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Cryptocurrency Is Just a Minor Threat to the State- CoinDesk

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Are cryptocurrencies a new form of money and, if so, do they threaten state power?

Our friend Nic Carter has recently commented on these questions in dialogue with the Federal Reserve Bank of New York. We would like to add our perspective and thoughts on this, as we believe there is value to be derived from discussing these matters in depth. For better and worse, we believe that blockchains such as Bitcoin, Ethereum and Handshake (in which I am involved) have features that make them a novel threat to the powers that states derive from currency issuance — but only a very marginal threat. This fairly mild conclusion flows from more controversial premises.

Steven McKie is a founding partner and managing director at Amentum Capital, developer on HandyMiner and HandyBrowser for Handshake and host of the BlockChannel podcast. A version of this article first appeared on Amentum’s blog.

The New York Fed writers name three kinds of money: fiat money, money with intrinsic or commodity value and claim-backed money. Without getting lost in the weeds, we think this overcomplicates things. All money that we can think of falls into two categories: either it has intrinsic value (like edible grains) or it doesn’t. If it doesn’t, then its value comes from the supposition that someone else values it.

This mysterious “someone else” might be totally unspecified, as when we suppose someone will pay us for gold; or it might include a specific party, such as a state, that promises to take the money in exchange for, e.g., discharging tax obligations. Bitcoin, like gold in the post-gold-standard era, falls into the former category. It has no intrinsic value and nobody in particular has promised to exchange anything for it. We just guess that someone will.

But we should not be surprised that the world’s most popular kinds of money are the ones that states explicitly promise to honor. For states, such promises are an extremely important instrument of their power. For example, by only accepting dollars as tax payment, the United States obliges its hundreds of millions of people to make sure they have dollars handy. Because of this, everyone in the world knows they can sell their dollars to someone (i.e., to U.S. residents). Moreover, everyone knows that by accumulating dollars they gain certain leverage over the United States. This situation enables the United States to print its own money and in so doing, project its power around the world.

The power to print money also gives states another kind of power: It enables them to maximize their productivity. By increasing the money supply, they can pull more people on the margins of the economy into the productive process. But this comes at the cost of the scarcity of money and, because it puts the newly minted money directly into the pockets of the less-powerful, tends to decrease the power of those who have already accumulated a lot of money. Hence, artificial constraints of the money supply, like the gold standard, are often associated with extremely conservative politics. Constraining the money supply hurts productivity, but it preserves social hierarchies.

This is where the more benign hopes of transcending nation-states mix with the darker fantasies of so-called bitcoin maximalists. On the one hand, a meaningful alternative to national currencies could allow people in abusive regimes not to rely on their governments’ worthless “promises.” On the other hand, a mechanistically fixed supply of money could put an unequal social hierarchy beyond the reach of democratic power, as the gold standard once did.

Read more: Trump’s Security Hawks Call Distributed Ledgers ‘Critical’ in US-China Tech Arms Race

Bitcoin, in this respect, is very much like gold. And like gold, it poses no active threat to state currencies or state power. For the value of state currencies – as described above – is predicated upon the actual, practical power of states. Throughout modern history, the preeminent reserve currency has been the coin of the world’s preeminent military power. Only if states lose their status as the main global powers are their currencies likely to follow suit.

Cryptocurrencies are only playing around the margins of this reality. Still, they can play an interesting role because they have features that prior non-state currencies did not. For example, they can facilitate coordination and communication between their holders. Imagine if all the holders of gold could, for example, vote on whether to mine more. Moreover, some cryptocurrencies have intrinsic value, such as ether (paying for the use of a distributed network), or HNS (paying for domain names on a decentralized registry).

Improved diplomacy through incentives

The ongoing improvements in global cooperation that happen in the bitcoin/crypto private sector derive from the many players that ensure a proof-of-work (PoW) system remains secure.

The intricacies that go into the production of hashrate, such as power and chipmaker pricing negotiation, manufacturing, international sales and marketing, mining pools and hashpower secondary markets. All are playing a piece in hardening relationships locally and internationally.

