Our future: Population control through data mining

Our collective future will be dictated by statistics, cheap cloud storage and data mining, not politicians. NSA's PRISM is a symptom, a natural result of current tech. In 10 years, your average tech startup will have access to as much generalized CPU and storage as 2013-era NSA. Anyone with Google Glass, not just the NSA, will use facial recognition, gait recognition and other biometrics and identify every person they see on the street, every car they see driving down the road, in real time.

"Solution" to bitcoin volatility

The Washington Post's wonk blog posted this interesting bit by Neil Irwin: Bitcoin Needs A Central Banker.  The article is tongue-in-cheek.  It immediately drew sarcastic retorts from a few in the libertarian-leaning bitcoin community.

However, it is fair to address the topic of volatility.  Several US Senators remarked upon it indirectly in the hearings (Day 1, Day 2).  New bitcoin users often raise the issue as well.

There are some simple, high level, underlying economic and development
realities that influence bitcoin's price volatility.

Supply and demand. This is obvious.  Let's move on.

Bitcoin is small.  Although the market cap exceeds $6 billion -- over 12 million bitcoins at price $500 -- the amount of bitcoins available for trading on markets is a fraction of that.  A large purchase might run up the price; a large sale will drop the price. Bitcoin behaves like a penny stock.  Penny stocks are also volatile, for the same reason. Volatility is inherent in any system where traders may make million-dollar trades, yet the underlying commodity or stock's market liquidity is small in comparison.

Bitcoin is young.  It took a decade or more to convert Eurozone nations to a common currency, including everything from banking software to cash registers to the cash in citizens' wallets.  That was with the force of nation-state laws, and the economic weight of trillions of euros, behind the effort.

Bitcoin had none of these advantages in its infancy stage.  It is truly a grassroots effort, with enthusiasts and early stage companies filling this role.  Building a currency involves many layers of financial tools and services, on top of the currency.  It is important to set bitcoin expectations properly. Building a currency from scratch like this is a unique endeavor.

It will take many months before common financial tools such as futures, options, shorting become widely available.  These tools will decrease bitcoin volatility, by adding information to the market.  It will take months for Point of Sale software to be updated to support bitcoin, and deployed into the field.  Needed PoS development holds back wide scale deployment in brick-and-mortar stores around the world. Smartphone apps only fill a small portion of the PoS needs.

Folks are working as fast as they can to develop these tools.  This requires both technical and legal developments, to deploy legally in the US and other jurisdictions.  It takes many years to build a currency from scratch like this.

Setting the goalposts. In the meantime, perspective and proper expectations are important.  What is a reasonable timeframe to bootstrap a global currency from scratch?  No one knows, and perhaps we are now watching the answer unfold before our eyes, as bitcoin grows.

Like a startup company, bitcoin is a startup currency.  Bitcoin is high risk, volatile, and may fail.  Or like many famous startups, bitcoin may succeed beyond our wildest dreams. Bitcoin's price behaves like a very early stage tech company. In my view, predictions of success or failure are premature, at such an early stage.

Question answered.  What, then, is the "solution" to volatility?  Economic growth of the global bitcoin economy, and time.  Bitcoin is simply the base layer in an entire ecosystem of services. Bitcoin itself, as wonderful an invention it may be, is not an end, but a beginning. As adoption increases, the number of market players financially able to move the market decreases.

Once additional financial tools and services are layered on top of bitcoin, once bitcoin grows beyond its tiny size today, reduced volatility is quite likely, indeed.  Bitcoin is an odd mix of currency, commodity, payment network and computer service. Time and field experience best inform the development of financial stability tools.

Updated to add: Volatility is also just another engineering problem to be solved.  Volatility can be ignored by the merchant, if you price in USD and use a service like BitPay.  Volatility is less a factor if you transfer USD -> bitcoin -> bitcoin -> EUR in a matter of seconds, as a means of rapid cross-border settlement.

Speculation: Are bitcoin thieves revealing NSA back doors?

Bitcoin is rather unique in that everyone in the world has a direct financial incentive for finding weak ECDSA private keys.  Compromise a key, and you may steal those bitcoins.

