Mar 292014

Bitcoin Insurance

With Bitcoin going more and more mainstream every day (irrespective of the price. Seriously, stop obsessing about the price, up or down!), as a financial instrument (currency/commodity/thing of value/I-have-no-idea-what-it-is-but-I’ll-speculate) it’s only a matter of time before Bitcoin insurance comes along. Well, it sort of already did, and it’s a matter of time before bigger players enter the market. This is an interesting development, considering Bitcoin is still a beta software!

Also, Barry Silbert, the founder and CEO of Second Market had this to say on Twitter recently:

(Interesting. We’re starting to get approached by large, well-known insurance cos looking to offer insurance products on bitcoin exposure)

This is a positive trend for Bitcoin, but just so the Bitcoin insurance companies know, insuring Bitcoin is nothing like insuring your car or insuring your gold supply. It would be very interesting to have an insurance claim on Bitcoin tested out in a court of law. Anyway, here are some things these companies need to think about –

  • Simple thefts: This seems like the primary motivation of the Bitcoin insurance companies. If there was a hacking theft or employee theft, I assume the insurance pays out. It’s trickier though – how do you really prove a hacking theft? The owner might simply transfer them to another wallet and claim he was hacked.
  • Partial key theft: An interesting situation where an insider is able to leak a part of the key (e.g. the one which he has access to) and then sells it on the black market and a powerful computing pool is able to crack the remainder of the key and steal all the Bitcoins. Note that the private key wasn’t ‘stolen’ in this case, but instead brute-forced with the help of some insider information.
  • Key loss: Proving a private key is lost can be tricky. How and when would this insurance pay out if a key is claimed lost?

There are also many unexpected scenarios that the Bitcoin insurance needs to be aware of, which might or might not directly impact the payouts –

  • Hard Fork: It has happened in the past but was quickly resolved. However, with so many interested parties in Bitcoin now that have a considerable investment, it isn’t out of the realm that there’s a hard-fork that cannot be reconciled. For instance, when Mike Hearn pushed for blacklisting of coins, the whole community erupted in opposition. If such a feature was to be implemented, the people close to governments and regulators might welcome the money and many others wouldn’t. There was already talk of forking the Bitcoin blockchain in that case. There’s no ‘main’ chain in that case – there would be two different chains, each one valid and I assume each one very well protected by hashing power. It’s a situation to think about at least.
  • Miner Blacklisted Coins: If the scenario above happens, or even if it doesn’t, the Bitcoin miners have a lot of control over which transactions are added to the blockchain. What if the most powerful players in the very centralized Bitcoin pools decide to block transactions from certain addresses to be processed? It seems unlikely that individual parties can ever conjure up enough hash-power to add to the blockchain themselves. It would be an interesting scenario – the Bitcoins are still present and not stolen, but there is no way to ‘spend’ them.
  • Lost Fungibility: Today, Bitcoins are more or less fungible, in that any Bitcoin is the same as another. However, ideas like Colored Coins would destroy fungibility. Such a situation would mean one Bitcoin is different from another. There are a plethora of issues that need to be thought about in such cases. This also applies to legal frameworks – since the blockchain is public, there could be cases where certain Bitcoins associated with some addresses, for whatever reasons are not considered fungible with the rest of the network due to specific laws in that country.

What other issues could Bitcoin insurance run into or should at least think about?

Photo Credit: Gabriel GM

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Mar 272014

Bitcoin Tug of War

A quote from Mark Andreessen during the CoinSummit in San Francisco caught my eye – “My prediction is that the Libertarians will turn on bitcoin in two years. It will be part of the mainstreaming.” It is amusing to me, considering Bitcoin has such a rich history already. Also, this comment appears to me to be somewhat naive (I know I am not rich enough to invest tens of millions into Bitcoin companies, but I think I’ve seen and followed this space more than Mark) and lacks nuance.

I am not a fan of Silicon Valley coming along and claiming Bitcoin to be their baby now, and asking ‘those crazy libertarians’ to back-off. Bitcoin needs to grow holistically, which means taking into account all the earlier efforts that have gone into bringing it to its current stage. Remember that it is not Silicon Valley that started Bitcoin or nourished it. They are just here because they see an opportunity to make some money here (you don’t actually think the millions of dollars are being routed to open-source developers do you). Like it or not, Bitcoin has strong cypherpunk roots and those ethos are embedded into the system, whether people realize it or not.

