go to any blockchain watching site like blockchain.info or blockexplorer.com and search for it. You will be able to see the address’s total current balance and all the transactions that have ever come in or out of it. If you memorized just the first six characters, both services will search for and find your full address automatically.
To spend your bitcoins, there are two paths that you can take. The first, easier, option is to import the private key into a wallet or client when you want to use it and simply proceed to send a transaction normally. There are three major clients that allow you to do this: Armory, blockchain.info and Electrum. Armory is a fully fledged Bitcoin client with many features, althought it does have the disadvantage that it requires a powerful computer to run as it currently stores the entire blockchain in memory (you need at least 4GB of RAM). Blockchain.info is a web application that requires no installation, which is much more convenient but slightly less secure because you’re essentially re-downloading the application from the server every time. The other major online wallet, Strongcoin, is also an option, although with it the functionality for generating a private key from a phrase is built in, but it charges a small fee for outgoing transactions. Blockchain.info and Armory, if their respective weaknesses are acceptable to you, have graphical interfaces that are very easy to use and self-explanatory. Electrum requires some basic command line use but it also not very difficult. Once you’ve created an address and private key, to import it into Electrum open up a command line, navigate to the directory Electrum is located in and type in:

./electrum import 1JwSSubhmg6iPtRjtyqhUYYH7bZg3Lfy1T:5KJvsngHeMpm884wtkJNzQGaCErckhHJBGFsvd3VyK5qMZXj3hS

And there you go. You can now send transactions with your Electrum wallet, and for added security you can delete the electrum.dat file (located at ~/.electrum/electrum.dat on Linux) when you’re done.

However, if you are storing your wallet in your head because you are paranoid, you may instead prefer the second option: offline transactions. This approach is more secure as it allows you to send transactions without ever having your private key touch a computer that is connected to the internet, so that even if both your computers have viruses on them your bitcoins are still secure. To do this with blockchain.info, you will need to take the following steps:

1. Create a blockchain.info account and log in.
2. Import just your address into your wallet.
3. Log in from a secure computer in offline mode, making sure to use private browsing mode (incognito mode in Chrome). When the system asks you to turn off your internet connection, do so.
4. Import the private key. Your address will automatically appear in your wallet along with it.
5. Click “send money” and follow the onscreen instructions until you get a base 16 number a few hundred characters long. Copy this string down on paper or with a USB key and close the browser window.
6. Copy this string over to the tool at http://blockchain.info/pushtx and send the transaction.

With Electrum, the procedure is slightly more complicated:

1. On an offline computer, import the address:
2. Locate the electrum.dat file on the offline computer. This file should be at C:Users\YourUserName\AppData\Local\Electrum\ on Windows Vista and 7 and ~/.electrum on Linux (sorry, no Mac version as of the time of this writing). Note that for the next step to be valid, the file should be unencrypted. If it’s encrypted (ie. is just a jumble of random data, without any kind of structure), remove it and generate a new wallet (with ./electrum create or the graphical interface) with no password.
3. Make a copy of the file. In that copy, look for the private key that you imported and take it out.
4. Take this neutered wallet and copy it over to your online computer, and wait until the client detects and collects the references to the 5 bitcoins’ worth of transactions that you need to spend.
5. Copy the wallet back to your offline computer and put it back where the original electrum.dat file was.
6. Put the private key back in.
7. Create the transaction offline:

./electrum mktx -s 1JwSSubhmg6iPtRjtyqhUYYH7bZg3Lfy1T -c 1JwSSubhmg6iPtRjtyqhUYYH7bZg3Lfy1T 13ignD31FysQbaBBVJUzffcQoFxxEuEcbE 5.00

From there, proceed as before. This is one of the highest levels of paranoia that you can possibly reach with Bitcoin, but it is worth it if you are handling large amounts of money. Electrum has three advantages over blockchain.info that may make up for the increased effort. First, you do not have to pay the 0.01 BTC fee per transaction. Second, since Electrum is a desktop application you can keep the computer that handles private keys off the internet 24/7, while with blockchain.info this is much harder as it is a web application – with the blockchain.info wallet you are actually downloading the program that runs within your browser every time you use it. The third problem is another consequence of this fact: if blockchain.info is hacked, the transactions that it generates might be compromised and you would not even know it until the intended recipient tells you that they never got the transaction and you realize that you’ve sent off your precious electronic cash to some teenager in Ukraine. With Electrum, you only download it once, you can check it once if you desire and you do not need to worry about such security issues.

