Bitcoin Price Analysis: Understanding the BTC-USD Price Correction

Bitcoin Price Analysis

Note: This analysis does not attempt to speculate on the market implications of news events. This is a pure analysis of the market data.

The unprecedented rise in the BTC-USD market to near $3,000 even caught many of the more bullish traders by surprise. However, this quick rise in value did not come cheaply: once BTC finally ran out of steam, the market correction not only affected BTC-USD prices, but it was felt throughout the entire crypto-space as entire market cap took a massive plunge from $49B to $36B over the course of three days.BTC Market Cap 1.png

Figure 1: Market Cap Pre–Bitcoin Price Correction

BTC Market Cap 2.png

Figure 2: Market Cap Post–Bitcoin Price Correction

Why Did This Massive Price Correction Happen and Where Are We Heading?

There are two ways of viewing the BTC-USD run to near $3,000 levels:

  1. The top can be viewed as the absolute top of the market ($2,948)

  2. The top can viewed as the peak at $2,726.50 with a healthy 127 percent Fibonacci Extension

I’m going to analyze the market from the view of option 2 because I feel this provides a more sober outlook on the direction of the BTC-USD market. In strong Bull Runs, it is very common for markets to take a 50 percent correction; a 100 percent Retracement of the initial downward move (if it’s a very strong Bull Run), followed by a 127 percent Fibonacci Extension will provide another test to see how the market feels in the new market highs. In our case, we didn’t quite make it to the 127 percent Extension (shown in orange in Figures 3 and 4).

BTCUSD Chart 1.png

Figure 3: BTC-USD, GDAX, 6-hr Candles, the Relative Market Top With Accompanying Extension

Failed Fib Ext.png

Figure 4: BTC-USD, GDAX, 2-hr Candles, Failed 127 Percent Fibonacci Extension

Currently, BTC-USD is finding support on the 50 percent Fibonacci Retracement of the Bear Run from $3,000 (labeled in green). It made a test of the 61 percent line (labeled in red) and it was ultimately rejected. This rejection and subsequent support test of the 50 percent line coincides with a decrease in volume and a near flip of the four-hour MACD from Bullish to Bearish (labeled in yellow). These market moves show that, unless significant volume hits the BTC-USD markets, there is a likely test of the lower Fibonacci Retracement Lines in its future.

BTCUSD 4HR Chart.png

Figure 5: BTC-USD, GDAX, 4-hr Candles, Fibonacci Retracement of Bear Run

After our initial market high around $2,700, multiple momentum indicators began to reveal that, although the price was increasing, the market was beginning to lose upward momentum — this type of price activity is called “Divergence” and can be seen across the RSI, MACD and Volume. The long-term outlook for BTC-USD indicates a possibility of lower lows in its future. On the higher time-scales (refer to Figure 3), the momentum indicators are pointing toward more downward movement as the price is currently failing to make a new high and seeing decreased market volume. It’s totally possible that the market could move sideways or even see price growth on decreasing volume — markets aren’t always rational. However, if you want to know whether the price growth is sustainable and reliable, keep an eye on the momentum indicators and watch for volume to accompany price growth in the coming days. For the time being, I find it very unlikely that BTC-USD will see any significant price growth. But, after all, this is cryptocurrency; anything is possible.

Summary:
  1. Short-term indicators are showing a possible move to the lower Fibonacci Retracement values ($2,500, $2,400, $2,280).

  2. Long-term indicators are showing a loss of upward momentum. Until more volume hits the markets, very little price growth is likely.

Trading and investing in digital assets like bitcoin and ether is highly speculative and comes with many risks. This analysis is for informational purposes and should not be considered investment advice. Statements and financial information on Bitcoin Magazine and BTCMedia related sites do not necessarily reflect the opinion of BTCMedia and should not be construed as an endorsement or recommendation to buy, sell or hold. Past performance is not necessarily indicative of future results.

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Project TITANIUM: The EU’s Plan to Decloak Cryptocurrency

Project TITANIUM: The EU’s Plan to Decloak Cryptocurrency

Project TITANIUM: The EU’s Plan to Decloak Cryptocurrency

Monitor blockchains, deanonymize wallet addresses, surveil dark net markets, and stop terrorists and money launderers: that’s the main thrust of the European Union’s Project TITANIUM.

TITANIUM, which stands for Tools for the Investigation of Transactions in Underground Markets, is a three-year, €5 billion ($5.5 billion) project that will unite universities, private research firms and law enforcement agencies from the U.K., Germany, Spain, Austria, the Netherlands and Finland.

Project TITANIUM will develop tools and best practices for criminal investigations involving cryptocurrency in Europe, which, up to now, most law enforcement agencies have pursued on an ad-hoc basis.

The project plans to create forensic tools to spot clusters of addresses controlled by the same entity; identify mixers or tumbler addresses used for money laundering; crawl the webs, both clear and dark; and automate information gathering about illegal activities.

The project’s coordinator, Dr. Ross King of the Austrian Institute of Technology, said that criminal and terrorist uses of cryptocurrencies and dark net markets “evolve quickly.” King also insisted that Project TITANIUM would respect “citizen privacy.”

Project TITANIUM’s announcement comes just a few weeks after the ransomware worm WannaCry disabled hundreds of thousands of computers in more than 150 countries. As of June 15, 2017, the hardcoded wallet addresses used by the attackers have collected about 50 BTC in ransom payments.

The project’s scope covers terrorism, as well as crime, and back-to-back attacks in Manchester and London have ignited calls for more sweeping government action to combat extremism.

On June 4, 2017, Prime Minister Theresa May called for “international agreements to regulate cyberspace” and to deny violent extremists “safe spaces” online. With terrorism in the background, cooperation on internal security matters like Project TITANIUM is likely to continue even after the U.K. formally exits the EU.

The call for more surveillance comes despite the fact that the United Kingdom already has one of the most wide-ranging surveillance laws, the Investigatory Powers Act, which went into force December 30, 2016.

Nicknamed the Snooper’s Charter, the act requires ISPs keep record of all websites users visit for one year and allows police and other public agencies to check anyone’s history without a warrant.

