Robert Herian, The Open University

The UK chancellor’s recent Budget reminded us that systemic problems continue to plague the government’s delayed roll-out of universal credit – a single monthly welfare payment that will replace six separate benefits. Philip Hammond also spoke of the UK government’s commitment to innovation, with the chancellor calling for a new tech startup to be founded in Britain every half hour.

Put the two together and what do you get? Govcoin.

You probably haven’t heard of Govcoin because the government has been very discrete about trials of the technology, which began last year.

It’s the brainchild of a London-based tech startup of the same name, led by mathematician, former financier and entrepreneur Robert Kay. Govcoin, intent on “disrupting” welfare state provision, has been working with the Department for Work and Pensions (DWP) since early 2016 to develop a blockchain solution for welfare payments. So how does it work?

Virtual jam jars

Govcoin aims to virtually mimic the jam-jar method which, according to the Money Advice Service, is a good way to manage your savings. The aim of Govcoin is to use this traditional method in the virtual environment of a mobile phone app to give claimants instant access to benefits and avoid delays in payment processing.

“Claimants can – voluntarily – download an app, which enables them to create virtual jam jars and apportion money to them. Whether that’s ‘rent’, ‘gas and electric’ – it’s entirely up to them,” said Kay in an interview with City AM last autumn.

“People who are on the fringes of financial inclusion,” he added, “or who are financially excluded, need a special service which can give them instant access to their benefits – three days going through the banking system may mean using a payday lender, or being thrown out of your house.”

Given the recent and ongoing problems faced by government over slipping deadlines for the deployment of universal credit, as well as concerns that delays in payments could lead to an increase of cases of homelessness, Govcoin must sound like music to the ears of ministers. But isn’t it simply a proposal for the wholesale privatisation of welfare distribution – a proposal legitimised by the government’s wider commitment to unfettered tech innovation?

Future markets in welfare provision

Kay claims Govcoin will financially empower benefit claimants. But its distribution model involves benefits being paid – not in pounds and pence – but in the form of a cryptocurrency similar to Bitcoin. Govcoin promises to allow claimants to pay for goods and services – such as utilities – linked to the system.

This is significant because, unlike Sterling, cryptocurrencies in the form of coins or tokens transacted on a blockchain can harbour additional and potentially valuable data regarding the person “spending” it. This data can then be used to create new markets in goods and services, or what Adam Greenfield refers to in his book, Radical Technologies, as “ever-tighter loops of response to desire”.

Using benefit claimants’ data in this way is highly cynical. Far from empowering individuals, it offers up seriously vulnerable people to the forces of commercial opportunism.

This might appear unreasonably speculative on my part and there have been “categorical assurances” made by the government that it won’t be used to monitor the activities of claimants. What is more, according to Kay, “the DWP has no access to the application or the data” held by Govcoin.

But I’m not sure government or the state ought to be the concern here, given how clear Kay has been about the commercial opportunities offered by the technology in this sector.

Govcoin aims to monetise the project through a network of merchants. However, it doesn’t end there. “We also haven’t looked at advertising opportunities yet, but clearly they exist,” Kay said.

Just because the DWP – we’re told – won’t have access to the data, doesn’t mean the data will evaporate. Quite the opposite in fact when the immutable recording of information and data that blockchain provides is taken into account.

The technology might in this sense be considered “disruptive” – insofar as that term has any real meaning in the context of political economy, as I have argued elsewhere. But not in any way that can or should be considered good, fair or even reasonable.

If the cost of disrupting welfare provision in order to satisfy desires for innovation involves the cynical exploitation of vulnerable people for commercial gain, then it is not a cost worth paying.

Great opportunities ahead of us?

Govcoin is yet to be implemented and it’s uncertain if the DWP plans to move it beyond small-scale trials. If Hammond’s Budget speech is to be believed, the tantalising opportunity of a tech “solution” to the problems of universal credit may be too tempting for the government to overlook.

Conservative peer Lord Henley, who is a government spokesman on the Govcoin experiment, said in March 2017: “There is no next trial planned at this stage.” More recently, during a upper chamber debate on the “Fourth Industrial Revolution” – in which blockchain is viewed as playing a key role – Henley failed to mention Govcoin by name.

A feeble response was elicited from Henley, following an enthusiastic comment made by fellow Tory peer Lord Holmes, who – hinting at the subject – said: “There are some excellent initiatives in various departments, not least the use of blockchain in the Department for Work and Pensions to greatly empower benefits recipients.”

Henley replied: “My noble friend is right to say that there are great opportunities ahead of us.”

The government may be backing tech innovation, but it doesn’t mean companies such as Govcoin should have a free pass into the heart of civic life. Ironically, the dream for some who backed the technology from the start was that cryptocurrencies and blockchain would mean less government interference – not more.

Robert Herian, Lecturer in Law, The Open University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Victoria Lemieux, University of British Columbia

Blockchain is an emergent technology that may be as transformative as the internet, according to many predictions. But this innovative new technology has a surprising link to the days of medieval treasuries.

Blockchain is a distributed ledger that uses cryptography — mathematical code — to chain together records of transactions in a tamper-resistant and transparent manner. It is being used as an alternative or replacement for national currencies, contracts, internet device authentication and more.

This form of record-keeping, though technologically novel in the digital era, is not so new after all. Historian M.T. Clanchy tells us that it existed in the medieval era, during the transition from oral to written forms of memorialization. At that time, symbolic objects played a crucial role in providing evidence of transactions, rights and entitlements.

I’ve been researching how governments and businesses around the world are either planning for or already piloting the use of blockchain for record-keeping. The goal of my research is to determine what these applications of the technology actually do — as opposed to what the marketing hype says they do.

I’ve been to Estonia to study how the government there is using distributed ledger technology to protect the integrity of citizens’ medical records. I’ve been to Sweden to discuss how its land registry is testing blockchain to record the transfer of land ownership. I’ve reviewed proposed blockchain systems for land title registration in Honduras, new pilot implementations for land transaction records in Brazil. And I’ve spoken with innumerable new ventures looking to transform record-keeping with blockchain technology.

Three patterns for blockchain records

From this research, I’ve noticed three specific design patterns for blockchain record-keeping, which need explanation to understand how blockchain relates to medieval practices. I have classified these categories as mirror, digital record and tokenized systems.

