Daimler Launches $100 Million Corporate Bond Blockchain Pilot

Daimler AG, one of Germany’s foremost car manufacturers, has successfully issued a corporate bond of $100 million through a blockchain pilot, in a move that is being heralded as one of the first of its kind.

The year long corporate bond, known locally as a Schuldschein, was issued in conjunction with one of Germany’s largest state-backed banks, the Landesbank Baden-Württemberg, as part of a blockchain pilot scheme to test the efficacy of distributed ledger technology in raising capital.

The pilot also included several other local banks, who joined LBBW in acting as lenders for the purposes of the trial issuance.

Following the success of these initial trials, Daimler is now set to continue work with LBBW, in pursuing additional opportunities for leveraging blockchain technology in corporate finance.

Amongst other planned applications is the potential for loan issuance and commercial paper transactions through a similar blockchain solution.

Representatives from Daimler have welcomed the successful trial, noting the automation afforded by the technology from origination to repayment confirmation, which could pave the way for significant efficiency savings in future corporate bond issues.

Speaking on the broader technology underpinning the trial, Daimler’s CIO Jan Brecht said that the blockchain remains a key focal point for research and development, with potentially significant implications for the automotive industry and beyond.

“We see blockchain as a promising technology, not fully mature yet, but continuously growing. Now is the right time to get into it, build up knowledge and form a network of like-minded people to share experiences.”

The successful trial is far from Daimler’s only involvement in blockchain development, with the company amongst one of the earliest movers in the sector to mobilise behind the technology.

In February, Daimler became a member of the Hyperledger consortium, a Linux-led open source collaboration between over 100 companies that seeks to explore new use cases and applications of blockchain technology.

Drawing on the combined expertise of partner organisations, including from the tech and financial sectors, this project represents one of the most significant explorations of a blockchain use case undertaken by the company so far.

World Economic Forum Publishes White Paper on Blockchain Governance

The World Economic Forum has published a new white paper on blockchain governance, arguing for a greater spirit of collaboration between diverse blockchain stakeholders.

The report, entitled ‘Realizing the Potential of the Blockchain’, argued that a broader collaborative approach would maximise the potential of the blockchain ecosystem, thought to hold many future benefits for industry and governance globally.

Echoing the collaborative spirit of development consortia like R3 and Hyperledger, the report suggests that stakeholders could go further, developing distributed networks of development expertise to advance the technology and its potential use cases.

With stakeholders worldwide pulling together, the research paper argues that the impact could be significant, massively outscaling any collaborative efforts yet to be seen in blockchain development.

According to the report, collaboration allows for expertise from a broad range of stakeholder sources to be pooled and focused on advanced distributed ledger technology.

Noting the impact existing consortia have had on shaping the technology to date, it suggests a broader network of stakeholders could help accelerate the growth and development of the technology across three main areas: blockchain platforms, blockchain applications, and the blockchain ecosystem more broadly.

Writing in the introduction to the paper, Richard Samans of the World Economic Forum said that in aspiring to reach its potential, blockchain necessitates greater cooperation and joint-development worldwide.

“The extent to which this new technology realizes its potential will depend in substantial part upon how well stakeholders steward its development. There remain important open governance questions regarding both the functioning of the technology and its current and potential applications.”

In addition to proposing the need for greater collaboration, the report also outlines an envisaged structure, or taxonomy, for how these efforts could be organised.

While ambitious in its scope and recommendations, the report has been welcomed by influential industry stakeholders, including the heads of the Enterprise Ethereum Alliance and Hyperledger, two projects already dedicated to advancing cooperation in blockchain development.

Jeremy Millar from the Enterprise Ethereum Alliance described the move as ‘welcomed’, in supporting the existing aims of blockchain consortia and development partnerships.

“Governance is critical to accelerate mainstream adoption of blockchain technology, and the work of the World Economic Forum, along with Don and Alex, is most welcomed.”

Craig Wright on Bitcoin Scalability

Craig Wright is the world’s foremost leading expert on cyber security. His work covers both public and private domains.

Taking a look at https://www.sans.org/cyber-guardian/cyber-guardians – you can see that Dr Wright is listed as both a red and blue team specialist. To clarify, Red team skills stand for attacking, that is to understand the processes used to break into systems. The blue skills, on the other hand, represent the defence expertise. Wright is on both sides of the fence. Fundamentally, it is of paramount importance in security systems to understand the attack, in order to best defend against it.

He has been trained more than anyone else has ever globally, with an incredible list of certifications.

Therefore, concerning Segwit, Dr Wright’s warnings on attack vectors come from a place of profound qualification on the subject.

“I am pro Bitcoin Unlimited. What we need to do is to scale on-chain and not allow SegWit” – states Wright.

Of course Bitcoin Unlimited comes from a place that correlates strongly with Bitcoin’s creator and inventor Satoshi Nakamoto’s scaling method.

