tag:thibm.net,2013:/posts @thibm_ 2019-04-30T13:47:53Z Thib tag:thibm.net,2013:Post/1401514 2019-04-24T14:19:53Z 2019-04-30T13:47:53Z A Monetary Layer for the Internet

Source: Wikimedia

ARPANET’s First Mark into Networked Computing

Created in February 1958, the Advanced Research Projects Agency (ARPA) was a response to the Soviet launch of Sputnik 1, the first artificial Earth satellite, to research and develop projects in technology and science, beyond direct US military applications.

Bob Taylor, an ARPA computer scientist convinced a colleague to support a research project using funding from a ballistic missile defense program. Following three years of research, the ARPANET project was launched as the first network to connect two geographically-distinct computers.

In 1969, on October 29th at 10:30 PM PST, the first successful message ‘LO’ was sent from UCLA in Los Angeles to Stanford in Silicon Valley. The message was supposed to be ‘LOGIN’ but the system crashed. Over 7 years later, Queen Elizabeth II was sending her first email from a computer installed in the UK.

The ARPANET was morphing into a small but fast-growing global network of connected computers.

Rising Computer Network Protocols

The ARPANET was the first public implementation of TCP/IP, two major protocols that now form an integral part of the Internet Protocol Suite. Taken together, this suite constitutes what we know as “the Internet”, the global interconnected network that hundreds of millions of humans use daily without ever being aware of it.

As additional computer nodes joined the ARPANET in different countries, novel technologies were developed to make the growing network more usable, notably standard network protocols.

Public computer protocols were created to govern how data is created, exchanged and interpreted between clients and servers on the same interconnected network, including Simple Mail Transfer Protocol (SMTP) to send and receive emails, File Transfer Protocol (FTP) to exchange and read files or Hypertext Transfer Protocol (HTTP) to structure and display web pages that we browse today.

HTTP is one of the most well-known public protocols. It turned ARPANET into the World Wide Web that is now commonly called the Internet or the web and established a standard for computers to communicate on the application layer of the Internet, having built on other layers of public protocols and open-source technologies.

The Internet's Onion Shape

The Internet is built in layers, abstracted in a framework called the Open Interconnection System (OSI) model. It is a logical construction that defines network communication used by various computer systems that interact with each other.

As the Internet morphed into a more sophisticated global network of computers, the OSI model was published to help decouple seven distinct layers of public protocols useful in the creation, exchange and interpretation of data flows.

As a hierarchical system, public computer network protocols coordinate how data moves across the Internet's seven layers. Each layer is solely responsible for performing assigned tasks and transferring completed tasks to the next layer for further processing.

This clear specialization ensures performance, reliability and scalability of the Internet.

Source: Cloud Scanner

The Internet is a multi-layered global distributed network of computers that we use every day for many things without ever questioning its existence. Though only 20 years old, the Internet powers an immense amount of trades between an ever-growing number of consumers, companies and nations, accounting for roughly $28 trillion in 2016.

Long before Amazon was a thing, in 1972, students from Stanford and MIT conducted the first ever online transaction using ARPANET. The first good ever sold on the Internet was marijuana.

Many projects followed as commercial and academic attempts to create electronic cash making commerce native on the Internet. All incommensurably failed from the late 1980s to the early 2000s, including B-money, Digicash, Hashcash, and BitGold.

Technology, regulation and centralisation prevented mainstream digital currencies from ever taking off.   

The Missing 'Monetary Layer' of the Internet

Regardless, for users to directly trade with geographically-distinct neighbours on the Internet, one essential component has been absent: a monetary layer to store, exchange and measure value natively on the web without being required to use legacy financial institutions.

Over two decades, failed attempts at creating digital money paved the way to a reckoning and the silent launch of an open-source software project on a cypherpunk mailing list, back in 2008. Satoshi Nakamoto was the unknown pseudonym who posted about the Bitcoin project with a link to its white paper explaining how it works.

It was initially understood as yet another doomed attempt to construct a digital currency by the disillusioned cypherpunk community. Without anyone’s permission, Bitcoin slowly emerged and diligently grew to be adopted by a small group of computer researchers, cryptographers and engineers curious to decipher the technology.

Source: Bitcoin P2P E-Cash Paper Mailing List

Fast forward 10 years, Bitcoin proved to be resilient to attacks, bugs and serious technical or political crises. There are hundreds of developers actively working on this project worth billions of dollars of market capitalization.

Bitcoin’s latest running software (0.17.1 released in December 2018) has created and maintained the world’s first form of digital scarcity. Without ever breaking the integrity of its underlying ledger, it does not rely on trusted third parties to verify everything is running well.

Everyone and anyone can take the role of verification. This had never been achieved in the past. Bitcoin solved a multi-decades long problem in computer science called the Byzantine Generals’ Problem.

BTC/LN as Public Network Protocols

Bitcoin is growing into the Internet's native monetary layer. Functioning as a suite of public network protocols, BTC/LN, Bitcoin has undeniably scarce units of value. It is a network of storable, movable and quantifiable value.

As a self-contained economic system on the Internet, Bitcoin is powered by energy and protected by a global network of computing power that voluntarily regulates the integrity of Bitcoin’s ledger and its digitally-scarce monetary units. That self-organized configuration is unbreakable and decentralized like the internet itself.

Bitcoin and its Lightning Network (BTC/LN) are joining the ranks of other open network protocols akin to TCP/IP. Bitcoin (BTC) has movable units of scarce value that can flow within its network, similar to the Internet Protocol (IP).

The Lightning Network (LN) acts as a second layer built on top of BTC, which permits nearly instant, friction-free, and anonymous exchange of smaller units of BTC, similar to the Transfer Communication Protocol (TCP).  

BTC/LN is the suite of protocols responsible for the rise of a native monetary layer of the Internet, adding a division to the OSI model’s current stack. Bitcoin represents the world’s first bytes of data with an intrinsic financial value priced by the physical world, in the form of energy and perceived market value.

Software now has a built-in price tag. Code is valuable without any specific application because of its remarkable scarcity. Scarcity isn’t a concept that is limited by physical boundaries anymore. Scarcity can provably be digital. It now exists in the most intangible form–bytes–digital binary digits.