The first of these design patterns is what I call the “mirror” type system. I characterize this type of system as being the most similar to current centralized record-keeping.

In these types of systems — be they for medical records, land titles, public archives or some other kind of records — digital records are neither created nor kept “on chain,” despite some claims by blockchain companies to the contrary. Instead, a kind of digital fingerprint of the records in the form of a 256-bit random number, known as a “hash,” is entered into the blockchain.

The purpose of recording this digital fingerprint in the blockchain is to protect the integrity of the records and be able to detect if they were tampered with. To prove that the records are tamper-free, the original digital records must be preserved in off-chain trustworthy digital repositories alongside preservation of their hashes in the blockchain.

Proving integrity of the records involves matching the hash of the record you want to validate with its digital fingerprint on the blockchain. If the hashes match, then the record you hold has not been altered.

Digital records

The second type of approach I’ve noticed is one that I call the “digital records” design pattern. In this type of system, new digital records are actually created within the blockchain itself, primarily by using smart-contracts.

Smart-contracts are computer programs that instruct the blockchain when to carry out a transaction, such as sending funds from one user to another. In these types of systems, the text of records is no longer in natural language that people can read. It is written in computer code for machines to read.

The rise of the smart contract raises a number of challenging and currently unanswered questions, such as what to do in case an error occurs and a smart contract doesn’t behave as expected.

In the 2016 Decentralized Autonomous Organization (DAO) incident, for example, the attacker exploited poorly written smart code to siphon off 3.6 million Ether — an alternative to the popular cryptocurrency Bitcoin — roughly equivalent to $68 million at the time of the attack.

Equally importantly, current principles, standards and practices for managing and preserving digital records are not designed for smart-contracts and other distributed autonomous records created on chain. Ensuring that society’s evidence infrastructure remains intact presents challenges similar to the early days of email and other electronic records. New approaches, yet to be developed, will be needed.

The third type of blockchain record-keeping design pattern is the “tokenized” type of solution. This is arguably the farthest from our current form of record-keeping, and many would argue the most innovative. With this type of system, not only are records captured on chain but valuable assets are represented and captured on chain.

These assets can symbolize anything of value: currency such as a primary use blockchain, Bitcoin; land, fine wine, food, diamonds, artworks — you name it.

In this third, tokenized form we can find centuries-old predecessors to blockchain.

Medieval objects parallel digital tokens

Are these assets really records? For answers, we may turn to the English archival theorist Sir Hilary Jenkinson, who observed in his 1937 Manual of Archive Administration that “there is a case where an old pair of military epaulettes; and among enclosures to letters, forming in each case an integral part of the document, the writer can recall portraits, human hair, whip-cord (part of cat-o’-nine-tails), a penny piece inscribed with disloyal sentiments, and a packet of strange powder destined to cure cancer.”

In Jenkinson’s view, these “exhibits” formed part of the archive, or collective body of records, because they provided evidence of business transactions.

We now have come to view these so-called exhibits more as museum objects than records because before the digital era, the physical awkwardness of these objects meant that they could not be managed with other records. Just as coins and paper currency once represented records of reserves of gold in a national treasury, Jenkinson’s exhibits were themselves tokens that represented other things.

Today, what once had a material form can be essentially dematerialized. Paper currency can be transformed into cryptocurrency. Land, fine wine, artwork, diamonds, food and other material objects — though still physically in existence — can be transformed into virtual representations called “tokens.” In this way, in a tokenized, blockchain record-keeping system, literally every thing potentially becomes a record.

This is not a new idea.

At the time of the Norman Conquest, many grants were conferred by the bare word (nude verbo) without a writing or charter, but only with a sword, helmet, horn or cup. One example is the broken knife of Stephen de Bulmer kept in the archives of Durham Cathedral. It bears a parchment label recording the details of a gift of land made in the middle of the 12th century — which the knife itself symbolizes.

Just like the knives, horns, cups, rings and other objects customarily used in the conveyance of land during the medieval period, today’s tokenized blockchain record-keeping systems use valuable cryptocurrencies such as Bitcoin as symbolic representations of assets like land.

This raises the question of whether blockchain technology will return today’s archival repositories to their medieval roots as the treasure storehouses of kings. Will it be back to the future?

Victoria Lemieux, Associate Professor, Archival Science, University of British Columbia

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Dirk Baur, The University of Western Australia and Niels Van Quaquebeke, Kühne Logistics University

A common idea about the blockchain, the technology that powers Bitcoin and other cryptocurrencies, is that it can “create trust”, or allow two parties to make a transaction “without relying on trust”.

If true, this means we could create a world without a trusted “man in the middle”. We could have financial services without a bank verifying transactions and we could transfer ownership (of a house, for instance) without a lawyer. But this idea is wrong.

The blockchain does not create or eliminate trust. It merely converts trust from one form to another. While we previously had to trust financial institutions to verify transactions, with the blockchain we have to trust the technology itself.

It is also not clear that a blockchain-powered currency (such as Bitcoin) can go mainstream without the backing of a trusted authority. In fact there are hardly any examples of money (including gold) that have ever worked without the backing of a central authority or a sovereign.

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Read more:
Demystifying the blockchain: a basic user guide

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When you make a traditional money transfer the bank will first verify that you have sufficient cash, and then debit your account and credit the recipient. Think of the blockchain as a decentralised version of this process. Rather than all of this information being held and verified by the bank, it is done on an “open public ledger”.

When someone transfers a Bitcoin, it is verified by “miners” (really powerful computers), then encrypted, and a “block” is added to the ledger.

Because all of the verification is done by the system itself, the idea is that users do not need a trusted central authority. Instead, trust is transferred from one central authority (such as a bank) to many decentralised, anonymous participants (the miners).

But here lies the problem – users must trust the technology and the governance of the system.

What is trust?

In economic exchanges there are three kinds of trust: institutions-based, characteristic-based, and process-based.

Institutions-based trust comes from the involvement of a central authority. Think of a commercial bank (and a government insuring deposits in that bank), as in the previous example.

