Posts from hacking finance

Multisig

A few days ago, I got an email from a reporter asking me this:

What is needed to help bring Bitcoin security and ease of use to mainstream Bitcoin users?

I was in a hurry, trying to get through my email, and wrote back this:

i think wider use of multisig would be a good thing

Mutisig is a technology that was added to the Bitcoin protocol in 2011 and 2012. This article on Multisig by Vitalik Buterin is a good description of the technology. This is from Vitalik’s article:

In a traditional Bitcoin account, you have Bitcoin addresses, where each address has one associated private key that grants the keyholder full control over the funds. With multisignature addresses, you can have a Bitcoin address with three associated private keys, such that you need any two of them to spend the funds. 

In principle this is a lot like the check-writing policies that many of our portfolio companies have. For checks below some number, say $5000, one signature is fine. But for checks above that number, two signatures are required.

Multisigned transactions are more secure. I would like to see more Bitcoin based systems implement multisig, as I explained to the reporter.

Yesterday our portfolio company Coinbase announced that their Vault service supports multisig. I use a Coinbase Vault and like to think of it as my “savings account” and I use it in combination with my primary Coinbase wallet, which I like to think of as my “checking account.” In addition to a Multisig Vault being more secure, it also allows the user to store their own private keys, something that has not been possible with the Coinbase wallet service. You can increase the number of required signatures from two of three to three of five. The latter service is great for family vaults or group vaults.

The reaction to Multisig Vault has been very good, as evidenced by this Hacker News thread. I particularly liked this comment:

the mere fact that a major Bitcoin exchange is allowing users to hold their own private keys really puts a smile on my face today.

It is completely unheard of in the financial industry (and usually technically impossible before cryptocurrencies) to have a bank give away their “middle man” access of people’s money and empowering their customers with complete control over their finances.

This is what Bitcoin is all about. Giving us control back over our money and taking it away from the financial institutions. It is not a coincidence that Bitcoin was invented in the wake of the financial crisis in 2008. But you can’t take control back from the financial institutions without providing trust and security. And multisig is a big part of that.

Sidechains

Earlier this year some entrepreneurs walked into our office and explained sidechains to us. I was pretty excited about the concept then and I continue to be excited about it. This past week some of the people who explained them to us and some other people I don’t know published a paper about sidechains called Enabling Blockchain Innovations with Pegged Sidechains. I think this is an important paper and everyone involved in bitcoin, blockchains, and cryptocurrencies should give it a read.

Here’s the basic idea in layman’s terms. I am purposely trying to dumb down and simplify the idea here.

1) The Bitcoin Blockchain is the most liquid blockchain, has the most mining on it, and is likely to remain that way given the network effects it has built up over the past five years.

2) The core Bitcoin system and software is not likely to change very much because making changes to it is risky and there is a lot of capital at stake on the Bitcoin blockchain now.

3) There are things you might want to do that are not well supported or not supported at all on the Bitcoin blockchain.

4) This desire for “other things you might want to do” has given rise to a ton of alternate blockchains, none of which have developed a lot of liquidity and mining on them.

5) So what if you created “sidechains” that are “pegged” to the Bitcoin blockchain that allow “other things you might want to do” while still leveraging the liquidity and mining of the Bitcoin blockchain?

That’s the basic idea and the paper I linked to explains how to do the “pegging” part which is critical to this whole idea working.

I believe that the core Bitcoin system and software will have to be modified to allow these “pegs” and I’m pretty sure (but not positive) that these changes have not yet been made.

It will be interesting to watch how all of this develops over the next year or two. If “pegs” are added to the core Bitcoin system and software, and if sidechains become popular and viable, then Bitcoin would essentially become the reserve currency of the entire cryptocurrency sector and there would be a host of sidechains and currencies that are pegged to it. This would allow a ton of innovation to happen around Bitcoin without requiring a lot of change to the underlying Bitcoin system. Which seems sort of ideal given how much money ($5bn at current prices) is at stake now.