A Silent Monetary Evolution 

Bitcoin is agnostic of any traditional institutions such as governments, central banks or for-profit corporations. Internet users can simply acquire, trade and use bitcoins as they see fit. No single entity controls its protocol. It is governed by open-source software, which is voluntarily run by tens of thousands of independent computers.

Computers in the network play two roles around Bitcoin’s ledger, called the Timechain, by either writing or reading transactions. Bitcoin’s Timechain is a chain of blocks, which transcribes a suite of bundled transactions that are recorded by one set of computers: miners.

Often coined ‘the blockchain’, which is for other cryptocurrencies trying to mimic Bitcoin, the Timechain is more accurate to describe Bitcoin's ledger as it ties to the original semantic used by Bitcoin’s creator, Satoshi Nakomoto.

A Free Market of Rational Volunteers

Miners are powerful computers with specialized hardware dedicated towards writing transactions to Bitcoin’s ledger. In a collective computational contest, vast amounts of energy are expensed by miners to brute-force random alphanumeric strings in an effort to guess a random code. It’s akin to a digital lottery.

Bitcoin miners’ contributions to the network are measured as hash rate, which is a function of computational power.

Source: Bitcoin Miners Beware: Invalid Blocks Need Not Apply

Once that random code, called a ‘nonce’ is found by a computer in the network, it proves that the miner has completed enough work in the form of energy and time expended. This is commonly referred to as Proof of Work, which allows all computers in the Bitcoin network to verify that the system stays fair and honest.

The lucky computer, or mining pool as they often combine computing power for efficiency, can then gather a batch of unconfirmed transactions from a queue called the ‘mempool’ and bundle them into a block to permanently write that block of transactions into Bitcoin’s ledger.

To be granted permission to write on Bitcoin’s ledger, there is no shortcut such as political influence, hierarchy or seniority. Each participant adding information to Bitcoin’s ledger needs to earn it through proven work that they must show to the network using the random nonce.

In return for their service to the network, miners receive a ‘block reward’ with new bitcoins, including transaction fees that users previously paid to have their transactions recorded. This is the only way for new bitcoins to be created. It must be earned via provable energy expenditure.

Since 2018, Bitcoin has shifted the world into an era of exahash computing. If one were to gather the 500 top supercomputers, altogether they would only represent 1.6% of Bitcoin's hashrate. It is dwarfing the world’s computing horsepower by multiple orders of magnitude, creating a robust computational defense mechanism, preventing malicious actors from controlling the network and double spending bitcoins using the majority of the hashrate (often called a 51% attack).   

A Self-Managed Computing Organism  

Bitcoin's ledger is secured and managed by cryptography. On average, a new block of transactions is added every 10 minutes, no matter what. Each time, this creates new bitcoins on the network, in the form of a block subsidy for the lucky miners.

The block subsidy used to be 50 bitcoins, which got cut in half in 2012, in 2016, and soon will be cut in half again in 2020, bringing the next block subsidy down to 6.25 bitcoins. This process is called halving.

Halving events happen every 210,000 blocks that are added to Bitcoin’s ledger. It is the only rule that controls the issuance of new bitcoins. It will continue roughly every 4 years until all 21 million bitcoins are mined, which should happen approximately in the year 2140.

The creation rate of new bitcoins slows down over time, until it ultimately turns to zero. No new bitcoins will be created after that moment. As new adoption increases demand, bitcoins’ price goes up too. Opportunistically, new computers are attracted to the Bitcoin network to mine blocks of transactions and receive the valuable block reward.

As more computers join the network and produce larger collective hashrate, Bitcoin is automatically adjusting the difficulty of the mining lottery. Roughly every 2 weeks, or 2,016 blocks, mining either becomes harder or easier based on how much hashrate there is.

It is the most reliable way to have new blocks mined roughly every 10 minutes, which keeps new bitcoins’ issuance highly stable and predictable, regardless of the network’s collective hash rate.

Towards Universal Financial Integrity

Since its first block mined on January 3rd, 2009 by Satoshi Nakamoto, Bitcoin has been up 99.98% of the time, and has never validated a malicious or wrong transaction, which is unprecedented for financial institutions.

This is only possible because verifying Bitcoin transactions is very accessible. While writing new transactions on the ledger is extremely costly, reading them to verify the integrity of the ledger is easy and accessible to all.

Full-validating nodes can be operated on computers less powerful than what anyone has at home or at work, making it trivial and affordable to verify the history of the Bitcoin transactions. Anybody can run them. This makes Bitcoin an impenetrable fortress of security as everyone can check every single transaction that ever happened in Bitcoin. It’s an openly auditable ledger.

Miners and full-node operators voluntarily run a version of the Bitcoin software that is compatible with the majority of the network. This maintains a general consensus on the shared rules of the network such as the block size, which dictates how many transactions can be included in a block by miners.

Large miners are incentivized to grow the size of blocks to include more transactions, gaining additional fees and making it more costly for newcomers and small participants. Full node operators choose voluntarily to run a version of the software to keep block size small to make verification accessible to everyone.

Miners have to be compatible with full-nodes to have the mined blocks be verified and approved. If Bitcoin’s block size grows, more powerful computers are required to run full-nodes with extra memory and bandwidth, which will centralize verification, adding a level of trust in the system, especially around miners.

Bitcoin’s current block size is 1MB, and has been challenged many times in the past. The most serious attack was in 2017 under the form of a fork, called Bitcoin Cash (BCH), which copied Bitcoin’s software and transaction history, and adjusted the code to raise the block size to 4MB.

Deviations such a Bitcoin Cash are the unavoidable by-product of the open-source nature of Bitcoin, which lets anyone create forked projects of Bitcoin’s Timechain, though the market continues to value these forked tokens at a substantially discounted value.

The Internet-Native Monetary System

Bitcoin (BTC) has recently seen the deployment of Lightning Network (LN), which is a layer built on top of Bitcoin to enable fast, cheap and anonymous payments. BTC is the base layer, or Layer 1. LN is the second layer, also referred to as L2. BTC and LN interoperate in a cryptographically secure manner.