Meanwhile, the EU is mulling a more direct approach to the problem of cryptocurrency. According to a proposed directive released on March 9, 2017, the EU could require exchanges and wallet providers to submit account owners’ identities to a central database.

The directive goes on that “virtual currencies should not be anonymous,” and that the anonymity or pseudo-anonymity of cryptocurrencies is “more a hindrance than an asset” for legitimate users.

The rules would not just apply to bitcoin, but all “virtual currencies,” and would effectively ban anonymous cryptocurrency, at least in the EU. The proposed directive is intended to combat money laundering and terrorism, despite scant evidence that cryptocurrencies play a prominent role in either.

Nevertheless, with or without evidence that they are empowering terrorists, the anonymous or pseudo-anonymous nature of cryptocurrencies is threatening to European lawmakers, and whether through legislation or projects like TITANIUM, they intend to decloak cryptocurrency.

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Op Ed: Three Technical Requirements to Connect Blockchains Without a Token

Op Ed: Three Technical Requirements to Connect Blockchains Without a Token

In my last post, I was talking about how connecting all blockchains is the final stepping stone for mass-crypto adoption. Here I want to outline the technical building blocks with which this idea can be implemented.

Since I see a lot of downsides to having one large uber-blockchain connecting all others, I will focus on a token-LESS solution. This would have several advantages:

  • No need for an additional token.

  • Users can “remain” on their blockchain.

  • No need to trust a centralized third party.

There are a couple of downsides to such an approach however. Since there is no uber-blockchain or a centralized party ensuring the connection, there needs to be enough liquidity between two blockchains to be connected. If I want to transfer funds from the Ethereum to the Bitcoin blockchain, for example, I need someone who, at the same time, wants to go from bitcoin to ether. For these two large blockchains, you will always find someone willing to go in either direction, but what about from Ethereum to a smaller blockchain or a small blockchain to another small blockchain? While I will be laying out a way on how that could even be solved, I want to stress that liquidity is the key economic factor in such a cryptographically secure multi-asset network.

Basic Building Blocks

Let’s look at the three very basic building blocks that are needed to connect any two blockchains:

  1. Multisignature feature (Multisig);

  2. Hashing functionality; and

  3. Time-lock functionality

Let’s work through each of these three and combine them into a larger single picture.

1. Multisig is an old and well-trusted concept that can be compared to a shared checkbook with multiple required signatories. A multisig transaction allows for the enforcement of arbitrary joint signature rules. In the case of a cryptographically secure, off-chain, multi-asset, instant transaction network (COMIT) one would use 2-of-2 multisig transactions for which both signers have to sign a transaction to become valid and be accepted by the network (an example of this will follow right after). This means a multisig transaction established between two parties needs to be signed by both so that its outcome becomes valid and can be accepted by the network.

In the picture below, a transaction was created with 1 BTC as input; however, in order to get it out, both parties (Alice and Bob) have to sign the transaction:

 

2. Hash functions are standard cryptographic concepts. These are one-way functions to convert arbitrary data (in our case a secret “s”) into a unique hash “h.” This hash h can then be shared safely without anyone being able to compute the secret s used to create it. This allows us to build a hash-lock transaction which will only unlock the funds with the knowledge of the secret s. In order to route across different blockchains, we need the same cryptographic hash function available in the smart contracting language of each blockchain participating on such a route.

In the picture below, someone put 1 BTC into a contract, but Alice can only take it out once she has the secret (which she normally would get from Bob).

3. Time-lock is a simple requirement for funds to be locked up until a future date. Blockchains are found to have two different time-locks: relative and absolute. Absolute time-locks will lock a transaction output until a fixed point in time in the future, whereas relative time-locks will lock a transaction output relative to an event or a point in time. That is to say, a relative time-lock rather defines a time span than a specific point in time. Time-locks are a requirement for trustless payment channels, and relative time-locks are recommended as they allow for indefinitely open payment channels.

In the example below, someone put 1 BTC in, but in order for Alice to get it out, she has to wait a predefined time. 

Putting It Together 

If we go ahead and combine these three building blocks, we get something called HTLCs (Hashed Time-Lock Contracts) whose states can be updated on a multisig basis. HTLCs combine the concept of a time-lock for refund purposes with a hash-lock. If the recipient can provide the secret s for the hash-lock before the expiry of the time-lock, he will be able to retrieve the funds. Otherwise, the sender can safely reclaim the funds. In case one party wants to update the HTLCs state, he needs the other party’s approval (signature). This is how the multisig function comes into play.

In the example below, Alice put 1 BTC into the contract with Bob. Bob can either take the 1 BTC out if he gets the hash from Alice within a predefined time, or Alice will get the funds back automatically after that predefined time has past.

Two HTLCs can be coupled with each other resulting in something called atomic transactions. To do so, the recipient first generates a secret s and computes its hash h. Subsequently, the recipient will share this hash h with a sender who in turn creates the first conditional transaction, i.e., its output is (hash-)locked by h. This output can only be redeemed with the knowledge of the secret s.

In layman’s terms, this would mean that if Bob wants to send Alice 1 BTC and wants ETH in return, they could open two payment channels (one with BTC and the other with ETH) and couple them with a hash h. Bob sends Alice BTC as long as she sends him ETH. In case either one backs out, the original amounts would just be returned.

The Full Route 

Now we can stack an arbitrary amount of transactions onto each other as every node in this chain can safely use the same hash to create a transaction which is also conditional on knowing the secret s. This hash is initially shared with the sender, who will then subsequently send a conditional payment to the first node requiring knowledge of the secret s to redeem it. Each node in the route can then safely forward the transaction while adding the same condition to the transaction redemption. Through the use of HTLCs we can guarantee that either all of the transactions via this route get fulfilled or all payment channel transactions will be unredeemable. No trust has to be put in any of the nodes in the middle of the route. In the end, you have a chain of transactions which all depend on the same secret to be fulfilled. When the receiver takes the last transaction and uses the secret to redeem the money, every other node will see the secret that was used and can then fulfill their own incoming transaction.

After the secret s has been shared across the route, every payment channel will then settle the transaction back into the channel. This is done by updating the payment channel’s state to the final balances and then invalidating the HTLC transactions by revealing the invalidation key k to the payment channel counterparty, which will eventually make the transaction complete.

