NXTER.ORG

The regulatory process: if you’re not at the table, you’re on the menu

On 22 April 2015 The European Securities and Markets Authority (‘ESMA’)1, the equivalent of the US Securities and Exchange Commission, issued a call for evidence regarding ‘Investment using virtual currency or distributed ledger technology’.

Nxt is the example of the digital currency platform ESMA used in its ‘call for evidence’ to illustrate how distributed ledger technology works.

ESMA has now published the 18 responses it received, only two of which were made on behalf of cryptocurrencies: Nxt and FIMK (which is based on the Nxt blockchain). No response was made on behalf of Bitcoin, although one was made in support of it by an exchange called Paymium.

No response to the ESMA call for evidence was made on behalf of (or even in support of) Ethereum, Counterparty, MaidSafe etc.

One can of course understand the lack of engagement on the part of the majority of cryptocurrencies (being, as they mostly are, opportunistic Bitcoin clones), but for Bitcoin itself and other serious players such as those mentioned above not to have responded is surprising.

The cryptocurrency industry needs to fully engage in the regulatory process to make sure that the potential for independent, genuinely decentralised, blockchain technology to democratize financial power is not compromised by a failure to challenge incompleteness or other inaccuracy in the information relied on by regulators.

Some examples of incompleteness and other inaccuracies can be found in the following extract of the ESMA response from Intesa Sanpaolo (a banking group based in Italy):

“We would like to point out that, unlike Bitcoin’s Proof of Work method (which, as stated in O1, we regard as the only effective one, at least at the moment, because of the computational power dedicated to it), other decentralized double-spending prevention algorithms, like NXT’s Proof of Stake (PoS) presented in paragraph n.17, are still not validated from both a theoretical and an empirical point of view:

○ There is an ongoing debate over the “Nothing at Stake” problem affecting every system which doesn’t use any consumption of resources external to the system for the validation;

○ Every single existing PoS scheme, NXT included, is actually relying on some kind of centralization in validation checkpoints, in “currency” ownership or in nodes distribution.”

It would not of course be reasonable to expect a mainstream commercial banking group to argue in favour of a genuinely independent decentralised financial ecosystem.

Rather, it is for the proponents of that technology to correct any inaccuracies and supply any omissions in how others (doubtless unintentionally) represent it, but to do that they need to get involved in the consultation process.

Thus, by way of correcting certain inaccuracies and otherwise filling in the gaps, we shall deal with each of Intesa’s three claims in turn.

Intesa Sanpaolo claims that Bitcoin’s Proof of Work (PoW) method has been empirically and theoretically validated and that Nxt’s Proof of Stake (PoS) method has not.

Theoretically, the PoW and PoS consensus mechanisms are neither better nor worse than each other, merely different. For a description of Nxt’s Proof of Stake model, see pages 5/6 of Nxt’s Response to ESMA.

As regards, the respective theoretical formalizations of PoW and PoS, the following points should be noted:

PoW formalization

The initial Satoshi Nakamoto paper (Bitcoin: A Peer-to-Peer Electronic Cash System) only investigated the consensus algorithm security against private branch attack.

Since then other potential attack vectors, for example selfish mining, have been discovered.

The selfish mining strategy provides unfair profit for the 33+% adversary and that’s dangerous in the long-term, but not critical for consensus itself.

Most recently, in November 2014, the formal model (of a more or less appropriate quality) was published: The Bitcoin Backbone Protocol: Analysis and Applications.

PoS formalization

Whilst Proof-of-Stake formalization is currently still behind that of PoW it’s now developing faster than PoW’s formalization and therefore catching up quickly.

The first implementations of pure PoS appeared in the second half of 2013, with the first investigations started in the first half of 2014 (Math of Nxt Forging by mthcl) following which Consensus Research made simulations2 and wrote articles3 about the few types of known attacks.

Consensus Research are currently in the process of discussing deeper formalization with colleagues from mathematics and theoretical computer science.

Turning next to Intesa Sanpaolo’s claim that Bitcoin’s PoW method has been “empirically validated” and that Nxt’s PoS method has not.

We assume “empirically validated”, as applied to Bitcoin’s PoW and Nxt’s PoS technologies, is intended to mean: proven to work in practice in accordance with their objectives.

Since both technologies demonstrably do work in practice in accordance with their objectives, at least up until now, they can therefore both be said to have been empirically validated: Bitcoin as a payment system and Nxt as a financial ecosystem which includes a payment system (see: Nxt Core Features, as described on pages 15/16 of Nxt’s response to ESMA).

But blockchain technology in general is still in its infancy and faces a number of significant practical challenges, including that of blockchain bloat and scalability – a problem which, at some stage, will have to be addressed and resolved (if they are to remain viable) by all blockchain technologies, including of course Nxt itself.

However, due to the large and (as currently anticipated) increasing number of transactions being processed through its network, Bitcoin now needs to address that problem as a matter of urgency and it is running out of time in which to do so.

According to Bitcoin Foundation Chief Scientist Gavin Andresen speaking in an interview in June 2015, Bitcoin will be reaching its 1 MB block size limit “some time in the next 6 to 12 to 18 months….”. In the interview Mr Andresen goes on to warn of what could happen if the problem isn’t resolved.4

In an apparent attempt to force the pace as regards tackling the block size issue, a patch to the Bitcoin Core was released on August 4 and is now available to download here: https://bitcoinxt.software/

It remains to be seen whether the Bitcoin network as a whole will accept or reject what in effect is a hard fork or indeed whether the network will split, resulting in the creation of two versions of Bitcoin, thereby crashing the value of one, if not both.

