Bitcoin, Decentralization and the Nash Equilibrium

By Vitalik Buterin
Bitcoin Weekly
Saturday, July 23, 2011

http://bitcoinweekly.com/articles/bitcoin-decentralization-and-the-nash-equilibrium

Technological historians will for a long time see Bitcoin as a fundamental innovation in Internet technology. It's the first distributed electronic currency that enforces a prohibition on double spending, something which was earlier thought to be inherently impossible - it is inherent in the nature of data that it can be copied, and media companies have tried for a decade to find a way to prevent their products from being copied and have had only limited, transient success; every scheme they devise is eventually broken. Bitcoin may indeed become the world's great internet currency and overturn the world financial system. But even if Bitcoin fails, the concepts behind it are revolutionary by themselves. The idea of a cryptocurrency is not itself the innovation - it is merely one of the most obvious applications of a more fundamental advancement: for the first time, we have seen a computer network that prevents cheating not by being proprietary, but by the protocol itself being a Nash equilibrium - a state where no deviation from the equilibrium strategy (ie. the standard client software) can result in a gain for the deviant.

Nash equilibria are often used to describe situations of social cooperation - consider a situation where two people are exchanging goods, but both have the ability to cheat and not fulfill their side of the bargain. If both cooperate, the payout is (3,3) - both benefit from the exchange. If both cheat, neither will benefit - a (0,0) payout. So from the point of view of an outsider concerned with both parties' welfare, cheating is clearly harmful. But if one cheats, the payout becomes (5,-2) in favor of the cheater, so from a selfish perspective cheating is beneficial. The strategy of cooperation (3,3) is not a Nash equilibrium, since unilaterally deviating from the strategy is beneficial for the deviant. The only Nash equilibrium in the situation is that of both parties cheating - (0,0). Here, deviation from the strategy implies cooperation, which reduces the cooperator's payout to -2. Thus, cooperation is unstable, and we can see how this affects the real world, with the need for laws, reputations, web of trust systems, etc to penalize cheating and make cheating less profitable than cooperation.

To understand the significance of the Nash equilibrium concept for distributed computing, consider an example from a completely different field: massively multiplayer online games. An MMORPG is also a protocol - people move their characters and use attacks and spells, these actions change the state of the world, and the state of the world is transmitted to the other players. But there is, theoretically, the option of cheating - a player might decide to give himself ten thousand hit points and pass that on to the game. MMORPGs, to solve this problem, resort to a centralized server approach: the hit points are stored on a central server and the only form of interaction allowed with that server is through a preset category of actions - movement and spells. However even within that framework there can be cheating - a player might write a bot to allow him to gain experience or gold while sleeping, or write a script to play the game with essentially a zero reaction time, and from here the only solution is proprietary software - Blizzard, for example, has a program that routinely checks the player's computer for common forms of cheating, and the client is proprietary to prevent the player from rewriting the client in a way that would show the world in a way that would be more convenient for him to see it - showing enemies behind him or camouflaged behind bushes, for example. There is always some way for players to cheat, and centralized enforcement is the only way to prevent it. As another example, consider torrent downloading: torrents require people to seed them voluntarily with no compensation, which is, from a selfish point of view, not the optimal strategy, so the amount of files available for torrenting is less than what it could be if there was some mechanism to encourage people to seed everything they have. Some try to overcome this, once again, with proprietary software - having clients or servers that force something close to a 1:1 download to upload ratio, but open solutions are vastly preferred, since especially in applications which may attract unwanted government attention in some countries it is better not to have to trust any single party.

Now, let us see how the Bitcoin network enforces itself. There are two kinds of players: users and miners (all miners are also users, but not all users are miners so we will consider the two separately). Users have only one action available to them: send coins. To do this, they must have their private key and someone else's public key, so they must authenticate themselves to the miners to be able to send their coins just like an MMORPG player must authenticate himself to the server. However, the key difference between MMORPGs and the Bitcoin network is that Bitcoin servers (miners) are decentralized. Torrent users are also decentralized, but we can see how a torrent user can unilaterally benefit by deviating from the standard by downloading but not sharing. What options might Bitcoin miners have of cheating? They all fall into one or more of the following:

1. Give themselves coins.
2. Take coins away from someone else.
3. Force a transaction from someone else to themselves.
4. Double spend their own coins.

Let's go through these case by case.

1. It is in fact agreed that miners are allowed to give themselves a specific number of coins (50 right now). However, if a miner tries to give himself more then 50, the block will be rejected by the other miners.
2. This can be done in three ways: (1) not including a transaction to that user in the miner's block, (2) erasing a transaction to that user from a previous block and (3) forcing a transaction from that user to another - see case 3. The first is definitely possible, but the signed transaction is still floating around and someone else will include it. The second will result in the hashes not matching, so the block will be rejected by the other miners.
3. A transaction where the private key does not match up will be rejected by any user that you try to send the coins to.
4. The block will be rejected by the other miners.