Characteristic-based trust is the trust we have in people mostly because they represent some sort of similarity to us, or show admirable features or values that warrant trust. For example, you are more likely to trust someone from the area where you grew up than someone from elsewhere; you might also trust someone with a similar taste in music, or who simply embodies what you value in life.

Process-based trust arises when previous experiences suggest that the inputs by one party will be predictably reciprocated. This trust often evolves into social micro-rules or norms. For example, most people would generally trust that if they do not harm a person, that person will also not harm them. Likewise, one would trust that others will answer when asked a question.

It follows that trust can be destroyed and lost if the central authority fails, the person you trusted fails, or the process you trusted fails.

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Read more:
Blockchain really only does one thing well

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When it comes to the blockchain specifically, we can see that there are at least two forms of this trust at play. Because of its complexity many people may find it difficult to trust the process.

But some may choose to trust it when like-minded people use it (characteristic-based trust). Indeed, friends of or nerds in the same sphere as Vitalik Buterin, the founder of the Ethereum cryptocurrency, likely became early adopters of the technology.

Yet, a different kind of trust may also be at play. For instance, when the Ethereum-powered decentralised autonomous organisation (DAO) was hacked, users asked Buterin to respond. This shows that people still need a central authority or will appeal to one if the system fails. Likewise, the fake news that Vitalik had died led to US$4 billion dollars being wiped off the market value of Ethereum. With the assumed loss of the central authority, many also lost their trust in the underlying system.

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Read more:
What’s holding up the blockchain?

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This may not be ideal but a truly open public blockchain (that is, one without any central authority behind it) is unlikely to work.

Analysis of the evolution of money shows that almost all currencies throughout history have had the backing of an authority. This is easy to understand. Think of a raw gold nugget. To be sure about its value you would need to trust a jeweller – a valuation authority. Because this process of identifying the quality of gold takes time, raw gold is not the ideal medium of exchange.

This problem with gold was largely resolved by the creation of the mint. In other words, the minting and standardisation of gold coins reduced the identification costs and thus the need to trust decentralised third parties such as the jeweller. Instead, there was now a need to trust a central authority – the mint.

You also need to trust that the government will accept tax payments in the minted gold coins, and that other people will take the coins as payment for goods and services. More generally, if people lose trust in the authority and the value of a currency, they will try to sell the currency, leading to inflation or even hyperinflation.

All of this shows that gold and any other form of money – including cryptocurrencies – are not “trustless”.

The importance of the trusted central authority can also be understood in the case that a currency is destroyed. For example, when the Roman empire fell, the central authority collapsed and so did the currency it backed. Process-based trust collapsed as well, which shows that the process only worked because of the institution.

If history is any guide, privately created money such as Bitcoin or any other blockchain-based currency is unlikely to become globally accepted without a trusted central authority. This means that an “open” blockchain will not succeed.
Although a “closed” blockchain, with the backing of a central authority, might work, it would be very different to the core feature of Bitcoin and the blockchain – decentralization.

Dirk Baur, Professor of Finance, The University of Western Australia and Niels Van Quaquebeke, Professor of Leadership and Organizational Behavior, Kühne Logistics University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Standard / by Wanderer / September 13, 2021 / 41 Comments

Follow Me: The Wanderer retired from his engineering job at a major Silicon Valley semiconductor company at the age of 33. He now travels the world, seeking out knowledge from other wealthy people, so that he can teach people how to become Financially Independent themselves.

I’m honestly not sure why so many people have such a hard-on for crypto. At this point, we now personally know nearly all the major FIRE bloggers out there and of the ones that successfully reached FIRE, most got there by investing their money in index funds, with some doing it through rental real estate. Nobody got there by investing in crypto.

The biggest reason for this is that cryptocurrency is a speculative investment with no intrinsic value. Even if someone did make millions off Bitcoin, it would be completely unreproducible. “How did you become a millionaire?” “Oh, I bought into Bitcoin 5 years ago.” Great, so how does that help anyone now?

But that doesn’t stop people from pestering us in our inbox every goddamned day. What about crypto? Why aren’t you writing about crypto? Why don’t you own crypto yet?

After the thousandth email, I’m throwing in the towel. OK FINE, INTERNET. You win. You’ve worn me down, OK? I now own freaking crypto. Happy?

This article might sound like one of those oh-so-hilarious “joke” posts that FIRE bloggers love to post on April Fools, but a) it’s not April and b) I’m being serious. I actually do own crypto.

I just refuse to pay for it.

The problem with Bitcoin (or any crypto) is that nobody actually knows what it’s worth. Today it’s worth about $40,000 USD. A year ago it was worth about 50% more. And 5 years ago it was worth a couple hundred bucks. Nobody, not you, not me, and definitely not Elon Musk, knows how much one of these things is worth.

So in that way, Bitcoins are kind of like Beanie Babies. Would I pay money for Beanie Babies? Hell no. But if I could get a box of them for free, why not? It’s no skin off my back, and if some idiot wants to buy them off me later, great!

So that’s the principle of my crypto strategy. Own crypto, but get it for free. How did I do that? Well, keep reading to find out!

The Basics of Blockchain

Despite me coming out publicly against Bitcoin as an investment strategy, I’ve always found cryptocurrencies fascinating from a technical perspective. In my previous life, I was a computer engineer, and I studied cryptography in both undergrad and grad school. Here, using the power of math, I could make any message unreadable at will, and only give the power to unlock that message to whoever I decided. World War II was won by the Allies not because one side’s military was stronger than the other, but because mathematicians like Alan Turing and Polish cryptologist Marian Rejewski out-math’ed the Germans. It was an inspiration to math nerds like me everywhere that they too could change the course of history.

Never in a million years did I think cryptography would take over the financial world the way it did.

So you’d figure that combining two of my loves (math and money) would turn me into a crypto fanboy, right? Well, yes and no. I mean, I’m still fascinated seeing how the crypto space is evolving, but once the Reddit maniacs jumped in, crypto lost most of its appeal to me as a financial investment. In order to buy Bitcoin on an exchange, I’d have to buy from one of them, and who knows what kind of pump-and-dump BS those guys are running on any given day.

So how do I plan on getting Bitcoin if I refuse to buy it on an exchange? Simple: Create them myself.