The time-lock mechanism is used as a refund mechanism in case of an intermittent routing failure. The time-locks need to be stacked from receiver to sender to make sure no one is able to cheat by having a shorter period than someone after him/her and thereby being able to pull out first.

Conclusion 

These transactions can span within the same blockchain, but can also go cross-chain as long as you find someone who is willing to transact on both blockchains. This is where the concept of liquidity and routing comes in. To go back to the beginning where we thought about connecting two low-liquidity blockchains we see now, that we actually don’t necessarily transact between those two directly. By using stacked payment channels one after the other, money could flow from one low liquidity chain to a high liquidity chain and then to the final low liquidity chain. 

This concept connects payment channels to a large network that is now:

  • Cryptographically-secure (relies on cryptographic standards),

  • Off-chain (like the Lightning- or Raiden-Network) ,

  • Multi-Asset (cross-chain),

  • Instant (no need for a transaction to settle on the blockchain as updates only happen between the parties until it gets broadcasted)

  • A Transaction Network, such as COMIT.

In the next blog post, I will talk about the concept of liquidity and Liquidity Providers (LP) and also on how routing through such a network could work.


This is a guest post by Dr. Julian Hosp, the co-founder of TenX and co-author of the whitepapers of TenX and COMIT. The views expressed are his alone and do not necessarily reflect those of Bitcoin Magazine.

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E&Y Report: How the Wealth Management Industry Could Benefit from the Blockchain

E&Y Report: How the Wealth Management Industry Could Benefit from the Blockchain

Blockchain technology has morphed from a popular buzzword to a technology that is in the process of revamping a wide range of operational and business processes within the financial service industry. A segment of the financial industry that could benefit greatly from the implementation of the distributed ledger technology is the wealth and asset management sector.

The global accountancy firm Ernst & Young published a report on the benefits of blockchain technology for the wealth and asset management industry titled ‘Blockchain Innovation in Wealth and Asset Management.’ The report states that the implementation of blockchain technology would likely result in reduced operational expenses, elimination of redundant yet time consuming functions and more opportunities to better the client experience. More specifically, using blockchain technology in important areas such as the client onboarding process, the creation of model portfolios, the settling and clearing of trades and compliance processes related to AML regulations can all be improved by implementing distributed ledger technology-based solutions in the wealth management industry.

Blockchain Use Cases in Wealth Management

In this report, Ernst & Young highlights two use cases as examples of the benefits of the blockchain.

Firstly, blockchain technology can be applied to digitize and streamline the customer onboarding and profiling process. Strict regulatory requirements require wealth managers to collect information such as proof of identification, marital status, residency, sources of wealth and political ties from new potential clients. This can be a cumbersome, long-winded and, therefore, costly process.

If, instead, high net-worth individuals’ data were to be stored on a distributed ledger to which permissioned parties could gain access with the individual’s approval, then this would greatly reduce the time and cost of onboarding a new customer. Furthermore, due to the immutability and auditability of the blockchain, an audit trail could easily be kept for each client.

Secondly, the blockchain could facilitate the creation of portfolios and the communication of portfolio changes to clients. Currently, wealth managers use a variety of different platforms to create and maintain portfolios and most of these platforms do not enable direct communication with the client.

Hence, by developing and implementing a blockchain solution that allows wealth managers to create and manage portfolios according to clients’ stored investment constraints that also allows for direct communication with regarding portfolio changes, the entire investment process would be made substantially more efficient and client relationships could be deepened due to an increase in direct communication between the wealth manager and its clients.

There Will Be Hurdles for Adoption but First-Movers Will Benefit

The report also highlights the challenges of adoption that the technology is likely to encounter. Scalability, interoperability with legacy systems, security and accordance with technology standards were the largest issues raised by the firms polled by Ernst & Young.

In addition, wealth and asset management funds do not exist in a bubble and are usually interconnected with other firms. Therefore, a wide-scale adoption would likely take a long time, considering there would have to be a consensus as to what type of blockchain solutions the whole financial industry chooses to adopt. Due to these factors, most firms are currently only willing to test blockchain technology on a small scale before considering a broader adoption of the tech.

Ernst & Young, however, believes that firms that are the first to adopt blockchain technology will reap the lion’s share of its benefits. As the success of financial blockchain solutions depends on its participants, E&Y encourages firms to begin the innovation process early as first-movers are likely to benefit the most.

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Ether Price Analysis: Price Movement Shows Strong Market Value

Ether Price Analysis

What the heck is happening in the crypto world?  Is Ethereum finally dead?  Is ETH taking its last breaths?

Not likey. In fact, the recent pullback on the ETH-USD market is probably one of the best and healthiest things investors and traders could have asked for. Given ether’s 300% price rise in just over a month, this pullback has a left many traders and investors bullish on the ETH-USD market.

On a macro-scale, we can see ETH-USD had a very nice, textbook market correction along the 50% Fibonacci Retracement Line (shown in brown).  This test of the 50% line was immediately rejected and is illustrated by the massive spike in volume (shown in blue).  

For healthy, growing markets 50% retracements are a very common occurrence, and the market response to the retracement can be viewed as a sort of litmus test for the strength of a market (i.e. a positive rejection of the 50% line with upward price action tends to indicate the market still desires higher prices, and a negative move from the 50% line will typically indicates the market is still extended and thus overvalued).

ETHUSD Macro View.png

Figure 1:  ETHUSD, GDAX, 12HR Candles

Looking at the micro-trend, we see the strong price rejection bounced off the 50% Fibonacci Retracement Line and is currently in the process of forming what is known as an “Inverse Head and Shoulders” pattern. This pattern gets its name simply because it has the following, easily identifiable characters:

  • A well defined neckline (shown in yellow)

  • A break of the descending trend line (shown in brown)

  • A left shoulder, a head which makes the lowest peak, and a right shoulder

  • A re-test of the neckline (at the time this image was made, the market was testing the neckline)

  • Finally, to confirm the reversal pattern, volume usually needs to increase after the re-test of the neckline to gain strength in the upward movement.