What is certainly clear is that the Bitcoin XT debate (whether or not to replace the current hard-coded block size limit of 1mb with a patch that, amongst other things, supports larger blocks) has polarized opinion.5

And it is doing so for the reason explained in this article in The Wall Street Technologist:

“What we have here is an ideological schism in Bitcoin. Most people fail to realize that this is what the block debate is really about. On one hand you have folks who believe Bitcoin should be the new VISA system. They believe that Bitcoin should be able to handle all the transactions on planet earth, from everyone’s daily coffee purchase, to everyone’s house purchase, to how Google cars should be paid for their services.  On the other hand, you have those who believe Bitcoin’s core value is the fact that it is a hedge against fiat currencies, and by extension, governments (in the case they decide to infringe upon your liberties). Bitcoin CANNOT be both. It’s just not possible.”

Whilst, as already mentioned, the scalability problem is common to all blockchain technologies, the following empirically observed problems are exclusive to Bitcoin and should also be borne in mind when reassessing the accuracy of any claim that Bitcoin is empirically valid:

  • the inherent tendency of the underlying economics of the Bitcoin network to create a vicious circle whereby increasingly sophisticated mining rigs generate increased hash output resulting in increased difficulty which in turn drives the need for evermore powerful rigs thereby making it uneconomic for any but the biggest miners and pools to operate. The end result: increasing centralisation of mining power; i.e. a shrinking network of nodes, making it less secure.6
  • over-dependency on a few manufacturers of the prohibitively expensive ASIC mining equipment.
  • high energy consumption involved in miners competing for blocks to validate, making the process environmentally very unfriendly.

Intesa Sanpaolo claims that “there is an ongoing debate over the “Nothing at Stake” problem affecting every system which doesn’t use any consumption of resources external to the system for the validation.”

The unqualified use of the word “problem” might suggest to the uninformed reader that Nxt, as a PoS system, has actually been subjected to a Nothing-at-Stake attack. In fact, it has not.

Like Bitcoin’s PoW, the Nxt PoS consensus algorithm is a work in progress; the current state of thinking and research regarding any theoretical vulnerability to a N@S attack can be summarised as follows:

A. The first more or less formal definition (at least in the form of computer code) has been produced by Consensus Research:

PoS forging algorithms: multi-strategy forging and related security issues.

B. The number of possible forks grows exponentially over time. A Nothing-at-Stake attack could therefore only be made by a multi-branch forger contributing to N best forks and since it’s impossible to predict whether 2 forks will be within N best forks from the exponentially growing set for k confirmations (a significant imponderable), this attack vector is inherently unpredictable making it very difficult to enforce in theory, let alone in practice.

C. The correlation with stake size is still the open question but, contrary to what has been stated by Vitalik Buterin,7  it’s nearly impossible to attack a proof-of-stake currency with “1% stake even”.

D. A solution to make the PoS consensus algorithmically enforced (as in PoW) is theoretically possible.

E. The N@S simulation tool is published here: https://github.com/ConsensusResearch/MultiBranch  for people to carry out their own experiments. Unfortunately, there is not currently any easy-to-understand (i.e. non-technical) visualization of the non-feasibility of a Nothing-at-Stake attack.

In practice, the Nxt forging algorithm provides a defence against a Nothing-at-Stake attack in the form of what has been termed Transparent Forging (TF), the main feature of which is the ability to predict which account will generate the next block.

Other TF aspects of the Nxt forging algorithm are:

  • account balance having to be older than 1440 blocks;
  • the ability to lease account balance for forging;
  • requiring the forging account to have had its public key announced for 1440 blocks before being able to forge; and,
  • not accepting a forged block if its timestamp is more than 1 second after the predicted time to forge.

Improvements to take effect in release 1.7 are a minimum effective balance requirement of 1000 NXT for an account to be eligible to forge, and preventing very long blocks by an improved base target adjustment algorithm.

Elements of the TF concept which have not yet been implemented include: achieving higher transaction processing speeds by sending transactions directly to the node expected to generate the next block, and reducing the time interval between blocks based on the knowledge of the next few predicted block generator accounts.

Further protection against any ‘Nothing at Stake’ attack can be achieved by temporarily reducing to zero the forging power of accounts which should have generated a block but skipped their turn.

At present though, the currently implemented components of TF are considered sufficient to protect against such an attack.

Those TF elements mentioned above which are designed to increase the possible transaction throughput will only be implemented once the need for it appears, and certainly not until blockchain pruning has first been implemented.

Intesa Sanpaolo claims that “Every single existing PoS scheme, NXT included, is actually relying on some kind of centralization in validation checkpoints, in “currency” ownership or in nodes distribution.”

At their current level of technological development, no blockchain (arguably Bitcoin least of all) is 100% decentralised.

Nxt validation checkpoints

The Nxt protocol includes a rolling checkpoint whereby any block submitted at a height more than 720 blocks behind the current block height is automatically rejected. This in effect limits chain reorganization to the most recent 720 blocks.

The Nxt protocol also includes some hard-coded checkpoints (e.g. at Block 333,000). Their purpose is to prevent any possibility of a so-called “history rewriting attack” in which somebody buys redundant early stakeholder accounts in order to try to build a complete alternative blockchain.

Another reason for the hard-coded checkpoints is performance optimization, specifically: improved blockchain download speeds for peers downloading the blockchain from scratch, the improved speed being due to the fact that they don’t need to check with multiple peers in respect of the blockchain before the latest hard-coded checkpoint whether or not the current fork they are on is the best one.

