Bitcoin Market Update 4/25

Hi Everyone,

This week bitcoin stabilized to the $480/BTC to $510/BTC range before dropping to the $450/BTC to $470/BTC range earlier today.  The drop was most likely due to an official announcement by China Merchants Bank prohibiting the use of its accounts for bitcoin-related transactions.  Given that this news affects fiat withdrawal (unlike earlier news which affected fiat deposits), some speculators likely sold their bitcoins and cashed out in anticipation of other banks following suit.

It seems that most of the trembling-hand speculators have already exited the market and everyone else is getting acclimated and recalibrated to China's fickle behavior toward Bitcoin so that news related to banking and regulation in China will have diminishing effects as they surprise the markets less and less.  Barring any new material developments, I don't see the price going significantly lower.

Maidsafe, an attempt at a fully distributed, de-centralized internet recently closed its pre-sale of MaidSafeCoin which represents 1:1 convertibility to safecoin, the transactional currency of the Maidsafe network once it goes live.  You can read more about MaidSafe here:  Interestingly enough, the pre-sale was available in both bitcoin and mastercoin at 17,000 SAFE : 1 BTC and 3400 SAFE : 1MSC.  This artificial and implied peg of 5 MSC/BTC led to MSC rallying from about $39/MSC to over $85/MSC.  Immediately upon the start of the pre-sale, large MSC holders dumped their MSC for SAFE and bought millions of dollars worth within the first few hours.  This prompted MaidSafe to close the mastercoin pre-sale so as to "leave some for the bitcoiners".    When the presale for MSC locked, MSC plummeted to $40.  Unfortunately, many bitcoiners had just sold their BTC for MSC in hopes of capturing value on the cheaper side of the peg and getting into SAFE that way.  Now, those who were slow to capitalize on MSC=>SAFE were left holding mastercoins worth less than half their peak/pegged value.  Bitcoiners who were slow got the worst of it as they bought MSC high and got locked in while the price tumbled.  This is a good example of the dangers of centralization (in arbitrarily deciding to close the presale to MSC) and in pegging one currency to another when the market disagrees (also see Argentina).  Arguably, MSC insiders made off with large profits and Maidsafe decision makers helped facilitate it.  As to whether the Maidsafe project itself will be successful, it remains to be seen.  It certainly is ambitious and there is good depth to the technical aspects but this botched pre-sale leaves me uneasy.  I will continue to watch for developments in this project going forward.

Recently there has been a lot of buzz about Blackcoin, the first hybrid Proof-of-Stake (PoS) - Proof-of-Work (PoW) altcoin to fully reach the PoS stage where PoW has been entirely phased out.  So today, I thought I'd take some time to talk about PoS.  First a little brackground: Bitcoin, litecoin, dogecoin and the majority of cryptocurrencies are based on PoW, whereby doing work (expending electricity and calculating hashes) creates new blocks in the blockchain.  Those who show "proof of work" (valid hashes given the difficulty) decide on the official history of transactions.  PoS, on the other hand, generates blocks based on your stake or how many coins you own and how "old" those coins are (I mentioned in one of my previous updates the concept of coin-days-destroyed; this would be coin-days before they are destroyed in a transaction).  Those who show "proof of stake" decide on the official history of transactions.

There's a few advantages and disadvantages with PoS.  On the pro side, transaction costs in the endgame will be significantly lower since the only cost of generating a block will be storage and bandwidth costs as compared to PoW costs of large quantities electricity (given a high hashing difficulty in the endgame).  PoS is more decentralized and mining pool oligopolies don't exist.  PoS is also more environmentally friendly since "energy" isn't wasted on hashing, a seemingly pointless exercise (arguably, environmentally friendliness has no material effect on how viable a cryptocurrency is in the long run from an incentive architecture perspective since the environment is a public good).  Finally, PoS is considered safer with respect to a 51% attack which would require an attacker to acquire not 51% of the mining power but 51% of the total coins which is much more expensive.  Also consider that the larger a stake someone has, the less incentive they have of undermining the system.

On the con side, participating in the PoS staking process requires you to leave your wallet facing the network constantly and unencrypted which is clearly a security hazard.  Also, and more importantly, the incentives for participants break down during a fork in the ledger.  Whereas with PoW, a miner can choose to mine on only branch of a forked blockchain because mining power is scarce, in a PoS system, stakers can stake their coins on all branches of a fork (can be more than a 2-way fork) at the same time at virtually no cost.  You can prove to Branch A that you own the coins you say you own while also proving to Branch B and Branch C and etc.  If you believe that any of those branches has a non-negligible chance of becoming the official history in the future, you would want to stake your coins on every branch at every fork.  Also, if you, yourself, are a double-spender, you can stake your spent coins on a branch where you never spent them.  The possibly infinitely bifurcating transaction history of PoS is my main contention against its viability (in fact, Peercoin (the biggest PoS-PoW hybrid coin uses centralized checkpointing precisely to avoid this type of consensus bifurcation).  Some solutions have been suggested like Vitalik Buterin's Slasher algorithm:  Here staking in multiple branches is punished and whoever finds the cheater is rewarded.  Also it functions on a Proof-of-Stake-2000-Blocks-Ago instead of Proof-of-Stake-Now so you can only stake now if you can prove you owned the coins 2000 blocks ago.  The latter feature prevents a double spender from immediately staking the spent coins in a different branch unless he controlled those coins at least 2000 blocks ago.  There is also Transactions-as-Proof-of-Stake (TaPoS) suggested by Daniel Larimer:  It essentially decouples network security from network hashing rate by making double spending more difficult even when the difficulty and hashing rate of the network are very low.

PoS is an ongoing experiment and new algorithms and incentive architectures are being thought up every week.  So far, I am unconvinced that current implementations of PoS are long-term viable (Peercoin, Blackcoin).  There are also some issues with Slasher and TaPoS but they are certainly improvements.  Personally, I've always favored pure PoW.  There's something intuitive about it.  To draw an analogy, suppose there was a material anyone could create by destroying gold and only by destroying gold.  Suppose that material had a good property which gold lacked (maybe it was lighter and uniformly came in the shape of coins).  It makes intuitive sense to me that such a material would have value and that part of its value would be derived from its scarcity due to its link to gold.  And people would have some incentive to actually create it by destroying gold because of its good properties.  With PoW, real value (electricity) is consumed/destroyed to produce a cryptocoin.  The comparison seems parallel.  With PoS, even if ultimately viable, just feels less scarce since nothing was expended or consumed for its creation.  PoS, if ultimately viable, also seems more prone to clone coins coming in and taking over market share. Whereas stake-based security is easily cloned by a new altcoin, mining hardware and thus PoW security cannot be duplicated out of thin air. Anyway, I'll be keeping an eye out for further developments in PoS.

Kevin & Team Buttercoin
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