Tuesday, July 30, 2019

Blockchain briefing for DoD

I was asked to deliver Blockchain: What's Not To Like? version 3.0 to a Department of Defense conference-call. I took the opportunity to update the talk, and expand it to include some of the "Additional Material" from the original, and from the podcast. Below the fold, the text of the talk with links to the sources. The yellow boxes contain material that was on the slides but was not spoken.
[Slide 1]
It’s one of these things that if people say it often enough it starts to sound like something that could work,
Sadhbh McCarthy

I'd like to thank Jen Snow for giving me the opportunity to talk about blockchain technology and cryptocurrencies. The text of my talk with links to the sources is up on my blog, so you don't need to take notes.

There's been a supernova of hype about them. Almost everything positive you have heard is paid advertising, and should be completely ignored. Why am I any more credible? First, I'm retired. No-one is paying me to speak, and I have no investments in cryptocurrencies or blockchain companies.

[Slide 2]
This is not to diminish Nakamoto's achievement but to point out that he stood on the shoulders of giants. Indeed, by tracing the origins of the ideas in bitcoin, we can zero in on Nakamoto's true leap of insight—the specific, complex way in which the underlying components are put together.
Bitcoin's Academic Pedigree,
Arvind Narayanan and Jeremy Clark

Second, I've been writing skeptically about cryptocurrencies and blockchain technology for more than five years. What are my qualifications for such a long history of pontification?

Nearly sixteen years ago, about five years before Satoshi Nakamoto published the Bitcoin protocol, a cryptocurrency based on a decentralized consensus mechanism using proof-of-work, my co-authors and I won a "best paper" award at the prestigious SOSP workshop for a decentralized consensus mechanism using proof-of-work. It is the protocol underlying the LOCKSS system. The originality of our work didn't lie in decentralization, distributed consensus, or proof-of-work. All of these were part of the nearly three decades of research and implementation leading up to the Bitcoin protocol, as described by Arvind Narayanan and Jeremy Clark in Bitcoin's Academic Pedigree. Our work was original only in its application of these techniques to statistical fault tolerance; Nakamoto's only in its application of them to preventing double-spending in cryptocurrencies.

We're going to start by walking through the design of a system to perform some function, say monetary transactions, storing files, recording reviewers' contributions to academic communication, verifying archival content, whatever. My goal is to show you how the pieces fit together in such a way that the problems the technology encounters in practice aren't easily fixable; they are inherent in the underlying requirements.

Being of a naturally suspicious turn of mind, you don't want to trust any single central entity, but instead want a decentralized system. You place your trust in the consensus of a large number of entities, which will in effect vote on the state transitions of your system (the transactions, reviews, archival content, ...). You hope the good entities will out-vote the bad entities. In the jargon, the system is trustless (a misnomer).

Techniques using multiple voters to maintain the state of a system in the presence of unreliable and malign voters were first published in The Byzantine Generals Problem by Lamport et al in 1982. Alas, Byzantine Fault Tolerance (BFT) requires a central authority to authorize entities to take part. In the blockchain jargon, it is permissioned. You would rather let anyone interested take part, a permissionless system with no central control.

[Slide 3]
In the case of blockchain protocols, the mathematical and economic reasoning behind the safety of the consensus often relies crucially on the uncoordinated choice model, or the assumption that the game consists of many small actors that make decisions independently.
The Meaning of Decentralization,
Vitalik Buterin, co-founder of Ethereum

The security of your permissionless system depends upon the assumption of uncoordinated choice, the idea that each voter acts independently upon its own view of the system's state.

If anyone can take part, your system is vulnerable to Sybil attacks, in which an attacker creates many apparently independent voters who are actually under his sole control. If creating and maintaining a voter is free, anyone can win any vote they choose simply by creating enough Sybil voters.

[Slide 4]
From a computer security perspective, the key thing to note ... is that the security of the blockchain is linear in the amount of expenditure on mining power, ... In contrast, in many other contexts investments in computer security yield convex returns (e.g., traditional uses of cryptography) ... analogously to how a lock on a door increases the security of a house by more than the cost of the lock.
The Economic Limits of Bitcoin and the Blockchain,
Eric Budish, Booth School, University of Chicago

So creating and maintaining a voter has to be expensive. Permissionless systems can defend against Sybil attacks by requiring a vote to be accompanied by a proof of the expenditure of some resource. This is where proof-of-work comes in; a concept originated by Cynthia Dwork and Moni Naor in 1992. In a BFT system, the value of the next state of the system is that computed by the majority of the nodes. In  a proof-of-work system such as Bitcoin, the value of the next state of the system is that computed by the first node to solve a puzzle. There is no guarantee that any other node computed that value; BFT is a consensus system whereas Bitcoin-type systems select a winning node.

Proof-of-work is a random process, but at scale the probability of being selected is determined by how quickly you can compute hashes. The idea is that the good voters will spend more on hashing power, and thus compute more useless hashes, than the bad voters.

[Slide 5]
The blockchain trilemma
much of the innovation in blockchain technology has been aimed at wresting power from centralised authorities or monopolies. Unfortunately, the blockchain community’s utopian vision of a decentralised world is not without substantial costs. In recent research, we point out a ‘blockchain trilemma’ – it is impossible for any ledger to fully satisfy the three properties shown in [the diagram] simultaneously ... In particular, decentralisation has three main costs: waste of resources, scalability problems, and network externality inefficiencies.
The economics of blockchains,
Markus K Brunnermeier & Joseph Abadi, Princeton

Brunnermeir and Abadi's Blockchain Trilemma shows that a blockchain has to choose at most two of the following three attributes:
  • correctness
  • decentralization
  • cost-efficiency
Obviously, your system needs the first two, so the third has to go. Running a voter (mining in the jargon) in your system has to be expensive if the system is to be secure. No-one will do it unless they are rewarded. They can't be rewarded in "fiat currency", because that would need some central mechanism for paying them. So the reward has to come in the form of coins generated by the system itself, a cryptocurrency. To scale, permissionless systems need to be based on a cryptocurrency; the system's state transitions will need to include cryptocurrency transactions in addition to records of files, reviews, archival content, whatever.

Your system needs names for the parties to these transactions. There is no central authority handing out names, so the parties need to name themselves. As proposed by David Chaum in 1981 they can do so by generating a public-private key pair, and using the public key as the name for the source or sink of each transaction.

[Slide 6]
we created a small Bitcoin wallet, placed it on images in our honeyfarm, and set up monitoring routines to check for theft. Two months later our monitor program triggered when someone stole our coins.

This was not because our Bitcoin was stolen from a honeypot, rather the graduate student who created the wallet maintained a copy and his account was compromised. If security experts can't safely keep cryptocurrencies on an Internet-connected computer, nobody can. If Bitcoin is the "Internet of money," what does it say that it cannot be safely stored on an Internet connected computer?
Risks of Cryptocurrencies,
Nicholas Weaver, U.C. Berkeley

In practice this is implemented in wallet software, which stores one or more key pairs for use in transactions. The public half of the pair is a pseudonym. Unmasking the person behind the pseudonym turns out to be fairly easy in practice.

The security of the system depends upon the user and the software keeping the private key secret. This can be difficult, as Nicholas Weaver's computer security group at Berkeley discovered when their wallet was compromised and their Bitcoins were stolen.

[Slide 7]
The capital and operational costs of running a miner include buying hardware, power, network bandwidth, staff time, etc. Bitcoin's volatile "price", high transaction fees, low transaction throughput, and large proportion of failed transactions mean that almost no legal merchants accept payment in Bitcoin or other cryptocurrency. Thus one essential part of your system is one or more exchanges, at which the miners can sell their cryptocurrency rewards for the "fiat currency" they need to pay their bills.

Who is on the other side of those trades? The answer has to be speculators, betting that the "price" of the cryptocurrency will increase. Thus a second essential part of your system is a general belief in the inevitable rise in "price" of the coins by which the miners are rewarded. If miners believe that the "price" will go down, they will sell their rewards immediately, a self-fulfilling prophesy. Over time, permissionless blockchains require an inflow of speculative funds at an average rate greater than the current rate of mining rewards if the "price" is not to collapse. To maintain Bitcoin's price at $10K would require an inflow of $750K/hour, or about $5B from now until the next reward halving around May 20th 2020. 

