Tag: cryptography

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Cypherpunk Ethereum

How The Ethereum Virtual Machine Could Run The World

Ethereum Virtual Machine

Since the beginning of 2016, anyone with a pulse on the digital currency industry has watched with bated breath the smart contracting platform Ethereum rise to meteoric highs. As a relatively new development utilizing bitcoin technology, Ethereum aims to implement a globally decentralized, digital computer for executing peer-to-peer contracts. Such an innovation could eliminate censorship, fraud, and the role of the third party in online collaboration.

Unlocking The Ethereum Virtual Machine

By taking the cryptographic payment structure of bitcoin and adding a Turing complete scripting language, Ethereum is attempting to create the most viable tool for executing smart contracts using blockchain technology. The term Turing complete here means a system capable of performing any logical step of the computational function. A technology in wide use today which employs Turing completeness is JavaScript, the programming language which powers the worldwide web.

Smart contract technology would describe a computer protocol which obviates the need for a contractual clause and instead is self-executing and self-enforcing.

What differentiates Ethereum from bitcoin is that it doesn’t stand first to be a payment system, but rather a computing platform. The cryptocurrency of Ethereum, ether, acts as a sort of fuel to power the engine of this computing platform. Ether is consumed by miners for accessing resources of the network. The more ether a user holds, the more “gas” they can pump into the computational engine of the Ethereum virtual machine.

This combination of cryptographic architecture and Turing completeness, could enable entirely new industries to spawn, where traditional business models occupying the role of middleman, will increasingly feel the pressure to innovate or die.

Ethereum is a world computer you can’t shut down and you can’t turn off.

Autonomous Corporations

One of the defining features of the 21st century corporation is populating the role of the employee with machines rather than humans. Bitcoin is one of the first models of such a corporation. The miners of the bitcoin network can be seen as employees rather than as humans were in the traditional corporate model.

Ethereum takes this development one step further.

Interestingly, the role of the customer (which is currently populated by humans) stands to be dominated by machine function as smart contracting systems enable end-to-end payments without requiring a human initiator. What Ethereum will help facilitate is an economy of interconnected devices where machines can transmit money and data in a manner which dwarfs the efficiency of human input. Businesses which overlook this trend, will pay dearly due to new supply channels which disintermediate the old world’s necessary third parties.

Ethereum today is where bitcoin was in 2010 – raw infrastructure, lack of developers, and plenty of skeptics. Competitors, such as Rootstock, add legitimacy to the use case Ethereum is attempting to bring to market.

From trustless crowdsales to democratic organizations, smart contracting platforms could unlock a new frontier in internet enabled innovation.

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Bitcoin Cybereconomy

Bitcoin Introduces Digital Scarcity

Bitcoin Introduces Digital Scarcity

Scarcity, the idea that some one thing is finite, has been thus far not applicable to the digital realm. Until the arrival of bitcoin, nearly anything that was of digital nature could be duplicated without recourse. Due to the ease of reproducing computer code, the problem of double-spending was the unsolved mystery of viable digital money. However, the innovation of the blockchain ledger has added a potent economic function to the equation of online exchange: digital scarcity.

The Introduction of Digital Scarcity

Beyond the realm of money supply, bitcoin has enabled everything from informational products, media, art, and more to be delivered in a manner where ownership is mathematically verified. Because digital ownership can now be determined, it proliferates a scarce quantity of goods. Digital scarcity marks the emergence of a new cohort of potential business models.

“Bitcoin is a remarkable cryptographic achievement and the ability to create something that is not duplicable in the digital world has enormous value.”

– Eric Schmidt, CEO of Google

The attribute of scarcity in bitcoin is not necessarily derived from the actual file information itself, but the method in which the information is stored. The difficulty in reworking the cryptographic proof-of-work which has hashed and timestamped the property with the creator’s digital signature represents the construct of scarcity. The difficulty of reworking this cryptographic chain then, is directly correlated with the difficulty of duplication (double-spending), as more hash power would be required to retroactively alter the information’s assigned ownership. Information hashed at the very beginning of the blockchain for example (such as the genesis block), could be viewed as nearly unforgeable in comparison to information hashed in the last 10 minute block because it would take magnitudes more computational power to rework that section of the chain.

The Digital Economy’s Missing Layer

Scarcity is a fundamental layer of any economic system. Without scarcity, there be no need for money. In a perfectly abundant world, resources would be limitless and money would serve no need because exchange would be entirely unnecessary.

Bitcoin introducing digital scarcity represents a milestone in the development of a totally digital economy, one which has the capacity to stand independent of national economies. In the years ahead, it is likely we will see new business models arise from the potent characteristic of digital scarcity.

