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What’s Worrying/Exciting about Bitcoin in 2017

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Looking forward into the next year and more of bitcoin, I see three main areas of concern, each related to the other. Let’s look at the problems, and the work going on to solve them.

  • Fungibility
  • Centralization
  • Scalability

Fungibility: Protecting Your Privacy

Fungibility technically means all coins are substitutable, but in practice it means that you can spend your bitcoins how you want. That means that nobody has the power to stop your transaction (see: Centralization), and nobody has reason not to accept your coins.

The state of fungibility in bitcoin today is poor. Services exist which aim to trace where bitcoins came from and whose they are. The fact that coins can be traced means some services are obliged to do so, and they refuse to interact with coins they see as “tainted”.

The simplest weakness of fungibility is the public ledger: everyone can try to analyze payments to see where they went. Consider transaction 3d96bcd… from April 8th 2016; one output is 3.10510875 BTC, the other is 0.05934611 BTC. If we convert them using the USD closing rate from April 7th, that’s $1307.8842 and $24.9968. It’s fair to guess that the second output is a $25 payment, and the first output is back to the payer. I’d also guess the payer is in the United States.

Addresses naturally cluster when a wallet has to use more than one input to create a transaction; when public addresses are revealed (particularly with address reuse!), analysis becomes easier. I asked someone to look at my bitcoin address, and he immediately linked me to localbitcoins.com using such techniques.

Different software creates slightly different transactions, which can also be used to link transactions and thus addresses. Differences in fee estimation is another method. And every transaction you know makes it easier to guess the remaining transactions, like solving a crossword puzzle. Fungibility is a network property: other people having it helps you have it, too.

There are also active probes going on; fake bitcoin nodes which connect to as many other nodes as they can, presumably to try to nail down the original source of transactions.

What’s Being Done For Fungiblity

Software is slowly improving: every bitcoin core release changelog seems to include tweaks to make active snooping more difficult.

We may see more uniformity in wallet implementations, too, though in the short term things like replace-by-fee will probably make wallets more different, not less.

The most promising development here is TumbleBit: it’s a tumbler which you don’t need to trust with your coins or your privacy. A normal tumbler is where I take everyone’s coins, and then return them randomly. Of course, I might decide to not return them, or keep records so I can trace whose coins went where. TumbleBit is more complicated, but doesn’t have either of these problems. It’s in early development, but once it’s complete I look forward to quite a few TumbleBit servers mudding the waters.

Centralization: Control of The Network

If the miners refuse to mine your transactions, your bitcoins aren’t worth anything. With better fungibility that becomes unlikely, but still possible (miners could insist on ID for every transaction, for example).

In most systems, there are economies of scale which drive centralization, and bitcoin mining is no exception. The invention of mining pools dramatically increased centralization, as small miners delegated their transaction selection to a handful of pools (this smooths out a miners income, by profit sharing). As block sizes increased, the situation became worse: if your block is slow to get out to the other miners, it’s likely to lose a race, and if you’re slow to get blocks from other miners, you’re more likely to produce obsolete blocks. Blocks which lose out like this are called “orphan blocks”, and how often you produce them is your “orphan rate”. More than 1% and your profitability is probably shot.

You can drop your orphan rate by being the biggest miner (or, part of the biggest pool). If a single miner or pool gets more than 50% (which has happened), they can reliably censor the network (which hasn’t). With even less they can still profitably exploit vendors who accept unconfirmed transactions (which has happened). And it turns out that larger miners can drive up orphan rates of other miners (so-called selfish mining) and magnify their advantage.

It should be no surprise then that mining is fairly centralized: four groups control more than half the mining power. Fortunately, there doesn’t seem to be deliberate orphaning attacks happening.

The other issue is that fear of orphaning leads to miners mining empty blocks (aka SPV mining). They do this because they watch other mining pools, and as soon as they see a block header which refers a new previous block, they start mining an empty block themselves. They have to mine an empty block, because they don’t know what transactions were in the previous block. That doesn’t help the network throughput at all, and because they are not validating the previous block, it greatly weakens the security of lightweight nodes which assume miners are actually checking blocks. It turns out over 50% of mining power was doing this in 2015, and many still are.