All of this makes sense - blocks which do not follow the rules exactly will be rejected by the other miners or users. But this is not enough for the system to be stable - what incentive is there for miners to participate in the punishment process? To solve this, second-order punishment - punishment of non-punishers - is needed. As an analogy, as this paper (PDF) describes in detail, property rights can be thought of as such a stable equilibrium - unilaterally deviating from the equilibrium strategy of everyone respecting private property is punished by the police, and the system of the police is itself upheld by second order punishment - if you don't participate in the punishment process (in our society indirectly by paying taxes) you are also punished by the very same system, and participation in this process of "second order punishment" is also enforced - some of your taxes go to support the government department that detects tax evasion, so the system is recursively stable. Everyone has the strategy of not stealing and of participating in every level of punishment, and every deviation from this strategy results in a net loss for the deviant due to the rest of the community's punishment. To prevent the government itself from deviating from this set of rules, we have democracy, which allows "the network" to reject bad government. This model is, of course, highly flawed in reality (whether better models of social cooperation exist is a hotly debated topic on the internet) since in practice there are so many ways for the government to slowly grab more and more power and for powerful interests to sink their claws into the government, but this is a practical weakness arising out of human inefficiency, not a theoretical one. The Bitcoin network is code, and in code theory is practice, so recursive infinite-order punishment is a perfectly stable model for Bitcoin to follow.

Second order punishment in Bitcoin is, in fact, very simple - if a miner creates a block that follows a previous bad block, then the next miner will notice that there is a bad block in the chain and both the original deviant and the careless miner will be rejected from the chain and they will have done all their computing work for nothing. If the miner two after the deviant does nothing, then the miner three after probably will, and so on - in this way it is recursive. Users are also encouraged to punish miners that put in transactions that were not signed with the correct private key - if they do not, they will be stuck with coins that no one else is willing to accept.

Thus, there is no conceivable deviation from the protocol that is not immediately corrected for and punished. There is the possibility of an attacker with more computing power than the entire network, but nothing can fully protect against that, much like no society can defend itself against a military attacker larger than all of them put together, although society can make the job difficult through guerrilla warfare and the Bitcoin protocol still limits the actions of such an attacker to double spending attacks. It is because of this that we now have a currency system that is both decentralized and open source - no centralization is necessary, and no proprietary client software is necessary. Thus, there is no single node that must be trusted for the system to function, and decentralization naturally creates more stable systems. To see why this is the case, one must realize that in centrally enforced systems the game is also a player - the central enforcer is itself subject to game theoretical motivations, and can itself unilaterally deviate from the rules for profit. The only reason why they do not is the punishment mechanism that we call the free market - people are not willing to buy into systems with an unreliable controller, so controllers have an incentive to maintain the game as it is (incidentally, the free market is also an infinitely recursive punishment system - the second order punishment, i.e. the punishment for those individuals that do not punish deviants by abandoning their services, is the crime itself). However, as we see with the example of government, partially centralized systems, although functional in theory, are flawed in practice, which is why decentralization is so important, and Bitcoin's innovation in setting up a Nash equilibrium that allows decentralization to take up more applications than ever before.

Reprinted with permission.

Maintaining Anonymity While Using Bitcoin

By Vince
The Daily Attack
Thursday, June 16, 2011

http://thedailyattack.com/2011/06/16/maintaining-anonymity-while-using-bitcoins/

The crypto-currency of the future is here: Bitcoin. As can be expected, the government has been making a huge stink about this decentralized, difficult to stop, nearly impossible to control, pseudonymous digital cash. It's an inevitability that when you give people a powerful tool for freedom, they will use it for exactly that. Silkroad, only accessible via the TOR network, using Bitcoin as its currency, has created a near bullet proof service for buying and selling illegal drugs. The site is run in the world of .onion, the unregulated shadow internet run through the TOR network, where users can browse the internet anonymously, or set up their own untraceable servers and websites. At Silkroad, a built in reputation and feedback system reminiscent of eBay ensures that most transactions go smoothly with as little fraud as possible. Mail delivery of concealed drugs appear to have a high rate of making it through the US Postal system undetected. And Bitcoin remains reasonably untraceable. Reasonably untraceable.

Bitcoin is not a truly anonymous digital currency. An example of an anonymous digital currency would be eCache. From the anonymity article at the bitcoin Wiki:

"The main problem is that every transaction is publicly logged. Anyone can see the flow of Bitcoins from address to address (see first image). Alone, this information can’t identify anyone because the addresses are just random numbers. However, if any of the addresses in a transaction’s past or future can be tied to an actual identity, it might be possible to work from that point and figure out who owns all of the other addresses. This identity information might come from network analysis, surveillance, or just Googling the address."

Network analysis can reveal which exchange service you bought your bitcoins from. Those bitcoins carry the traces of your original transaction even after you have made your purchase at the Silkroad. For the average user, the problem is moving fiat currency into bitcoin using an unidentifiable method of payment, thereby breaking the link between you and whatever it is you’re using your bitcoins for. Bank wires obviously won’t work. Dwolla, Paypal, Western Union, and any other payment system that requires you to deal with a public, registered corporations will leave a paper trail. Do you think Western Union is going to stand tall and not rat you out if push came to shove? Not likely. Neither is it likely that buying an occasional 1/8th oz. of pot at Silkroad will trigger a full scale investigation into your drug consumption habits. But for those of us who are paranoid, or have some serious money to hide from the IRS, or who are just plain cautious, here are your options to move your US Dollars into bitcoins while maintaining some degree of anonymity. One quick note, unless you’re mining your own coins (hey, not a bad idea!) you will have to deal with and trust someone, somewhere, to get your bitcoins.

Get TOR

If you even want to access a service like Silkroad you need to be running TOR. Even if you’re not buying drugs, TOR is the tool that will anonymize all of your online activity, including setting up accounts and communicating with bitcoin exchangers. The easiest way to do this is the all in one Browser Bundle. It works right out of the box, running its own instance of Firefox. No installation necessary. While your at it, store the Browser Bundle in a Truecrypt encrypted file. TOR+Truecrypt will open you to a whole new world. Trust me.

