Transcription - E37 - LTB Compiled by devthedev (.10BTC) & xkeyscore89 (.

05 BTC) 12/22/2013 Upload/Completion Date

Participants: Adam B. Levine AL Andreas M. Antonopoulos AA Dr. Stephanie Murphy SM Jonathan Mohan - JM Marco Santori - MS J.R Willets - JR

Lets Talk Bitcoin: E37 Meeting Mastercoin

AL: Hi, and welcome to Lets Talk Bitcoin, the twice weekly journey into the ideas, people and projects building the new digital economy and the future of money. We close on our first August here at LGB with an episode bursting at the seams. This week saw a flurry of news excitedly claiming disaster or deliverance from a set of meetings the Bitcoin Foundation undertook in the US capital, Washington DC. Bitcoin NYCs Jonathan Mohan sat down with Marco Santori, head of the Foundations Legal Affairs committee and one of the primaries at this weeks meetings in question to figure out what went on and if its something for the average user to worry about. Bitcoin, Litecoin, BarbecueCoin, Mastercoin? One of these things is not like the other, and towards the end of todays show I speak with J.R Willets who is at the end of a successful crowd-funding launch about what that means and why everyone should be excited about his new payment layer, called Mastercoin. Throughout the show Im joined by Stephanie and Andreas for a variety of discussions, from the potential for Bitcoin exchanges on American Indian reservations, to the Terracoin time-warp attack, and what can be learned from it, and finally about physical Bitcoins and their unique proposition to trade digital advantages and hurdles for their physical equivalents. Enjoy the show, and make sure to check out the new LetsTalkBitcoin.com in the last few days, Jeff Fong took a look at denationalizing money with Bitcoin in Hayek to Satoshi and Beyond. Tuur Demeester shares his journey from cautious interest to Mining Magnate with An Insiders Take on Bitcoin Mining, and Invictus Innovations cofounder Daniel Larimer talked about improving what Bitcoin started to take back; not just financial control, but communication and identity too.

AL: My name is Adam B. Levine. Im a writer and speaker who likes to talk about complicated topics in understandable terms. As usual, were joined by the other hosts of Lets Talk Bitcoin: Andreas M. Antonopoulos is an expert in secure systems and decentralized networks. AA: . AL: Dr. Stephanie Murphy is a scientist and syndicated radio host Andreas, what did you even say? AA: I said, , which means Good Morning, in Greek. AL: In addition, Dr. Stephanie Murphy is a scientist and syndicated radio host. SM: How can I beat that? Hi. AL: That works good, speak your native language. Today were going to jump right into some interesting discussion topics submitted through the Lets Talk Bitcoin subreddit that you can visit by going to LetsTalkBitcoin.com/talk. This one is entitled: Bitcoin on American Indian Reservations. I was listening to a non-Bitcoin related podcast, says Thomas533, where they were talking about the possibility of avoiding US federal regulations by partnering with American Indian tribes because they have tribal sovereignty. It occurred to me that this would also be a great place for Bitcoin too. A quick Google search didnt turn up any discussions on this, so has the idea been thought of already? The Bush 2 Administration clarified that Limitations on tribal powers and selfgovernment are few, and include the same limitations applicable to states. For example, neither tribes nor states have the power to make war, engage in foreign relations, or coin money and this is important, the coin money part. This does not seem to imply that they must take US dollars as their default currency. In fact, the late Russell Means of the Republic of Lakota

had proposed that the nation use not fiat currency, but instead adopt a gold standard. Would they be interested in using Bitcoins?. AL: This is a really interesting use scenario I think, because theyre right. In a lot of places there are de facto monies. In most parts of the world, the local currency is the de facto money, but because there are these nations within nations, they dont necessarily have the same rules applied to them. So what do you guys think about this, as it relates to Bitcoin? SM: I think its a really interesting idea. Id like it if everybody were just free to use Bitcoin completely freely. I can see why people feel like this appeals to them, though, trying to partner up with Native American tribes, and actually historically there was the Lakota nation and they had the free Lakota bank where they were minting silver. They probably didnt care too much about those rules that said, You cant make coins, and they also tried to succeed about a million times, and they did succeed about a million times as well, just I dont know if the US government recognized it. Theres been a huge movement for Native American sovereignty thats gone on for quite a while, and its interesting I was just on a road-trip and I went through upstate New York, and there was the 6 nations the united 6 nations where there were several native tribes that have federally recognized sovereignty, and theyve got some land that they have and cops dont go in there, they turn around out the boundary, you dont have to show a passport or any documents to go in there, which is pretty cool, I like that. You can go in and sit down at a casino or a restaurant and it has a smoking section and a non-smoking section which you wouldnt find in the US not that thats exactly the freedom Id want to have, Im not a smoker or anything, but it just made it obvious that youre not in Kansas anymore, youre in a different place. Yeah, Bitcoins could be a natural fit. The thing that I would really like to see more than that though is for people to not have to necessarily go into a Native American reservation to be able to use Bitcoins. Id like to just see complete freedom of Bitcoin use everywhere.

AL: I dont necessarily know if were talking about needing to go into a reservation to use Bitcoin. I think this is more like: If you had, say an exchange AA: Right. AL: - that was based out of one of these reservations, then they dont necessarily have the same sort of rules because its technically not the United States. Now, whether or not again, like you said, the United States chooses to recognize this is a different matter entirely, and as weve seen, companies like Kapochi wallet have opted not to do any business with any US customers whatsoever because even though theyre not a US company, the US financial authorities assert that if you do business with any single US customer, then de facto all the rules that apply to the same people who run a US company also apply to you. SM: Exchanges and a vibrant Bitcoin economy on native reservations would do a lot. Its really interesting in the US because theres these American Indian reservations - some of them, theyre doing pretty well, theres not much poverty; but in some of them theres a lot of poverty, a lot of unhealthiness, a lot of disease - its frankly the places where the federal government has stepped in and done everything - wanted to manage everything about lives of these people - on top of taking their land originally. I think having a Bitcoin economy there could really be a chance for economic revitalization, especially in some of these areas where they really need it. AA: Well, interestingly enough over the history of the Indian reservations, even if the federal government doesnt particularly like it of course, have recognized quite an extensive level of sovereignty in the reservations including, with regards to *something*, which has been established by the Supreme Court in several separate occasions, but also in issues of money lenders and money transmitters, and other things like that, far more than a currency within the reservation - I think it would be much more interesting to think of the reservation as a sovereign legal environment for