OK, a brief primer on how Bitcoin works. You’ve undoubtedly heard of the term block-chain by now. Here’s what it means.

When people make transactions using Bitcoin, their transaction details (sender, receiver, amount, etc.) are put into a ledger that tracks everyone’s activity. These ledgers are split into chunks called blocks. These blocks are then chained together to form a chain of blocks, or a block-chain.

The block-chain is not owned by any one entity, government, or financial institution. This quality is why people keep referring to Bitcoin as a decentralized currency. Anyone can download it, host it, or make changes to it.

But what’s keeping me from downloading the block-chain and altering it to give myself a bajillion Bitcoins? Well, I can’t because each block is validated and digitally signed. If I were to alter a transaction on a signed block, it would be immediately obvious that the block had been tampered with (since the signature would no longer be valid), the block, and my fake transaction, would be rejected by the network.

So, you might be wondering, who is doing the validation for each block? That’s where the miners come into play.

Validating a block is a very computationally expensive task. It involves solving a series of complicated math puzzles that takes even very powerful computers a long time to do. Theoretically, anyone with a computer can do it (since the block-chain is de-centralized), but it’s going to take time and computing power. So why would anyone do it?

Simple. If they solve the puzzle, they get rewarded with Bitcoins.

The Bitcoin protocol is designed so that when someone successfully validates a block, new Bitcoins are created and awarded to that person. This is how new Bitcoins are added to the system, and is referred to as “mining.”

That’s how I’m planning to acquire Bitcoins.

Altcoins

Now, as you might expect, generating Bitcoins via mining is a little more complicated than I made it appear. In fact, if you’re a regular person like me without access to custom-built mining hardware, mining Bitcoins no longer works.

This is because the Bitcoin protocol is designed so that mining becomes progressively more difficult the more blocks get added to the block-chain. Why would they do this? Because they knew that computers get faster over time. If mining the first block was the same amount of effort as the bajillionth block, after a while validating each successive block would become faster and faster, which would result in more Bitcoins flooding the market, which would devalue existing Bitcoins and render the whole ecosystem worthless. Gold is valuable because getting the first nugget out of the ground is relatively easy, while getting the last nugget out of the ground is insanely hard. That’s where the inspiration for the block-chain validation protocol came from.

Clever, right?

So here’s the problem. So much attention and computing power has been focused on Bitcoin that the mining difficulty is completely out of reach for average computer owners like you and me. At this point, you need specialized computer equipment plugged into geothermal power sources to profitably mine Bitcoin.

That’s why I’m not going to mine Bitcoin. I’m going to mine an altcoin.

Altcoins are one the many, many cryptocurrencies out there that were created after Bitcoin. You may have heard of Ripple, Ethereum, or (sigh) Dogecoin. All these are altcoins.

The advantage of mining a less popular altcoin is that the difficulty of mining is way lower. Not everyone has jumped on the bandwagon yet, so you have less competition. However, it’s important that whatever altcoin you pick is popular enough that enough people use it, and most importantly, a relatively stable exchange rate exists between that altcoin and Bitcoin. Collecting altcons is worthless if you can’t exchange it.

For that reason, I’ve chosen Monero as my altcoin of choice. In my mind, Monero is what Bitcoin should have been. Bitcoin prides itself on being de-centralized, private, and that no government can decode how you spend your crypto. Except that governments absolutely can decode how you spend your crypto. The block-chain, ironically by nature of being de-centralized, is downloadable by anyone without a court order, and because Bitcoin made the mistake of leaving everyone’s Bitcoin wallet addresses unencrypted, they can trace any transaction ever done in the in Bitcoin ecosystem.

Monero fixes that flaw by encrypting everyone’s wallet addresses in the block-chain (among other security measures like ring-based transactions, which I won’t get into in this article). As a result, I believe Monero fulfills the original intent of Bitcoin, but for now is relatively unpopular, yet still exchangeable for Bitcoin via an exchange like Binance.

How To Mine

To start, I got me some mining software. The most popular Monero miner right now is XMRig. It supports all sorts of hardware, including PCs, Macs, and even Nvidia-based GPU’s (graphics cards).

Next, I needed to create a Monero wallet. After all, if I’m going to mine Monero, where should that Monero go? I got mine from the official Monero site, and installed it on my computer.

Once I had my miner and my wallet, it’s time to start mining, right? Well, not quite. First, you need to join a mining pool.

Mining is a very computationally intensive job. So most people don’t mine themselves since they don’t have a bank of servers at their disposal. Instead, they join mining pools, which are groups of miners that all collectively pool their resources and work together on a block. If that block gets solved, the reward is split among the miners in the pool according to how much work they each put into it.

The most popular Monero mining pool at the moment is MineXMR, so we’re going to join that.

That page directs you to download and install the mining software onto your computer.

Now, in order to perform any actual mining, we need to configure our mining software. Fortunately, there’s a handy wizard to help us do this. So we will start it up by clicking here…

We pick the pool that we want to join in the drop-down…

Then we put in our Monero wallet address, so the miner knows where to send our Monero…

We enable whatever features we have available on our machine…

We set how much we want to donate to the mining pool (1% is standard)…

And finally the wizard spits us out a command to run!

We start up this command on our computer…

And we are off and to the races!

Results

Let me make this clear: mining is not exciting. Your computer may be chugging away at full speed, but all you actually see is a black or white screen with scrolling status messages. Whoop-de-freaking-do.

What’s much more interesting is the dashboard from your mining pool. If you go to your mining pool’s website and enter in your wallet address, you can see the work that your computer is doing and contributing towards the pool’s mining efforts. For nerdy reasons, the computational steps towards validating a block is referred to as a “hash.” Here’s my current MineXMR dashboard.

Right now, I’m mining on FIRECracker’s Macbook Air, my Macbook Air, and my desktop machine. Combined, that’s a respectable 2.3 kHash/s.

And after a couple hours, you can already see Monero rolling in…

There are a couple ways to play this. I could keep accumulating Monero in the hopes that Elon Musk mentions it on another SNL episode and its price skyrockets. I could also exchange it for a more popular crypto like Bitcoin. I could also sell it directly.

I haven’t decided yet. But the important thing is that whatever I end up doing, I did it for free.

So there you have it. I now own cryptocurrency.