[Slide 8]
Ether miners 07/09/19
can we really say that the uncoordinated choice model is realistic when 90% of the Bitcoin network’s mining power is well-coordinated enough to show up together at the same conference?
The Meaning of Decentralization,
Vitalik Buterin

In order to spend enough to be secure, say $750K/hour, you need a lot of miners. It turns out that a third essential part of your system is a small number of “mining pools”. A year ago Bitcoin had the equivalent of around 3M Antminer S9s, and a block time of 10 minutes. Each S9, costing maybe $1K, could expect a reward about once every 60 years. It would be obsolete in about a year, so only 1 in 60 would ever earn anything.

To smooth out their income, miners join pools, contributing their mining power and receiving the corresponding fraction of the rewards earned by the pool. These pools have strong economies of scale, so successful cryptocurrencies end up with a majority of their mining power in 3-4 pools. Each of the big pools can expect a reward every hour or so. These blockchains aren’t decentralized, but centralized around a few large pools.

At multiple times in 2014 one mining pool controlled more than 51% of the Bitcoin mining power. At almost all times since 3-4 pools have controlled the majority of the Bitcoin mining power. Currently two of them, with 35.2% of the power, are controlled by Bitmain, the dominant supplier of mining ASICs. With the advent of mining-as-a-service, 51% attacks have become endemic among the smaller alt-coins.

The security of a blockchain depends upon the assumption that these few pools are not conspiring together outside the blockchain; an assumption that is impossible to verify in the real world (and by Murphy's Law is therefore false).

[Slide 9]
Since then there have been other catastrophic bugs in these smart contracts, the biggest one in the Parity Ethereum wallet software ... The first bug enabled the mass theft from "multisignature" wallets, which supposedly required multiple independent cryptographic signatures on transfers as a way to prevent theft. Fortunately, that bug caused limited damage because a good thief stole most of the money and then returned it to the victims. Yet, the good news was limited as a subsequent bug rendered all of the new multisignature wallets permanently inaccessible, effectively destroying some $150M in notional value. This buggy code was largely written by Gavin Wood, the creator of the Solidity programming language and one of the founders of Ethereum. Again, we have a situation where even an expert's efforts fell short.
Risks of Cryptocurrencies,
Nicholas Weaver, U.C. Berkeley

In practice the security of a blockchain depends not merely on the security of the protocol itself, but on the security of both the core software, and the wallets and exchanges used to store and trade its cryptocurrency. This ancillary software has bugs, such as last September's major vulnerability in Bitcoin Core, the Parity Wallet fiasco, the routine heists using vulnerabilities in exchange software, and the wallet that was sending user's pass-phrases to the Google spell-checker over HTTP. Who doesn't need their pass-phrase spell-checked?

Recent game-theoretic analysis suggests that there are strong economic limits to the security of cryptocurrency-based blockchains. To guarantee safety, the total value of transactions in a block needs to be less than the value of the block reward, which kind of spoils the whole idea.

Your system needs an append-only data structure to which records of the transactions, files, reviews, archival content, whatever are appended. It would be bad if the miners could vote to re-write history, undoing these records. In the jargon, the system needs to be immutable (another misnomer).

[Slide 10]
Merkle Tree (source)
The necessary data structure for this purpose was published by Stuart Haber and W. Scott Stornetta in 1991. A company using their technique has been providing a centralized service of securely time-stamping documents for nearly a quarter of a century. It is a form of Merkle or hash tree, published by Ralph Merkle in 1980. For blockchains it is a linear chain to which fixed-size blocks are added at regular intervals. Each block contains the hash of its predecessor; a chain of blocks.

The blockchain is mutable, it is just rather hard to mutate it without being detected, because of the Merkle tree’s hashes, and easy to recover, because there are Lots Of Copies Keeping Stuff Safe. But this is a double-edged sword. Immutability makes systems incompatible with the GDPR, and immutable systems to which anyone can post information will be suppressed by governments.

[Slide 11]
BTC transaction fees
Cryptokitties’ popularity exploded in early December and had the Ethereum network gasping for air. ... Ethereum has historically made bold claims that it is able to handle unlimited decentralized applications  ... The Crypto-Kittie app has shown itself to have the power to place all network processing into congestion. ... at its peak [CryptoKitties] likely only had about 14,000 daily users. Neopets, a game to which CryptoKitties is often compared, once had as many as 35 million users.
How Crypto-Kitties Disrupted the Ethereum Network,
Open Trading Network

A user of your system wanting to perform a transaction, store a file, record a review, whatever, needs to persuade miners to include their transaction in a block. Miners are coin-operated; you need to pay them to do so. How much do you need to pay them? That question reveals another economic problem, fixed supply and variable demand, which equals variable "price". Each block is in effect a blind auction among the pending transactions.

So lets talk about CryptoKitties, a game that bought the Ethereum blockchain to its knees despite the bold claims that it could handle unlimited decentralized applications. How many users did it take to cripple the network? It was far fewer than non-blockchain apps can handle with ease; CryptoKitties peaked at about 14K users. NeoPets, a similar centralized game, peaked at about 2,500 times as many.

CryptoKitties average "price" per transaction spiked 465% between November 28 and December 12 as the game got popular, a major reason why it stopped being popular. The same phenomenon happened during Bitcoin's price spike around the same time. Cryptocurrency transactions are affordable only if no-one wants to transact; when everyone does they immediately become un-affordable.

Nakamoto's Bitcoin blockchain was designed only to support recording transactions. It can be abused for other purposes, such as storing illegal content. But it is likely that you need additional functionality, which is where Ethereum's "smart contracts" come in. These are fully functional programs, written in a JavaScript-like language, embedded in Ethereum's blockchain. They are mainly used to implement Ponzi schemes, but they can also be used to implement Initial Coin Offerings, games such as Cryptokitties, and gambling parlors. Further, in On-Chain Vote Buying and the Rise of Dark DAOs Philip Daian and co-authors show that "smart contracts" also provide for untraceable on-chain collusion in which the parties are mutually pseudonymous.

[Slide 12]
ICO Returns
The first big smart contract, the DAO or Decentralized Autonomous Organization, sought to create a democratic mutual fund where investors could invest their Ethereum and then vote on possible investments. Approximately 10% of all Ethereum ended up in the DAO before someone discovered a reentrancy bug that enabled the attacker to effectively steal all the Ethereum. The only reason this bug and theft did not result in global losses is that Ethereum developers released a new version of the system that effectively undid the theft by altering the supposedly immutable blockchain.
Risks of Cryptocurrencies,
Nicholas Weaver, U.C. Berkeley

"Smart contracts" are programs, and programs have bugs. Some of the bugs are exploitable vulnerabilities. Research has shown that the rate at which vulnerabilities in programs are discovered increases with the age of the program. The problems caused by making vulnerable software immutable were revealed by the first major "smart contract". The Decentralized Autonomous Organization (The DAO) was released on 30th April 2016, but on 27th May 2016 Dino Mark, Vlad Zamfir, and Emin Gün Sirer posted A Call for a Temporary Moratorium on The DAO, pointing out some of its vulnerabilities; it was ignored. Three weeks later, when The DAO contained about 10% of all the Ether in circulation, a combination of these vulnerabilities was used to steal its contents.

The loot was restored by a "hard fork", the blockchain's version of mutability. Since then it has become the norm for "smart contract" authors to make them "upgradeable", so that bugs can be fixed. "Upgradeable" is another way of saying "immutable in name only".

[Slide 13]
security researchers from SRLabs revealed that a large chunk of the Ethereum client software that runs on Ethereum nodes has not yet received a patch for a critical security flaw the company discovered earlier this year.

"According to our collected data, only two thirds of nodes have been patched so far," said Karsten Nohl, ... "The Parity Ethereum has an automated update process - but it suffers from high complexity and some updates are left out," Nohl said.