establishing exchanges, for establishing payment suppliers and things like that within the US. AL: Do you think that that would get around FinCENs asserting authority? Because it seems like you can treat it like a different country but its still AA: Well keep in mind its not just FinCEN, youve got all these overlapping jurisdictions, and I dont think FinCEN has been the main problem nor the federal government necessarily but the states have been. When you get out of the federal governments jurisdictions, yes you do partly but not entirely, so there are some things, theres a lot of overlap. But, Indian Reservations are subject to some state regulations, not all state regulations in the state they reside. So often its a patchwork of laws and certainly they have some sovereignty, more so than the county next door thats not an Indian Reservation. I think its worth a court case, and really thats the only way youll find out. Start one, let them sue, dont let them shut you down. SM: Im kind of excited about that idea, I wonder if its already been started - I wonder if someones already doing this. AA: Well if casinos were a good idea for American Indians and were able to generate revenue for the Reservations, I think Bitcoin Exchanges could effectively do the same thing, but with a much more global audience, and with much less reliance on geographic borders. This should be great, its another way to take advantage of what little American Indians got back from the government. AL: Thats a really interesting point, that its about the global audience relative to gambling where its more about people coming in, because I talked about this with Jeffrey Tucker the last time we spoke, about this idea that a country like, say Greece or Cyprus, could choose to effectively optout of the monetary system and use Bitcoin, to instead of being local or regional with say, the Euro, they could instead be in the global system, which is of course the Bitcoin or the cryptocurrency system. So things similar to the same thing could very much apply here with these little

sovereigns, and each one of them can not only connect to each other through this as a means of doing easy business from reservation to reservation, but also to interact with the entire world which is very exciting. AA: Which is in fact how money used to work, the idea that you have a single source of money is ridiculous, and in fact over the history of money all of these sovereign environments and in fact much smaller units of organizations down to city states and even individual families were issuing currency and backing that currency in a healthy market of currencies. Now its down to sovereign states and its a healthier return to how money should be in a healthy economy. AL: We dont have any direct experience with this, but if any of our listeners out there are part of a reservation or have an opinion on this that comes from your perspective, then absolutely write in: adam@letstalkbitcoin.com or come to the Lets Talk Bitcoin subreddit at LetsTalkBitcoin.com/talk. SM: I just wonder if theres a Native American reservation that has a Bitcoin Exchange or some kind of Bitcoin operation there, and they start to do really well with it, is the federal government going to see it and think We need to get our hands on that, or the state governments just like the lottery or even casinos where they want a state-run casino in some places to generate revenue for the state - if it gets too successful, Im wondering if states are going to be like We want a piece of that in some way. AA: Nothing different about that. I think its just common like any other SM: Yeah but, could you guys imagine a state-run Bitcoin Exchange? That would be like going to the DMV to get some Bitcoins. I just have trouble imagining that. *new section* AL: Things used to be simple. Bitcoin wasnt taken seriously, so important companies like BitInstant were founded on a whim; the faintest scent of

capital able to catalyse their startup operations for months. But, things are different now, and as we move towards regulatory and governmental legitimacy, the barrier to entry for new people rises along with the cost of compliance. The Bitcoin Foundation is an organization on the razors edge - pushing for legitimacy through education, yet trying to protect the financial industry from the crushing burdens that come along with it. After meeting with an alphabet soup of regulators and legislators in DC earlier this week, Bitcoin NYC founder and LTB New York correspondent Jonathan Mohan caught up with Marco Santori, chair of the Foundations Regulatory Affairs committee, and one of the primaries pushing towards an understanding of Bitcoin at the government level. We join them now. JM: So, Marco, thank you for sitting down and talking with us. I know that youre a lawyer, but what is your involvement with the Bitcoin Foundation? MS: Im a Lawyer in private practice here in New York City, I represent the early stage technology companies, more and more the digital currency district, and Bitcoin in particular. As to the Foundation Im the chairman of the Bitcoin Foundations Regulatory Affairs committee, which means via committee we interface with state and federal regulators on the topic of digital currency regulation. We try to - at least now, our focus is on education and closing the knowledge gap, and making sure that state regulators and federal regulators understand Bitcoin industry, the businesses in it, the users in it, what it has been, what it is and what it might be since realistically none of us really know for sure. JM: One day, you and about 4 other representatives from the Bitcoin Foundation took to Washington to speak with federal regulators about Bitcoin. How did that meeting even come about? MS: It was FinCENs conference, it was FinCENs meeting - they called it, and they invited the Bitcoin Foundation. They also invited all of the other agencies, regulators and enforcement agencies. They managed to get really a lot of the biggest stakeholders in Washington in the same room, so kudos and hats off to them for doing so.

JM: There were a lot of of scary, 3 letter-named organizations there. Who were the agencies that were represented at the conference and how well where they represented? MS: There were a ton of agencies there, and like you said its something of an alphabet soup when you list them all off, but I can try to get most of them. Well, obviously FinCEN had hosted it, so FinCEN was there. IRS was there, FDIC, Federal Reserve, Office of the Comptroller of the Currency, FBI, DEA, Secret Service and the Department of Homeland Security was there as well. JM: So there were quite a number of enforcement agencies. What was their take on it? MS: As you might guess, the regulators and the enforcers each had different takes on Bitcoin. They view Bitcoin through their lenses - the regulators, they were more interested in the policy positions of what the consequences are of regulating Bitcoin in a certain way, whereas the investigative folks were interested in the nitty-gritty methodologies to find bad actors, and just general investigative tricks and tips that they could use to do their investigative jobs. One of the representatives from the Foundation who was there with me - Brian Klein - is actually an ex-federal prosecutor and was able to explain how, say, using the blockchain for example makes investigation of a Bitcoin transaction possible, and it makes it possible in ways that investigating a cash transaction would really never be possible. JM: So, would you say that there was more excitement or fear in the group? MS: It depends on who was asking questions. Just to recap the structure of it, there was about an hours worth of presentation from each of the representatives from the foundation, and then we did about an hour of answering questions, so the questions were hard questions - and