Now that TOR is running, use it and only it while accessing any Bitcoin related service or internet site. Also open an email account. A few of the services below don’t require email communication, but at some step of the way you’ll likely need to message someone. Remember to open and access this email account only through TOR! I suggest Safe Mail. They’ll wonder why you logged in from India 15 minutes ago and now appear to be in Australia, but they won’t pry.

Get a place to store your bitcoins

You’ll need a place where you can receive, store, access and spend your bitcoins. The easiest way would be to set up an account with a service like My Bitcoin. They act as a sort of online wallet. It’s the least technical way to get going with bitcoin, but it does require that you trust a third party with your money. If you are only sending through a small amount of money at a time for occasional transactions (like for retail volumes of drugs?) then your risk exposure is pretty low.

Mixing

You could just follow the advice at the Bitcoin Wiki and use a mixing service such as Bitcoin Laundry. This requires that you already have bitcoins, acquired through some of the more anonymous methods mentioned later in this article, or by using a bank transfer or other payment method at Bitcoin Exchange, MtGox, or another such service. This is ok, since the mixing service breaks the connection between you and your bitcoins after you purchase your bitcoins.

Right now Bitcoin Laundry is in beta, and its reliability to obscure your funds is limited by how many other people are using the service. Basically, a mixing services acts like a big pot that everyone throws their cash into. The mixing service then gives the pot a good shake, pulls the cash out, and distributes it back to everyone who put their money in, minus a small commission. If you were using US Dollars, imagine throwing a twenty dollar bill in, and receiving back someone else’s random twenty dollar bill, or a ten and 2 fives.

Again, the effectiveness of this is limited, you may get some of your own bitcoins back, or there may not be enough people using the service to adequately obscure who put in what and took out how much. BitLaunder (only accessible through TOR) takes a different approach. They take your bitcoins, sell them for another currency, then use that currency to buy different bitcoins and then send them to you. I imagine the bitcoins they sent back to you would still have their trace on them, but most important, they wouldn’t be directly traced back to your original purchase of bitcoins using Dwolla or wire transfer. So you still may have an issue with acquiring the original bitcoins that you throw into the mixer. Would you rather no money transaction service or financial institution know that you are moving money into Bitcoin?

The Cash is in the Mail!

The US dollars in your wallet have served the black market well over the years. Cash is pretty darn untraceable. Estimates of the US black market put its total value at 8-10% of GDP, all traded in crisp US bills. Hey! Maybe the Feds should be trying to shut down the US dollar instead of Bitcoin! Anyway…. in an ideal world, you’d be able to anonymously mail an envelope of cash to a trusted, reputable bitcoin exchanger and instruct him where to send your bitcoins. Two examples of such a service are:

Bitcoin 4 Cash

and

Bitcoin 2 Cash

They have different methods of operation, which can make a big difference. Bitcoin 4 Cash does in and out exchanges, meaning they buy bitcoins (in exchange for pre-loaded virtual credit cards, pretty cool) and sell bitcoins for cash. The exchange rate you pay is either locked in (a 10% deposit is required) or you take whatever the going rate is for bitcoin at the time Bitcoin 4 Cash receives your payment. In the first scenario, with a locked in rate, Bitcoin 4 Cash bears the risk that Bitcoin could sky rocket in value between the time you lock in your rate and the time your cash arrives in their mail box. This exact scenario has played out recently, leading to some drama (search the bitcoin.org forum.) In the second scenario, you bear the risk that your dollars will be worth fewer bitcoins by the time they reach Bitcoin 4 Cash.

Bitcoin 2 Cash (don’t get them confused, now,) operates an exchange market that matches buyers and sellers. When you send them your cash, you aren’t actually buying bitcoins from them. Instead, you’re funding an account that you then use to buy from another account holder who is selling. The theory here is that there are enough people doing out exchanges or trading to fill demand for bitcoins. The advantage is that you can decide exactly when you want to execute your exchange, leaving out some of the guess work that comes with trying to price out your dime bag in bitcoins a week into the future given market fluctuations.

Both of these services rely on a lot of trust in the operators. I highly suggest you research the reputation of these dealers and any other such service you consider using. If you take the proper precautions in mailing your cash, the only trace back to you will be the originating zip code the envelope was mailed from, which is not a whole lot to go on. And remember to direct them to send your bitcoins to your online wallet (like at My Bitcoin) that you opened and access only through TOR!

In Person Exchanges

You might just fire up your TOR web browser and go to the bitcoin forums and try to find someone nearby who is willing to sell you bitcoins in person. If you want to go really cloak and dagger, you could arrange a drop site for your cash, but you’d be relying on the seller of bitcoins to actually transfer bitcoins after you’ve paid him. Treating it like a Craigslist transaction is probably best. Meet at a coffee shop, bring a laptop, and engage in mutually beneficial trade. Ubitex, BTC Near Me, and Bitcoin.Local all take this concept a step further by matching buyers and sellers according to geographic location. Last I checked, no one was selling in my area, though. Your mileage here may vary.

Conclusion

Bitcoin is not inherently as anonymous as cold, hard cash. But following the steps above can make you reasonably safe. Some would even say that taking these steps to, say, buy drugs on the Silkroad is being a little too paranoid. The rationale being that the DEA will be most interested in busting the Silkroad operators and sellers on the site, and not worry too much about the buyers. But if you’ve read this far, you want to make it as difficult as possible for the man to get his hands on your bitcoin, and you’d rather he not know about how you spend your recreational time.

