Bitcoin Bail-Ins and Yuan Bets
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From a "blockchain enthusiast"'s perspective, this is exactly why Bitfinex and other centralized Bitcoin businesses are idiotic. If we're just implementing centralization on top of Bitcoin's decentralized structure, Bitcoin has literally no benefits over the traditional financial system. It's actually worse, because when a major traditional financial institution gets hacked, they reverse the charges instead of going bankrupt. Bankruptcies happen all the time in the Bitcoin world because creating a centralized Bitcoin puts a target on the business that grows as the business grows, and the damage when they get hit is irreversible.
The benefit of Bitcoin is decentralization, and businesses that don't understand this are always going to come across as naive. Sometimes so naive that they fail.
That being said, is that added benefit worth the (much MUCH bigger) risk of your money going up in smoke? Personally, I don't think so.
Overall, I agree... The reinvention of the wheel for the sake of it is laughable.
Bitcoin isn't trivially anonymous, and centralization almost universally comes with regulation that prevents it from being anonymous.
Businesses understand this really well and they are using this to their advantage, there's not much regulation around crypto-curruncies as of now, so these companies can operate in a legally gray area. It is the customers of these businesses who has no idea what is going on.
Many are happy to buy and sell the whole utopian view of how the block chain is going to liberate them all, how its going to end poverty and and kill all the evil bankers, but everyone saw what happened then the DAO got hacked, that whole utopian view of the irreversible something something was somehow now the responsibility of a central group.
If anyone wants to see examples of how most of these users have no idea of how to handle money, look at all the ponzi schemes that are build around crypto currencies. Its insane thinking how easily people give away their money for a piece of the moon.
I specifically said, "businesses that don't understand this" to talk about the subset of businesses that don't understand decentraliztion. I didn't say that all businesses didn't understand decentralization.
There are many businesses that do understand decentralization, but centralized exchanges like Bitfinex definitely don't. If they did, they wouldn't be holding the money of thousands of users. Lack of regulation around cryptocurrencies is only one implication of decentralization, and for that matter, it's one that isn't permanent. Decentralization makes regulation hard to enforce for individuals, but large centralized businesses are going to have a hard time avoiding regulation in the long term.
I think the key phrase here is "in the long term". Who says Bitfinex is in it for the long term? They say it? Why do you trust them?
A typical business will try to make money off you any way they can, scamming you if they deem it is profitable. The more legally gray area the business is in, the more likely it is you'll get scammed.
I think 'oolongCat was trying to point out that a centralized Bitcoin business may very well understand decentralization perfectly; that doesn't mean they will care about it in any way.
Assuming they don't plan to die tomorrow, Bitfinex is on the hook for a lot of money to a lot of people right now, and they're likely going to be sued. If they were only in it for the short term, they weren't in it for short enough; they didn't get out in time. Where does Bitfinex benefit from this? If their intent was to scam their users, they've also scammed themselves through their own lack of understanding.
I get what you're saying, but it just doesn't work out, even as a short term scam, for reasons that are obvious to anyone who understands decentralization. Bitcoin centralization can be a way to execute a scam (see various darknet markets that have exited with all their users' escrow Bitcoins). But Bitfinex didn't use centralization to execute a scam. They just failed because they didn't understand how decentralization would affect their business.
Speaking as a fellow "Bitcoin enthusiast" who's been involved in it for five years, exchanges are useful for selling Bitcoin. The key is to limit your exposure to hacks by leaving your money with them for as little time as possible. So my balances are always sitting at zero, right up until I want to sell some, at which point I deposit it, wait the six required confirmations (roughly an hour), immediately sell it, then immediately initiate a withdrawal. Even assuming a very pessimistic situation of the exchange I'm using suffering a full loss every year, that still puts my % loss from hacks at well under 1%. That's a risk worth taking considering how much more inconvenient all other ways of selling Bitcoin are.
bitcoin is the slowest of all cryptocurrencies and many people use alternate cryptocurrencies (colloquially called altcoins) that transfer to exchanges faster than bitcoin (2-10 minutes compared to 10-60 minutes)
so storing more securely in your own altcoin's wallet and transferring is very fast.
most people aren't selling bitcoin for national currencies when they are using an exchange, they are trading between altcoins and other cryptoassets.
In the 5% of the time you actually need a national currency, you deal with those fiat exchanges on the far edge of the cryptocurrency economy, and deal with their slowness and questionable security for a brief amount of time.