It’s a bit of an irony to even state that increasing Bitcoin’s blocksize enables scalability… Bitcoin was already scalable, there never was a limit in the beginning. And today, there’d be no outrageous fees on the Bitcoin network if it wasn’t for an artificial, temporary parameter that Satoshi input into the code, as a means of early spam prevention.

Dr Wright explained that in the early days, it was very cheap to spam the network, and hence why a spam limit parameter was required. Now, this limit can be lifted.

However, the biggest argument used by small-blockers and the Core-aligned flock, is that large blocks will cause centralization. Indeed, this argument rests on the shoulders of a rather loose argument which heavily hijacks the term ‘node’. It then assumes an incredibly high reliance on ‘validating’ nodes.

The bitcoin code as per the github repository states the node purpose in a comment.

According to Satoshi’s whitepaper, nodes were miners. The hijacking of the word seems to have placed unneeded importance on these validating nodes. But what would Bitcoin look like without these ‘nodes’, and how centralized would mining be, with the removal of the blocksize limit?

Gregory Maxwell of Blockstream has in the past stated:

“With gigabyte blocks bitcoin would not be functionally decentralized in any meaningful way: only a small, self-selecting group of some thousands of major banks would have the means and the motive to participate in validation” – Gregory Maxwell

Craig Wright debunks the centralization myth with a very simple analysis:

“There are around 15,000 banks. Add financial organisations including savings and loans… We are up to 60,000. Then add in all the major merchants and operations that need to have transaction data by law, and that’s around 17 million organisations. That is decentralised do you not think?”Dr Craig Wright

Adam Selene has written extensively on the hijacking of the term ‘node’. In short, any non-mining node is simply a wallet. It doesn’t help the system propagate, and it doesn’t create blocks.

This leads us to SPV wallets. SPV wallets or “Simple Payment Verification” clients are a technique which Satoshi had described in his paper, describing how a lightweight client can verify transactions without downloading the entire blockchain.

Craig Wright states the following:

“Now, the first thing we need to understand is that all encryption systems are probabilistic. Password systems and any modern information security system works on probabilistic information. The so-called experts who talk about the probabilistic system of bitcoin fail to comprehend that strong encryption is probabilistic.

Fraud proofs and nowhere near as difficult as anyone thinks. They do not require some special cryptographic protocol. They are far simpler to implement than anyone seems to understand.

The solution is incredibly simple. All you need to do is randomly select a series of nodes on the network and query whether the inclusion of your transaction has occurred on that node. Each query would be random. Using a simple Bayesian algorithm, we could use a failure model to analyse the likelihood of a double spend or other attack.”Dr Craig Wright

Wright explains that each time we pick a node at random and request our transaction we can expect either of the following results:

  • – We receive our transaction as we expected,
  • – We receive an alternate transaction such as a double spend, or
  • – We receive nothing.

Basically, checking eight nodes would give you 99.9999% assurance that your transaction will be included within a block in the next block mine (assuming that the cap has been removed and we don’t have all these delays). The limitation imposed by the cap it is severely diminishing the security of the network.

In under two seconds, 99.98% of the total hash power would have received your transaction. These figures are from the existing network. This means that without the cap, you can be assured of even zero confirmation transactions in a minimum amount of time. This wasn’t the case in 2010. This has nothing to do with the protocol. It is to do with the economics of the system. As miners become more commercial and professional, the overall security and efficiency of the network increases exponentially.

Craig Wright concludes “0-confirmation WAS secure before Core”.

Eli Afram
@justicemate

Bitspark Announces New Blockchain Trial in Tajikistan

Blockchain startup Bitspark has announced it is set to work in collaboration with the UN to develop a blockchain for use in Tajikistan.

The proposal will see the startup working with the United Nations Development Programme to develop a blockchain solution aimed at promoting financial inclusion, in a move that could revolutionise development and aid in the country.

With an estimated 90% of the population cut off from traditional financial services, with no access to bank account facilities, Bitspark hopes to develop a solution that will allow more effective remittance of relief money and aid throughout the country.

Working in partnership with the UNDP, it is hoped that the blockchain could help ease the distribution of resources to and within the country, while helping foster critical growth and economic development.

The plan will see a blockchain trail centred around migrant workers, providing access to direct remittances from overseas to Tajikistan via smartphone apps.

According to the detail of the launch, Bitspark hopes the service will ultimately be as easy as hailing a cab or making a purchase on a smartphone.

“People are familiar to sending and receiving cash and this proposal seeks to streamline that process … Instead of calling a taxi and handing over a bag of cash … Bitspark’s digital payments app Sendy can be used for instant, verifiable, trustless payments cash in cash out.”

The project is currently in early development phases, but could become a mainstream solution to the problem of overseas remittance in Tajikistan. Further, its applications in other similar scenarios around the world makes this a potentially exciting development for the aid sector.

