Bitcoin in Israel, Part 3: Interview on Alternative Currencies
Alternative cryptocurrencies have been an important part of the Bitcoin ecosystem for a long time; the first one to reach any prominence, Namecoin, was first released in early 2011, and since then many more have entered the stage. We have Litecoin running with an alternative mining algorithm that is less skewed toward specialized hardware, Primecoin trying to make the process of mining more useful to society at large and offering very fast transaction confirmations, PPCoin doing away with traditional mining entirely, Krugercoin making confirmations even faster, and a new one appears to be popping up every week. More recently, a new type of cryptocurrency has started to appear: Bitcoin blockchain-based overlay currencies. These currencies, of which Bitshares and Mastercoin are currently the two leading contenders, do not try to live on their own blockchains; rather, they are a sort of overlay networks on top of Bitcoin, piggybacking on the Bitcoin transaction system to store data. Every Mastercoin transaction is a Bitcoin transaction, but the way in which the transaction is interpreted is different; what a Bitcoin client might see as an innocent transfer of a few satoshis a Mastercoin client may well see as the creation of a whole new currency inside the Mastercoin network. Are alternative currencies the future? Are any of the current ones likely to succeed, or is there still a missing piece of the puzzle? Read this interview for a glimpse into the state of alternative currencies right now.
Ron Gross is heavily involved in the Mastercoin project, but also runs Bitblu, a business whose goal is to make it easier for people to diversify their savings across many different alternative currencies, and Meni Rosenfeld is a cryptocurrency enthusiast and a key Bitcoin community organizer in Israel.
Vitalik Buterin: Ron, could you talk a little about your business, Bitblu?
Ron Gross: Bitcoin is the first digital currency. And as we know there are other clones or forks. Some of them are proper code forks, some are more spiritual forks. I consider Ripple a sort of fork; maybe fork is not the right word, but it’s another cryptocurrency, and Mastercoin is another one, and maybe more will appear in the future. A question that a lot of new Bitcoiners ask when they consider investing in Bitcoin is, why invest in Bitcoin? Maybe another currency will take its place, and Bitcoin will not fulfill its vision of being the One True Currency. Bitcoin obviously has strong network effects and it’s in a great position right now, and there is a chance that all the other coins will either stay small for a long time or people will abandon them. But there are also other possibilities, and Bitblu is offering our customers the ability to work with all of these other coins, and really manage their investments over time – not just in exchanges like btc-e, where they can buy a certain amount of coin and that’s it. We have a very product-centric vision, we are always thinking about how we can make the user experience very simple and easy for people that do not understand these new currencies but want to invest a bit in them, and we will offer new tools for diversification. We will offer new indexes that automatically diversify across all the currencies, just like someone who wishes to buy stocks can buy Nasdaq, the S&P 500, and other indices. So we are developing indices for the Bitcoin and cryptocurrency space.
It’s a project that I’m starting with another founder, but Meni has also played a vital role in advising the company, and that’s important to note.
VB: About cryptocurrencies in general, what do you think are the most promising right now?
RG: Bitcoin is of course number one. I usually just go by market cap, that’s usually a good indicator. XRPs, or Ripple, have a huge market cap. Bitcoin today is worth around $1.5 billion, Ripple is around $1 billion, and most people don’t realize this. Up until a few weeks ago most people could complain that Ripple is closed-source, and not really decentralized; I think that these claims are starting to wear off as they are now open-source and maybe they will be truly decentralized in the future.
Meni Rosenfeld: It will never be truly decentralized because the underlying currency is 100% pre-mined. If you are talking about building a new economy based on peer-to-peer and so on, you can’t do that if the currency that you use was all started by one company that does whatever it wants with it.
RG: That may be a valid point. They have a strong team backing them, so they are certainly a viable player in this space, the payment network and the currency.
Mastercoin is also interesting in its own right. Litecoin is getting a lot of traction in the last six months. It does offer the promise of a more decentralized currency than Bitcoin because it reduces the power concentration of mining companies. That’s the promise; it still remains to be seen if the promise will be fulfilled. Maybe soon enough we will see an ASICminer for Litecoin. There are also other projects that are trying to build a currency that is even harder to optimize or do in parallel than Litecoin. There are currencies that use six or more different algorithms, and something that is very easy to compute by a computer, but hard to build dedicated hardware for.