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Bitcoin Cybereconomy

Did John Nash Help Invent Bitcoin?

John Nash

Hal Finney, one of the early developers of the bitcoin protocol, is often touted as one of the creators of the technology due to the optimizations to elliptic curve cryptography he made alongside Satoshi Nakamoto in the earliest days of its existence. As the first transaction recipient of bitcoin, Finney was integral to bitcoin’s operational takeoff, and can justly be described as one of its most crucial creators. In much the same way that Hal Finney is credited with being a core contributor to the implementation of bitcoin, could John Nash, someone who had been at the forefront of mathematical and economic thought into the prospect of ‘ideal money‘, be justly attributed credit for the formation of the electronic cash system of cryptocurrency?

The special commodity or medium that we call money has a long and interesting history. And since we are so dependent on our use of it and so much controlled and motivated by the wish to have more of it or not to lose what we have we may become irrational in thinking about it and fail to be able to reason about it like a bout of technology, such as a radio, to be used more or less efficiently.

– John Nash

Ideal Money

Nash described the concept of ideal money as having the function of a standard of measurement and, thus, it should become comparable to the watt, the hour or a degree of temperature.

He asserted an ideal form of money should provide a viable solution to the Triffin Dilemma – it should serve both short-term domestic and international long-term objectives where central banking money has utterly failed (the average lifespan of a fiat currency is 27 years).

Bitcoin Money Supply
The inflation rate of bitcoin asymptotically approaches zero as we inch closer to the currency limit of 21 million units.

Disinflationary Money Supply

Asymptotically ideal money focuses on the fluctuations and long-term perceived value of money, where the ideal inflation rate is as close to zero without being negative (deflation). Currently this accurately describes the economic nature of bitcoin, as it is a disinflationary money supply by design – that is, it is decreasing in its inflationary nature by halving the block reward at predetermined intervals. The inflation rate of bitcoin asymptotically approaches zero as we inch closer to the currency limit of 21 million units.

Nash described this ideal of money as something which could solve the Triffin Dilemma and provide a global savings outlet for people who would otherwise be subject to ‘bad money’, or money expected to lose value over time under conditions of inflation.

Nash described a nonpolitical value standard for comparisons of value, asserting that an industrial consumption price index could be “appropriately readjusted depending on how patterns of international trade would actually evolve”. Moreover, Nash described how actors that were in control of this standard could corrupt this continuity, yet the probability of damages through corruption would be as small as politicians who alter the measurements of meters and kilometers.

Bitcoin Consumption Index

Within the bitcoin network, the mining difficulty index, which can be viewed as a type of consumption index, is intelligently adjusted based on a regulatory algorithm which assigns the difficulty at a rate where new blocks are mined every 10 minutes, on average. Further, authorities of the bitcoin network (51% mining pools) could corrupt the standard of non-double spending, yet doing so would be an attempt to alter the calculation of transactions while not honoring their own incentive to remain an honest mining participant. The bitcoin whitepaper itself describes how such an authority would choose to ensure the integrity of this transaction standard as doing otherwise would devalue their own authority position in the mining network.

The nonpolitical industrial consumption price index Nash described in his 2002 paper is represented by the bitcoin network’s intelligent design towards regulating mining consumption power and readjusting the difficulty and block rewards accordingly.

Given that the bitcoin network is inherently regulated by an algorithm which adjusts the consumption index to an average of 10 minutes, could it be argued that the standard of measurement is time itself?

Is Bitcoin Nash’s Ideal Money?

Nash’s work on ideal money is represented in the most fundamental aspects of bitcoin’s economic nature. His insights into a form of money which can be used as a true measuring tool and one which solves the Triffin Dilemma by serving as a viable domestic and international money supply, have made bitcoin into what it is today – a practical opportunity to achieve an international standard of ideal money.

Is bitcoin the closest thing we have thus far seen to the concept of ideal money? John Nash’s work into the field did indeed make its way into the invention of bitcoin. Although he was very likely never behind the guise of Satoshi Nakamoto, his work lives on in the monetary policies built into the bitcoin protocol.

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Bitcoin Cybersecurity

How to Store Bitcoin Securely

Bitcoin Has Redefined Money

As one of the most important topics on cryptocurrency, learning to store your money securely is absolutely essential if you are to use digital payments systems with the peace of mind that your money will still be available when you return. If you make a mistake in the area of storing your bitcoin or another cryptocurrency, there is a chance they will come under the control of someone else, so take heed when we say this is the most important aspect of being a holder. Storing bitcoin securely is a topic cryptocurrency holders must appreciate. Without the necessary understanding, your money susceptible to theft and hacking attempts.

