Thursday, September 18, 2014

The Stupidity of the Blockchain Fragmentation

The world is now filled with cryptocurrency fans, and it would be great, but we're cannibalizing our movement. It's Bitcoin against BitSharesX against Ethereum against Ripple... we've created a situation where we're unwilling to have the others succeed, because it threatens our investments.

Our infighting is unnecessary.

I invested in the Ethereum ICO. Shortly after making my investment, I stumbled on a proposal on bitcointalk. I'm glad that my money has gone towards rewarding Vitalik Buterin and all the rest of the development team for their efforts, but I feel I have to take a public stand now, and say I hope Æthereum succeeds, and Ethereum does not, even though I own a greater proportion of ether than bitcoins.

For those who don't have the patience to read the Æthereum proposal, basically it's all the same code, but a different blockchain. This different blockchain will contain a snapshot of all bitcoin address balances at a certain time, and a mechanism with which bitcoin holders can use their private (bitcoin) keys to retrieve a proportional amount of ether. So bitcoin holders can upgrade to a (possibly) superior technology and keep their original investment safe.

All new cryptocurrencies need this ability. If you see any new ICO that does not give bitcoin holders an automatic stake, you should consider it a scam. Maybe the developers have some quixotic scheme for a more equitable initial distribution of coins, but I'm going to make the judgement that's unlikely to pan out in any form for any coin.

Let me make it clear that I do support developers and initial investors reaping a reward. But I think that can be safely capped at 10-20% initial stake, with bitcoin holders getting the rest.

Cryptocurrency investors should only need to invest once in the idea of cryptocurrency, in archetypal bitcoin, and be able to reap the rewards no matter how the technology changes. It's not the blockchain that matters, it's the balances that matters; it's the weight of emotion: hope, and yes, greed, symbolized in electronic numbers that matters.

Bitcoin sooner or later will be replaced, and we need to have an orderly exit. We can't just hack anything on top of a bitcoin blockchain in perpetuity and expect security and scalability.

We need to stop doing things like BitShares PTS. We already have a blockchain indicating interest in cryptocurrency, and it's called bitcoin.

I really, really hope this post or something similar said in a better way gets popular and permeates the entire cryptocurrency world.

6 comments:

  1. It seems the SuperNET project by jl777 is exactly what you are looking for

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    1. It seems like SuperNET is much more complex. What are SuperNET's holdings? I'm having difficulty finding that out.

      What if SuperNET invests in Ethereum, but then Æthereum is released and overtakes Ethereum? I'm still fairly certain that investing in anything that isn't based on a snapshot of bitcoin's ledger is extremely risky.

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  2. You're spot on. The proliferation of altcoins only undermines the growth of The One.

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  3. Any altcoin can be immediately improved by using a Bitcoin blockchain snapshot. Additionally, any altcoin that does not launch with such a snapshot will be extremely vulnerable to competitors that simply take the altcoin's concept, marketing, and source code and then make a version that does include the snapshot incentives.

    I am calling these incentive snapshots. I don't know if aethereum was the first to propose the concept, but is a really clever one.

    These snapshots are a powerful concept because they make it possible to instantly incentivize millions of users without contacting them, asking permission, getting them to type in passwords, etc. This also removes the opportunity cost for Bitcoin users that have to decide to sell some Bitcoin to buy some of the new currency (they no longer have to decide at all). By using a snapshot incentive scheme, an altcoin instantly acquires millions of hoarders. These hoarders don't know they are holding, but they still count anyway. As they become more aware of the new altcoin's benefits, they can begin to capitalize on the incentives that the snapshot bestowed upon them, such as by actively using the new currency or accepting payments.

    On the other hand, without this snapshot, there would be significant friction to onboarding users because they would be spoiled by the convenience of instant onboarding from other competing altcoins that did happen include an incentive snapshot.

    I have been wondering when a new altcoin would use multiple incentive snapshots. There are a great deal of many almost-dead altcoins. An extremely easy way to incentivize a bunch of altcoin users would be to include multiple incentive snapshots based on each of the dead altcoins. Suppose that there are 1,000 dead altcoins, each with on average 10,000 users with tons of overlap. Instead of only using one incentive snapshot to launch the new altcoin, the programmer would have 1% or 5% chunks that get proportionally allocated to snapshots from each of the different dying altcoins. This is very much like accepting stock dilution because a valuable stakeholder was added to the captable. One of the downsides to this concept is that if a "completely too much dead" altcoin is picked, there may be no remaining users from that altcoin anyway. Also, what happens if a "multiple incentive snapshot" altcoin starts to die, too? Would another altcoin come along that includes this altcoin's snapshot as an incentive? Actually you would probably have to merge (or add-by-address) different incentive snapshots together because the same address may be present in multiple snapshots from different altcoins if this scheme becomes widely used.

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  4. I don't know how this would work, but this same incentive scheme can apply to scenarios without a new altcoin too. For example, a store may issue coupon tokens as a promotion to get more customers, without using Counterparty, Dogeparty, Open Asset or Mastercoin to distribute a token asset directly on the blockchain, in the same way that a new altcoin can incentivize Bitcoin users by public key without spamming the Bitcoin blockchain. Unfortunately I can't think of many scenarios where this would be useful, because usually you don't want to give everyone a discount or gift because not every Bitcoin user is in your target customer demographic, except obviously in the case of altcoins and new currencies.

    Also: Bitcoin's blockchain offers an interesting benefit to users who are concerned about Bitcoin the currency becoming worthless, because other blockchains can be created based on these Bitcoin blockchain incentive snapshots. This particular benefit is a property of any cryptocurrency based on Bitcoin.

    Also... incentive snapshots should be careful to filter out unspendable addresses, like exodus addresses for proof-of-burn schemes. Because why would you want to spend some of the new currency on unspendables anyway? That's all sorts of broken.

    Also.... an altcoin based merely on forking Bitcoin software has a worthless currency on the market, even if it does include an incentive snapshot of the Bitcoin blockchain. Such altcoin currencies are worthless because the market price of "an idea or currency that you haven't valuated yet" is at most zero or sometimes even negative because the supply of "ideas or currencies that you haven't valuated yet" is practically unlimited and the demand for such is upper-bounded by available human resources, hard drive storage capacity, internet bandwidth, electricity, etc.

    On top of that, hoarding an altcoin reduces your purchasing power (there is an opportunity cost here), because the optimal behavior is to immediately sell for Bitcoin any altcoin that granted you some currency (via an incentive snapshot) as soon as there is a positive market price, because of the overwhelmingly huge amount of purchasing power you can acquire by hoarding more Bitcoin.

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  5. Oops, regarding "this particular benefit is a property of any cryptocurrency based on Bitcoin", this is not entirely true. Clearly it will be Bitcoin that is most incentivized in these snapshots, while other less popular blockchains should never be snapshotted and included. Of course, this reasoning doesn't prevent people from making silly decisions when throwing together currencies.

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