But the big question is, how much money will I make with this experiment? Who knows? But I’m sure it will make another interesting article when we find out.

How much do you think this experiment will make? Vote below!

Source: https://www.millennial-revolution.com/invest/how-to-get-free-bitcoin loaded 26.09.2021

Dimaz Wijaya, Monash University

The Reserve Bank of Australia could join the likes of Estonia and Lebanon in creating a cryptocurrency based on the Australian dollar, to reap the benefits of technology like the blockchain but with more stability than other well known currencies like Bitcoin.

The RBA has already been approached by interested startups to create this new digital currency, known as the “DAD” or Digital Australian Dollar.

In contrast with other cryptocurrencies a state-backed digital currency has the advantage of being backed by the government as in fiat currency, but at the same time has the technological advantages shared by other cryptocurrencies.

A digital Australian dollar could remove the role of middlemen and create a cheaper electronic currency system, while at the same time enabling the government to fully regulate the system.

It would also allow transactions to settle faster (several minutes to an hour) than the traditional banking system (several hours to several days), especially in a situation where an international payment is involved.

The difference between a digital Australian dollar and Bitcoin

We already use the Australian dollar in a digital form, for example paying via your smartphone. But banks are essential in this system, moving money on our behalf.

When using a cryptocurrency, you interact with a system like the blockchain, an online ledger that records transactions, directly. Bitcoin, Litecoin, and Ethereum are examples of cryptocurrency that use the blockchain in this way. These currencies are created by the community that use them and are accepted and trusted within the community.

However, since the community runs the system, the price of the cryptocurrency solely depends on the market mechanism. When the demand increases, the price increases, but when the demand decreases, the price also decreases. While it might create an opportunity for speculators to gain profit from trading, it also creates risk for the cryptocurrency holders.

In comparison to cryptocurrency, the digital Australian dollar might be well managed that the price volatility could be reduced significantly. The government holds the capability of increasing or decreasing the money supply in the system. This power can be used to stabilise the market supply of the new digital currency.

The blockchain technology also reduces the fee for every payment made. This is made possible by removing the role of banks or other intermediary parties charging fees for their services. However, a small transaction fee still needs to be introduced to protect the system from being flooded by adversaries with insignificant transactions.

The characteristics of cryptocurrency itself might limit its usage to daily transactions. As the pioneer of cryptocurrency, Bitcoin was created to become a payment system, but the users gain incentive by simply saving their cryptocurrency and not using them to purchase goods or services.

They believe the future price of the cryptocurrency is higher than the current price and thus does not make a good medium of exchange nor a store of value. There is no guarantee that the cryptocurrency will hold any value in the future. Since there is nothing to back up the value, users will lose their wealth when the community no longer acknowledges the value of cryptocurrency.

Cryptocurrency might also jeopardise the local government’s effort of implementing regulations to minimise illegal activities. Perpetrators create cryptocurrency transactions easily without being detected by the government’s financial monitoring system.

The privacy features of cryptocurrency also make it hard for law enforcement agencies to determine the actors behind illegal activities. Although most governments in the world have enforced the coin exchange services to identify their users, the operation of the cryptocurrency is beyond their reach.

There are other state-backed digital currencies

The idea of creating a national cryptocurrency is not new. Estonia has explored ways to create Estcoin, following an initiative on the blockchain-based residency registration called e-Residency. Lebanon’s central bank has also started to examine the possibility of creating one.

Despite the efforts of those central banks, several questions must first be addressed before launching the real product to the public. The user’s financial data could be exposed since the blockchain will make all transactions created in the system transparent.

Consumer protection is also a concern since all transactions made in the blockchain are permanent without the possibility of being reversed. Without firm solutions to those problems, the digital Australian dollar will not satisfy all requirements to be the next groundbreaking innovation for the country’s financial system.

Dimaz Wijaya, PhD Student, Monash University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Alicia (Lucy) Cameron, CSIRO and Kelly Trinh, CSIRO

The price of Bitcoin has dropped to around A$8,000 in the last few days, after almost hitting A$10,000 in the past month, and rising over 1,850% since 2015. All of this shows how volatile the currency is, prompting the question, what leads to such huge movements?

Our ongoing research reveals four factors that affect the price of Bitcoin. These include media hype and uptake by peers, political uncertainty and risk (such as the election of Donald Trump or the vote for Brexit), moves by governments and regulators, and the governance of Bitcoin itself.

It is likely the last factor that has driven the latest drop in the price, as a proposed Bitcoin split (or “fork”) failed to gain support from developers towards the end of last week. The split would have doubled the number of coins in circulation (as previous splits have) and increased transaction speed.

1) Animal spirits

Economists have long had a notion that psychological factors affect investor decisions. This is called “animal spirits” and refers to investors making decisions based on the behaviour of other market participants and their own intuitions, rather than hard analysis.

Analysis of the price of Bitcoin shows that positive media coverage is one of the main factors driving the price.

Positive media coverage of new technologies causes a well-known hype-cycle – a peak of hype is followed by a “trough of disillusionment”.

This was most apparent in the early days of Bitcoin, when mainstream press started to report on the new currency and caused a number of short price spikes and collapses. As media coverage increases and other factors are brought in, it is harder to distil the effect of the media alone.

Something similar happens when high-profile companies go public, as investors “pile in” and the value rapidly increases from a low base. Think of a company like Twitter, which saw a huge sharemarket “pop” when it went public.

2) Political risk

Political risk around national currencies can also affect the price of Bitcoin as people use it to hedge against price movements in a particular currency, or they need to quickly move large amounts of value out a country or currency.

The economic crisis in Greece in 2015 was followed by reports of increased buying of Bitcoin by Greek citizens wishing to protect their wealth. This did not seem to affect the price of Bitcoin on global markets, however, which remained steady between A$300 and $400 for most of that year.

But nervousness about the national referendum for Britain to leave the European Union (Brexit) on June 23 2016 did lead to an increase in the price of Bitcoin alongside a decrease in the value of the British pound.

The pound started plummeting around May 20 2016. By July 25 it was more than 10% below its pre-Brexit value. For the same period the price of Bitcoin increased by over 65% (from £302 to £502).

