Monday, March 31, 2014

New Binary Options Trading Service Takes Bitcoin-Only Payments

By Jon Matonis
Wednesday, March 26, 2014

A new service for financial options has launched a beta website for nine different binary options, including gold, silver and crude oil, plus six foreign exchange pairs.

The offered currencies – euros, Australian dollars, New Zealand dollars, British pounds, yen, and Swiss francs – are all paired with the US dollar.

Different than previous binary option offerings, the new service – which is called UpDown – processes payments and payouts in bitcoin only.

With binary options, the trader selects the direction that the price of the underlying asset will move – either up (‘call option’) or down (‘put option’) – and purchases an option contract. This contract gives the buyer the right to exercise the option at the end of the specified time period, at which point the trader makes a return or loses the initial investment.

Binary options are sometimes referred to as ‘all-or-nothing options’, ‘digital options’, or ‘fixed return options’ (FROs), which are traded on the American Stock Exchange.

More popular outside the US, foreign binary options are offered by individual brokers, rather than through an exchange, and they typically have a fixed payout and risk. The brokers earn their revenue from the percentage discrepancy between what they pay out on winning trades and what they collect from losing trades.

Most foreign binary options brokers are not legally allowed to solicit US residents unless that broker is registered with a US regulatory body, such as the Securities and Exchange Commission or the Commodities Futures Trading Commission.

First-generation brokers

First-generation binary options for bitcoin simply offer the BTC/USD currency pair as a trading vehicle, whereas second-generation operators also allow deposits and payouts in bitcoin. Coindesk first covered first-generation bitcoin binary options in June 2013.

Now, binary option brokers that trade bitcoin as an option instrument include anyoption, SetOption, TradeRush, and Bloombex-Options.

Fast and simple, the tradeable asset lists are extensive with durations of 60 seconds to one week. Payouts range between 60% to 85%, depending on the asset and option type. Top brokers will also provide news resources and trading tools.

Second-generation brokers

Second-generation brokers offering both bitcoin funding and bitcoin trading include UpDown, BTCOracle, and BeastOptions.

The first such trading service operating on the bitcoin block chain, Satoshi Option, debuted in March 2013.
Similar to the SatoshiDice betting game, Satoshi Option requires no account registration and no personal details. Payouts are near instantaneous and the service is accessible from anywhere in the world because it relies on the bitcoin block chain as the platform.

Maximum trade size per bitcoin address is currently set at 0.25 BTC. Since the available commodities are traded with publicly available pricing, the binary option outcomes are verifiable.

Unlike the other bitcoin-funded brokers that rely on proprietary platforms, BeastOptions operates on the third-party TRADOLOGIC trading platform, which provides a customizable front end that is a lightweight, high-performance solution for web-based or mobile platform trading.

Several binary option trading platforms exist and SpotOption, TRADOLOGIC’s biggest competitor, has been offering bitcoin binary options since mid-2013. Leverate‘s new platform also includes support for bitcoin binary options and CFDs, which is utilized by Plus500 and TopOption.

Contracts for difference, or CFDs, differ from binary options in that they allow the use of leverage and the contract can be closed at any time, whereas binary options have a fixed expiry. Counterparty risk is a concern for both instruments, which is what the very short-term binary options utilizing the bitcoin block chain seek to alleviate.

UpDown will soon be adding a BTC/USD trading pair to its binary option asset list after it negotiates an exchange partnership. UpDown refers to itself as a community-regulated project and is registered in the British Virgin Islands. As always, please perform your own due diligence on binary option brokers and trade at your own risk.

Saturday, March 22, 2014

A Taxonomy of Bitcoin Mixing Services for Policymakers

By Jon Matonis
Monday March 17, 2014

shutterstock_154987619As the first-ever technical workshop devoted to bitcoin research convened on the island of Barbados on 7th March, it was clear from the outset that several academic papers would be exploring various methods to compensate for bitcoin’s inherent lack of anonymity.

For now, it’s an academic endeavour, but it underlies the fundamental principle known as ‘freedom of transaction’.

The International Financial Cryptography Association (IFCA), which organised the conference, has been at the center of this research work for 18 years. The burgeoning field of applied cryptography drives the mathematical science that makes digital anonymous value, and its transfer, possible.

At IFCA, CRYPTO, and other global conferences, cryptographers routinely assemble to present various theories and protocols that will allow a digital currency unit to emulate the privacy features of paper cash.

As applied to bitcoin specifically, these privacy-enhancing protocols can be organized into a taxonomy of mixing services for policymakers.