Most importantly, such hard-coded checkpoints are only added at blocks more than 720 blocks before the current (at the time of adding the checkpoint) last block. At this point, the consensus has already been reached and set in stone by the rolling 720 block checkpoint limit, therefore the hardcoded checkpoint does not influence the decentralized consensus.

Whether or not these validation features can be regarded as  “centralised” is debatable and in any case neither are critically needed for blockchain survival.

Bitcoin, of course, has its own hard-coded checkpoints (see further: https://github.com/bitcoin/bitcoin/blob/master/src/chainparams.cpp )

Nxt currency ownership and node distribution

Nxt does not rely, as a matter of technical design, on centralisation of currency ownership or node distribution and the authors of this article are unaware of any PoS model (or indeed any other blockchain consensus mechanism) that does.

Proof-of-stake must have a way of defining the next valid block in any blockchain. Selection by account balance would result in (undesirable) centralization, as the single richest member would have a permanent advantage. Instead, several different methods of selection have been devised.

Randomized Block Selection

Nxt uses a pseudo-random algorithm to predict the next block generator i.e. forger, by calculating a hash value which should be lower than a target value using the combination of the account stake, time since last block, signature of the previous block and the forger account public key. Since all these parameters are publicly available, each node can predict, with reasonable accuracy which account will forge the next block.

It might be that what Intesa Sanpaolo meant to say in its ESMA response was that in certain PoS models a relatively small number of accounts are in practice currently responsible for the majority of the work of validating blocks and earning the transaction fees for doing so.

In the case of Nxt the original distribution of the currency was made to the 73 subscribers who participated at the start and as a continuing, albeit slowly improving, legacy effect of that relatively small distribution, it is true to say that a large percentage of the Nxt currency has been owned by a relatively small number of account-holders.

Nxt critics have long sought to portray this as an inherent irremediable weakness of the system. It is not and over time, as more people get involved in Nxt, the number of accounts will continue to increase and ownership become more diffuse.

In the meantime, having a large percentage of the currency concentrated in a relatively few hands has had some advantages for the system, not least of which is the relative absence of speculative manipulation (i.e. pump and dump) and the funding of development and marketing that would not have happened but for the generous bounties made available by large Nxt account holders.

Meanwhile, Proof of Stake blockchain technology, of which Nxt is the leading example, continues to innovate and improve.

The features planned for the next hard fork (Release 1.7) are coin shuffling, account control for phased transactions (whereby an account is only allowed to submit phased transactions that require the approval of one or more other accounts), more stable block times and various usability enhancements. A security enhancement, 2FA using hash chains, will be added in Release 1.8.

Nxt core developers will also be adding features that make it easier to use the platform in regulated financial environments, for example “account properties” which can be used to endorse accounts as having been verified or authorized by third parties (to be implemented in Release 1.7) and “controllable assets”, designed to satisfy legal requirements that only authorized accounts can purchase certain types of asset (planned for Release 1.8).

Update: Since this article was published, a new version of The Nxt NRS client software has been released: NRS v.1.7.0e

This is an experimental release for testing only. Source code is not provided.

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Acknowledgments

Many thanks to kushti, Jean-Luc, Riker, mthcl and ChuckOne who all reviewed and variously commented on and contributed wording to the article.

re-esma-nxt-cryptocurrency

Footnotes

1. ESMA states on its website that it:

‘…is interested in how different virtual currencies and the associated blockchain, or distributed ledger, can be used in investments. There are now facilities available to use the blockchain infrastructure as a means of issuing, transacting in and transferring ownership of securities in a way that bypasses the traditional infrastructure for public offer and issuance of securities, trading venues like exchanges and central securities depositaries or other typical means of recording ownership. ESMA would like to find out more about these market developments and in particular to know to what extent the use of the blockchain could enter the financial mainstream, and how it could be used.’

2. https://github.com/ConsensusResearch/ForgingSimulation.

3. https://github.com/ConsensusResearch/articles-papers.

Kushti is currently discussing joint papers possibilities with colleagues and preparing a paper to be published in a peer-reviewed journal.

4. In the interview (at 6:43 mins), Bitcoin Foundation Chief Scientist Mr Andresen, who has a less apocalyptic vision than his colleague Mike Hearn as to what might happen to Bitcoin in a worst case scenario, nevertheless warns that:

“…people will just stop sending transactions if they notice that their transactions are not getting confirmed in a day or two or three or a week. The nature of transaction confirmation and the nature of how blocks are found softens that a little bit so every once in a while we’ll get a period of time when transactions really pile up because blocks are found more slowly than normal and every once in a while we’ll have a period of time where lots of transactions get confirmed because we’re finding lots of blocks.

It’s just the nature of the randomness of mining that we get this natural variation in how many transactions are confirmed in any given period of time and so I think that that natural variation plus people react so if you’re sending transactions with very low fees that aren’t getting confirmed well then you’ll bump up your fees if you can and if you can’t bump up your fees because transactions get more expensive then you find some alternative and that alternative may be: well I won’t use Bitcoin, I’ll find some other way of doing what I want to do.

So I don’t think we’ll have a crash. It won’t be a disaster. I think what we will see is people turning away from Bitcoin and using other things and I think we’ll see transaction fees rising. Both of these things I think are bad.”

5. Bitcoin XT vs Core, Blocksize limit, the schism that divides us all.

“The news recently is all abuzz about the Gavin Andresen and Mike Hearn’s fork of Bitcoin called Bitcoin XT.  For the first time in the history of Bitcoin, its very existence has been put into peril by way of what is termed a ‘Hard Fork’ of the protocol.  I have watched the situation develop, and I feel that I must comment on this topic as the amount of FUD coming from both sides of the camps is reaching alarming levels, and frankly I think this is hurting Bitcoin.”