The election of Donald Trump as US president was also followed by two months of steep rises in the price of Bitcoin. Many attributed this to uncertainty in the US economy.

3) Regulatory moves

Regulators around the world have had to catch up to the rise of Bitcoin. They must decide, for instance, how it will be treated by the tax system, or whether and what regulation applies to its use.

Two events in particular highlight the impact regulations can have on the price.

The announcement that Bitcoin would be considered legal tender in Japan pushed the price of Bitcoin up by 2% in just 24 hours, and increased the price globally by 160% for the next two months.

China’s decision to shut down several Bitcoin exchanges and ban initial coin offerings (a form of crowdfunding often paid for with cryptocurrencies) sent the price of Bitcoin plummeting by 29% in 24 hours.

4) Bitcoin’s governance

Although Bitcoin is a decentralised currency, some decisions about how it will work or evolve need to be made from time to time. These also have an impact on the price.

The software used to verify Bitcoin transactions is created by developers and is run by miners (the global network people who verify Bitcoin transactions).

To change the software used to mine and authenticate transactions developers need more than 50% of the global network of miners to agree with that change. When they get that support they can create a “fork”.

On August 1 2017 Bitcoin underwent a “hard fork”. A new cryptocurrency – Bitcoin cash – was created and given to everyone who owned Bitcoin. Bitcoin cash software can process 30 transactions per second, four times more than Bitcoin.

Not many investors in Bitcoin are coders, however, or knew what the fork would entail. There was a period of uncertainty before the fork, and a period of rapid price rises afterwards.

Since then there has been another fork – to create Bitcoin gold.

The attempt at a third fork was the one that failed to get support last week. This seems to be the cause of the correction in the price of Bitcoin late last week (at the time of writing the price is down almost 20% from a peak of A$9,925 on November 8). However, the price of Bitcoin cash has simultaneously risen from A$818 to A$1,850.

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Read more:
Australian regulators have finally made a move on initial coin offerings

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Although we can point to these four factors as affecting the price of Bitcoin over its short life, it is a volatile and experimental technology, and is still in development.

Over the longer term it is likely to gain acceptance among investors for other reasons. For instance, it is deflationary – because there is a limited supply both in the total number of Bitcoins that can ever be created as well as the rate they can be created, the purchasing power of Bitcoin will increase over time.

This differs significantly from currencies like the Australian dollar. If you store national currencies under your bed they will, over time, become worthless.

For other investors, the volatility of Bitcoin makes for a good trading environment (e.g. lots of price movements give opportunities to make money buying or selling). You can see this in the above comparison with gold.

Bitcoin can also be a long-term investment due to it being unregulated in supply and having some huge benefits over some national currencies: it is global, untied to supply of currencies by central banks, easily transferable across borders, and doesn’t suffer from the considerable transaction and administration costs paid to banks, currency markets and financial traders.

Being a relative new market, however, with no mathematical mechanism to predict how it will act in the future, it really it is a case of buyer beware. Our only tip would be – don’t put in more than you can afford to lose.

Alicia (Lucy) Cameron, Senior Research Consultant, CSIRO and Kelly Trinh, Data Scientist, CSIRO

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Marc-David L. Seidel, University of British Columbia

Technology blogs and financial news networks are buzzing about blockchain, a cryptographic, distributed trust technology. The key innovation is how it reduces the need for central third-party institutions to serve as central authorities of trust — banks, courts, large corporations, stock markets and even governments, for example.

Distributed trust enables co-operative forms of organization without a centre. It can distribute power away from centralized institutions to those that traditionally have less power. Such powerful institutions do not let go of their influence easily.

The ongoing debate about how to regulate distributed trust technologies assumes that the advocates of the technologies will seek both legal status and enforceability. Scholars propose that such developments in distributed trust are a competitive threat to nation-state paper currencies.

Much of the current, popular focus is on cryptographic currency — or cryptocurrency — applications such as Bitcoin.

Bitcoin vs. banks

Regulators are struggling to deal with a fundamental shift in market structure. National central banks are implementing policies to keep control and regulate distributed trust technology.

For example, the Chinese government has banned several types of distributed trust activities, and is launching its own non-distributed, centralized digital currency.

The Japanese government has made Bitcoin a legal payment method, and major Japanese banks are planning to launch a J-Coin digital currency pegged to the Yen which may be built on a blockchain.

Russia initially treated non-approved currency trades as illegal, but is now determining how to regulate them.

In fact, traditional centralized, powerful organizations like banks, governments, regulators and technology behemoths are all spending billions figuring out how to use and control distributed trust technologies.

But distributed trust technologies have many uses beyond cryptocurrency.

Volunteer-driven communities

Organizational theory has a lot to say about this transition. Distributed trust technologies are organized in what we call a Community Form (C-Form) of organization.

C-Forms are not new. They have been around since the 1800s when the Oxford English Dictionary was created by a distributed community of volunteers.

The growth of C-Forms was accelerated by technological developments enabling inexpensive peer-to-peer communication. C-Forms came into focus with the last internet-enabled major organizational shift to distributed information-creation platforms.

As a result of that innovation, we have seen many forms of information production shift to C-Forms. Open source software such as the Linux computer operating system, which competes with Microsoft Windows and Apple macOS, is produced and shared by individuals in C-Forms instead of centralized software companies. Encyclopedias such as Wikipedia are created by individuals in a C-Form instead of a centralized publishing house. Video content on Vimeo is produced and shared by individuals in a C-Form instead of centralized studios.

Similarly, distributed trust technologies are shifting the organizational landscape of how trust is produced and managed from centralized institutions to a C-Form.

The development of distributed trust technologies is having a similar enabling effect on the growth of C-Forms replacing the trust functions of centralized institutions.

Fundamentally, this is a decentralization of power.

Power shift

Many of our previous assumptions about formal organization are being challenged by shifts to distributed forms of trust.

Individuals can now enter into direct peer-to-peer trusted exchanges with strangers. They no longer need a central institution to vouch for the other party. A blockchain-enabled microgrid in Brooklyn is already allowing individuals to sell their excess solar energy directly to neighbours without involving a central utility company.

This is a drastic shift to many of the underlying assumptions about how markets and society are organized. As power centralizes, opportunities emerge.