Wallets

When someone says that you hold bitcoin in a wallet, it is not entirely true. Think of a wallet as a key which unlocks a certain amount of bitcoin in circulation. There are never any bitcoin being transferred from wallet to wallet, but rather the ownership of the bitcoin is what’s being transferred. In fact, there is no such thing as bitcoin as a “currency” in the first place. There is no computer file or data to represent the unit of account itself. The only file associated is a wallet data file which acts as your representation on the blockchain ledger. Instead, when you buy bitcoin, you are essentially increasing the percentage of the blockchain which you claim control over. Your wallet is your key to that amount of ownership. In this sense, Satoshi was correct in labeling it as an “electronic cash system” and not a digital currency, because it is a payment system which was built and not simply a unit of currency. For the sake of simplicity, everyone still views bitcoin as a type of currency, when in truth the control of the blockchain ledger is what is being transferred, not the unit of account itself.

A wallet address functions much the same way an email address might function. Payments are capable of being sent from, and received at, a wallet address. These are the primary purposes of a cryptocurrency wallet. Each wallet is randomly assigned a string of characters which designate its address. For example, if you create a new wallet address you may have a string of 34 characters such as:

1KuCSoMhnahkJuFCL3TQWRW8bX6EnkR3t9

This would be the address shown in the blockchain ledger when you send and receive payments. As we have discussed, keeping your real-world identity separate from this string of characters is crucial if you wish to have your cryptocurrency holdings remain private.

Public Key Cryptography

There are two parts to a wallet address. The first is the public key, which is the 34 character string wallet address we just displayed, and the second is the private key. We must always keep our private key unknown to other parties, else the contents in our wallet are not truly controlled by the person using the wallet. Whomever holds the private key to a wallet, controls the ownership associated with the wallet on the blockchain. These two keys in combination are known as public key cryptography and they are what makes using and transacting with bitcoin so secure.

In order to transfer bitcoin from one address to another, a request is broadcast to the network that a certain amount of bitcoin now belong to the receiver’s address. This transfer is authorized by the sender’s private key and the miners verify the transaction through a hashing algorithm. Once the transfer is fully verified, they are added to the next block in the chain of transactions.

Bitcoin addresses are created by first picking a random number and creating an ECDSA (Elliptic Curve Digital Signature Algorithm) public/private key pair with them. This operation alone generates the private key – but bitcoin addresses are not simply public keys, but rather modified versions of them. The generated public key is then put through several SHA-256 and RIPEMD-160 operations, until eventually being converted into a format called Base-58. Base 58 is an encoding that removes the possibility of similar looking characters, such as lowercase L and uppercase I, as well as 0 and O. Finally an identifying number is added to the beginning of the address – for most bitcoin addresses, this is 1, indicating it is a public bitcoin network address.

Operating Systems

The first recommendation in regards to using bitcoin securely, is only managing your funds on a computer that has a clean operating system. By this we mean free of malware, viruses, and other hidden key logging programs you may have no idea lurk in shadows on your computer. These programs will crawl your computer hard drive for wallet files and passwords, sending sensitive information to the attacker. Some programs even have the ability to take control of your webcam, microphone, and files without you being aware of it. If you suspect your computer is infected, use another one or reformat your computer in order to erase your hard drive and install a fresh copy of your operating system.

Not all operating systems are created equal. The most inviting operating system for hacking attempts is Windows. Although it is user friendly and compatible with most programs, it is relatively vulnerable by design. In contrast, the safest operating system you could use is a Linux system which runs 98% of the world’s supercomputers and comes in a variety of distributions. Linux can come with a steep learning curve and is not your operating system for typical mainstream needs, but when the essentials of security and performance arise, none best it. Take as many security precautions as you can, and remember that there is no such thing as a computer system which is impossible to hack. Because Linux provides the most resilient and reliable operating system, it is your safest bet, but not guaranteed to prevent hacking attempts to steal your holdings.

Dangerous hacking programs can get onto your system by opening email attachments, transferring files from media storage devices, and browsing unscrupulous corners of the web. The most common way hackers infect your computer is through email attachments. Therefore it is imperative that you never open an email attachment or download a file when you are unsure of the implications it will bring. Always obtain as much information about the properties of the file before you transfer it to your local hard drive.

Passwords

When you are confident in the security of the computer you are using, the next biggest threat is that of handling your wallet information with complete confidentiality. When settling upon a password to access your bitcoin wallet, it is imperative that you tattoo the phrase into your mind in a way that you will surely never forget.

