Daily Archives: March 7, 2017

An often misunderstood topic is that of chain splits and how they are potentially resolved. With the recent proposal from Shaolinfry discussing User Activated Soft Forks (UASF) getting much attention, these misunderstandings must be clarified to fully understand the implications of chain splits and their potential resolutions.

Types of Forks

Miners can create chain splits through the deliberate orphaning of blocks that appear to be valid to some clients. Users maintain a set of consensus rules that they require of all blocks. When users disagree about the sets of consensus rules to enforce, they will follow a different chain. To simplify discussion, well skip the case where the consensus rules are agreed upon, but miners decide to orphan blocks for other reasons, and cases where there are more than two sets of consensus rules.

In the following examples, there are two sets of rules, the Red rules and the Yellow rules. In these examples, the Red rules are original rules being enforced, and the Yellow rules are the modified rules. Orange rules are the combination of both Red and Yellow rules (both rule sets agree that these blocks are valid).

Incompatible Hard Fork

An incompatible is the simplest type of chain split to understand. At a certain block height, some users decide to implement a new ruleset. In this case, the new ruleset is completely independent of the original rules.

Incompatible Hard Fork

A hard fork occurs after some miners decide to mine on the new ruleset, and some continue on the old ruleset. No block produced under the new rules is valid under the old rules, and vice versa. The Ethereum/Ethereum Classic split is an example of this kind of split. In this case, the chains are eternally split with no chance of ever converging, no matter how much work is mined into each chain.

Semi-Compatible Hard Forks

A semi-compatible hard fork occurs whenever the rulesets intersect, but there are some blocks that are valid on only one of the chains for each chain.

Semi-Compatible Fork

In these cases, miners can prevent a chain split by mining only Orange rule blocks. However, once a miner mines a Red or Yellow block, the chain splits. It is possible for the chains to converge if miners eventually put together an exclusively Orange chain starting from when the users accepted Yellow rules that surpassed the total work of both of the other chains. If they ever did this, both the Red/Orange and Yellow/Orange chains would be orphaned by Red/Yellow clients, and they would see a single chain. There are no major forks of this type that I am aware of.

The best bet for miners in this case (depending on the specifics) would typically be to just mine Orange blocks, preventing any chain split. By doing so, miners are effectively turning a Semi-compatible fork into a Soft Fork.

Compatible Hard Fork

In a hard fork, the ruleset expands, to include all of the previous rules, but also allowing other conditions.

Hard Fork

When the rules expand, as soon as a miner mines a block with the Yellow rules, the chain splits. This type of split will diverge as long as the Yellow chain contains more work than the Orange chain. One danger in this type of split is that if the Orange chain contains more work, the Yellow chain will be orphaned. Users of the Yellow chain must not only be sure that a vast majority of hashpower will be on this chain initially, but will continue to be on this chain for eternity. Examples of this type of fork include Bitcoin XT, Bitcoin Classic and Bitcoin Unlimited.

Soft Fork

A soft fork is when the ruleset is tightened and the Yellow rules are completely covered by the Red rules (thus only Orange and Red rulesets).

The chain split can occur whenever a miner creates a Red block. Users who use the Red ruleset will follow that chain, and users who use the Yellow ruleset will follow the Orange chain. In this case, if the majority of hashpower ever starts enforcing the Orange rules, the Red chain will become orphaned. This type of fork occurred in Bitcoins history numerous times with changes such as BIP66, CSV, CLTV, and is in the proposed SegWit Soft Fork.

Reorganization Risk and Split Risks

Both massive reorganizations and chain splits present dangers to users and miners. A massive reorganization can cause previously accepted transactions to disappear, which will guarantee that a large number of people will lose money in the process.

In this case, for example, perhaps a year ago you were paid 10BTC for your car, and a year later, that transaction essentially disappears from the ledger and your chain is abandoned. You have no car and no Bitcoins. This type of behavior would cause a great loss of confidence in the currency. Depending on the type of split, a massive reorganization will only affect users of the looser ruleset. Users of the tighter ruleset will never get reorganized.