sometimes we had to give hard answers about what about Bitcoin is simply not going to change, what about Bitcoin might be changed in the future based on the communities interest in doing so. So, some of the investigators like I said were interested in hearing more about enforcement and the methodologies and the regulators wanted to know more about why, for example, somebody might want 10,000 different Bitcoin addresses if it wasnt to launder money. The investigators wanted to be able to know what they would be able to do to follow a transaction from Point A to Point B, really follow the money, because if you know how criminal financial investigations work - typically they know who theyre trying to get, the investigators, what the challenge is is discovering what happened with the money - who took the money, at what time, and what amount? That sort of thing. So, I have to say it was more interest than anything and I didnt get a lot of fear from people, I think that it was really encouraging actually, to see them asking intelligent and informed questions and not just giving knee-jerk reactions that I think a lot of people feared we were going to get. JM: The following day, you spent almost the entire day talking to Congressmen about Bitcoin? What was that experience like? How many did you have to talk to, and what were their concerns? MS: Thats a good question. When you run through it in 1 day and try to look back on it, all the conversations are distinct. Everybody asks different kinds of questions and has different kinds of concerns, so when we were meeting with representatives from conservative legislators offices, we would have one set of concerns, and when we were meeting with more liberal legislators we would have another set of concerns, and wed have to respond to each of them truthfully explaining what about the Bitcoin protocol is good and what about it is potentially bad for them, we really had a frank conversation and I was surprised to see the difference in levels of understanding and levels of concern - some offices really werent all that interested in Bitcoin, but on the other side of the spectrum some of them were really concerned about what was going on - some of them were very informed about Bitcoin, it was a knowledge gap we needed to close.

JM: What was one of the toughest questions that one of the legislators asked and what did that conversation look like? MS: I think that they all seemed to be concerned about Money Laundering. One of the more interesting concerns is privacy concerns - they wanted to know about use cases, they wanted to know about examples of where and how Bitcoin supposedly puts privacy back in the hands of consumers, and what are the consequences of that - what are the good ones and what are the bad ones? JM: Theres this vibe in the community that the governor's just want to learn about Bitcoin, not to get it regulated, but to kill it as quickly as possible. When you were there, what was the feeling you got from them? Was it that theyre genuinely working together to get it regulated, or do you think that theres just so much of a lack of understanding there about Bitcoin or how it can be used in a fear that it might be used for illicit means that they may just want to kill Bitcoin entirely? MS: First of all, I dont think that anybody that we spoke with had any attention or desire to kill Bitcoin or to eliminate it, that at least they expressed to us. One of the positions that the Foundation was very firm on - it was sort of where we had our pivot foot down - was that people have finally figured out how to use the internet to send money and that theres no changing that - you cant, theres no stopping it. The real question is, how do we address it? What do we do from here - and that was our first premise, its not something that anybody really seemed to question and I think that people understood intuitively that this is a real, substantial development in the course of human affairs. I dont think that anyone expressed any real interest in killing it or stifling it. What they wanted to know was: how were doing it? JM: I know you lead the Regulatory Affairs committee - to a person listening to this talk who wants to get involved, and help this community move forward as it relates to regulation, how could they contact you, how could they help?

MS: Everybody that weve spoken to so far in Washington followed comments and within the Foundation I think the general consensus is that this was just a tremendous success for all involved - for those who want to get more involved, first up is to look into joining the Foundation if youre interested in having a voice in the course of Bitcoin affairs, generally and specifically in these sorts of meetings, the best way to do that is to be a part of it. JM: Thank you so much for doing this, Marco, keep up what youre doing! MS: Thanks, Im happy to be here. *new section* AL: Youre listening to Lets Talk Bitcoin, the premiere audio cast for news and insights that cover the rapidly evolving world of digital money - our twice weekly show includes analysis for late breaking news, updates on key technical, regulatory and business issues, and interviews with the key people driving the new digital economy. Lets Talk Bitcoin offers sponsors an attractive way to reach a targeted and savvy audience. For more information, e-mail sponsors@letstalkbitcoin.com. Advertisement: More than 300,000 users and counting trust blockchain.info. Its a Bitcoin wallet service, and a wealth of information, and is completely free to use. With a blockchain.info wallet, youll get the convienience of a web wallet, and the security of a desktop client. blockchain.info is also a block explorer - you can use it to see Bitcoin transactions in real-time, check the balance of any Bitcoin address, and see many handy Bitcoin charts all for free. See what they have to offer today at blockchain.info. SM: We received a listener email about something that happened about a month ago, I think its pretty evergreen because it highlights an issue that could potentially affect all different kinds of coins including Bitcoin, so this

listener wrote in about a Terracoin attack that happened recently and its been referred to as a 51% attack and also as a time-warp attack, apparently what happened is - somebody pointed a powerful source of hashing power at the Terracoin network - and Terracoin by the way is an alt-coin, the thing thats different or unique about Terracoin is that it has a very short block generation time and the difficulty also adjusts very, very quickly. Terracoin would be a great example of a coin that might be prone to this thing that Andreas described as being underwater on your difficulty, where your difficulty could go really high and then someone could pull out a very powerful miner and then you could end up with a difficulty thats high and not enough hashing power to match it - and then you cant find a block suddenly for a very long time. Terracoin has these characteristics, and apparently what happened is, since its an alt-coin its got a smaller network, somebody points a powerful ASIC at the Terracoin network, generates their own blockchain - on this blockchain, apparently they also did something so that the difficulty was a lot lower so that coins could be mined a lot easier, not exactly sure how they did that but thats the time-warp part of the attack. Then, they mined a bunch of Terracoins on their own alternate blockchain, and then they took them to an exchange, sold them on the exchange and traded them for different coins and withdrew the different coins, and then vanished. And so what they had was basically that they mined all these coins on an alternate Terracoin blockchain, sold them and then disappeared, and since that wasnt the real blockchain those coins never existed but they got the coins that they exchanged them for. Does that make sense? AA: Yes, absolutely, sounds like exactly the kind of attack you can pull off if you can persuade nodes, and in this particular case it sounds like the node they persuaded was the exchange, that this was the consensus blockchain. So the exchange had to be at some point persuaded that the consensus blockchain for Terracoin was the one in which this particular miner had outputs to spend, and so they persuaded the exchange to be on the wrong blockchain. Thats the danger of running these services, especially if you are an outlet, and often for the Bitcoin or Alt-coin economy, unless youre absolutely sure that the value is there to spend and you can source that