As at 24 November 2015, there were 410 Bitcoin XT nodes (supporting bigger blocks) out of a total of 5018 nodes in the Bitcoin network. Source: http://www.xtnodes.com/ Accessed 24.11.2015.

6. “As a Proof of Work network becomes stronger, there is less incentive for an individual peer to support the network, because their potential reward is split among a greater number of peers. In search of profitability, miners keep adding resources in the form of specialized, proprietary hardware that requires significant capital investment and high ongoing energy demands. As time progresses, the network becomes more and more centralized as smaller peers (those who can do less work) drop out or combine their resources into pools.”

http://wiki.nxtcrypto.org/wiki/Whitepaper:Nxt#Proof_of_Stake_Attacks.

See also:

“The risk is that the trend will claim too much obsolete hardware and put many miners out of business, resulting in even more centralisation and fewer incentives to invest in the mining space.” http://www.coindesk.com/bitcoin-mining-can-longer-ignore-moores-law/

And:

“The problem is that there is little incentive to run a node anymore. That’s because powerful machines built specifically for bitcoin’s SHA-256 proof-of-work algorithm have changed its decentralized and more open nature.” http://www.coindesk.com/five-biggest-threats-facing-bitcoin/

7. Vitalik Buterin is one of the original authors of a cryptocurrency platform called Ethereum. A version of Ethereum, called Serenity, currently in development “…is meant to move from consensus through Proof-of-work to Proof-of-Stake.”

The “Nothing at Stake” attack is described by Vitalik Buterin here:

“However, this algorithm has one important flaw: there is ”nothing at stake”. In the event of a fork, whether the fork is accidental or a malicious attempt to rewrite history and reverse a transaction, the optimal strategy for any miner is to mine on every chain, so that the miner gets their reward no matter which fork wins. Thus, assuming a large number of economically interested miners, an attacker may be able to send a transaction in exchange for some digital good (usually another cryptocurrency), receive the good, then start a fork of the blockchain from one block behind the transaction and send the money to themselves instead, and even with 1% of the total stake the attacker’s fork would win because everyone else is mining on both.” Extract from Proof of Stake: How I Learned to Love Weak Subjectivity

In the following two papers, the authors also seek to prove the feasibility of a “Nothing at Stake” attack

It Will Cost You Nothing to ‘Kill’ a Proof-of-Stake Crypto-Currency     Nicolas Houy, University of Lyon, January 2014.

On Stake and Consensus, Andrew Polesta, March 2015

By contrast, here’s a detailed description, written in layman’s terms, on the practical impossibility of N@S attack by JordanLee

http://www.peercointalk.org/index.php?topic=2976.msg27303#msg27303

Discussion threads regarding the theoretical possibility of a Nothing-at-Stake attack include:

BitCoin Talk: Nothing-at-Stake & Long Range Attack on Proof-of-Stake (Consensus Research).

Nxt Forum: The Paper on Long-Range attack & Nothing-at-Stake.

NXT Sub-Forum: Consensus Research.

FinTech Asia trend vote on the Nxt Blockchain

The 29th July was Demo Day for FinTech Startups in Singapore. The biggest event in Asia of its kind!

[fusion_youtube id=”-qa1fIQi_SY?” width=”” height=”” autoplay=”false” api_params=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” class=””][/fusion_youtube]

During the course of the day Roberto Capodieci of DeBuNe gave a number of presentations  and organised, through Open Trade Docs, a survey of the audience via the Nxt blockchain.

Survey Results:

Q. Which 2 areas should be next in FinTech?

A. Blockchain (25 votes) and Wealth Management (21 votes).

Q. What is missing in the FinTech ecosystems in South East Asia?

A. [Top 2 answers] Cultural change in large institutions to allow innovation (34 votes); improved regulatory frameworks (24 votes).

And here’s the most important result of all from the survey: the number of first time blockchain users (specifically Nxt blockchain users) in the world has increased!

Roberto writes:

As it would have been impossible on the day to have arranged for the participants each to have their own funded and activated Nxt accounts so that they could cast their vote using the Nxt voting system, we instead created a wrapper with a PHP application, and used a single account that sent the votes as messages to itself, and another app that counted the votes.

Users accessed the app either via mobile by scanning a QR code or simply by going to http://demoday.live.otdocs.com

It really wasn’t meant to demonstrate a secure method of voting, but rather to take people who had never used a blockchain before for a micro ride into this world, to trigger their curiosity and desire to learn, and maybe kill the “fear of the unknown” that stops so many from getting started with crypto platforms.

The results of the votes can be seen here: http://demoday.live.otdocs.com/#/results

And the last transactions (so people could see the votes recorded on the blockchain as they happened) are visible here: http://demoday.live.otdocs.com/#/transactions

FINtech.bootcamp.july2015

Fun fact supplied by m19 of Nxt Forum:

The guy in the front [2nd from left – click pic to enlarge] is Sajid Javid, Secretary of State for Business, Innovation and Skills from the UK.

Hopefully, Mr Javid will have attended one of Roberto’s presentations and learned for himself how the OTDocs system can remove the potential for international trade finance documentation to be misused in fraudulent schemes that cost businesses around the world billions every year.

……………………………………..

Further Information

‘OTDocs is a license fee free Open Source software tool that provides a platform for certification and compliance to online identities and documents as a mean to facilitate document management and process, respect privacy, and prevent international trade finance frauds.’