The proposals build on similar development work already underway through the UN Development Programme looking at ways of administering aid to refugees, as part of a wider approach to assess the potential of blockchain technologies.

In recognising these possibilities, the UN heralded the blockchain as a technology with the capacity to revolutionise financial services globally.

“The application of new financial technologies like blockchain can assist in increasing the number of people with access to the financial system at less cost and at a scale necessary to make an impact and ultimately improving economic opportunities for people in Tajikistan and around the world.”

Bitcoin Wallet Blockchain Secures $40 million Funding

Startup bitcoin wallet Blockchain has today announced the completion of a successful funding round, which has raised as much as $40 million from investors.

The announcement came as the firm concluded its Series B funding round, securing support from a range of industry partners and external investors.

While the round fell just short of Ripple’s $55 million, which was achieved towards the end of last year, it still remains in the order of the largest investments ever of this type, and remains the highest benchmark total for funding rounds conducted in 2017.

The investment included support from a broad cross section of names, including Richard Branson, Digital Currency Group, Virgin, Lightspeed Venture Partners, Lakestar, Prudence Holdings, Mosaic Venture Partners, Nokota Management, and GV.

In marking the conclusion of the funding round, Blockchain CEO and co-founder Peter Smith said that the company was now able to focus on realising its mission of overhauling financial services.

“The 14 trillion dollar financial services industry hasn’t meaningfully changed in over a century. Blockchain is on a mission to create a financial system that is faster, more inclusive, and radically different than the status quo.”

Blockchain is a bitcoin wallet, which enables consumers to hold, store and transact in the cryptocurrency. Unlike others in the space, Blockchain has focused its development efforts so far on delivering consistent evolutions and improvements to their technology, in favour of developing new innovations.

It is hoped that with funding now secure, the company can go on to more aggressively position its service as one of the leading bitcoin wallets in the industry.

It comes at a promising time for the cryptocurrency wallet sector, with market leader Coinbase recently announcing it had secured a $1 billion valuation as part of its latest funding round, reflecting the extent to which this is seen as a significant future growth market.

With investors and analysts alike recognising the potential for the cryptocurrency industry, and for the underlying blockchain technology that powers it, companies like Coinbase and Blockchain look set to be at the forefront of this market as it continues to emerge.

Illinois Authorities Back Hackathon For Blockchain

The state of Illinois has announced it is to give its formal backing to a forthcoming hackathon event, designed to focus on developing new technologies on the blockchain.

The hack, which has been set up by the Illinois Blockchain Initiative, is scheduled to start from July 1, and will see startups and freelance developers join forces to explore new possibilities with the technology.

Students and university graduates are invited to take part in the event, which seeks to draw talents from across the world to collaborate and develop the project aims.

As part of the project, a series of presentations and seminars have been organised that will run throughout the month, with the aim of raising awareness about the impact of the blockchain and its efficacy as a technology across a range of different industries.

Now, with formal backing from state authorities, the project has been leant even further capability. It comes at a time when a number of other US states, and indeed countries worldwide, are turning an increasing focus on the blockchain.

In welcoming the project and its aims, Illinois state governor Bruce Rauner said that he hoped to enthuse a new generation about the implications of blockchain, and the range of solutions the technology could provide in future.

“Illinois is the state of innovation, and I am proud to see our young men and women getting involved in the Illinois Blockchain Initiative Hack. Empowering our youth is empowering the future of Illinois.”

The Illinois Blockchain Initiative, which is set to run the project, was founded back in November, with the remit to explore blockchain capabilities across a range of public sector functions.

It is thought that the technology could deliver huge efficiency gains and cost savings on a range of government functions, from delivering public services through to the administration of land registry and leasing records, as just two examples.

The Cook County Registry of Deeds is one local public sector agency keen on the technology, having previously examined using the blockchain to record time and date information about documents on execution.

The IBI project is only the latest step on their journey to harnessing the potential of distributed ledger technology.

In March of this year, the state of Illinois became one of the first US states to join the R3 blockchain consortium, pooling efforts with private sector partners to develop the technology.

Craig Wright Interview Part 3 – Academic Record Truths

Editor Note: This is the third in a multiple-part series of interviews with Craig Wright, conducted by guest columnist Eli Afram, where he discusses some facets of his disputed academic ventures.

I asked if Craig we could dispel any disputes concerning Dr Wright’s academic record. Quite frankly, this is not a pleasant question to ask anyone. And it’s not a pleasant question to answer either.

I want to make this point absolutely clear – Craig Wright handed over evidence of all his postgraduate degrees, and I along with CoinGeek management can confirm this. I’ve come to a realisation that for some people, no amount of evidence will ever be enough. I believe the primary reason for this comes in the form of hidden agendas, and smear campaigns. In the west, we operate on a basis of innocent until proven guilty. It’s not too dissimilar here. It is a wild expectation that someone should prove they did not lie to the public, in the face of a media onslaught.