ETHUSD Micro View.png

Figure 2:  ETHUSD, GDAX, 30Min Candles

This sort of pattern is often traded in FOREX and stock markets because it is seen as a reliable and predictable indication of future price movement.  Typical price projections for Inverse Head and Shoulders are easily calculated with the following formula:

Price Movement = Price of the Neck Line (~$350) – Price of the Head (~$250) = ~$100

Price Target for Trend = Price Movement + Neck Line Price = $450

Given the strength of the macro-trend’s rejection of the 50% Fibonacci Retracement Line and the current pattern forming on the 1-hour charts, we must then look to other indicators to give us further market insight. Two commonly used momentum indicators, RSI (Relative Strength Index) and the MACD (Moving Average Convergence Divergence), show us that the price increase from the initial, aforementioned 50% Fibonacci Retracement Line rejection is welcomed with a rising trend on both momentum indicators; this shows us that the price growth still has upward momentum.

Summary:
  1. Although the sudden price drop was a bit terrifying for many investors and traders, it was much needed and has now shown the strong market value of ether.  

  2. Now that we have proven the strength in the market, it is very likely we will see new price highs in our future before we see further tests of lower prices.

  3. On a macro level, ETH-USD sentiment still remains bullish; on a micro level, we are seeing strong indications of a trend reversal from the sudden bear market over the past few days.

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BIP91: The SegWit Activation “Kludge” That Should Keep Bitcoin Whole

BIP91: The SegWit Activation "Kludge" That Should Keep Bitcoin Whole

Bitcoin’s long-lasting scaling debate appeared to be heading toward a climax lately, with two proposals gaining significant traction. At one end of the fence there is Bitcoin Improvement Proposal 148 (BIP148), a user activated soft fork (UASF) originally proposed by the pseudonymous developer “shaolinfry.” On the other, there’s SegWit2x, an agreement forged between a significant number of Bitcoin companies and miners.

The good news is that both of these proposals have a short-term solution in common: both plan to activate Segregated Witness (SegWit) this summer. The bad news is that the activation method of the two has differed, which could lead to a coin-split.

As of today, it seems this schism will be avoided — at least initially. The SegWit2x development team plans to implement BIP91, a proposal by Bitmain Warranty engineer James Hilliard that cleverly makes the two conflicting activation methods compatible.

Here’s how.

BIP141

The current implementation of Segregated Witness is defined by BIP141. This version is included in the latest Bitcoin Core releases, and is widely deployed on the Bitcoin network. BIP141 is activated through the activation method defined by BIP9. This means that 95 percent of all blocks within a two-week period need to include a piece of data: “bit 1.” This indicates that a miner is ready for the upgrade. As such, SegWit would be activated if the vast majority of miners are ready for it.

Or that was the intention. So far, only some 30 percent of hash power is signaling support for the upgrade. There is a lot of speculation as to why this is the case, but it almost certainly has nothing to do with (a lack of) readiness.

That’s why other activation methods are increasingly being considered.

BIP148

BIP148 is a user activated soft fork (UASF), specifically designed to trigger BIP141.

On August 1st, anyone running Bitcoin software that implemented BIP148 will start rejecting all blocks that do not include bit 1, the SegWit signalling data.

This means that if a mere majority of miners (by hash power) runs this software, they will reject all blocks from the minority of miners that does not. As a result, this majority of miners will always have the longest valid chain according to all Bitcoin nodes on the network. Consequently, all deployed BIP141 nodes will see a chain that includes over 95 percent of bit 1 blocks, meaning SegWit would be activated on the network.

However, if BIP148 is not supported by a majority of miners (by hash power), Bitcoin’s blockchain could split in two. In that case, there would effectively be two types of Bitcoin, where one activated BIP148 and the other did not. This may resolve over time — or it may not.

SegWit2x

SegWit2x (also referred to as “SegWit2MB” or “the Silbert Accord”), is the scaling agreement reached by a numer of Bitcoin companies and over 80 percent of miners (by hash power), drafted just before the Consensus 2017 conference.

For some time, the details surrounding SegWit2x were not very specific. As the name suggests, all that was really known was that SegWit was included in the agreement, and that it included a hard fork to double Bitcoin’s “base block size” to two megabytes.

And, of course, SegWit was meant to be implemented using a different activation method. Like the original BIP141 proposal, SegWit2x was to be activated by miners through hash power. But where BIP141 requires 95 percent hash power support, SegWit2x would only require 80 percent. Moreover, SegWit2x readiness would be signaled using another piece of activation data: “bit 4” instead of “bit 1.”

This makes SegWit2x largely incompatible with BIP141, and especially with BIP148: Different nodes would be looking at different activation bits, meaning they could activate SegWit under different circumstances and at different times; and that would mess up SegWit-specific block relay policy between nodes, potentially fracturing the network.

BIP91

Now, it seems BIP91 has provided the solution.

BIP91 is a proposal by Bitmain Warranty (not to be confused with Bitmain) engineer James Hilliard which was specifically designed to prevent a coin-split by making SegWit2x and BIP148 compatible.

The proposal resembles BIP148 to some extent. Upon activation of BIP91, all BIP91 nodes will reject any blocks that do not signal support for SegWit through bit 1. As such, if a majority of miners (by hash power) run BIP91, the longest valid Bitcoin chain will consist of SegWit-signaling blocks only, and all regular BIP141 SegWit nodes will activate the protocol upgrade.

Where BIP91 differs from BIP148 is that it doesn’t have a set activation date, but is instead triggered by hash power. BIP91 nodes will reject any non-SegWit signalling blocks if, and only if, 80 percent of blocks first indicate within two days that’s what they’ll do.

This indication is done with bit 4. As such, the Silbert Accord can technically be upheld — 80 percent hash power activation with bit 4 — while at the same time activating the existing SegWit proposal. And if this is done before August 1st, it’s also compatible with BIP148, since BIP148 nodes would reject non-bit 1 blocks just the same.

This proposal gives miners a little over six weeks to avoid a coin-split, under their own agreed-upon terms. With a SegWit2x launch date planned for July 21st, that should not be a problem… assuming that the miners actually follow through.