information independently from multiple peers or verify it - make sure youre on the right blockchain - if you give that value out, youre the double spender. SM: So this is a small exchange that basically got screwed in this transaction unfortunately, it was Bter, I think, the name of the exchange? Do you think that this is - obviously if a coin has more hashing power on its network, the less likely an attack like this is to happen, and probably this is partly the fault of Terracoin being a small alt-coin and a new kind of coin, and also mining on SHA256 where somebody can basically take current existing technology which is like a powerful ASIC and use it to take a lot of the Terracoin networks power and do something malicious with it, but do you guys think that other coins are vulnerable to this too? Could somebody do this with a Scrypt coin, could somebody do this with Bitcoin? It would be a lot harder, but what can we learn from this lesson? AA: For a point of reference, and this is a really interesting page that has been created by Jeff Garzik who is one of the developers of Bitcoin. This is the Bitcoin Robustness Index - BRIX - and what Jeff has done here is built a site where you can see the estimated cost of a 51% attack against Bitcoin as of today. And so today in order to do a 51% attack against Bitcoin it would take 400 million dollars, as a point of comparison that is higher than the defence budgets of 92 countries. SM: Yes, I love that because it compares it to the military spending of all these different countries. AA: So, 400 million is what it would take to even attempt to launch such an attack on Bitcoin, and then even if you were able to do that, youd have to find an exchange that was persuaded that your blockchain was a valid blockchain and wasnt sufficiently connected to notice that you were doing a 51% attack. Keep in mind that Terracoin exchanges at some point were only getting 1 blockchain reported to it or getting multiple blockchains reported to it while connected to the Terracoin network, so theres a number of different ways that these types of attacks occur, its not just

getting the hashing power - you also have to persuade someone that you have the right blockchain. AL: Im trying to figure out how something like this can be avoided, because it sounds like this exchange didnt necessarily do anything wrong, it sounds like this is more something just having to do with essentially the network being taken over for a short amount of time as far as the exchange was concerned. Do we know if they were not waiting for many confirmations or did the confirmations just not matter? Because this is a question - people talk about Litecoin or Alt-coins that reduce the block time for confirmations and say that that makes it so that you have faster confirmations, but my understanding is that that isnt necessarily true - you do get faster confirmations, but the confirmations are less valuable. AA: So lets first explain what a confirmation is, because I think theres a bit of a mis-understanding around - there is no such thing as a message saying Confirmed! - theres no confirmation message per se. What a confirmation is is that another block has been mined on top of the one your transaction is in. It means youre buried under another block, thats 1 confirmation. If youve got 2 confirmations it means that your transaction is buried under 2 blocks, 3 blocks, 4 blocks, 5 blocks. If theres 6 blocks mined on top of your transactions, for someone to fake or double spend that they would have had to have been able to mine a 6-block fork. Now it sounds like, in this case of Terracoin, if the exchange assumed those confirmations were valid, then that scammer had managed to mine an altchain or a forked chain with enough blocks to be more than the number of confirmations which then persuaded the exchange that this was a valid transaction. Now in Bitcoin, in order to get 6 blocks ahead, youd have to have more than 51% of the hashing power and maintain that for 6 blocks in order to do a double spend. 400 million dollars. AL: That is roughly 60 minutes under ideal circumstances in the Bitcoin network, but in the Terracoin network because it looks like they do blocks every 2 minutes - 120 seconds - for 6 confirmations there its only 12 minutes, so is it the time?

AA: Yeah, but is it 6 confirmations though? So, 6 confirmations is by convention on the Bitcoin network - as a vendor, or as a merchant or as an exchange, if you want you can say I want 12, I want 8, whatever. How many are the norm on Terracoin? Do we know? AL: No, we dont know but I think this is the point though, you would want more confirmations in a situation where confirmations are less valuable by themselves because they happen more often, right? SM: Right, so theres not much of a point of having faster ones because youll just need more for security. AA: Depends on the difficulty - essentially each confirmation is a validation that someone did that level of difficulty to prove the work. Right? So if the difficulty is low your confirmation isnt worth much because its not that hard to create one. AL: Which is a problem that Alt-coins have because they always have that chicken-egg problem where they show up and nobodies using them so they have to bootstrap an audience, which means they have a small audience which means its easier to do these things and since these things can happen - you can see theres a circular logic here that if you get targeted as an Alt-coin early on and youre poorly positioned to be able to handle these things it can be really disruptive, and it seems like in a nutshell thats what happened with Terracoin. AA: Thats what happened with Terracoin - again. SM: Yeah, I was just going to say this isnt the first time its happened to them. AL: Oh really?

SM: Yeah, theyve had 51% attacks before and theyve also had the difficulty problem too, where they got too high on the difficulty, some miners dropped out and then it was impossible to get the next block. Its been a big problem and it hasnt just affected Terracoin either, this has happened to a lot of different Alt-coins, Feathercoins had a couple of attacks - 51% attacks, Bitcoins had spam attacks - probably 51% attacks too - its kind of a growing pain, I guess, but some coins are just not gonna cut it - theyre just not designed to withstand any sort of potential pressures that are in the environment of users, some of whom might be malicious and maybe Terracoin is one of them just because of the way its designed. AA: Theres two conclusions you can read from this - the first conclusion is that when you take the core parameters of Bitcoin and you tweak them to make an Alt-coin, its not guaranteed that youre going to come up with a correct set or healthy set of parameters - it certainly sounds like Terracoin has found itself in an area of parameters that cause this difficulty whiplash lets put it that way - or very big swings in difficulty, possibility of a 51% attack. So, one conclusion is - Satoshi Nakamoto got these parameters more or less right, on the first try. Thats pretty impressive - and weve seen that because the other Alt-coins arent doing much better in terms of core parameters. The second conclusion I would draw from this is - its hard to boot a currency because in the early stages its very, very vulnerable to malicious effects, which means that the network for Bitcoin and its resilience to Alt-coins is higher than we anticipated. Its going to be harder for competitors to jump-start and bootstrap into this environment. AL: Can an Alt-coin that comes out now be viable if it uses SHA256? If it shares the same hashing algorithm, the same way that it does mining, as Bitcoin does, then that means that as the Bitcoin network increases over time, and as miners have hardware thats really, really, really efficient by any meaningful standard, but compared to the amount thats being thrown at the Bitcoin network is not significant at all, doesnt it, like - you see where Im going with this? It seems like an inherent problem where if you use that same algorithm someone can turn a single unit thats gonna devote 400 Gigahashes of power into your network and your network is small, that can

