Securing Your Bitcoin for Dummies

An unfortunate predicament for newcomers to Bitcoin is most do not hold PhD’s in cryptography or computer science. The idea of being responsible for the security of a technically intimidating and poorly understood asset is terrifying. Too often individuals defer this challenge and choose to leave their coins on exchanges as “surely they know how to better secure these things”. Here I will summarize what newcomers need to know, why securing your own bitcoin is important and the easiest ways for a newcomer to secure their bitcoin & take personal responsibility for their assets.


 

No More “Forgot Password?” Button

Bitcoin’s greatest strength comes from the fact that it is censorship-resistant. If you own the private keys (bitcoin speak for password) to your bitcoins you can send them to whomever you want whenever you want. You alone control your wallet (bitcoin speak for account) and no organization, business, bank or government can stop you.

Historically for many a password has always been something you can easily recover by clicking the “Forgot Password?” button, right? This has been an option with online accounts because the service providers (Google, Facebook, PokemonGO, etc.) have record of your password. You don’t always think about it this way but you are trusting them with your account access and information.

This is not the case with Bitcoin. In Bitcoin you have the option to own your own private keys (password) giving you sole control and responsibility of maintaining access to your funds. A scary but empowering new possibility.

Why Securing Your Own Private Keys is Important

The recent hack of crypto-currency exchange Bitfinex of nearly 120,000 bitcoin (worth over $60 million at the time of the hack) has brought the issue of security back into mainstream discussion; an issue the industry is all too familiar with as displayed by the following tweet:

It is important to note these instances were never a hack on the bitcoin network itself. Rather they were instances where 3rd party service providers were robbed. (akin to your local bank branch being held up). When this occurs it is typically the customers of the exchanges (you) that end up holding the bag with no recourse. Imagine if your bank was robbed and they told you; “Sorry, we got robbed and it was your money. Nothing we can do!” This is what has happened time and time again to the customers of Bitcoin exchanges.

hack

If you own Bitcoin there are literally scary ghost hackers in hoodies trying to rob you.

Ultimately, the takeaway for a newcomer should be this; Bitcoin has value. If something has value people will likely try and steal it — especially if it can be stolen easily and with little risk. Bitcoin exchanges have shown they get robbed pretty regularly (at least one major hack per year) and when they do their customers lose there money.

If you don’t want to end up like these people you should learn the simple ways to secure your own Bitcoin that also don’t involve becoming a master cryptographer. Here I share the easiest & most secure known options for newcomers.

Important Tip Before You Read On

  • Creating Backups of Your Wallets: Each of the options below encourages you to create “backups” of your private keys. This is a good idea. Create backups and store them in a secure location(s)

Easiest Ways to Secure Your Own Bitcoin

  1. Phone a Friend: First and foremost if you have a friend or know an expert in the space get their support in navigating your options. Ask them questions.
  2. Buy a Hardware Wallet: Think of a hardware wallet like a really secure USB drive. They come with fairly simple instructions that will walk you through setup. You need to treat these as you would a wallet full of cash or a brick of gold. If someone physically steals them they can now control the funds stored on them. Here are the websites of two reputable brands:
  3. Print a Paper Wallet: Think of paper wallets as a unique account with it’s very own password printed out on a sheet of paper. Generate a new one, print it out, send bitcoin to it, and store it in a secure & safe place. Here’s a trusted site: Bitcoin Paper Wallet. You can take this to the next level by buying a device called Mycelium Entropy which will generate secure paper wallets offline and allow you to easily print them on a offline print. Link here: https://mycelium.com/mycelium-entropy.html
  4. Create a Coinbase Multi-Sig Vault: A little more complex then the previous options but Coinbase’s instructions walk you through the process of setting up a secure “vault” that only you can access. If you have 2 secure e-mail addresses this shouldn’t be too hard to learn to do yourself. Here’s a link: Coinbase Multi-Sig Vault

Getting More Secure

The Bitcoin protocol and its peripheral service providers continue to innovate and increase the ease of security over time. This list will get you started for now but if you find yourself getting more into Bitcoin you should make it your own priority to stay on top of the trends in security. If owning your own keys is still something you are not comfortable with be sure to investigate a service provider that has insurance. I believe Coinbase and Xapo currently offer more secure “vault” storage that provides this.

