Hot Take

Bitcoin is the currency of choice on the multiple darknet markets. These are hidden sites mainly used for drugs and other contraband. Bitcoin’s psuedo-anonymity and decentralized nature make it appealing for online transactions of this nature. Bitcoin has been used extensively on the darknet since Silk Road launched in 2011.

A lot has changed since Silk Road. Cryptocurrencies have gotten more complex and improved on Bitcoin’s innovative design. In particular, cryptocurrencies Monero and Zcash both have built in privacy protection and absolute transaction anonymity that Bitcoin doesn’t have. Bitcoin has also recently had problems with high transaction fees and slow confirmation times, so these other coins will likely be able to handle more transactions simultaneously. AlphaBay, the leading darknet market, began accepting Monero in August 2016, and you can see the effect on the price in the chart:

monero_price

While users like the privacy features, the lower fees, and faster transaction times, they complain that the existing tools for Monero, like wallets, are hard to use and they have concerns about price volatility. As developers improve on these problems and the ecosystem evolves further, it’s not hard to foresee Monero getting more mileage. AlphaBay also recently began supporting Zcash.

Bitcoin still has some advantages at the moment. It was the first mover and first to achieve widespread adoption by users and marketplaces, thus every market accepts it. With adoption comes a community with tools and support. For example, while Bitcoin does not have the built in privacy features of Monero or Zcash, there are multiple coin tumblers or coin mixers that make it more difficult to track transactions (though these methods have their drawbacks). Bitcoin is also the easiest to exchange for cash using sites like Local Bitcoins. This means someone selling drugs would first have to exchange their Monero for Bitcoin in order to turn their profits in to cash.

The online drug marketplace was an early, substantial business use case for Bitcoin and what happens there may be a precursor for other markets. The darknet is a also big business, with some estimates that Silk Road alone pulled revenues of over $100 million per year. Right now, some competing currencies offer technical advantages over Bitcoin. Will users move to using these competing currencies or will Bitcoin maintain dominance?

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One thing on the horizon that will fundamental change the nature of computing and security is quantum computing. Google (arguably) has one, and it’s not crazy to think the NSA has an even better one. Given that a quantum computer could possibly crack all existing encryption methods, and cracking Bitcoin’s or Ethereum’s encryption would mean an attacker could determine your private key and get access to your wallet, this poses the natural question: could the NSA crack Bitcoin or Ethereum right now if they wanted to?

The answer is that they possibly could, but they definitely won’t. The reason is that you would never blow the lid off of your quantum computer project for such small peanuts. As Andreas Antonopoulos puts it, “The last thing they’re going to use that on is Bitcoin, because the moment you use it on Bitcoin and you announce to the world we have quantum cryptography that can build elliptic curves, guess what happens?” Your rivals try to implement quantum resistance. “You just blew all of your advancements in that technology.”

There is historical precedent for this. In WW2, British Intelligence cracked the Enigma machine, allowing them to decode German communications. They started becoming aware of German movements, including imminent attacks on vulnerable targets. However, they could not act on every bit of intelligence without alerting the Germans that they had cracked the Enigma machine. Ultimately, boats were sunk and people died because British Intelligence had to keep their discovery secret.

If you’re still paranoid, I recommend generating a new address every time you do a transaction in tokens on the blockchain and don’t leave any tokens left over when you’re done. An attacker can only attack addresses that are known by the network (i.e., has been involved in a transaction), and by the time your address is known you will have already sent all the tokens out of it. This method should let you sleep at night until the underlying protocol is updated to be quantum resistant.

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Elon Musk has been pretty quiet on blockchain technology. There is no evidence that he is not aware of the potential of digital currency. As a huge Musk-fanboy, I will attempt to explain why he is going to become one of the biggest leaders in the transition to a decentralized economy.

Paypal:

PayPal Chief Executive Officer Peter Thiel, left, and founder Elon Musk, right, pose with the PayPal logo at corporate headquarters in Palo Alto, Calif., Oct. 20, 2000. Online payment provider PayPal Inc. raised $70.2 million in its widely anticipated initial public offering, but a patent infringement lawsuit gave investors reason to be wary as the stock began trading Friday, Feb. 15, 2002 on the Nasdaq Stock Market. After covering expenses, Palo Alto-based PayPal expects to net $61.3 million from the initial sale Thursday of 5.4 million shares at $13 apiece, according to a Securities and Exchange Commission filing. (AP Photo/Paul Sakuma, File)

Here is a picture of Elon with Peter Thiel.

Paypal was originally a way to email money to someone. Their legendary growth was reported to be 7 to 10 percent a day at some points. At one point the roadmap was to put money on your palm pilot. Without the crazy growth, subsequent IPO, and quick buyout from eBay, maybe they would have gotten to peer-to-peer transactions. In any case, after his windfall from Paypal he spent some time flying his fighter jet before embarking on Tesla and SpaceX.

After the continued success of Tesla, and recent success of SpaceX, Musk has been inundated with interviews. Due to appealing to audiences not familiar with his work, some of his political views have taken a backseat to anecdotes and inspirational messages. So sometimes people forget that Musk is a self-described anarchist. The message isn’t that harsh, though. What he is describing is equivalent to a mature Blockchain (Ethereum) environment. Keep in mind, Musk and his contemporaries have pretty radical ideas, I mean the guy did start a rocket company.

