Coinbase Exchange

Here's an explanation of multisig: https://bitcoinmagazine.com/11108/multisig-future-bitcoin/

Multisignature escrow works as follows. When Alice wants to send $20 to Bob in exchange for a product, Alice first picks a mutually trusted arbitrator, whom we’ll call Martin, and sends the $20 to a multisig between Alice, Martin and Bob. Bob sees that the payment was made, and confirms the order and ships the product. When Alice receives the product, Alice finalizes the transaction by creating a transaction sending the $20 from the multisig to Bob, signing it, and passing it to Bob. Bob then signs the transcation, and publishes it with the required two signatures.

In this case, Bob is Coinbase and Alice is you. Alice plus Martin always retain control over the coins, so Bob alone can't take them offline.

The way that a multisignature wallet works is simple. Instead of the Bitcoin address having one private key, it has three. One private key is stored semi-securely, just as in a traditional Bitcoin wallet. The second key the user is instructed to store safely (eg. in a safety deposit box), and the third key is stored on the server.

Basically, the user would be the one storing it in offline storage, not Coinbase. But since Coinbase is claiming 98% of coins are stored offline, that means at least 98% of coins aren't using multisig.

EDIT: Thank you to kanzure's comment below. Updated.

What do you mean by this?

Re-read that with the word 'internet' in place of the word 'Rails.'

That average bit is a bit nebulous, but it doesn't make me think they are insuring the 98% but not the 2%.

"Coinbase is insured against employee theft and hacking in an amount that exceeds the average value of online bitcoin it holds at any given time."

Those statements seem mostly consistent to me. The only question is whether the insurance is always more than is in their hot wallet, or exceeds the value on "average" (whatever that means).

I suspect it would be difficult to guarantee the insurance would always exceed the value of online bitcoins, perhaps because the insurance is issued on the USD value and prices can fluctuate wildly, or perhaps because they can't predict when large deposits will be made (though I'm unsure if deposits go directly to hot or cold wallets)

That's a little irrelevant, because their hot storage wallet (their online coins) should be a small subset of their total coins. The whole point of a hot storage wallet is that if you lose them, it doesn't matter. So insuring those is pointless except as a marketing stunt to confuse people, which is why saying "We're insured" is bad faith.

This is a serious, professionally-run company backed by a lot of VCs we all recognize, plus banks and the NYSE.

Indeed, and if Coinbase loses all the coins, none of those people will step in to replace them, because nobody is going to put up hundreds of mullions or a billion dollars just to reimburse customers.

They have everything to gain by honesty and everything to lose by committing fraud, including prison (and that is the only reason they would become insolvent).

I disagree that technical problems can't make them insolvent. All it would take is an unhappy accident in their cold storage procedures.

But beyond tech problems, consider a thought experiment: If you're a gambling person, would you trade 20 years of your life in exchange for becoming a billionaire?

Banks are nice because if someone takes money, the money can be retrieved. Not the case for bitcoin. Someone is in charge of the cold storage procedures, so that person is in control over all the coins. If they decide to take all of them, there's nothing anyone can do about it except throw them into prison.

Obviously, bitcoin may be completely irrelevant by the time you're out of prison. In fact, emptying Coinbase's cold storage reserves might even cause that. But money does strange things to people, and this technology has changed the power dynamic. Some of those changes are good. But are you sure you want to trust a single person with your entire fortune? Worse, you're trusting multiple people where any single person can take your fortune. Even if they require several people to sign off, that's a very small number of people in complete control of your fate.

It probably sounds like I'm anti-Coinbase. I'm not. I'm pro-consumer. As soon as Coinbase insures all of their coins or offers true protection to consumers (by default!) then I'll be their biggest fan, because they'll have become an awesome bank.

So nothing like mtgox. More like Enron? "serious professionally run" isn't some magic ward of protection.

What I mean is if they are stolen today priced at $200, let's say you have 100btc on there,that is $20k. You claim but it is 2 months later any payout is made. Now bitcoin is only worth $100 each so you they give you $10k to rebuy your 100btc or do they give you the $20k it was worth when it was stolen. How about if the price of btc goes up? 100btc might now cost $200k to replace, so now they want to give you the dollar value at the time it was stolen.

I would not want the be the person putting it to the test regardless of the outcome.

FDIC is tested and backed by something beyond corporate assurances about insurance policies.

Does that policy pay out upon bankruptcy?

Agreed. Diversify. But, US banks are still demonstrably lower risk (with stipulations) thanks to FDIC than, currently, a bitcoin exchange.

I don't think that's completely clear. There will certainly be co-ordinated resistance from many entrenched interests, but that resistance also creates a profit-opportunity to break ranks to provide the service to customers who want it. It's more likely we'll see a split amongst banks and their policies to digital/alternative banking services.

anyone who uses it for anything other than quick, small transfers is a complete moron.

it's akin to calling a escrow that just opened shop and giving them thousands of dollar that you don't plan to spend.

I have two big specific questions in exchanges :

1. injecting new inventory - But I could probably think of an exchange built using a couple of queues in rabbitmq and a few python workers... but this will not give me subsecond latency. What would you choose to build a super low latency eventing system using current off-the-shelf components ?

2. the order matching system. does the choice of programming language make a difference ? probably the matching system is where you need strong type checking.

I suppose that the maker-checkers and EOD reconciliation remains the same.

@tptacek - I dont understand your question about testing. do you refer to testing of sub-microsecond latencies/race conditions ? Is there even a way to simulate that (Jepsen?)

Such pseudo-compliance is troubling. It suggests other problems. Remember, over half of Bitcoin exchanges have failed, usually taking user deposits with them.