Remember this formula if nothing else: TOR + TRUECRYPT + BITCOIN = REASONABLE ANONYMITY!

UPDATE – 6/17/11

Bitcoin exchanger to comply with any court sanctioned investigations

Mt. Gox has announced that they will comply with any court sanctioned investigation. Due to the fact that they are an above ground company and under the legal jurisdiction of multiple nation states, this is not surprising. Indeed they could be forced to comply and cooperate or find their bank accounts frozen and their management held in contempt of court. Protect yourself! Protect your identity! Anonymize your bitcoin transactions!

Reprinted with permission. Vince can be reached at vince@thedailyattack.com.

For further reading:
"An Analysis of Anonymity in the Bitcoin System", Fergal Reid and Martin Harrigan, July 22, 2011
"Bitcoin: More Covert than it Looks", Thomas Lowenthal, July 14, 2011
"Patching The Bitcoin Client To Make It More Anonymous", coderrr, June 30, 2011
"Chaumian Blinding Service Using Bitcoins", Bitcoin Money, June 18, 2011

The Free Market Currency Manifesto

By Michael Rozeff
LewRockwell.com
Monday, July 18, 2011

http://lewrockwell.com/rozeff/rozeff360.html

Currency is the blood of human exchange. From currency arise prices, and prices are the air that peaceful exchange breathes, an air that communicates living information. Currency is the division of labor’s partner. Currency is our means to transfer labor and energy through time and space, to bring future goods into commerce today. It is that vital means by which we convey the benefits of our labor to others and they to us.

Mankind needs currency. It is absolutely essential to our welfare in any modern economy.

Do we want freedom and free markets? Then currency must be produced in freedom. Do we want to be controlled and directed by government in totalitarian style? Then currency will be in the hands of government as it is now.

What sort of order do we now have and what sort of order do we want to have? We now have an order of force. It is a corrupt and harmful order that destroys lives. It is an order of unjust laws written by unjust government to pay off privileged and select groups in society. It is an order of excessive and overbearing government that destroys healthy social relations. This is not a free market order. If we want a peaceful free market order built upon private property and recognizable and well-defined rights, we need to change direction. The order of force in all respects leads away from the free market order.

If we want freedom and free markets, we cannot and should not depend on one supplier of currency. That supplier, government through its central bank, playing dictator, has abused, will abuse and cannot help but abuse the power of issue. Its hidden and unstated goal, its raison d’être, is favoritism and privilege for itself and its friends.

The monopoly supply of currency is obviously not a free market institution, since rivalry and free entry are hallmarks of free markets. Yet their controllers sell themselves on the deception that the free market cannot produce its own currencies and that government control preserves the free market order. Any notion that monopoly control saves this or any free market or perfects the free market or overcomes its supposed negatives is the biggest sort of lie, imposed only to gain advantage and privilege for its proponents. Monopoly currency corrupts and poisons the free market order, transforming it into the order of force.

We neither need nor want a monopoly supplier of currency: We – as entrepreneurs, in companies, in associations, in banks, in localities – as free persons. Currency is a spectrum of media of exchange that includes credit and money. It is many, not one. At one end, we can create currency out of nothing, out of thin air, whenever and wherever we want to. It will be credit, and the trust that exists between us is its backing. In the middle range of currency, we can create credit using assets of many kinds as backing (including money). At the other end, we can use money, which is not credit, not a liability, not a promise, but an asset free and clear.

Money has its uses and its place, but we are not restricted to it. Centuries ago in a great step forward, mankind added credit to its techniques of trade; but modern man has taken a great wrong turn. In our fear and ignorance of the free market, we have centralized credit in the hands of a few central bankers, where they have changed it from an instrument based on commerce and trust into an instrument of force and privilege. In our ignorance, in our fear, in our misplaced awe of government, and in our manipulation by overlords, we have allowed a few to take control over credit. We have even allowed them to banish real money and replace it with forced credit.

We are so indoctrinated in government control that the most popular mass works of imagination in science fiction are wedded to this totalitarian conception. In 24th century Star Trek, the currency is mainly "credits" – origin presumably the United Federation of Planets. In Star Wars, currency is more varied but includes galactic credit standards and there is even an InterGalactic Banking Clan. Any science fiction work without freedom of money and credit creation leaves mankind in its present chains.

We need monetary freedom. That is only a start to ending democratic totalitarianism, but it is the essential start.

We need currency issuers that uphold clear property rights transparently in the light of day. Only competition can secure quality and advance. We need customers in markets to drive out of business those companies that undermine the value of their currencies by investing in the wrong assets or by not living up to their charters. We do not need legislators who clumsily and criminally claim and misuse the power to control financial institutions. We do not need legislators accepting money and favors from financial lobbyists and writing laws in their favor.

We do not need central banks with powers to create credit that bail out failing banks, failing insurance companies, failing foreign central banks, and failing governments. We do not need misbegotten attempts to control entire economies by controlling credit. We need to scourge government-sanctioned credit and central banks from the marketplace. We need to separate currency and finance from government power.

Good media of exchange based on our compassion will drive out the bad in a free market. Sound liabilities and sound moneys from creative hearts will drive out the bad media of exchange, but only if we divorce government from financial control and embrace the free market. It's so simple.

We are being held back. We are being robbed of wealth and opportunity. We are being prevented from choosing. The market will automatically create a range of liabilities that can be media of exchange if it is given a chance to be free. We in the market will choose our currencies. To stand in our way is to destroy us.