I am not new to this kind of a struggle though. When Bitcoin price peaked near $1200 per Bitcoin a few months ago, there was plenty of trading activity in China and elsewhere, with little consideration to the underlying technology. That cycle is probably going to repeat sometime again. In those cases, the traders and ‘finance-guys’ thought they ran the show and firmly believed in it, without realizing Bitcoin as a technology.

It’s funny how these cycles and bubbles form, but Bitcoin as Bitcoin is survives and thrives nonetheless, without bothering about who is trying to flex their muscles. Even then, there are powerful groups of play here, so I think it’s important to understand and get an overview of the current state of Bitcoin and the players involved –

Crazy Libertarians: The guys who started it all, believed in the idea and philosophy of Bitcoin (including the founder Satoshi Nakamoto), nurtured it in their own way and stuck with it during the ups and downs. They can sometimes seem crazy to the mainstream, mostly because they are, with their anti-government anarchist rhetoric. Bitcoin needs them as they are the strongest supporters of the idea of Bitcoin and contribute to the idea wholeheartedly even when there are no direct financial incentives.

Silicon Valley Geniuses: The guys who believe in making products and services around Bitcoin, making money for themselves in the process, and clash directly with the crazy libertarians over the direction Bitcoin needs to take in terms of government involvement and regulation. Bitcion needs them because they build the technologies and businesses around Bitcoin that will help it gain mainstream adoption, as the founder intended.

Wall Street “Trust us we know what we’re doing” Traders: The guys who have no clue what Bitcoin is, and are only interested in making money off of this new shiny thing they call bit coin or something like that and are trying to figure out whether this new thing is a currency or commodity and how to modify the Black Scholes to create Bitcoin derivatives. Bitcoin needs them because they are the one who can design financial systems around making Bitcoin as a payment system/store of value/store of account and also provide it with the required price stability so ordinary people can start using Bitcoin more and more.

It seems like these groups of people have their ups and downs in terms of what the current narrative in the media is. Make no mistake though – Bitcoin needs all of them and it needs all of them to work together. No one group is going to achieve glory for Bitcoin on its own without the others.

Photo Credit: Janet Lackey

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Mar 122014

Bitcoin is Much More Than Money

Bitcoin is much more than money, and don’t let the mass-media, or worse, most of the ignorant comments on the mass-media pieces convince you otherwise. About 95% of the “criticism” you read about Bitcoin revolves around how it isn’t a good currency and a plethora of reasons justifying that stance. Don’t get lost in the noise, and let’s be very clear about something – we don’t know what Bitcoin can be yet. No one does. Not the founder, not the core devs, not the miners, not the traders, and certainly not economists and journalists.

Just because Bitcoin has been used as a currency in certain contexts doesn’t make it a currency. Bitcoin is a piece of technology that has potential to decentralize the hell out of everything. With guarded optimism, this is an incredible feat and we don’t know how this going to be used yet.

Not to sound cliched, but the earliest versions of the internet allowed two people on two different continents to communicate. That’s all. Most of the scholars and pundits could never see the emerging web beyond a teenage fad and porn haven. These inventions today have made the old life almost unrecognizable. Bitcoin, I suspect, is on similar footing. It is not possible to really predict what it is and what it will be yet.

Bitcoin isn’t a currency that fluctuates greatly in value, it is a piece of technology that has been used as a currency, and as it develops, it will be used as much more than a currency. In its current state, Bitcoin seems like a hybrid of a currency, payment system, commodity and a financial asset. Don’t think it will remain that way though. With little fan-fare, there are uses beyond this already – time-stamping a piece of document, for instance, without a notary. I don’t think a currency does this, do you?

Don’t get me wrong, Bitcoin can be used as a currency, but it is much more than currency. What the future holds is anyone’s guess. With the implementation of smart contracts in the protocol, sky is the limit, from autonomous corporations to decentralized stock markets. The value of Bitcoin is going to be a sum total of all the utility it provides in the world, not just as a currency.

The reason the main-stream media gets it so wrong most of the time is because they ask the “experts” with a uni-dimensional world-view who cannot think beyond. You know this is the case when world-renowned economists and professors get almost everything wrong about Bitcoin, like Nouriel Roubini or Paul Krugman. As Scott Rose put it eloquently, the current criticisms of Bitcoin are 10 years too early.