Regardless of the unfairness of it all – Mr Wright provided us with the evidence of his academic record, and went on to explain:

“There’s been a lot of media stating that I lied about my qualifications. I have not. What I do dislike is being put in a position where I’m expected to hand over proof. I’ll be doing it again here now, but I do degrees for me. I don’t do this so that other people can see what I have done, and has little to gain there.”

“The study I continue to do this for my own purposes. I studied statistics so that I could understand the mathematics of networks. I achieved a Masters degree in mathematical statistics from the University of Newcastle. I studied law so that I could understand the legislative frameworks surrounding international financial systems and electronic commerce. I was awarded a Masters in law from the University of Northumbria in the UK.”

“At the time, I was doing those two degrees I was also enrolled in a Masters degree at Charles Sturt University in Australia. At the time, I was technically in breach of the rules. I was enrolled in three universities at one time studying three masters degrees and later starting a doctorate. I completed all three of these masters degrees. When I finish my current Masters degree it will be my 18th degree overall. I’ll start my third doctorate this year.”

“… People have no right to delve into the lives of others” explained Wright, “In my case, the notion that I have to prove my qualifications when am not going for a job with these people not asking for anything from them is ludicrous, but that is the world they are creating. – It is exactly the opposite of the free, open world of trade that bitcoin is built to deliver.”

“Bitcoin is built as a competitive system. It never was altruistic and it never will be. The system works because people engage in trade and commerce and act to promote their own self-interest. That’s what bitcoin is really about. The ability to freely offer the services you have without fear.”

“There are a number of people who are very shortly going to learn that law is law and that code is evidence. The fear in this community has to stop. High pressure is one thing. Competition is marvellous. When we stop teaching our children that is bad we will start to develop as a community. This toxic environment that has been created around bitcoin is something that must end.”

“…one of the things I find distasteful is the ability to manipulate media. I have a PhD and I have a professional doctorate and I am about to start my second PhD which will be my third doctorate. I’m completing my eighth Masters degree.”

“A professional doctorate is equal standing to a PhD. Many academics try to argue that the applied nature of a professional doctorate makes it less valuable. They are wrong. I have both and I will tell you quite flatly that applied studies are more valuable than pure theory. I have engaged in both so I can actually compare these from the perspective of an individual who is used the knowledge he has gained in the real world.”

“The attacks on my character have come from people who are unable to provide solutions themselves that the market desires.”

Perhaps the media can tell us many things, and we are open to believe whatever we choose concerning individuals, but unwarranted attacks are uncalled for. Fundamentally, the issue concerning Craig Wright’s academic record should be put to rest.

Later this week, I will be posting details of our interview as we venture more into Bitcoin itself. In this first post of the series, Wright alluded to scalabity improvements for Bitcoin, and some thoughts on its development. I’ll be going further in depth on these matters, and also getting some thoughts Craig Wright has on Segwit as well his view on alt-coins.

I look forward to sharing more real soon.

Eli Afram.
Twitter: @justicemate

Comcast/Disney Consortium Launches Blockchain Advertising Platform

A collection of global media companies including Disney have announced the launch of a new advertising platform powered by the blockchain, one of the first solutions of its kind to utilise this new technology.

The project was pioneered by Comcast in conjunction with Disney and a range of other industry partners, including Channel 4, NBCUniversal, Cox Communications, Mediaset Italia and TF1.

Known as the Blockchain Insights Platform, the system has been designed to streamline the process of buying and selling media, with advertisers and network publishers able to more effectively exchange audience information for more effective advertising.

The platform will allow advertisers to identify the types of audiences they most want to target with their advertising by anonymously compiling demographic and audience data from the partner publishers, in a bid to make traditional media advertising more effective.

It is hoped that the platform will enable publishers to make efficiency gains through the ad sales process, while ensuring advertisers get access to the most effective placements for their media.

According to Marcien Jenckes, a representative of Comcast who worked closely on delivering the project, the blockchain platform will create a new data-driven environment for ad sales, to the benefit of participants and their customers.

“This new technological approach would make data-driven video advertising more efficient and consumer data more secure. We’ll work with the participants in this initiative to improve ad planning, addressable targeting, execution and measurement, to ultimately create even more value for the television advertising industry.”

The platform is likely to be regarded as a landmark for the advertising industry, and exemplifies the type of use cases envisaged for the blockchain and distributed ledger technology.

The technology, which currently underpins cryptocurrencies like bitcoin and ether, is thought to have potential applications across a huge number of industries, above and beyond the close symbiosis it shares with financial services.

While the platform has been publicly announced today, the consortium are eyeing up a further rollout in 2018. In the meantime, they are set to recruit additional partners, as well as expanding across both the US and European markets.