Many Silicon Valley success stories are simply centralized platforms. They capitalize on the power and legitimacy of enabling trusted interactions for others.

Centralization creates new opportunities

Just as Uber matches riders to drivers, Facebook matches consumers to advertisers. This centralization of power has created an opportunity for distributed trust.

The major platforms stand to lose their power as distributed trust takes hold. Such powerful organizations will no longer be needed.

But those in power tend to try to hold onto power.

Microsoft faced a challenge to its centralized market power as open-source software C-Forms grew. The “Halloween Documents” were internal Microsoft communications about responding to the strategic threat of open-source software. One tactic detailed was “FUD” (fear, uncertainty, and doubt).

We are now seeing similar responses to distributed trust technologies.

JPMorgan Chase & Co. CEO Jamie Dimon called Bitcoin a “fraud,” and claims governments are going to close down “crypto things.” He is being accused of market abuse in Sweden by a company called Blockswater. Blockswater alleges he “deliberately spread false and misleading information.”

In other words, Dimon is being accused of creating FUD.

The future of distributed trust

We used to assume that large centralized organizations had legitimacy and power. But that’s starting to change. As distributed trust technologies develop, we will continue to see this power shift.

We must question the role of centralized organizations in a time of distributed trust. The key now is to ensure that we use insights from organizational theory, and sociology, to shape our joint societal future in a world of distributed trust.

It’s a world where the role of powerful central institutions will be greatly diminished. With such insight, we will be able to design a more equitable future for all.

Marc-David L. Seidel, RBC Financial Group Professor of Entrepreneurship & Associate Professor, OBHR Division, University of British Columbia

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Ari Juels, Cornell University; Iddo Bentov, Cornell University, and Ittay Eyal, Cornell University

When hackers hold their victims’ data for ransom, as happened in the WannaCry and NotPetya ransomware attacks that spread across the globe in mid-2017, a key to the criminals’ success is getting away with the money. That often means they use cryptocurrencies like bitcoin to collect payment, hoping to remain hidden behind a digital mask.

The WannaCry hackers went a step farther, though. They converted their bitcoins into Monero, another e-currency designed to offer even stronger privacy.

At the Initiative for Cryptocurrencies and Contracts, we have explored the ways cryptocurrency systems protect users’ anonymity. Anonymity in cryptocurrencies is fueling crime by enabling criminals to evade identification by law enforcement. We believe that this problem will get worse as cryptocurrencies evolve stronger privacy protections and become more flexibly programmable. We also believe there’s no simple solution.

Masking criminal identities

All cryptocurrency systems work in roughly the same way. Groups of computers receive transaction information directly from users who want to send each other money. The computers order and permanently record these transactions in a public ledger so that anyone can read them. The public ledger also makes it possible to keep track of how much currency individual users own. Developers tweak the code in different cryptocurrency systems to add additional features, like fast transaction processing or improved anonymity.

The first major cryptocurrency system, bitcoin, allows users to conceal their real names. But users’ transaction amounts and bitcoin account numbers (known as “addresses”) are visible to anyone – even people who don’t use bitcoin but know how to read the transaction ledger. This approach offers more privacy than credit cards and bank accounts, even against powerful entities like governments who might try to trace money obtained by criminals. Bitcoin’s privacy both attracts users – law-abiding and otherwise – and raises law enforcement agencies’ suspicions.

It is true that bitcoin and other cryptocurrencies create opportunities for tax evasion, ransomware and illicit marketplaces selling everything from narcotics to illegal arms. Some concerns, though, like the potential uses for terrorists, are probably overblown.

When crimes happen that involve bitcoin, law enforcement and security experts can exploit the system’s privacy defects. They study illicit activity by analyzing chains of transactions. Sometimes they can trace criminals to systems where their true identities can be discovered.

If this isn’t possible, they can often still obtain clues about criminals’ behavior. For example, analysis of the bitcoin transaction patterns of WannaCry quickly showed that victims would not automatically receive decryption keys for their ransom payments. To identify a payer, bitcoin requires that the payer send payment to a unique address. This address acts like a kind of transaction serial number. WannaCry victims were all told to pay into just three bitcoin addresses. Because payments were commingled in this way, investigators realized that the WannaCry perpetrators could not figure out which victims actually paid the ransom.

Systems with stronger privacy have arisen to shield users – and criminals – from such scrutiny. One type, called “mixes,” such as CoinShuffle++ and TumbleBit, bundle transactions together, allowing bitcoin users to launder their money and achieve stronger anonymity. Distinct new cryptocurrencies have arisen that offer very strong privacy using powerful built-in mixes. These include Monero, Zcash and MimbleWimble.

Their success has been limited so far. Technical problems are one reason, but mainly their technical complexity and limited software support makes them hard for people to use. Ransomware usually requests payment in bitcoin. It is simply easier for victims to buy bitcoins than more exotic cryptocurrencies that better conceal ransomware creators’ identities. Ransomware creators hope to get the best of both worlds – enabling easy payment for victims in bitcoins, but then converting ransom payments to currencies like Monero to obtain strong privacy. Someday, once privacy-hardened cryptocurrencies are easier to use, though, ransomware creators and other criminals will be able to bypass this two-step process.

Criminal smart contracts

Cryptocurrencies are not limited to simple money transfers. Newer systems like Ethereum also include in the public ledger not just a record of which account sent money to whom, but small computer programs called “smart contracts.” Once entered into the ledger, these programs remain forever executable. They can store and send money in arbitrarily complex ways. Any user – or another smart contract – can trigger execution of a smart contract simply by sending it a transaction.

When autonomous smart contracts are combined with anonymous cryptocurrency, they provide opportunities to handle money in complicated ways that hackers can exploit. Twice, money has been stolen from Ethereum contracts in heists that each involved more money than the largest bank robbery in the United States. The identities of the thieves remain unknown.

In the future, “criminal smart contracts” may emerge. These might be programmed to make automatic payments when specific secrets are stolen, when particular websites are hacked and defaced, or even for physical crimes ranging from vandalism to terrorism. A person who wanted a particular crime to be committed could post a smart contract reward to be paid out to the criminal who actually does the deed. Someone seeking to claim the reward would, before committing the crime, add an encoded message to the smart contract containing specific details only the criminal would know beforehand – such as a unique phrase or long string of numbers to be posted on a hacked website.