What’s Being Done For Centralization

Fast block propagation was a big area of work last year, with Bitcoin Unlimited’s XTHIN and Bitcoin Core’s Compact Block work. Both send short summaries of the block contents which often allow a node (which usually knows all the transactions already, just not which ones are in this block) to reconstruct it.

Matt Corallo previously ran the Bitcoin Relay Network to try to increase propagation and reduce incentive to SPV mine; the latest version is based on compact blocks and is even more efficient, called Bitcoin Fibre. You’re welcome to run your own Fibre network, too (I run a test one on Digital Ocean, for example). It uses UDP and error correction so you can get blocks from multiple sources at once, and handle packet loss. Matt claims that there’s no point in SPV mining any more; Fibre gets you the blocks just as fast.

There’s ongoing work on speeding up new block creation further: I’m told Bitcoin Unlimited removed the validity double-check on newly created blocks (it’s caught issues in the past, but maybe it’s time) and Bitcoin Core has worked on speeding it up so it’s no longer measurable. Combined with more significant fee income (which is lost when SPV mining), we may see SPV mining eliminated this year.

None of these addresses the core problem of centralization; this is the issue we have fewest technical fixes for and thus is likely to be least amenable to technical efforts.

Nontheless, Roger Ver’s bitcoin.com mining pool gives me hope that we’ll see some diversity in motivations for miners. Making life easier and more convenient for small miners (especially solo mining) should be a priority for those who care about centralization. In the long term, as more businesses become dependent on bitcoin, I’d like them to start investing in mining capacity as a kind of distributed insurance policy.

Scalability: More Transactions

In the early days, bitcoin software had a 100k block limit and no transaction fees were required. Nobody cared, and blocks were never full.

When blocks passed 700k, bitcoin saw its first centralization crisis as orphan rates spiked and one pool (Ghash.io) got over 50% of the hash power. Since then developers have scrambled over the issue of block propagation; in theory, it could be independent of block size, but in practice it’s not. Centralization has remained a core source of tension with hopes for enlarging blocksize. Blocks are now full (though only 85% of theoretical maximum), and the transition from “free” to “user pays” is causing pain as software has to be upgraded and users proceed through the stages of mourning on free transactions (disbelief, denial, bargaining, guilt, anger, depression, and acceptance).

But other scalability issues exist: the bitcoin history has reached 100GB (that’s a lot of work for starting a new node), the size of unspent outputs each node has to remember keeps expanding (it must remember these forever), and the number of full nodes in the network is in long-term decline (though currently flat).

What’s Being Done For Scalability

There are several “20% improvement” factors on the horizon, and together they multiply to give significant improvements in scalability as software improves. Rising fees are causing wallet authors to (finally!) begin optimizing their transactions, because users are noticing.

Block propagation has gotten better (see centralization above) and slightly less coupled to blocksize, and validation has gotten much faster (thanks much to libsecp256k1) which may see us close the gap between the theoretical 1MB blocksize and the current 850k average blocksize.

Segregated Witness should increase blocks to about 2MB, though it depends how quickly the ecosystem (wallets and other transaction businesses) start using it.

Segregated witness makes signatures (aka “witnesses”) discardable, and gives them a discount over parts of transactions which must be kept (ie. unspent outputs). This should bias wallets towards using it so more of the blocks can be discarded by nodes.

Replace-by-fee is becoming more common: this allows you to bump the fee on transactions which are taking too long to confirm. This not only means you can be more aggressive on lowering fees, it also allows you to combine multiple payments into one if you have them, which reduces your total transaction size.

On the horizon are Schnorr signatures, which can be combined together, reducing witness size even further: instead of a transaction with two inputs which are each a 33 byte key and 72 byte signature, we might have two 33 byte keys, and a single signature. Interestingly, this also provides an incentive to adopt mixing protocols (like TumbleBit) because they are smaller and hence cheaper, helping the network fungibility even if you don’t care about fungibility yourself.