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On Hard Forks: They’re Getting Harder

Since the Ethereum hard fork on July 20th Ethereum Classic (ETC) (the original blockchain which includes the DAO heist) has found increasing support beyond just banter on twitter and crypto forums. It has grown substantially in terms of hash rate, price and trade volume. (It even surpassed Ethereum trade volume on 7/26/2016 at over $105 million).

At the time of the hard fork the new chain established almost instant separation in terms of hash rate leading many to declare the hard fork a success (Ethereum Blog Post). Many are beginning to realize that the fight may not be over. This is the first sign that in the maturing cryptocurrency ecosystem hard-forking a mature protocol provides challenges beyond hashing power — including the hearts, minds, and incentives of speculators and exchanges. With it’s own hard fork in the pipeline it may be a good idea for bitcoin to take note.


 

A Blockchain Street Fight

Anyone remember Double Dragon II for NES? No, just me? Well, in this game there was a point where the character is forced to fight his own shadow — a near mirror image of himself. In the most basic of analogies this is what is playing out before our eyes with Ethereum. We now find the two versions of the protocol battling it out.

Screen Shot 2016-07-26 at 6.34.12 PM

If I had to decide which was which I would call the hard-forked version of Ethereum the “shadow” chain. After all, it’s fair to say it is a less pure.

 

From what I see, this battle is being fought on several fronts. The historical elements of a hard fork include the following:

  • Mining Hash Rate: On one front, miners driven by profit motive are finding that rewards for mining Ethereum Classic in the immidiate time after the hard fork are greater than those of Ethereum leading to increased competition for hash rate between the protocols. This can be seen here: What to Mine
  • Perception & Social Media: Sadly this is a reality which I don’t care to discuss — but if you follow this stuff online the infighting is laughable and makes me slightly ashamed to associate myself with this industry.

A New Layer of Complexity

The new challenge facing open-source protocol forks is the maturing infrastructure surrounding them. Some of the new fronts include the following:

  • Exchanges Enabling Trade Volume & Price: Within days Poloniex exchange made ETC available to trade. Since then Kraken, Bitfinex and Shapeshift have either gone live with ETC trading or shared their intentions to do so. As a result ETC’s 24-hour trade volume now exceeds that of ETH. Its price has also increased substantially with a market capitalization ranking ETC a top 10 cryptocurrency. Where as a less mature ecosystem wouldn’t be able to support the previous chain the industry can now almost instantly get the previous asset on exchanges.

Ultimately, this new layer of complexity may indicate that as the ecosystem becomes more robust future hard forks could face new challenges not faced by previous forks.

So What’s Next?

I do not pretend to know enough to accurately predict how this battle will play out but that won’t stop me from speculating. It would seem the final stage would lie with the developers and companies building upon the blockchain(s) themselves.

If both chains can establish effective hash rates, mining incentives, communities, trade volume, and price it will come down to adoption by developers and companies.

  • Developer and Startup Preference: We’ve seen this play out with other blockchains (example: Onename moving from Namecoin to Bitcoin) where it became clear that one blockchain was favored over another. In this case it likely sealed the fate of Namecoin. The adoption of these companies can make or break a blockchain.

The ultimate deciders may be the developer and entrepreneurial community. Will they choose ETC, ETH … or will the division rendered by competing chains stagnate Ethereum sentiment and give Bitcoin maximalists more time to time to mature their more expansive projects built to compete with Ethereum with a proof-of-work backing. (Examples include YoursNetwork, Sidechains, Lightning Network, Rootstock, etc.)

One thing is certain … there will be more hard forks on open source blockchains and the Ethereum civil war will provided a number of great lessons for these projects. Hard forks are getting harder but with careful planning and attention it may still be possible to mitigate the risks and pull them off smoothly. Only time will tell.

 

On Consensus: The Good, Bad & Ugly of ‘Consensus Maximalism’ for Open-Source Blockchains

When first introduced to bitcoin I experienced an epiphany of sorts in realizing I didn’t understand what money was. One of my first assignments was to educate myself on what makes money money. This gave me a new understanding and appreciation for bitcoin and blockchain technology as a whole.