LN is a network of nodes for routing payments that lets people send sats (subunits of bitcoins) where 1 BTC = 100,000,000 sats. It is much cheaper to use LN for smaller amounts instead of using BTC’s on-chain network because transactions aren’t replicated by a global system of miners and nodes to be preserved for eternity in the Timechain.

On the Lightning Network, transactions occur directly between peers, and only occasionally settle on-chain if needed as an arbitration system.

Under beta release, the Lightning Network was deployed in 2018 and has since seen a massive growth in its utilization with over 8,000 public nodes connected to the network, around 40,000 channels connecting them and more than $5 million of liquidity. One day, as LN matures, it may very well power the world’s commerce, exchanging trillions of dollars of value in today’s terms.

Source: 1ML

Intrinsic BTC/LN properties let people store, exchange, and measure value on the Internet. These three functions are the primary use cases for standard money we use today for our everyday lives. It just exists natively on the Internet, available to anyone with a connection.

Bitcoin and Lightning Network are two public protocols that are undeniably morphing into native Internet money, but it is still incredibly early.

Infrastructure is in its infancy, following a steady increase in global adoption with now a few millions of people using Bitcoin. Many improvements on both the base and second layer are made around privacy, security, and performance.

Beyond Bitcoin and Lightning Network

As the Internet liberated free information between global peers, Bitcoin is liberating capital exchange, creating open, fair, and social markets in which anyone can participate.

New companies exclusively built on Bitcoin’s base layer and/or Lightning Network are making it safer and easier for sovereign people to opt-out of the legacy banking system.

As trust-minimized agents, companies building the “Layer 3” of Bitcoin and Lightning Network are pushing for reasonable adoption with ethical principles and a core focus on security, usability and sovereignty.

Whether working on non-custodial private key management, LN channel capacity distribution, protocol implementations, or peer-to-peer BTC exchanges, L3 companies make the capital flow from the legacy banking system into Bitcoin possible.

L3 companies are creating massive economic upside potential for this new Internet monetary layer and will be building a Bitcoin-based economic system in the next 20-30 years without a doubt.   

As always, major thanks to a few Bitcoiners who helped out with reviews, edits and suggestions.

@mrcoolbp
@zanepocock
@theonevortex
@alan_btc
@Joss_do_it_BTC
@anbuteau
@allenshashaty

]]>
Thib
tag:thibm.net,2013:Post/1392755 2019-04-02T04:04:25Z 2019-04-14T19:48:29Z Managing Bitcoin and Private Keys

Owning a bitcoin means controlling the underlying private key that secures it.

If lost, no recovery is possible. No third-party can help. It’s irrevocably gone.

Private keys must be kept secret and protected at all times. This is non-trivial for most users, with many severe financial losses in the past attesting to such unfortunate reality (here, there, over here and more there).

Private keys govern how bitcoins are spent (or moved between UTXOs, to be precise). Bitcoins are securely stored on a globally distributed ledger. The ledger is replicated and synced across anyone who wants access to it to verify how bitcoins are moved within the network. This is usually done by running a full node (more on that later). Private keys unlock bits of this ledger, called addresses (or UTXOs), where bitcoins are stored.

Managing private keys

A Bitcoin private key is a 256-bit data unit, often represented as an hexadecimal string, which can be understood as a digital bearer asset with intrinsic financial value. It is code with a price tag. Money is now pure software. Anyone in possession of a private key is deemed the rightful owner of the associated bitcoins.

From generation, to storage and utilization, private keys deserve delicate care and extreme caution for Bitcoin to be utilized securely as a global value communication protocol on the Internet.

Generating new Bitcoin private keys requires randomness to ensure no one can easily guess what it is. Once it is created, it must be stored securely, sometimes offline, to reduce the possibility of loss or theft. When used to approve or sign Bitcoin transactions, private keys must be cautiously managed to avoid introducing risks of loss. Secure backups may also be used with additional security to recover compromised or lost private keys.

This is an oversimplification of private key management, applied to Bitcoin.

Security issues are real

Exclusive control of private keys, echoing with rightful ownership, is primordial for bitcoin owners. But self-managing private keys brings an unusual responsibility that can be problematic to most people. Cutting trusted third parties, such as banks for credential recovery, requires full accountability over private key management. Not an easy feat for most.

In many countries, consumers are legally protected from any liability in traditional banking as most transactions are traceable and reversible. Bitcoin transactions while traceable are irreversible, leading to permanent losses with no legal recourse to authorities or financial protections.

Users who manage their own bitcoin private keys rely on setups that often require technical skills, an advanced dedication for security and a high risk tolerance as simple errors are still quite common.

Over the last decade, multiple improvements were released by individuals, open source projects and companies, making bitcoin private key management much easier and minimizing safety trade-offs, while ensuring users retain full control of their funds in the best cases.

Full control means bitcoin owners can be sovereign in how they manage their wealth, independently from trusted third-parties, which is essential for bitcoin’s long-term morphing from a value communication protocol on the Internet into a global peer-to-peer economic system.

Custodial wallets

Today, most bitcoin owners still leave private keys on online custodial wallets such as exchanges after having acquired bitcoins, delegating full control of their private keys to trusted third parties.

There isn’t comprehensive data on the third-party custodied proportion but it is public knowledge that Coinbase, a popular cryptocurrency exchange, recently announced they possess 5% of bitcoin’s circulating supply under custody, drawing attention to the large portion of bitcoin holders giving away full control of their assets.

Exchange platforms make it ridiculously easy for people to acquire and store bitcoins, reducing the anxiety that comes with the self-custody responsibility. They are one of the most essential and valuable products to onboard new users. But simplicity is often mistakenly associated with security.

Multiple custodial exchanges have lost customers' bitcoins in the past due to hacks, as they turn into honey pots for hackers or internal collusion jobs. User credentials have been stolen, 2-factor authentications have been spoofed and private keys were compromised with no recourse for affected users.

Mt. Gox is the obvious illustration with 850,000 BTC lost, but there was also Coincheck with over $500M stolen, and most recently QuadrigaCX that lost $190M of customers’ funds. Lots of other cases (here, there or here) have happened, totalling hundreds of millions of customers’ funds that are gone forever.