Bitcoin Adoption Metrics

I said in yesterday’s post that price and volume charts were not what I look at when I think about Bitcoin. I mentioned Github repos, hackathons, and teams in accelerators working on bitcoin projects. This morning I came across an excellent slideshare on the state of the Bitcoin ecosystem. It had this slide in it.

These are the kind of metrics we need to be looking at to decide how Bitcoin is doing. And on these measures, I’d say 2014 has been a great year for Bitcoin.

bitcoin adoption metrics

I bumped into a friend of mine last night who said “all you write about is Bitcoin.” That may well be true. But I write about what I think about. So take that for what it is. I’m not going to apologize for my obsession with Bitcoin.

Bitcoin – Price and Promise

I’ve written a lot about Bitcoin. I’m a believer as I think it will be the transactional plumbing of the Internet and mobile and lots more in due course.

But the story right now is the sagging price of Bitcoin.

In full disclosure I’ve started buying it again after staying mostly on the sidelines for most of the past two years.

I have never owned much Bitcoin. I give away or spend what I buy. I am not a hoarder of Bitcoin. I don’t care about that aspect of Bitcoin, although many (most?) do. I care about it as programmable money.

But, of course, Bitcoin’s price is a function of its promise. Why own Bitcoin if it has no future?

So does a sagging price mean sagging promise?

In the long run, absolutely.

In the short run, not so much.

The market price of an asset in the short term is driven by emotion (greed vs fear), liquidity, technical factors, and a bunch of other things. Right now, those factors are driving down the price of Bitcoin. Last year they drove it up.

I continue to believe that the thing to watch is not the price chart, the volume chart, or any chart. The thing to look at is Github, Hackathons, Accelerators, and everywhere else that entrepreneurs and developers showcase their work. That’s where the future of Bitcoin and its promise will be determined. And right now, based on what I’m seeing, it’s future is very bright.

For another take on this same question, William Mougayar has a post up today on the same topic.

Video Of The Week: Fred Ehrsam’s Bitcoin Presentation

Someone posted this video in the comments a week or two ago. I watched it and liked it a lot. Fred Ehrsam, the co-founder of our portfolio company Coinbase, does a good job explaining what Bitcoin is and why it is important in ten minutes, no small feat.

In other Bitcoin news, the results of the AVC poll on Bitcoin ownership are in. 40% of AVC readers own Bitcoin, 60% do not.

bitcoin poll results

I purposely did not tweet out this pool as I only wanted regular readers of AVC to participate. I think if I had tweeted out a link with the headline “Do You Own Bitcoin?”, that would have skewed the results as Bitcoin fans would have poured in to vote.

The Bitcoin Hype Cycle

Most people are familiar with the Gartner Hype Cycle. It is a great framework for looking at the development of important technological innovations:

Hype-cycle

It is interesting to look at the price chart of Bitcoin in this context:

btc prices since jan 2012

It sure feels like we’ve been through the technology trigger phase, the inflated expectations phase, and are now well into the trough of disillusionment phase.

What’s more interesting is the question of what will lead us onto the slope of enlightenment? I am thinking that we will start to see native applications of Bitcoin. These would be things that simply could not exist without this technology. Donating money to charity with Bitcoin is awesome, and I do it regularly, but it is not a native application of Bitcoin.

I plan to write more about these native applications because I think they are the key to getting to the next phase in the Bitcoin adoption cycle.

Toshi

Our portfolio company Coinbase announced something yesterday that went largely unnoticed, but might be one of the most important things to happen in the Bitcoin space in a while.

They put out a bunch of developer tools under the name Toshi, including a full open source version of their Bitcoin node. When you combine Toshi with the core Bitcoin APIs it comes with and the Coinbase APIs, you get a platform for building Bitcoin applications that is unmatched in the market.