Press Kit

Newsletter

The Viral Exchange joins SuperNET

viral.exchange.large

The Viral Exchange (TVE), project-led by Killakem (founder of Fibre coin and also project leader of Blitz), has just been announced as a SuperNET official partner.

TVE enables users to promote their websites and social media presence whilst earning NXT, Bitcoin and Blitz for their social interactions on all the major social networks.

TVE is the first social exchange platform that allows users to cash out points to digital currencies.

Killakem writes:

The Viral Exchange (TVE) is a next generation social exchange with the goal of monetising social network activity via the blockchain.

TVE is a free social exchange network which helps businesses increase their social network presence and drive users to their websites. The exchange system is very simple: every time a user likes, follows, or views another member’s social media page they receive Viral Points which can then be used to get more followers, likes, views or visitors to their own website or social media pages. The Viral Exchange is the first social exchange platform that allows users to cash out points to digital currencies. Users can earn Bitcoin, NXT and Blitz with their Facebook, Twitter, Google+, YouTube plus many more.

The Viral Exchange is now a SuperNET official partner! TVE will be helping to raise awareness of SuperNET inside and outside of crypto, while also providing free marketing on the platform and exposure through our press releases. TVE will also utilize InstantDEX for automated user withdrawals once its ready and we will be integrating SuperNETs innovative technology with TVE wherever possible.

Version 2 of TVE is currently in beta testing and 100 Blitz is being offered for every new bug found (cosmetic bugs not included).

To find out more, join the Bitalize channel on Slack.

TVE is being redeveloped from scratch, the new platform will utilize an MVC Architecture providing an extensive API. Moreover, the NXT Monetary system will be used as part of our Proof Of Reserve system, this will give users, marketers and asset holders complete visibility of the purchases and withdrawals on The Viral Exchange. Asset holders will not need to rely on the information we give them: all deposits and withdrawals will be publicly available on the blockchain.

[Source: TVE Business Plan]

Working closely with NXtInspect, TVE has recently relaunched its Nxt Asset. ID: 10848741160900045194.

The NxtHacks Hackathon 2015

Fame and fortune awaits!

This is an all-comers challenge issued by Jones.

Using any programming language or library you like, can you build a fully functioning App using the Nxt API in just 48 hours?

Nxt is the fastest developing, open source, second-generation cryptocurrency platform.

For a complete listing of all available Nxt API calls: http://jnxt.org:7876/test

To sign up for the competition and to join the NxtHacks’ mailing list: http://jnxt.org/nxthacks.

To find out the latest news and views about the NxtHacks Hackathon and to contact Jones himself, join the #nxthacks channel on Supernet Slack

Competition Rules

  1. Entrants may use any programming language or library they wish (e.g. C, Javascript, Node.js, PhP, Python, Java) to build an App for whatever purpose using the Nxt Api.
  2. Entries will be judged by the Nxt community on:

    –  Completeness (i.e. is the app fully functional?)
    –  Style
    –  Usefulness

  3. The App programming work should only take place between midnight Friday 31 July and midnight Sunday 2 August.
  4. Developers may submit as many entries as they wish but in practice, given the 48 hour time limit, it’s not expected that anyone will submit more than one…
  5. …especially since no team working is allowed – each App submitted must be the exclusive work of a developer working on their own!

Prizes

1st place: 40’000 NXT
2nd place: 20’000 NXT
3rd place: 10’000 NXT

And a place in Nxt history as the winners of the inaugural NxtHacks Hackathon!

———————-

Further information:

http://www.peerexplorer.com/

(‘PeerExplorer is your gateway for Nxt infrastructure. Be a part of building the world’s most advanced decentralised open-source platform. Feel free to use the API. Don’t know what Nxt is? Take a look here!‘)

http://www.thenxtwiki.org/wiki/For_Programmers

http://nxtinside.org/whats-nxt/

Nxt Source Code

Fiat is failing. Let ‘battle’ commence?

This is the first in a series of articles examining the problems of the fiat monetary system and comparing the various possible solutions, with particular reference to the 2nd generation cryptocurrency: Nxt.

———————

Cryptocurrency (which is a decentralised form of digital currency)1 has now reached such an advanced stage of technological development that it would be remarkable if there was a national government anywhere in the world that was still not yet paying it serious attention; at the same time, the debt based fiat monetary system, following the ‘global’ financial crisis of 2007/8,2 remains in a critical condition.3

What exactly the world’s financial and monetary systems will look like beyond the short time horizon of the foreseeable future is impossible to know but we can at least be sure that the powerful private vested interests (primarily the commercial banks) who support the fiat monetary system in its present form will seek to preserve it substantially unchanged as far as possible and for as long as possible (a subject which is discussed in more detail in the forthcoming second article in the series: ‘Is fiat a fraud? From false commodity to false economy’).

fiat-printing-nxt-crypto-currency

Has war been declared and, if so, where are the battle lines?

