LET’S TALK BITCOINEpisode 115 – Revisiting Pompeii

Participants:

Adam B. Levine (ABL) – HostAndreas M. Antonopoulos (AA) – Co-hostStephanie Murphy (SM) – Co-hostScott Maxwell (SMax) – Founder of Cryptocurrencymadesimple.comKai Chang (KC) – Analyst of MtGox 500

Today is June 3rd 2014 and this is Episode 115.

This program is intended for informational and educational purposes only. Cryptocurrency is a new field of study. Consult your local futurist, lawyer and investment advisor before making any decisions whatsoever for yourself.

ABL: Welcome to Let’s Talk Bitcoin, a twice weekly show about the ideas, people and projects building the digital economy and the future of money. My name is Adam B. Levine and we’re joined, once again, by the other hosts of Let’s Talk Bitcoin, Stephanie Murphy. [0:36]

SM: Hello. [0:37]

ABL: Andreas M. Antonopoulos. [0:39]

AA: Hello. [0:40]

ABL: MtGox is dead, may it rest in pieces. Recently, new information has shed some light on the inner workings of that mess in the months and years before the crash but it doesn’t look good. We’ve got a pair of guests on to help us explore this topic. Scott Maxwell is the primary over at Cryptocurrencymadesimple.com. Scott, thanks for being here today. [0:58]

SMax: My pleasure. [0:59]

ABL: Rounding out today’s panel, we’ve got Kai Chang of the MtGox-500 analysis over at Bitcoin.stamen.com. Kai, thanks for being here. [1:07]

KC: Thanks Adam, it’s a pleasure. [1:09]

ABL: Scott, let’s start from the basics. What happened here? [1:13]

SMax: Well, what we’re looking at is an attempt by the community around MtGox to make some kind of sense about where all of that cash went. At the end of the crash, we were

roughly 650,000 bitcoins down and very little fiat currency to show for it. Now, either there was a hack or there was an exploit through DDoS, which many think or maybe there is something else going on here. Over the last couple of days, some data has been published which suggests that it’s something else. That it’s an insider job. [1:48]

ABL: The official story that we got was that this was transaction malleability. It was, as we talked about in an earlier episode, it was people attacking a store with fraudulent return slips essentially, and getting back more money than they rightly deserved. Is that at all plausible in this explanation, based on this new information? [2:09]

SMax: It’s looking less and less likely. The data doesn’t lie. The transaction malleability, if you analyse the same data, accounts for maybe about 30,000 clash transactions which, when you take into account the fact that transaction malleability, more often than not fails, that drops down to about 1,000 transactions. Maybe 6-700 of those were actual thefts, so it just doesn’t account for the order of magnitude of the loss we’re seeing. [2:39]

ABL: What was the information that actually became available? How was this analysis possible where previously it was not? [2:47]

SMax: The data that is being analysed has been around for over a month now. There are two data sets. One is a leaked set of logs which has come round about the time of the crash itself and the second is the same logs but with very specific differences. It’s those differences that have allowed the analysis. [3:09]

AA: Were these logs leaked at the same time, by the same person or were they two different leaks? [3:14]

SMax: It looks like the same log has been edited, that one has been leaked by an MtGox insider but the second one has got out through another route. This second one is the non-anonymized set of logs. For the first time, we see user IDs. We can see a lot more detail about the transactions and we can start to analyse them properly. Before that, the bots that we’re talking about, and it does look to be a few accounts that these bots have traded in, were deleted so they simply weren’t there in the data. What we’re now seeing is those bots had been there all along. [3:55]

AA: That’s a pretty strong signal. The absence of bots in the first place, presumably, those were in the logs so someone deliberately deleted their tracks? Is that a likely explanation for why they were missing from the first set of logs? [4:13]

SMax: It’s certainly one set of explanations that are around someone trying to hide what’s going on here. It’s not necessarily the only way that that information could have been left out but it certainly is suggested. [4:27]

AA: Let me ask you Scott, these logs, are these logs of the database or are they logs from the software application, the trading application itself, are they assist logs, what type of logs are they? [4:39]

