DAO Critic Defends Ethereum Hard Fork as 'Rite of Passage'

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A Cornell University professor of computer science who has proved to have a knack for pointing out flaws in blockchain code believes the hard fork that occurred earlier today is a sign of maturity for the ethereum platform.
Last month, Cornell's Emin Gün Sirer emerged as a major critic of The DAO, the project whose failings ultimately led to the hard fork, pointing out vulnerabilities in its code and becoming the go-to source for ethereum coders looking to understand what exactly happened and how it could be avoided again.
Though he’s still quick to point out that unforeseen vulnerabilities in the code might persist, he told CoinDesk there are several reasons to be hopeful for the future of ethereum, even after the weeks of drama that ended in today's hard fork.
From an ethereum bootcamp co-hosted with the Ethereum Foundation, Gün Sirer said "chains change" because they are responding to the needs of a community, and not necessarily because they are weak.
He told CoinDesk:

"It’s a point of strength to be able to adapt to that change, to be able to respond to it, to be able to do it in an orderly fashion. Ethereum just demonstrated this. I think this is a rite of passage for ethereum."

A lesson for every currency

After weeks of planning, and several coordinated efforts to help achieve consensus among the miners on the etherum blockchain, the hard fork occurred today at approximately 14:30 UTC, returning about $140m worth of funds lost in the collapse of The DAO to an account available to its original investors.
According to Gün Sirer, the hard fork should be seen as a sign of growth not just for ethereum, but a lesson for anyone using cryptocurrency of any sort, or for that matter, fiat currency.
In particular, he describes the belief among some cryptocurrency users that the length of a blockchain is the source of its value as "long-chain fetishism" that misses the point of what really gives any currency value.
He said:

"The most important lesson, at least for me, and I hope for the public at large as well, is that the fiat currency in my pocket and also the cryptocurrency in various different wallets that I have, they all have value because of community properties, because the community believes them."

No rest for the weary

Beginning today and for the next week, Gün Sirer is co-hosting an etherum bootcamp with both the Ethereum Foundation and the inventor of ethereum, Vitalik Buterin, as part of an effort to build out that community.
Thirty-eight guests have enrolled to participate in the event from all over the world, half of which come from Cornell University, where it is hosted. Coding instructors include Buterin and three other Ethereum Foundation members and multiple Cornell University staffers. Participants range in experience from early-stage developers to high-level executives from several companies interested in exploring ethereum.
But not everything about building such a strong community is positive, according to Buterin. In email to CoinDesk, Buterin explained that ethereum users were "lucky" the hack gave them time to respond, but that might not always be the case.
Buterin wrote:

"The next time around, we may well not have such an opportunity at all. Additionally, forks will only get more and more difficult to implement over time as the community grows."

Image via Michael del Castillo for CoinDesk

Washington State Utility Raises Power Rates on Bitcoin Miners

A Washington State utility is raising rates on bitcoin miners, months after a dispute with the local
industry began over its power usage.

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The Chelan County Public Utility District (PUD) announced earlier this week that, effective January 2017, electrical rates will rise for so-called "high-density load customers", or those that use 250 kilowatt hours per square foot per year. The definition, as stated by the PUD, is intended specifically to cover server farms and bitcoin mines, or data centers that specifically service network transactions.
The increase won't be immediately felt by the region’s bitcoin miners, however, as the PUD said that a five-year transition period is being initiated for existing customers who can show they’ve made "substantial investment" and meet additional criteria.
The process dates back several years, to when the industrial bitcoin mining boom began. At the time, several firms sought to establish a presence in the hydroelectric power-rich Chelan County. A reported influx of phone calls and on-site visits by prospective bitcoin miners prompted PUD officials to put a moratorium on new high-density load customers in late 2014.
Bitcoin miners run high-powered machinery in a race to discover the next block of transactions, a process for which they earn rewards from the network. Cheaper power means more profitability for miners, and some of the least expensive electricity can be found in Washington State, particularly in places like Chelan.
PUD representatives said in statements that they believe the rate increase is a fair one, resulting from months of discussion between utility officials and members of the public.
"There was a lot of individual and collective effort involved in bringing this proposal forward, and I think it's a good product," Commissioner Dennis Bolz said in a statement.
It’s not yet clear how bitcoin miners in the region are taking the news. Phone calls to miners in Chelan County were not immediately returned.
In interviews with CoinDesk earlier this year, miners working both in Chelan and in nearby counties criticized the planned rate increase harshly, with at least one suggesting that the move could put them out of business.
Chelan county image via Shutterstock