As yet there has been no internationally co-ordinated government level response to the disruptive potential of decentralised ledger technology (i.e. cryptocurrency 1.0 and 2.0),  although work is currently being carried out which will ultimately lead to a response at the European Union level specifically regarding investments.4

In the meantime there has, to date, been a number of responses from individual countries, either specifically in respect of bitcoin or otherwise regarding all forms of digital currency, including for example:

  • declaring the use of bitcoin as a parallel currency to be illegal (Russia).
  • (whilst allowing citizens to buy or sell bitcoins amongst themselves), banning the country’s banks from processing transactions involving bitcoin (China).
  • stating (or at least intimating) that they do not recognise digital currencies as legal tender and therefore do not regulate them (Ireland).
  • treating bitcoin as a commodity and banning its use as a currency (Japan).
  • treating bitcoin as a foreign currency and banning its exchange with the national currency (Iceland).
  • announcing the creation of a national digital currency and banning all others (Ecuador).
  • regulating digital currencies to the extent of requiring ‘digital currency businesses’ to comply with anti-money laundering laws (Isle of Man).5
  • announcing proposals to consult on how best to regulate digital currencies and in the meantime issuing guidance regarding their status/treatment for tax purposes (the US and UK).

So, whilst some governments apparently see digital currencies as constituting an immediate, existential threat to their financial and monetary systems (even their national sovereignty)6 others are for the time being more welcoming, at least as regards the potential for blockchain technology to confer a competitive advantage on their economies.7

Financial and monetary stability is, quite rightly, of paramount importance to governments but, despite the growing body of evidence to the contrary, they still regard that stability as best being achieved by the continuation of a debt based, fiat money creation and allocation system run by profit-maximising private banks, ostensibly subject to central bank control.

Happily, there are signs that this inter-governmental consensus may perhaps finally be starting to break down:

For more than half a century, Iceland has suffered from serious monetary problems including inflation, hyperinflation, devaluations, an asset bubble and ultimately the collapse of its banking sector in 2008.
Other countries have faced similar problems. Since 1970, bank crises have occurred 147 times in 114 countries causing serious reductions in output and increases in debt. Despite its frequent failures, the banking system has remained essentially unchanged and homogenous around the world….[a] necessary step toward monetary reform is to increase awareness of the drawbacks and risks of the present system and why reform is needed.
This report will hopefully serve as a useful source of information for the coming debate on the money creation process in Iceland and how it could be reformed to serve society better in the future.

Extract from the Preface to ‘Monetary Reform – a Better Monetary System for Iceland’ (March 2015)

The solution to the debt based fiat money problem being proposed for Iceland is the Sovereign Money System.8 How this potential solution, which is also being advocated by the Positive Money campaign, compares with Nxt will be discussed in the third article in the series (‘Comparing the potential of sovereign/positive money and Nxt to solve the debt-based fiat money problem’).

Regardless of the success or otherwise of the Positive Money campaign or the Icelandic initiative, the existing fiat monetary system looks set to continue, fundamentally unchanged, in the rest of the world indefinitely, thanks partly to the entrenched network effect that the existing system enjoys, partly to the commercial vested interest of the disproportionately powerful commercial banks9 and partly also to:

  • the collective bureaucratic inertia of the ‘four pillars’ of global economic governance (the International Monetary Fund,10 the World Bank, the World Trade Organization, the Financial Stability Board of the G2011) and of the Bank for International Settlement;
  • large parts of the financial press; and last, but by no means least,
  • mainstream economic theorists.12

To be as effective as possible in getting our message listened to with attention it’s not enough for cryptocurrency advocates only to refer to the fact that the current fiat monetary creation and allocation system leads to socially and economically damaging results and that it remains in a critical condition, we must also demonstrate that we understand why it does so (topics which are examined in more detail in the next article in the series: ‘Is fiat a fraud? From false commodity to false economy’).

Six years after the launch of blockchain technology (in the initial form of Bitcoin), the commercial banks are becoming increasingly aware of the competitive threat which this rapidly developing technology poses to their business.13

They understand that their long-established centralised system of financial networks based, as they are, on restricted access to the APIs14 on which they run is now being challenged by a rapidly developing and expanding decentralised system of financial networks based on open API access which, in effect, makes possible the democratisation of financial power worldwide.

The banks also understand that cryptocurrency technology does not just represent a competitive threat to their dominant position in the provision of financial services in general it also represents (at least in theory) an existential threat to their virtual monopoly position as money creators and allocators which came about purely as an accident of history.

It’s hardly surprising therefore that most of the major banks are now working on blockchain solutions/strategies albeit that, under the mantra of Bitcoin is bad, blockchain is good they seem to be currently focusing their attention on trying to adopt/adapt the capacity of bitcoin’s blockchain technology to store data and execute financial contracts without needing to use the reward mechanism of the bitcoin currency to secure the integrity of the ledger. Their objective appears to be the creation of a private, federated blockchain in which every hashing institution is known and trusted.

Whether that would work and, assuming it did, what effect, if any, it would have on the continuing development, implementation and rate of adoption of genuinely decentralised, trustless, mathematically secure, blockchain technologies, such as Nxt, remains to be seen.

Much more promising than private, federated blockchains (technologically speaking and also in terms of social utility) is the idea of hybrid systems that, in effect, bridge the gap between the banks’ existing infrastructure and blockchain technology. A prime example being 44 Phones’ hybrid cash and cryptocurrency platform15 which has been developed as a mobile banking application using the Nxt blockchain technology to deliver mobile money via SMS, mobile app and the web.

Systems such as these may well prove to be the salvation of the fiat monetary system which otherwise left to its own devices seems set to go that one step further than it did in 2007/8 and irretrievably implode.

In the meantime, many cryptocurrency enthusiasts appear to welcome the prospect of a mainstream financial collapse believing that it would clear the way for cryptocurrency to take its rightful place in the world.

In practice, though, it is much more likely that in the event of such a collapse national governments would take emergency powers 16 and impose a top down solution designed in collaboration with, and therefore favouring, the banking industry rather than adopting a solution from the genuinely free market, unless that solution had already achieved such widespread acceptance that public and commercial pressure to adopt it was irresistible (an unlikely scenario admittedly, but anything is possible).