SMax: These are transaction logs. These are logs from the database of actual transactions completed. [4:45]

AA: Are these generated by a specific sequel query, do you believe in terms of reporting or do you think these were routinely dumped to a text file as they were happening? [4:56]

SMax: The data looks like it’s the sort of data you’d want to keep if you were, at some point, to go back and audit and understand exactly who owns what. Now, the fact that the logs have been there building up for some time and the fact that there have been discrepancies which weren’t found for some time, suggests that they weren’t actually used for auditing, or certainly not by external sources. That’s the sort of use that this information would have been put in another exchange. [5:25]

AA: You said that, in the second set of logs, there were bots. What do you mean by bots exactly? [5:31]

SMax: These are automated trading algorithms and the algorithms would work on a set of rules, a set of buy orders and a set of sell orders and can be, more or less, sophisticated. We’re looking at two types and both types show up very clearly in Kai’s data, which we can show there and look at the visualization later on. The Willy bot is the one that gives the name to the Willy Report. This appears to have done nothing but buy bitcoins – slowly, steadily, slightly randomly between 10 and 20 bitcoins every 5 to 10 minutes but the trading bot sat there buying the bitcoins, come what may, for some time. It actually bought into multiple accounts, which is quite interesting, so whenever it got to the point of having about $2.5m worth of Bitcoin, it would open a new account. The second trading bot shows up as, what almost looks like a glitch in the system. It always buys for zero fees which is unusual. It buys them to a single account but the money that it generates, or is generated in that transaction, appears to be random. Part of the analysis is trying to understand why that is so, regardless of the number of bitcoins being bought, the money being paid for it, doesn’t seem too correlate. In some cases, a large number of bitcoins are bought for very little and in other cases, the reverse. What appears to be happening and, this is an old coding gotcha is the previous value in the log is the one that’s been used as the fiat spend. If the person who transacted immediately before you happened to spend $15, then this transaction is also worth $15 exactly. That points to something that’s actually not using fiat money at all to buy. [7:31]

AA: Kai, can you tell us a bit more about the analysis and how did you arrive at these conclusions? What was your methodology? [7:40]

KC: Well, let’s just go back a little bit to when the data was leaked. This is in March of 2014 that I took this data. I found it in a torrent on Reddit and the data was trade data so for every trade there would be two parties, a trade consists of a buyer and a seller and you are put buying and selling opposites, whatever you put in the other will get out. This is what this data contains. There is a lot of duplicate data and data issues. [8:09]

SM: Tell us about those duplicate data sets. [8:13]

KC: The duplicate data is if you run a sequel query, you get a bunch of rows back, basically this array of rows and if you just took the database and loaded it in and started feeding some, you’d see that there about 20 million trades. I would say, maybe, 4-5 million where just same data have been returned twice and ended up in two files or sometimes would end up in one file, 17 times. Your totals are going to be wrong because you don’t have the right set of trades that took place. Of course, if there is a bug in MtGox, maybe those trades did take

place and that money was paid out. What is data and what is wrong or incorrect is difficult to work out in this case. [8:58]

SM: You were drawing your data from one of the leaks. Is that correct because there were two leaks and they were separated by information that was contained in one of them but not the other and a period of time, right? [9:11]

KC: This was in March of 2014, so two months ago. [9:16]

SM: Your dataset had the user IDs or it didn’t have them? [9:20]

KC: It had user IDs and it also had deposit/withdrawal data. The deposit/withdrawal data had transaction IDs. It didn’t have transaction IDs but it had an amount and a time. It’s the sort of thing that you could take the withdrawal data and go the Bitcoin blockchain and see if this user account, basically, withdrew at this time and tried to do this sort of identity attacks on the Bitcoin network. This is not part of the data that I visualized. I only visualized about the trade data because there are these ethical issues really exposing the whole sort of community to these identity attacks. [9:55]

SM: You were working with the data that included the data from these bots, Willy and Markus? [10:03]

KC: It did, yeah. I didn’t quite do analysis; I sort of took the top 500 users by volume and did this with my partner, Mary Becica. We just ordered them by volume and just tried to plot every single trade that they made. I told these stories around Bitcoin Barons and Greater Fools and bots and this really strange user. I wouldn’t say it’s analysis and it’s not conclusions; they’re sort of this kind of fairy tale I made up. I don’t treat it as evidence. [10:34]