Multiple Bidders Claim $16 Million in Australian Bitcoin Auction

Ernst & Young revealed today that multiple bidders claimed 24,518 BTC (worth roughly $16m at press time) as part of a scheduled bitcoin auction that began on 20th June and ended on 21st June.
E&Y, the professional services firm that oversaw the sale, did not disclose the price paid by bidders or the number of bidders involved, though it said participants had been notified of auction outcomes.

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However, given that the funds were held in a publicly available bitcoin wallet, analysis indicates that as many as three to four winners were awarded funds in the sale. (The bitcoin wallet holding the funds was first identified by bitcoin user Adam Meister on YouTube).
Data from blockchain data provider Skry shows unknown winners claimed 13,999 BTC ($9.25m), 6,517 BTC ($4.27m)  and 1,999.99 BTC ($1.31m), with the largest winner claiming seven 2,000 BTC blocks as part of the auction.
At press time, at least one transaction block was unaccounted for in the transactions, with 1,999 BTC still unspent in the original wallet.
In statements, E&Y transactions partner Adam Nikitins said that the auction drew “significant interest” from participants including bitcoin exchanges, digital asset investment funds and high net worth individuals.
Nitkins said:

"The process was very competitive and demonstrates the growing appetite for digital assets such as bitcoin."

Prior to the auction, participants indicated a willingness to enter the bidding process due to what they said has been the recent scarcity of bitcoin sellers given the sharp increases in the digital currency's price in the weeks leading up to the event.
As previously reported, the funds were originally confiscated by the Australian government in connection with the prosecution of a Silk Road user who plead guilty to commercial drug trafficking in 2014.
Australia auction image via Shutterstock

Presidential Candidate Hillary Clinton Pledges Support for Blockchain

Presumptive US presidential nominee Hillary Clinton has thrown her support behind blockchain tech
applications in the public sector.

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Clinton, who is expected to receive the presidential nomination from the US Democratic Party next month, released a broad technology and innovation agenda yesterday in which her campaign argued that US public policy should include work with blockchain.
The Clinton campaign stated:

"We must position American innovators to lead the world in the next generation of technology revolutions – from autonomous vehicles to machine learning to public service blockchain applications – and we must defend universal access to the global, digital marketplace of ideas."

The Clinton campaign also indicated that the presumptive Democratic nominee will, if elected, push for reduced regulatory barriers for startups and entrepreneurs.
"Hillary will challenge state and local governments to identify, review and reform legal and regulatory obligations that protect legacy incumbents against new innovators," the campaign said.
The comments make Clinton the latest major US political candidate to offer support for blockchain technology and its surrounding industry.
In April 2015, then-Republican presidential candidate Rand Paul announced he would accept bitcoin as payment for donations, a decision that was soon followed by former Texas Governor and presidential hopeful Rick Perry.
Image credit: Trevor Collens / Shutterstock.com

IBM’s New Watson Centre Merges Blockchain With AI

IBM today opened an incubator where 5,000 computer scientists will work to build rapid prototypes

using the company’s blockchain and Watson AI tools for businesses in the Asian-Pacific region.

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Called the Watson Centre at Marina Bay in Singapore, the incubator will also house Singapore’s IBM Garage, which will specialize in building blockchain applications using the company’s Open Standards tools.
IBM Asia Pacific’s chairman and CEO, Randy Walker, described the operation in a statement:

"Watson and blockchain are two technologies that will rapidly change the way we live and work, and our clients in Asia Pacific are eager to lead the way in envisioning and creating that future."