I believe the Bitcoin, Ethereum, and open-source blockchain communities are collectively suffering from a similar ignorance revolving around the idea of consensus. I call this affliction ‘consensus maximalism’ and hope this post can help shed light on this issue and share a different perspective on this concept.

Beating-Corruption-by-Building-Consensus-459x240

Only known photo of the world’s earliest blockchain.


 

Defining the Term

Merriam-Webster provides 2 variations of the primary definition for the term consensus. They are as follows:

consensus:

a :  general agreement

b :  the judgment arrived at by most of those concerned

Most notable about these definitions is neither includes any reference to absolute agreement. In lieu of absolute, total, or complete the definitions contain the terms general and most. This is a common oversight. I’ve observed this misunderstanding frequently in the Bitcoin and Ethereum space … I call it ‘consensus maximalism’.

Consensus Maximalism vs. Consensus in the Real World

I would define ‘consensus maximalism’ as the belief that to reach consensus there must be absolute agreement by all parties as to the best path forward. The fallacy is this level of rigidity would make any real-world consensus relatively impossible. Real progress requires a real-world definition of consensus.

Dr. John Toussaint, a former doctor & CEO, leadership guru and author famous for his contributions to organizational transformation work in the healthcare space was the first to bring to my attention that consensus is most often never about reaching full agreement. It is best described by the following excerpt:

…synthesizing the wisdom of all the participants into the best decision possible at the time. When you consent to a decision, you are giving your permission to the group to go ahead with the decision. You may disagree with the decision, but based on listening to everyone else’s input, all the individuals agree to let the decision go forward, because the decision is the best one the entire group can achieve at the current time.

After all, the term is rooted by the word ‘consent’. Very few systems, organizations, or communities have ever reached unanimous agreement on any decision. They always require a minority to ‘consent’ to moving forward in spite of their views for the benefit of the majority. Participants often have the option to ‘exit’ should their convictions be strong enough.

The Irony of Consensus Algorithms

The reality is that even in distributed systems consensus is never 100% at any time. This is displayed by orphaned blocks, alternatives cryptocurrencies, and of course hard forks. It is the great irony of this space that the communities supporting these systems struggle so greatly to achieve consensus in their effort to innovate upon consensus-mechanisms (blockchains).

The Good

In my view, as with many things in life, there is likely a smaller minority of ‘consensus maximalists’ who act as the squeaky wheels. This is not to say that this is all bad. In fact I believe it has some great benefits including:

  1. Increasing the difficulty to change highly distributed protocols with larger consensus pools (Bitcoin Core’s relative conservatism as an example)
  2. Encouraging outliers & dissenters with great conviction to ‘exit’ or support minority forks for communities & protocols. This drives creativity & innovation. (Every alt-coin ever)

The Bad

It stagnates progress to the limits of acceptance encouraging participants to ‘exit’. Nothing is more painful then being in the deadlocked state of consensus failure. Be it the decision as to where to go to dinner…

You: “I want to eat out … where would you like to go?”

Partner: “I don’t know, nothing sounds good.”

You: “Ugh… I don’t even want to bother.”

…or the debate on how to scale the world’s most promising blockchain.

The Ugly

The failure to reach consensus often blinds the minority participants from the shared purpose/goal of the entire population. Gun controls a good example of this. Nobody wants mass shootings but many people have strongly held opinions as to how to impact the problem… The ugly reality is as a result many of these camps end up fighting one another rather than focussing on actual experiments/solutions.

This unfortunate reality has reared its ugly head several times in recent years … examples including the bitcoin blocksize debate and the DAO / Ethereum hard fork.

The Good News

One benefit that blockchains have is the almost instant ability for those that do not consent with the path forward to fork. Ultimately anyone supporting or interacting with the longest chain should have nothing to complain about… by doing so they are ‘consenting‘ to the decisions of the majority of hashpower.

 

The Bitcoin Triangle

This is the most basic way I could describe the dynamics of the blocksize debate. Here are the rules….Pick any two sides of the triangle. You can have those two things but they come at the expense of the 3rd.

 

bitcointriangle

The Bitcoin Triangle. Pick any 2 sides at the expense of the 3rd.