Finally, there are at two significant efforts to create off-chain scaling for bitcoins; Lightning for microtransactions, and the proposed sidechain MimbleWimble. Lightning takes Satoshi’s original (but incomplete) ideas for payment channels on top of bitcoin and makes them bi-directional and trustless, and forms them into a network. There are at least four teams of us actively working on implementing it. MimbleWimble is more radical, and uses a cut-down scriptless bitcoin with some amazing math to produce a blockchain which doesn’t require transmission or storage of any historical state, just the current unspent outputs, without loss of security (but with great fungibility benefits). Implemented as a sidechain, you would move bitcoins across to it, then back. It has cast its spell on Andrew Poelstra and I look forward to seeing an alpha release this year.

Conclusion

It’s often hard to find an overview of all the different threads of development and effort going on at once in the bitcoin technical community. I haven’t even covered more speculative things like Bitcoin-NG or Confidential Transactions nor developments which don’t directly address these three areas such as covenants or new scripting enhancements, let alone things which will no doubt be dropped from the sky

But hopefully this gives you a list of things I’m looking forward to in 2017!

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About the Author 

This article was written by Rusty Russell. Rusty is a Linux kernel dev who wandered into Blockstream, and is currently trying to produce a prototype and spec for bitcoin lightning.

Entrepreneurship

Is There A Coworking Space Bubble?

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An annual growth rate of nearly 100%, almost five years in a row? More than 60 coworking spaces in a city like Berlin? Are these the characteristics of a bubble? Nope, these are characteristics of a lasting change in our world of work, which has been further catalyzed by the recent economic crises in many countries. But what makes this change different to a bubble? We’ve summarized some arguments of why the coworking movement is based on a sustainable change. However, that doesn’t mean it’s an easy job to open a good working coworking space.

Five reasons why the growth of coworking spaces is based on organic and sustainable growth: 

1. Coworking spaces invest their own money and create real wealth

Already, there is a convincing argument supporting why coworking spaces are not developing in a bubble: the fact that they create real wealth.

Whether referring to the dotcom bubble a decade ago or the real estate crisis in Spain or the United States, the crisis originated in a glut of cheap money, in an environment in which the sender and the recipient were unacquainted. From funds and banks, money flowed in steady streams to investments which offered little resistance and the most promising returns – which only a little while later turned into delusions and ruined investments.

Redistributed risks create illusions. Those people who distributed the money rarely wore the risk of investment decisions. The risk was mainly taken by small shareholders or people who bought parts of those investments. This was because either both parties’ (better) judgement was drowned out by the noise of the market, or because shareholders were unaware of the risk, and were at the mercy of banks and funds for reliable information.

Another fundamental condition for the creation of bubbles are the sheer amounts of money that flow from various locations globally and are concentrated, by comparison, in much fewer places.

Most coworking spaces, however, receive their funding from local or nearby sources and do not operate within this financial system. In fact, the founders mainly inject the bulk of the required investment, and turn to friends or relatives for additional support. They wear the full brunt of the risks that are involved in small-time investment.

They have access to much more information, because it is their own project, rather than a foreign one thousands of miles away. This also includes failures and mistakes that are encountered along the way, but the risk is less redistributed, thereby decreasing the probability of failures.

2. Labor market changes demand on certain office types lastingly

Most users of coworking spaces are self-employed. The proportion of employees is also on the rise, in many cases simply because they work for small companies that increasingly opt to conduct their business in coworking spaces rather than in traditional offices. The industry of almost all coworkers fall within the Internet-based creative industries.

With flexibilisation of work markets, new mobile technologies that are changing work patterns, and the increase of external services purchasing from large and medium-sized enterprises (outsourcing), the labor market has changed radically in many parts of the world.

The long-term financial and emotional security of becoming an employee no longer exists, especially for younger generations of workers. Bigger companies are quicker to fire than hire, and precarious short-term contracts are on the rise. Promising options on the labor market are more often recuded to freelancer careers and starting your own company.