blow up your currency just from a single miner devoting a single unit. But that could also be a good thing if lots of people do it, right? AA: It reminds me of the Red Ocean, Blue Ocean strategy concept which was a management book written in the past which was quite popular - the idea being that as an entrepreneur you dont want to going into an ocean thats full of sharks and red with blood - you want to find the chunk of the ocean thats blue, that doesnt have too many predators in it. Well, in this case, choosing SHA256 as a proof of work puts you right in the shark pool. So, maybe if youre a guppy, you dont want to be there, maybe you want to see if you can use the proof of work to carve out your own swimming pool where you can survive for long enough to play with the big boys. Otherwise, the ASICs will come and swallow you. *new section* AL: We talk a lot about Alt-coins, and we talk a lot about coins that basically take the Bitcoin protocol and fork it, making a couple of changes and going in their own direction hoping that theyll catch attraction with the merits that theyve introduced. This morning were joined by J.R Willets - hes developed a protocol, or, Im not sure what youd really call it - its almost like a Meta-coin. Its not an Alt-coin in a conventional sense because it rides on top of the Bitcoin network, but it makes some things possible that are pretty interesting. So again, Im pretty glad to be joined by J.R this morning to tell us a little bit about what Mastercoin is and why it should matter to us. JR: Well, hey Adam. Thanks for having me on your show, I love listening to your podcast - I think youve been doing an awesome job. Mastercoin - I came up with the basics of this in 2011, Ive been pondering on it for a long time, and the 1-sentence summary is Were building a protocol layer on top of Bitcoin, so you can think of Bitcoin as money and you can also think of it as a protocol layer. If you think of it as a protocol layer then you can put another protocol layer on top of it. Doing so lets you create a new coin, so to speak, that does everything Bitcoin does and adds new features.

Features we could add are pretty much unlimited, right out the gate were looking to do a distributed exchange between Bitcoin and these new currencies being built on top of Bitcoin - I called the first layer Mastercoin, and then the idea is that people can build their own currencies on top of that without doing any programming. AL: Lets back up for a second here. When we talk about a layer being built on top of Bitcoin or a layer being built on top of the Bitcoin protocol, are there any analogues in other areas that people might be familiar with of what this sort of thing looks like or is this something entirely new? JR: Well, I like to compare it to HTTP, any time you type in a web address it starts with HTTP, thats a protocol layer, and it runs on top of TCP/IP. Everybody listening to this podcast will know what an IP address is, TCP/IP is a protocol layer and HTTP runs right on top of it and uses it to accomplish what it wants to do. AL: But TCP/IP came first - this is important - TCP/IP was an underlying technology that was neutral, and that allowed for further protocol layers like HTTP to be added on top of it that made it more useful in ways that TCP/IP wasnt. Is that right? JR: Exactly. AL: So what youre doing here is very similar to that, because youre taking the Bitcoin protocol, which is neutral, and youre building a layer on top of it, and you said that this layer then will allow for additional layers to be built on top of it? JR: Yeah, thats the idea. Im trying to open the eco-system up, everybody has a crazy idea of what they want to see Bitcoin do, and I want to provide some tools to help people do that. AL: One of the complaints thats been levied against this idea that everybody has something different that they want Bitcoin to do, is that

youre putting too many things into Bitcoin - that youre making the core protocol too complicated. So it sounds like this is the response: We wont add to the protocol, well just build another protocol on top that people can opt-in to. JR: Thats exactly right, and its important to keep the core Bitcoin protocol stable, you add something like a new feature to that and you break it, thats a very big deal, and Gavin does a fantastic job of being very conservative of what new features are being added to Bitcoin, but when you start building on top of Bitcoin youre able to be a lot more experimental, and as you said its opt-in. AL: What is it that Mastercoin is adding - what are the top 3 things that Mastercoin is bringing to the table that are not possible with Bitcoin but are possible with this additional layer? JR: I mentioned the distributed exchange - to my knowledge nobodies ever done a distributed exchange between 2 cryptocurrencies, the reason we could do that is because its all in the Bitcoin blockchain. The next thing wed have after that would be distributed betting, so basically youll be having a person A who will be publishing some data into the blockchain at a very low rate, and Im worried about blockchain bloat - thats probably the biggest criticism of this project, that it adds a lot to the Bitcoin blockchain. So something like once a day, adding say the price of gold for instance to the Bitcoin blockchain and then everybody in the world can bet on it using this protocol, so I could bet that golds gonna go up, you could bet that golds going to go down, and the whole protocol recognizes the winner. We dont have to go off to BetsOfBitcoin or how many betting sites there are now, we can just use the protocol and we dont have to trust a human being to hold our money. Now, we do have to trust the data source, if the data source gets compromised then obviously our bet goes south. AL: So a data source in this context would be something like a RSS feed that would be essentially feeding data at a fixed rate into the blockchain, and then everybody else is basically just watching that, and people who bet

one side and people who bet the other side, really they dont know each other but they bet against each other as far as the blockchain is concerned, so the blockchain just works it out? JR: Yeah, and everybody parsing Mastercoin transactions pays attention to those bets, and pays attention to who wins, and then recognizes the winner as the owner of the coins. So Im really excited about that, I think its going to be a great feature - I think the feature Im most excited about is user currencies which track external values - so if we already have the price of gold being published in the Blockchain, wed have a scheme to set up user currencies which will track the value of gold, so you could have a GoldCoin and own it and have it track the price of an ounce of gold. Theres a lot of arguments about how well that could work - I think it will and well see. AL: Well, the big question whenever we start talking about redeemable cryptocurrencies is - are they actually redeemable? Because it seems like in order for something like that to be pegged, youd either have to put up a whole bunch of collateral in case the price goes way up or in case the price goes way down, it seems like theres risk there which is difficult to ameliorate unless at some point in the chain Im able to say Well this is my GoldCoin, it entitles me to 1 gram of gold, Id like to cash this in and have somebody send me that 1 gram of gold.. Can I do that? JR: The way people have typically approached this problem is the colored coin approach, where you have an issuer and you have this guy that stores some gold in a warehouse somewhere, selling shares of it for people to trade, and then everyone has to trust the issuer to honor those shares. What Im attempting to accomplish is a trust list backing using an escrow fund. Youre exactly right, you have to have something in storage to back this up, and essentially everybody buying it through a new currency like this is putting their money into an escrow fund, which is then used to peg the value of that currency to the data feed. AL: Does that work?