All of these issues put all Ethereum users at risk, and not just the nodes running unpatched versions. The number of unpatched notes may not be enough to carry out a direct 51% attack, but these vulnerable nodes can be crashed to reduce the cost of a 51% attack on Ethereum, currently estimated at around $120,000 per hour. ...  "The patch gap signals a deep-rooted mistrust in central authority, including such any authority that can automatically update software on your computer."
A large chunk of Ethereum clients remain unpatched Catalin Cimpanu

It isn't just the "smart contracts" that need to be upgradeable, it is the core software for the blockchain. Bugs and vulnerabilities are inevitable. If you trust a central authority to update your software automatically, or if you don't but you think others do, what is the point of a permissionless blockchain?

[Slide 14]
Permissionless systems trust:
  • The core developers of the blockchain software not to write bugs.
  • The developers of your wallet software not to write bugs.
  • The developers of the exchanges not to write bugs.
  • The operators of the exchanges not to manipulate the markets or to commit fraud.
  • The developers of your upgradeable "smart contracts" not to write bugs.
  • The owners of the smart contracts to keep their secret key secret.
  • The owners of the upgradeable smart contracts to avoid losing their secret key.
  • The owners and operators of the dominant mining pools not to collude.
  • The operators of miners to apply patches in a timely manner.
  • The speculators to provide the funds needed to keep the “price” going up.
  • Users' ability to keep their secret key secret.
  • Users’ ability to avoid losing their secret key.
  • Other users not to transact when you want to.

So, this is the list of people your permissionless system has to trust if it is going to work as advertised over the long term.

You started out to build a trustless, decentralized system but you have ended up with:
  • A trustless system that trusts a lot of people you have every reason not to trust.
  • A decentralized system that is centralized around a few large mining pools that you have no way of knowing aren’t conspiring together.
  • An immutable system that either has bugs you cannot fix, or is not immutable
  • A system whose security depends on it being expensive to run, and which is thus dependent upon a continuing inflow of funds from speculators.
  • A system whose coins are convertible into large amounts of "fiat currency" via irreversible pseudonymous transactions, which is thus an irresistible target for crime.
If the “price” keeps going up, the temptation for your trust to be violated is considerable. If the "price" starts going down, the temptation to cheat to recover losses is even greater.

Maybe it is time for a re-think.

Suppose you give up on the idea that anyone can take part and accept that you have to trust a central authority to decide who can and who can’t vote. You will have a permissioned system.

The first thing that happens is that it is no longer possible to mount a Sybil attack, so there is no reason running a node need be expensive. You can use BFT to establish consensus, as IBM’s Hyperledger, the canonical permissioned blockchain system plans to. You need many fewer nodes in the network, and running a node just got way cheaper. Overall, the aggregated cost of the system got orders of magnitude cheaper.

Now there is a central authority it can collect “fiat currency” for network services and use it to pay the nodes. No need for cryptocurrency, exchanges, pools, speculators, or wallets, so much less temptation for bad behavior.

[Slide 15]
Permissioned systems trust:
  • The central authority.
  • The software developers.
  • The owners and operators of the nodes.
  • The secrecy of a few private keys.

This is now the list of entities you trust. Trusting a central authority to determine the voter roll has eliminated the need to trust a whole lot of other entities. The permissioned system is more trustless and, since there is no need for pools, the network is more decentralized despite having fewer nodes.

[Slide 16]
Faults Replicas
1 4
2 7
3 10
4 13
5 16
6 19
a Byzantine quorum system of size 20 could achieve better decentralization than proof-of-work mining at a much lower resource cost.
Decentralization in Bitcoin and Ethereum Networks,
Adem Efe Gencer, Soumya Basu, Ittay Eyal, Robbert van Renesse and Emin Gün Sirer

How many nodes does your permissioned blockchain need? The rule for BFT is that 3f + 1 nodes can survive f simultaneous failures. That's an awful lot fewer than you need for a permissionless proof-of-work blockchain. What you get from BFT is a system that, unless it encounters more than f simultaneous failures, remains available and operating normally.

The problem with BFT is that if it encounters more than f simultaneous failures, the state of the system is irrecoverable. If you want a system that can be relied upon for the long term you need a way to recover from disaster. Successful permissionless blockchains have Lots Of Copies Keeping Stuff Safe, so recovering from a disaster that doesn't affect all of them is manageable.

[Slide 17]
So in addition to implementing BFT you need to back up the state of the system each block time, ideally to write-once media so that the attacker can't change it. But if you're going to have an immutable backup of the system's state, and you don't need continuous uptime, you can rely on the backup to recover from failures. In that case you can get away with, say, 2 replicas of the blockchain in conventional databases, saving even more money.

I've shown that, whatever consensus mechanism they use, permissionless blockchains are not sustainable for very fundamental economic reasons. These include the need for speculative inflows and mining pools, security linear in cost, economies of scale, and fixed supply vs. variable demand. Proof-of-work blockchains are also environmentally unsustainable. The top 5 cryptocurrencies are estimated to use as much energy as The Netherlands. This isn't to take away from Nakamoto's ingenuity; proof-of-work is the only consensus system shown to work well for permissionless blockchains. The consensus mechanism works, but energy consumption and emergent behaviors at higher levels of the system make it unsustainable.

[Slide 18]
Mentions in S&P500 quarterlies
Still new to NYC, but I met this really cool girl. Energy sector analyst or some such. Four dates in, she uncovers my love for BitCoin.

Completely ghosted.
Zack Voell

S&P500 companies are slowly figuring out that there is no there there in blockchains and cryptocurrencies, and they're not the only ones:

So if both permissionless and permissioned blockchains are fatally flawed, and experts in both cryptography and economics have been saying so for many years, how come they are generally perceived as huge successes?

The story starts in the early 80s with David Chaum. His work on privacy was an early inspiration for the cypherpunks. Many of the cypherpunks were libertarians, so the idea of money not controlled by governments was attractive. But Chaum's pioneering DigiCash was centralized, a fatal flaw in their eyes. It would be two decades before the search for a practical decentralized cryptocurrency culminated with Nakamoto's Bitcoin.

[Slide 19]
Bitcoin failed at every one of Nakamoto's aspirations here. The price is ridiculously volatile and has had multiple bubbles; the unregulated exchanges (with no central bank backing) front-run their customers, paint the tape to manipulate the price, and are hacked or just steal their user's funds; and transaction fees and the unreliability of transactions make micropayments completely unfeasible.
David Gerard

A parallel but less ideological thread was the idea that the business model for the emerging Internet was micropayments. This was among the features Nakamoto touted for Bitcoin in early 2009, despite the idea having been debunked by Clay Shirky in 2000 and Andrew Odlyzko in 2003. In fact, none of Nakamoto's original goals worked out in practice.

But Nakamoto was not just extremely clever in the way he assembled the various component technologies into a cryptocurrency, he also had exceptionally good timing. His paper was posted on 31st October 2008, and met three related needs:
  • Just 40 days earlier, on 15th September 2008 Lehman Brothers had gone bankrupt, precipitating the Global Financial Crisis (the GFC).
  • The GFC greatly increased the demand for flight capital in China.
  • Mistaking pseudonymity for anonymity, vendors and customers on the dark web found Bitcoin a reassuring means of exchange.
A major reason Bitcoin was attractive to the libertarian cypherpunks was that many were devotees of the Austrian economics cult. Because there would only ever be 21 million Bitcoin, they believed that, like gold, the price would inevitably increase. Consider a currency whose price is doomed to increase. It is a mechanism for transferring wealth from later adopters, called suckers, to early adopters, called geniuses. And the cypherpunks were nothing if not early adopters of technology.

Sure enough, a few of the geniuses turned into "whales", HODL-ing the vast majority of the Bitcoin. The Gini coefficient of cryptocurrencies is an interesting research question; it is huge but probably less than Nouriel Roubini's claim of 0.86.

The whales needed to turn large amounts of cryptocurrency in their wallets into large numbers in a bank account denominated in "fiat currency". To do this they needed to use an exchange to sell cryptocurrency to a sucker for dollars, and then transfer the dollars from the exchange's bank account into their bank account.