If we are the ones who build our cities, if we grow our food, if we clothe ourselves, if we care for our children and our weak and aged, if we do all this – and we do and not our government – then so can credit be ours, of us, by us, and for us. Then so can we devise our own moneys. Then so can we create our own currencies freely, without obstruction, without instruction, without regulation, without monopoly, and without government guns pointed at our heads.

Stop running our currency, and doing such a pitifully poor job of it anyway. Let us create our own currencies.

Get out of our way. Move aside. Begone.

The entire financial system nearly collapsed in 2008. The order of force in currency nearly fell. It remains vulnerable with stagnant economies, inflationary economies, immense deficits, insolvent banks that are too big to fail, and sovereign debts nearing default. The order of force in currency risks disintegration before our eyes.

If there is a collapse of the financial system, there is every likelihood that government, to save this unjust and unworkable system, will transform it and itself into something even more beastly and oppressive. The near collapse prodded government into adopting measures that prolong the system but impoverish us.

Collapse will bring disorder. If we do not have working currencies in place, our economy will fragment as it reduces to guns and barter. Disruption will rule. Living standards will decline sharply. The unprepared, the weaker and disadvantaged in society will scramble to survive. Chaos and disorder will bring about calls and demands for order in the form of more and stronger government. Working currency alternatives are a necessity to avoid this outcome.

Perpetuation of the order of force with its accompanying stagnation is simply a slower motion collapse. It too will provide many excuses for further resort to the order of force. Government in much the same and worse form will be maintained or restored. No crisis in American history has yet done anything but enhance the order of force.

The free market order is always vulnerable to demands for more government force and especially so when there are highly publicized problems exacerbated by media that agitate, distort and sensationalize. Attempts to alter or end government that transform it radically and produce excessive disorder become counterproductive.

We who are the public have to support change and it has to be the right sort of change or else it fails. Without a much deeper understanding among us that produces the consciously different goal of a free market in currency and free markets in general, we will remain slaves to the order of force.

We must certainly not let the government use smoke and mirrors to replace the existing monetary system and currency with another government system of the same kind. We must not exchange one system of tyranny for another.

The need for alternative currencies now is urgent. With alternative currencies in place, Austin continues to touch Boston and Tacoma without interruption when the old currency dies. It continues to touch Hong Kong and Ankara and Manila. Economic life goes on without being severed when new currencies smoothly take over from the old.

We resolve to terminate the order of force in currency. We declare ourselves free to create our own currencies of money and credit based on institutions of trust and property rights. We declare ourselves ready to transform our monetary system and laws. We will employ ourselves, pay ourselves, transport and distribute our product using whatever currencies we deem fit. We will manage currency in freedom, not by multiplying bad credit, but by bearing the losses for which we are responsible and winnowing out the bad and ineffective currencies.

In order to rid ourselves of the currency monopoly, we need alternative currencies up and running. But before that we need the will and commitment to open free markets in currency, in both money and credit. We need to know the goal and to know that it is right and to know that what we now have is wrong. We need a Free Market Currency movement.

For further reading:
"The English Individualists as They Appear in Liberty", Carl Watner, 1982
"Institute for Monetary Freedom: Statement of Purpose", Jon Matonis, July 16, 1982
"Free Currency Propaganda", Henry Seymour, Liberty, May 5, 1894

Bitcoin Exchanges Popping Up Like Daisies

By Stephen Gornick
Bitcoin Money
Monday, July 18, 2011

http://www.bitcoinmoney.com/post/7757843969/bitcoin-exchanges-like-daisies

The variety of currencies and exchanges where bitcoin is traded has been expanding, rapidly.

Canadian Dollar (CAD)

In July we’ve seen the first market exchange for Canadians with the VirtEx launch. In a few weeks over $100K CAD has traded on their BTC/CAD exchange, placing them well within the top ten of Bitcoin exchanges, by volume. Also newly opened for trading CAD is Canadian Bticoins, a fixed-rate exchange.

U.S. Dollar (USD)

Among BTC/USD exchanges, Camp BX is the newest and among the most ambitious. Camp BX is operated by BulBul Investments, LLC — a corporate entity registered with the State of Georgia. The exchange is among Bitcoin’s first to have market orders — orders that will fill regardless of the price, as well as the more common limit order. Though not enabled just yet, the exchange also plans to offer the ability to buy on margn and to short-sell bitcoins. Dwolla is the only USD funding method offered by this exchange.

Another fairly new BTC/USD exchange is ExchangeBitcoins.com. Exchange Bitcoins is a corporate entity registered with the State of California and has been trading for about a month. This exchange is the only exchange where USD deposits may be made by paper check. Dwolla is accepted for deposit as well. This exchange is also the first to offer withdrawals by check and they also offer direct deposit (ACH) for USD withdrawal as well. Volume at this exchange has been increasing and their BTC/USD exchange now places in the top 10 bitcoin markets, when ranked by volume.

TradeHill recently added the ability to withdraw USD funds as direct deposit (ACH) and they allow domestic and international wire transfer withdrawal as well. This organization’s BTC/USD exchange is now the second largest, by volume.

A novel funding method is offered by a new fixed-rate U.S.-based exchange, GetBitcoin. Among the funding methods offered by this exchange is the ability to buy bitcoins after mailing to them a prepaid debit card purchased from most any convenience store or supermarket.

