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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!

________________________________________________
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.

Callum Connects

Mikyung Kim, TV Commercial Producer

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Mikyung Kim is a savvy producer who runs her own TV and print production business, based in Hong Kong.

What’s your story?
I am a TV commercial and print producer working with advertising agencies and brands to bring their communication needs to the screen. My background is in film production and I started my career in Hollywood working with Oscar winning directors Michel Gondry and Alejandro González Iñárritu. Before starting my own company last year to produce content directly with agencies and brands, I was with Ogilvy & Mather Hong Kong for nearly five years as the Senior Producer and Head of TV running the film production department.

What excites you most about your industry?
How it’s constantly evolving! Every day is different and it’s certainly never boring. I love that it’s a creative industry and that my job involves talking to people with creative minds on how we can bring a story on paper to life. It’s exciting that the advertising industry places high value on the creativity and effectiveness of content. I’ve produced a few commercials that creatively push the envelope with fun and sometimes wild ideas that have converted into positive brand awareness. Ever heard of KFC Finger Lickin’ Good…Nail Polish that yes, tastes like chicken? https://www.adweek.com/creativity/kfc-just-made-edible-finger-lickin-good-nail-polish-yeah-tastes-chicken-171245/

What’s your connection to Asia?
I was born in Seoul and raised in Hong Kong until graduating from high school at HKIS. I spent my university years in Boston at Emerson College and worked in Los Angeles at Anonymous Content and Partizan Entertainment. But on a brief visit back to Hong Kong in 2010, I decided to move back and continue my career here, and it was the best decision I ever made.

Favourite city in Asia for business and why?
Hong Kong is my home so it will always be my favourite city for business and for me personally. What I love about Hong Kong is that while I am based here, I can actually work with agencies and brands from anywhere in APAC. If I need to attend an important meeting, I can just hop on a quick flight easily. I spent most of 2017 working in Seoul with Korean agency Cheil and Samsung, and currently I am working with Japanese agency ADK and Toyota based in Singapore.

What’s the best piece of advice you ever received?
“Fake it until you become it,” from Amy Cuddy’s TED talk. Worth a watch. This helped me early in my career when I felt like I was under qualified for the job I was in. I learned to fake my confidence and fake a powerful body language until I truly felt that confidence became something real. It was nerve wracking at first but it worked and now I don’t have to fake it.

Who inspires you?
My friends. Noelle who worked part time jobs while being a full time student to pay her own tuition while we were in college together. Osti who is a lawyer focused on supporting developing nations and a board member of Redress, an environmental NGO working to reduce waste in the fashion industry. Vanessa who runs a real estate company, co-owns the gym Crossfit Asphodel, started a health foods business called Quo and NGO The Keep Moving Project to promote wellness in our community. Cathy who will be the first Asian woman to direct a big budget superhero film starring Margot Robbie with Warner Bros and DC. And too many more to name!

What have you just learnt recently that blew you away?
5.2 million plastic bottles are thrown away in Hong Kong every day. Plastic pollution is a major issue for the environment and we as responsible citizens can do our small part by reducing our consumption of unnecessary plastic. I do mine by having a water filter at home and carrying my own reusable water bottle with me everywhere I go. I love the brand Hydroflask because the stainless steel material keeps water hot or cold for hours, so I don’t feel tempted to buy a cold water at 7-11 on those hot, humid days we have here.

If you had your time again, what would you do differently?
About five years ago I purchased my very first stock and put one month’s salary into it, which at the time was a lot of money for me. Knowing how that stock has performed now, I would have put all my savings into it.

How do you unwind?
Exercise is essential in my daily life to help clear my head and de-stress. My go to is a workout at Crossfit Asphodel, running outdoors, yoga and hiking. But a glass of red wine and live music at Soiree in Soho on Sunday night works pretty well too!

Favourite Asian destination for relaxation? Why?
One of the best trips I ever took was to the island of Lombok in Indonesia. Two girl friends and I did a 3 day 2 night hiking and camping trip to summit the Mount Rinjani Volcano. It was physically challenging but mentally relaxing. There was no cellphone reception, no distractions, we had the company of nature and nights with skies full of shooting stars. It was pretty magical. We then went to the Gili Islands for a few days of scuba diving, yoga and sitting on the beach doing nothing but sipping on coconuts. That was pretty relaxing too.