Note that Electrum also has a “brain wallet” functionality of its own that offers a compromise between memorizing a premade key and making a key from something you memorized: a 12-word base 1600 “wallet seed” from which Electrum generates five addresses and private keys. You can use roughly the same process as above to send transactions with such a wallet, but removing the seed instead of the private key when copying the wallet over to the online machine.

If your goal for having a brain wallet is not security but either as a backup, for the convenience and versatility of having your wallet literally always on you no matter where you are or what you have with you or just to impress your friends, though, you do not need to bother with offline transactions and simply using it in conjunction with other Bitcoin wallets is enough. Just like Bitcoin in general, the concept of a brain wallet is extremely flexible; you can make whatever tradeoff between convenience and security that suits you best.
 

 

 

Seeking to be the iTunes of the Bitcoin world, a new digital goods marketplace has recently appeared at coindl.com. While the idea of selling digital goods is nothing new, with sites like bitcoinservice.co.uk and BitWillet having been around for many months now, Coindl seeks to provide a more professional alternative.

The service stands out compared to the existing alternatives in a few ways. First, it has a much cleaner interface, giving users a way to look through everything that is sold on the site. Second, while previous services were little more than minimalistic pay-to-download storage boxes, Coindl intends to put an effort into SEO, marketing as well as “first class support for buyers and sellers”. What is the price for all this? A 20% commission; although compared to the 30% that most competing services charge this is nevertheless comparatively cheap. Also, however, the site differs from its predecessors in that it plants significant hurdles for sellers, requiring a registration process involving the seller providing an extended array of personal information and signing a sales agreement before being able to publish any content.

The service intends to attract high-quality content and help Bitcoin enter the mainstream, so the motivation to add increased hurdles for sellers is understandable. So far, there are a few songs and ringtones offered for sale, as well as some icons, wallpapers and even a Bitcoin-themed CSS template for 0.199 BTC. While the more restrictive seller registration policy and the high fees will turn off many, as Bitcoin users are used to instant hassle-free registration and fees ten times lower than those available in the mainstream world, the ease of use and marketing that the service provides nevertheless has the chance to go a long way toward legitimizing Bitcoin as the go-to currency for digital goods. If mainstream independent digital content producers can be convinced to sell their products on Coindl as well as Amazon, Android’s App Store or whatever other service they choose, the 10% difference in fees may convince many digital media consumers to undertake the hassle of buying bitcoins as a sort of “digital media gift card” in order to save a few dollars and help their favorite authors and artists gain a few dollars more. Thus, the opportunity is there for Coindl to finally bring microtransactions to the masses and achieve the success of Bitmit, the centerpiece of Bitcoin auctions with nearly 1000 products for sale, or even BitInstant, a Bitcoin-based money transfer facilitator that is receiving significant business helping people avoid costly international money transfer fees and delays as we speak.

Will they succeed? Unfortunately, just like all new businesses entering the Bitcoin economy, we can only wait and see.

 

 

Picking up on the emergence of innovative payment solutions appearing in the US like Square and projects like Bitcoin, The Royal Canadian Mint decided to get in on the game as well with its own digital currency project: the MintChip, seeking to offer the key benefits of electronic currency backed by the Canadian dollar. “Until now,” the website reads, “there has been no electronic solution that cost-effectively addresses the very-low-value transaction markets, protects privacy, is available to everyone and emulates the characteristics of cash.” And MintChip seeks to address this. The product “works online and offline, at the physical Point-of-Sale, on mobile devices, and enables easy person-to-person payments.” There is no requirement for external authorization or intermediaries, payments are irreversible, and it has the cost-effectiveness, privacy and accessibility that current digital payment solutions do not. It even has a few advantages over Bitcoin; secure transactions are instant, it’s backed by the Canadian dollar and it even manages to solve the double spending problem even without connecting to the internet. At first glance, it seems like the Mint has managed to implement all of the major features of Bitcoin and even improve upon the concept.