If you’re trying to value Bitcoin, don’t think of it as one thing and try to model Bitcoin in terms of the familiar, just so you can get away with intellectual laziness. No, Bitcoin isn’t a currency. Bitcoin isn’t a payment system. Bitcoin isn’t a financial asset.

Bitcoin is just Bitcoin, get used to it.

Photo Credit: epsos

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Feb 282014

Bitcoin only economies

There are so many articles in the media about how ‘Bitcoin is such a poor currency’ that I won’t bother linking to them all. In a one-line summary, they claim Bitcoin is too volatile to be a store of value and not universally accepted. In a one-line refutation, Bitcoin is an emerging technology that will obviously take time to stabilize and catch on. That, however, is just a small part of the story.

For those who are lost in the flurry of media attention about MtGox and Bitcoin’s doom, don’t get lost in the day-to-day details of one business dealing with one aspect (arguably one of the most important, though) of the Bitcoin ecosystem. Yes, Bitcoin can sometimes replace traditional commerce and banking system (tell me again how I send $10 to someone in Nigeria?) but that’s just the beginning. Like I previously mentioned in an older article, the real value of Bitcoin lies in economies that don’t yet exist.

What are Bitcoin-only Economies?

It’s true that Bitcoin can sometimes replace traditional payment systems. If I go to my local bar selling me beer for US Dollar cash, US Dollar credit or Bitcoin, I can choose to pay any way I want, and especially in the new, beginning phase as the ‘early’ adopters of Bitcoin are excited to be able to use Bitcoin to buy ‘real’ things, they’ll be quite inclined to pay with Bitcoin. In the longer term though, there is no reason to think that Bitcoin would replace the existing payment network or structure – it will probably be a strong alternative but not completely replace it. The world of credit cards and cash is too entrenched in our economy to be replaced overnight.

However, the real transformative power of Bitcoin lies in economies where traditional payment systems are either infeasible or impossible. It doesn’t matter whether you like Bitcoin or whether you think it’s the future – if you want to participate in these economies, you will need to get your hands on some Bitcoin. Lets start from the simpler and more obvious cases to the more ambitious ones. Here’s a brief description of the kinds of economies (I’ll write more detailed posts about each one individually in future updates to the blog).

Please note that when I use Bitcoin here, I mean any crypto-currency, not necessarily Bitcoin, although at this current state of things, it seems that Bitcoin would be the dominant chain.

  • Micro-Payments: Tipping, donations to artists, as a general ‘thank-you’ across the internet (Dogecoin seems very dominant in this area too). Chicago Sun Times tried this out, and BitWall, a Silicon Valley startup is actively working on this.
  • Cross-Platform Gaming/Competition Currency: Any game developer can use this as an in-game currency without trying to handle a whole payment system. In addition, it’s easy for in-game competitions and giving the ‘money’ to the winner in a competitive game. This is an evolving field, and there are a few good companies working on this.
  • Provably Fair Gambling: Most reputable Bitcoin gambling sites today have provably-fair gambling. There are other ideas of implementing gambling into the blockchain itself, so there’s absolutely no counterparty risk either from the other side of the bet or from the betting company itself.
  • Payments to Autonomous Corporations: This is another area of the future that only Bitcoin can tackle – autonomous corporations can never take fiat currencies. See Dawn of Autonomous Corporations part-1 and part-2.
  • Smart Property: Again something that should be implemented in the future, but the best way to get this going is through crypto-currencies due to a number of desirable features (weak versions can be created with traditional networks too).
  • Stock/Bond Markets: Within the next 5-10 years, I am sure there will be good implementations of moving securities to the blockchain. There are just so many advantages. Dividends or coupon payments can be made in a very simple and easy to implement manner without having to go through complex brokerage networks. International trading is a piece of cake. Bond-issue voting is easy to implement too.
  • Others: Electronic notarization, cheaper remittances, international payments, etc.

It would be good if Amazon starts accepting Bitcoin. And then Walmart. However, the real strength and value of Bitcoin shine through when these Bitcoin-only economies are developed.

Photo Credit: ViewMinder

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Jan 202014

Dawn of Autonomous Corporations 2

See original Dawn of Autonomous Corporations, Powered by Bitcoin and discussion on Hacker News.