Just last week Intersango from the Bitcoin Consultancy — a group that also operates Britcoin, opened its BTC/USD market. Funds may be added or withdrawn using Dwolla. Britcoin and Intersango’s two exchanges all use the same open source market exchange software built by the Bitcoin Consultancy.

E.U. region (EUR)

Nearly all the exchanges with EUR funding methods have undergone banking changes in recent days. Mt. Gox is currently running without a bank where EUR funds may be deposited though the exchange says that should be rectified by Tuesday July 19th.

A new EUR exchange launched this month as well — Intersango EUR exchange. EUR funds may be added or withdrawn as SEPA bank transfers. This is one of three exchanges that use the same open source market exchange software built by the Bitcoin Consultancy.

Another fairly new exchange, Bitcoin7, now accepts SEPA transfers of EUR funds as well. Bitcoin7 out of Bulgaria has been trading since mid-June and their BTC/EUR market is one of five currency markets they serve.

The U.S.-based exchange Camp BX indicates that they will be announcing a EUR funding method in August.

While BitMarket.eu itself doesn’t escrow EUR funds, it does operate a BTC/EUR market where EUR orders between buyers and sellers are matched.

British Pound Sterling (GBP)

Mt. Gox recently started accepting GBP deposits using its U.K. banking partner. GBP funds received are converted to USD for trading on Mt. Gox’s BTC/USD market. There are no GBP withdrawal methods yet with this exchange.

Britcoin’s BTC/GBP market remains among the top five bitcoin markets when ranked by trading volume This exchange is operated by the Bitcoin Consultancy which also operates the Intersango EUR and USD exchanges. All three run the same open source market exchange software.

Bitmarket.eu does compete with their BTC/GBP market as it attracts many users who wish to buy using PayPal.

Polish Zloty (PLN)

Bitomat’s BTC/PLN market continues to be the most active of all non-USD bitcoin markets, even with the BTC/PLN competition from Bitcoin7 and Bitmarket.eu.

Bulgarian Lev (BGN)

Bitcoin7’s home is in Bulgaria and they run the only BTC/BGN market. Though trading volumes are thin yet, the market does function.

Czech Republic Koruna (CZK)

Just days ago was launched Bitcoiny.cz, a BTC/CZK market.

Australian Dollar (AUD)

TradeHill’s BTC/AUD market is just days old but is the only AUD market thus far. They offer domestic AUD deposits and withdrawals through an AU banking partner.

AUD transfers may be sent to Mt. Gox but those funds are converted to USD for trading on the BTC/USD market. Mt. Gox recently started allowing AUD withdrawals through Technocash.

BitPiggy is a fixed-rate BTC/AUD exchange with the ability to send and receive AUD funds using the banking network.

Chinese Renminbi (CNY)

Bit currency China has been trading just about a month now and daily trading volume is increasing causing this exchange to be the fastest growing of all bitcoin exchanges. Another BTC/CNY exchange has emerged, doTen.co, in which bitcoins are bought and sold with AliPay — a Chinese payment network similar to PayPal.

Indian Rupee (INR)

TradeHill stands alone as the only exchange with a BTC/INR market and also the only exchange to offer a funding method for use by those who bank in India. With significant restrictions imposed on PayPal, bitcoin may start getting more attention in this country.

Saudi Riyal (SAR)

Bitcoin7 is the only exchange to operate a BTC/SAR market and at this time the exchange does not yet accept deposits of SAR funds. SAR withdrawals are available. It is not certain where SAR funds for placing bids originate then but there are bids and the trading spread is narrow.

Chilean Peso (CLP)

Trading volumes on TradeHill’s BTC/CLP market are low but it is a functioning market with a respectably narrow trading spread.

Second Life Lindens (SLL)

Trading on the BTC/SLL market operated by VirWoX remains strong thanks to it being one of the few methods available to PayPal users. It ranks in the top 10 bitcoin markets, by volume.

Liberty Reserve USD (LRUSD)

Many Bitcoin exchanges trade Liberty Reserve USD, which continues to be a widely used digital currency that is available through currency exchanges in many places around the world. The BTC/LRUSD markets that exist include TradeHill, Btcex (Russian), Bitcoin Central, and Bitcoin Market.

Mt. Gox will accept LRUSD for deposits and will allow LRUSD to be withdrawn so it might be considered a BTC/LRUSD exchange as well except LRUSD withdrawals from Mt. Gox experience significant delays.

Bitcoin Central remains the only BTC/LREUR market though Bitcoin7 accepts LREUR funds as being the equivalent to EUR funds deposited from a bank.

Brazilian Real (BRL)

A new exchange is set to launch this week. The launch countdown clock for Brazilian exchange Mercado Bitcoin shows a Wednesday launch.

Bitcoin Argentina also will trade bitcoins for BRL.

WebMoney (WMZ)

Another new exchange, BTC-E.com, was announced on the Russian forum on Bitcoin.org. BTC-E.com accepts deposits of WebMoney and funds sent through INTERKASSA. BTC-E is currently in testing before launch.

Rest of world (ROW)

There still are significant currency markets that have no bitcoin exchanges in operation yet. For instance, those wishing to add funds from Japan (JPY), Switzerland (CHF), New Zealand (NZD) or Hong Kong (HKD) have no exchanges specifically for these currencies but that doesn’t mean they are shut out. Trade in and out of bitcoin can occur through GoldMoney as that payment system accepts for deposit or withdrawal all of those currencies and others as well. Trade then between GoldMoney and bitcoins can occur over-the-counter as many bitcoin traders will exchange bitcoins for GoldMoney.