Craig Wright on Segwit

Many people undoubtedly would like to hear Craig Wright’s stance on Bitcoin. Today, one of the earliest developers of Bitcoin, Gavin Andresen, stands by his belief that Craig Wright is Satoshi Nakamoto after personally witnessing cryptographic verification of messages signed with keys that only Satoshi possesses. Craig Wright did not offer the same proofs to the public. If there is a chance he might be then his words hold incredible weight. If not, his mere academic record should hold substantial value alone.

Despite immense criticism, particularly from Blockstream and Core, Craig Wright has a clean record. Coingeek and myself have verified his academic record, the degrees all exist, the papers and research exist, and he has no criminal record whatsoever.

But onto the Segwit narrative, Craig Wright did not hesitate in immediately expressing his distaste for what it is. He claims “it’s a boondoggle project by a group of developers with something to prove.”

Boondoggle – “an unnecessary, wasteful, or fraudulent project.” – thanks Google.

He explained that the real problem is that the Core developers have proven they don’t understand the fundamentals of Bitcoin.

He put forward four points concerning Core on Segwit:

  • They failed to understand scarcity.
  • They have no idea about economic constraints controls.
  • They haven’t shown the least knowledge of how incentives function.
  • They have missed the entirety of what makes Bitcoin what it is.

“The first aspect of Bitcoin that needs to remain, that adds more value than anything else, and that offers a path to global growth is scarcity. Not artificial restrictions on how many transactions are allowed, but rather the maximum amount of Bitcoin that can ever be owned. These are not the same things. Right now, the [1MB] cap is a constraint limiting the use of the system.”

“The only way that Bitcoin is going to survive is to scale massively. Not three, not five, not 10 transactions a second but rather 100,000, 200,000, 500,000 transactions a second. We can do this now. All we need to do is remove the cap. When Bitcoin was created it was set up with flood controls and no limit on the number of transactions. The problem with an economic flood control when something is not worth anything is the difficulty of value. At three cents a Bitcoin, there’s very little you can do with flood control. Where we are now, and over $1000 and having just breached $3000, flood control is very easy to implement. You make people pay for denial of service attacks.”

Dr Wright has explained to me on at least a few occasions now that it is economics which is the core of information security. He explains that at its core, it is the most fundamental aspect of risk that is available to us.

“When people start to understand this and move away from the idea that toys can save us we might actually create secure systems. This is why sites that cared about their security used to hire me. I understand the need for economics in security.”

“Segregated witness fundamentally changes the nature of Bitcoin. I completed my Master of laws degree from Newcastle University here in the UK in 2008. Looking at Internet intermediary liability and the functions of online contracting and digital signatures taught me just how precarious the law can be. This idea of code being law is insane. You cannot simply discard digital signatures and decide that the packet is still the same. The result is we have a double Merkel tree structure that is larger than the native Bitcoin Blockchain and takes up more space. Miners and exchanges won’t be able to prune information as it will be required under the laws of most countries.”

Information retention is an interesting topic. For example, s254 of the Crimes Act 1958 (Vic, Australia) creates an offence of the destruction of evidence which ‘is, or is reasonably likely to be, required in evidence in a legal proceeding’.

Interesting point to ponder no doubt.

Dr Wright stands firm on his position – “Segregated witness doesn’t scale.”

“There’s nothing more to say there. There is not a single use case or review that shows any scale. What they try and do is sell the idea of changing the block size into a concept called block weight. Basically, they have created a 4 MB block that gives between 1.2 and 1.4 times the amount of transaction size. Where we have the need to scale tens of times at least immediately they give us 140% for a 400% cost. That’s a piss poor deal anyway you look at it… If they simply increase the block size to 4 MB they would gain many times the number of transactions.”

“The truth of the matter however is a little bit different. What they are looking at doing is locking us into side chains and the lightning network. None of them ever liked scarcity.”

Craig Wright then recalls a conversation he once had with Adam Back (CEO of Blockstream). Adam had explained to him that the problems with Bitcoin and how it would never work because of scarcity. Adam Back was claiming that there needed to be a means of growing the amount of Bitcoin if needed.

“Well that’s what they seek to add… The concept of side chains is about infinite inflation” states Wright.

“Instead of scaling based on a scarce resource, they seek to return to the classic idea of Fiat money. Each side-chain becomes an infinitely scalable resource. If you need more money, print more with a side-chain.”

Indeed, it is no secret that Blockstream’s $76m funding over two investment rounds were on the basis that it expands its Bitcoin code for commercial use, and that it produces a host of off-chain solutions. I have personally written about this in the past.

“Bitcoin is not a cyberpunk wet dream. It is a system that allows for a Rothbardian idea of money. That is hard money. Money with no inflation. Value that is fixed. No monetary system that can be played with and manipulated” says Wright.

“This idea of a need for a side-chain network or the lightning network simply demonstrates the lack of understanding around the system. Both of these options destroy scarcity. Without scarcity Bitcoin isn’t a store of value and it isn’t a unit of trade and account, it may as well just be swift.”