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The Moonbeam Scaling Network: A “Semi-Decentralized” Scaling Solution

Moonbeam scaling solution

Bitcoin exchange and hosted wallet provider Luno (formerly BitX) is developing a Bitcoin scaling solution called Moonbeam. Unlike the lightning network, Moonbeam does not require SegWit’s transaction malleability fix and would be able to operate on the Bitcoin network as it is today.

Moonbeam  aims to provide a way for multi-user Bitcoin platforms — such as exchanges, hosted wallets, and payment processors — to easily open standardized one-way payment channels with each other, and thereby offload the Bitcoin network from a growing number of transactions.

How Does it Work?

Moonbeam aims to take advantage of the fact that many Bitcoin transactions occur among multi-user platforms. Using Moonbeam, these platforms can open standardized one-way payment channel contracts with one another to facilitate payments. By taking these transactions off-chain, Moonbeam can reduce transaction fees for those who use it and benefit Bitcoin users generally by reducing congestion in the mempool.

These channels are simple smart contracts in which one party locks up a certain amount of bitcoins for a specified period of time (with the end point referred to as the “timeout”) for the purpose of sending payments to the other party. Before the timeout, the party that has locked up funds can send an unlimited number of off-chain transactions using those locked up bitcoins (until the channel runs out of bitcoins). Each channel involves only two on-chain transactions: one to open the channel and one to close it.

Because these intermediate transactions are off-chain, they are nearly instant. Without the need for a blockchain confirmation, the transactions only take as long as it takes to route an http request (think: loading a simple web page). These transactions would also be cheap. Only two transactions per channel require miner fees, and the rest are essentially free to the platform, though the platform could charge fees to its users.

The one-way payment channels used by Moonbeam are not a new invention. Bitcoin inventor Satoshi Nakamoto embedded preliminary code for payment channels in the very first release of Bitcoin, and more recent protocol upgrades like CheckLockTimeVerify have further enabled this usecase. Bitcoin platforms could negotiate and implement these smart contracts on the blockchain today.

What Moonbeam aims to do is facilitate the creation of these channels between major payment platforms by using the Domain Name System (DNS) to route communications related to creating and using these channels. This way, high volume platforms can easily discover one another and enter into a payment channel smart contact using the standardized Moonbeam terms. Using the Moonbeam protocol, this process can happen automatically when it is more efficient to open a channel than sending payments on-chain.

Trust

The Moonbeam project overview indicates that it is “semi-decentralized.” It is labeled as such because while the Moonbeam network does not require platforms to trust one another, it does require users to trust their platforms. A hosted wallet with a Moonbeam address is a custodial account, where the platform is managing the funds, and credits and debits user accounts accordingly as users send and receive transactions. Exchanges such as Coinbase operate in this manner; users do not directly control their private keys. Moonbeam can be a useful tool for these services, but it will likely not be a suitable scaling solution for users who prefer to manage their own private keys.

Other Downsides

The Moonbeam specification document also mentions several other potential downsides. Among them is the cost of capital. In order to open these channels, sending platforms must commit capital in the form of bitcoin for a period of time. If the receiver does not use the channel, the sending platform must wait until timeout to regain control of the funds, entailing potentially large financing costs.

Another risk involves the use of DNS. DNS hijacking is an attack that involves rerouting domain name requests to an attacker’s server. These attacks could be used to receive payments over new channels that were meant for the authentic server.

While Moonbeam does not offer the level of decentralization of the lightning network, the fact that it does not require any fork to the network may may make it an attractive solution to Bitcoin’s scaling troubles in the short term. It could be implemented by hosted wallet providers as soon as the project is production ready.

The current state of Moonbeam can be found on the project’s Github.

Luno was not available for comment for this article.

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Samson Mow Introduces Liquid Networks at Blockchain Forum in Canada

Samson Mow Introduces Liquid Networks' at Blockchain Forum in Canada

Blockstream’s Samson Mow and Paycase’s Joseph Weinberg unveiled the Liquid network yesterday at the Blockchain Association of Canada’s Government Forum in Ottawa, as a step forward in the ongoing Bitcoin scaling debate.

The Liquid network is a federated sidechain designed to provide new features and benefits to exchanges, users, and businesses by leveraging a sidechain which will process transactions more quickly and efficiently than the main Bitcoin blockchain.

Sidechains like Liquid Networks offer automated real-time audit, a secure open protocol, and unforgeable secure tokens, all of which can be used over the open internet.

Samson Mow, Chief Strategy Officer with Blockstream told Bitcoin Magazine:

“There’s a preference from some people to scale on-chain with block size increases, but that’s a technical dead-end. Scaling off-chain with sidechains means leveraging proven technology that’s already available, and will be far superior to static blocksize increases for trivial on-chain scaling gains.”

Mow explained:

“Sidechains allow for new innovations in security models and features, plus the added benefit of faster and more cost efficient transactions – if more businesses were utilizing sidechains for use cases involving recurring transactions, they would take some pressure off the main Bitcoin blockchain.”

He noted that there are strong indications that cryptographic federations and sidechains in general are a good solution to better distribute networks that currently hold the potential for centralized systemic risk.

“In the case of Liquid, it will also improve bitcoin interchange liquidity, and accelerate trading and security for a large percent of today’s global and currency-paired BTC trading,” added Mow.

Mow explained that Liquid Networks or “Liquid” represents a point-to-point sidechain that provides near-instant, secure transfer of assets (bitcoin initially), all while user and exchange environments remain separate from the movement of the underlying value.

Paycase CEO Joseph Weinberg told the audience that they have been working with users, enterprises, financial institutions and others on solutions that leverage strong federations.

Weinberg told Bitcoin Magazine:

“Sidechains become even more interesting when you have multiple sidechains from an interoperability perspective. As you tokenize the world, you see this marketplace of all assets being liquefied and then rapidly traversed, similar to how currents move liquid water around the world.

“It’s this frictionless flow and interoperability that our economy here in Canada and our geo-political and economic partners around the world are really well positioned to adopt and champion into the mainstream.”

Samson Mow Introduces Liquid Networks' at Blockchain Forum in Canada

Strong Federations and Sidechains

In order to function, a Liquid Network requires explicit trust of a group of parties, governance guarantees whereby you have rule adherence and a network of many participants responsible for network consensus.