I want to follow up on my original article on how a technology like Bitcoin can enable autonomous corporations to take root. A few commentators didn’t like the use of the word ‘corporation’, considering the legal implications of such. I guess autonomous entities would be more accurate, but I’ll stick with corporations for the sake of consistency. If you don’t like it, just replace corporation with entity.

Also, as another note, I discuss two broad structures of autonomous corporations. Neither of them is anywhere close to ‘singularity’. This could be considered AI but it isn’t anything remotely ‘futuristic’ in the way that these would be our overlords. In fact, many of these ideas are already in existence today, starting with Bitcoin, and many others would become reality in the near-future, in say 5-10 years time. These autonomous corporations are fully autonomous, but still fairly ‘dumb’. The real power comes from services they can provide that have real economic value, based on a completely human-run world.

Structure of Autonomous Corporations

There are two broad categories of autonomous corporations that can exist. I discuss both of these below. The main structure to look for is where the ownership and control lies. On the control side of things, by virtue of being autonomous, this corporation/entity has no central control, not even the inventors/founders. By nature of its design, it controls itself (think Bitcoin) and it lives and dies by this principle. I’ll discuss these in more detail below.

1. Distributed Ownership, No Centralized Control

Ownership is where an autonomous corporation will differ significantly from a regular corporation. In a publicly traded corporation, for example, the ownership is distributed but the control is centralized with the management. In an autonomous corporation, there shouldn’t be any centralized control.


The simplest base case of this form of ownership and control structure is of course Bitcoin. The ownership is distributed as ‘shares’ – think of each Bitcoin as representing one share in the corporation. The corporation provides some service (value transmission, store of value, asset registry, implementation and enforcement of contracts, etc.) and the value is distributed to the shareholders. However, the Bitcoin network also needs some external help to survive, so it pays ‘miners’ to perform a proof-of-work computation to secure the ledger and prevent double spending. This is paid from two different sources – stock payment (creation of new Bitcoin) and charging service fee (transaction fees). After 2140, only the latter is left.

Shareholder value is distributed in the form of capital appreciation for Bitcoin and most other crypto-currencies. There are proposals for including dividends in newer ideas like Bitshares.

On the employee front, the employees are different from owners although employees are paid in company stock. The employees include miners who secure the network. The development is open source and therefore not really ‘paid for’ although the early development team knew about the project and mined, and therefore has a stake in Bitcoin. This can potentially, down the road, create the infamous Principal Agent Problem but we are pretty far away from that stage.

Bitcoin was the first truly autonomous corporation that opened the doors for future ideas. There are several interesting ideas that improve upon this or experiment with different value propositions.

Proof of Stake or Owners as Employees

The principal agent problem can be overcome by proof of stake, first implemented in Peercoin. I won’t go into the full details here, but know that it is imperfect, but a way to avoid the ‘miners’ working off on their own, that doesn’t benefit the ‘owners’ (e.g. centralized pool controls and corresponding power abuse). This isn’t perfect, but it’s a start. It also doesn’t need a lot of expenditure in terms of employee compensation and can thus retain more shareholder value. Distribution is always a challenge though, e.g. NXT, but if a beneficial service can be provided, its effects are minimized.

Additional Services to Increase Shareholder Value

Primecoin was the first to provide additional services besides value transfers/asset registers etc. to branch out beyond the regular value sources of crypto-currencies. The proof of work involves computing cunningham chains that are useful in Mathematics. Namecoin does the same through a decentralized DNS system that is very useful as there is no central point of failure. Although these don’t have a tremendous economic value at this stage, this is the first idea how an autonomous corporation can use distributed computing to solve problems and thereby increase the overall value for shareholders.

Hiring Additional Employees

Remember how we said that these aren’t ‘highly intelligent machines’ that can do everything by themselves? They need humans in the form of development work, mining, etc. Memorycoin, a new altcoin, pushed the envelope to include, within the protocol of the blockchain to hire 5 employees for development, marketing, network effects, etc. This is the first instance of a blockchain hiring people directly to do activities that promote the autonomous corporation and increase its overall value instead of just securing the network. These positions are paid in company stock just like for miners. Read more about it here.

In addition to hiring employees, Memorycoin created the first real voting mechanism in the blockchain, where one-coin-one-vote system was implemented. This could branch off into several future corporate decisions, so instead of having a board of members decide future direction, it could be the owners themselves in a purely democratic voting system.