A chain split also presents risk. The value of Ethereum took a tumble after it split from Ethereum Classic. It added confusion to the marketplace (Which is really Ethereum? The one with the original rules, or the one with the rules the centralized Ethereum Foundation enforces today?). A chain split affects all users adversely. There are cases where a split may be preferred (say, two groups have vastly different interests and are best served following their own wants, rather than compromising).

Mitigating Risk

Risk for most of these forks can be mitigated by both miners and users, in most cases.

For an incompatible hard fork, no mitigation plan can occur. The chain IS splitting, so long as some miners and some users want it to. There is nothing that can happen. This is the equivalent of getting a divorce decree and parting ways, never to interact again.

For a semi-compatible soft fork, miners have the power to prevent both a chain fork and massive reorganization. If the majority of miners choose to mine only Orange blocks, users will remain on one chain and reorganizations will be limited to a small number of blocks.

For a compatible hard fork, risk is exclusively on the Yellow rule users. Their best mitigation is to ensure the majority of the economy is on their side. Its also important to make sure the majority of the miners are also on their side initially, otherwise the chain will not split. Without the majority of the economy, the value of the Orange blocks will be greater, thus pulling miners interested in profit to their side, leading to a massive reorganization.

Extreme care must be taken in this scenario (something that was not present with Bitcoin XT, Bitcoin Classic, nor the proposed Bitcoin Unlimited). The former would activate with a mere 75% of hashpower, and Bitcoin Unlimited has no threshold for activation.

For a soft fork, the risk is exclusively on the Red rule users. Their best mitigation strategy is to ensure that they have the economy on their side, and the vast majority of miners following the Red rules OR the vast majority of miners on the Orange rules.

This may seem a bit counterintuitive, but if the vast majority of miners are mining the Orange rules, then they will remain in consensus with the Orange users and will not get Orphaned. Miners can mitigate this by only mining blocks in the Orange set and orphaning the Red set.

Miners have a significant role in mitigating this risk. In every case except the Incompatible Hard Fork, the miners can prevent a chain fork. For the semi-compatible hard fork, they can do this by converting it into a soft fork. For the compatible hard fork, they can only do this by rejecting the hard fork. For the soft fork case, they do this by enforcing the soft fork. However, even without the miners doing this, users have an incentive to protect themselves by enforcing the Orange rules and rejecting anything does not meet them. This means rejecting hard forks and enforcing soft forks.

Epilogue: Escaping a Miner-Imposed Ruleset Change

Many, including Jeff Garzik, have cast suspicion upon soft forks because they do not give users a choice. The nature of Bitcoin and other Proof-of-Work based blockchains cannot prevent miners from enforcing stricter rules than users agree to. However, users do have power by invoking an incompatible hard fork.

In this case, users will force the chain to split by introducing a new ruleset (which may include a proof-of-work change, but does not require one). This ensures users always have an escape from a miner-imposed ruleset that they reject. This way, if the economy and users truly reject a soft fork rule change, they always have the power to break away and reclaim the rules they wish. It may be inconvenient, but the same is true of any attack by the miners on users.

This guest post by Alphonse Pace was originally published on Mediumand is reproduced here under a Creative Commons License.

Link:
Guest Post: Chain Splits and Resolutions - Bitcoin Magazine

The worlds most famous cryptocurrency is trading at record highs, but is it a bubble?

Looking at a chart of bitcoins price as it climbed and eventually overtook its long-held, previous all-time high, set in the final months of 2013, its easy to see why some people think its a bubble in danger of popping.

But Vikram Mansharamani, who wrote a book about identifying bubbles, says the bitcoin market exhibits fewer than two of the five major features of a fully inflated bubble. He lays out his argument in a LinkedIn post, which Ive summarized in the scorecard below.