Maybe you’re wondering why he hasn’t championed decentralization yet. The answer is pretty clear though, he still has a lot of politicians to get into bed with. His companies have to be influential in the centralized world before he can flip the switch. However, we think that switch is rapidly approaching.

The offerings of Tesla today consist of battery packs and cars. SolarCity, the company founded by Musk’s cousin, installs solar panels on homes and businesses. Putting the pieces together yet?

A huge Musk influencer is the Sci-Fi writer Issac Asimov. Another major influencer was Robert Heinlein. Heinlein’s book The Moon is a Harsh Mistress was embraced by counterculture groups and libertarians alike. For a guy who promotes an electric society, harnessing and storing your own electricity, and a distaste for authority, decentralization seems complementary to his vision.

If a robust electronic society should emerge, an economy that can scale is a necessity. While Musk is busy with the hardware, the ethereum community is busy with the software.

 

 

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The short answer: Game Theory.

Consensus networks like the Ethereum blockchain that record data and transactions as a single source of truth seems like it would be a great fit for multiplayer games. A natural suggestion would be putting games involving chance, such as poker, backed by the block chain and guaranteed to be fair by the blockchain network and cryptographic hashes. Why hasn’t the blockchain disrupted online poker and similar games?

The reason is not a technical problem, but more of a game theory problem. Due to the pseudo-anonymous nature of the blockchain, it is impossible to perfectly know the identity of each user and prevent collusion among participants. To put it another way, if you were to join an online poker table, it would be impossible to know whether the other players were other individuals, or if it was one guy with a dozen accounts. The fact that someone could create multiple identities and use that to his or her advantage is a difficult problem to solve.

People are working on solutions to this. Anyone dealing with any kind of financial regulation typically must comply with Know Your Customer (KYC) laws. While KYC compliance is not new, the tradeoff is that these processes are expensive and time consuming to implement. There are blockchain systems being developed that will rely on KYC to operate fairly, such as with FirstBlood, and it will be interesting to see what solutions they come up with.

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If you have done any research on ICOs you probably know that people are skeptical about the legitimacy of some recent offerings. Right now, hack.ether.camp is running their ICO. We are not suggesting buying in, but it is an interesting project to check out. Look at their feed to see a huge range of Ethereum projects. Some are just people spitballing but there are a fair amount of legitimate contenders in there. Keep an eye on that feed for new ideas.

 

Here is the link to their “Hacker Gold” crowd sale if you are interested: https://hack.ether.camp/sale

 

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Using Blockchain for payments is the biggest no-brainer use case out there. The central issue that can be resolved is the removal of intermediaries required to fulfill a transaction. For everyone involved the more parties involved in a transaction, the higher the costs and time delays. Also, its not as if big banks are not aware of this. You might have heard of Santander getting in on it. Even Goldman Sachs filed a patent on a virtual currency.

Of course, the banks got in way too early and would not see a viable product for years which causes them to abandon projects before they can materialize. The Ethereum and Bitcoin communities love having vanity names like Goldman Sachs associated with their projects, however, the major Blockchain players of the future are in smaller companies that are in aggressive growth stages.

One company that is poised to pivot into payments is Chicago-based startup, Raise. The Raise business model has been to let people sell unused gift cards for less than their cash value, and Raise would take 15% of each sale. In June, they acquired mobile payments company, Slide.

Raise appears to be telegraphing a move to the Blockchain in some capacity. In August, Raise laid off 15% of its staff. According to the Chicago Tribune article, the founder wants to move beyond the gift card marketplace into a sophisticated mobile wallet. The question that remains is if they will use Ethereum or a Private Blockchain.

Off the top of my head I can think of three reasons Raise why would use Ethereum as a Blockchain solution:

 

Privacy

Using Blockchain, Raise can have zero-knowledge proof of transactions. This will allow them to process payments and transactions at a fraction of the cost.

Scalability

With the number of transactions Ethereum is able to handle, Raise will no longer need to store transaction logs to validate transactions. Plus, this solution avoids duplicate transactions.

Settlement

With Digital Ledgers, Raise can cut costs and reduce errors upon settlement. Instead of having high liquidity costs, they could settle transactions immediately and not take on extra operational costs.

 

Either way, if you’re on the operations team Raise, it probably wouldn’t kill you to dust off your resume and maybe drag a comb through your hair.

 

 

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FirstBood is a decentralized platform for peer to peer betting on online games like as League of Legends, Dota 2, and Counter­Strike: Global Offensive.  One interesting aspect of this project is that it relies on a jury system to resolve conflicts.  Two players place a bet then complete a game and report to FirstBlood who was the winner.  Most of the time, those two users will agree on who won.  During the times when the two users both claim to be the winner, twelve other users are selected at random, presented with evidence from both players, and are compensated for delivering the correct verdict (or the verdict that agrees with the majority).  Jury members are compensated in FirstBlood tokens, whose value is tied to Ether.

This is a great example of the sharing economy that emerges from decentralized systems.  Users are compensated for their participation in the networks and for completing vital tasks such as conflict resolution.  If the size of the sharing economy continues to grow, people will be able to supplement their incomes settling disputes on FirstBlood, or doing other tasks on other dApps.  You could even imagine compensation from participation in various dApps could be a viable source of income.  It’s possible the concept of income and working will change as our economy becomes more like advanced bartering.  For example, imagine paying for a ride across town by writing an article and getting page views, where you provide value for value without money changing hands.

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