Many web, mobile and desktop wallets also have full custodial control of their users’ bitcoins, which introduces similar risks as with exchanges. Aesthetically-pleasing user interfaces with highly usable experiences lure users into trusting them.

Often these products are developed by small teams of developers or early-stage companies with light governance, fragile security models and no credit history, making these counterparties highly risky to delegate full control of your funds.

Some custodial wallets may let users control a portion of their private keys but still force users to rely on trusted third-party full nodes to verify Bitcoin transactions. More on that later.

Non-custodial wallets

Self-custody of bitcoin private keys is therefore the most advisable alternative to eliminate reliance on unproven third parties. “Not your keys, not your bitcoins” is being thrown around over and over in the community but it often takes some time (rightfully so) to fully grasp why that concept truly matters.

Efforts in the Bitcoin community, such as the Proof Of Keys movement initiated by Trace Mayer, are attempts to make more people care about controlling their own keys to protect their bitcoins, asking bitcoin holders to withdraw their private keys from custodial exchanges into the non-custodial alternatives described below.

Bitcoin’s architecture design using public key cryptography allows users to be sovereign by self-managing their wealth in an effort to cut the overwhelming dependence on trusted financial institutions such as banks.

With that principle in mind, non-custodial wallets have been developed to help users safekeep bitcoins on their computers, mobile devices, specialized hardware and even paper.

Non-custodial desktop wallets can be "lightweight", meaning they need to be connected to a full-node of the Bitcoin network to verify transactions.

Full nodes are used in Bitcoin to transparently verify the transactions that are happening in the network, without trusting an intermediary to report information. All the Bitcoin transaction history since the network was born on the Internet on January 3rd, 2009 are stored and accessible in any active full node.

Using Simple Payment Verification (SPV), non-custodial desktop wallets ask full nodes to verify specific transactions, which diminish privacy if done with a trusted third-party full node, but is fine if it is user-owned. Using this method, bitcoin holders are truly sovereign in how they manage their private keys and verify that their transactions went through.

Lightweight desktop wallets include Electrum or Wasabi, which rely on their corporate servers to verify user transactions as trusted full nodes, reducing user privacy.

For lightweight desktop wallets that don’t rely on third-party full nodes, users need to set up and operate their own Bitcoin full node and have the patience to perform the initial block download from the genesis block to today, which may take several days or weeks depending on technical limitations such as bandwidth and processor speed.

This makes desktop wallets easier to use for regular users who may not have sufficient computer disk space to store the entire Bitcoin blockchain history directly on their computer, or enough network bandwidth to download the 215GB of transactions. Some companies such as Nodl, Casa and Samourai’s Dojo are making full node plug-and-play products to help onboard less tech-savvy users.

Other desktop clients have "full-verification nodes," which requires users to download Bitcoin's entire blockchain transaction history without requiring any external full node for verification.

Besides the technical specifications required for the computer to perform such operations (at least 500GB of disk space as Bitcoin's blockchain is 215GB now and growing, with high network bandwidth and reasonable CPU), users need to have this wallet connected to the Internet constantly.

This is to prevent the in-app full node from disconnecting from the network and having to re-sync to download the latest blocks, which introduces delays until the full node is fully synced again to the tip of Bitcoin’s blockchain.

Full node desktop clients include Armory or Electrum. Unfortunately, hardware failure risk and Internet connectivity via Wi-Fi for desktop computers and laptops make users prone to a wide range of online security risks on desktop wallets.

Mobile

Similar to desktop clients, mobile wallets store private keys on user devices, which are connected to the Internet via Wi-Fi and cellular networks such as LTE. They are available on either Android, iOS or Windows Phone.

Bringing better usability, mobile wallets are by default “lightweight” wallets due to the hardware memory and bandwidth constraints tied to mobile devices. Mobile wallets also use SPV and either rely on trusted third-party servers providing transaction verification (which isn’t favorable) or connecting to user-owned full nodes.

As noted, SPV wallets can introduce privacy concerns for users when there is a trusted third-party full-node involved in providing transaction verification. For users operating their own personal full node, privacy concerns using SPV are diminished.

Mobile devices are reasonably more secure than desktop computers with data encryption but still face hardware failure risks, social engineering and physical losses. Strikingly, they are ubiquitous and can be useful in other multi-party configurations that we will cover later on.

Mobile wallets using trusted third-party full-node servers include Mycelium and Blockstream Green. Some rely on one core corporate server, which is the least favorable option for privacy and security, while other configurations randomly select verification servers from a trusted list, which reduces privacy concerns.

Other mobile wallets connecting to user-owned full nodes include BRD Wallet and Zap on iOS, Electrum Wallet with Samourai Wallet on Android. HODL Wallet is available on both iOS and Android and lets advanced users choose between connecting to their own full-node or using their third-party server.

Specialized hardware

Dedicated companies have developed specialized hardware products to make it safer and easier for owners to store their bitcoins independently of any trusted third parties, while reducing risks of traditional desktop and mobile wallets.

Hardware wallet providers such as Trezor, Ledger and Cold Card Wallet are the most popular manufacturers. Specialized hardware in the form of USB-like devices store private keys offline to reduce the potential attacks from hackers that users may face but require users to trust the hardware providers and their full-node APIs to verify transactions.

Specialization of hardware devices is an attempt to prevent physical extraction of private keys. Hardware wallets are either connected to desktop or mobile apps to execute operations in tandem with a trusted interface built-in on the device. Users need to have these specialized devices physically each time they want to move funds to and from their wallet, which is not the most convenient.

Even with added security features, multiple cases of losses and thefts occurred in the past due to people buying reused hardware wallets (always buy directly from verified manufacturers) or loosing the device with its recovery (here or here).

In case of physical loss or destruction, hardware wallets have backups that need to be stored separately to recover the private keys they contained.

Physical backups

Backups of private keys must be stored by users who are advised to write them down on a piece of paper. Backups, also called seed, recovery or mnemonic phrase, are the ultimate option for users to recover funds in case private keys get lost or compromised via a web, mobile, desktop or hardware wallet.