Another blogger has weighed in with his own interpretation of the market using Mansharamanis framework and concludes that trade in the cryptocurrency is a tad frothier. Whereas Mansharamani gives bitcoin half mark for reflexivitythe idea that an assets rising price increases demand for it, which investors like George Soros subscribe toSG Kinsmanns analysis gives bitcoin a full point for reflexivity. The argument for doing so? Transaction volumes and fees, which indicate demand, have risen along with the price.

Still, that puts bitcoin at just two out of five marks for bubble indicators.

Bubble or not, bitcoin investors are in for some price action this week. The US Securities and Exchange Commission only has five more days before it must issue a decision on a bitcoin exchange-traded fund, which could really open the floodgates of demand for bitcoinor bring the price crashing back down.

View post:
The case against calling it a bitcoin (BTC) bubble Quartz - Quartz

Editors Note: This post originally appeared in slightly different form on The Finanser blog.

As referenced in my recent post about the R3 consortium, there are various camps out there fighting for the cryptocurrency crown. The lead runners are bitcoin and Ethereum, and both have serious backing. However, its still early days. I keep stressing that we need to remember we are experimenting here, and the endgame is still a ways away. The end game is that there will be a digital currency we can all buy into, whether its bitcoin or bityuan or ekrona or ether or monero or any of them, who knows it could be all. Equally, it could be none.

This is not a win-lose equation, however, as there is a potential win-win zero-sum game where several currencies and blockchains survive and thrive, with interoperability for different use cases. After all, corporates might use Ethereum while the general public uses bitcoin. So heres a quick lowdown on how I see it.

Bitcoin

After blogging about bitcoin for six years, Ive closely followed its peaks and troughs, ups and downs.

Right now its peaking with a price of $1,290 per bitcoin. That makes it worth more than gold, and the bitcoinisters are all over the moon. But theres the usual factions moving here, with the hype of the bitcoinisters versus the reality of the markets. For example, Im pleased the price of bitcoin is way up there but (a) its meant to be a currency you spend, not an investment you hoard; and (b) its still tiny (in terms of the size of the market) when compared with other currencies and commodities.

On the former note, Im seeing too many people buying into bitcoin because theyre being suckered by the hype and believe its a good investment. Its a currency, not an investment; or thats what we should be thinking. On the latter, this quote from Fran Strajnar, co-founder and CEO of Brave New Coin, makes sense: The gold supply is 180,000 tonnes of above ground gold, valued at $7 trillion. The bitcoin market value is $20 billion, so gold vs bitcoin is psychological more than anything.

Yep.

Bitcoin has had a lot of people buying into the market, but its still a small $20 billion market. A long way to go before we can believe its mainstream, and there are plenty of competitors out there such as Zcash, which claims to overcome the deficiencies in bitcoin.

It is notable that the gold rush of recent bitcoin activity is caused by a variety of factors, from Japans legitimizing the currency to Chinas outlawing it to the Winklevoss twins' creating a potential SEC-approved ETF to trade in it. All of these factors, along with Brexit and the Trump presidency, are fueling people to invest. This then creates a virtuous circle of the more who invest, the more who invest. This may all come tumbling down quickly, or it may move mainstream. We just dont know. What I do know is that we no longer talk about bitcoin as a Wild West, the dark net currency, ridiculous or stupid. People are taking it seriously now, and thats probably a good thing. Even so, there are many who dont buy into it, with the currency announced as dead 124 times to date. Its still not dead, though.

Ether

Ether is the currency of Ethereum, and this is proving popular with corporates. In fact, its so popular that the Ethereum Enterprise Alliance was announced last week, driven by Microsoft, Intel and JPMorgan. Thats saying something.

So why is Ethereum more popular than bitcoin for corporate users? Because of Microsoft. Microsoft saw the potential of Ethereum for blockchain-as-a-service using their cloud Azure platform early on, and has been driving that project forward ever since to its enterprise account base as the platform of choice. Equally, Ethereum and ether differs from Bitcoin and bitcoins (former is the infrastructure, latter is the currency), because it allows both permissioned and permissionless transactions to take place, whereas bitcoin only works in a permissionless way. For corporates, having transparency of transactions and a completely public ledger just wouldnt work, which is why corporates and banks arent buying into bitcoin.