A brainwallet refers to the concept of storing bitcoin in one’s own mind by memorization of a passphrase. As long as the passphrase is not recorded anywhere, the bitcoin can be thought of as existing nowhere except in the mind of the holder. If a brainwallet is forgotten or the person perishes, the bitcoin are lost. The importance of remembering your password cannot be stressed enough. If you forget your password and do not have your private key, your money will be impossible to ever be reclaimed. Writing down your password somewhere private is a helpful deterrent in the event you forget your password, but it makes it accessible to someone who may come across it. Furthermore, the complexity of your password cannot be understated. It is very important when creating a brainwallet to use a passphrase that would be not be susceptible to a dictionary attack or brute force attack. If this is not done, theft is an eventual certainty if a hacker uses a high level of computing power. In the event of a brute force attack, an attacker will unleash a machine to continuously attempt passwords until they are locked out. Another method, a dictionary attack, will figuratively throw the dictionary at your login system, using word combinations found in the dictionary.

“The simple fact of the matter is that hacking a brainwallet password is a mathematical exercise that requires no internet access, no communication, and leaves no trace, so hackers can collectively try multiple trillions of passwords every second in the privacy of their own homes with the very same equipment they use for mining bitcoin.” (Bitcoin Wiki, 2012)

Backing Up Your Wallet

You may also want to consider making a copy of your wallet file and storing it with a cloud computing service (Google Drive, Dropbox, Microsoft OneDrive). In the case where you lose access to your wallet, you can restore it by opening your saved wallet file and using your password. Access to your wallet file alone will not give the user the ability to move your bitcoin unless you have left it unencrypted with no password.

As well as storing an electronic copy of your wallet file, you can also print out what is known as a paper wallet. Bitcoin storage does not entirely require the use of computers, and using a paper wallet is one of the safest methods of storing your bitcoin holdings. This method of storage works because the private key to your bitcoin wallet is printed on the paper, making it easy to enter the information when you want to access your wallet file. If you use a paper wallet, realize that it represents the key to accessing your bitcoin and should be kept in a safe location.

A final method to storing your bitcoin is keeping your wallet file on a hard drive belonging to a computer which has never connected to the internet. To achieve this, many large bitcoin holders have purchased an old computer, wiped the hard drive clean, and transferred their wallet onto this system. This gives you the most security because you know the operating system is clean. Without an internet connection, an outside attacker cannot make changes to your wallet file.

You can also put your wallet file on an external media device such as a USB stick. Many large holders of bitcoin put their wallet file on a USB and then lock that device in the safe at their bank. That’s about the highest level security for your bitcoin you could come across. This is known as cold storage and is the most effective way of storing bitcoin safely.

Additional Security

A further step in securing your bitcoin, and one that is highly recommended, is using 2-factor authentication to gain access to your wallet. Online exchanges offer 2-factor authentication which involves an outside source to verify the request before granting access, even if they know the password. Typically this is done by sending a text message to a smartphone or by inputting a code sent to the email associated with the wallet. Always enable 2-factor authentication on your bitcoin wallet and always associate a secure email address with an exchange account.

Generally, the safest way to store your bitcoin is to do so offline or with a paper wallet. One sure way of putting your bitcoin holdings in jeopardy is by keeping them on an exchange. In a world filled with tech-savvy criminals, even businesses which promise to practice security procedures and guarantee the safety of your money are susceptible to hacks. These exchanges are targets for some of the most skilled hackers in the world and leaving your money on the exchange means when that service goes down, your money sinks with it.

Already many times exchanges have been on the receiving end of a calculated hacking attempt or an unanticipated technical glitch, causing users who kept their holding on that exchange’s server to lose everything. Don’t let this happen to you. Move your money off the exchange if you do not plan on actively trading it. Furthermore, be wary of phishing attempts (hacking attempts which attempt to imitate trusted services and ask you to submit sensitive information) on your wallet information and passwords. Always check the URL an email or webpage is being broadcast from and use common sense when dealing with customer inquiries. You will never be asked for your password from any legitimate business because it would be more sensible to simply reset the password.

Remember, the magnificence of bitcoin is that it is a financial obligation between you and your money, no third party need be involved. Never, under any circumstances, should you reveal your private key.

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Bitcoin Forecasting

Advantages & Disadvantages of Using Bitcoin

Bitcoin Has Redefined Money

The benefits of using a bitcoin for payments far outweigh the risks posed. Bitcoin represents a dramatic improvement upon our current arrangement of financial payment systems which use government sponsored currency by relying on an internet protocol for the transmission of value where no humans or third parties are required.