[Slide 20]
We’ve had banking hiccups in the past, we’ve just always been able to route around it or deal with it, open up new accounts, or what have you … shift to a new corporate entity, lots of cat and mouse tricks.
Phil Potter of the Bitfinex exchange.
FOWLER opened numerous U.S.-based business bank accounts at several different banks, and in opening and using these accounts FOWLER and YOSEF falsely represented to those banks that the accounts would be primarily used for real estate investment transactions even though FOWLER and YOSEF knew that the accounts would be used, and were in fact used, by FOWLER, YOSEF and others to transmit funds on behalf of an unlicensed money transmitting business related to the operation of cryptocurrency exchanges.
US vs. Reginald Fowler and Ravid Yosef

For the exchange to have a bank account, it had to either conform to or evade the "Know Your Customer/Anti-Money Laundering" laws. The whole point of cryptocurrencies is to avoid dealing with banks and laws such as KYC/AML, so most exchanges chose to evade KYC/AML by a cat-and-mouse game of fraudulent accounts.

Once the banks caught on to the cat-and-mouse game, most exchanges could not trade cryptocurrency for fiat currency. To continue, they needed a "stablecoin", a cryptocurrency fixed against the US dollar as a substitute for actual dollars. The guys behind Bitfinex, one of the sketchier exchanges, invented Tether. They claimed their USDT was backed one-for-one by USD, promising an audit would confirm this. But before an audit appeared they fired their auditors. Earlier this year, after the New York Attorney General sued them, they claimed it was 74% backed by USD (except when they accidentally create 5 billion USDT), and revealed an 850M USD hole in Bitfinex' accounts.

[Slide 21]
"approximately 95% of this volume is fake and/or non-economic in nature, and that the real market for bitcoin is significantly smaller, more orderly, and more regulated than commonly understood."
Bitwise Asset Management's detailed comments to the SEC about BTC/USDT trading on unregulated exchanges.
According to Blockchain.info, about $417m worth of bitcoin was traded on Friday on the main dollar-based exchanges. Which sounds decent until you notice that about $37bn worth of Tether was traded on Friday, according to CoinMarketCap.
Jemima Kelly, FT Alphaville

There were many USDT exchanges, and competition was intense. Customers wanted the exchange with the highest volume for their trades, so these exchanges created huge volumes of wash trades to inflate their volume. Around 95% of all cryptocurrency trades are fake.

[Slide 22]
"An upset Mt. Gox creditor analyses the data from the bankruptcy trustee’s sale of bitcoins. He thinks he’s demonstrated incompetent dumping by the trustee — but actually shows that a “market cap” made of 18 million BTC can be crashed by selling 60,000 BTC, over months, at market prices, which suggests there is no market."
David Gerard.

Because there was so little real trading between cryptocurrencies and USD, trades of the size the whales needed would crash the price. It was thus necessary to pump the price before even part of their HODLings could be dumped on the suckers.

[Slide 23]
P&Ds have dramatic short-term impacts on the prices and volumes of most of the pumped tokens. In the first 70 seconds after the start of a P&D, the price increases by 25% on average, trading volume increases 148 times, and the average 10-second absolute return reaches 15%. A quick reversal begins 70 seconds after the start of the P&D. ... For an average P&D, investors make one Bitcoin (about $8,000) in profit, approximately one-third of a token’s daily trading volume. The trading volume during the 10 minutes before the pump is 13% of the total volume during the 10 minutes after the pump. This implies that an average trade in the first 10 minutes after a pump has a 13% chance of trading against these insiders and on average they lose more than 2% (18%*13%).
Cryptocurrency Pump-and-Dump Schemes
Tao Li, Donghwa Shin and Baolian Wang

Off-chain collusion among cryptocurrency traders allows for extremely profitable pump-and-dump schemes, especially given the thin trading in "alt-coins". But the major pumps, such as the one currently under way, come from the creation of huge volumes of USDT, in this case about one billion USDT per month.

[Slide 24]
Issuance of USDT
[In April] there were about $2 billion worth of tethers on the market. Since then, Tether has gone on a frenzied issuance spree. In the month of May, the stablecoin company pumped out $1 billion worth of tethers into the market. And this month, it is on track for another $1 billion. Currently, there are roughly $3.8 billion worth of tethers sloshing around in the bitcoin markets.

Whether this money is backed by real dollars is anyone's guess.
Amy Castor

Who would believe that pushing a billion "dollars" a month that can only be used to buy cryptocurrency into the market might cause people to buy cryptocurrency and drive the price up? If we believe Bitfinex that the 26% of USDT that isn't USD is in cryptocurrencies, that might provide a motive for a massive pump to recover, say, 850M USD in losses.

I want to end by talking about a technology with important implications for software supply chain security that looks like, but isn't a blockchain.

[Slide 25]
A green padlock (with or without an organization name) indicates that:
  • You are definitely connected to the website whose address is shown in the address bar; the connection has not been intercepted.
  • The connection between Firefox and the website is encrypted to prevent eavesdropping.
How do I tell if my connection to a website is secure? Mozilla

How do I know that I'm talking to the right Web site? Because there's a closed padlock icon in the URL bar, right? The padlock icon appears when the browser has verified that the connection to the URL in the URL bar supplied a certificate for the site in question carrying a signature chain ending in one of the root certificates the browser trusts.

Browsers come with a default list of root certificates from Certificate Authorities (CAs). My current Firefox browser trusts 133 root certificates from 72 unique organizations, among them foreign governments but not the US government. Some of the organizations whose root certificates my browser trusts are known to have abused this trust, allowing miscreants to impersonate sites, spy on users and sign malware so it appears to be coming from, for example, Microsoft or Apple.

[Slide 26]
A crucial technical property of the HTTPS authentication model is that any CA can sign certificates for any domain name. In other words, literally anyone can request a certificate for a Google domain at any CA anywhere in the world, even when Google itself has contracted one particular CA to sign its certificate.
Security Collapse in the HTTPS Market, Axel Arnbak et al

For example, Google discovered that "Symantec CAs have improperly issued more than 30,000 certificates". But browsers still trust Symantec CAs; their market share is so large the Web would collapse if they didn't. As things stand, clients have no way of knowing whether the root of trust for a certificate, say for the Library of Congress, is the one the Library intended, or a spoof from some CA in Turkey or China.

In 2012 Google started work on an approach based on Ronald Reagan's "trust but verify" paradigm, called Certificate Transparency (CT). The basic idea is to accompany the certificate with a hash of the certificate signed by a trusted third party, attesting that the certificate holder told the third party that the certificate with that hash was current. Thus in order to spoof a service, an attacker would have to both obtain a fraudulent certificate from a CA, and somehow persuade the third party to sign a statement that the service had told them the fraudulent certificate was current. Clearly this is:
  • more secure than the current situation, which requires only compromising a CA, and:
  • more effective than client-only approaches, which can detect that a certificate has changed but not whether the change was authorized.

Clients now need two lists of trusted third parties, the CAs and the sources of CT attestations. The need for these trusted third parties is where the blockchain enthusiasts would jump in and claim (falsely) that using a blockchain would eliminate the need for trust. In the real world it isn't feasible to solve the problem of untrustworthy CAs by eliminating the need for trust. CT's approach instead is to provide a mechanism by which breaches of trust, both by the CAs and by the attestors, can be rapidly and unambiguously detected.

This can be done because:
  • Certificate owners obtain attestations from multiple sources, who are motivated not to conspire. Clients can verify these multiple attestations.
  • The attestors publish Merkle trees of their attestations, which can be verified by their competitors.
[Slide 27]

  1. Each log operates independently.
  2. Each log gets its content directly from the CAs, not via replication from other logs.
  3. Each log contains a subset of the total information content of the system.
  4. There is no consensus mechanism operating between the logs, so it cannot be abused by, for example, a 51% attack.
  5. Monitoring and auditing is asynchronous to Web content delivery, so denial of service against the monitors and auditors cannot prevent clients obtaining service.
Certificate Transparency David S. H. Rosenthal

How do I know I'm running the right software, and no-one has implanted a backdoor? Right now, there is no equivalent of CT for the signatures that purport to verify software downloads, and this is one reason for the rash of software supply chain attacks. The open source community has a long-standing effort to use CT-like techniques not merely to enhance the reliability of the signatures on downloads, but more importantly to verify that a binary download was compiled from the exact source code it claims to represent. The reason this project is taking a long time is that it is woefully under-funded, and it is a huge amount of work. It depends on ensuring that the build process for each package is reproducible, so that given the source code and the build specification, anyone can run the build and generate bit-for-bit identical results.