Also, although less true now, exchanges can't be relied on to broadcast transactions to pay for things as well as a software wallet does. So when you aren't speculating and trying to buy something in a time sensitive way (such as using bitpay or shapeshift.io), using an exchange as a personal bank account for online shopping results in a horrible user experience.
I'd actually like to know if this is the case. It certainly isn't what I'm doing. I did hold some Litecoin/Peercoin for a while, and I still have Namecoin, but I have enough Namecoin that I'll probably never have to buy one again to keep my .bit domains, and I haven't held anything else except Bitcoin in over a year. So my typical use-case for an exchange is just to exchange national currency for cryptocurrency.
I suspect that I'm not the only one, but I don't have any evidence for that. If you have evidence that my use case is actually the 5% use case as you claim, I'd be interested to see it.
Secondly, my extrapolation came from the daily volume of trade on the exchanges, from what I see on Coinmarket cap and other sources
http://coinmarketcap.com/currencies/bitcoin/#markets
As of time of writing, Ethereum/Bitcoin pair is 20% of bitcoin trade volume. Where Ethereum Classic/Bitcoin pair is another 6.5% of bitcoin trade volume.
Feel free to calculate all of the pairs to see which percent is national currency pairs. This is useful if I was here to defend the "most" assertation, but the point I intended to make stands. Altcoins are fast, more practical to move to exchanges, many people use them.
And finally, 'many people' aren't trading in and out of the currency pairs to acquire goods and services, just for speculation. As such I'll stick to my '5% of the time' statement about when people actually need national currency.
So maybe people who make frequent trades are doing it between cryptocurrencies, which makes sense, because if you're day-trading cryptocurrencies it makes sense to trade for other cryptocurrencies, as that avoids regulation. But we don't have any data about what percentage of users are day-traders. If anything, the fact that Eth/BTC trades are only the percentages they are on that chart indicates that this isn't the case.
And incidentally, people who make frequent trades are the ones least likely to pull their money out of the exchange to somewhere safe, because it's going to be the biggest PITA for them, since they'd have to do it so often.
Maybe decentralized exchanges like Bitsquare can alleviate them soon
I sent ~8 checks at the beginning of the month without doing literally anything, because they were set up with automatic bill payment. When I get paid it goes directly into my account, again without me doing anything. Unless you're going to claim that Bitcoin is easier than literally not even thinking about getting paid or paying my bills, ease of use is not really a selling point for Bitcoin.
There are real reasons to use Bitcoin that aren't provided by traditional banking. We don't need to persuade people it's easier, especially since it's not easier.
If someone had seriously proposed this as a way they use traditional cash + banks, you'd be laughing at them.
I'm not proposing an alternative to cash and banks here, I'm just pointing out that, if you have Bitcoin and want to sell it for fiat currency, using an exchange is definitely the easiest way to do so, and a best practice for doing so is to hold your cryptocurrencies yourself and only move them to the exchange when you're selling them, rather than holding them in the exchange.
On a serious note....
> Engineers at Sydney-based Metamako LP and Exablaze Pty. Ltd., and Chicago-based xCelor LLC are rolling out switches that take around four nanoseconds—four billionths of a second—for messages to transit from one side to the other, sending data from exchanges to electronic traders.
Wow, can anyone shed some light on how they time this? What sort of clock, I'm assuming its some fancy hardware that you use to benchmark at the 4 nano second level? Or do you just claim this and assume that no one can prove you wrong?
As to Bitfinex, on the weekend a few friends and I were batting around ideas on how to reliably trade bitcoins without having to worry about being robbed by the exchange^H^H^H^H^H err worrying about the exchange being hacked and passing their mistake onto you.
The top ideas we had were:
- only trade on US domiciled exchanges, the US government tends to poke their nose into everything and this is one case where you benefit.
- phone the exchange before you start trading. If you can't get someone on the phone, that's a very bad sign:)
- Similarly, if the C level executives of the exchange aren't well known and always around at the regular bitcoin industry conferences then that's a bad, though this fails the Mt Gox test.
- we tried to figure out if you could pull the coins out each night and put them back in each day, but even then, you'd run the risk of the hack happening while you had coins held by the exchange.
But we came to the conclusion that there just isn't any sane way to trade bitcoins currently where you can eliminate "exchange risk". If anyone does know of a way please let me know.