SM: You’ve taken the top 500 users from this leaked data from MtGox and you’ve graphed it in a visual form, in a way that makes it easier for people to understand. You said that you got a story out of that. I mean, what is the story, basically? [10:49]

KC: The story to me is that when people look at this data, they sort of see these trends. I didn’t do any trending; I didn’t do any statistics or regressions or any sort of this formal analysis. All I did was plot data. If you look at this data and you may be heavily influenced by these example stories we created at the top, which are not necessarily true. This Greater Fool one, we suggested they may investment groups and in the Willy Report, it’s suggested that these are bets by Willy. Although, these Greater Fools generally make really large, big trades, whereas I think Willy made about 10-20 bitcoin... Willy was a trading pattern that was observed, this was back in November/December 2013 of last year and the public trading feed coming out of MtGox. People would notice that MtGox was down but every couple of minutes there would be a buy for 10-20 bitcoins even when no one else could trade. This activity - the community at Reddit especially, decided to call Willy. [11:52]

SM: Yeah and that was unusual because this bot was trading when MtGox was supposedly down. [11:58]

AA: When you say that Willy was trading while the network was down, was Willy also the one that was occasionally trading without paying fees or is that a different bot? [12:07]

SMax: Willy was paying fees. It was Markus that was trading without paying anything. [12:16]

AA: Essentially, those two data points, point that both of those bots had positioning in the market that was quite distinct from any of the bots that might be operating via the regular APIs. They had insider status somehow, either maintaining network connectivity where there was none for anyone else or being able to achieve trades without fees that nobody else was able to do? [12:42]

SMax: Exactly. In the logs, the activity during the downtime is quite stark. The only bots trading, the only people trading on MtGox were these bots. [12:53]

AA: That’s pretty damning evidence. [12:55]

SMax: I think it’s quite important to be somewhat circumspect about what it points to. What it does show is that something inside the perimeter was running these bots. It doesn’t necessarily point to any individual or group. The potential that a hacker has got in and has compromised the system to such an extent where it’s installed these bots and can make trades and create accounts and create US dollars at will, just by changing the database. Although that kind of exposure would be very dramatic, it’s not out of the question. There have been a few people pointing to the lack of security and the lack of patching in the Linux builders used. The general lack of professionalism around it; if this were a trading platform in New York or London, then the physical security, the IT security around it would have made this sort of thing impossible, even if there had been activity that was unexplained, the logs themselves would have been logged and made secure in such a way that they would be unimpeachable. [14:07]

KC: It really shows what an advantage Bitcoin is in that we have a public ledger that is constantly being verified every 10 minutes and whenever you download it, you verify every transaction on the blockchain, whereas here we have a private ledger and we get a leak of the private ledger and we find it’s very problematic. It’s something we would have all agreed to. [14:29]

ABL: How long ago did the trading start for these bots with this abnormal behavior? Was this from the beginning of MtGox? How far back does it go? [14:37]

SMax: It’s difficult to see. The log data itself isn’t complete and, in the Willy Report, we’ve only got two days towards the tail end of November where it’s very clear what’s going on. The author, the anonymous author says that he first became aware of it in December 2013, 3rd

January. Then Markus picked up 7 hours after the Willy bots stopped and took it from there. Whether it goes back before that, it gets more circumstantial. Certainly, there seems to be evidence to say that these bots moved the market and that’s the important point here, it manipulated the price of Bitcoin. The April bubble may well have been caused in the same way, but there is far less data. [15:23]

SM: The timeframe, as I understand it, that’s been analyzed here goes back, I think, to about summer 2013, or maybe back to April 2013, and it stops at the end of November 2013. Is that correct? [15:38]

KC: The torrent that was released on Reddit, two months ago, actually goes back to April 2011 and goes to November 2013. [15:47]

SM: OK. [15:48]

KC: If you look at any of these graphs on Bitcoin.stamen.com, you’ll actually get a time axis on the bottom and you’ll see the couple of months that it goes back. [15:55]