PPCoin is also a very interesting concept; Meni and myself, by the way, have done a bit of work on proof of stake originally, and Sunny King has taken this and other work and built a coin using that. PPcoin tries to eliminate the mining industry altogether. It starts with proof of work mining and slowly moves to proof of stake, so it is very interesting. If it can be done, then of course we don’t need to waste all this electricity and CPU cycles. One caveat with PPCoin is that it’s a bit harder to analyze, so to understand what the exact money supply will be and the security model. I personally also like Primecoin, which is innovative and is trying to make the computations create a new public good. It’s a matter of debate whether the chains of prime numbers that are generated are actually useful to anyone or not, maybe some mathematicians can testify. It’s certainly an interesting role, trying to make the computations more useful for everyone.
MR: I don’t think that any of the current alts are really interesting. Maybe there will be interesting ones in the future, but if you take for example Litecoin, I don’t think it’s true that it will be more decentralized, because there will be ASIC miners. It will take a bit more time, but once it happens the same thing will happen that happened with Bitcoin. If you do a currency with a proof of work that is really immune to ASICs, then we will have CPU mining vs ASIC mining, but then the question is, is this better or worse? I don’t know.
About Primecoin, it’s nice that they use a completely different work function, but I don’t think their function is really all that useful, and I also don’t think that it’s really possible to do something which is useful, because in order to be good for cryptocurrency mining you need some very specific properties which I don’t believe are compatible with any “useful computation”, so I’m a bit pessimistic about that. About proof of stake, that’s an idea which I support and I’m one of its early pioneers. I don’t think any of the current implementations are really good. But, there is a concept of “proof of activity“, which is like a probabilistic proof of stake, so maybe that’s a good direction for doing something which is not pure proof of work, as proof of work is very expensive. And as for Ripple, the idea of a credit network is very powerful, but the problem is that the XRP currency is centralized, so I hope we will see something which is decentralized but also has a fair distribution of the underlying currency.
RG: anyone can fork it now, so maybe that will happen.
MR: [There is also] Freicoin, the currency whose main feature is that there is demurrage, which is equivalent to perpetual inflation, which has some advantages and disadvantages. If they do the inflation and it’s pretty mild, then maybe it can work. But what’s interesting is that the same people who work on Freicoin are also working on developing FreiMarkets, which is an extension that can be applied to Freicoin or to Bitcoin or whatever, and it has a lot of interesting features like hierarchical transactions and so on, and also tag-based coloring of coins. So there are a few variants, which are currently still in the works. Whatever currency it will be applied to will become much more interesting.
RG: Another thing to add. First, regarding FreiMarkets, currently there is a bunch of these projects going about. Mastercoin is one of them, there’s FreiMarkets, there’s BitShares, PeerShares. I have a limited amount of time, I can’t understand each and every one of them. It’s clear that there will be at least one decentralized market that follows these principles. Maybe it will be something else that takes the best of each of them, so it will be interesting to see how this develops. I want to add one more theoretical coin that doesn’t exist yet, but I think it would be really interesting to develop, which is a quantum-resistant coin. There is a branch of algorithm research that specializes in developing algorithms that are immune to quantum computers. There are encryption and hashing algorithms that a quantum computer can’t efficiently break. Regardless of the existence and performance of current quantum computers, it’s useful to have a hedge against them. About the mining algorithms, it’s important to understand that the proof of work algorithms in Bitcoin can be changed. Theoretically, if there is a consensus of 51% or more ,maybe 60% or 70% of the Bitcoin miners and users, then the entire SHA256 algorithm of Bitcoin can be replaced with whatever people agree would work. That doesn’t change the fundamental workings of Bitcoin. But the thing is that in practice it would be extremely difficult to do this. Maybe what would happen in the real world, whether there is a scrypt-based or quantum-based proof of work, is that there would be a new coin and people would just buy the new coin instead. That will be easier on a political level I think.
VB: That is actually,something that I’ve heard from some Litecoin developers. A long time ago they had a DDOS attack against their chain where someone basically published a few million single-satoshi transactions, which every node now needs to download and verify, so what they’re thinking of is essentially deleting those satoshis.
RG: Well, that’s not something that can happen in a decentralized currency.
VB: The specific rule that they’re thinking of is to make very very small outputs unspendable, and to add some kind of fee that you would have to pay for every output depending on how long ago it was spent, so you can see how in Bitcoin it would be politically impossible.
RG: Alright, I need to go, this was very interesting, thank you.
VB: Thank you!