To give you some idea of how hard this is, the UK government has been working with Huawei since 2015 to make their router software builds reproducible so they know the binaries running in the UK's routers match the source code Huawei disclosed. Huawei expects to finish this program in 2024.

With a few million dollars in funding, in a couple of years the open source community could finish making the major Linux distributions reproducible and implement CT-like assurance that the software you were running matched the source code in the repositories, with no hidden backdoors. I would think this would be something the DoD would be interested in.

Thank you for your attention, I'm ready for questions.


David. said...

The topics of the questions I remember were:

1) Use of cryptocurrency for money laundering and terrorism funding.

2) Enforcement actions by governments.

3) Use of blockchain technology by major corporations.

4) PR for libertarian politics by cryptocurrency HODLers.

5) Relative security of decentralized vs. centralized blockchains.

I will add shortly comments addressing them, with links to sources.

David. said...

1) Use of cryptocurrency for money laundering and terrorism funding.

In general it is a bad idea to commit crimes using an immutable public blockchain. Pseudonymous blockchains such as Bitcoin's require extremely careful op-sec if the pseudonym is not to be linked to Web trackers and cookies (see, for example, When the cookie meets the blockchain: Privacy risks of web payments via cryptocurrencies by Steven Goldfeder et al).

There are cryptocurrencies with stronger privacy features, such as Zcash and Monero. These are more popular among malefactors than Bitcoin.

But turning cryptocurrencies into fiat currency with which to buy your Lamborghini while remaining anonymous faces difficulties. Users of exchanges that observe KYC/AML, such as Coinbase, will need to explain the source of funds to the tax authorities. The IRS recently sent letters to Coinbase users reminding them of their obligation to report the gains and losses on every single transaction.

North Korea is reputed to be very active in stealing cryptocurrency via exchange hacks and other techniques.

2) Enforcement actions by governments.

See my post Regulating Cryptocurrencies and the comments to it.

3) Use of blockchain technology by major corporations.

See, for example, Blockchain for International Development: Using a Learning Agenda to Address Knowledge Gaps by John Burg, Christine Murphy, & Jean Paul Pétraud. And this, from David Gerard:

"Bundesbank and Deutsche Boerse try settlements on the blockchain. You’ll be amazed to hear that it was slower and more expensive. “Despite numerous tests of blockchain-based prototypes, a real breakthrough in application is missing so far.” But at least it “in principle fulfilled all basic regulatory features for financial transactions.”

David. said...

4) PR for libertarian politics by cryptocurrency HODLers.

John McAfee is running for US President. See also Laurie Penny's must-read Four Days Trapped at Sea With Crypto’s Nouveau Riche.

5) Relative security of decentralized vs. centralized blockchains.

As I described above, at scale anything claiming to be a "decentralized blockchain" isn't going to be decentralized. Economic forces will have centralized it around a small number of mining pools. See Decentralization in Bitcoin and Ethereum Networks by Adem Efe Gencer, Soumya Basu, Ittay Eyal, Robbert van Renesse and Emin Gün Sirer. Its security will depend upon those pools not conspiring together, among many other things (Slide 14).

Centralized, permissioned blockchains have fewer vulnerabilities, but their central authority is a single point of failure.

IIRC the questioner used the phrase "100% secure". No networked computer system is ever 100% secure.
6) I seem to remember also a question on pump-and-dump schemes.

The current pump is via Tether. Social Capital has a series explaining Tether and the "stablecoin" scam:

* Pumps, spoofs and boiler rooms
* Tether, Part One: The Stablecoin Dream
* Tether, Part Two: PokeDEx
* Tether, Part Three: Crypto Island

David. said...

North Korea took $2 billion in cyberattacks to fund weapons program: U.N. report by Michelle Nichols reports that:

"North Korea has generated an estimated $2 billion for its weapons of mass destruction programs using “widespread and increasingly sophisticated” cyberattacks to steal from banks and cryptocurrency exchanges, according to a confidential U.N. report seen by Reuters on Monday."

David. said...

Timothy B. Lee debunks the idea of Bitcoin for purchases in I tried to pay with bitcoin at a Mexico City bar—it didn’t go well:

"So we gave up and paid with a conventional credit card.

After leaving the bar, I sent off an email to the support address listed on my receipt. The next morning, I got a response: "Transactions under [1,000 pesos] are taking a day to two, in the course of today they will reach the wallet." I finally got my bitcoins around 6pm."

The bar is called Bitcoin Embassy:

"Does Bitcoin Embassy pay its employees in bitcoin?

"I always tell them I can pay you in bitcoin if you want to, but they don't want to," Ortiz says."

David. said...

Clare Duffy reports that The Fed is getting into the real-time payments business:

"The Fed announced Monday that it will develop a real-time payment service called "FedNow" to help move money around the economy more quickly. It's the kind of government service that companies and consumers have been requesting for years — one that already exists in other countries. The service could also compete with solutions already developed in the private sector by big banks and tech companies.

The Fed itself is not setting up a consumer bank, but it has always played a behind-the-scenes role facilitating the movement of money between banks and helping to verify transactions. This new system would help cut down on the amount of time between when money is deposited into an account and when it is available for use. FedNow would operate all hours and days of the week, with an aim to launch in 2023 or 2024.

"Real-time payments" are something that enthusiasts see as a competitive edge for cryptocurrencies against fiat currencies. This is strange, for two reasons:

1) In most countries except the US, instantaneous inter-bank transfers have been routine for years. But the enthusiasts are so ignorant of the way the world outside the US works that they don't know this. Similar ignorance was evident in the way Facebook thought that Libra would "bank the unbanked" in the third world.

2) Cryptocurrency transfers are not in practice real-time. Bitcoin users are advised to wait 6 block times (one hour) before treating a transaction as confirmed.

David. said...

Jemima Kelly's When bitcoin bros talk cryptography provides an excellent example of the hype surrounding cryptocurrencies. Anthony Pompliano, a "crypto fund manager" who "has over half his net worth in bitcoin" was talking (his book) to CNBC and:

"When one of the CNBC journalists put it to Pomp that just because bitcoin is scarce that doesn’t necessarily make it valuable, as “there are a lot of things that are scarce that nobody cares about”, Pomp said:

    Of course. Look, if you don’t believe in bitcoin, you’re essentially saying you don’t believe in cryptography.

Have a watch for yourself here (and count the seconds it takes for the others to recover from his comment, around the 4.33 mark):"

The video is here.

David. said...

More on the Fed's real-time payment proposal in The Fed is going to revamp how Americans pay for things. Big banks aren’t happy from MIT Technology Review.

David. said...

Trail of Bits has released:

"findings from the full final reports for twenty-three paid security audits of smart contract code we performed, five of which have been kept private. The public audit reports are available online, and make informative reading. We categorized all 246 smart-contract related findings from these reports"

The bottom line is that smart contracts are programs, and programs have bugs. Using current automated tools can find some but not all of them.

David. said...

Brenna Smith's The Evolution Of Bitcoin In Terrorist Financing makes interesting and somewhat scary reading:

"Terrorists’ early attempts at using cryptocurrencies were filled with false starts and mistakes. However, terrorists are nothing if not tenacious, and through these mistakes, they’ve grown to have a highly sophisticated understanding of blockchain technology. This investigation outlines the evolution of terrorists’ public bitcoin funding campaigns starting from the beginning and ending with the innovative solutions various groups have cooked up to make the technology work in their favor."

David. said...

Larry Cermak has a Twitter thread that starts:

"It’s now obvious that ICOs were a massive bubble that's unlikely to ever see a recovery. The median ICO return in terms of USD is -87% and constantly dropping. Let's look at some data!"

Hat tip to David Gerard.

David. said...