For example, you can keep scale bitcoin and do so in a relatively short amount of time (increase blocksize) but inso-doing you sacrifice decentralization. Similarly, you can make bitcoin super-decentralized (smaller blocks) quickly as well, but inso-doing you sacrifice scale.

Fortunately, I believe the way things will play out for bitcoin is the best of the three possibilities. I believe we will see a scenario where we focus on scale and decentralization at the acceptable expense of time. I don’t know about you but I’m willing to wait on a sound solution… even if it takes some a couple more months, that’s all.

HELP WANTED: Non-Developer Seeks Experts to Make Informed Blocksize Decision

Recent events and bitcoin volatility appear to have sparked momentum in the blocksize debate. Despite following the proposals and on-going debate I have yet to formally support a proposed path forward. Here I want to lay out a very succinct account of the issues and pose some questions that will help me finalize my decision to support (or not support) Bitcoin Classic. I welcome comments and feedback from anyone in the community to help me gain a better understanding and make an informed decision.


The Fundamentals of the Debate

I understand the foundation of the debate to be based on two fundamental objectives shared by many in the community.

  1. Scale Bitcoin to Compete as a Global Transaction Network & Clearing Rail
  2. Maintain Strong Degree of Decentralization of the Bitcoin Blockchain

The irony in the debate is that all parties would likely agree that they want to achieve both of these. The challenge is that in many ways these objectives are at odds with one another, at least in the short term. To scale bitcoin in the near term means increasing the blocksize but increasing the blocksize means weakening the degree to which bitcoin is decentralized. Thus the need for compromise.

helpwanted
Where is the fair ground between scaling bitcoin for short term utility while not losing what makes bitcoin bitcoin in the process? In my humble opinion I believe this point falls where objective #2 (maintaining decentralization) has been prioritized while allowing for objective #1 (scaling bitcoin by increasing blocksize) to be achieved in a way that reasonably maintains decentralization.

Resources Informing my Decision

I’ve laid out my concerns. My stance could be summarized as follows:

Decentralization should be maintained as a priority and scaling bitcoin should be attempted where possible as long as it doesn’t jeopardize the decentralized nature of the protocol itself.

With this understanding I’ve referred to a number of resources to become more informed on the immediate proposals and considerations. Here are some of the resources for your reference:

  • Charles Hoskinson’s recent blog post has a section at the end called “My Proposal to Solve the Debate”. I respect his opinions based on his past & current contributions to Bitcoin and Ethereum. In it he shares a number of potential solutions (both technical and political) as well as a number of foreseeable innovations worth taking into account. This post does a good job of painting the big picture for bitcoin in the long run.
  • In the latest episode of the Lets Talk Bitcoin! podcast Andreas Antonopoulos spends the final minutes discussing the greater implications of Segregated Witness (Dr. Peter Wuille’s proposal that could reduce blockchain bloat by 75%). Beyond it’s immediate implications for bitcoin blocksize and transaction capacity Andreas describes a number of other benefits that may have even greater implications for scaling Bitcoin over time.
  • Overall growing momentum and support of Gavin Andressen’s Bitcoin Classic proposal.

While my greater understanding of the issues is based on a host of other information from the past 3 years these are the primary sources I’m considering at the moment.

My Own Conclusions

Based on this I’ve come to the following conclusions:

  • Decentralization must be maintained and protected as a priority — aggressive blocksize increases are not worth the risk but minor ones may be acceptable.
  • The benefits of Segregated Witness as a soft-fork are significant and this should be considered for immediate testing & implementation.
  • Bitcoin Classic is gaining momentum, is supported by leaders in the space, is proposed by one of Bitcoin’s most trusted core developers. It’s 2 MB blocksize increase appears modest and does not immediately threaten decentralization to any significant degree.

Essentially, if Bitcoin Classic maintains the tenants described above (prioritizes decentralization and allows for scaling at modest levels when appropriate) and allows for Segregated Witness I am inclined to support it and see bitcoin move on to it’s next great challenges.

Questions to the Community

What am I getting wrong here? Have at it!

The Revelator: On Permissioned Ledgers & Bitcoin

r evolution

Opposing camps have emerged regarding the debate of permissioned ledger technology and Bitcoin. Here I summarize my thoughts on this dynamic and make the case that permissioned ledger tech and bitcoin represent two radically different experiments; one evolutionary — the other revolutionary.