Indeed, Bitcoin’s store of value is derived from its utility. That is, if its use has any value. This aspect of it is quickly dying. In fact, there is no question about it. Bitcoin fees have wiped out an entire eco-system of merchants operating on Bitcoin.

Wright then makes an interesting reference – “Coke doesn’t make a lot of money selling thousand dollar cans of Coke. It is one of the most profitable organisations on earth because it sells voluminous quantities of sugar water for low amounts of money. That’s how Bitcoin will be successful. Not because we can move transactions to side chains and steal revenue from the miners as we inflate the system, but because many people will use it and pay small fees. Billions of pennies a day comes to a very large amount of money.”

With Bitcoin in particular, it’s difficult to talk about scalability without venturing into a discussion of nodes – which is another discussion altogether. Whenever talk of increasing the blocksize pops up, a common defense used is to mention the nodes and their capacity to handle transactions beyond their bandwidth and hardware scope – somehow contributing to the centralization of Bitcoin. The error in this type of thinking is multifaceted, and this discussion requires another article (which I will soon publish).

I have stated this before – but usability and users are fundamental to a working system. To be more concerned with losing nodes than to be with losing users can only mean that Core’s priorities are the wrong way around.

More on the discussion concerning nodes in the next instalment.

Eli Afram.
@justicemate

The Risks of Segregated Witness: Opening the Door to Mining Cartels Which Could Undermine the Bitcoin Network

The bitcoin community continues to debate Segregated Witness, the Bitcoin Core development team’s proposed scaling solution which would separate signature data (witnesses) from transaction data. There are numerous risks with SegWit, but one in particular needs more attention: SegWit opens the door to methods of collusion and mining cartels which could undermine the bitcoin network.

Protections of the Current Bitcoin Protocol
To understand how SegWit opens this door, let’s review the format of the bitcoin protocol. The way that bitcoin works allows for a large miner who has managed to gain more than 51% of the network to engage in a form of attack based on double spending an existing transaction. This works in the following manner:

“Even if a bad guy does overpower the network, it’s not like he’s instantly rich. All he can accomplish is to take back money he himself spent, like bouncing a check. To exploit it, he would have to buy something from a merchant, wait till it ships, then overpower the network and try to take his money back. I don’t think he could make as much money trying to pull a carding scheme like that as he could by generating bitcoins. With a zombie farm that big, he could generate more bitcoins than everyone else combined.[1]

This form of attack would cost the miner revenue. Unless the miner has more than 51% of the network, any such attack would be unlikely and expensive given the cost of mining bitcoins. It would also risk the miner’s existing revenue model.
In bitcoin, a large miner can make a small gain if it manages to introduce a double spent transaction into a block. This means that a nefarious miner is able to introduce a transaction that it has itself caused to be spent in an attempt to reverse the first payment. But there is no economic incentive whatsoever to do this for small transactions (such as transactions of less than an order of several thousand U.S. dollars).

In addition, this form of attack would only be viable with careful timing. The miner would have to implement the attack after a sale has occurred (in the above example, sale of a merchant product) and the transaction has been completed, but before the transaction is integrated into a block. Transactions of a higher (more expensive) amount are naturally the most lucrative targets for attack but they would likely be integrated into the block at a suitable depth where the time for being reversed has passed. For instance, when real property is transferred, the laws of many jurisdictions give the purchaser a right to rescind the transaction for some specified amount of time that would exceed any block height that could be reversed. Thus, the current bitcoin protocol provides economic disincentives to deter, and protections against, a double-spend attack, especially for larger transaction amounts.

SegWit Creates Incentives to Form Mining Cartels
If implemented, SegWit would change this for the worse. It opens the door to an economic incentive model that would encourage mining cartels to form. As the bitcoin network currently operates, there is no incentive for miners to form cartels. Mining pools are not cartels; they are a firm. But SegWit introduces a fundamental change to bitcoin: the “AnyOneCanSpend address”, or essentially a blank signature for transactions. SegWit uses an “AnyOneCanSpend” address so that transactions will be validated and recorded into blocks, even though the sender/receiver signature data is separated. Normally, an “AnyOneCanSpend” output (as its name implies) would allow any miner to spend the funds associated with that transaction; therefore, SegWit would introduce new rules for interpreting “AnyOneCanSpend”. This means that miners could not take advantage of that output address to inappropriately spend the funds associated with all SegWit transactions.

But with “AnyOneCanSpend” addressing, the system is only secure while all participants agree it is secure. Proponents of SegWit assume that once its protocol change is activated, all miners will agree to play nicely, never steal funds, and funds will be locked up safely. But the major flaw in their thinking is that it ignores economic incentives for nefarious miners to do the following after SegWit activates:

  • 1. Form a cartel to take over the network
  • 2. Switch off SegWit and revert back to the current bitcoin protocol
  • 3. Take advantage of the “AnyoneCanSpend” address to instantly steal funds associated with all SegWit transactions in blocks they mined.

