Mining centralization; US Marshal leaks bidder list; Monero

Hi Everyone,

This week traded between $540/BTC and $615/BTC before ending the week at $593/BTC.  Volatility was highest in the beginning of the week and settled down thereafter.

Interesting bits from the week:
  • Ghash.IO continued to hover between 45% and 50% of the network hashrate before coming down sharply to 36% where it sits today: http://bit.ly/1lugyvQ.
  • US Marshal leaks list of potential bidders for it's bitcoin auction: http://bit.ly/1pJel2q.
  • Japan announces that it will not regulate bitcoin: http://reut.rs/1rhK7Bm.
  • Monero has been on the rise.  I mentioned Monero and ring signatures in one of my previous posts (5/30/2014) and, since then, it has quadrupled in value.  Currently it is the 13th largest cryptocoin by market cap: http://bit.ly/1dqX6ht.
  • An article by Tuur Demeester drew parallels between the invention of bitcoin to the invention of petroleum as an energy source: http://bit.ly/1jv7270.  I thoroughly enjoyed the parallels.
Concerns about a 51% GHash.IO continued this week as some in the bitcoin community had suspicions that much of the hashing power coming from "unknown" mining operations actually belonged to GHash and that GHash was simply splitting their hashing to appear smaller.  This is no longer believed to be the case as two mystery addresses unrelated to GHash.IO were found to represent about 8% of the network and were originally counted as belonging to the "unknown" group.

There was also suspicion in the past that GHash sent fake miners to infiltrate other pools to show partial work while withholding full solutions to reduce honest member payouts.  See block withholding attack: http://bit.ly/1npHgCC.  This type of attack would cause the attacked pool to seem "unlucky" and might ultimately drive members to convert to a pool which is not being attacked.  This could be a minor contributing factor to how GHash has been gaining members (the major factor would be the 0 fees).

In any case, given the whole 51% scare, many have come up with possible solutions to the centralization of mining power we are seeing with GHash:
  • P2P mining enabled by an auxiliary blockchain: http://bit.ly/1uMeobz.  P2Pool does this, has been active for a while, and is gaining traction.
  • Lamport Signatures: http://bit.ly/1nq9f6x.
  • Not using Lamport Signatures: http://bit.ly/1qzc61K.  Incorporates a secret which allows pool members to steal the block from the pool thus making pools which don't trust its members impossible.
  • Fawke Signatures: http://bit.ly/1kWtYMg.
  • Two-Phase PoW: http://bit.ly/1srPhPs. One phase is outsourcable and the other is not thus creating an equilibrium size for mining pools (i.e. the equilibrium is set to the point when the efficiency losses of a pool due to the nonoutsourcable phase of PoW is equal to the gains in utility to members from reducing the variance of their payouts).
  • Nonoutsourcable Scratch-Off Puzzles: http://bit.ly/UWqPr1. ???
  • Multi-PPS: http://bit.ly/1nTynV5.  Individual miners mine blocks where the coinbase transaction is split between multiple mining pools and each pool pays the individual per share of partial work proportionally based on the proportional split of the coinbase transaction.
It's rather amazing that not 1 week after the 51% scare, the bitcoin community has come up with several possible solutions to mining centralization.  It furthers my confidence that no challenge bitcoin encounters will be insurmountable.

I also recently read a piece by Vitalik Buterin which took a very thorough but concise look at mining centralization: http://bit.ly/1rfwra1.  I highly recommend it.

The US Marshal email leak was quite interesting.  First, from the list we can see players like DRW Trading (top-tier prop shop), Matrix Capital (Tiger Cub) (on a side note, Pantera Capital is also a Tiger Cub)), and BNP's stat arb desk taking a serious interest in bitcoin.  Tiger Cubs and other hedge funds, bank trading desks, and prop shops are all coming to bitcoin?  I wouldn't be surprised if Jane Street and GETCO are also positioning themselves for a Jump into bitcoin.  Looks to be a huge year in the making.

There has also been speculation whether the auction coins will trade above or below market price.  It all depends on the propensity of the bidders to have directional opinion.  Folks like the stat arb desk and Binary Financial are probably only looking for a deal they can quickly flip for profit so they will likely underbid the market.  Coinbase is also unlikely to buy at a premium since they usually keep their books balanced.  For SecondMarket's syndicate, they will likely aggregate the bids they receive from their syndicate members and pass them on as block bids to the auction (capturing any differential in the process) so their bidding prices will likely vary per 3k BTC block and depend on their members' propensities to buy.  For DRW and Matrix, it's hard to say. They could see this as an opportunity to get into bitcoin for a directional play, giving up less slippage than market would charge them.  If this is true, it is possible that the auction closes at above market rates.  I am more inclined to believe that Matrix will take a serious long position here rather than DRW or any of the others.  Since most of the big players are well-capitalized enough to buy all blocks being auctioned, it is hard to say how the auction will play out and whether most people will come away empty-handed.

Cheers,
Kevin & Team Buttercoin
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