Ethereum is not proven, however, as demonstrated by the infamous DAO hack and hard fork last year. However, it does show the nature of factions and different views when you google Ethereum fail and the top results include two next to each other: "Why Ethereum Succeeded Where Bitcoin Failed" (Motherboard) and "How Bitcoin Succeeded Where Ethereum Failed" (Coinjournal).

The competition between the various blockchain and distributed ledger models was well summarized recently by Penny Crosman for American Banker in an article focused on Microsoft and IBMs competing projects, respectively, the Enterprise Ethereum Alliance and the Linux Foundation Hyperledger Project.

It just goes to show that there are lots of tribes fighting for survival here, and its not pretty. The two leading tribes are bitcoin and Ethereum, but there are plenty of others, as I outline above. For banks this leads to choices: do we invest in Ethereum and join the Ethereum Enterprise Alliance or do we become part of R3 CEVs consortia? It is not even as simple as that, as there are plenty of other alliances out there.

Chris Skinner is an author, expert and speaker on banking, finance and fintech. He is the author of the The Finanser blog and chairs the Financial Services Club.

Read the original post:
BankThink Bitcoin vs. Ethereum may be a zero-sum game - American Banker (subscription)

By Keith Weiner

Bitcoin Mania

The price of gold has been rising, but perhaps not enough to suit the hot money. Meanwhile, the price of Bitcoin has shot up even faster. From $412 one year ago to $1290 on Friday, it has gained over 200% (and, unlike gold, we can say that Bitcoin went up - it's a speculative asset that goes up and down with no particular limit).

Compared to the price action in Bitcoin, gold seems boring. While this is a virtue for gold to be used as money (and a vice for Bitcoin), it does tend to attract those who just want to get into the hottest casino du jour.

Bitcoin has been on a tear lately - the same cannot be said of gold at the moment [PT].

Perhaps predictably, we saw an ad from a gold bullion dealer. This well-known dealer is comparing gold to Bitcoin and urging customers to stick with gold because of its potential for price appreciation. We would not recommend relying on this argument. Whatever the merits of gold may be, going up faster than Bitcoin is not among them.

We spotted another ad today from a mainstream financial adviser. The ad urged clients not to buy gold. This firm should have little need to worry. Stocks have been in a long, long, endless, forever, never-to-end bull market. Gold is not doing anything exciting now. $1234? "WhatEVAH (roll eyes)!" Stocks, well, the prices just keep on going up. Like we said, nothing whatsoever to worry about. Other than declining dividend yields. There's more than enough irony to go around.

Speaking of dividend yield, that leads us to an idea. Readers know that we like to compare the yield of one investment to another. This is why we quote the basis as an annualized percentage. You can compare basis to LIBOR easily. And also stocks. Or anything else.

For example, the basis for December - a maturity of well under a year - is 1.2%. The dividend yield of the S&P stocks is just 1.9%. For that extra 70 bps, you are taking a number of known risks and some unknown ones too.

It is worth noting that the yield on the 10-year Treasury is up to 2.5%. Yes, that's right, you are paid less for the risk of investing in big corporations than you are for holding the risk-free asset.

Of course, the Treasury bond is not really risk-free. But in any case, if the Treasury defaults, then it's safe to assume most corporations will be destroyed, if not our whole civilization.

The "risk-free" 10 year treasury note yields a lot more than last year, but while 2.5% is not exactly exciting, it is still more than the stocks in the S&P 500 Index are paying out in dividends. It doesn't look like anyone is getting proper compensation for the risks involved [PT].

A Shortlist of Myths

We have heard the mainstream theory so many times, our heads are hurting. Here are the myths: the Chinese are selling, inflation is coming, and the economy is picking up.