CurrencyFair is a P2P Forex service that is assisting Bitcoiners when trading other currencies as well.

With Bitcoin existing as an open technology and nothing more, there is no approval process required before it can be used for trading among other currencies or any restrictions that specify for what purposes it can be used. There is no issuer and there is no regulator. There is only a protocol, software and network connectivity.

As a result, these currency additions from these new exchanges add towards increasing the network effect propelling Bitcoin. They help to make bitcoin even more useful everywhere.

Because domestic bank transactions clear faster than international transfers, Bitcoin essentially minimizes the delays. With bitcoin, a slow cross-border payment can instead become two relatively quick domestic bank transfers.

The finality of Bitcoin payments (non-reversible and irrevocable), plus the speedy service (bitcoin funds are available for spending in about an hour) combined with the ultra low fees (pennies per transfer, no matter the amount) all help to explain why these exchanges were so badly needed. They also help to explain why we should expect to see so many more.

[Update]:

Oh look, another daisy! Ruxum, out of Hong Kong, was featured on TechCrunch. Their site, currently invite only, shows their intention to accept USD, EUR, GBP, and JPY funds via bank wire. Assuming the site is complete, it appears that the only bitcoin market traded will be BTC/USD.

Reprinted with permission.

A Response to Ben Laurie's 'Last Word' on Bitcoin

By Amin Khadempour
Monday, July 4, 2011

http://amincd.tumblr.com/post/7191580728/my-response-to-ben-lauries-last-word-on-bitcoin

Ben Laurie wrote a paper that he described on twitter as his ‘last word’ on bitcoin, which explains his view on why bitcoin is either not a decentralized system, or that if it is, how it could be a more efficient one.

The paper is linked to in the blog post here: Decentralised Currencies Are Probably Impossible (But Let’s At Least Make Them Efficient).

Laurie’s basic point is that since bitcoin’s development team uses ‘checkpoints’, which are hard-coded points in the block-chain that cannot be changed through the protocol’s usual method of establishing an authoritative chain, to make transactions that occurred at or before the checkpoint safe from a > 50% attack, bitcoin is either not decentralized, if one considers the insertion of these checkpoints as centrally coordinated, or that there is a more resource efficient means of achieving decentralized consensus in the method used to insert the checkpoints.

His conclusion is that a decentralized currency using the method of arriving at consensus that is used to agree on the inclusion of the checkpoints in bitcoin’s block chain, as its sole means of establishing an authoritative block-chain, would be far more energy efficient than the bitcoin protocol’s mining method.

I believe Laurie’s paper is missing a key element in bitcoin’s reliance on hashing power as the primary means of achieving consensus: it can survive attacks by governments.

If bitcoin relied solely on a core development team to establish the authoritative block chain, then the currency would have a Single Point of Failure, that governments could easily target if they wanted to take bitcoin down. As it is, every one in the bitcoin community knows that if governments started coming after bitcoin’s development team, the insertion of checkpoints might be disrupted, but the block chain could go on.

Checkpoints are just an added security measure, that are not essential to bitcoin’s operation and that are used as long as the option exists. It is important for the credibility of a decentralized currency that it be possible for it to function without such a relatively easy to disrupt method of establishing consensus, and bitcoin, by relying on hashing power, can.

Reprinted with permission.

Andrew Jackson On the Paper Money System and Its Consequences

Jesse's Café Américain
Saturday, July 16, 2011

http://jessescrossroadscafe.blogspot.com/2011/07/andrew-jackson-on-paper-money-system.html

As the US Federal Reserve System approaches its 100th Anniversary in a few years, and as central banks and their political allies around the world promote the bailout and enrichment of the biggest banks and wealthiest individuals, to be paid for by the impoverishment and sacrifice of the people, it might be well to remember the lessons of history with regard to a fiat currency controlled by private corporations under the guise of an 'independent monetary authority.'

"The paper system being founded on public confidence and having of itself no intrinsic value, it is liable to great and sudden fluctuations, thereby rendering property insecure and the wages of labor unsteady and uncertain.

The corporations which create the paper money can not be relied upon to keep the circulating medium uniform in amount. In times of prosperity, when confidence is high, they are tempted by the prospect of gain or by the influence of those who hope to profit by it to extend their issues of paper beyond the bounds of discretion and the reasonable demands of business; and when these issues have been pushed on from day to day, until public confidence is at length shaken, then a reaction takes place, and they immediately withdraw the credits they have given, suddenly curtail their issues, and produce an unexpected and ruinous contraction of the circulating medium, which is felt by the whole community.

The banks by this means save themselves, and the mischievous consequences of their imprudence or cupidity are visited upon the public. Nor does the evil stop here. These ebbs and flows in the currency and these indiscreet extensions of credit naturally engender a spirit of speculation injurious to the habits and character of the people. We have already seen its effects in the wild spirit of speculation in the public lands and various kinds of stock which within the last year or two seized upon such a multitude of our citizens and threatened to pervade all classes of society and to withdraw their attention from the sober pursuits of honest industry.

It is not by encouraging this spirit that we shall best preserve public virtue and promote the true interests of our country; but if your currency continues as exclusively paper as it now is, it will foster this eager desire to amass wealth without labor; it will multiply the number of dependents on bank accommodations and bank favors; the temptation to obtain money at any sacrifice will become stronger and stronger, and inevitably lead to corruption, which will find its way into your public councils and destroy at no distant day the purity of your Government."