SM: Back to the idea that there were these two bots that had very unusual trading activity, trading when MtGox was supposedly down and paying zero fees, it’s kind of hard to imagine that that would go unnoticed. [16:10]

SMax: Yes, it is isn’t it? Either there was wanton blameness, frankly, on the part of the people whose responsibility it was to the customers, to make sure that this system was secure or there was something, perhaps, more nefarious going on. [16:32]

KC: What do you think? Incompetence or misunderstanding of how this would play out. There could be legitimate reasons why... you know, there are two more bots, there is also THK, which was a really, really strange one. That’s user one in the Bitcoin 500. That actually only sells; it sold like 2.9 million bitcoins. There were some posts when this data was released on... they were posted on WordPress, posted on Reddit, about what this user was. There’s one more too, it’s a bond limited HK which I did not graph because it basically only trades with itself. People suspected that was a currency exchange buyer. There is more. It’s the whole market here. It’s all the MtGox trading data from 2011-2013. That’s like three Bitcoin bubbles. It’s everyone trading on this marketplace. [17:17]

ABL: Can you talk about a couple of the more interesting traders that you came across in graphing these various individuals? [17:24]

KC: Yeah, the first one I called Bitcoin Barons and I put it at the front. I started calling a Bitcoin Baron who started selling Bitcoin early, especially people who ran in the mining client early on in 2011 on an either CPU or graphics card. These are people who were trading for a long time. User 145 is like this. User 30, 33, 34, 35, 36 – there are dozens of them. They could be mining pools; BTC Guild is on here. [17:57]

ABL: The thing that distinguishes these Bitcoin Barons, as you’re defining them, is that they got involved in the market early or that they sold when the price was high before it went down consistently. [18:09]

KC: You know, you could come up with your own rules because everyone is sort of a mix of these different archetypes that are trying to create value for themselves and not with Bitcoin and they have other currencies that they want to trade and everyone is trading. As time goes on, what you do changes. User 40 is really interesting. User 40, for instance, sold little bits of Bitcoin in 2011 for small amounts of money and then, in 2013, just started buying Bitcoin like crazy but he sold when it was super valueless and just started buying tons of Bitcoin when it was worth a lot. Something changed in this user’s buying that they decided to use their account to do [delisted?] activity. [18:52]

AA: One of the things I was reading about this analysis and, again, I think it’s right to not take any positions as to whether this was just gross incompetence, which is certainly no good

judgement of the outcome, or it was outright fraud, inside a fraud or a hack or something else. One of the things I’ve been reading is the possibility that some of these bots essentially represented market making VIP clients or big whales who had some kind of agreement with the trading exchange to get specific trades done automatically on a priority basis, essentially front running trades, which is a different judgement on what the bots are doing because maybe they were actually representing clients, still in a way that’s highly unethical and preferential towards some people and making an uneven market. What’s your opinion on that? [19:51]

SMax: That’s true for some of the activity; for some of the Willy spends and especially late in the day, there does appear to be bitcoins trading at far lower than the market rate and that may well be the platform trying to increase liquidity when they were having difficulty with people trying to withdraw funds. It doesn’t explain how markets managed to buy so many bitcoins without any money backing it up whatsoever. A VIP would still have the fiat funds and that would be represented in the system but the Markus buys had no funds behind them. [20:29]

AA: There’s also the possibility that it’s not one explanation that fits all of these bot behaviors. Maybe some bots were, essentially, known to the owners or known to represent clients, other bots were unauthorized, maybe some were run by hackers, maybe some were run to do fraud, some were run to do market making. There could be different explanations for different bots, correct? [20:56]

SMax: That’s right. [20:57]

SM: That’s an interesting idea because I was kind of confused reading the Willy Report about why would there be these two major bots, and probably lots of other littler ones, that were influencing the market so much but that explanation makes more sense. [21:13]

AA: Think of a scenario, perhaps, where one bot was created to do a market making job and then someone broke in or an insider took advantage of that and then created a second one based on the same codebase that was doing something very different, something very nefarious. On the surface, perhaps, they appear and operate very similarly but one actually has trades, real trades and the other one does not. Again, it could be the same person who created both bots, or it could be someone copying the bot and then using it to do something with very different goals. [21:45]