Further Reading:
Bootstrapping a DAC
DACs Revisited

2. Self Ownership, No Centralized Control

These are a very different type of autonomous corporations that retain control of their ownership, so they are 100% self-owned instead of distributing equity. The corporation retains the full proceeds of its economic activity instead of being distributed among shareholders. Think of this as a private, non-publicly traded corporation.

Since there is no ‘stock’, this corporation needs to figure out ways to pay its employees, contractors, vendors, service providers, etc. in real money rather than stock. The only way for such a fully autonomous entity to hold and spend money is through crypto-currencies like Bitcoin.

There needs to be an economic incentive for people to design these autonomous entities, and if there isn’t capital appreciation (remember not even the founder holds any ‘stock’ in this entity), then there needs to be another mechanism. This should be a debt-based rather than an equity-based incentive structure.

This means, every autonomous corporation starts off with a debt to its founder. After it gets enough revenues and converts this into earnings, it pays the owner back, at which stage, it is completely debt-free. I’ll discuss why this model is useful below when I discuss further financing and future development – the creation of ‘children’.

If it’s no longer economically viable to operate, the corporation can shut down or try to enter a new market, just like any other ‘real-world corporation’.

There are a few challenges in this design –

  • Spending and securing Bitcoin: Human-run cloud operators will try to steal the Bitcoin by trying to grab the private keys.
  • Future development: Hiring humans can be tricky because they can try to get away with shoddy work or worse, try to create a backdoor to steal the corporation’s money.
  • Financing: Sometimes, the corporation might need money for a profitable project. It needs to work through financing requirements, especially at the initial stages of development.
  • Independence: The autonomous corporation needs to figure out a way to live on a distributed network and migrate with ease. Otherwise, it is at the mercy of one cloud service provider who can decide to shut this down.
  • Transparency: There should be a way to increase the customer’s trust and help troubleshoot problems if they encounter any.
  • Dispute Resolution: There needs to be a way to address disputes. Transparency helps, and in an ideal world, everything is dispute-free but there needs to be a fair ‘trial’ in case things go wrong.

One can work out, bit by bit, the solutions to all these problems. Here are some ideas in this direction. Needless to say, it requires a lot of community effort in this direction with various iterations.

  • Bitcoins can be secured by using the N of M signature transactions and Shamir’s secret sharing to help secure keys across multiple instances, so no one agency can steal the Bitcoins.
  • Any changes to the source code of the autonomous corporation needs to be tested on children. Since the parent is paying for the development work that creates the children, the child-corporations come into existence exactly like the first parent – through a debt to the parent instead of the creator. The parent monitors the child, and if it is happy with its existence, will adopt the new source-code conditionally.
  • Financing needs to be through debt issuance. Debt issuance can be complex, e.g. which party gets priority if money is running low. This part can be very innovative, and I suspect a heavy use of smart contracts.
  • The code needs to be modular and easy enough to compile and execute on several servers and in case of any problems, kill the process, remove all traces of code and migrate to a new process. This also needs to make sure there are no traces of private keys left and if there are, then migrate the money to a new wallet.
  • I think all the logs can be published and made public on a website, with a decentralized DNS using namecoin (so there’s no central point of failure). The corporation can also hire programmers (or this could be done at inception by the creator) to create additional pages on the website that parses the data and displays relevant information.
  • Dispute resolution needs to be done in a decentralized way, perhaps through random assignments of people using the network and giving them a small financial incentive for the same. The identities of these people need to be anonymous. There are lots of improvements on this model of course.

These are obviously starting-point ideas. There is a lot of innovation possible in this space, and we can only imagine the kinds of interesting creations possible in the future.

Further Reading:
Video of Mike Hearn Speaking at Turing Festival 2013

What are your thoughts on this?

Photo Credit: Eric Borja

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Nov 282013

Real Value Bitcoin

The price of Bitcoin has been skyrocketing, increasing more than 10 times in the last two and a half months, and the media is going nuts. Nuts, because they don’t know a thing about Bitcoin. Every Tom, Dick and Harry with any major “respectable” outlet gets to write his “opinion”, each one a masterpiece onto itself (I forget, someone remind me of that analogy about opinions again please). Seems like the more respectable the outlet, the more ignorant the opinions. For instance, this guy, who thinks he “single handedly sent the price of Bitcoin soaring” (no that’s not a typo and no I am not drunk. Yet), writes for the highly respectable New York Times. Speaking of highly respectable New York Times, here’s A Prediction: Bitcoin is Doomed to Fail (yes, that’s the title, I don’t make titles up for the highly respectable New York Times), a highly respectable opinion of a highly respectable author of a highly respectable publication starting with the sentence “The developers of bitcoin are trying to show that money can be successfully privatized”. You can’t make this up. I stopped reading, and so should you.