There are decentralized exchanges that are becoming more popular (Bitsquare for one, check out http://www.bitsquare.io), but there's a chicken-and-egg problem for liquidity. Not a lot of people currently trade on the decentralized exchanges, so liquidity is thin (and until there's liquidity, larger traders will likely not trade there). However, there isn't any counterparty risk, other than if you buy BTC for USD, and the person on the other end charges back the bank transfer. When you trade crypto-to-crypto, the risk is minimal (barring a 51% attack reversing the history on the cryptocurrency you purchased).
(Sell BTC for real money, surely?)
So there isn't any counterparty risk apart from when it's most critical, actually cashing out?
Maybe if you're a day or mechanical trader. Although, I personally don't know if that's actually true. Have you tried it? Can you share any data or citations?
> Exchanges exist for trading quickly
Agreed
> they must be centralized due to this.
Have you encountered any definite proof of your conclusion?
Or swing trader or any kind of trader looking to time the market. Trading requires the ability to execute in near real-time. Block chain transactions and worse, fiat transfers between parties, takes far too long for trading to be effective.
> Have you encountered any definite proof of your conclusion?
They must be centralized to obtain the necessary speed because currently block chain transactions are too slow. Proof is unnecessary, logic is more than ample. One can't trade effectively if ones capital is hung up in "transit" between parties. Exchanges exist specifically to provide fast trading. There wouldn't be any exchanges if block chain transactions were fast enough.
We don't know that blockchain transactions are inherently slow and we haven't verified that no decentralized architectural/algorithmic/structural solutions exist to coordinating trades. In fact, I can think of one or two. So I'm asking you for data, not hypothesis. Do you have any info from your research about trade order execution times on p2p exchanges over time or userbase size? Or is it just your conclusion from anecdote?
That should show up on your 10GHz scope, although the probe setup is a little fiddly.
Or you could just ask your 10G network card to timestamp packets for you. Only valid for packets sent back to the same card, unless you go to heroic lengths to synchronise between systems.
(The exchange issue is called "counterparty risk", and it's the one area Bitcoin advocates tend to handwave away with reputation systems)
There are some expensive hardware solutions to capture all network traffic and timestamp it at nanosecond level. E.g.,
https://www.endace.com/endace-high-speed-network-recorders.h...
> So when hackers stole about 36 percent of the bitcoins at Bitfinex, they didn't just steal 36 percent of each customer's bitcoins: They stole, basically, all of the bitcoins owned by 36 percent of the customers, and none of the bitcoins held by 64 percent of the customers. (Weighting customers by account size; you know what I mean.)
I think that all, or almost all, of Bitfinex's Bitcoins were stolen. Certainly more than 36%! The hackers generated all transactions and then simultaneously broadcast them. There's no reason they wouldn't or couldn't have gone after every last Bitcoin that was accessible to them. Bitfinex did not realize the attack was occurring in time and did not send out any counter-transactions to attempt to spend all of their coins first (realistically they had on the order of seconds to minutes for this). We know that Bitfinex wasn't using cold wallet storage like they should have, instead opting for some multi-sig scheme using BitGo that didn't actually work, so essentially all of their Bitcoins were available to be stolen, and were.
What's happening is that the 36% haircut is across all values in all accounts, including fiat currencies that were on deposit such as USD, as well as other cryptocurrencies that Bitfinex trades such as Ethereum. So Bitfinex lost all of their Bitcoin, which represented 36% of the total value on deposit with them, most of the rest of which was fiat currencies.
Edit: Sources:
https://www.reddit.com/r/Bitcoin/comments/4wizdn/txid_and_bi...
https://www.reddit.com/r/Bitcoin/comments/4wmpzt/bitfinex_as...
"In prosecuting money laundering offenses, the US Department of Justice takes the position that jurisdiction exists over a financial transaction if the laundering is completed by a US citizen anywhere in the world, or by a foreign national or non-US corporation if the criminal conduct occurs in part in the United States—even if the foreign individual or company never themselves took an action in the United States, or intended for an act to occur there... US enforcement authorities increasingly operate on the assumption (unless convinced otherwise) that they have jurisdiction for such offenses whenever a suspect transaction is denominated in US dollars. http://www.whitecase.com/publications/insight/how-us-laws-ca...
https://www.mayerbrown.com/files/Publication/577b946b-8ad0-4...
Still waiting for a proper post-mortem/post-hack. They must be gaining precious time and lawyering up before all the details are released and SHTF...