Bitcoin Markets Blog

tl;dr:

This past week markets have been rallying strongly from around $450/BTC to over $580/BTC with a brief pause Thursday at around $495/BTC and Friday/Saturday at around $530/BTC.  After over 3 weeks of consolidation at around $450/BTC, it seems that demand is once again outpacing supply.  Actually, given that 25 BTC are introduced into the economy every 10 minutes or so, the fact that the price stayed at $450/BTC for so long likely showed that consumer demand was slightly outpacing the rate at which merchants could sell.  An alternative explanation could be that many merchants have started holding onto their bitcoins without converting them back into fiat.

A curious thought I had recently was that since Bloomberg started tracking bitcoin at the end of last month, many more eyes in the financial sector must have since started watching it.  I could see some traders, brokers, and bankers who've heard of bitcoin but never made the jump now taking a more close and serious look (maybe during their lunch break) at the bitcoin charts on Bloomberg which ultimately caused them to make the jump.  A 5000% yearly return is more than enough to catch a few Wall Street folks' interests.  And it's one thing to hear the number and another to see it as a chart on Bloomberg.  And a lag of a few weeks seems like a reasonable amount of time to for people to familiarize themselves with bitcoin and deal with the logistics of moving money into an exchange.  That's one narrative of what triggered the rally but who knows.

Outside of bitcoin, Darkcoin, an altcoin focused on anonymity and privacy shot up almost 100% in market cap (and price as well) this week.  This is largely due to a transaction anonymizing feature called DarkSend (based on a distributed implementation of CoinJoin) which disassociates senders from their receivers.  Darkcoin also uses X11 which is a combination of 11 different hashing functions in it's proof-of-work (as compared to bitcoin's single hashing function, SHA-256) as well as a variant of the Kimoto Gravity Well (fast difficulty retargeting after every single block) called Dark Gravity Wave (I don't know who comes up with these names).

DarkSend involves senders pooling their funds together and electing a master node among themselves based on a predetermined random algorithm based on the blockchain history.  The master node then creates a transaction which would take the inputs of all pool participants and send them out to the appropriate outputs, mixing the transactions in the process.  Then each member of that current pool signs the transaction to make it valid (requires all signers to sign; multi-sig n of n) once they see their personal outputs are correct in the transaction.  If the master node creates a fraudulent transaction, the pool participants simply refuse to sign.  There are also incentive structures in the form of collateral payments which keep the system honest (i.e. punish the pool participant when he/she fails to sign a legitimate transaction or hangs the mixing process; punish the master node for creating fraudulent transactions).  That's the short version.  You can read more about it here: http://bit.ly/1icW3i2; http://bit.ly/RukoJ1.

The Kimoto Gravity Well (KGW) was invented by the creator of Megacoin as a solution to a difficulty adjustment problem many altcoins were facing at the time.  Imagine a situation where difficulty readjustment happens every 2056 blocks for a new Proof-of-Work altcoin with very low total network hashing rate.  One day the price goes up and it becomes profitable for multipools (multipools are mining pools which move around mining the most profitable coin of the time) to mine this new altcoin, driving up the hashing rate and subsequently the difficulty to new highs.  Once the difficulty readjusts, the multipool leaves and goes back to mining some other coin which is now the most profitable coin for it to mine.  Now this new altcoin is now stuck on an artificially high difficulty with a low network hash rate and must trudge through 2056 blocks of very slow block production.  Clearly, this is a problem.  These days, almost all new altcoins use the KGW difficulty adjustment algorithm or some variant of it to avoid this problem.  The Dark Gravity Wave (DGW) algorithm claims to address some of the recently found exploits in the KGW, namely something called the Time Warp Exploit (http://bit.ly/1raCVL9).  Outside of a potential patch of the Time Warp Exploit, DGW does not seem to have any meaningful innovation on top of KGW though it is claimed to adjust faster and more accurately to hashrate manipulation.  On a sidenote, Dogecoin uses a variant of KGW called DigiShield.  You can read more about KGW here: http://bit.ly/S9D1mc; http://bit.ly/1nrfFVb.

X11 is a hashing algorithm consisting of 11 different chained hashing functions (blake, blue midnight wish, grostl, jh, keccak, skein, luffa, cubehash, shavite, simd, echo) including the 5 finalists which competed for the designation, SHA-3 (http://bit.ly/1ilLKZ1).  The idea for using multiple hashing functions is that should any single one become cryptographically compromised, the whole protocol still stays secure.  On the flip side, in the event SHA-256 becomes weakened or broken, the whole of the bitcoin protocol becomes compromised.  With multiple chained hashing functions, the cryptocoin becomes more robust to that type risk.  I should also mention that having a handful of hashing functions should suffice.  11 functions seems overkill since each additional function gives diminishing marginal value.  On a sidenote, there is a PoW-PoS hybrid coin which uses this X11 hashing algorithm for its PoW component called X11Coin whose price went up over 70% in the past 24 hours.