Advantages of Bitcoin

    1. Trustless Payments

Bitcoin does not require a central party to facilitate transactions or confirm account balances. This is the power of peer-to-peer payments. When a payment is made, the transaction is verified by an economy of interconnected computers very much in the same way networks of servers make up the world wide web of today. The transaction is initially broadcast, then verified by the network in a secure manner. Eliminating the need for third party trust was one of the objectives of bitcoin in the first place, and it accomplished this unlike any financial instrument before. Typically, people trust banks to store their money, they trust central banks to retain the value of their money, and they trust governments to manage debt problems in a responsible manner. Bitcoin divorces the reliance on these institutions by putting trust in cryptographic technology rather than third parties.

    1. Open Payment System

The bitcoin payment system is the first non-exclusionary payment system every devised. It does not require paying monthly fees or deny access to people who are not in a position to be serviced by a traditional banking institution. Your account is never in jeopardy of being locked because there is no central institution with the capability to block transactions. With bitcoin technology, advocacy groups are able to accept and spend their money as they like, without requiring approval from government payment processing services.

    1. Personal Information Privacy

Under the current system, unless you are using cash, you are identified when you make a purchase. With bitcoin, this is no longer necessary, but it comes as a double edged sword. In one sense, bitcoin can be obtained and used in an anonymous manner. It does not require the personal information that traditional financial institutions would, such as government identification and contact information among a host of other data. Because the bitcoin payment system does not require these inputs, it need not put a citizen’s personal information at risk. However, just as easily as it can be used for stealth can bitcoin be used transparently, giving the entire world first-hand viewing ability into your financial standing. Being a distributed ledger, the blockchain will be making your wallet viewable but will be tied to your identification the instant you associate your real world identity to your transactions. Every person has an inalienable right to privacy, and that includes financial privacy. Bitcoin may provide that financial privacy while eliminating the potential for identification fraud and theft of personal information. Many people will argue that providing the ability to transact anonymously opens the floodgates for money laundering, illicit purchases, and all kinds of criminal activity. This may be true to a certain degree, but bitcoin technology does not aggravate this issue any more than paper cash does today. Indeed, using cash is still the most popular way to conduct money laundering and other illegal activities. There are risks associated with an anonymous form of transaction that financial enforcement agencies are well aware of. Even more so are they aware that paper cash is still the best medium for laundering money.

    1. Simplicity & Security

The cryptographic technology behind bitcoin is the most advanced of its kind, making the system impractical to hacking attempts. Rather, the hacking attempts to steal funds have been successful due to poor storage practices and faults with exchanges. Security experts around the world have been attempting to attack the bitcoin network directly since its inception. None have been able to find a chink in its armor. When used correctly, the bitcoin blockchain is an elegant and airtight solution to sending money cheaply and efficiently.

    1. Internet Functionality

The innovation of a payment layer for the internet is one of the primary reasons people are so excited about bitcoin. Some of the payment system features include worldwide accessibility, zero or low processing fees, open-source, fraud control, multi-signature accounts

Disadvantages of Bitcoin

    1. Technical Sophistication

In order to properly store and use bitcoin it requires a certain degree of technical understanding that most of society current finds challenging. The more you understand about vulnerabilities to storing bitcoin, the safer you will be. Storing your bitcoin is one of the biggest challenges and being protected from hackers takes a considerable degree of computer competency.

    1. Limited Acceptance

Bitcoin is continuing to gain traction with merchants. The number of businesses accepting it is growing daily. The Federal Reserve Board of Washington reports that the number of daily users is likely to have grown exponentially in the past few years, and that the user base has doubled every 8 months for the last 3 years. Businesses that do transactions online are taking a close look at integrating bitcoin, while brick and mortar retailers are still just getting onboard with this new type of payment. Because you may find it difficult to pay your rent or buy food at the grocery store with bitcoin (for now), this limited acceptance can be a disadvantage.

    1. Uncertain Future

No one can say with certainty what will come of bitcoin. As it remains today, bitcoin is very speculative as it is still an experimental type of technology. However, the upside is so one-sided that the average consumer would be wise to research and understand this new type of technology, given that money factors into our lives essentially everyday.

In the long-run bitcoin technology will transform the distribution and access to information in a manner similar to internet and smartphone technology. Considering the only action a user need perform to start using bitcoin is downloading an app using the aforementioned technologies, and you may begin to see why we are on the cusp of a powerful disruption in business, economics, and daily life.