Therefore, a properly secured chain has then worked its way into regional regulations and labor, becoming a localized economic staple over time as it approaches scale. And, the second-order effects that come from that embedded chain of incentives include a public blockchain that is secure, not just technically but socially and politically. The most secure chains possessing such widespread economies of scale become powerful economic instruments of finance and political social progress (albeit slowly, but each new major public chain hastens this emergent process, thankfully).

In essence, though these systems may at first seem adversarial to state power by their very design, if you look more closely you’ll see they inherently (slowly) improve diplomacy via scalable trustless cooperation and international business over time.

To understand more on the “alchemy of PoW hashpower” and how it naturally derives incentives for international business cooperation, see this ongoing series from Anicca Research. The trustless systems we deploy globally have powerful consequences, and it’s important that we as an industry understand how to continually scale the positive aspects of decentralized monetary systems, without amplifying the negative effects such as centralized financial influence.

States are not wrong to be somewhat threatened by these hard-to-assess possibilities. If many people decide they would rather hold cryptocurrencies than state-backed currencies, it will diminish states’ abilities to project power through their coins.

Read more: The Crypto-Dollar Surge and the American Opportunity

But states still have the armies, the police and – on a good day anyway – democratic legitimacy. All of that still matters, and will for a long time.



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Ethereum Classic’s MESS Solution Won’t Provide ‘Robust’ Security Against 51% Attacks: Report

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A solution being implemented to safeguard against so-called 51% attacks on the Ethereum Classic (ETC) network may not be as secure as other alternatives, according to a new analysis.

This summer, the ETC blockchain suffered three such attacks in a month. Soon after, ETC Labs – leading organization supporting the network – announced it would roll out the Modified Exponential Subjective Scoring (MESS) solution as an “innovative and low-risk” means to mitigate the risk of future 51% attacks.

But, according to a report from the ETC Cooperative and Cardano developer IOHK on Tuesday, an analysis concluded that “the ‘MESS’ solution will not provide “robust security” and there’s “no guarantee that further attacks will not succeed.”

Further, MESS doesn’t provide “high confidence for stakeholders to reduce confirmation times to desirable levels,” the report reads.

A 51% attack occurs when a nefarious actor gains the majority of a network’s computing power, allowing them to carry out a reorganization (“reorg”) of blocks on the chain and potentially double-spend transactions.

MESS is designed to make large block reorgs up to 31 times more costly, in theory negating any profit motive behind 51% attacks.

The firms looked at various solutions proposed by developer teams from across the ETC community for the analysis, and said checkpointing and timestamping solutions would provide superior security.

According to the report, timestamping enables ETC to base its security off another secure blockchain such as Bitcoin.

Meanwhile, checkpointing occurs when a “trusted authority” chooses a block to become the canonical chain all participants must follow, and cannot be later “dropped or reverted.”

ETC Co-op Executive Director Bob Summerwill said he hoped the report was the “first step” toward centralized decision making among ETC’s leadership, “allowing technical and other ecosystem proposals to be essentially peer-reviewed, improving them, and ensuring they are sound.”

The report also suggested the implementation of a “decentralized treasury,” providing an ongoing source of funding for the future development of the ETC platform.

“A democratic and transparent funding mechanism will also allow the ETC community to determine its future direction by allowing it to choose which innovations are incorporated into the ETC product offering,” it reads.

This, the report claimed, would ultimately allow ETC to “keep pace with and exceed the capabilities of other platforms.”



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O(1) Labs Raises $10.9M More for Lightweight Mina Protocol

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O(1) Labs’ lightweight blockchain project Mina, formerly known as Coda Protocol, has raised $10.9 million in a funding round co-led by Hong Kong-based Bixin Ventures and Singapore-based Three Arrows Capital.

Mina was set for mainnet launch in Q4 but O(1) Labs CEO Evan Shapiro told CoinDesk it has been delayed to early next year because “launching a blockchain near the holiday season is never a good idea.”