JR: Theres an awful lot of argument about that, its never been tried before. AL: Okay, fair enough. So you can do the distributed betting, the pegging currencies to data feeds of prices going into the blockchain - where are you right now with this project? Is it still in the conceptional phrases? Is it already out - whats the time frame on this roughly? JR: Well, Ive published the complete specification of the features weve talked about so far, so if I got hit by a bus tomorrow somebody else could continue with it from what Ive written - its down to the byte level of what the messages look like - Mastercoin and everything based on it is 100% message based, thats important, say colored coins - you anoint a certain number of satoshis as having some special meaning and you trade them around. Mastercoin is different, its only messages. If I want to send you Mastercoins I have to publish a certain message into the blockchain that says I transfer 5 Mastercoins to Adams Bitcoin address, and then I have to have the message in the right format, and if I do, everyone will recognize that transfer. But I could use any Bitcoins to publish that message - it doesnt matter which Bitcoins I use. AL: I was under the impression that Bitcoin itself did not have a messaging protocol and that there was no real memo field and that it was something that users see locally, they have the ability to locally make labels and notes - so how are you putting information into the blockchain? JR: That is a fantastic question. There are other people doing similar things, and what it essentially involves is destroying a small amount of Bitcoins to accomplish this. So basically I create a fake Bitcoin address, so it starts with 1 and it has a payload of 20 bytes, and I can put anything in those 20 bytes, and then there has to be a checksum at the end that makes it a valid Bitcoin address. And then I send a small amount of Bitcoins, just above the dust threshold, to that fake address - which are destroyed and will never be spendable. But weve just put 20 bytes of arbitrary data in the blockchain.

AL: If Mastercoin is successful to the level that you would like it to be, is that sustainable over the long-term? Are there literally enough Bitcoins that this could operate for 100 years without it actually causing a problem? JR: It depends on how you define causing a problem. Were not going to run out of Bitcoins, the dust threshold will shrink if Bitcoins become more valuable, we have 8 decimal places and we can have even more if we wanted them. So Im not worried about running out of Bitcoins, my legitimate concern is blockchain bloat. Now, Mastercoin is designed hopefully to be as compact as possible, but were still adding a lot of transactions to the blockchain and if were wildly successful I like to say that SatoshiDice will look pretty tame in comparison. AL: And youre saying SatoshiDice will look tame in comparison because they do the same thing - they destroy small amounts of Bitcoin in order to generate their betting results. Is that right? JR: I dont know if they destroy Bitcoins, but they do get a lot of flak because they have so many transactions. AL: I see. JR: Now, Mastercoin is essentially making Bitcoin more useful. If Bitcoin becomes more useful, therell be more transactions. If theres more transactions, the Blockchain will get larger at an even faster rate which will cause even greater migraines for all the Bitcoin developers and they may just leave. Thats kind of the bad side of this. AL: One of the common ways I see people introduce new coins into existence is that they make them mineable, but thats actually not true with Mastercoin, Mastercoin has a different scheme. JR: Because weve already got Bitcoin mining away - Satoshi did us a great thing by solving the which-came-first-problem which is the root of double

spending, so we dont need to solve the double-spending problem, because were writing on top of Bitcoin - it already solves that problem, so we dont really need mining. So I structured Mastercoin as a kickstarter, so essentially anyone who sends funds to a certain address before a certain date owns some Mastercoins, and then as we build the protocol hopefully those will become more valuable. AL: Then this is a currency that literally you cant mine into, but you can buy into if you have Bitcoin. JR: Yeah. I created an address called the Exodus address and I was basing that off the idea that Bitcoin started from the Genesis block and so I said that Mastercoin starts from the Exodus address, and it starts with 1Exodus and weve raised actually quite a bit of money there, at the end of this month - this is August 2013 - actually by the time this podcast will be published there will only be a couple days left. AL: That is true. So, if people are interested in this - so, this seems speculative, even more so than Bitcoin seems speculative. We didnt actually go over where you are with this - so youre collecting funds, and those funds are being used to generate the new Mastercoins, and the people who contribute money now will get the appropriate amount of Mastercoins. Is there a conversion rate? JR: Were doing a higher Mastercoins for every Bitcoin contributed to the Exodus address and theres an early-bird bonus of 10% a week. When I first announced this whole thing about a month ago people were getting a 40% bonus for buying it early and now its pretty much down to 100:1. Where are we with the project - weve got to the point where weve been able to send them, I have a Python script where you can type in an address and say I want to send 5 Mastercoins to this Bitcoin address and it will tell you what sends you have to send from your Bitcoin client to make that happen - and Ive been using that for a giveaway thread - its a very common thing that somebody with a new currency will do these days, start a giveaway thread, and I bought some Mastercoins and Ive been giving

them away using that protocol. Weve been doing (that) since and thats the simplest and most basic type of Mastercoin transaction. AL: For this to get to a position where you feel like the product is representative of the vision that weve been talking about here, what type of time frame is that? I mean, I dont want to pin you down to a date but I mean, are we talkingIs this a couple of months out, six months out, years out? Is there an estimate? JR: Yeah, I mean, it depends somewhat on how much money is raised. Its been picking up lately, so it could be that theres a lot more money raised in the next few days. Assuming that it doesnt blow up a lot, you know, Im not planning on quitting my day job. Thats a whole other conversation, but I have three small children so that my time is limited to work on this myself. Im hoping to do some bounties, leveraging other peoples time in exchange for the money thats been raised. If I raised obscene amounts of money and was able to quit my job and work on this full time, I think wed probably have the majority of these features maybe in kind of a ghetto-form, command-line type of programs running within a few weeks and fancier GUI-based systems, MeV and so forth, a few weeks later. Im thinking that given that Im not quitting my day job and relying on other people it may be double that with the fundraising weve done so far. AL: Okay, so it sounds like youre fairly confident that youll have something workable by the end of the year. Is that safe to say? JR: We already have something workable AL: Okay, I gotcha. (*Laughing*) JR: with Mastercoins. It will definitely be more workable and usable by the end of the year. Im not sure that well have every feature by the turn of the year, but we should have some awfully nifty stuff by the turn of the year.