China is selling. The Chinese people are selling the yuan to buy dollars - when they can get through the increasingly strict capital controls. The People's Bank of China takes the other side of the trade - selling dollars and buying yuan - to keep the yuan from collapsing.

When a foreign central bank holds dollars, it does not hold paper notes. Nor does it deposit them in a commercial bank. It holds Treasury bonds. Its sales of Treasuries may look scary, but that is just what is seen. The unseen is that the Chinese people are buying dollars. Those dollars come back to the Treasury market one way or the other.

Onshore yuan, weekly. This is the USDCNY notation, which shows how many yuan one has to pay for one US dollar, i.e., a rising trend on the chart denotes a weakening yuan [PT].

Inflation is coming. The Fed is printing, the quantity of money is going up, there will be demand pull, etc. Well, if that were true, then the last place you would want to be is in an asset the price of which is set by the net present value of its future free cash flows. Or at least the price should be. If you think stock prices have to rise in inflationary periods, look at what happened in the 1970s.

The economy is picking up. What can we say? There are two views on this. One has seen (or looked for) green shoots and nascent recoveries since the crisis. The other has seen rising asset prices, and with that, a small wealth effect. We will not opine about Trump and the future of the economy here. We just wish to note that junk bonds have not sold off the way Treasuries have. Junk bonds have hardly sold off at all.

Quite the opposite. They have been massively bid up (i.e., yield has been crushed). We submit for your consideration that if inflation were coming and/or the economy were picking up, you would do even worse in junk bonds than in S&P stocks.

Happy days are here again! Apparently there is currently practically no risk whatsoever in holding junk bonds. Especially the very worst ones are doing exceptionally well. Who are we to argue with "millions of well-informed investors" - they are always right, aren't they? [PT].

The 10-year Treasury hit its low yield (so far) of 1.3% in July. Since then, it has been a wild ride mostly up to 2.6% in December. Since then, it's been choppy but falling (i.e., prices rising a bit).

July also happens to be when the yield on the Swiss 10-year government bond began rising. It made a low of -0.6% (yes, negative). Since then, the yield has gone up (i.e., bond price has gone down) to near zero in December. It is currently at -0.1%.

In Japan, the same occurred. Low yield on the 10-year government bond in July was -0.3%. The high was hit in December. Still elevated now, but off the December high.

It's almost as if government bond yields around the world were moved by the same drivers, or even connected by some kind of arbitrage...

Whatever the cause of this worldwide sell-off of government bonds may be, it is not selling by China. It is not inflation. It is not expectations that the economy will take off under Trump. Maybe it's just traders looking at price charts, buying because stocks are going up?

Precious Metals - Fundamental Developments

This week, the prices of the metals dropped. As always, the question is what happened to the fundamentals?

Below, we will show the only true picture of the gold and silver supply and demand. But first, the price and ratio charts.

Prices of gold and silver.

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It moved sideways again this week.

Gold-silver ratio.

For each metal, we will look at a graph of the basis and co-basis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and co-basis in red.

Here is the gold graph.

Gold basis and co-basis and the dollar price.

This week, our old friend returned. He is the correlation between the price of the gold (i.e., the inverse of the price of gold in dollar terms) and the co-basis (i.e., our scarcity indicator). They had been moving together.

This week, they met up for old time's sake. The dollar is up from 24.75 mg gold to 25.20 mg. And the co-basis is up from -0.41% to -0.16%. At least in the April contract, which is rapidly approaching First Notice Day, and is already under downward pressure. For farther contracts, the co-basis is up, but not that much.

Our calculated fundamental price dipped twenty bucks. It is still $150 above the market price.

Now let's look at silver.

Silver basis and co-basis and the dollar price.

The co-basis in silver moved up big-time as well. The silver fundamental price also fell about fifteen cents.

Charts by: Cryptowatch, StockCharts, BigCharts, St. Louis Federal Reserve Research, Monetary Metals

Chart and image captions by PT where indicated

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

More here:
They're Worried You Might Buy Bitcoin Or Gold - Precious Metals ... - Seeking Alpha