So how does such a system work? On the surface, the security model is similar to Bitcoin: payment is done by sending a “value message” from the sender’s MintChip to the receiver’s, bearing the receiver’s unique ID and a digital signature to prove that the message came from the sender. Once the value message is created by the sender’s MintChip, the MintChip’s balance is decreased by the corresponding value.

The question immediately obvious to any Bitcoin afficionado is: how does the system prevent double spending – what prevents the user from sending a payment, resetting the state of the chip to a previous state and sending the payment again? Here, however, the answers become much less satisfactory. The core of MintChip “is an integrated circuit that holds electronic value and transfers value from one chip to another in a secure fashion”; essentially, proprietary tamper-resistant trusted hardware. The chip would store the user’s balance and handle transactions internally, but would be designed to prevent users from going in and modifying the balance themselves. Such systems are nothing new, and time has shown them, like all other forms of digital rights management, to be far too insecure to build an economy around. About two years ago, the supposedly “unhackable” Infineo chip was hacked by Christopher Tarnovsky using an electron microscope, needles and acid, and one can only imagine how quickly such a feat would be repeated when doing so gives you essentially gives you an unlimited license to print money. The paradox of simultaneously giving users’ devices the ability to arbitrarily modify their balance and denying that ability to the users themselves, even while the devices are in the users’ hands, seems far less compelling a basis for a sound digital currency system than cryptographic digital signature algorithms and a proof-of-work based distributed public blockchain.

There are other aspects of the system that Bitcoin users are likely to object to. The currency creation model is centralized: value is originally injected into the system by the Royal Canadian Mint and customers can purchase value to spend by going through trusted brokers. The system is designed to be able to force upgrades, giving the Mint the power to introduce onerous tracking features over time if it so desires. Innovative means of value storage like paper and brain wallets are out of the question, since nothing can be done without the physical chip, and it’s impossible to have an online wallet that does not require trusting the provider.

However, the system gets a lot of things right. MintChip is a massive improvement over the existing bank and credit card-based model of finance, as payment verification is based on Bitcoin’s digital signature model rather than central providers. Bitcoin’s ease of use, lack of significant transaction fees, irreversibility and other cash-like properties are all present. The level of privacy is comparable to Bitcoin since although transactions are stored in the chips the various MintChip devices would be purchasable without ID, and cheap enough for individuals to purchase multiple “wallets” to further secure their privacy. Also, if users are willing to accept unbacked currency, as Bitcoin has shown people are, the system can even theoretically survive without any trusted parties except the chip manufacturer. As for the implementation, the Mint is making the system accessible to developers right from the start, releasing APIs in Java, .NET and Javascript and offering $50,000 in prizes for developers who make novel payment applications with the service. What the MintChip shows us is not what the final iteration of digital currency will look like, but rather a sign of things to come. The project shows that the Canadian government is willing to expand into the area of digital currency and other governments and companies are now going to be much more willing to follow suit, perhaps even helping legitimize Bitcoin itself.

The influence of Bitcoin on such efforts is undeniable. The Mint has been watching digital currency efforts on the internet for many years now, and on the board of the MintChip Challenge’s judges are people like David Birch, who has researched Bitcoin extensively and even spoke at the Bitcoin conference in Prague last November. Five years ago, no government would have even considered supporting a digital payment system with the level of privacy that the MintChip provides, and the project is a sign of how times have changed. Even if Bitcoin itself never succeeds and other, even government-supported, alternatives eclipse it in importance, projects like Bitcoin have played a valuable role in keeping governments honest and ensuring that any system that they back at least pays lip service to concerns about privacy and centralization. Regardless of how well Bitcoin fares in its current implementation, it has already succeeded in spirit.