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SM: How much US dollar, basically, fake liquidity from Markus are we talking about here? [23:22]

SMax: It looks like in the region of about $110-112 million. [23:27]

ABL: What happened to those bitcoins? That’s the thing I’m sitting here thinking and I’m like – Oh, this sounds like there are a lot of movement here on both sides, on the buying and the selling side but yet you’re saying that no money was actually changing hands in these cases. These bots didn’t actually buy in and one of them didn’t even pay trading fees. Were any of those bitcoins ever pulled out by the bots? Were they sold? Did they just buy and hold to lower supply? [23:53]

SMax: In the large of it, it looks like most of them stayed in the system and this is the interesting thing about what the bots were doing. It does speak to a story. In effect, we had a bot buying bitcoins and, at first, it was backed up by real money and then it was buying it with fake money which, frankly, was just a database number which was increased. The result was the value of Bitcoin is pushed higher for everyone. If you imagine you’ve got two funds – one is real money, the other one is magic money. If you spend the magic money and the price goes up, the value of your holding in real terms also goes up and you make money on the margin. If anyone tries to cash out of the trade that you’ve just bought their bitcoins for, that’s fine so long as you’ve got the Bitcoin value going up. That is the Ponzi scheme part of it. The problem comes, is you are betting on the price always going up and an event, such as the Silk Road crash which pushed the value down, would have reversed that. What we could be also seeing is an attempt to right a wrong position. It’s something that happens in commercial banks as well. If you find yourself exposed on the wrong side of the rules, then you try and break more rules to get yourself back in. [25:13]

AA: In fact, that’s really the most common story of how insider trading Ponzi schemes, and things like that, develop. It starts with an overleveraged position that turns sour and then crossing the line, wants to try to fix it and then getting increasingly desperate and pushing more and more money until the mistake can no longer be hidden. It’s not the initial mistake, it’s the attempt to cover it up by, essentially, doubling them on the bet with increasing margins until eventually, it becomes unsustainable. We saw that with a UBS trader, who got

into a position, in over a year, trying to cover that up and ended up multiplying that position by almost 100 fold. [26:01]

SMax: Exactly. Nick Leeson as well and Barings. There have been quite a few examples of people that have started just bending the rules to some extent and the temptation must be there, at this point, is lightly regulated and the database is simply there, to the point where actually now, people can’t get their money out and then it becomes headlines and then you start to risk everything. Again, we’re hypothesizing here but certainly the trading towards the end looked like the bots were trying to increase liquidity inside of MtGox. Now, if you were a hacker, you wouldn’t care about MtGox going down, you’d have your money and you’d be out. If, for whatever reason, you did care about that, you’d right it by increasing liquidity, by spending or selling some of those bitcoins that you bought with fake money to turn them into real money. [26:59]

KC: For some context here, this is back earlier this year where the activity, which we call Willy, was just selling Bitcoin and providing way too much liquidity in Bitcoin, which people didn’t take seriously, to the point where people called it Goxcoins – they fell to $160, $100. The price was just totally at variance with what real bitcoins were selling at on other exchanges. [27:26]

ABL: That didn’t seem to have much to do with the bots so much as it seemed to have to do with the banking problems at least, that Gox was talking about having at that point. It became later that Bitcoin was restricted but earlier it was just dollars and getting other types of fiat currency out, right? [27:43]

KC: There were liquidity issues on all sides at MtGox, at that point. [27:47]

AA: Wherever the liquidity issues got worse, the withdrawals had to be stopped in order to prevent, essentially, default in a way that revealed the entire problem. If we follow this train of thought and assume that this is the oldest of all Ponzi scheme failings which is trying to cover up for a small mistake by making bigger and bigger mistakes, then the dollar positions and liquidity problems had to be stemmed by turning off withdrawals there, which means really that the transaction malleability was a red herring. It was simply an excuse, a convenient excuse at the time, in order to cover up serious liquidity problems that prevented full withdrawals in Bitcoin and to maintain the scheme for a bit longer, in the hope that the market rectified itself to the point where the cover up would be complete. [28:44]