The abstract for the European Central Bank's In search for stability in crypto-assets: are stablecoins the solution? reads:

"Stablecoins claim to stabilise the value of major currencies in the volatile crypto-asset market. This paper describes the often complex functioning of different types of stablecoins and proposes a taxonomy of stablecoin initiatives. To this end it relies on a novel framework for their classification, based on the key dimensions that matter for crypto-assets, namely: (i) accountability of issuer, (ii) decentralisation of responsibilities, and (iii) what underpins the value of the asset. The analysis of different types of stablecoins shows a trade-off between the novelty of the stabilisation mechanism used in an initiative (from mirroring the traditional electronic money approach to the alleged introduction of an “algorithmic central bank”) and its capacity to maintain a stable market value. While relatively less innovative stablecoins could provide a solution to users seeking a stable store of value, especially if legitimised by the adherence to standards that are typical of payment services, the jury is still out on the potential future role of more innovative stablecoins outside their core user base."

David. said...

David Gerard writes:

"Tethers as ERC-20 tokens on the Ethereum blockchain are so popular that they’re flooding Ethereum with transactions, and clogging the blockchain — “Yesterday I had to wait 1 and half hours for a standard transfer to go through.” Ethereum is the World Computer, as long as you don’t try to use it for any sort of real application. Another 100 million tethers were also printed today."

David. said...

David Gerard has been researching Libra, and has two posts up on the topic. Today's is Switzerland’s guidance on stablecoins — what it means for Facebook’s Libra:

"Libra will need to register as a bank and as a payment provider (a money transmitter). It probably won’t need to register as a collective investment scheme for retail investors.

FINMA notes explicitly: “The highest international anti-money laundering standards would need to be ensured throughout the entire ecosystem of the project” — and that Libra in particular requires an “internationally coordinated approach.”

So the effective consequence is that Libra will be a coin for well-documented end users in highly regulated rich countries, and not so available in poorer ones."

Yesterday's was Your questions about Facebook Libra — as best as we can answer them as yet (my emphasis):

"As I write this, calibra.com, the big splash page for Calibra, doesn’t work in Firefox — only in Chrome. This is how companies behave toward products they don’t really take seriously. Facebook also forgot to buy the obvious typo, colibra.com — which is a domain squatter holding page."

Facebook is under mounting anti-trust pressure, both in the US and elsewhere, and it is starting to look like cost-of-doing-business fines are no longer the worst that can happen. My take on Libra is that Facebook is floating it as a bargaining chip - in the inevitable negotiations on enforcement measures Facebook can sacrifice Libra to protect more valuable assets.

David. said...

Claire Jones and Izabella Kaminska's Libra is imperialism by stealth points out that, in practice, currency-backed stablecoins like Libra and (74% of) Tether are tied to the US dollar. Argentina and Zimbabwe are just two examples showing how bad an idea dollarizing your economy is:

"A common criticism against dollarisation (and currency blocs) is that they are a form of neocolonialism, handing global powers -- whether they are states or tech behemoths -- another means of exercising control over more vulnerable players. Stablecoins backed by dollar assets are part of the same problem, which is why we believe their adoption in places like Argentina would constitute imperialism by stealth."

David. said...

Dan Goodin writes about a statement from the US Treasury announcing sanctions against 3 North Korean hacking groups:

"North Korean hacking operations have also targeted virtual asset providers and cryptocurrency exchanges, possibly in an attempt to obfuscate revenue streams used to support the countries weapons programs. The statement also cited industry reports saying that the three North Korean groups likely stole about $571 million in cryptocurrency from five exchanges in Asia between January 2017 and September 2018. News agencies including Reuters have cited a United Nations report from last month that estimated North Korean hacking has generated $2 billion for the country’s weapons of mass destruction programs."

David. said...

Tether slammed as “part-fraud, part-pump-and-dump, and part-money laundering” by Jemima Kelly suggests some forthcoming increase in transparency about Tether:

"a class-action lawsuit was filed against Tether, Bitfinex (a sister crypto exchange), and a handful of others. The suit was made public on Monday, having been filed on Saturday in Court of the Southern District of New York by Vel Freedman and Kyle Roche. Notably, they are the same lawyers who recently (and successfully) sued Craig Wright on behalf of Ira Kleiman."

David. said...

The abstract of Cryptodamages: Monetary value estimates of the air pollution and human health impacts of cryptocurrency mining by Goodkind et al reads:

"Cryptocurrency mining uses significant amounts of energy as part of the proof-of-work time-stamping scheme to add new blocks to the chain. Expanding upon previously calculated energy use patterns for mining four prominent cryptocurrencies (Bitcoin, Ethereum, Litecoin, and Monero), we estimate the per coin economic damages of air pollution emissions and associated human mortality and climate impacts of mining these cryptocurrencies in the US and China. Results indicate that in 2018, each $1 of Bitcoin value created was responsible for $0.49 in health and climate damages in the US and $0.37 in China. The similar value in China relative to the US occurs despite the extremely large disparity between the value of a statistical life estimate for the US relative to that of China. Further, with each cryptocurrency, the rising electricity requirements to produce a single coin can lead to an almost inevitable cliff of negative net social benefits, absent perpetual price increases. For example, in December 2018, our results illustrate a case (for Bitcoin) where the health and climate change “cryptodamages” roughly match each $1 of coin value created. We close with discussion of policy implications."

David. said...

Ian Allison's Foreign Exchange Giant CLS Admits: No, We Don’t Need a Blockchain for That starts:

"Blockchain technology is nice to have, but it’s hardly a must for rewiring the global financial markets.

So says Alan Marquard, chief strategy and development officer at CLS Group, the global utility for settling foreign exchange trades, owned by the 71 largest banks active in that market.

Nearly a year ago, it went live with CLSNet, touted as “the first global FX market enterprise application running on blockchain in production,” with megabanks Goldman Sachs, Morgan Stanley, and Bank of China (Hong Kong) on board.

CLSNet was built on Hyperledger Fabric, the enterprise blockchain platform developed by IBM. But a blockchain was not the obvious solution for netting down high volumes of FX trades in 120 currencies, Marquard said recently."

David. said...

Preston Byrne's Fear and Loathing on the Blockchain: Leibowitz et al. v. iFinex et al. is a must-read summary of the initial pleadings in the civil case just filed against Tether and Bitfinex. Byrne explains how the risks for the defendants are different from earlier legal actions:

"Being a civil case, protections Bitfinex might be able to rely on in other contexts, such as the Fourth Amendment in any criminal action, arguing that the Martin Act doesn't confer jurisdiction over Bitfinex's activities, or arguing that an administrative subpoena served on it by the New York Attorney General is overbroad, won't apply here. Discovery has the potential to be broader and deeper than Bitfinex has shown, to date, that it is comfortable with. The consequence of defaulting could be financially catastrophic. The burden of proof is lower, too, than it would be with a criminal case (balance of probabilities rather than beyond a reasonable doubt)."

David. said...

David Gerard provides some good advice:

"If you’re going to do crimes, don’t do them on a permanent immutable public ledger of all transactions — and especially, don’t do crimes reprehensible enough that everyone gets together to come after you."

From the Chainalysis blog:

"Today, the Department of Justice announced the shutdown of the largest ever child pornography site by amount of material stored, along with the arrest of its owner and operator. More than 337 site users across 38 countries have also been arrested so far. Most importantly, as of today, at least 23 minors were identified and rescued from their abusers as a result of this investigation.

U.S. Attorney Jessie K. Liu put it best: “Children around the world are safer because of the actions taken by U.S. and foreign law enforcement to prosecute this case and recover funds for victims.”

Commenting on the investigation itself, IRS-Criminal Investigations Chief Don Fort mentioned the importance of the sophisticated tracing of bitcoin transactions in order to identify the administrator of the website.

We’re proud to say that Chainalysis products provided assistance in this area, helping investigators analyze the website’s cryptocurrency transactions that ultimately led to the arrests.
When law enforcement shut down the site, they siezed over 8 terabytes of child pornography, making it one of the largest siezures of its kind. The site had 1.3 million Bitcoin addresses registered. Between 2015 and 2018, the site received nearly $353,000 worth of Bitcoin across thousands of individual transactions."

David. said...