Now, recall a recent security incident:  "Concern mounts as Google confirms Android cryptographic vulnerability"

While there is zero evidence to support the following speculation, let us reconsider this Android SecureRandom bug in light of today's revelations about NSA decryption on the Internet (bullrun).

Is it possible that SecureRandom() was known to be weak by the NSA, and that bitcoin thieves simply stumbled upon the security hole first?

Even entirely innocent engineering bugs are likely to be discovered by anyone with the time to iterate across all known weaknesses and platforms.  Random number generators are a known vector for weaknesses in the past, after all.

By extension, will bitcoin -- and the financial incentive to break bitcoin crypto -- reveal other NSA backdoors in ECDSA, SHA256, RIPEMD160, and other algorithms and libraries used by bitcoin?

Thieves are likely to exploit any flaws immediately, and move stolen loot to another private key.  The NSA, on the other hand, is likely to avoid exploiting any weaknesses until key moments.

Thus, ironically, thieves are playing a role in securing bitcoin and associated algorithms from NSA, Chinese, Russian or mafia tampering.

Was the SecureRandom() bug a now-revealed NSA backdoor?  It can never be known.  But you can thank bitcoin for exposing the problem and leading to immediate fixes, and drawing attention to weak RNG issues.

On stolen coins and transaction blacklists

This blog post was originally email, written in response to a reporter's questions, such as:  Why can we not recover or blacklist stolen coins?

As usual, the answer is not "we can" or "we cannot" but very complex, and outside the realm of engineers in my opinion.  Theft of private property, and money in particular, is of course wrong and illegal in most jurisdictions.

First, bitcoin is a global phenomenon.  It is impossible to get 100% agreement on what coins are even considered stolen.

Second, Stolen coins are fundamentally a legal, not technical concept.  That complicates the matter immensely.  Anyone may track any bitcoin transaction via the public blockchain, but the easy part ends there.

Some exchanges and payment processors already refuse to credit payments made with coins from some well known, large thefts.   This is done on an individual, business-by-business basis.

One key difficulty is defining a stolen coin.  It is possible to claim that one's coins were stolen, yet possess the private key that spends those funds.  Even if the victim is indeed an honest victim, the problem becomes one of reviewing and authenticating police reports from jurisdictions around the world, matching those up to bitcoin transactions, deciding on a technical disposition, executing that in software, and finally, gain the community's support to upgrade to your transaction blacklist.

It is not the place of engineers to sort through police reports, and pronounce judgements on each transaction as "good" or "evil".  The act of centrally administering a transaction blacklist is a job no one in the bitcoin community wants.  A transaction blacklist is fundamentally human-driven financial censorship, a concept almost antithetical to bitcoin itself.

Any one person or company administering a transaction blacklist exposes themselves to very real legal risks -- lawsuit if a blacklist mistake costs money -- as well as physical threats such as intimidation and blackmail.

At its most basic level, the bitcoin protocol destroys each coin, when it is spent, and creates brand new coins for the recipient.  Example: sending 1.0 BTC to me might involve destroying coin #1111 (0.5 BTC) and coin #1112 (0.5 BTC), and creating coin #6789 (1.0 BTC).  Thus, beyond a single transaction, you cannot say that a coin is 100% stolen.

From a technical standpoint, you can see that a coin is "related" to a stolen coin, but you cannot know how many innocent people lay in the chain after the theft.  Thief Alice can give a coin to Bob, who doesn't know the coin is stolen.  Bob sends the coin, along with some others, to Charlie.  Charlie sends those coins, along with some others, to David.  Bob, Charlie, and David are all unknowingly holding coins /related/ to a stolen coin, but from a technical standpoint, it is at that point impossible to say which coins should be blacklisted without making subjective, non-technical, human judgements. Businesses and exchanges receiving bitcoins are in the best position to know their customer, and make some sort of judgement about that.



The outside observer looking for stolen coins does not see an Alice, Bob, Charlie or David or any other identity information.  Observers only see coins #1110, #1111 and #1112 being destroyed, and coins #2222 and #3333 being created.