The IBM Garage is run as part of the company’s Global Entrepreneur program. Launched in 2010, it is intended to help startups build distributed ledger applications using the IBM Cloud.

All-in on blockchain

The opening of the new center comes during an active time for IBM and its exploration of blockchain.
IBM's work with the emerging technology goes back to 2015 when it joined the Hyperledger open-source blockchain project to build a cross-industry distributed ledger solution. Further, earlier this year, IBM CTO Chris Ferris was appointed project lead for Hyperledger.
By February, IBM blockchain director John Wolpert declared that the company was "all in on blockchain" during a keynote speech in San Francisco, and the following month, the company was already working to merge AI with blockchian.
Image of Watson Centre at Marina Bay via IBM

NFL Star Accuses Ex-Manager of Stealing $3 Million for Bitcoin Mine

A player for a professional American football team has filed a lawsuit against his former business
manager, alleging that he squandered money on bad investments including a $3m bitcoin mine.

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Court documents filed in an Arkansas federal court and published by the Arkansas Times allege that Michael Vick spent as much as $15m belonging to Darren McFadden, a running back for the Dallas Cowboys, on a series of fraudulent investments.
McFadden has accused Vick of lying to him about the success of those investments, while at the same time using those funds to pay for a luxurious lifestyle and failed business ventures.
Vick allegedly used $3m to build the operation, which court documents say was aimed at "creating and manufacturing bitcoins". McFadden further said that Vick guaranteed a profit on the mine, stating that he would "not lose any money”.
However, Vick would allegedly go on to keep the profits from the mine for himself, court documents assert.
The complaint states:

"...Defendant Vick used plaintiffs funds to start this bitcoin 'business', including using all of plaintiffs monies to purchase all the necessary infrastructure and materials, only to retain all the revenues generated or derived from the 'business' along with all the corresponding business assets purchased with plaintiffs money.”

McFadden accused Vick of fabricating financial documents to conceal the health and nature of the investments he was making in the player’s name, and for a time Vick held power of attorney. He further said in court documents that he ended the relationship after Vick tried selling him a property purchased using the player’s own money.
In an interview with The Dallas Morning News, McFadden said that he began working with Vick in 2008, and that the man was “an old family friend” whom he trusted.
"It's just one of those deals with me as a young guy I wasn't on top of my finances like I should have been and I trusted somebody to take care of everything for me and I don't feel like at the time he had my best interest,” he told the publication.
Vick declined to comment when reached by The Associated Press, earlier this week, saying that he hadn’t yet seen the lawsuit.
Images credit: Ken Durden / Shutterstock.com

Coinbase and ARK Invest Report Argues Bitcoin is a New Kind of Asset Class

A new report argues that bitcoin should be considered the first in a new kind of asset class.
The paper was produced by digital currency exchange and wallet startup Coinbase and ARK Invest, an investment management firm that specializes in disruptive technologies and offers financial products tied to bitcoin.
The white paper, written using data from Coinbase, TradeBlock, the S&P 500 Index and several additional industry benchmarks, outlines four approaches to characterizing assets before laying out the argument that traditional investors should view "cryptocurrency" as an entirely new asset class.
ARK Invest analyst Chris Burniske, who co-authored the report, said that the project started as an exploration between the two companies of how people use gold to buy bitcoin.
Burniske told CoinDesk:

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"We realized this is a bigger story than comparing bitcoin and gold. This is about bitcoin and cryptocurrencies maturing into their own asset class."

The new report builds on a 1997 paper about asset class characterization, which breaks down assets into three categories: capital assets, consumable/ transformable assets, and store-of-value assets.
Burniske and co-author Adam White, who serves as vice president for Coinbase, go on to define four distinct characteristics of traditional asset classes, positioning bitcoin both within and beyond those traditional definitions.