Are we ready for war?

The short answer is no, we’re not. At least not one against a common enemy. Instead, the cryptocurrency industry appears to be engaged in its own permanent civil war. Have a quick read of some of the discussion threads on bitcointalk.org and it soon becomes obvious that many, perhaps most, people involved in cryptocurrency seem to regard the only enemy as being the developers, owners and promoters of any cryptocurrency they don’t currently own which is doing better than the ones they do.

Although some people do genuinely invest in cryptocurrency for the long term, most seem to be looking to make as much ‘fiat money’ as quickly as possible. Moreover, whilst all of us (long and short term investors alike) say that we welcome competition as a force for catalysing innovation and improvement, which it undoubtedly does, competition also inevitably has the effect of engaging our instincts for survival and dominance, hence the feeling of despair that some may feel when a crypto in which they decided not to invest suddenly increases significantly in value and then the feeling of relief if, as they had been fervently hoping, it subsequently collapses.

What we must always bear in mind however is that the cryptocurrency industry is still in its infancy and until the various (competing) blockchain technologies become established and their real value gets priced by the market, the price and purchasing power of their native currencies will continue to be subject to much greater potential volatility than that of fiat currencies. In the longer term, of course, the reverse may well eventually turn out be the case.

Can war be avoided?

Answer: it depends if you listen to your heart or your head.

Emotionally speaking, war is inevitable and the ‘enemy’ is either other cryptos or fiat money or both (including their respective providers, users, supporters and fellow travellers), depending on what your unmediated instinct for self-preservation tells you.

Strategically speaking, yes, war can be avoided as there shouldn’t, in reality, be any enemy to fight, at least not as far as cryptocurrency is concerned.

To acknowledge someone as an ‘enemy’ is to acknowledge that instead of merely competing with them one wants, if possible, to destroy them in a ‘zero-sum’ fight to the death where the winner takes all and the loser ceases to exist.

However, there seems little possibility of blockchain technology on its own destroying the fiat based monetary system and absolutely no advantage to be gained by claiming that it could.

Moreover, other cryptocurrencies aren’t the enemy either; no one single coin, not even Bitcoin itself, will be able to monopolize what will inevitably become an ever-expanding and diversifying market.

Every cryptocurrency that gains a foothold in the mainstream (in particular, it must be said, when one of those cryptos is part of SuperNET 17) will help to educate the wider population about the benefits of the technology, thereby opening up the market for cryptocurrency usage more generally.

In my opinion, the language of war is not the most appropriate category of discourse to use in the ongoing struggle to establish cryptocurrency. Instead we should be more inclined to use the language of diplomacy in recognition of the fact that whatever ‘best case’ scenarios we might imagine for cryptocurrency, the financial landscape in which cryptocurrencies will be operating in the future will, in the absence of a complete and irretrievable global financial collapse, almost certainly continue to be dominated by the existing debt based fiat monetary system.

It may even be that cryptocurrencies, by strengthening local economies and thereby building greater resilience into national economies and ultimately the global economy, will actually help the existing fiat monetary system to survive and traditional banks to continue in business.

Seen in that light, it would actually be in the banks’ own best interests to be more accommodating in their attitude towards independent cryptocurrencies and, for our part, perhaps we should be thinking of making a virtue out of the fact that cryptocurrency usage in the mainstream economy, if sufficiently widespread, could have the unintended consequence of actually bolstering the fiat monetary system.

The non-crypto, potential solutions to the fiat problem include:

  • a fundamental reform of the debt based fiat system as advocated by, for example, the positive money campaign, which argues that money creation should only be used in the public interest.
  • Abandonment of the debt based fiat system and a return to the gold standard.

In articles 4 to 6 in the series each of the above solutions is examined in turn and the case is made for why the blockchain based, financial platform known as Nxt is the better solution.

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Notes:

1. ‘Cryptocurrencies [which are a type of digital currency] typically feature decentralized control (as opposed to a centralized electronic money system, such as PayPal) and a public ledger (such as bitcoin’s block chain) which records transactions.’ http://en.wikipedia.org/wiki/Cryptocurrency

‘Cryptocurrencies are designed to be capable of replacing cash…No central power has arbitrary control over the money supply.’ https://bitcoinmagazine.com/15862/digital-vs-virtual-currencies/

cryptocurrency 1.0: decentralised, P2P, cryptographically secured, digital payment systems.

cryptocurrency 2.0: ‘…is the application of block chain or distributed ledger technology to things other than digital currency. The block chain offers the ability to facilitate decentralized ownership and store, transfer and process information in a decentralized, programmable way. Many consider that innovation to be the true value of this technology.’ http://www.coindesk.com/crypto-2-0-roundup-bitcoins-revolution-moves-beyond-currency/.

2. ‘While the housing and credit bubbles [the immediate causes of the financial crisis] were building, a series of factors caused the financial system to both expand and become increasingly fragile, a process called financialization.’ http://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%9308

3. Is the debt based fiat monetary creation and allocation system sufficiently robust to be able to respond adequately to the ‘extraordinary’ demands that are being placed on it?

‘…extraordinary central bank action has become the new normal in the developed world. Faced with the twins threats of deflation and economic stagnation, monetary policymakers are reaching for their interest rate levers and digital money-printing tools in a bid to stave off recessions and debt deflationary dynamics.’ http://www.telegraph.co.uk/finance/economics/11378193/How-central-banks-have-lost-control-of-the-world.html

4. On 22 April 2015, The European Securities and Markets Authority (equivalent to the Securities and Exchange Commission in the US) issued a call for evidence regarding ‘Investment using virtual [sic] currency or distributed ledger technology’.