On recovery:

Stolen coins are, by definition, sent to another bitcoin address outside the victim's control.  There are no private keys to recover. The victim's private keys are rendered useless, because the thief's private key controls the stolen coins.

If a person simply loses their private keys, sometimes hard drive forensics may be able to recover the keys from a backup.  Depends on what "lost" means.  Keys are simply encrypted data, which may be recovered (or not) after a data disaster just like any other encrypted data.

Finally, and very important to economists, is http://en.wikipedia.org/wiki/Fungibility   It is important that the value of one bitcoin is the same as the value of another bitcoin. Otherwise it becomes impossible for software and average users to figure out which bitcoins they should hold, and which they should avoid.

Journalists Are The New Terrorists

The detention of David Miranda is only the latest example of a new trend, where journalism is now terrorism, and journalists are pursued as such.

Digital technology and near-real-time global communication has reinforced the maxim Information Wants To Be Free.  For the cost of an Internet connection or cafe visit or $10 flash drive, one may leak an entire Library of Congress worth of digital material onto filesharing networks.  Technology makes sharing so easy that keeping secrets becomes increasingly difficult -- for individuals, companies and governments alike.

These mass-leaks are a brand new type of attack on the nation-state.  Robbs' Brave New War describes asymmetric attacks such as these.  Never before has a nation-state faced the possibility of losing so many secrets to so many adversaries in a single incident.  The famous Pentagon Papers leak is nothing compared to the scale of leaks that current digital technology enables.

What, then, are a nation-state's responses likely to be?

Realpolitik says that "terrorism" opens legal doors that are otherwise closed to law enforcement, making its invocation economically rational and, therefore, likely.  Additional law enforcement tools including but not limited to extended detentions and searches are available, once "terrorism" has been invoked.

Further, given that exposure of state secrets to the world may be seen by rational folks as an attack, a government response that engages the anti-terrorism apparatus is not unexpected.

Traditionally, the leaker is considered the criminal, but the journalist receiving the leaked materials is in the clear, as if passed through a Chinese wall.  Some nations even have shield laws. That tradition is breaking down, as journalists are now as pursued as the leakers, with associated anti-terrorism forces.

Leaks are always an incredibly difficult ethical boundary.  Put simply, leaking has a very real chance of harming Good Guys, and enabling Bad Guys.

Paradoxically, leaks also appear to be necessary to prevent Top Secret America from driving too much policy outside the view of the voting public.

With the logic that leaks are attacks on the state, and therefore terrorism, any journalists associated with leaks are now terrorists.  And who is to say that, next year, Chinese cyberwarfare or US cyberwarfare units will not consider journalists enemy combatants?

If publishing information is terrorism, is it not also warfare?

Update: The UK is defending the seizure by claiming Miranda was “in possession of highly sensitive stolen information that would help terrorism.”

Original SIN

Recorded for posterity.


jgarzik@pum:~/node_modules/libcoin$ node sin-test.js 
{ created: 1376709207,
  priv: 'bc65f94b4142be3c6c0b02b33dab3775a829fc1f60e484e7d4ea64e2f421cdc4',
  pub: '029381bcb36358e58842431981a01742d494970a245c8f5c77874bbbde8fb25a9b',
  sin: 'je9eFspuTC29yhUqGqzEYwWmVTJRS9nWEkA' }

EDIT: or, perhaps, after some shed-painting,


 { created: 1376715876,
   priv: 'db25473a599ad99db89616da536be066ea58825a6cd9b17e90b70b824e0daea6',
   pub: '0346891919f18000be1c9aae381b93870f7dcf807c4f581e2b64dcd547342f70b8',
   sin: 'Tf86BqNWrnyn117U7N7Vc1sAUfKc2esd4z3' },

Bitcoin, free markets, and wanting your ASIC mining hardware now now now

The reddit comments discussing the Avalon status update are particularly amusing, embodying signature American impatience:  "I want something, I want it now, and I will rage at the injustice of instant gratification being delayed."

When it comes to Bitcoin mining, the whole idea of buying something without having any real clue when you'll get it is absurd. It should be like any other computer. Buy it, get it shipped to you within a week. No more bullshit.