While accelerating trading in bitcoin, this system will build an infrastructure that leads to a “trustless” exchange for users.

Best use cases include cryptographic assets, central bank currency issuance, land titles/registries, credit issuance and settlement between large institutions.

Mow noted that what Lightning Networks can do for smaller transactions, the Liquid Network can do for larger transactions between companies and exchanges.

Currently, Liquid Beta participants include Bitso, Bitfinex, Bitt, BTCC, Coins.ph, Streami, Paycase, The Rock Trading, Unocoin and Zaif. Discussions continue with other partners.

Bank of Canada Is Interested in Liquid Networks

While in Ottawa, Mow and Weinberg met with representatives from the central Bank of Canada. Weinberg told us:

“We met with the Bank of Canada and had some great discussions with them about blockchain technology, and use cases and systems like Paycase’s cross-border transaction platform Traverse and Blockstream’s Elements platform.

“There is a sense that the media misrepresented the Bank’s recent comments on the Jasper experiment, which was actually a well-balanced and accurate assessment of the technologies they’ve trialed to date. I think they’re still very much interested in evaluating blockchain technology.”

Weinberg added: “We are also working on other sidechain initiatives that leverage strong federations and confidential assets via the elements project both in Canada and globally that require multi-participant governance guarantees and explicit trust.”

He added that they are excited going forward, not just about Liquid Networks but the whole interoperation and weaving of different technology stacks in the ecosystem to enable new use cases and leverage all the great layers of the blockchain stack that are being built around the world.

The post Samson Mow Introduces Liquid Networks at Blockchain Forum in Canada appeared first on Bitcoin Magazine.

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Op Ed: Here’s Why All Rational Miners Will Activate SegWit Though BIP148

This Is BIP148’s Asymmetric Advantage, or How Game Theory Should Prevent a Split

A segment of the Bitcoin community is preparing a user activated soft fork (UASF), using Bitcoin Improvement Proposal 148 (BIP148). If they go through with it, there could be two types of “Bitcoin” on and after August 1st, which this article will refer to as “148BTC” for the BIP148 side of the split, and “LegacyBTC” for the non-BIP148 side.

At time of the split, 148BTC nodes will no longer recognise the LegacyBTC chain as valid — no matter how much hash power mines on this chain. 148BTC would basically just be its own coin.

But the opposite is not true. Because BIP148 is a backwards compatible soft fork, LegacyBTC nodes will recognise the 148BTC chain as valid if it ever becomes the longest chain (that is, most total proof of work). Once this happens, the entire LegacyBTC chain since the point of split would be “re-orged” away: it would disappear. Then only the 148BTC chain will be left, which this article will refer to as “UnifiedBTC.”

What follows is an examination of the scenario of the BIP148 soft fork under a set of four starting assumptions. And: and an explanation of why the game theoretical implications of this scenario suggest that rational miners will activate SegWit through this soft fork.

The Starting Assumptions

This is not the type of article that examines all possible scenarios of the BIP148 UASF. These scenarios are plentiful and as varied as the human imagination.

Instead, this article takes four presumably reasonable starting assumptions and draws the single most likely scenario from there.

These starting assumptions are:

1) BIP148 does get activated, and at least some hash power is attributed to 148BTC no matter what. Or, more specifically, enough hash power is dedicated to this chain to eventually reach the point where mining difficulty is re-adjusted to normal, two-week levels. This is a strong commitment, but keep in mind that almost any amount of hash power would eventually reach this point, while producing hash power becomes cheaper over time.

2) All else being equal, the market would value 148BTC (or UnifiedBTC) more than or equal to LegacyBTC. In other words, if hash power, re-org risks, or related considerations played no part, the market would prefer a bitcoin that has SegWit activated through BIP148 over a bitcoin that does not. Or at least, the market wouldn’t mind it if a bitcoin had SegWit activated through BIP148, and would value it equally to a bitcoin that does not. (This includes a bitcoin that has SegWit activated through a different activation method later on.)

3) Both the market and at least a majority of miners (by hash power) behave in a rational, profit-maximizing way and have sufficient information to do so.

4) There is no hard fork, counter soft-fork, checkpoint or anything like that on the LegacyBTC side of the split. This would equate the creation of a new coin, and just make it so that users and miners can pick and choose as they would among altcoins. That being said, even in most of these cases the game theory described in this article still holds up. (Notably, Bitmain’s claimed “contingency plan” would ensure that it holds up stronger.)

Interestingly, not all of these starting assumptions even need to be true. In the style of a Keynesian beauty contest, it’s actually enough if a majority of miners (by hash power) thinks they are true, or if they think that other miners think they are true, or if they think that other miners think that other miners think they are true… and so on.

It should also be noted that this article omits some nuance; for example, regarding potential hash power attacks, fee levels on different chains, pruned nodes, a possible AsicBoost advantage, or developer support. While all this may skew miners’ behavior to some extent, none of it should fundamentally change the dynamic described here.

The Market’s Options

More than anything else, bitcoin gains value from holders: the people and entities that accept bitcoin in trade and hold on to it as a store of value. This also includes miners after they’ve mined new bitcoins and hold on to them, which Bitcoin’s protocol rule forces them to do for at least 100 blocks after the coins have been mined.

Once the UASF is activated on August 1st, all holders will have a choice of three options:

1) 148BTC or UnifiedBTC

2) LegacyBTC or nothing

3) Both 1 and 2

Option 3 will mostly represent holders who don’t send or receive any coins until the situation is resolved. This has no bearing on the game theory of a BIP148 coin-split, so we’ll ignore this option.

The other two options, 1 and 2, may seem strange to you. You may have thought that there will simply be a choice between LegacyBTC and 148BTC in much the same way the Ethereum split simply resulted in a choice between ETH and ETC. But that’s not the case.

This is because if you choose to hold 148BTC, should a re-org happen at any time in the future, you will instead be holding UnifiedBTC.

On the other hand, if you choose to hold LegacyBTC, should a re-org happen, you’d find yourself holding nothing at all.