When the crime is committed, the person who did the deed would decode the added message, revealing the details that had been specified in advance. The smart contract could then check the actual details of the crime and, if they matched, pay out the reward. The anonymity of the underlying cryptocurrency would hide the criminal’s identity.

Today, smart contracts cannot easily obtain trustworthy data from the internet about crimes like vandalism in a form that computer programs can easily understand. So criminal smart contracts have not yet come about. But advances in crime driven by smart contracts will eventually emerge, aided by continuing improvements in anonymity technologies.

The hard quest for balance

Anonymity isn’t all bad, of course. On the contrary, it’s a key ingredient of privacy-preserving systems, and necessary to prevent overreach and abuses by governments. Cryptocurrency cannot thrive without privacy protections. What’s hard is finding a socially responsible blend of privacy and accountability.

Today, law enforcement authorities can exploit privacy weaknesses in systems like bitcoin to identify certain cryptocurrency as belonging to criminals and thus as “tainted.” They try to catch criminals when, for example, they convert tainted currency into ordinary currency like U.S. dollars or euros. This strategy will no longer work when stronger privacy technologies conceal tainted cryptocurrency.

Scientists have for decades sought to design systems that balance law enforcement needs with individual privacy in digital currency. Most of these systems provide what is called “conditional anonymity,” allowing authorities to learn user identities selectively through a technical process that can involve courts or other overseers. Appealing as it sounds, this approach is unworkable. If one authority, say the U.S. federal court system, has the ability to strip users of anonymity, then all authorities will want it. Privacy will then be meaningless.

Crime-fighting tools require empowerment of authorities. Cryptocurrencies are innately anti-authority technologies. How this tension is resolved will determine the future of the world’s monetary systems. There is no simple answer.

Ari Juels, Professor of Computer Science, Jacobs Technion-Cornell Institute, Cornell Tech, and Co-Director, Initiative for CryptoCurrencies and Contracts (IC3), Cornell University; Iddo Bentov, Postdoctoral Associate in Computer Science, Cornell University, and Ittay Eyal, Research Associate, Computer Science and Associate Director, Initiative For Cryptocurrencies and Contracts (IC3), Cornell University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Philippa Ryan, University of Technology Sydney

It’s not technology or regulation holding back the blockchain – software that stores and transfers value or data across the internet – we just haven’t figured out the next big use-case. Two reports released this week by the CSIRO’s Data61 not only inject some well-researched gravitas into the conversation, they also provide insight into why some of the major blockchain projects have stalled.

Since 2015, banks, regulators, tech giants and startups all over the world have raised billions of dollars to explore the blockchain.

But the only really successful, scaleable use of the blockchain remains cryptocurrencies like Bitcoin. Bitcoins currently trade at almost AU$4,000, with a total market cap of A$61.4 billion.

Think of the blockchain as a type of transparent spreadsheet or “public ledger”. When someone transfers a Bitcoin, for example, the transaction is verified by “miners”, encrypted and a “block” is added to the spreadsheet. Mining takes a lot of computing power, and so miners are incentivised to participate in the system with a reward of bitcoin.

It’s finding a way to put all these pieces together for purposes other than cryptocurrencies that has yet to be figured out.

Because of all the computing power required to verify and encrypt new blocks, running a blockchain network is expensive and consumes a lot of electricity. For this reason, a blockchain should only be used if it solves particular problems. For example, a blockchain could allow users to see each other’s ledgers and transactions, negating the need for a trusted third party to manage risk. The blockchain itself, through sophisticated cryptography, would provide privacy and trust.

Conversely, if there is already a central third party managing trust between users and verifying transactions (something banks already do for consumers), then a blockchain is probably not needed at all. Failing that, a sophisticated database or expert system would be a cheaper and simpler alternative.

Opportunities and risks

The Data61 reports describe some of the possible opportunities for the blockchain in Australia, including monitoring the outbreak of pests or animal and plant diseases, border surveillance, tracking intellectual property, and identity systems that provide greater certainty over entitlements, benefits, and tax obligations. The reports also identify some of the risks.

The risks include both business and technical risks. For example, public ledgers do not afford privacy and blockchains generally are not suitable for storing large volumes of high speed data. Bitcoin’s blockchain has been suffering from this very problem for more than a year. Finding a solution is a priority for any developers wanting to attract the number of users needed to make running a network profitable.

The use of blockchain in financial transactions also poses problems for compliance with anti-money laundering legislation, which requires that anyone providing financial services (for example) must satisfy themselves as to the identity of their client or customer.

These shortcomings may explain why a number of high-profile blockchain projects have recently stalled. For example, last week, the Bank of Canada announced that its blockchain project, Jasper, is not yet fit to handle settlements. Citing transparency and privacy issues, the bank found that the benefits of using blockchain did not outweigh the risks.

But risk is not the only reason that blockchain projects are stalling.

In February 2017, the R3CEV consortium of banks and technologists announced after more than 18 months of investment, innovation, and testing, that they would not be using blockchain for their project because they did not need it.

Meanwhile, in a speech delivered to the Africa Blockchain Conference in March 2017, Andreas Antonopoulos warned that many recent “blockchain” projects are fraudulent attempts to raise capital under the guise of innovation and disruptive technologies.

The blockchain’s holy grail

While bitcoin has proven what the blockchain can do, the technology still needs a killer app to justify the hype. The most likely contender is currently a “smart contract”. Smart contracts are programmable transactions with complex internal logic that can interact with internet-enabled devices and other smart contracts.

At this time, the problem with smart contracts is that they are susceptible to manipulation. What is needed to test the capacity of the blockchain is a small-scale low-stakes low-risk smart contract that (for example) regulates energy consumption, manages permissions, or ensures payment on supply.

Data61’s Smart Contracts Report lists some contenders, but first we need to manage the risk of fraud, breach of privacy, and blockchain bloat. Once these risks have been reduced to nil or negligible, the real work can resume.

Philippa Ryan, Lecturer in Commercial Equity and Disruptive Technologies and the Law, University of Technology Sydney

This article is republished from The Conversation under a Creative Commons license. Read the original article.