In other news, Ripple XRP fell over 50% on an announcement by founder Jed McCaleb (also the founder of Gox before he sold it to Mark Karpeles; founder of eDonkey prior to that) that he would be selling his 9bn XRP stake (considering that the float is only 8bn XRP, that sum is massive and will likely, in the words of some, "crater the market") in two weeks.  See: http://bit.ly/1i70Rp1.  Jed had already left Ripple Labs in the summer of last year citing disagreements with the CEO (he begins to talk about this before catching himself and exercising more prudence: http://bit.ly/1nqMAvs) so this eventual selloff was not unexpected.  Since the announcement, Jed has taken a small amount of XRP and moved it as proof he controls the address which holds the bulk of his XRP as a way to show the community that he is who he says he is.  Since then Jesse Powell, founder of Kraken, has resigned from the Ripple board.  In Jesse's statement, he called out that the founder's allocation of 20% of the XRP in existence was "perplexing".  According to Jesse, when he approached the founders to return their XRP to the company, Jed was open while Chris was hostile.  Shortly after these statements, Jesse was served with a cease and desist by Ripple Labs: http://bit.ly/1hs2a1O.  It accuses Jesse of libelous statements against Ripple and collusion with Jed to destroy Ripple's credibility.  In response, Jesse posted the cease and desist letter online and gave a rather heated tirade, airing out the company laundry even further.  In his response he reaffirms that his statements were factual and calls out that Ripple, has in the past, used legal strong-arming to keep former employees from speaking up.  He also points out that his relationship with Jed has been nonexistent since Jed forced the board to choose between Chris and himself and the board, including Jesse, chose to side with Chris.  Jesse claims that his friendship with Jed was irreparably damaged by that event and that he chose to side with Chris because he believed it was in the best interests of the company even though he knew it would damage his friendship with Jed.  He also claims that it was improper in the first place for Jed and Chris to award themselves so much XRP that should have belonged to the company.  He also acknowledges that a selloff by Jed would crash the market price and jeopardize the next financing round so he tried to broker a deal between Jed and the Ripple board to no avail. More here: http://bit.ly/1psXHRF.  My takeaway from this is that pre-mined cryptos are susceptible to these types of dumps.  I'm also inclined to believe the Jed/Jesse side of the story.

I'm sure most of you have heard about the Gox Willy Report that came out over the weekend: http://bit.ly/1takJgd.  It uncovers a bot dubbed "Willy" whose activity spread across multiple accounts but had consistent behavior of continuously buying some 10 to 20 BTC every 5 to 10 minutes at market price with 0 fees.  It also uncovers a user account dubbed "Markus" which seemingly buys BTC are random prices.  The author suggests that in fact, bitcoins were bought for nothing and the "fiat spent" field was simply populated by the previous entry in the database creating what looked like bitcoins being bought at random prices but were actually bought for free.  Apparently Willy came online for the first time just 7 hours after Markus was taken offline for the last time after 8 months of activity.  The author also notes that there are two versions of the trade logs: one full log and one anonymized log with user hashes and state/country removed.  In the anonymized log there is another peculiar difference in that the user id for Markus was lower (since the original user ID stood out as an outlier) and the "fiat spent" field had normal correct values.  Also, this anonymized log had an earlier creation date.  This leads the the author to suggest there was an inside job going on and this discrepancy was Karpeles covering that up.  While author's findings have merit, I hesitate to jump to these sorts of conclusions.  It's possible that someone compromised their system and were able to inject values into their database thus altering the logs.  It's also possible that Karpeles did manually edit the database to cover up a hack even if he wasn't the one to do it.  There are many possibilities here but it is clear that something is very strange about the trading logs.  The author also implies that Willy was responsible for the run up in November.  While Willy may have had some effect, others have pointed out that the run up to over $1000/BTC started in China: http://bit.ly/1nS1gj9.  Nevertheless, Willy representing 7% of Gox volume during the period certainly had a big part to play in the run up especially since its entire volume was in the buy direction.  In April of last year, the author finds other suspicious activity including many low account ID accounts from Japan with no trading fees buying up a good deal of BTC.  Strangely, the user hashes of these users don't add up to the hashes of the account owners.  Again the author suggests insider malpractice.  It's also possible that these were employee accounts which were allowed to trade for free and were created before they were assigned to said employees.  All in all, the report shed light on the peculiar behavior of certain bots and accounts on mtgox and I agree that it is fairly conclusive that Willy had a big part to play in the Nov run up.  As for how gox lost it's all its customers' coins, that part is still unclear.  For other interesting theories, check out http://bit.ly/1c5Z0n; http://bit.ly/1joxONv.

Next week I will be comparing Darkcoin (CoinJoin) with other implementations of anonymous transactions like Bytecoin/Monero (ring signatures) and Zerocoin (zero-knowledge succinct non-interactive arguments of knowledge).  I'll also give my thoughts on why anonymity ultimately matters against a background of popular opinion that a cryptocurrency's anonymity (and ability to store value for that matter) is largely irrelevant compared to it's value as a payments solution.

Cheers,

Kevin & Team Buttercoin

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