So holders really have the option between “batches” — not just two types of bitcoins that happen to exist at a specific point in time.

‘148BTC or UnifiedBTC’

When BIP148 activates, under the stated assumption, at least some hash power will be attributed to 148BTC. This could be very low compared to LegacyBTC: perhaps 10 percent, perhaps 1 percent, or perhaps even less. But no matter how low the hash power is, 148BTC will then “exist.”

Now remember that, all else being equal, 148BTC — or UnifiedBTC — should be worth more than LegacyBTC, or at least as much. The market will prefer a bitcoin that has SegWit activated through BIP148 over a bitcoin that does not.

From a pure, trading perspective, then, it’s easy to see why it will make sense to invest in 148BTC at any price lower than (or equal to) LegacyBTC, especially if you’re buying 148BTC with LegacyBTC. If 148BTC trades at a mere percentage of LegacyBTC’s exchange rate, it could potentially offer a 100x return on investment.

Of course, in reality, not all things are likely to be equal. Most importantly, 148BTC may find itself with much less hash power support, which will result in lower utility (slow confirmation times) and lower security (cheaper to perform 51%-attacks).

Nevertheless, keep in mind that this means that low hash power is the main reason why this investment case may not hold up.

Hash Power and Value

In a normal situation, where miners act as rational profit-maximizing entities, hash power tends to follow price. Miners want to make as much money per hash as possible, so they mine the most profitable coin. If a coin gains in value, more miners will point their machines to this coin. When a coin loses value, miners will increasingly switch to another coin or turn their machines off completely. This is clearly seen in the altcoin markets, for example.

However, this coin-split scenario is not a normal situation. Under the stated assumptions, the main reason 148BTC won’t be valued as much as LegacyBTC, is that it may not have as much hash power.

But this means that an increase in hash power should also increase 148BTC’s price.

And that makes intuitive sense. If 148BTC goes from 0 percent of total hash power (between 148BTC and LegacyBTC) to 1 percent, it improves from “unusable” to “more than one set of transactions per day”: not unlike typical fiat transfers — just less of them. At 15 percent hash power, SegWit will activate before the timeout of November 15th, further increasing utility. And at 25 percent, LegacyBTC miners can no longer 51%-attack the 148BTC chain without re-orging the LegacyBTC chain away. Increased hash power would likely increase 148BTC’s price.

Moreover, with only 51 percent of total hash power, 148BTC turns into UnifiedBTC and will therefore account for 100 percent of total value. This suggests that a single percentage of hash power increase would, on average, increase 148BTC’s price by more than a percent.

And the opposite is just as true.

If LegacyBTC ever drops a single percentage from 50 percent of total hash power to 49 percent, it will (eventually) turn into “nothing,” and its value will drop significantly: to zero. By extension, if LegacyBTC ever decreases from 51 percent to 50 percent of total hash power, it should increase the risk of this scenario playing out, which should also decrease its price. And that should also be true for any hash power decrease.

This is important because it flips the normal situation, where hash power mainly follows price, on its head. For 148BTC, increased hash power should further increase price. While for LegacyBTC, decreased hash power should further decrease price.

Game Theory: A Primer

The basic idea behind game theory is that rational players in a game can anticipate the moves of other rational players and make the best mathematical decisions accordingly.

As a simple example, let’s say Alice auctions off a dollar to Bob and Carol. (And for those well-versed in game theory, don’t confuse this example with the better-known and paradoxical dollar auction; we’re keeping it simple here.)

Bob is first to bid, and could bid 1 cent to win a grand total of 99 cents. But of course, Carol could then outbid Bob for 2 cents. Then Bob and Carol could go through the motions of bidding 3 cents, 4 cents, 5 cents… up until one of them bids 99 cents. It makes no sense to bid a dollar for a dollar, while it always makes sense to outbid your opponent up until 99 cents, so 1 cent profit is the maximum each can win.

Now, if Bob and Carol are both rational, they both already know they could win the maximum if they’d just bid 99 cents straight away: they know that’s what they should do if they want to win the maximum. Moreover, if Bob gets to act first, and he knows that rational Carol will bid 99 cents on her first turn, Bob definitely needs to bid 99 cents, or he’ll lose out on his cent.

The important takeaway is that because Bob can anticipate the outcome of a bidding race, and assumes Carol can too, there would be no bidding race. Bob would end the auction with one bid.

BIP148’s Game Theory

Not unlike Bob and Carol in Alice’s auction, rational bitcoin miners can anticipate how other rational bitcoin miners as well as rational bitcoin markets will act after the BIP148 split … in order to prevent a split.

Let’s say the market initially expects 148BTC to gain only 1 percent of total hash power. 148BTC currently doesn’t exist yet, so that would basically be an increase from zero to one.

Now, remember that for 148BTC, increased hash power further increases price, while for LegacyBTC, decreased hash power further decreases price. So if one percent of total hash power were to mine 148BTC, the market should (eventually) push the price of 148BTC higher than 1 percent of the total. Meanwhile, the market should also (eventually) push the price of LegacyBTC down to below 99 percent of the total.

But of course, if the market now expects 148BTC to (eventually) have more than 1 percent of total price, miners should also be expected to (eventually) dedicate more than 1 percent of total hash power to 148BTC, and less than 99 percent to LegacyBTC. After all, hash power also follows price. It always does.

And yet again, if the market expects 148BTC to (eventually) have more than 1 percent of total hash power, this should drive the expected price up even higher. And it should push the expected LegacyBTC price even lower.

As a result, we’re in a situation resembling Bob and Carol’s bidding race. 148BTC’s expected hash power increases 148BTC’s expected price … which increases expected hash power, which increases expected price. The exact opposite is true for LegacyBTC.

This can ultimately only lead to one conclusion. Both rational markets and rational miners should expect 148BTC to eventually be the only coin standing, as UnifiedBTC.

Now, if miners expect only UnifiedBTC to be left standing eventually, it is of course smart to switch from LegacyBTC to 148BTC before other miners do. And if all miners know that all miners know this, and all miners know that all miners know this, they have only one rational decision to make. Like Bob in Alice’s auction, miners should switch to 148BTC immediately.

