Blockchains: Empowering Individuals or Corporations?

TWO MAIN TYPES Not all blockchains are created equal. Some empower individuals, others profit corporations. This article takes a look at who benefits and why. Of course, the world isn’t neatly divided into two categories: people and corporations. Companies are composed of individuals after all. However, the interests of people, in contrast to corporate motivations, may be a useful framework for understanding two primary types of blockchains: “public” and “private”—or perhaps, “public” and “corporate”, is a more apt depiction. Let’s first cover some basic terminology to better make sense of blockchains and how they are used in real-world applications. BLOCKCHAIN JARGON A blockchain is simply a special type of database—one that is usually replicated and distributed amongst numerous interested parties.

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Primer: Think about accepting bitcoin.

Many friends label me a Bitcoin fanatic, however let me first state that Bitcoin alone will not save your business, will not make you wealthy, and is not essential for a successful business; at least not today.  Bitcoin remains small[1], but important in a growing niche payments technology space.  We will see more of it in the future.  In 2009, Bitcoin introduced two fundamental innovations[2]; the blockchain: a secure public ledger managing the possession of a cryptographically scarce counterfeit resistant digital token.  That token, bitcoin with a small ‘b’ is what a merchant may accept at the register alongside cash and credit cards.  That token, BTC (aka XBT), in the last 7 years, has achieved a real world value which

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Bitcoin Is No Paradise for Criminals

This brief article helps to clear up a common misconception about Bitcoin. Bitcoin is frequently portrayed as the chosen currency of crooks. There is no doubt that criminal activity has been associated with the Bitcoin ecosystem, but I would argue that cash is still king in the underworld. Jason Bloomberg writes in his recent Forbes article [1]: “Professional criminals’ number one requirement is a secure, anonymous way to move and store money, and Bitcoin fits the bill perfectly.” There’s a really big problem with that statement: it is simply and provably not true. It displays ignorance in how Bitcoin really works. In fact, Bitcoin is a potential nightmare for criminals. If they want to minimize getting caught, they’ll stick with

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Ripple vs. Bitcoin (security and privacy)

by Albert Szmigielski Fairness Bitcoin’s public ledger, the blockchain, allows any entity to check the transactions in the system. Furthermore, as long as 66.7% of the miners are honest no entity can change the history of transactions. Both of those properties ensure fairness. However in light of recent research into attacks on the Bitcoin network, several double-spending attacks have been identified. Such attacks negate the fairness property. Ripple has not been studied as extensively as Bitcoin. Ripple relies on ledgers that can be inspected. However, Ripple’s validating nodes are currently run and therefore controlled by Ripple labs, it seems that there are not sufficient incentives to run a Ripple validating node. Double spending attacks have not been identified in Ripple

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Countermeasures to information leakage of Bloom Filters in Bitcoin lightweight clients

by Albert Szmigielski Keep the state about the seed. When a device restarts and uses a different seed (as well as other filter information) to create a new bloom filter, the probability of having the same false positives is very low. Therefore an adversary with access to two bloom filters from the same client, created with different seeds can easily check if addresses appear in both filters. If so, they are addresses of the SPV client, otherwise they are false positives. Keeping the state about the seed would not give that advantage to the adversary. When an SPV client restarts it will create the exact same filter. Disadvantages The need to store a seed and some other information about the

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Bitcoin Security and Privacy

Bitcoin Security and Privacy By Albert Szmigielski Bitcoin is a decentralized currency and payment system. In order to be an effective and secure payment system it should satisfy several security requirements. The first of these requirements is fairness. On the surface Bitcoin meets the property as users can only sign for coins that they control. However, upon further examination of recent research we do see that several double-spend attacks have been performed that would negate the fairness property of Bitcoin. On the other hand Bitcoin does satisfy resistance to impersonation attacks very well. No one can obtain the private keys (assuming they are stored properly and securely) of another person in the system to sign their transactions. As a result

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The Oligopoly of Payment Networks

What are the advantages and disadvantages to the oligopolical structure of payment networks? If you could, what changes would you make to the current system, if any?   The current payment network market is dominated by a small number of players. By definition that makes it an oligopoly. Visa is by far the biggest, followed by Mastercard, followed by a few much smaller companies. They operate a credit card and debit card networks. The system as it exists now is far from idealistic, but it has some advantages. Of course most of the advantages are designed to benefit the incumbents. Visa and Mastercard are very well recognized brand names all over the world. Both are accepted in the vast majority of

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Non-RTGS settlement system & Bitcoin.

Select one type of non-RTGS settlement system that exists in the existing financial system and highlight how it could theoretically work, in a Bitcoin-centric ecosystem The National Settlement Service (NSS) is a non-RTGS settlement system in the United States. Designated agents submit electronic files on behalf of participants in a clearing arrangement. The participants are depository institutions with accounts at a Reserve Bank. Once a file is submitted, verified, and processed the settlements are final. Each debit is checked against the account balance and intra-day credit of the participant in their Federal Reserve Bank. The NSS is owned and operated by the Federal Reserve Banks. In a Bitcoin-centric ecosystem there are more than one way to implement such a system. In

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Liquidity and Credit Risk in Settlement Systems.

Describe the trade-off between liquidity and credit risk in a settlement system and highlight how different RTGS, net and hybrid systems address this topic. Liquidity and credit risk are two competing characteristics of a settlement system. An increase in liquidity necessitates an increase in credit risk. The different types of settlement systems address the issue in various ways. RTGS Systems eliminate credit risk by settling all payments in real time as they arrive. Participants have deposits on file with the central bank running the RTGS against which debits can be deducted. Participants can also have collateralized credit lines to further fund their debits. It is noteworthy that the FED lowered the quality and expanded the types of collateral accepted during the

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Payment & Settlement Systems, Past Patterns & the Future.

What patterns and themes have emerged from the last 30 years of payment / settlement system development? Given these patterns, what can we expect future developments to focus on? Over the last 30 years of developments in payment/settlement systems certain pattern have emerged. They can be categorized as: technological advancement which drove almost all innovation, development of widely used standards, globalization, increase in competition, decrease in fees charged, regulatory push for more security of systems, security of data, fault tolerance, mobile accessibility, and mitigation of various risk factors. Systems have become increasingly  sophisticated with respect to technology. This has had an impact on almost all aspects of  payment/settlement systems. Improvements in technology translate directly to faster and cheaper systems as human interaction

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