Tools against surveillance

Last year, Mercatus duo Jerry Brito and Andrea Castillo published “Bitcoin: A Primer for Policymakers” which touched only lightly on the advanced research into the privacy layers above bitcoin.

However, the privacy around bitcoin address data is no different than the privacy provided by Tor for anonymous web browsing and ultimately just as important for liberty and human dignity. Also similar to Tor, the network becomes more useful and robust as the level adoption increases.
Just as Tor prevents people from learning your location or browsing habits, bitcoin privacy extensions prevent people from learning your bitcoin amounts and spending habits.

Tor assists in defending yourself against network surveillance and traffic analysis, while bitcoin assists in defending yourself against financial surveillance.

Adopted from “The First 3 Generations of Bitcoin Mixing” by Kristov Atlas, the following taxonomy provides a fundamental guide for practitioners as bitcoin spreads itself into each and every monetary regime existing within artificially-delineated boundaries.

Before various governments like Jordan, Singapore, Iran, and Russia decide to ban bitcoin outright, or significantly restrict its usage, they need to be aware of the potential limitations to such regulation and attempted surveillance.

Centralized mixing services

The first generation of bitcoin mixers operated as a standalone service where you could send your bitcoin, pay a small fee, and then receive different bitcoin than the ones that were sent. These were some of the earliest and most rudimentary bitcoin mixing services.

The successful bitcoin anonymization of these services depended on the total number of users and coins available for mixing, which is why larger exchange sites and bitcoin shopping platforms were used more frequently. If an exchange was large enough, bitcoin could be deposited and withdrawn without being traded – effectively mixing the customer’s original coins.

Additional considerations of centralized mixing services are that you must trust the service not to steal your bitcoin and you must trust the service to protect your bitcoin from external theft.

Similar to VPNs, you must also trust the service not to maintain logs of the bitcoin address mixing and not to sell or turn over such records, both of which are difficult to verify.

Peer-based mixers

In an attempt to address the problems of a centralized model, the next generation of mixers relied on a ‘team’ of bitcoin users who all want to mix their coins together, gathering at the same place and time on the Internet.

Rather than a mixing service receiving bitcoin from a customer and performing the mixing itself, these peer-based mixers simply act as a meeting place for users to orchestrate mixing amongst themselves.

This model solves the problem of theft, because without a third party, the service is trustless. Protocols such as CoinJoin, SharedCoin, and CoinSwap allow multiple bitcoin users to get together, crafting a single bitcoin transaction in multiple stages, and sending their bitcoin to each others’ destination addresses.

Other than the mixing server, none of the participants need to know the relationship between their starting address and destination address. This can be performed multiple times with multiple parties to further complicate traffic analysis of the block chain.

Also, according to Atlas, peer-based mixing solves the problem of record-keeping, because:
“Cryptographic primitives such as cryptographic blinding, zero-knowledge proofs (ZKPs), and Succinct Non-interactive Arguments of Knowledge (SNARKs) can improve on peer-based mixing protocols so that, not only do the peers not need to know about each other’s destination address, but the mixing server helping to orchestrate the mixing doesn’t know it, either.”
Atlas refers to this approach as ‘blind mixing’.

Anonymous altcoins

Altcoins are cryptocurrencies derived from the Bitcoin protocol with some slightly modified properties.
Atlas believes that cryptocurrency exchanges featuring various altcoins can be incorporated into block chain-based technologies to form peer-to-peer exchanges. He states that “once anonymous altcoins and decentralized exchanges are deployed, we will see these altcoins being used as off-ramps from and on-ramps to bitcoin, essentially acting as mixers.”

Improvements to the second generation of mixers include further decentralization of the mixing process by outsourcing the processing load to the altcoin’s distributed network, rather than relying only on the mixing server and vastly increasing the total size of the user ‘anonymity set’.

Leading the charge of anonymous altcoins is the Zerocoin team, which includes cryptographers Matthew Green and Ian Miers. After deciding to avoid the engineering complications of implementing Zerocoin on top of bitcoin, Green and his team began working on a standalone altcoin implementation dubbed ‘Zerocash‘.

Miers presented the Zerocash paper, “Rational Zero: Economic Security for Zerocoin with Everlasting Anonymity”, at the IFCA Bitcoin Workshop. Another privacy-enhancing paper, “Increasing Anonymity in Bitcoin”, was presented by Amitabh Saxena.

Atlas correctly states that bitcoin core developers have so far been reluctant to incorporate mixing technologies directly into the core protocol. Aside from being politically unpalatable, it would also add computational overhead and potential complication, leaving the option of services outside of the core protocol as the primary method for maintaining fungibility and user-defined privacy.