Storing backups is a responsibility that is outside the scope of hardware, web, mobile or desktop wallet providers. This introduces potential user errors and likely loss events if backups are lost or compromised. It is the ultimate recovery material. If lost or compromised, there are no recourse.

Backups must be stored offline to minimize risk exposure to theft and loss, which involves operational and physical security. Preventive measures must be considered to avoid physical theft of recovery material, which would lead to the compromise of the entirety of the associated private keys and funds.

Floods, fires, earthquakes and other catastrophic events may very well destroy the backups users are storing in their homes or workplaces. Companies such as Cryptosteel, Hodlinox or Billfodl are developing heat-resistant steel plates to prevent long-term degradation of backups.

Redundancy of backups across geographies is advisable, which introduces other risks and dependencies. Sharding, or splitting, backups into multiple sub-parts help reduce the likelihood of a malicious actor compromising the funds. Vault providers can help store redundant or partial copies of backups for maximum security but introduce third-parties.

Operational complexity and cognitive burden rise dramatically as a direct cost of extended security measures. Today this is the state-of-the-art for backups and recovery of bitcoins.

Open-source frameworks

Open-source software and procedures, such as Glacier, a protocol for high-security bitcoin storage have been released by the community in an attempt to create an industry standard. It is a highly-involved operational procedure, which require redundant, quarantined and special-purpose hardware.

Physical dice are used to generate true randomness that algorithms on computers aren’t capable of creating properly. Combined with purpose-limited offline computers, truly random private keys are generated, and stored on offline paper wallets.

This is a deep cold storage, which involves machines that have never been connected to the Internet and never will with one-time disposable hardware that gets burned after having generated private keys.

All these operations must happen in a faraday cage to nullify the exposure to potential radio-wave side attack channels. Not a procedure for your casual user securing his bitcoins. Minimum expense for that configuration is roughly $600 and takes 5-7 hours of initial set up.

Institutional custodians

With the rise of Bitcoin's market cap in 2017, institutions have showed interest in the safekeeping of bitcoins with novel configurations. As fiduciaries, institutions are forbidden to self-custody bitcoins and are required to hold funds using dedicated third-party custodians that are regulated under the appropriate regulatory regimes, licenses and supervising entities.

With the segregation of duties between investing and custody, custodians have emerged as a quality interim solution to bring institutional liquidity in the market until regulations and technology mature sufficiently to have reliable non-custodial infrastructure deployed mass market.

Custodians often provide bespoke governance, internal controls, proof of reserves and insurance guarantees for fiduciaries with multi-party authorizations, where many signatories are registered to collectively approve transactions on bespoke governance rules.  

Multiple companies are working towards getting a share of the market, with notable entities such as ICE’s Bakkt (still pre-launch), Fidelity Digital Assets, Anchorage, Xapo or KNØX.

Multi-signature

Multiple signing authorities can be required to execute Bitcoin transactions. Multi-signature is a built-in feature of Bitcoin's P2SH (pay-to-script hash) at the base protocol layer that has been available since the early days. This design reduces single points of failure and enable bespoke transaction governance rules based on amounts, time locks and specific use cases.

Multi-signature schemes, where 2 authorizers out of 3 registered would be required to execute on a transaction, allow users to retain full control of their bitcoins, controlling 2 keys, while ensuring continuity in case of loss with other parties controlling the remaining key. The architecture of such system is non-trivial to design and implement securely while abstracting away the complexity from the end-user experience.

Companies such as Casa has recently released multi-signature wallets for users, letting consumers store keys across their devices, and a few with Casa creating a “seedless” configuration, where users can get their private keys recovered using other keys securely held by Casa in case of loss events.

BlockstreamGreen has been updated recently with a new multi-signature mobile wallet for consumers using “2-of-2 multisig by default, with one key held on the device, and one key held on Blockstream’s servers.” BlockstreamGreen send pre-signed transactions to users, which only need the user signature to be treated as valid transactions.

Muun is the another multi-signature mobile wallet for Bitcoin. “As a non custodial service, Muun helps users fulfill Bitcoin’s be-your-own-bank promise, and protect their funds from trusted third parties, attackers and human error [...] transactions are protected with 2-of-2 multisig and theft detection. A personal key is stored in your phone. Muun holds a co-signing key.”

On the institutional side, Unchained Capital has recently announced their “collaborative custody” product, as “a superior approach to security that combines the control of self-custody with the benefits of a managed financial service.

Ledger Vault was released in 2018 as a “multi-authorization cryptocurrency wallet management solution enabling financial institutions to safekeep their funds [...] looking for convenience and streamlined operations with zero compromise on security.”

Ciphrex, is an open-source, free to use multi-signature desktop wallet. “It supports the best security practices in the industry and is rated amongst the most secure wallets by bitcoin.org.”

MuSig, was released by Blockstream earlier in 2019, as a new multi-signature standard to offer “provable security, even against colluding subsets of malicious signers, and [producing] signatures indistinguishable from ordinary single-signer Schnorr signatures.” Blockstream has proposed their code implementation to be deployed into Bitcoin development environments, which may happen later on should it pass community standards.  

An ongoing quest...

Multiple developments are currently happening for bitcoin private key management in an effort to blend security with usability and user sovereignty. A peer-to-peer, country-agnostic and economic system built on Bitcoin deserves novel solutions to onboard the next millions of consumers and businesses without introducing reliance on trusted third parties.

It has only been 10 years since Bitcoin’s birth so the industry still deserves additional infrastructure development for Bitcoin private key management. Safekeeping private keys and utilizing public key cryptography has proven to be a non-trivial but ever-evolving endeavour.

Perhaps in 10 years, most Bitcoin hodlers will be able to securely manage their private keys without knowing how the system operates in the back-end, collectively storing a portion of the world’s growing Bitcoin wealth.

--

Owing a lot to Antoine, Ben, Allen who reviewed early draft versions of this writing, and specifically to Sun and Zane with whom we're trying to make bitcoin private key management better for us three. 