So as the media continues to do whatever it does, there are other “real” developments in this space. All these people who have no idea what Bitcoin is, predict its doom because they don’t see a “real” value. They don’t see what it is “backed by”. They don’t consider it real money because they can’t go to the corner grocery store and buy their New York Times with Bitcoin yet. Behind this doom and gloom of course is real progress.

I wrote an article about two months ago, which asked What Would Happen if Bitcoin reaches $1000? I didn’t expect it to happen so soon but I also stand by it. Like my first point, “More (Stupid) News Coverage”. Also, my fifth point was Remittances. Remittances is a huge area where Bitcoin has a lot of potential to begin with. People using Bitcoin to send money will need to cover much less in fees than the average 8-10% today through wire transfers and Western Union, depending, once again, on the number of middle men (still waiting for the time when Bitcoin to sovereign money conversion will become moot!)

Today, there’s good development in the remittances space for Bitcoin. BitPesa in Kenya is working on this for the Kenyans. I’ll let you read the article, but the implications are clear. There is clearly “real” value for Bitcoin and slowly, one industry at a time, will be revolutionized. After all, what is fundamentally more disruptive than a redefined monetary system?

At the end of the day, remember that Bitcoin is a technology that will take time for mass adoption. It is well suited for certain purposes and ill suited for others (e.g. buying drugs. Cash is still the king in that aspect since it is anonymous and you can do a lot of bad things with cash without ever being tracked). As a base protocol, it has already seen a lot of success. The real value addition will happen with the services built on top of the Bitcoin protocol. With something that is fundamentally so different as Bitcoin, you need a fundamentally different paradigm to understand it, rather than narrow ‘gold 2.0’ or ‘volatile currency that can never survive’ type of perspectives. Now if only I were as highly reputable as the New York Times …

Photo Credit: Michelle Bender

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Nov 182013


Crypto-equity, instead of just plain crypto-currency, might be the future of Bitcoin-like projects including alt-coins. So what is crypto-equity and has it been tried yet?

Crypto-equity was first successfully tried and implemented by Invictus Innovations (correct me if there are earlier instances) by launching ProtoShares, which is crypto-equity for several other projects in the pipeline, most notably BitShares. ProtoShares has been a pretty successful launch, even though it’s just been 2 weeks. In this short time-span, the market cap of ProtoShares has risen to be greater than Peercoin, which has been around for a much longer time. Why is it? Because ProtoShares is more than an alt-coin, it is crypto-equity.

What is Crypto-Equity?

Crypto-equity looks like a regular crypto-currency in that it has a blockchain, proof-of-work and other elements. However, it differs in one fundamental respect: there is a promise to fork crypto-equity into a future product by the development team. This means anything this dev-team makes in the future, you’ll get an automatic share in it if you hold crypto-equity. This is a pretty neat concept and has several advantages such as –

  • Show People the Team is Serious: There is no pre-mine or other incentive for the development team. All they have is crypto-equity. For it to have value in the future, the team needs to be committed to their idea. The team mines crypto-equity just like everyone else. However, they will likely be more invested in this and spend more on hardware because they believe in their ideas.
  • Good Compensation for the Development Team: Pre-mining is frowned upon on the community and with good reason. Through crypto-equity, the dev team is on the same level playing field as everyone else in the world. However, it is likely that they will invest more in mining because of higher stakes. When future ideas of this dev-team take off, they get a higher compensation through a stake in everything they create, since they hold a higher percentage of crypto-equity.
  • Investing in Ideas: Crypto-equity allows you to invest in ideas before they become reality and before they are fully implemented.
  • You can Own Many Things: The team can create several new products and you get a share in each one of them through crypto-equity. Thus the crypto-equity continues to have value as long as new products are being created.
  • A Ready Community: In addition, anyone else holding the same crypto-equity could fork it to create a new product, so as to leverage an already enthusiastic population of people. When you launch, you have a core group that has invested in crypto-equity and they will automatically be invested in your idea as well. This makes it easier to raise a community around your new products.

