Thursday, January 8, 2015

Real World Crypto 2015: Bitcoin and Beyond: What Virtual Currencies Really Are Useful For

One year after Real World Crypto opening with Bitcoin, there was only one talk to follow up. Sarah Meiklejohn talked about the many ways how Bitcoin has failed but also a new practical application for Bitcoin or any similar system.  She started by outlining the four categories of digital currencies according to the European Central Bank:
    1. Closed currencies: No official exchange with central bank currencies exist in either way, even though black markets might exists. Examples are most currencies used in online games.
    2. One-direction currencies: They can be bought using central bank currencies, but they can't be sold. Examples are airline reward miles.
    3. Convertible centralized currencies: They are convertible both ways and governed by a single authority. An example is the Linden Dollar of Second Life.
    4. Convertible decentralized currencies: There is no central authority. The most prominent example is Bitcoin.
    From a cryptographer's point of view only the last category is interesting because of the mechanisms needed to establish consensus. There are a few requirements to such a decentralized system: The history has to be updateable, globally visible, and immutable.

    Sarah then examined the history of Bitcoin using the hype cycle paradigm, which uses the following five phases: technology trigger, peak of inflated expectations, trough of disillusionment, slope of enlightenment, and plateau of productivity. Bitcoin was proposed in 2008, and the block chain started in 2009. One year later, Mt. Gox began trading Bitcoin, and the first mining pool appeared. In 2011, Silk Road emerged, and the price exceeded 1 dollar for the first time. The subsequent general interest sparked the involvement of regulatory authorities and the creation of many other currencies, called altcoins. Finally, the price of Bitcoin reached and all-time high of over 1000 dollars in December 2013. With respect to the hype cycle, the speaker claimed that Bitcoin has reached the trough of disillusionment in 2014.

    The increased interest also revealed a few technical weaknesses of Bitcoin and its deployment, from its theory (minority pools can take over control) to implementation issues. Also the unproven claim of anonymity was disputed by a paper. On the non-technical side, Bitcoin has lost two thirds of its Dollar value and was banned in several countries, and centralized payment systems such as Apple Pay look more promising at the moment.

    After all this disillusionment, Sarah turned the attention to a new application of Bitcoin or any decentralized system achieving the aforementioned properties. Essentially, they can be used as a notary public. For example, one can include a hash of a digital object into the block chain for timestamping, that is, to prove knowledge of it at a certain point in time without revealing it at that time. Similarly, the block chain could be used to store the ownership history of a piece of land or any object. This could in fact replace the land registry. The speaker pointed out that anonymity or the value of a currency is less crucial for this application.

    The talk ended with a call for cryptographers to increase the usability, better enforce decentralization, and audit the software for virtual currencies.

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