AL: You mentioned that you werent going to be quitting your job. Do you have a team thats going to be working on this or is this a totally solo project right now? I know you mentioned bounties, but I mean, as far as people who are going to be developing this as developers. JR: Its me right now and its whoever I recruit through whatever bounties Im able to put out and there are some people who are very interested in this project and have been giving me a lot of help, which is awesome. AL: JR, if somebody wants to either get involved with the project or learn more about it or possibly, invest and get some mastercoins for themselves, is there a website they can go to or are you guys just living on the Bitcoin forums these days? JR: Well, we are living on the Bitcoin forums so far, however, one of the guys on the forum registered Mastercoin.org and it redirects to our project thread. If you type in Mastercoin.org, youll get to the right place and were working on a bounty for the website. AL: JR, thank you very much for joining us today and talking to us about Mastercoin. I look forward to seeing how this project develops over time. It seems very exciting. JR: Im excited about it. AL: (*Laughing*) (LTB Promo #1 - SMVoice Start) SM: Hi, Stephanie here. Would you like to turn your book into an enthralling audiobook? Need a persuasive commercial to promote your company? How about a narrator for your explainer video? Heres where I can help; Im a freelance voiceover artist, and since 2009, Ive lent my voice to dozens of audio projects. To hear some examples of my work,

check out my website, smvoice.info. If you like what you hear, Id love to be the voice of your next project. Get in touch at smvoice.info. (LTB Promo #1 -SMVoice End)

(LTB Promo #2-PSA-Start) AL: In addition to bringing you intelligent news, discussions, and interviews, Lets Talk Bitcoin is about testing new models. Despite our growing audience, listener support has been down, both in terms of cumulative numbers of tips and the actual amount of tippersway down. If you appreciate the work were doing, the best way to show that support is to send us tips, shop with our sponsors, and of course, share the show with everyone who wants to be concerned with the future of money. Visit us at letstalkbitcoin.com and thanks for listening. (LTB Promo #2-PSA-End) SM: Guys, my first Bitcoin was a physical Bitcoin and it was of the Casascius bitcoins. Casascius is one of the first companies to make physical representations of bitcoins. Its basically a token that has some pretty graphics. Its gold colored and on the back theres a private key or a code, I guess, that goes to Mt. Gox that you can put in and redeem your bitcoins and its covered up by hologram for security. Its basically, a way to have physically represented bitcoins and so, I have a soft spot in my heart for those, I guess, because that was the first coin that I ever possessed or received. Now, theres more physical bitcoins starting to come out. People have made coins that are actually made out of silver or even gold, that have Bitcoin private keys on them and theyre somehow encoded for security so that someone cant just look at the private key on the back and take the bitcoins and run. Now, there are even physical litecoins coming out. There are some silver pieces that somebody has made and theyre very beautiful graphics and have a Litecoin private key on the back. Whats your opinion about physically represented coins? I

could see how that might be a little confusing to a newbie. Tell them, Wow, theres this great virtual currency and its all online. Its frictionless, you can send it anywhere in the world and oh, by the way, heres this chunk of metal that you can use to represent it. AL: Right, thats a little confusing. SM: I could see how that would be kind of confusing, but on the other hand, I could see how it might also help somebody grasp the concept, right, or help somebody become more comfortable using it because its something they can actually hold in their hand. Other talk around physical bitcoins or other coins has centered around, Is this a good way to do cold storage? Is this a good way to secure your coins offline? Is this a good way to use them anonymously? What do you guys think about that? AL: When I first got into Bitcoin, physical bitcoins were absolutely the first thing that caught my attention and the Casascius coin was definitely up there. There was also Bitbills I was interested in. Lets explain real briefly how these things work because it is a confusing concept and whenever you talk to peopleyou know, I used to bring physical bitcoins with me when Id go some-place because it was an easy way to introduce it, but it is also the wrong way to introduce it because people dont understand the way that they work. What youre essentially doing with either a physical Bitcoin or a paper wallet or really any of these things is youre taking your wallet information and instead of storing it on your computer youre storing it on a physical object. The hope is that, its stored there in a way that is secure so that it can have value loaded onto it through a public key that can then be verified through the public key, but so long as that private key is covered up, then nobody can spend it. It means that you can easily verify the value within the token and just by looking at it you can see that it hasnt been tampered with which means that, its still up for grabs. Really, what this means though, is that when you give someone a physical in person, youre not doing a Bitcoin transaction as the network usually does. Instead, what youre doing is youre literally giving them a wallet that contains an unknown amount of Bitcoin. So, if you think about it, thats a really

interesting thing. It means that physical bitcoins are the single most anonymous way to spend bitcoins of anything because, so long as its passing from hand to hand to hand, you can see this being used at conferences or something like that. Theres no record of any of those transactions in much the same way that if I hand you a dollar, theres no record of that transaction. If we were to make the transaction through the Bitcoin network there would be a record, so youd be able to see them but in a physical form, thats just not the case. AA: You know, another way of thinking about this - one of the main differences, is the money weve been grown accustomed to over our lives has been physical money thats gradually been abstracted into the digital realm. From gold coins intrinsic value abstracted, now, its more of an abstraction of the productive capacity of the country, per se. When youre dealing with digital money in our banking system, youre really representing the physical dollars of the Treasury and the reserve banking capacity of the banks. Essentially, youre representing physical money in digital form. Bitcoin tokens are the exact opposite. Youre taking digital frictionless money and youre representing it in physical form and that creates some very interesting opportunities. The first one is that youre replacing all of the existing protocols of Bitcoin with physical equivalents. So, securing your bitcoins becomes a physical exercise. Transacting your bitcoins becomes a physical exercise. You hand them over. Accounting for your bitcoins is a physical exercise. You count them. You can visibly see how many there are. It really physicalizes not just the value, but all of the interactions, security features, and accounting features of Bitcoin. But, its still digital, so you can do some really interesting things. Imagine if - lets say you had a physical Bitcoin that had some intelligence in it. You could have it locked to your own private security code based on proximity so when you hand to another person, a buyer, maybe, your phone hands off the encryption keys to their phone as the physical token changes sides and unlocks it. So, you could add extra layers of security or extra layers of intelligence because it is digital money even though its encoded in a physical token. Its both weird but its also extremely exciting because it opens up new capabilities for bitcoins that come from the physical realm,