Tim Swanson has updated his post from August 2018 entitled How much electricity is consumed by Bitcoin, Bitcoin Cash, Ethereum, Litecoin, and Monero? which concluded as much as the Netherlands. In Have PoW blockchains become less resource intensive? he concludes that:

"In aggregate, based on the numbers above, these five PoW coins likely consume between 56.7 billion kWh and 81.8 billion kWh annually. That’s somewhere around Switzerland on the low end to Finland or Pakistan near the upper end. It is likely much closer to the upper bound because the calculations above all assumed little energy loss ‘at the wall’ when in fact there is often 10% or more energy loss depending on the setup.

This is a little lower than last year, where we used a similar method and found that these PoW networks may consume as much resources as The Netherlands. Why the decline? All of it is due to the large decline in coin prices over the preceding time period. Again, miners will consume resources up to the value of a block reward wherein the marginal cost to mine equals the marginal value of the coin (MC=MV)."

David. said...

What's Blockchain Actually Good for, Anyway? For Now, Not Much by Gregory Barber has a wealth of examples of blockchain hype fizzling but, being a journalist, he can't bring himself to reach an actual conclusion:

"“decentralized” projects represent a tiny portion of corporate blockchain efforts, perhaps 3 percent, says Apolline Blandin, a researcher at the Cambridge Centre for Alternative Finance.

The rest take shortcuts. So-called permissioned blockchains borrow ideas and terms from Bitcoin, but cut corners in the name of speed and simplicity. They retain central entities that control the data, doing away with the central innovation of blockchains. Blandin has a name for those projects: “blockchain memes.” Hype and lavish funding fueled many such projects. But often, the same applications could be built with less-splashy technology. As the buzzwords wear off, some have begun asking, what’s the point?"

David. said...

Patrick McKenzie's Tether: The Story So Far is now the one-stop go-to explainer for Tether and Bitfinex:

"A friend of mine, who works in finance, asked me to explain what Tether was.

Short version: Tether is the internal accounting system for the largest fraud since Madoff.

Read on for the long version."

You need to follow his advice.

David. said...

A Lone Bitcoin Whale Likely Fueled 2017 Surge, Study Finds by Matthew Leising and Matt Robinson reports on an update to 2018's Is Bitcoin Really Un-Tethered?:

"One entity on the cryptocurrency exchange Bitfinex appears capable of sending the price of Bitcoin higher when it falls below certain thresholds, according to University of Texas Professor John Griffin and Ohio State University’s Amin Shams. Griffin and Shams, who have updated a paper they first published in 2018, say the transactions rely on Tether, a widely used digital token that is meant to hold its value at $1."

David. said...

Today's news emphasizes that using "trustless" systems requires trusting a lot more than just the core software.

First, Dan Goodin's Official Monero website is hacked to deliver currency-stealing malware:

"The supply-chain attack came to light on Monday when a site user reported that the cryptographic hash for a command-line interface wallet downloaded from the site didn't match the hash listed on the page. Over the next several hours, users discovered that the miss-matching hash wasn't the result of an error. Instead, it was an attack designed to infect GetMonero users with malware. Site officials later confirmed that finding."

Second, David Gerard reports that Canada’s Einstein Exchange shuts down — and all the money’s gone:

"Yet another Canadian crypto exchange goes down — this time, the Einstein exchange in Vancouver, British Columbia, Canada, which was shut down by the British Columbia Securities Commission on 1 November.

Yesterday, 18 November, the news came out that there’s nothing left at all — the money and cryptos are gone."

David. said...

Jonathan Syu tweets:

"The whole decentralization experiment is really just an attempt to figure out what's the maximum amount of control I can maintain over a system without having any legal accountability over what happens to it."

David. said...

Electronic voting machines mean you can't trust the result of the election, but there are even worse ways to elect politicians. One is Internet voting. But among the very worst is to use (drum-roll) blockchain technology! To understand why it is so bad, read What We Don’t Know About the Voatz “Blockchain” Internet Voting System by David Jefferson, Duncan Buell, Kevin Skogland, Joe Kiniry and Joshua Greenbaum. The list of unknowns covers ten pages, and every one should disqualify the system from use.

David. said...

Nathaniel Rich's Ponzi Schemes, Private Yachts, and a Missing $250 Million in Crypto: The Strange Tale of Quadriga is a great illustration of the kind of people you have to trust to use trustless cryptocurrencies. The subhead reads:

"When Canadian blockchain whiz Gerald Cotten died unexpectedly last year, hundreds of millions of dollars in investor funds vanished into the crypto ether. But when the banks, the law, and the forces of Reddit tried to track down the cash, it turned out the young mogul may not have been who he purported to be."

It is a fascinating story - go read it.

David. said...

Among the people you have to trust to use a trustless system are the core developers. People like Virgil Griffith, a core Ethereum developer. Read about him in David Gerard's Virgil Griffith arrested over North Korea visit — engineer arrogance, but on the blockchain and see whether you think he's trustworthy.

David. said...

I'm shocked, shocked to find illegal activities going on here!. Celia Wan reports that:

"There are over $400 million worth of illicit activities conducted via XRP, and a large portion of these activities are scams and Ponzi schemes, Elliptic, a blockchain analytics startup, found in its research.

The UK-based startup announced on Wednesday that it can now track the transactions of XRP, marking the 12th digital assets the firm supports. According to Elliptic co-founder Tom Robinson, the firm is the first to have transaction monitoring capacity for XRP and it has already identified several hundred XRP accounts related to illegal activities."

David. said...

Jemima Kelley's When is a blockchain startup not a blockchain startup? recounts yet another company discovering that permissioned blockchains are just an inefficient way to implement things you can do with a regular database:

"It’s awkward when you set up a business around a technology that you reckon is going to disrupt global finance so you name your business after said technology, send your CEO on speaking tours to evangelise about said technology, but then decide that said technology isn’t going to do anything useful for you, isn’t it?

Digital Asset was one of the pioneers of blockchain-in-finance, with the idea that it could make clearing and trade settlement sexy again (well OK maybe not but at least make it faster and more efficient). Its erstwhile CEO Blythe Masters, a glamorous former JP Executive who was credited with/blamed for pioneering credit-default swaps, trotted around the globe telling people that blockchain was “email for money”.
What is unique about this “blockchain start-up” is that although it is designed to work with blockchain platforms, it can actually work with any old database."

David. said...

More dents in the credibility of the BTC "price" from Yashu Gola's How a Whale Crashed Bitcoin to Sub-$7,000 Overnight:

"Bitcoin lost billions of dollars worth of valuation within a 30-minutes timeframe as a Chinese cryptocurrency scammer allegedly liquidated its steal via over-the-counter markets. The initial sell-off by PlusToken caused a domino effect, causing mass liquidations.

PlusToken, a fraud scheme that duped investors of more than $2bn, dumped huge bitcoin stockpiles from its anonymous accounts, according to Chainalysis."

David. said...

PlusToken Scammers Didn’t Just Steal $2+ Billion Worth of Cryptocurrency. They May Also Be Driving Down the Price of Bitcoin from Chainalysis has the details of the PlusToken scammers use of the Huboi exchange to cash out the winnings from their Ponzi scheme. And there is more where that came from:

"They’ve cashed out at least 10,000 of that initial 800,000 ETH, while the other 790,000 has been sitting untouched in a single Ethereum wallet for months.

The flow of the 45,000 stolen Bitcoin is more complicated. So far, roughly 25,000 of it has been cashed out."

David. said...

In China electricity crackdown sparks concerns, Paul Muir reports on yet another way in which Bitcoin mining is centralized:

"A recent crackdown in China on bitcoin miners who were using electricity illegally – about 7,000 machines were seized in Hebei and Shanxi provinces – raises concerns about the danger of so much of the leading cryptocurrency’s hash rate being concentrated in the totalitarian country, according to a crypto industry observer.
However, he pointed out that just four regions in China account for 65% of the world’s hash rate and Siachen alone is responsible for 50%. Therefore, if China decides to shut down network access, it could be very problematic."

David. said...

Catalin Cimpanu's Chrome extension caught stealing crypto-wallet private keys is yet another example of the things you have to trust to work in the "trustless" world of cryptocurrencies:

"A Google Chrome extension was caught injecting JavaScript code on web pages to steal passwords and private keys from cryptocurrency wallets and cryptocurrency portals.