Mina’s lightweight design – it only takes 22 kb to store a copy of the Coda blockchain thanks to its reliance on zk-SNARKs – is meant to foster widespread adoption.

“Mina addresses the failure of legacy blockchains like Bitcoin and Ethereum which, over time, pushes users out of participation,” Shapiro said.

Before launching on mainnet, Mina aims to finish its adversarial testnet with over 1,000 unique participants by the end of the year.

O(1) Labs previously raised a $3.5 million seed round in May 2018, followed by a $15 million Series A in April 2019 from leading investors including Polychain, Paradigm and Coinbase Ventures.

“Mina presents a lightweight layer-one blockchain solution to the cryptographic trilemma of decentralization, scale, and security,” Three Arrows Capital co-founder Kyle Davis said in a statement. “As daily blockchain users ourselves, we are particularly excited to support the Mina team and ecosystem.”



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Ketsal Proposes Toolkit for Measuring ‘Decentralization’

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A New York law firm is trying to test blockchain projects’ decentralization claims against their perhaps not-quite-so-distributed realities.

Called the “Ketsal Open Standards” rubric, the toolkit, developed by the Ketsal law firm and revealed exclusively to CoinDesk, proposes using hard, measurable data points to either bolster or burst a blockchain’s decentralized credentials. 

It’s the latest contribution to a long-raging debate in crypto: when, and how, is something truly decentralized? 

Finding that key, said toolkit co-creator and Ketsal partner Josh Garcia, can help investors, security researchers and even securities regulators root out blockchain projects’ sometimes bogus claims.

“It’s a tool to push along an informed discussion on what you’re talking about when you’re saying, ‘my network is decentralized.’”

“Now you can push back” with evidence the assertion is demonstrably false, he said.

Garcia and co-author Jenny Leung’s Open Standards is hardly the first decentralization measurement toolkit. But a review by CoinDesk shows it to be one of the most robust. 

See also: To Get Serious About Decentralization, We Need to Measure It

Thirty-three data points probe the hard facts behind blockchain decentralization. Many are obvious. For example, the focus network’s node count – a decentralized network should have plenty – and its underlying code’s licensure status – open source or bust – are clear benchmarks.

But others appear to be more novel. Ketsal’s framework proposes weighing the network’s GitHub statistics, measuring inter-node communication times, determining how large a stake of the cryptocurrency rests in wallets (and with the big-investing whales) – and even the theoretical cost of mounting a 51% attack, among others. 

Compiling these statistics can help researchers better understand a blockchain’s in-the-moment distribution even if reaching an up-down verdict on its decentralization is impossible, said Garcia.

“It’s not an answer to the question, ‘What is decentralization,’ but it’s a way to find that answer,” he said. “If people can decide whether or not some of these metrics are valid,” they can use their chosen set to test for the type of decentralization they’re looking at.

Providing a broad selection of diverse metrics is critical, he said, because of the political, computational and economic analysts searching for a “decentralization” particular to them. A securities regulator concerned with the Howey Test would likely choose different data points than a security researcher probing the network for holes. 

Read more: Coinbase-Led Crypto Ratings Council Plans Transparency Boost as New Members Join

But different analysts also might hone in on similar points. For one, mining power concentration, or the concentration of miners whose computational efforts cryptographically secure proof-of-work blockchains, is a critical benchmark for any decentralization hawk.

If all the key miners are geographically concentrated or grouped into a single pool, a blockchain may face mounting centralization and security risks, according to Ketsal. Just four pools mined 58% of Bitcoin blocks in the past year, the rubric shows. 

Garcia said his team spent months compiling all the relevant data points from the world’s best-known blockchain network. Bitcoin’s resilience as well as the consensus agreement that it is decentralized make it an ideal case study, and Garcia said it’s the obvious benchmark to hold other projects against.

“If you do the same exact chart for another blockchain network, and you compare it side by side to Bitcoin … you know how far off you are from [decentralization]” he said. 

Read the Open Standards whitepaper and rubric:



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