Producing a new computer chip requires engineers with highly specialized design skills, and enormous amounts of capital.  $500,000 - $2,000,000 or more.  Any mistakes in the chips cost similarly large sums of money to fix.  Even with a 100% complete design, production may take months.  This is simply not a just-in-time operation.  Further, unexpected month-long delays are common.  Any mistake or change adds weeks to the schedule.

Thus, economics dictates certain realities.  Namely, paying your engineers and paying for chip production.  Possible funding sources:

1. Angel investors (rich people write big checks)
2. IPO (ASICMINER)
3. Pre-orders (BFL, Avalon)
4. KickStarter (company can fail to produce, and nobody gets sued)
5. Bounty

Let's take them one at a time.

1. In 2011-2012, no one stepped forward to write big checks.
2. ASICMINER IPO'd successfully, on an unregistered-securities exchange.  Risky, but it worked.
3. Pre-orders, we will discuss separately, below.
4. KickStarter-like models do not appear to work well for >$1 million projects (statistical anomalies aside).  KickStarter itself is anti-bitcoin.
5. Bounties never amount to anything more than pocket change, for real projects.

Essentially, there were two workable models that the free market has shown will work in 2011-2012:  IPO on unregistered securities market, or pre-orders.

An unregistered securities market clearly appeals to free market libertarians, as the creation of GLBSE and other projects in the bitcoin community demonstrate.  It is also a magnet for scams, as experience has shown (Pirate-related pass-through funds were listed on GLBSE).  Thus, IPO is a risky endeavor, and in 2011-2012 was unlikely to be successful in producing mining chips.

ASICMINER, through the regular exercise of [some levels of] transparency, prevailed in a difficult market.  They raised capital, started operations, and have so far maintained sufficient levels of profitability to continue operations.  ASICMINER survived the collapse of GLBSE, and continues to pay dividends to shareholders, despite the operator "friedcat" remaining anonymous.

Pre-orders are the remaining funding model.  This is another model that is fraught with scams.  Indeed, there have been many copycats who set up a website, promise ASIC hardware, and attempt to collect money.  How to separate these scams from the real operators?  That question is the fundamental problem with pre-orders.

Unfortunately, pre-orders are also the most straightforward way to fund an ASIC project, if you lack IPO or Angel money.

For bitcoin, circa 2011-2012, pre-orders were the most realistic way that a computer chip was going to be produced.  At the time, fewer knew about bitcoin, and it was unknown if bitcoin's price -- then under $5.00/bitcoin -- would support mining hardware.  It was not obvious there would be a profit. 

Butterfly Labs and Avalon took that risk, and succeeded.  Avalon was out the door first, while Butterfly Labs took over 12 months to begin shipping hardware in volume.  Another effort, bASIC, failed, through the operator eventually refunded almost all the pre-order sales money.

Today, mid-2013, bitcoin hardware has been proven to sell.  BFL, Avalon and ASICMINER proved that hardware can be produced, that customer interest exists on the free market.  Several other startups are entering the mining hardware business:  CoinTerra, HashFast, Alydian, KNCminer to name a few.  Existing players are shipping hardware, and working on next-generation designs.

We all want instant gratification.  And customers who pre-order mining hardware have a clear economic incentive to want the mining hardware in their hands ASAP -- every day lost costs money.

But that must be balanced by setting realistic expectations on the mining hardware businesses.  These are all tiny startups, with no existing chip production lines, creating brand new computer chips for an uncertain, volatile bitcoin market whose profitability in future months is unknown.

"buy it, get it shipped within a week" is a realistic expectation for a decades-old computer market that mass-produces PCs.  As the bitcoin mining hardware market matures, we will start to see this too.  Many of the new mining hardware companies are learning from the BFL/Avalon experience, and competing with enhanced pricing and customer service models.

The free market at work.  The bitcoin mining hardware market is what it is, and could not have been accomplished any other way.

Disclosures:  Am a customer of almost all companies mentioned (I try to buy one of each).  Missed out on the ASICMINER IPO, though, as GLBSE was not a platform I wanted to dabble with, for legal reasons.