In the case of Invictus and ProtoShares, the holder of ProtoShares automatically gets ownership in BitShares, DomainShares, and other products to be released by Invictus. If you have a good idea, you might want to buy some ProtoShares yourself and fork your product off of it, because you give the already formed community an investment in your idea, thus increasing the chances of its success.

Crypto-equity is a great way to build a new product in this space, and I think it will catch on with more and more teams adopting the idea.

Photo Credit: Kevin Trotman

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Nov 172013

One Bitcoiners

There are only so many members allowed in this club. About 21 million, theoretically, but probably close to 1-2 million now and perhaps never exceeding 5 million. That’s a few million people out of a population of 6.5 billion. Are you one of them? Welcome to the elite club of One Bitcoiners.

No matter how divisible Bitcoins are, there is still a psychological charm of saying you own a full Bitcoin. One full Bitcoin. What it’s value is in terms of government money or goods and services it can buy fluctuates greatly. Recently, it’s been on the rise. It’s usually pretty volatile. But the underlying is still the same – One Bitcoin.

Who are these one Bitcoiners? Either the early adopters or the rich adopters. Some have contributed greatly to the underlying infrastructure and made it possible for the world to use Bitcoin and continue to innovate on top of the protocol. Think of the core developer team. Others, meanwhile, are the rich who have money to buy up some Bitcoin. Think the Winklevii. No matter. They are all early in terms of what Bitcoin can become. A generation down the line, it would hardly matter if you knew of Bitcoin in 2011 or 2012, considering you still hold on to your prestigious One Bitcoin.

The early team consists of a dizzying array of people on the ‘fringe’. The cypherpunks. The cyberpunks. The anarchists. The libertarians. The dreamers. The thinkers. The technolophiles. People who envision a world different from the rest, and are happy to remain on the fringes. Only this time around, they might see their initial love turn into something more mainstream and make them wealthy in the process. Who knew.

Wealth creation is seldom egalitarian, but the egalitarian nature of Bitcoin is how the barriers to entry are nil at the initial stages and then it gradually keeps increasing, rewarding the early adopters. It’s not limited to the current power structure of the wealthy and elite, although it helps if you’ve got a few hundred million lying around. The people who’ve created this idea and worked at its concept are people who love and believe in the idea, irrespective of their background. If Bitcoin does catch on in a big way, the next generation would be within its rights to complain about our generation having it easy. They wouldn’t be able to fathom how hard the initial days were, with constant life-threatening onslaughts coming from all sectors, from politicians to media to hackers.

What the future holds is hard to speculate. Buried deep inside the day to day fluctuations of Bitcoin vs. the US Dollar is an idea, a silent revolution that can truly remake the world we know. It has the potential to do things never thought possible and open up new facets of the economy, giving power back to the people in a truly decentralized way. It’s about the potential, it’s about an uncertain future we can all help create, a part of one big story.

Remember the One Bitcoiners were once just ordinary folk who believed in an idea and were willing to take a chance on that idea. And today, they are One Bitcoiners. It will forever remain a highly selective club and no matter how good the people are, the masses cannot get entry to the club. Which side of the gate are you at?

Photo Credit: Doug Wheller

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Nov 132013

Bitcoin Price Crash

As the price of Bitcoin hovers around $400, with the price rising more than $50 in a day and more than doubling in a month, people seem to be anticipating a crash. This isn’t unusual or unexpected. BTC/USD has a history of high volatility and subsequent recovery. In fact, almost ironically, it’s the people who know Bitcoin the longest who seem to anticipate a crash soon considering the crashes in the past. However, as wrong as it might seem looking into the future, this could be a crash that would never come.

Firstly, it is almost naive to think that one can predict the next crash based on the previous two well-known crashes. This is because the history of BTC/USD is so little, projecting trends almost makes no sense. There are too many factors at play. The recent price rise can be attributed to everything from institutional investors to favorable media coverage to Chinese appetite for Bitcoin. How are we to know how these factors affect the price now and in the future?