Learning everyday from the best, who are helping us shape a better understanding of Bitcoin, for private key management, security, privacy, usability and so many other important things:

@JackMallers
@giacomozucco
@francispouliot_
@LukeDashjr
@lopp
@starkness
@valkenburgh
@nic__carter
@fernandoulrich
@LarryBitcoin
]]>
Thib
tag:thibm.net,2013:Post/1384057 2019-03-12T15:20:00Z 2019-04-04T02:30:43Z Money's Weird History

Over millennia, humans' social desire led us to help, trust and trade with non-akin individuals to create mutually beneficial value.

We have discovered novel ways to expand our activities from mobile hunting and gathering, to settled groups in farming villages, and more recently, concentrating humans in densely-populated vertical cities.

In the early days of agriculture, debt and credit helped us trade in barter societies where people started specializing their skillset, stimulating trade with neighbours' to feed each other. As local exchanges started to intensify, keeping track of debt and ledger history for both individuals and groups became cumbersome. On top of it, the problem of matching wants in bartering made it simply hard to scale trade beyond a certain size and frequency of exchange.

Looking for a fix, humans quickly and iteratively sought alternative systems in the form of various natural commodities to serve as a way to exchange, store and ultimately measure value in commerce. Seeking the best option, humans tried it all: stones, salt, spices, sea shells, glass or gold to use as neutral forms of money. Most of these commodities all had something in common: they had natural properties that made them relatively neutral in trade, portable across space, durable over time, divisible amongst scales, and generally fungible or replaceable by other similar items.

As early as 5,000 B.C., we have been collectively calling it money, an ever-evolving technology sought, and freely adopted by people.

The common understanding and appreciation of money has massively evolved over the past centuries. Following multiple trial-and-errors, we came to realize the necessary properties that make money a stable, usable and trustworthy means of storing, sending and measuring the amount of effort put into labour. Time is dedicated to labour in an effort to achieve something, usually a product or service the producer will then sell in exchange for money. For buyers not having the skillset to produce, it is economically rational to spend money to acquire it from someone else who does.

Acquiring a specialized skillset takes time, hard work and perseverance such as a wood crafter, a book writer or a computer engineer. Undeniably, money can be interpreted as frozen time, which lets humans store their hardly earned labour for a future date or exchange it freely at any moment against other people’s specialized products and services that they wouldn’t be able to get otherwise. Using money, humans had the ability to specialize in specific fields to get productive at what they do, increasing their ability to produce more at a better quality. With their earned income from this specialized labour, humans were ultimately able to buy and rent other products and services from other specialized humans. Without money, humans wouldn’t have been able to specialize, having had to rely on bartering, which doesn't scale due to the lack of matching wants.

Leveraging money has propelled human societies in subsequent eras of rising prosperity, enhanced by substantial improvements in productivity, doing more with less. Rapidly growing from a population of 60 million in Roman times, to 1.7 billions people at the beginning of the 20th century, we are now reaching 7.7 billions individuals only one hundred years later, exemplifying the value money created for us.

From the age of hunter-gatherers, towards agriculture, and the industrial revolutions, we've recently entered the now well-known information age. Critical pieces of human activities are moving to the digital realm, bringing massive efficiencies to freely distribute information across the world at an almost zero-marginal cost, and that, quasi-instantly. The Internet was the singular trigger for that shift, which broke physical barriers to communicate amongst multiple parties across global networks. Before that, its analog predecessor, the Telegraph, had led the way with a single communication channel, which was the first time humans could communicate across borders.

The evolution of computers into a networked environment gave birth to the rising digital era. Since then, software has been rapidly ‘eating the world’, spreading via the Internet, powering our social and work lives as much as our homes, cars and hospitals. As an ever-evolving species looking for better ways to thrive collectively, we're now working daily with previously distant neighbours in different time zones. We're buying products from across the planet when we can't find them locally or find them cheaper elsewhere. Beyond exchanging information, goods and services, we now exchange trillions of dollars of value on the Internet on a daily basis with billions of other human peers and companies.

The value of goods and services we buy and sell today is currently denominated in 180 national currencies. These local “fiat” currencies are defined by legal tender laws whose value is backed by the government that issued it. Fiat money is present in 195 countries that regulate, protect, and control the amount of available monetary units that are available at any given time through discreet monetary policies. Powered by religious beliefs, empires and nations have been the main vector of global economic expansion in the last centuries, facilitating the development of regional transportation, culture, infrastructure, and trade. As a coordination mechanism for humans, countries have been sustaining their expansionary desires by controlling their monetary policies to stabilize their economies and manage the value of their money against other foreign currencies.

Previously, currencies were fully redeemable in gold, as a proof of reliability and truth worthiness for trade settlements. As gold is no one's liability, currencies pegged to it were actually asset-backed and transactions had undeniable finality between countries, which incentivized central banks to accumulate larger amounts of gold for stability. Paper certificates were then issued in an effort to serve as a way to make gold more usable, portable and divisible for daily commerce. Trusted banks gradually started occupying this function of commerce, which enabled people to convert their paper money back into dollar at any time. Carrying gold was indeed not very convenient for mainstream consumers. More than that, in 1933 Roosevelt’s US government issued Executive Order 6102, making gold private ownership illegal, including a penalty of 10 years in prison and a $250,000 fine for owning more than $100 worth of gold. Banks were also prohibited from issuing any gold payment to citizens.

Paper money then became the standard to store and exchange value for US, and citizens of other countries. Over time, countries have been steadily debasing the scarce yellow rock collateral and paper money created additional claims on the existing vaulted gold money reserves held by newly trusted institutions, central banks. At the dawn of WWI, countries started to create even more claims on gold, further diminishing the individual money value of each citizens holding it, to artificially finance their short-term GDP expansion, debt and even wars. The Weimar Republic’s hyperinflation episode is the most popular illustration of the first half of the 20th Century. This nefarious behaviour has undeniably led countries to neglect the natural scarcity of gold, which was the sole property responsible for its collective election as a multi-century global reserve asset.

Most recently, in 1944, gold was recognized as the global asset reserve under Bretton Woods Agreement. It was a US program established after the American intervention in Europe to dismantle Nazi's Germany in WWII, to ensure currency exchange rate stability across nations, prevent competitive devaluations, and promote sustainable economic growth. Positioning gold as the asset backing the US dollar on a fixed peg, the Bretton Woods system made sure no countries would abuse their printing press by fixing the value of their national currencies to the US dollar. This was a US-led and globally coordinated effort to prevent unreasonable economic stimulus, which had created inflationary recessions (massive increases in consumer prices).