A Difference in Opinion

I think it is fair to say that the perspectives of these camps could be summarized as follows:

Proponents of Permissioned Ledger Tech: Believe it is possible to harness value through blockchain technology innovations without the requirement of decentralization or native tokens. Believe a blockchain is a distributed ledger. Are generally blockchain agnostic. Work with legacy systems to explore savings opportunities such as clearing. (Ex: Ripple, R3 CEV, ERIS).

Opponents of Permissioned Ledger Tech: Believe the primary benefit of blockchain technology is the ability to transact P2P without the need for a 3rd party (legacy systems). Believe a blockchain is a distributed and decentralized (to the extent possible) ledger with a native token. Generally support the most decentralized blockchains; bitcoin, litecoin, ethereum, etc.

I imagine many will read these definitions and assume that these two camps are fundamentally at odds with one another. In the landscape of public debate they are often presented as such.

I believe these assumptions to be misguided based on the idea that these experiments (permissioned ledgers & bitcoin) represent two drastically different efforts. Permissioned ledgers represent projects focused on improving legacy systems. Bitcoin and decentralized blockchains represent a movement to remove the need for legacy systems entirely.

Evolution vs. Revolution

Evolution can be defined as a gradual change or improvement. When comparing the Model-T to the Tesla the superiority of the Tesla is the result of successive evolution’s in automotive technology.

modelttesla

The first Model-T went into production in 1908. The first Tesla Roadster went on sale in 2008. 100 years of automotive evolution.

Revolution can be defined as a sudden, complete or marked change. When comparing the Tesla to the first airplanes the superiority of the airplane is the result of a revolution in the concept of transportation.

teslaplane

The first Tesla Roadster can only drive on roads and can not leave the ground, traverse over a stone wall or cross a river. The first airplane flown by the Wright Brothers in 1903 traveled 120 feet by air and could do all of the above even in its primitive state. This was a revolution in transportation.

Blockchain Technology: Evolution & Revolution

Permissioned ledgers represent an evolution in banking. The goal of permissioned ledgers experiments is to explore how legacy systems could marginally improve with the use of the technology. The primary focus is to understand what kind of savings and efficiency might be achieved to the benefit of financial institutions and their customers. If I were to take the liberty of assuming the principles of those working on such efforts I might imagine them being as follows: explore how blockchain technology can provide better services at lower cost to customers.

Distributed and token-based technologies like Bitcoin represent a revolution in banking. The seed of bitcoin efforts (and where most of the debate in the space is focused) is how to establish as decentralized a system as possible to ensure transactions can be secured P2P with no middle man. This is revolutionary in both thought and application and has significant implications if the movement grows. If I were to take the liberty of assuming the principles of those working on decentralized efforts I would imagine them being as follows: explore how blockchain technology can establish a sustainable system enabling P2P transactions without the need for a third party.

A Healthy Co-existence

An evolution in banking is a good thing. If legacy institutions can leverage permissioned ledger technology in the short term, however marginally,  to reduce costs and improve the services they provide their customers this is a good thing. Who doesn’t want to be charged less and have faster clearing of their assets?

A revolution in banking is a great thing. If the promise of P2P systems like Bitcoin can be achieved at scale in the long term  the world will be a dramatically different place in the decades ahead (likely for the better). Who doesn’t want to have true financial autonomy?

Today we have both planes and automobiles. Despite the revolutions in transportation not everyone is a pilot — and evolution in automotive technology is welcome and frequent. These technologies co-exist and likely will for some time.

I view permissioned ledgers and blockchain experiments in much the same way. Despite the revolutionary opportunities Bitcoin foreshadows not everyone uses it yet — and evolution in modern banking should be welcome in the interim.

That being said, I welcome the day I can fly my Tesla over a river while paying my electric bill in bitcoin.

Bitcoin’s Digital Waiting Line: “Micropay-for-Queue”

Bitcoin and micropayment-enabling technologies (like the 21 Bitcoin Computer) will allow society to monetize economies previously untouched by legacy payment methods. One of the first potential applications, monetizing time, may revolutionize the way we “wait”.