Notably, bitcoin core developer Mike Hearn says that an upcoming version of bitcoinj will route all connections to the bitcoin network over Tor’s anonymity network.

Monday, March 10, 2014

How Bitcoin Smashes Mobile Payments Barriers

Open Letter to Mobile World Congress, Barcelona 2014
from Jon Matonis, Executive Director, Bitcoin Foundation 
February 27, 2014

I have worked in the currency, payments, and cryptography business for over 20 years, at businesses including Visa, Sumitomo Bank, VeriSign, and Hushmail.

The technological developments now occurring in peer-to-peer payments and online distributed trust ledgers will shake the current financial system to its core. Ultimately, this will be a good thing for society and, therefore, it should not be feared or resisted.

Of course, I am speaking about the bitcoin network and the bitcoin monetary unit which runs over that network.

If I had to describe bitcoin in just three words, I would say it is: Money Without Government.

Alternatively, I could say bitcoin is Survivable Digital Scarcity. In just five short years, bitcoin has unequivocally demonstrated that we don’t need kings to coin our money and we don’t need central banks issuing debt-based paper notes and deciding what our money should be. Money is anything we collectively determine it to be.

Ladies and gentlemen, the fiat emperor has no clothes. The illusion of legal tender has been exposed.

Just like the untainted child in the Hans Christian Andersen fairy tale, some of us are beginning to notice. It’s not the illusion itself that so offends our sensibilities, but more the notion that a competitive illusion is not to be permitted.

If a free market illusion voluntarily agreed to from the bottom up is so desperately feared, then the protectors of the state-sanctioned illusion must not have the most benevolent of motives in store for us.

At some level, all money is an illusion that we share and as such we must be free to determine that shared illusion from the bottom up, rather than have it dictated to us from the top down. Even with gold, the most tangible of all monies, it is estimated that 95% of its value is attributed to its illusory monetary exchange properties.

With a bitcoin monetary unit, seigniorage becomes a thing of the past. And, as users of the monetary unit, we are not insulted by the insidious practice of having zeros added to the left of the decimal point. Bitcoin is infinitely sub-dividable to the right of the decimal point, as it should be.

Governments are not opposed to a shared illusion, they only want it to be their shared illusion.

Just as the copyright world is being radically transformed by distributed file-sharing protocols like BitTorrent, the legal tender facade will be transformed by decentralized survivable cryptocurrency because, in the end, legal tender is simply an unearned copyright privilege over money.

Additionally, most governments are sorely mistaken when it comes to bitcoin because, in order to thrive, bitcoin requires only market-based legitimacy – not government-sanctioned legitimacy. This is enormously frustrating for them and it is something not witnessed on this scale before.

OK, now that we have placed bitcoin in that proper monetary context, we can turn our attention directly to mobile.

For some in the mobile payments space, the following will be difficult to hear.

Traditionally plagued by a variety of barriers, mobile payments have seen lacklustre adoption around the world. This is particularly true in the developed economies, where a trio of competing interests breeds perpetual infighting and stagnation.

The holy trifecta in mobile payments includes governments, banks, and operators – each trying desperately to secure their own piece of the coveted payments pie, exerting maximum influence along the way. This, in my opinion, has strangled mobile payments progress and adoption.

Fortunately, bitcoin and its decentralized network bypass these three quarrelling constituencies.

First, the bitcoin monetary unit is nonpolitical in nature and it doesn’t require an intermediary for issuance, authorization, clearing, and settlement functions. Those are performed via the public block chain.

Second, bank accounts and card networks are not required for clearing bitcoin transactions, eliminating the need for those silly dongles and awkward squares.

Third, since bitcoin wallets can run as standalone apps on smartphones utilizing QR codes, specialized accounts with operators become unnecessary, as does specialized hardware at the point of sale.

Guess what? These point-to-point bitcoin-powered mobile payments are already happening today. Furthermore, they are happening over your networks or at the very least over optional Wi-Fi.

Bitcoin is the quintessential disruptor, for not only does it disrupt established primary-level players in the field of payments, like Visa, MasterCard, and PayPal, but it elegantly disrupts the very nature of monetary authority. Bitcoin is disruption within disruption.

Money naturally operates like a virus and that makes bitcoin potently viral. It is viral cubed, in fact – money on the Internet with a network effect. A monetary unit does not stop expanding until it runs into artificially delineated boundaries or achieves widespread dominance.

An undisputed early advantage will be bestowed upon those that recognize and harness bitcoin’s transformative role in mobile.

It is my sincere hope that we will never again have to sit through a “disruption in payments” conference without hearing the phrase bitcoin.

Thank you.
Jon Matonis