At the core, remember that Bitcoin is still a nascent technology and will invariably go through the technical adoption curve. That takes time. The price might be volatile, but many other metrics are steadily increasing. How many people have heard about Bitcoin, and how many people own any number of Bitcoin, would be on a gradual rise. The number of businesses accepting Bitcoin is on a steady rise. The number of Bitcoin startups in on the rise.

We didn’t see much price appreciation this year from March-October even though this adoption increased several fold. BitPay has over 10,000 businesses now and growing. It’s better to concentrate on such concrete statistics than just the price, which can be subject to large speculative power.

Speaking about this time, there seems to be a constant and steady demand for Bitcoins even with a lot of trading and speculating going on, at ever increasing prices. The bigger fish are in the market, who can afford to pay big bucks for the Bitcoin they acquire. Of course, I am not predicting that the price won’t crash, but it is quite possible that it wouldn’t. The market dynamics are different in each rise and crash, and this might very well be the rise without an immediate crash.

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Oct 212013

Dawn of Autonomous Corporations Bitcoin

Still waiting for Bitcoin to be accepted at Amazon and eBay? Forget it. Bitcoin will power the next generation of corporations and the only way to deal with those corporations will be through Bitcoin (that’s right, they won’t, or rather can’t, accept fiat like US Dollar). These ideas may seem futuristic, but they are not more than 5 years away, maybe 10.

Autonomous Corporations

That’s right, autonomous corporations will be a new breed of corporations that act and behave, for all practical purposes, just like regular corporations. However, no one ‘owns’ them. Not the creator, not the customers, not the governments, no one really. Sound familiar?

Bitcoin can be thought of as the first real autonomous ‘corporation’ although you probably don’t see it that way. Think about it – it provides a payment protocol and employs miners to maintain that protocol. The employs are rewarded with ‘stock’ that is split at most into 21 million units. You don’t have to think of Bitcoin this way to get to autonomous corporations, though it will help.

The idea is the same – this corporation has revenues, expenditures and profits. However, once again, no one owns this entity, it owns itself. The reason it exists is to provide a service at an extremely competitive price that no human-based corporation can provide, so they’ll work higher up the chain to provide ‘value-added’ services.

How Does this Work?

  • The corporation is completely decentralized, so no one can really shut it down. It lives in the cloud. It finds the cheapest and most reliable servers and lives there. This is also the biggest source of the corporation’s expenditure.
  • Revenues come from people using the service. For instance, if it is a file-sharing service, like StorJ, revenues could be anything that regular file-sharing services have – paid hosting, advertising, etc.
  • People will make all attempts to rob this poor corporation of its money. This means it needs to keep the private key really private and decentralized. This also means major code changes, written by humans, will need to be tested on a child first.
  • It also needs to establish a protocol for communication (HTTP might not cut it in a decentralized network) through which people will interact with the corporation.

This kind of corporation isn’t restricted to live online. If the hardware exists (which might take time), you could have, say, self-driving cars owned by this corporation. These are being worked on right now, and the first ones shouldn’t be that far away into the future. See also Vitalik’s series on decentralized autonomous corporations.

Bitcoin makes this possible, for the first time ever, because it provides a payment protocol that is independent of an entity and since this autonomous corporation cannot deal with banks (for all practical reasons), Bitcoin solves the major missing piece of the equation – payments. Bitcoin makes it possible to program a corporation to accept payments and make payments without having to deal with any intermediaries that cannot be trusted. If you want to deal with such a corporation, you better have Bitcoin or any other potential decentralized crypto-currency.

The last pieces of centralization are removed with a system like Namecoin that is decentralized DNS system that the autonomous corporation uses as its website/front where it interacts with people. There will ideally be a decentralized identity system, like the Keyhotee system. Communication can take place through something like Bitmessage or through the Keyhotee mailing system that is decentralized. The autonomous corporation cannot afford a central point of failure for essential functions.

Value of Bitcoin

This is just one example where a protocol like Bitcoin can completely revolutionize the world we live in. Lets look at the big picture. Who cares if eBay accepts Bitcoin? The real value of Bitcoin lies in economies that don’t yet exist. Now that Bitcoin has reached another high since the last run-up, there will be several calls of a bubble. Lets not forget the real strengths of Bitcoin in the day to day price fluctuations. These don’t measure the value of Bitcoin and what it can be. And all people seem to care about is drawing parallels to tulips!

Also see Dawn of Autonomous Corporations Part-2.

Photo Credit: Jarod

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