SMax: That’s right. That’s what is supported by the analysis of whether transaction malleability was at the core of this. Interestingly enough, when the exchange was finally closed, there was plenty of liquidity, in terms of being able to get yen out of the bank. It was never the banks stopping the currency leaving or certainly be indicated by that. It simply was that there wasn’t enough liquidity inside MtGox to pay for everyone who wanted their money out. [29:18]

AA: I have to admit that back then, when I saw this problem evolving with transaction malleability, one of the things that was evident was that this wasn’t a very serious technical problem and that all of the other exchanges, that were affected by the rush of bots to try out that same trick, were able to fix it relatively quickly. I was under the impression that if transaction malleability was a problem, it would be fixed pretty soon because it wasn’t a very

serious problem. Of course, now we know that wasn’t the problem. The problem had started possibly more than a year earlier. [29:57]

ABL: It’s certainly been compounded by the pricing action that occurred in October. Looking at what happened with MtGox over the years, that was really the big difference is that previously, the price of Bitcoin hadn’t gone up so high. If they had a problem where they were trying to get back Bitcoin, then their problem would have been exponentially made worse by the increase to $1000-$12000 and nothing besides that really matters. [30:21]

SM: I don’t know, was MtGox the highest volume exchange? Were they actually making the entire market, including for other exchanges? Were they setting the price? [30:31]

ABL: It depends on what your timeframe is, right? If you’re talking about before 2013, then pretty much, yeah, MtGox was most of the market. [30:37]

KC: This is something that’s just interesting about the data because you really get to see this market unfold all the way back from April 2011 and Gox was like 90-95% of the trading volume of Bitcoin back then, at least online in these exchanges. [30:50]

SMax: The interesting thing to remember is, it doesn’t take too much activity to push a price if it’s done at the right moment. For example, if we’re talking about buyers wanting to buy into Bitcoin, and certainly as the price was going up and the bubble was going up that’s what was happening, the lack of sellers would push up the price faster than would otherwise be suggested. If you’ve got something sitting there quietly buying the excess Bitcoin, then the price is going to be leveraged higher. [31:22]

AA: That’s a really great point. I think it’s important to distinguish between Gox being responsible for signalling the market that was already predisposed to a big buying spree and the other exchanges following through on that initial signal and perhaps accelerating it a bit. Certainly, the number of trades and the volume don’t say that all of the price increase we saw was due to Gox but it may have precipitated and accelerated a buy sentiment that was already there, to the point where it became much bigger than it would have otherwise. [31:59]

SMax: It appears, at least on one occasion, to have reversed a downward trend. [32:07]

ABL: Is this, essentially, the tail wagging the dog at MtGox? [32:12]

SMax: In a way. Markets are notoriously complex things and any attempt to alter those markets, you do at your own risk. [32:20]

KC: We all have to participate in markets, you know? It’s the only way that rational actors can cooperate. [32:27]

ABL: Let’s assume for a second that this did have an impact on the Bitcoin price and possibly even caused these bubbles. What does that mean for the world that we live in? Does anything change? Do I need to think about anything differently? Is Bitcoin less serious or more serious because of this? [32:41]

KC: Many of the actors who were trading on Gox still exist and still have large positions in cash, or Bitcoin, or whatever kind of capital. These agents and these kinds of activities are all out there and they’re all happening at every moment. [32:55]

SM: That is what the Willy Report says that... the conclusion is that Willy caused the November bubble. [33:01]

SMax: I think the thing that it teaches us is, at this stage in its development, Bitcoin needs to move from being almost entirely unregulated to having some form of regulation. The temptation for any exchange, or any exchange owners, or anyone in a position to manipulate the market, the temptation is massive. People being who they are, this sort of thing may well reoccur unless controls are put into that and doing everything broad daylight certainly helps. I think, I mentioned earlier on the benefit of the public ledger but also requirements to audit, also requirements to hold a minimum amount of fiat currency, in order to have a position of any kind. These are the basis for any kind of currency or asset trading and that’s where Bitcoin needs to go. [33:56]