By using “AnyOneCanSpend” addressing, SegWit therefore opens the door to a corrupt miner mining a block to subvert transactions, and instead redirect them to the miner’s own address. The value of such an illicit attack would grow every day SegWit is used. Over time, the more people use bitcoin, the more SegWit transactions are added to the blockchain, and the more funds are locked up with SegWit aspects of bitcoin, the more valuable this form of cartel attack becomes. A defecting miner could access historical funds that have not been redirected from SegWit to a traditional bitcoin address. Hence, the longer a SegWit system runs, the more likely it is that a cartel will form to steal funds.

Under SegWit, miners are not likely to form a cartel to recover an individual double spent transaction – even if it is a large single transaction. Rather, it is the sum of all SegWit transactions (at least in blocks mined by cartel members) which provides a large enough treasure chest worth pirating. If 51% of miners that signal for SegWit secretly support cartelisation of the protocol, it is only a matter of time before transactions are stolen. This could occur in the following way:

  • 1. Miners signal SegWit.
  • 2. A group of mining pools and companies with a joint hash rate in excess of 50% of the current network power form a cartel.
  • 3. The cartel group then stops signaling SegWit and returns to the network to the former bitcoin protocol.
  • 4. If a sufficient quantity of bitcoin is transacted using SegWit, the cartel would switch from SegWit to treat all transactions using the original protocol. Cartel members could then instantly use the “AnyOneCanSpend” address from SegWit to steal funds from the transactions in blocks they mined (especially any high-value block). To incentivize miners to join the cartel, the cartel could agree that each member distributes stolen funds from their attacked blocks to the whole the group in some proportion (for example, according to the hash rate each maintains.) No one miner or mining pool would need to itself have 51% of the hash rate in order to participate.

This is one of several hundred attack scenarios which SegWit could open. Under a SegWit regime, such attacks against the bitcoin network could work because the economics of the system would be changed; rather than illicit activity being discouraged, it would be encouraged under SegWit. This seems to be the aspect of the system that is least understood by Bitcoin Core developers and other proponents of SegWit.

There have been several large individual transactions even in the early days of bitcoin. As noted above, it is not however any individual transaction that creates the major risk to the network; rather it is the overall level of transactions within any one block. As bitcoin scales, it will become more and more likely that a large high-value block will come to exist. Looking at the Visa and MasterCard transaction processing rate, it would be expected that in certain peak transaction times, the collected pool of transactions within a short time period (for example, 1 to 2 hours) could lead to scenarios where total transaction volumes exceed USD $100 billion if bitcoin scales to be the predominant form of Internet money. At such levels, even a normally honest miner could be incentivised to defect from the standard protocol.

Such negative consequences of SegWit have not been explored and publicly vetted for the bitcoin community to consider. Instead, SegWit’s proponents downplay incentives, economics and the game theory of their system, and instead allude that the cryptographic controls are what makes bitcoin secure.

Game Theory Explains Why People’s Self-Interest Often Trumps Social Cooperation
An easy way to visualize the problem is through class game models. The present model of security within bitcoin is equivalent to a super game stag hunt. Conversely, SegWit changes the model into a prisoner’s dilemma, where groups of miners form into either “honest” or defecting groups.

In game theory, the prisoner’s dilemma shows why two people may not cooperate, even when it is in their best interests to do so. Two friends or partners are accused of committing a crime and are held separately, without means to communicate with each other. Prosecutors do not have sufficient evidence to convict them of the principal charge, so offer each of them a choice to either testify against (betray) the other or to help the other by remaining silent. The choice by each prisoner will determine scenarios (laid out in a four-quadrant grid) whether the prisoners go free (if they both choose to help each other by remaining silent), or get sentenced to different levels of prison time (with the worst case scenario being that each betrays the other). More often than not, each prisoner will look out for his self-interest and betray the other – and if both prisoners do that, they each end up receiving longer prison sentences than if they had both helped each other. The game model’s lesson is that personal interest often controls people’s decision-making, even if it often leads to a worse result when all involved persons act in their self-interest. It provides an interesting model for real world situations – such as the bitcoin network – involving cooperative behaviour.

If a prisoner’s dilemma results in both parties choosing to defect (betray the other), the game again becomes a stag hunt – another game model about incentives for individual vs. social cooperation. In a stag hunt, each player can choose to hunt a stag or a hare, and must choose without knowing the other person’s choice. Hunting a stag requires both players’ cooperation to succeed. A hare only requires one player but is worth less than a stag. Cooperation to hunt the stag would thus be better for both players (just as cooperation by both prisoners to help each other leads to the best result in the prisoner’s dilemma).