Liquidity and distinctness

The first characteristic of an asset class that the report outlines relates to what it calls “investability”. This, according to the report, pertains to whether an asset class provides sufficient liquidity and opportunity to invest.
In the case of bitcoin, ARK Invest and Coinbase analyzed bitcoin exchange trading volumes from July 2011 through the first quarter of 2016 to determine the liquidity available to investors.
Using data obtained from Bitcoinity and Tradeblock’s XBX Index, the paper shows steadily increasing volume, reaching as much as $1b per day through April of this year – though it acknowledges that this high figure is driven by self-reported figures not subject to third-party validation.
Next, the report defines a traditional currency relative to its “politico-economic features”. To be an asset, the report argues, the entity needs to have a unique profile that “arises” from its value, governance and use cases.
In each case, the report draws distinctions between bitcoin and traditional asset classes.
For example, bitcoin’s operational model, in which transactions are broadcast and verified on an open network, results in a predictable, "mathematically metered" release of the asset. By 2140, 21m bitcoins in the market will exist – by comparison, roughly 15.6m bitcoins have been created to date.
According to figures provided in the paper, that’s distinct from both the US monetary base and gold supply, which increase at sporadic rates based on data from the Federal Reserve Bank of St. Louis and Number Sleuth’s "All the World’s Gold Facts".
The report argues:

"Compared to bitcoin, no asset has evolved from concept to billions of dollars in stored value so quickly. Moreover, no asset in history has followed such a predictable supply trajectory."

Sufficiently different

The third trait used in the report to define traditional assets and help position cryptocurrencies as a new asset class relates to “price independence”, a characteristic that suggest how assets should exhibit a low correlation on returns relative to other assets in the marketplace.
Put more simply, an asset needs to be sufficiently independent from the value of other existing assets.
Using data sourced from Bloomberg and TradeBlock, ARK Invest and Coinbase compare bitcoin with the S&P 500, along with data on US bonds, gold, real estate, oil, and emerging market currencies.
“Strikingly, bitcoin’s price movements have been separate and distinct from those of other asset classes during the last five years,” the report states. “It is the only asset that maintains consistently low correlations with every other asset.”
Lastly, ARK Invest and Coinbase argue that the first three characteristics of traditional asset classes need to differentiate the risk-reward profile of the entity, leading to easily defined returns and a degree of volatility.
Using the Sharpe Ratio, which measures the returns on an investment per unit of risk, the authors of the report analyzed a five-year span from May 2011 through May 2016.
With data sourced from the XBX Index, the report shows that, during the five-year period, the average daily volatility compared to the previous year decreased from about 10% to about 4%.
Bitcoin’s daily volatility in May 2016 was roughly a third of that figure compared to five years ago, and 24% less than at the start of May 2015, according to the paper.
Image via Shutterstock

EU Watchdog: Distributed Ledgers Still Face Key Challenges

The European Securities and Markets Authority (ESMA), a securities trade watchdog based in the EU, has released a new discussion paper on blockchains and distributed ledgers as part of a fact-finding effort aimed at developing policy positions on the technologies.

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The paper, published today, comes more than a year after the organization first issued a call for information on the technology. ESMA has also hosted its own events, as well as participated in others focused on the use of blockchain applications in finance.
ESMA’s fact-finding mission itself grew out of an effort to investigate digital currency investments in the EU, which in the newest report ESMA said "remained marginal" overall.
The agency stressed throughout its new report that it had not developed a concrete opinion on the technology, framing the release as one that constitutes a "preliminary analysis" of blockchain applications to the securities sector. Each section is built out with a series of questions to industry stakeholders as part of the agency’s comment-seeking process.
The report states:

"ESMA appreciates that the [distributed ledger technology] may have different applications and impacts on financial activities, market participants and market infrastructures, depending on a variety of elements, including its capacity to address a number of technical, governance, legal and regulatory issues. It is too early at this stage to form a definite opinion on whether the DLT will be able to address these issues in an efficient way."