Countries such as Germany in the 1920s had abused the printing press having realized their incapacity to pay their war reparations imposed by the Treaty of Versailles, crushing Germans’ purchasing power, which led to the rise of populism and political instability. Later on in 1971, as part of the Nixon Shock, a series of economic policies, the US government stopped the US dollar’s convertibility to gold due to the rising addiction of economies to leverage their national monetary policies in the stimulation of short-term economic growth. The United States maintained their hegemony as all currencies remained pegged to the US dollar while a novel leading position was established on a rising commodity, oil, which was needed by most countries in the fast-paced industrialization of the 1970s and 1980s. Today, petroleum is mostly priced in US dollars, which gives it an artificially stable position as a global reserve currency.

Since it’s debasement from gold, the US dollar lost over 90%, while other free-floating fiat currencies followed similar downward paths. Countries arbitrarily use the printing press once again the finance national debt that reached maturity and need to be repaid to creditors as payment defaults obviously affect their future ability to borrow. As sovereign debt rises to new highs, the US $22 trillion dollar debt along with a $1 trillion deficit in 2018 appears to be inflating unsustainably. The Federal Reserve may very well further expand their money supply in the US by printing more US dollars to purchase bonds from the US Treasury that need to pay back current creditors, having reached abnormally high levels of debt-to-GDP, amounting to over 105% in 2018.

Fiat currencies getting large inflows of new units added to the circulating supply by central banks lead to wealth extraction from currency holders who do not invest their money in yield-generating assets. Money is stable if its new flow of units created is relatively smaller than its current existing stock. The larger the stock-to-flow ratio, the more stable the value of the currency is. This is the very reason why gold was the most successful money after humans have tried spices, salt, seashells and other forms of money before. Gold is naturally scarce because it is mechanically hard to dig it from the ground. Each year, around 2,400 tonnes are mined from the ground. Gold’s stock-to-flow ratio is large, roughly equal to 71, which means it currently takes 71 years of digging non-stop to get the current existing stock of 170,000 tonnes.

Fiat currencies have a low stock-to-flow ratio, which diminishes frequently as central banks print more money to control their national monetary policies. Citizens in politically unstable countries are seeing most of their wealth vanish due to depreciating currencies. Inflation is an upward wealth drought from fiat money holders to yield-generating asset holders. Poor citizens get poorer as money they hold lose purchasing power due to inflation while capital owners get richer benefiting from monetary inflation pumping their real-term yield-generating positions (positive return earned over the inflation).

Venezuela is a current illustration of what happens when a fiat currency, in this case the Bolivar, is exposed to political instability of a government. Maduro-led Venezuela has been experiencing an astonishing 80,000% inflation in 2018, which brought the life savings of millions of Venezuelans to be worthless, causing tragic financial damage and irrevocable losses for many hard working families. Recently, the country has gone into darkness with a long-standing power outage. Multiple other countries such as Germany, Hungary, France, or Zimbabwe faced dramatic hyperinflation events in the past.

Across time, the realization that centrally-controlled government currencies do not work is evident. As more countries see higher rates of national inflation, leading to an undeniable loss of citizens’ purchasing power, people will start looking once again at other forms of money. Our current currencies, whether it is the Euro, the US Dollar, or the Argentinian Pesos are all designed around the same obsolete principle: governments can be trusted to control the issuance of money conservatively. The Internet gave us the ability to talk to everyone without anyone’s permission for free and instantly. Utilizing a more stable money for savings or to send payments abroad to families and friend should be done without anyone’s permission too.

Heard of Bitcoin?

Mega thanks to people who've helped out breaking the logic, and disambiguate this special thing we call money. Plus other folks who don't know it, and yet inspire me to learn more every day.


Especially, thanks to the #Bitcoin Reading Group started by
@_JustinMoon_ from whom I'm learning a lot with awesome chats along with @mrcoolbp and @HillebrandMax.
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Thib
tag:thibm.net,2013:Post/1382007 2019-03-06T01:59:01Z 2019-04-04T02:30:48Z Bitcoin And Us

Without anyone's permission, Bitcoin—the now infamous Internet currency—was birthed 10 years ago as an open software project.

Since then, it has been silently turning into an un-stoppable form of value accumulation and transfer.

It is now clear that Bitcoin is an un-seizable liberty for anyone to opt-out of the legacy and elitist financial system. And nobody is behind Bitcoin, but anybody can participate. It is a truly open and organic financial revolution. As a new form of money for the digital age, Bitcoin has a predictable inflation schedule with an unalterable pace leading to a hard cap limit of 21 million units that will ever be created on the network. It is undeniably and absolutely scarce.

Owning one full bitcoin is an ultimate privilege that will soon be a long-gone fantasy.

Bitcoin is as scarce as time in a human life. As a living organism, it has a sophisticated mechanism secured by powerful computers to validate transactions roughly every 10 minutes, each time creating new units as blood flows from a heart beat. Expensive to power, Bitcoin requires substantial amounts of energy to be expanded in the form of electricity, which guard malicious actors at bay. Abused monetary policies perpetrated by central banks to finance national debt at the cost of the currency holders exists no more. An open protocol to verify ownership, Bitcoin is a way to store, exchange and measure value, globally via the Internet.

It is a new universal currency, free of any central control, local regulation and national borders.

Bitcoin completely neglects obsolete concepts of country borders, making money a universal phenomenon free of government intervention. It is ushering a new era of commerce with truly open, fair and free markets. Money is finally divorcing from the State with an unstoppable currency. Should it continuously gain adoption, Bitcoin will morph our world towards global economic prosperity, where money and capital flow freely to productive endeavours creating unseen collective marvels.

Today's financial system relies on elite bureaucrats, opaque institutions and blind trust. We tend to take the financial stability of our banks for granted, which is a fallacy as we've unfortunately experienced glitches in the past, most recently in 2008's subprime crisis. Tomorrow's financial backbone may very well live on top of open-source money: a delicate alliance of secure cryptography, decentralized computing and behavioural economics.