KC: For us as users, don’t treat these exchanges as banks. You can’t just leave your Bitcoin in there and expect it to be safe. You have to take control of your Bitcoin and learn about the protocol. [34:05]

AA: I’m going to challenge you a bit on that and I would say treat them exactly as banks which means don’t trust them because banks fail all the time. (Laughter) The reason we have all of these regulations is because, when you centralize control over money, people steal it. Everything built in the regulatory system is to prevent that exact thing from happening. When you say regulate Bitcoin, let’s be more precise. Bitcoin didn’t fail here. Let’s regulate Bitcoin exchanges that are centralized and do not provide a public ledger. A decentralized exchange wouldn’t suffer from these problems because people wouldn’t have the keys. A public ledger wouldn’t suffer from these problems because you can’t fake possession of Bitcoin. The failures of a centralized institution holding custodial accounts in the old way and failed in exactly the same way as every bank and exchange has failed in the history of failure. Yeah, that needs to be... [35:00]

SM: Every regulated bank and exchange. [35:02]

AA: Right... that needs to be regulated but it needs to be regulated because of the failures of centralization and has nothing to do with Bitcoin. [35:08]

SMax: I couldn’t agree more and you’re absolutely right. The precise point, there are three things here at work isn’t there? There is the Bitcoin network and the exchange of crypto assets and using the public ledger. There is the Bitcoin currency itself, which is the one that’s taking the pounding that other currencies haven’t and then there is the medium of bringing people together and having the convenience of the service. It’s this last which has been at fault here, none of the other two. [35:40]

AA: In some cases, you’ll see altcoins point and laugh at these failures of Bitcoin which leaves them really exposed to a blind spot. The issues, for example, transaction malleability exists in every alt currency out there because they’re all based on the same codebase. More importantly, the issues of centralized trading [audio cuts out] – boy, is that a can of worms and the only reason we haven’t seen it exposed in other parts and other cryptocurrencies is a

matter of time and scale. I would say it’s probably a very good time to open our eyes wide and look very carefully at some of the big players in other coins. There are some big issues in Doge and specifically one of the big players in that space, where we’ve had quite a lot of issues with transparency, accountability, secrecy and some concerns by the users in that community. I think it’s premature to point fingers but it’s certainly provoking a lot of questions and people should be open to those. [36:41]

KC: There has been a lot of web wallet hacking in Doge where users just lose all the funds in their account. These are web wallets that were recommended as the main wallet you should try if you want something easy. [36:53]

ABL: It sounds like early Bitcoin. Does anybody remember MyWallet? [36:57]

AA: Right. Web wallets? [36:58]

SM: Yeah, definitely. You know Andreas, not all altcoins are based on the same codebase as Bitcoin. I agree the vast majority are but there are a few that aren’t and then also you mentioned centralized exchanges. We talked about Nxt on our 2.0 show, a little while ago, and they’re not based on the same codebase as Bitcoin and they also have a decentralized exchange and there are more coming. [37:20]

AA: Yeah, that’s the right way to do it. Let’s really focus – what is the issue here. The issue here is taking a decentralized currency, artificially creating a single point of failure, a single point of control and a single point that requires trust by centralizing a specific function, whether that’s the exchange function, whether that’s a wallet function, custodial access to keys and then that brings with it the need to centralize regulation around that. Once you start down that path, then you need to carry in all of the baggage of traditional fiat currencies with all of the centralization that implies. That’s a mistake no matter which currency you do it in and it will bring all of the same failings that we’ve seen in the past, both in fiat currencies and learn from in Bitcoin. It’s bad to centralize wallets, it’s bad to centralize exchanges and the solution to that is not to layer on regulation to build layers of centralized trust on top of that, it’s to not centralize in the first place – it’s to keep the spirit of decentralization pure and not recreate the errors of the past. [38:30]