Overall, the report echoes other assessments, including those of its own executive director, on the technology’s potential in finance.
It posits that the technology could be leveraged to boost systemic efficiency, reduce intermediation in the clearing and settlement process and improve transparency in trade data recordkeeping. At the same time, the ESMA report raises questions about scaling, governance and cybersecurity issues.
"ESMA believes that the DLT will need to overcome a number of possible challenges and shortcomings before its benefits can be reaped," the report’s authors write. "Some of these challenges are related to the technology itself."
Notably, the report explores which regulatory frameworks within the EU that could apply to market applications of blockchain tech should it see wider adoption. These include the Central Securities Depositories Regulation (CSDR), the European Market Infrastructure Regulation (EMIR) and the Settlement Finality Directive (SFD).
The full ESMA report can be found below:

ESMA Discussion Paper

Image via Shutterstock

London Workshop Explores Blockchain Identity in Finance

The Identity & KYC conference in London hosted a workshop on using blockchain technology to improve know-your-customer processes earlier this week.
Led by blockchain compliance consultant Siân Jones, the workshop was attended by a group drawn from banks, financial institutions, startups and regulators.
The group discussed several challenges faced by banks and financial institutions when it comes to identity, and whether or not the blockchain can help solve these problems. The overwhelming consensus was that even though the blockchain is very promising, it has many real-world limitations around identity.
The discussion was exploratory in nature, focusing on the needs of current financial industry participants and exploring the use of potential blockchain technologies.

KYC moving beyond simple identity

The group discussed the impact on the financial industry of the trend of moving away from simply looking at government-issued identity cards, like passports and driver's licenses. Attendees looked at exploring more holistic datasets around individual identity that involve everything from purchase history to utilities connections to assess an individual’s identity.
These third-party data points already provide an important source of identification information beyond simple identification systems and are becoming increasingly popular in the financial industry and elsewhere to supplement government-provided identification data. They are also more nebulous in nature, giving a 'probability score' for how strongly the algorithm believes the individual is who she says she is.
The trend is expected to accelerate in the future, with simple identification mechanisms becoming less important for financial institutions.
In such a world, an identity on the blockchain, like a tokenized version of a driver’s license, may not be sufficient for most businesses and financial institutions. Any blockchain solution will therefore need to gather information on the individual available via third-parties, a considerably harder problem for blockchains to solve.

Where blockchains fall short

There are many challenges faced by the financial industry involving identity, and some of the key issues are hard problems to solve. The initial on-boarding process, when the issuing of identity is first conducted by a government or financial body after verifying information about the individual, still remains a challenge.
This is especially true on a global level, where a significant portion of the developing world is without any form of government-issued identification.
The reliability of any identity, whether on the blockchain or outside, is only as good as the authority issuing that identity. An identity verified and issued by the UK government, for example, would likely be considered more reliable than one issued by a bank in Somalia.

Advantages of blockchain-based identity

There are several advantages of using blockchain-based identity, especially around the quick dissemination of information about an individual in a global context.
This is true when identity needs to be revoked and reissued, especially in the event that someone's identity is stolen. For example, if a passport gets stolen, the issuing country might replace it, but it takes much longer for a financial institution in another country to know about the status of this identity revocation. Blockchain allows this process to be quick and efficient.
In addition, blockchain-based identity systems have the possibility of selectively revealing information about an individual’s identity. This could help prevent identity theft and enhance end-user privacy.
There could also be efficiency gains by larger institutions around issuing blockchain identities, especially because a lot of verification processes today are repetitive.
Although not a current concern to the nascent Internet of Things industry, several institutions are looking into how digital identity will play out when identity is not restricted to individuals and legally defined entities but also includes physical things.
A blockchain seems like an efficient solution to handle such large-scale identities that need to be shared among multiple stakeholders.

Starting point

Although many financial institutions are exploring blockchain technology for identity solutions, most of the rules and regulations around KYC and identity for regulated financial companies revolve around government-issued identity as the preliminary requirement. Therefore, the use of blockchain for identity will need to start with a government body deciding that it would issue some form of identity on the blockchain.
There are many unsolved problems around this, from privacy to access. For example, even though an identity document like a passport is issued to the individual, it isn’t owned by the individual in a legal sense.
It is unclear how the identity data on a blockchain will be owned — whether the individual or the identity issuing body will ultimately own the identity and data around it.
As Jones put it:

"The fundamental challenge in identity is the intents of various participants are not aligned. Governments, businesses and individuals have conflicting interests."

Anonymous crowd image via Shutterstock