“Micro-Pay for Queue” with Bitcoin

bitcoinqueue

Pay per second with satoshi’s instead of wait in line? Sure!

Historically the currency we spend to hold our spot line is time. One individual might be willing to spend 2 hours waiting in line to purchase tickets while those more fanatical are willing to spend 18 hours and camp out overnight. We see such scenarios play out with all kinds of events (sports, music, appearances) and releases (iphone, Black Friday, etc.). The cost of time is a prohibitive mechanism for many who might otherwise be willing to participate.

The challenge for online sales is that there is no prohibitive mechanism (cost) to develop a queue for priority… until now. By placing a bitcoin micro-fee to each second/minute/hour a spot in the queue is held we can now develop true digital waiting lines to establish order. (i.e. whoever is willing to pay the most over the longest period of time gets the first spot, second spot, third spot, and so-on).

I’m Still Not Getting It, Give Me a Metaphor

Imagine you are waiting in line to purchase something in high demand… something you want very badly. Maybe it’s playoff tickets for your favorite sports team or preferred seats for your favorite band. You know they’re gonna sell out fast.

Also imagine that instead of waiting in line overnight for hours, you have the option to simply pay a fraction of a penny per second (say 0.01 pennies = 28 satoshi’s) to hold a spot in line.

Tickets go on sale Friday at 10 AM. You decide to start paying for a “spot in line”on Thursday night at 8:00 PM. To hold this spot you will pay second-by-second for 14 hours of “micro-pay for queue” time. 14 hours amounts to 50,400 seconds. Here is a rate breakdown:

50,400 seconds x $0.0001 Dollars = $5.04

OR

50,400 seconds x 28 Satoshis = 0.014 BTC

You’ve effectively monetized the cost of your time and paid it out on a second-by-second basis to maintain your spot in queue.

Additional Benefits of “Micro-Pay for Queue”

Enabling digital queues online via “micro-pay for queue” systems would make a host of other added benefits possible.

  • Preventing Bad Actors

Spam free e-mail is an application often touted by bitcoin micropayment proponents. A cost to send an e-mail acts as a disincentive for spammers because the fees of high-volume spam attacks have the potential outweigh the benefit. The same principles apply for an online queue.

A sunk cost needs to exist in a queue to prevent bad-actors from participating. If there is no sunk cost bad-actors are free to clog the line (DDoS attack) to:

A) Generate the illusion of demand

B) Dominate the queue with their own requests

C) Clog the queue to disrupt the service

  • A New Revenue Stream

A new revenue stream would emerge for both merchants and service providers. High demand events would likely drive the fee-per-second price higher. You might imagine a future where “micropay-for-queue” fees add entire percentage points to tickets sales.

  • Reducing Customer Dissatisfaction

For many consumers high-demand events can lead to significant issues for online sales. Crashed servers, faulty purchases, customer service nightmares, etc. By enabling digital waiting lines many of these issues would be mitigated, providing ideal experiences for the most invested customers. In fact, you’d imagine that events with greater demand (high cost-per-second queue fee) would become more anti-fragile.

Beyond Ticketing

Ticketing is a palatable example for how this kind of system might apply to the real world. In the short term I can imagine such technologies being adopted by major online ticket-brokers to save real costs and add new revenue streams.

What I believe is even more exciting is for this kind of queue-ing technology to make its way into the physical world. You might imagine this kind of system applying to reservations of any kind for high-demand services; be it a table at a restaurant, a parking space in a garage, or future IoT machines claiming a spot in a queue against other machines. I wonder if robots call shotgun?


 

**Update 12/5/2015**

If this post was of interest you may also enjoy this paper from @AnouarElHaji:

 


 

Case in Point: The night tickets went on sale for “Star Wars: The Force Awakens” I did my best to buy seats for opening night with bitcoin on http://www.movietickets.com and via my credit card on Fandango. Given that both servers crashed and that I had to do a number of refunds based on faulty purchases — I think a few satoshi’s would have been well worth the cost to ensure a smooth and fair experience.

StarWarsBTC

To the credit of http://www.movietickets.com they refunded the bitcoin I paid for this purchase after a couple days and e-mails.