Moreover, knowing that all rational miners would switch to 148BTC immediately makes it even more irrational for any individual miner not to switch immediately. He’d be wasting hash power on blocks that would be rejected — orphaned — by other miners.

That is, of course, if miners think the stated assumptions hold up.

Am I wrong? Feel free to let me know via email at aaron@bitcoinmagazine.com or on Twitter at @AaronvanW

The post Op Ed: Here’s Why All Rational Miners Will Activate SegWit Though BIP148 appeared first on Bitcoin Magazine.

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Bitmain Responds to UASF With Another Bitcoin Hard Fork Announcement

Bitmain announces hard fork to counter uasf

Major Bitcoin mining hardware producer Bitmain today announced that it may launch a “hard fork” in August. Labeled a “contingency plan,” this announcement is a response to the upcoming user activated hard soft fork (UASF), as defined by Bitcoin Improvement Proposal 148 (BIP148) — and the wipe-out risk that comes along with it.

After an initial 8 megabyte proposal, Bitcoin Classic, the Hong Kong roundtable consensus, Bitcoin Unlimited, and SegWit2x, this marks the sixth time the Chinese mining giant has announced support for a hard fork in the space of two years.

Here’s what their latest proposal looks like.

Hard Forks, Coin-Splits and Altcoins

On August 1st, a segment of the Bitcoin community will activate the BIP148 UASF. These users and miners will only accept Bitcoin blocks that signal support for Segregated Witness (SegWit), the protocol upgrade proposed by the Bitcoin Core development team. If, at that point, a majority of miners (by hash power) does not signal support for SegWit through BIP148, Bitcoin’s blockchain and currency could split in two, resulting in a coin-split.

Now, with Bitmain’s hard fork announcement, it seems there could be a third part to the split … sort of.

Bitmain refers to its announced hard fork as a “UAHF” or User Activated Hard Fork. While perhaps a clever play on UASF, this is not a very accurate term because the “contingency plan” will actually be very explicitly launched by Bitmain — and Bitmain alone.

Moreover, use of the term “hard fork” is questionable in this context as well. Originally, at least, the term referred to a change to the Bitcoin protocol that makes previously invalid blocks or transactions valid. But for it to be a change to Bitcoin’s protocol, at the very least it arguably requires the Bitcoin ecosystem to follow these new rules.

Under Bitmain’s own stated condition this wouldn’t be the case, at least not to the full extent. Rather, the “UAHF” will only be launched in response to a successful BIP148 UASF. It is thus more or less assumed that not everyone will adopt the new rules, which indeed seems likely. Technically, at least, Bitmain’s “hard fork” would be better described as the creation of an entirely new coin that shares a common history with Bitcoin.

For purposes of this article, Bitmain’s version of Bitcoin will therefore be called “Bitmain’s Bitcoin.”

Bitmain’s Bitcoin

So what. specifically, will Bitmain’s Bitcoin look like?

Bitmain announced it will create Bitmain’s Bitcoin exactly 12 hours and 20 minutes after the UASF activation, though this is configurable. At that specific point in time, under Bitmain’s new rules, a block must be included in the blockchain that’s bigger than one megabyte. This will automatically “split” the chain — or create a new chain depending on how you look at it. All existing full Bitcoin nodes would reject this block and ignore this chain, and would continue to follow the chain adhering to Bitcoin’s current consensus rules. 

From that point on, Bitmain will first mine on Bitmain’s Bitcoin chain privately for three days. After these three days, Bitmain will “officially” launch Bitmain’s Bitcoin to the public if three circumstances are met. 

First off, the BIP148 UASF must have been successful enough to have gained significant hash rate. Second, there must be strong market demand for Bitmain’s Bitcoin. And third, the non-BIP148 side of the split must be less than successful, comparatively.

Then, if launched, Bitmain’s Bitcoin will accept bigger blocks. The statement mentions an initial limit of up to 8 megabytes, though this is slightly ambiguous as the same blog post mentions there will be “no hard-coded consensus rule” at all. The hardware manufacturer does add that miners should impose a “soft limit” of less than 2 megabytes, which is really more like a recommendation. Additionally, Bitmain writes that there will be a new protocol limit on “sigops,” which, in short, should counter some potential attack vectors on bigger blocks that could otherwise significantly slow down propagation times. 

For the longer term, Bitmain lays out a “future roadmap” that includes a version of Segregated Witness, Extension Blocks, Bitcoin NG, Lumio, Schnorr signatures, Weak Blocks, and Bitcoin Unlimited-inspired base block size increases up to almost 17 megabytes in two years. Overall, this “future roadmap” part of the announcement does not seem very concrete yet, however. 

What This Means for You, and What This Means for Bitcoin 

The good news is that anyone who holds bitcoins (meaning: their private keys) at the time of a split will receive coins on both sides of the chain. In other words, you will get free “Bitmain bitcoins”, which you can keep, sell or spend as long as someone is willing to accept them as payment. Bitmain will even implement replay protection on Bitmain’s Bitcoin, which means that there should be no risk of accidentally spending the same (copied) coin on both chains.

From a broader Bitcoin and scaling perspective, the chances of BIP148’s success may have actually increased, due to this announcement. If Bitmain follows through on their blog post, it means the company will take hash power that could have otherwise frustrated the UASF “off the table,” to mine on Bitmain’s Bitcoin chain. As a result, there is a greater chance that BIP148 miners will claim the longest chain versus non-BIP148 miners, avoiding a coin-split on the original blockchain. Additionally, Bitmain’s blog post seems to have angered some Bitcoin users that were so far undecided, further increasing support for BIP148.

The other scaling proposal in the running is SegWit2x, which is also supported by Bitmain. SegWit2x code should, according to its timeline, be up and running before August 1st. If that deadline is met, it may or may not prevent a coin-split in the first place, depending on its compatibility with the BIP148 UASF. But since this proposal has been mostly developed in private, the status of this project — as well as its (in)compatibility with Bitmain’s “contingency plan” — remains largely unclear.

And of course, in the end, it’s possible that neither BIP148, nor SegWit2x, nor Bitmain’s Bitcoin will gain much traction. Status quo could prevail, in which case not much would change at all.

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