The Risks of Segregated Witness: Opening the Door to Mining Cartels Which Could Undermine the Bitcoin Network
Figure 1: Stags or Hare
Image by Chris Jensen and Greg Riestenberg

When applied to the bitcoin network under SegWit, the game model will be perverted. Instead of acting in a form of positive social cooperation to benefit all bitcoin network participants, a mining cartel will wait for a large enough target before engaging in a destructive hunt. Once a block reward is discovered containing a suitably large payment provided through SegWit, either in part or in whole, the cartel acts.

At this point, a cartel with over 51% of the network hashing power switches back to the original bitcoin protocol, changing all outstanding SegWit payments as well as the last block payments to AnyoneCanSpend addresses that can be instantly redistributed to themselves. As the volume of payments into SegWit addresses increase, the incentives for miners to defect from the network also increase. In game theory, this leads to a Nash equilibrium of defection.

As bitcoin becomes more widely used under its default protocol, it becomes more and more secure and less vulnerable to attack (which is a key feature of its default protocol). SegWit alters the protocol fundamentally in a manner that is opposite to this. That is, it allows it to become more and more vulnerable over time. If (for example) in the first week of a SegWit implementation, there are $100 million worth of transactions, and in the first month $1 billion worth of transactions, the incentive to cheat is not simply from the amount in any one transaction or even in any one block, but the total outstanding within the system.

From this, it is apparent that every transaction involving SegWit and not being relayed into a standard bitcoin address slowly increases incentive to attack the system. The larger the system, the larger the incentives to defect. This is exactly the opposite of the existing protocol dynamics within bitcoin: the larger the bitcoin ecosystem and hashrate grows (using bitcoin’s original protocol), the more secure it becomes. In the early days of bitcoin, it was possible for an individual miner to plan and execute a double spend attack. But as the system has grown in power and as it continues to grow, a double spend attack becomes more and more difficult, and less and less profitable. If SegWit is implemented, the longer the system runs and the more it is used, the incentives will only grow for miners to defect and compromise the system. Thus, SegWit would produce exactly the opposite effect of the current bitcoin network when it comes to building (or in the case of SegWit, undermining) security.

Risks from the introduction of new players
One of the key flaws in the modelling of SegWit is the assumption that existing miners who may harbour good intentions towards the protocol will remain as the key players. This assumption ignores new entrants to the system. The mere possibility of the defection strategy described above is likely, under SegWit, to attract new pool miners with illicit motives. These could be groups opposed to SegWit or those who have never mined bitcoin and seek a relatively quick profit. Such quick profit would allow them to enter the market at a discount.

The introduction of SegWit would alter the maximum known risk associated with bitcoin from a 51% attack with the ability to censor transactions or to engage in elaborate double-spending attacks, to a catastrophic risk that could possibly and completely destroy the whole ledger and all contained value. The premise that miners will not steal funds at the genesis of SegWit does not address the introduction of new players who are now incentivised more and more each and every day to steal the funds that are locked into the ledger and which are growing daily. These new players and the increasing level of funds place all open areas of the ledger at risk to attack at a later date.

Initial introduction of SegWit was proposed to activate at 95% hashrate support. This was based on the presumption that once SegWit activated, new entrants or players would need to support existing rules. The consequence is a presumption that all transactions will be safe forever. This presumption is incorrect. Mining pools and miners change periodically, just as industry players change in any other business field
In the current bitcoin protocol, the economically fair nature of the system increases security over time. But under SegWit, governments and other state players with increased incentives to attack bitcoin will benefit. The creation of a cartel secretly formed through a hostile government poses a serious risk.to attack and seriously damage bitcoin. Such a cartel would not require an immediate 51% control through the centralised party.

Rather, the cartel head could engage in a strategy where it boosts the weakest players. This strategy would involve finding mining pools that had been formally profitable but, due to a downturn or technological advancements or even changes in energy pricing, are finding it difficult to compete in the existing market. Joining the cartel would give these players a methodology to profitably leave the network. A final attack that is profitable in the short-term could fund the miner’s decision knowing that ongoing competition would be difficult.

The new player running the cartel would then gain access to the existing market share and be able to buy access to the system at a depreciated price before returning to a system that does not implement SegWit. With the flaws in SegWit then removed, the new entrant could gain a competitive advantage, low cost access to the market, and at the same time, subversive control.
These scenarios of cartel attacks against the bitcoin network may seem alarmist, but they are very real possibilities lurking behind the SegWit door. Does the bitcoin community really want to open the door to this serious risk of SegWit?

Dr. Craig Wright is Chief Scientist at nChain, the global leader in research and development of innovations in blockchain technology. nChain opposes SegWit and instead supports removing the Bitcoin blockchain’s artificial block size limit (temporarily set at 1MB) to fuel increased scalability. nChain also supports on-chain scaling as the only viable method for the Bitcoin protocol to scale globally and remain decentralised. nChain also advocates for the formation of a neutral standards organisation to coordinate and manage the Bitcoin protocol and technical standards.