The extension is named Shitcoin Wallet (Chrome extension ID: ckkgmccefffnbbalkmbbgebbojjogffn), and was launched last month, on December 9."

David. said...

In Blockchain, all over your face, Jemima Kelly writes:

"Enter the “Blockchain Creme” from Cosmetique Bio Naturelle Suisse (translation: Swiss Organic Natural Cosmetics). We thought it must be a joke when we first heard about it ... but yet here it is, being sold on the actual internet:"

David. said...

Adriana Hamacher's Is this the end of Malta's reign as Blockchain Island? reports on reality breaking in on Malta's blockchain hype:

"Malta’s technicolor blockchain dream has turned an ominous shade of grey. Last weekend, Prime Minister Joseph Muscat—chief architect of the tiny Mediterranean island’s pioneering policies in blockchain, gaming and AI—was obliged to step down amid the crisis surrounding the murder of investigative journalist Daphne Caruana Galizia."

It appears that the government's response to her criticisms was to put a large bomb in her car:

"Anonymous Maltese blogger BugM, one of many determined to bring Caruana Galizia’s killers to justice, believes that an aggressively pro-blockchain policy was seized upon by the government to distract attention from the high-profile murder investigation that ensued."

The whole article is worth a read.

David. said...

Jill Carlson's Trust No One. Not Even a Blockchain is a skeptical response to Emily Parker’s credulous The Truth Is All There Is. But in focusing on "garbage in, garbage out" Carlson is insufficiently skeptical about the immutability of blockchains.

David. said...

David Canellis reports that Bitcoin Gold hit by 51% attacks, $72K in cryptocurrency double-spent:

"Malicious cryptocurrency miners took control of Bitcoin BTC Gold‘s blockchain recently to double-spend $72,000 worth of BTG.

Bad actors assumed a majority of the network‘s processing power (hash rate) to re-organize the blockchain twice between Thursday and Friday last week: the first netted attackers 1,900 BTG ($19,000), and the second roughly 5,267 BTG ($53,000).

Cryptocurrency developer James Lovejoy estimates the miners spent just $1,200 to perform each of the attacks, based on prices from hash rate marketplace NiceHash.

This marks the second and third times Bitcoin Gold has suffered such incidents in two years."

Mutating immutability can be profitable. Investing $1.2K to get $72K is a 5,900% return in 2 days. Find me another investment with that rate of return!

David. said...

John Nugée's What Libra means for money creation points out two big problems that Libra, or any private stablecoin system, would have for the economy:

"the introduction of Libra threatens to split the banking sector’s currently unified balance sheet, by moving a significant proportion of customer deposits (that is, the banking system’s liabilities) to the digital currency issuers, while leaving customer loans and overdrafts (the banking system’s assets) with the banks. The inevitable result of this would be to force the banks to reduce the asset side of their balance sheet to match the reduced liability side – in other words reduce their loans.

This would almost certainly lead to a major credit squeeze, which would be highly damaging to economic activity."


"It is by no means clear that such a private sector payment system would be cheaper to operate than the existing bank-based system even on the narrow point of cost per transaction, particularly if, as seems probable, one digital currency soon becomes dominant to the exclusion of competitors. But there is the wider issue of whether society is advantaged by big tech creaming off yet more money from the economy into an unaccountable, untaxable and often overseas behemoth."

David. said...

Yet another company doing real stuff that started out enthusiastic finds out they don't need a blockchain:

"We have run several POCs integrating blockchain technology but we so far decided to run our core services without blockchain technology. Meaning, the solutions that we are already providing are working fine without DLT."

David. said...

Drug dealer loses codes for €53.6m bitcoin accounts by Conor Lally reports that 6000BTC are frozen in wallets for which the codes have been lost.

Presumably there is a fairly constant average background rate at which BTC are frozen in this way, in effect being destroyed. BTC are being created by the block reward, which is decreasing. Eventually, the rate of creation will fall below the rate of freezing and the universe of usable BTC will shrink, driving the value of the remaining BTC "to the moon"

David. said...

David Gerard summarizes Libra:

"Libra can only work if Libra can evade regulation — and simultaneously, that no system that Libra’s competing with can evade regulation. And regulators would have to let Libra do this, for some reason. I’m not convinced."

David. said...

Trolly McTrollface's theory about the backing for Tether is worth considering:

"We all know miners need real cash to pay their electricity bills. They could sell their rewards on exchanges - which someone (cough Tether cough) would have to buy, to prevent $BTC from crashing. But when everyone knows that everyone knows, something different happens. Tether has real money, because Bitfinex has real money from sheering muppets dumb enough to trade on its exchange. But why would they buy miners' Bitcoins, when they can LOAN them the money instead, and get a death grip on their balls? Tether is secured by these loans, not cash. In any case, Tether would be secured by loans, not cash. Nobody keeps $7B in cash in a bank account, especially not the kind of bank that would accept Tether's pedo laundromat money. Too much credit risk.
What if, ... you called up Bitcoin miners, and offered them a lifeline, promising them to pay their electricity bills, in exchange of a small favour - a promise they won't sell their Bitcoin for a while? Let's put these Bitcoins in escrow, or, in finance words, let's offer miners a loan secured by their Bitcoins. Miners are happy because they can pay their bills without going through all the trouble of selling their rewards, while Tether is happy because, well, when someone owes you a lot of money, you have a metaphorical gun to his head."

Hat tip to David Gerard, who writes:

"In just six weeks, Tether’s circulation has doubled to 9 billion USDT! Gosh, those stablecoins sure are popular! ... Don’t believe those Tether conspiracy theorists who think that 4.5 billion tethers being pumped into the crypto markets since 31 March 2020 has anything to do with keeping the bitcoin price pumped"

David. said...

Jemima Kelly's Goldman Sachs betrays bitcoin reports that Goldman has seen the light:

"We believe that a security whose appreciation is primarily dependent on whether someone else is willing to pay a higher price for it is not a suitable investment for our clients."

David. said...

Crimes on a public immutable ledger are risky, as three alleged perpetrators of the Twitter hack discovered:

"Three individuals have been charged today for their alleged roles in the Twitter hack that occurred on July 15, 2020, the US Department of Justice has announced.
The cyber crimes unit “analyzed the blockchain and de-anonymized bitcoin transactions allowing for the identification of two different hackers. This case serves as a great example of how following the money, international collaboration, and public-private partnerships can work to successfully take down a perceived anonymous criminal enterprise,” agent Jackson said."

David. said...

Implausibly good opsec is necessary if you're committing crimes on an immutable public ledger. Tim Cushing's FBI Used Information From An Online Forum Hacking To Track Down One Of The Hackers Behind The Massive Twitter Attack reveals how Mason John Sheppard was exposed as one of the perpetrators when his purchase of a video game username sent bitcoin to address 188ZsdVPv9Rkdiqn4V4V1w6FDQVk7pDf4. The FBI found this in a public database resulting from the compromise of an on-line forum:

"available on various websites since approximately April 2020. On or about April 9, 2020, the FBI obtained a copy of this database. The FBI found that the database included all public forum postings, private messages between users, IP addresses, email addresses, and additional user information. Also included for each user was a list of the IP addresses that user used to log into the service along with a corresponding date and timestamp."

David. said...

Alex de Vries' Bitcoin’s energy consumption is underestimated: A market dynamics approach shows that:

"most of the currently used methods to estimate Bitcoin’s energy demand are still prone to providing optimistic estimates. This happens because they apply static assumptions in defining both market circumstances (e.g. the price of available electricity) as well as the subsequent behavior of market participants. In reality, market circumstances are dynamic, and this should be expected to affect the preferences of those participating in the Bitcoin mining industry. The various choices market participants make ultimately determines the amount of resources consumed by the Bitcoin network. It will be shown that, when starting to properly consider the previous dynamics, even a conservative estimate of the Bitcoin network’s energy consumption per September 30 (2019) would be around 87.1 TWh annually (comparable to a country like Belgium)"

Tip of the hat to David Gerard.