The reality is building on top of the Bitcoin Core is not a simple task. There is a lot you need to do to make it work. Coinbase has been building on top of the Bitcoin Core for over two years and has addressed many (most?) of the obvious needs and they are now making all of that technology available to developers who want to build Bitcoin applications but don’t want to get knee deep in the Bitcoin Core.

There is a free hosted version of Toshi, you can download and run Toshi on your own servers, or you deploy Toshi to Heroku with just one click.

If you are building Bitcoin applications or thinking about it, check out Toshi. I think making Bitcoin easier for developers is a big thing and I’m pleased to see Coinbase doing exactly that.

Bitcoin and Taxes

If you had read Satoshi’s white paper back in October 2008, you would have said “there is no way this can work.” There were literally hundreds of reasons Bitcoin could not and would not emerge as a new form of money.

Coming up on six years later, Bitcoin has overcome many of those issues and every day looks more and more like some form of financial value. What remains unclear, though, is if Bitcoin will predominantly be a store of value (like gold) or a medium of exchange (like the dollar), or both (the best case for Bitcoin bulls).

And one important factor in determining what happens with Bitcoin is taxation policy.

In the US, the IRS has issued guidance that places Bitcoin very much in the store of value column. The IRS has said that in their eyes Bitcoin is “property” and will be treated like stocks and bonds for tax purposes. In some ways this is good as the IRS is treating Bitcoin seriously and telling everyone how to report Bitcoin transactions to them. That’s progress. But sadly, treating Bitcoin as property makes it less likely that Bitcoin will become a medium of exchange in the US. That’s because consumers and business don’t normally transact in property. It would be a massive pain to keep track of “cost basis” and “sale price” for every dollar you received and parted with in the course of a day, week, or month. The good news is that because Bitcoin is “programmable money”, it is possible to do this programmatically for consumers and the companies providing payment infrastructure for Bitcoin are slowly but surely doing just that. However, in the long run, it would be much better for the IRS to treat Bitcoin as a currency, and my hope is they will do that as soon as possible.

An even more problematic issue for Bitcoin is VAT tax policy in countries where that is the norm. Right now, Canada is considering applying VAT tax to the purchase of Bitcoin. VAT can be as high as 15% in Canada, so that would mean every purchase of Bitcoin would cost up to 15% more than the current market price. And then when you turn around and purchase something with Bitcoin (as I did yesterday with seats for Tuesday night’s Met game), you would be taxed another up to 15% on that transaction. That’s double taxation which, in my mind, is always terrible tax policy. If Canada goes with this approach, it is my view that Bitcoin as a medium of exchange in Canada is a non-starter.

It is also true that VAT tax on the purchase of Bitcoin would be problematic for the store of value use case. Most investors aren’t going to pay a tax of up to 15% on the acquisition of investment property (like stocks and bonds). So why would they do that with Bitcoin?

The UK went down this path with Bitcoin and VAT last year and then, after careful consideration, the HMRC decided that VAT would not apply to Bitcoin acquisition, but VAT would be applied when Bitcoin was used to purchase goods and services, just like the British Pound.

If we had to pick a country that has taken the most thoughtful and helpful policy toward Bitcoin, it would be the UK. In fact, last week the Chancellor of the Exchequer announced an effort to make the UK the leading center of Bitcoin innovation in the world. That’s forward thinking. That’s what the US and Canada should be doing. But they aren’t. Instead they are stifling innovation in and around Bitcoin with their taxation and other policy initiatives.

I am sure many policy makers would prefer to see the Bitcoin genie put back in the bottle. But that’s not going to happen. Not only is Bitcoin alive and well, it is a global phenomenon, so even if you stifle it in your country, it can and will grow and thrive in other parts of the world. And so you are eventually going to have to deal with Bitcoin, what it means, and what it enables.

It is my view that treating Bitcoin like a currency is the most helpful approach. That will allow Bitcoin to find its best use cases without overly burdensome taxation and other regulatory requirements. I’m very pleased that the UK has found it’s way there and my hope is other major economies like the US and Canada will follow suit as soon as possible.