but also, new capabilities for physical money that come(s) from the Bitcoin realm and creates a whole new category of money, which is this tokenized digital currency that weve never had before and it has its very own characteristics. AL: Its the local-global thing, I think, thats the most interesting about it. You can think about the digital version of Bitcoin as, quite literally, the global version where you can do business with anybody anywhere whos connected to the internet. And then, these tokens are the localized format where they create some problems of their own, of course, because its very hard to take a sealed, physical Bitcoin and send it through the internet to someone, but you can make zero-confirmation transactions because no transaction is actually happening. The one thing that people do tend to be concerned about with these, and I think that its with good reason and Im not really sure what the solution is to this yet, necessarily, is the problem of - these are mostly made by individuals. These are mostly made by very small companies because, again, the infrastructure hasnt really been there to require any sort of larger companies. Mike, from Casascius, still does all of his own the sticker application by hand because theres sensitive information there and if somebody were to get that and use it maliciously then you could take the value off of it. This is something thats really only a vulnerability at the beginning of the process when youre actually manufacturing them, but its something that wouldnt necessarily show up until years, weeks, whatever point later that it makes sense to pull the value off of the coin. Looking at other areas of technology, Andreas, are there any solutions to that type of problem where youve got information that no human can know and yet, it has to be applied during the manufacturing process? AA: Thats a great question. Actually, Mike Caldwell himself has already solved this problem. The solution comes with a proposal he calls BIP 0038, the Bitcoin improvement protocol thirty-eight which allows for encryption of private keys. The simplest case which weve actually implemented in a safe paper wallet, an open paper wallet, is where you want on a paper wallet to encrypt a private key or a Casascius coin with a

PIN number or passphrase so, unless you know that second number PIN number (or) passphrase, you cant unlock it. Thats number one. Whats not obvious from the specification is, Mike has also proposed a multi-factor approach to this that involves splitting the private key in such a way that the manufacturer only knows part of the secret and can generate a coin, but that coin is useless unless it paired with a private component that the buyer knows and that actually, essentially splits the key between manufacturer and buyer and guarantees that initial stage of the process when its shipped. SM: Thats very clever. That might be a good way to actually use physical bitcoins for secure cold-storage. AA: Absolutely, and I think BIP 0038 is going to become a critical component of that. I want to also push back on another concept which is this idea that, If you have a token, a physical token like that, it has to be perfect. It doesnt have to perfect and it doesnt have to be perfect to retain its value. The reason I know this is, because a very large percentage of the $20 bills that go through my hands, are forged and counterfeit. That applies also to a large percentage of the $20 bills that go through your hands. Yet, we dont notice, and we also dont freak out about the value of our $20 bills because if you have a system enforcement where every hundred transactions that dollar bill goes through a merchant or retailer or banking teller whos going to use a magic pen to test it and take it out of circulation, if its counterfeit. You can make that the part of cost of doing business and essentially discounting the value by the amount of fraud that exists, which means that you dont need 100% security. You only need, maybe, 75% security. It establishes enough trust between consumer, or buyer and seller, that you dont need to do validity checks at every point, so I dont get a swipe of the UV pen on my $20 bill at every retail merchant. I dont get it at every check-out counter, but it happens often enough that the overall system is trusted. Lets discount this idea that you need 100% security. For physical circulation, you just need enough security that the majority of people can trust it for transactions.

AL: But, is that true for people who are looking at it for storage applications? Because, I agree with you - its not unusual for temporary or event specific token-based currencies to pop up. Thats something thats happened forever. People dont generally save money in those. People generally use them and then, thats it. They lose their value once that particular event is done or they devalue. Something happens. The point is, is that with bitcoins, thats not necessarily true. Ideally, people wouldnt have to be cashing in their physical bitcoins for the digital bitcoins because of these concerns about security. Ive had my coins, at this point, I think, for about two years. Isnt that a concern? AA: Is it a concern as to whether they still retain the value? I believe you could check. AL: Right, I could check. Thats not what I mean. Youre saying that it doesnt matter to you if a couple of counterfeit $20s go through your hands, because chances are pretty good that youre not going to be the one that feels the pinch when eventually theyre pulled out of the system. Chances are pretty good. Theyre not staying in your hands. Youre not keeping those counterfeit $20 bills and youre not storing them in bank where you going to get those same $20 bills back. Theyre fungible. AA: Right, right. Its a transactional currency. Thats the fundamental difference which is that if you use the physical Bitcoin tokens as transactional currency, you dont care about forgery. If you use the physical Bitcoin tokens to store larger amounts of Bitcoin in cold-storage, I would totally recommend encryption and verifying the amounts are on there after youve encrypted it, so that they stay on there, absolutely, which is where youd apply something like BIP 0038. AL: Well, thats exciting. I didnt know that Mike was working on that, but thats really cool, because that is a problem. I actually worked on a project called Betcoin Chips, for the this was one of my first projects in the Bitcoin space that was a real problem that we had was trying to figure out

ways where we could be able to manufacturer these things without exposing it, so its great to see that theres been work done on that. (Outro Music Fade-in) AL: Thanks for listening to episode 37 of Lets Talk Bitcoin. Content for todays show was provided by Stephanie Murphy, Andreas M. Antonopolous, JR Willets, Jonathan Mohan, and Marco Santori. Music was provided by Jared Rubens and we actually have a few new tracks in there that I kind of liked, quite a bit. If you cant get enough original thought and discussion, read our daily blog at letstalkbitcoin.com, sign-up for our weekly newsletter at theweeklybitcoin.com, and participate in our listener interaction area at letstalkbitcoin.com/talk. See you next time. (Outro Music Cut)