ESMA states on its website that it:

‘…is interested in how different virtual currencies and the associated blockchain, or distributed ledger, can be used in investments. There are now facilities available to use the blockchain infrastructure as a means of issuing, transacting in and transferring ownership of securities in a way that bypasses the traditional infrastructure for public offer and issuance of securities, trading venues like exchanges and central securities depositaries or other typical means of recording ownership. ESMA would like to find out more about these market developments and in particular to know to what extent the use of the blockchain could enter the financial mainstream, and how it could be used.’

Nxt is the example of the digital currency platform ESMA uses in its ‘call for evidence’ to illustrate how distributed ledger technology works.

The NXT Foundation will be submitting a ‘NXT Community Response To ESMA’s Inquiry  On Investments Using Virtual Currency Or Distributed Ledger Technology’ a week before the July 21, 2015 ESMA deadline. For more information visit the related discussion on the Nxt forum.

5. ‘Digital currency businesses [as defined below] will have to comply with the Isle of Man’s anti-money laundering (AML) laws from 1st April [2015] and will likely fall under the remit of the Financial Services Commission from the Summer.’

‘[Those in] the business of issuing, transmitting, transferring, providing safe custody or storage of, administering, managing, lending, buying, selling, exchanging or otherwise trading or intermediating convertible virtual currencies, including crypto-currencies or similar concepts where the concept is accepted by persons as a means of payment for goods or services, a unit of account, a store of value or a commodity.’ http://www.coindesk.com/isle-of-man-introduces-regulation-for-bitcoin-businesses/

6. A senior Central Bank [of Ireland] official has warned that virtual and digital currencies have the potential to challenge the sovereignty of states.

7. ‘Osborne looks to virtual currencies in bid to make UK world fintech capital’.

Further details regarding the UK government’s attitude towards ‘digital’ currency is contained in two recently published reports: Digital Currencies – response to the call for information
and Banking for the 21st Century – driving competition and choice.

See also:

‘Virtual Currency Schemes – a further analysis’, European Central Bank, February 2015.

‘Cryptotechnologies, a major IT innovation and catalyst for change’. European Banking Authority, 11 May 2015.

8. Sovereign Money System: this, in effect, nationalises money by giving the central bank the exclusive power to create money and parliament the power to allocate how the money is used; the government then spends/invests it into circulation.

9.The network of global corporate control’ Stefania Vitali, James B. Glattfelder, and Stefano Battiston published in the New Scientist Magazine 22 October 2011 (Issue no. 2835) An analysis of the relationships between 43,000 transnational corporations has identified a relatively small group of companies, mainly banks, with disproportionate power over the global economy.

10. But see: IMF report from 2012 by Jaromir Benes and Michael Kumhof. The focus of the study is the so-called Chicago plan of the 1930s which the authors have updated to fit into today’s economy. The basic idea is that banks should be required to have full coverage for money they lend. Under this proposal, banks would no longer be allowed to create new money in the form of credit in connection with their lending activities. Instead, the central bank should be solely responsible for all the creation of all forms of money, not just paper money and coins. The advantages of such a system, according to the authors, are a more balanced economy without the booms and busts of the current system, the elimination of bank runs, and a drastic reduction of both public and private debt. The authors rely on both economic theory and historical examples, and state that inflation, according to their calculations, would be very low.’

http://en.wikipedia.org/wiki/The_Chicago_Plan_Revisited

11. It should be noted however that the chair of the policy development committee of the Financial Stability Board, Adair Turner, wrote in his foreword to Monetary Reform – a Better Monetary System for Iceland’ (March 2015) that the efforts to make the existing financial system more stable: have still failed to address the fundamental issue – the ability of banks to create credit, money and purchasing power, and the instability which inevitably follows. As a result, the reforms agreed to date still leave the world dangerously vulnerable to future financial and economic instability.’

12. ‘Mainstream economists’, those who subscribe to ‘…neoclassical equilibrium theory and assimilated Neokeynesianism, or to put it differently, American textbook standard economics…Mainstream economics for the most part rests on the assumption of neutrality of money…If one believes in neutrality of money, then of course dysfunctions of the money system are not an obvious subject of concern, despite all financial crises. As a consequence, most mainstream economists find it difficult to see why monetary reform might be of relevance.’ Joseph Huber http://www.sovereignmoney.eu/sovereign-money-in-critical-context/

13. The banking industry is now organising conferences to consider questions such as:

What is the future of money?

Do you know what cryptocurrencies mean for your business and for the future of financial services? Are you leveraging [the] blockchain? Are these developments an opportunity or a threat for traditional financial services providers?

SWIFT Business Forum London, 23 April 2015

14. An example of an API (Application Programming Interface) in the mainstream financial system is the VISA network’s merchant API which only the merchant, as a trusted party, is allowed to program. Examples of APIs in cryptocurrency based systems include: the transaction scripting language, the P2P network protocol and the ‘Northbound’ client, all of which are open source and are therefore available for anyone to program.

15. ‘UK’s 44 Phones Building Blockchain-Based International Mobile Network, Mobile Money Service.’

16. For example (in the UK) the Civil Contingencies Act 2004, Part 2 Emergency Powers, S. 22 (2) (h) http://www.legislation.gov.uk/ukpga/2004/36/pdfs/ukpga_20040036_en.pdf

17. SuperNET is an association of the most reliable blockchain technologies. Giving you access to all their innovation from one place.