In the last decade, Bitcoin has shown a robust 99.99% uptime, which is unprecedented in legacy banking. A once isolated but unshakeable minority belief held by a few will turn into an indisputable majority public opinion: Bitcoin is not going away, it is here to stay. With multiple death obituaries, the now infamous Internet currency has repeatedly proven many to be wrong.

Up until now, fiat money has been geographically limited by monopolistic central banks issuing different national currencies within their borders. Currencies such as the US Dollar, the Euro or the Argentinian Pesos have been protected by governments' legal tender laws. Imposing citizens to use fiat for their savings, to get payroll or pay for their taxes, these artificial barriers have been attempting to isolate local currencies to protect them, which has no more reason to exist with economically-networked social markets. 

Similarly to language, money has a strong natural network effect. English today is 30% of the Internet content. The Internet gave a platform for English to thrive as a global communication protocol, even though English-natives only account for 4.5% of the world's population. Being an Internet-native currency, Bitcoin has followed similar tendencies. An inescapable gravitational force will then absorb the world's financial value away from centrally-controlled fiat currencies, converging it into a reserve currency for global wealth: Bitcoin.

Gradually, Bitcoin may very well dethrone the politically-exposed US dollar, which to this day has been centrally managed by the opaque and unpredictable Federal Reserve. The USD's recent and temporary position as a global reserve currency has been artificially secured through its now-defunct gold convertibility and current exclusive conversion to petroleum, the commodity responsible for the fast industrialization of the late 20th century.

During that journey towards a reserve currency, multiple serious roadblocks will spawn attempts to stop Bitcoin in its natural monetary evolution. Armed with ferocious power, nation states will try to ban it to protect obsolete fiat currencies. Letting go off a decades-long monopoly on the printing press will have painful withdrawal effects on overly-inflated economies with addictive tendencies to easy money-fuelled stimulating debt. The demonetization of fiat currencies will be painful, unfortunately.

As a hard to swallow medicine, Bitcoin will successfully unchain global free trade between people. Every day, billions of individuals will enjoy free, instant and easy payments to buy what they deem useful at the moment. Countries will rely on its finality, security, and apolitical nature to settle multi-billion dollars international transactions.

Small experiments have already been settled in Latin America between Argentina and Paraguay. Consumerism will slow down as people come to appreciate the inalterable scarcity of this new form of money and start saving further, only buying things they truly need or desire and storing the rest for rainy days. Investments into productive assets and activities will flourish, forcing capital allocators to solidify how long-term returns on investments are evaluated. Once isolated, local communities will now be able to trade with distant economic neighbours. Basic goods and services such as food, housing, education and healthcare will become truly commoditized as yield in these sectors decrease, pushing investors to allocate capital towards innovative fields with higher yield.

A simple realization will become evident: hard money in the form of Bitcoin will enrich productive hard work, no matter who you are or where you live. And rightfully so.

Today, Bitcoin is still a monetary experiment that is neglected by large traditional institutions and governments. At most it is a 10 year-old multi-billion dollar software bug bounty program. It is a transparent glass window with a fortune that remains unbreached. This experiment simply cannot be ignored anymore.

In 2029, it will be 20 year-old and at this point in time, Bitcoin will be an unquestionable institution that people will not only tolerate, but accept as durable and ever-lasting. In 2039, our world before Bitcoin will be an embarrassing collective memory, tracing back to the aberration of central and fractional reserve banking, which fed wars, economic crises and above all––tarnished all of us with greed and impatience.

At a rough estimated world population of 8.8B people in 2040, owning a full bitcoin will mean being in the 0.19% top wealthy, leading to the largest wealth transfer phenomenon the world has ever witnessed. An asymmetric bet that was once available to all, everywhere. After having evolved from its early days as a scarce digital collectible sought after by the computer geeks and libertarians, Bitcoin will have accumulated a material portion of global wealth trending towards a global store of value. As the issuance rate of new units reduces over time and demand for Bitcoin increases with mainstream attention picking up steam, the network will morph into a more stable and reliable store of value worth trillions of dollars.

Central Banks may very well start accumulating bitcoins on their balance sheets as a way to hedge their own fiat currency risk and diversify their assets. Sovereign wealth and pension funds will come to realize that allocating bitcoins to their portfolios is the most reasonable decision to hedge against inflationary pressures of unstable fiat currencies, and the resulting overly inflated assets that their portfolios are composed of. This will be the era where the future retired days of the elderly turn to become denominated in bitcoins. At that point in time, volatility will be long gone.

Having achieved over a hundred trillions in market capitalization, Bitcoin's economic upside potential will most likely have diminished, shying away speculative behaviours. Other asset classes that used to act as a de facto store of value will have started to shrink substantially, leading to a healthy reduction in prices of commoditized areas of our societies such as housing, healthcare and education. More people will be able to afford basic human needs. Global well-being will peak as food, shelter, health and education are finally something we can take for granted, globally.

At a point of equilibrium, Bitcoin will be universally used as a stable way to save value and buy and sell goods and services using sophisticated layers of technology built on top of the currency network. Most of its technology will be abstracted away from users who will solely enjoy a fluid financial system with open, fair and social principles. Unstable fiat currencies will sunset, some gradually and abruptly, until every printing press is put to sleep.

Relying on an immense collective computational effort, Bitcoin's digital scarcity and its immutable monetary policy will be the first and only form of verifiable trust that humans can blindly rely on. This careful orchestration of energy conversion into financial value will make it the first free money the world has ever experienced. Major prosperity will result, letting humans focus on fundamental problems of the 21st Century such as aging, energy, transportation and more.

It will only be Bitcoin and us. And that will suffice.

This article was heavily inspired from brilliant minds openly sharing their research, opinions and knowledge on #BitcoinTwitter. Major shout out to a few of them: 

@MustStopMurad 
@hodlonaut 
@nic__carter 
@NickSzabo4 
@saifedean 
@real_vijay 
@pierre_rochard 
@jhamel 
@MartyBent 
@danheld 
@hasufl
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Thib