And that’s possible with less money to invest. All you need is a laptop, a brain and a good network. For years, the number of independent workers and small businesses has been growing worldwide – particularly in internet-based creative industries. Anyone who has sufficient specialized skills and the willingness to take risks may adapt more quickly to market conditions if they own a small business or are self employed; more so than if they were to work in a dependent position in an equally volatile market.

Coworking spaces provide an environment in which to do this. Once they have joined a (suitable) coworking space, these factors become apparent to coworkers, who will remain in their space for years to come.

Furthermore, independent workers rarely fire themselves in crises, and even small companies are less likely to give their employees the boot – compared to their large counterparts. This combination enables more sustainable business models – and less business models à la Groupon.

3. Coworking spaces don’t live on crises

Global economic growth is waning while the number of coworking spaces is continually growing. Do coworking spaces thus benefit from this crisis?

The current crises accelerate the formation and growth of coworking spaces, because they offer solutions and space for the resulting problems. Coworking spaces are therefore not a result of a crisis, but the product of change that pre-dates their existence. A crisis is simply the most visible expression of change.

The first coworking spaces emerged in the late 1990s; the movement’s strong growth started six years ago – before the onset of economic downturns in many countries.

4. Coworking spaces depend on the needs of their members

Most coworking spaces are rarely full. Does this mean they are unsuccessful? On average, only half of all desks are occupied. But the average occupancy rate of 50% refers only to a specific date.

In fact, coworking spaces generally serve more members than they can seat at any given time, since members do not use the spaces simultaneously. Coworking spaces are places for independents who want to work on flexible terms. Smaller spaces rely more on permanent members. Larger spaces can respond more flexibilty to the working hours of its members, and, can rent desks several times over.

If a coworking space is always overcrowded or totally empty, the purpose of said space would be defeated. Firstly, it is rather impossible to work in an overcrowded room. Second, it’s impossible to cowork in an empty room. Given the nature of flexible memberships, a coworking space only can survive if they fit the needs of their members. Members would otherwise be quick to leave, and membership would be much more transient.

5. The coworking market is far from saturation

Less than 2% of all self-employed – and even fewer employees – currently work in coworking spaces. Reporting on coworking may increase, but inflated reporting on the coworking movement in the mainstream media is still far away.

Coverage of coworking space are most likely to be found in the career or local sections in larger publications – front cover coverage remains the dream of many space operators. This is because the whole coworking movement can’t be photographed in one picture. What appears to be a disadvantage, however, is actually a beneficial truth: niche coverage allows the industry to grow organically, and avoid over inflation.

Conclusion

Coworking spaces don’t operate in parallel universes – like the financial market. Demand and supply are almost exclusively organic and operate in the real world economy.

For the same reason, there is no guarantee that opening a coworking spaces will be automaticly successful. Anyone who fails to learn how to deal with potential customers in their market, or is unfamiliar with how coworking communities function, will have a difficult time of making one work. In the same way that business people in other industries will fail if they do not understand their market.

Those who simply tack on the word ‘coworking’ to their space’s facade will need to work harder. The structure of most coworking spaces is based on real work, calculated risk, and real-world supply and demand.

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About the Author

This article was produced by Deskmag. Deskmag is the magazine about the new type of work and their places, how they look, how they function, how they could be improved and how we work in them. They especially focus on coworking spaces which are home to the new breed of independent workers and small companies. see more.

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Callum Connects

Dextre Teh, Founder of Rebirth Academy

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Dextre Teh is a consultant and marketing guru, helping F&B businesses to tighten their operations and grow their businesses.

What’s your story?
I help frustrated F&B business owners stuck in day to day operation transform from a glorified operator into a real business owner. I’m a 27 year old Singaporean second generation restaurant owner and a F&B business consultant. Entering the industry at 13 years old, I have always been obsessed with operations and systemisation. At the age of 25, I joined the insurance industry and earned a six figure yearly income. However, I left the high pay behind because it was not my passion and returned to the F&B industry. Now I help other F&B companies to tighten operations and grow their businesses with my consulting and marketing services.