SMax: I agree and for me, one of the main takeaways of this is how apparently ordinary the failings in the system is and it does point to people. It’s not the technology, it’s not the currency itself, it’s the same old pressures that we’ve had, like runs on banks, which has caused us to get to a point where fiat currency is regulated to the point where it can be manipulated on a vast scale for national needs. That’s not the place to go back here. I’m very much along the lines of thinking we should be talking about how we agree to be good neighbors in this network. How do we interact in ways that we need to, in order to make use of the network? The network decentralizes to some extent but we still need to come together, in order to make use of this. Whatever happens next, this technology is being adopted in many, many uses. The idea of a decentralized ledger is going to be key to currency for the next hundred years, regardless. I think it’s quite important to agree, at this point, amongst ourselves, exactly how we’re going to use this. [39:51]

AA: Trust is at the core of this and the answer, in these cases, is not to say – Well, we needed to add more trust. We should have vetted Karpeles. We should have vetted MtGox more. We should have added regulations so that we could add more layers of trust on top of that

shaky foundation. The answer really was we should have had less trust. We should have had a zero trust system where it didn’t require us to trust anyone because no one could steal the money. A zero trust system, where you can’t be evil, where you can’t steal the money, where you don’t have power and it’s a public ledger, is a much better system going forward. Those systems were not possible before 2008 so they don’t immediately come to mind but they are possible now. We need to resist the temptation of reimplementing the whole of the mistakes of the past by building layers of trust. Don’t build layers of trust. Zero trust is much better. [40:47]

SMax: Hear, hear. [40:48]

ABL: It’s easy to make that argument now but, at the same time Andreas, it’s sort of is experiences like this, painful though they are, that prove to people that that’s something that’s important because otherwise decentralized exchanges, trustless exchanges... I’ve been playing around with them for the last couple of months, as I know you have too and they have some issues too. There is really no magic bullet here that’s going to make it so that all of our trading woes go away. You trade one set of problems for another but yeah, I agree with you that the trust needs to be sucked out of the system. People need to assume that everyone is a bad actor when it comes to wanting to hold your money and operate from there. [41:20]

KC: Part of the story I love is that MtGox created this Bitcoin bubble and it happens every couple of years, every six months or whatever it is and it gets the media’s attention and first three - it’s all about Gox, Gox, Gox. We still sort of have this idea of a Bitcoin bubble that could happen and lives in people’s minds and it gets people thinking about the technology. [41:39]

ABL: That really is an interesting point because that was very true for me. You talked about the user that sold small amounts of Bitcoin in the early days and then bought lots of Bitcoin in the later days. I think that, actually, was a lot of people. I think that the thing that proved, at least to users like myself, that it wasn’t going to go away is because it not only had these bubbles but that it didn’t die after the bubbles. It went down but then it would come back up to something normal. Lacking the bubbles though, I don’t know if it would have pulled me in in the way that it did. I mean, it’s really interesting to think about how, even though this is obviously a breach of trust in so many ways and obviously a bad thing and an immoral thing in so many ways, at the same time, did it serve a good purpose in drawing attention of users that it might not have otherwise done? [42:24]

KC: It always picks up if there’s a Bitcoin bubble. My mind will always go back to these events that happened. It will never be separate for me. [42:30]

SMax: It could well be that MtGox is there to serve as a warning. Moving from where we are, which is speculating on the value though, is not making full use of it. Ultimately, we’re talking about a network which can give very low friction trades of assets and that doesn’t necessarily need any kind of speculation around it in order to be valuable. [42:58]

ABL: Scott Maxwell of Cryptocurrencymadesimple.com, Kai Chang of Bitcoin.stamen.com, thanks very much for shedding some clarity with us on this kind of convoluted topic. (Laughter) [43:08]

KC: Thank you Adam. [43:08]

ABL: We look forward to continuing this story here. [43:11]

SMax: Thank you. [43:11]

ABL: I’m sure that this isn’t over. [43:12]

____________________________________________

CREDITS:

Thanks for listening to Episode 115 of Let’s Talk Bitcoin.

Content for today’s episode was provided by Stephanie Murphy, Andreas M. Antonopoulos, Scott Maxwell and Kai Chang

Music for this episode was provided by Jared Rubens and new artist, Dirty Beats

Any questions or comments? Email adam@letstalkbitcoin.com.

Have a good one! [43:36]