Andrew Jackson, Farewell Address, March 4, 1837


For further reading:
"Andrew Jackson on Repealing a Central Bank", ZeroHedge, February 13, 2011
"Andrew Jackson: Then and Now", Dan O'Connor, Mises Daily, January 19, 2010
"Andrew Jackson and the Bankwar", Tony D`Urso, March 6, 2003

Competing Currencies: A Defense Against Profligate Government Spending

By U.S. Rep. Ron Paul
Monday, July 11, 2011

http://paul.house.gov/index.php?option=com_content&view=article&id=1891

The end of June marked what is hopefully the end of the Federal Reserve's policy of quantitative easing. For months the Fed has purchased hundreds of billions of dollars of Treasury debt, enabling the government to fund its profligate deficit spending, push the national debt to its limit, and further devalue the dollar. Confidence in the dollar is plummeting, confidence in the euro has been shattered by the European bond crisis, and beleaguered consumers and investors are slowly but surely awakening to the fact that government-issued currencies do not hold their value.

Currency is sound only when it is recognized and accepted as such by individuals, through the actions of the market, without coercion. Throughout history, gold and silver have been the two commodities that have most satisfied the requirements of sound money. This is why people around the world are flocking once again to gold and silver as a store of value to replace their rapidly depreciating paper currencies. Even central banks have come to their senses and have begun to stock up on gold once again.

But in our country today, attempting to use gold and silver as money is severely punished, regardless of the fact that it is the only constitutionally-allowed legal tender. n one recent instance, entrepreneurs who attempted to create their own gold and silver currency were convicted by the federal government of "counterfeiting." Also, consider another case of an individual who was convicted of tax evasion for paying his employees with silver and gold coins rather than fiat paper dollars. The federal government acknowledges that such coins are legal tender at their face value, as they were issued by the U.S. government. But when it comes to income taxes owed by the employees who received them, the IRS suddenly deems the coins to be worth their full market value as precious metals.

These cases highlight the fact that a government monopoly on the issuance of money is purely a method of central control over the economy. If you can be forced to accept the government's increasingly devalued dollar, there is no limit to how far the government will go to debauch the currency. Anyone who attempts to create a market-based currency -- meaning a currency with real value as determined by markets -- threatens to embarrass the federal government and expose the folly of our fiat monetary system. So the government destroys competition through its usual tools of arrest, confiscation, and incarceration.

This is why I have taken steps to restore the constitutional monetary system envisioned and practiced by our Founding Fathers. I recently introduced HR 1098, the Free Competition in Currency Act. This bill eliminates three of the major obstacles to the circulation of sound money: federal legal tender laws that force acceptance of Federal Reserve Notes; "counterfeiting" laws that serve no purpose other than to ban the creation of private commodity currencies; and tax laws that penalize the use of gold and silver coins as money. During this Congress I hope to hold hearings on this bill in order to highlight the importance of returning to a sound monetary system.

Allowing market participants to choose a sound currency will ensure that individuals' needs are met, rather than the needs of the government. Restoring sound money will restrict the ability of the government to reduce the citizenry's purchasing power and burden future generations with debt. Unlike the current system which benefits the Fed and its banking cartel, all Americans are better off with a sound currency.

Len Sassaman on Bitcoin

Len Sassaman was a brilliant cryptographer and a true champion for privacy rights and privacy enhancing technologies. He passed away on July 3rd, 2011 at the age of 31. He will be sorely missed.

I had several opportunities to discuss bitcoin and cryptocurrencies generally with Len, with the most recent exchange on June 25th below. In posting this, it is my hope that anonymity considerations with bitcoin are well understood by the individual user and appropriate for the type of bitcoin transaction that is undertaken, as all security is relative. I had asked him "if his concerns about bitcoin traceability were more of a non-cryptographic nature? i.e., real-world identity?" Len's reply, in his own words:

"Well, it's hard to decouple cryptography from identity in a crypto-based currency, but, yes, my concerns are real-world identity issues. Bitcoin is less anonymous than physical cash. Compare to Digicash, which was 'more' anonymous. It's useful to speak about these things in more precise terms; using the Pfitzmann terminology, Bitcoin lacks unlinkability as a property. 'Throw Tor or Mixmaster at it' isn't a very satisfying answer, at least not to someone with an understanding of how those systems fail. My fear is people will associate 'bitcoin' and 'anonymous', get seriously burnt by the fact that it's 'not' anonymous, but rather a persistent ledger of all transactions ever, and then dismiss future e-cash that actually 'does' provide anonymity and unlinkability, etc., because they've 'heard that before.'

It may be possible to use bitcoin as a building-block in constructing an anonymous payment system; I'm skeptical, but what 'is' clear is the people currently advertising such systems haven't ever worked on traffic-analysis defeating protocols before. Any state-level adversary can link bitcoin back to the user's real-world identity — or at least, real-world computer. You're probably marginally better off with pre-paid visa cards exchanged through some kind of swap system like the cypherpunks used to do for Safeway cards, though I don't know if that exists. This is all somewhat of a distraction, though, since it's unclear to me that Bitcoin will survive the speculators; that's not what it was designed for, and it's showing. Further, the competence differential between the designers of bitcoin itself & the exchanges is staggering. Sorry for that flood of messages. I've added you to Skype; when's a good time to chat?"

For more Len, here's his presentation, "Anonymity for 2015: Why not just use Tor?" and another, "Towards a formal theory of computer insecurity: a language-theoretic approach".