What excites you most about your industry?
The food. I’m a big lover of food and even have a YouTube show on food in development. But that aside, it is really about impacting people through food. Creating moments and memories for people, be it a dating couple or families or friends. Providing that refuge from the daily grind of life. So in educating my consulting clients and training their staff to provide a better experience for their customers, I aim to shift the industry in the direction of creating memories instead of just selling food.

What’s your connection to Asia?
I was born and bred in Singapore. I love the culture, the food and travelling in Asia.

Favourite city in Asia for business and why?
Singapore hands down. The environment here is built for businesses to thrive. The government is pro business and the infrastructure is built around supporting business growth. Not to mention the numerous amount of grants available in helping people start and even grow business. If I’m not mistaken, the Singaporean government is the only government in the world that offers grants to home grown businesses for overseas expansion.

What’s the best piece of advice you ever received?
Learning to do things you do not intend to master is a BIG mistake in business. Focus on what you are good at and pay others to do the rest.

Many business owners including myself are so overwhelmed by the 10,000 things that they feel they need to do everyday. We try to do everything ourselves because we think it saves us money. The only thing that, that does for us is overload our schedules and give us mediocre results. Instead we should focus on what we do best and bring in support for the rest.

Who inspires you?
Christopher M Duncan.

At 29, Chris has built multiple 7 figure businesses. He opened me to the possibility of building a business on the thing that I loved and gave me a blueprint of how to do it. He also showed me that being young doesn’t mean you cannot do great things.

Imran Mohammad and Fazil Musa
They are my mentors and inspire me every single day to pursue my dreams, to focus on celebrating life and enjoying the process of getting to where I want to be.

What have you just learnt recently that blew you away?
Time is always more expensive than money. Money, you can earn over and over again but time, once you spend it, will never come back.

If you had your time again, what would you do differently?
I am a firm believer that your experiences shape who you are. I am grateful for every single moment of my life be it the highs or the lows, the successes and the failures because all these experiences have led me to become the person I am and brought me to the place that I’m at so I will probably do things the same way as everything was perfect in its time.

How do you unwind?
Chilling out in a live music bar with a drink in hand, listening to my favourite live band, 53A. Other than that I’m big on retail therapy, buying cool and geeky stuff.

Favourite Asian destination for relaxation? Why?
Bangkok. It feels like a home away from home where the cost of living is relatively low, the food is good and the people are friendly.

Everyone in business should read this book:
Everything you know about business is wrong by Alastair Dryburgh. It is a book that challenges commonly accepted business “truths” and inspires you to go against the grain, think different, take risks and stand your ground in the face of the challenges that will come your way as a business owner.

Shameless plug for your business:
I’m the creator of the world’s first Chilli Crab Challenge. It gained viral celebrity earlier this year with 3 major newspaper features and more than a dozen blog and online publications featuring it in the span of two weeks. In the span of the two weeks, the campaign reached well over a million people in exposure without a single cent spent in ads.

Now I help F&B companies to tighten operations, increase profits and grow their businesses with my consulting and marketing services. Chilli Crab Challenge (https://www.chillicrab.com/nationalday)

How can people connect with you?
You can connect with me on Facebook (www.facebook.com/djtehkh) or visit www.rebirthacademy.sg for more information or book a 10 minute call with me @ www.tinyurl.com/dexclar

This interview is part of the ‘Callum Connect’ series of more than 500 interviews

Callum Laing is an entrepreneur and investor based in Singapore. He has previously started, built and sold half a dozen businesses and is now a Partner at Unity-Group Private Equity and Co-Founder of The Marketing Group PLC. He is the author two best selling books ‘Progressive Partnerships’ and ‘Agglomerate’.

Connect with Callum here:
twitter.com/laingcallum
linkedin.com/in/callumlaing
Download free copies of his books here: www.callumlaing.com

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