Everyone in business should read this book:
“Nice Girls Don’t Get the Corner Office” by Lois P. Frankel and “Lean In” by Sheryl Sandberg. Essential reads for every working woman and/or man who wants to know how to support the working women in their life.

Shameless plug for your business:
I am a TV commercial and print producer that can plug into an existing advertising agency or brand team to produce their communication needs. Many advertising agencies these days are scaling down so they have creative directors and account services but may not have an in-house producer, so I can fill that gap by becoming a part of the existing agency team. For brands that want to produce content directly without involving an agency, I can also bridge the gap by bringing my production knowledge in-house and working as part of the marketing/brand team and liaising with the other departments in the company such as product team and ecomm.

How can people connect with you?
They can email me at [email protected]
or visit my website at mkimproducer.com

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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Callum Connects

Renne Ballard, Owner of Renée Ballard Communications

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Renne Ballard runs a social media agency working with business women, helping them find their business’s voice.

What’s your story?
I began my career in PR/communications ten years ago in Australia, after arriving home from two years in Dubai. In Dubai I was working for Emirates Airlines as a flight attendant and flying around the world non-stop for two years. This really sparked my interest for how people communicate. I started out as a community manager for an online advertising company, then moved into the corporate world of outdoor advertising, managing internal and external PR and communications. After having a baby four years ago, I decided to leave the safety net of corporate, and stride out on my own. I now run a social media agency and I specialise in working with business women, helping to find their business’ voice so they can use social media to achieve their business goals.

What excites you most about your industry?
I love the open accessibility online provides. It’s free for businesses to get online and connect with their target audience. Twenty years ago, advertising and PR was insanely expensive and quite elitist, but through incredible platforms like Facebook or Twitter, any business can connect with who is looking for their product/solution. Social media is particularly effective for small businesses because they have the edge when it comes to authenticity and a clear voice.

What’s your connection to Asia?
I’m in Hong Kong because I’m a trailing spouse. I know it’s such a daggy term, but I love it, it makes me sound so dedicated to my husband! Alas, we came to Hong Kong for my husband’s work. He’s the Design Director of Asia for an international retail design agency. We’ve been here for almost two years and it’s been a huge learning curve in terms of business and culture. We love the fast-paced nature of Hong Kong and the fact that everything is open late – it suits me perfectly because I’m nocturnal.

Favourite city in Asia for business and why?
That’s easy, Hong Kong. It’s the perfect blend of start-ups and mothership-sized institutions. I love the small business side, watching the collaborations between workshare spaces with galleries, networking groups and foodies; it’s a hothouse of creative partnerships here.

What’s the best piece of advice you ever received?
When you’re are feeling scared about your next step, lean in and feel the difference. Is it fear mixed with excitement? Or fear mixed with dread? Always go with the former and cut loose the latter.

Who inspires you?
I love Tamara Mellon (Jimmy Choo founder). She has created multiple empires and she never stops trying new business models and pushing her limits. It helps that I love shoes too.

What have you just learnt recently that blew you away?
I just turned 40 years old. At best, I’m probably halfway through my life. It makes me constantly question, “Am I where I want to be?”

If you had your time again, what would you do differently?
I would have asked more questions to the people I looked up to, and listened less to the people telling me I won’t achieve my goals.

How do you unwind?
In this day and age, it’s scandalous to say, but I love sunbaking. At any chance, you’ll find me poolside, laying in the sun in a trance-like state.

Favourite Asian destination for relaxation? Why?
Northern Danang in Vietnam. We were there at Christmas, at the foot of the mountains and it was beautiful. Heaps of wildlife and jungles and enough five star resorts that I was never parched once.

Everyone in business should read this book:
‘The E Myth’ by Michael Gerber. It’s an oldie but a goodie because it succinctly outlines how to transition from a one person operation to a global business like McDonalds. Once you see how important systems and processes are, you can recognise shambolic companies a mile off.

Shameless plug for your business:
Renée Ballard Communications is a social media agency that works with business women who are ready to make social media work for them. We create effective, powerful social media strategies that are tailored to the people who will be breathing life into them. We hand on heart promise to never use annoying, marketing buzzwords and that we value laughter above everything else.

How can people connect with you?
[email protected] or www.reneeballard.com or +85296670115

Twitter handle?
@ballard_comms

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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