Oleg Andreev

Arguments for Litecoin are fraudulent.

TL;DR: there’s no important difference between LTC and BTC and only one of them can win over another, because, other things being equal (which they are) people want to invest in the most liquid money: that is, with the biggest number of folks willing to hold it. LTC can’t be “silver to bitcoin’s gold”, because both LTC and BTC have exactly the same risks and costs. Either LTC wins over BTC, or BTC over LTC.

I’ll elaborate.

Litecoin/Bitcoin/Shitcoin are all long-term bets. I myself don’t speculate on daily basis, most of us bet for value of these things in the multi-year time frame. So let’s focus on that.

1) In long term security is not measured in “block interval time” or number of blocks. It’s measured in amount of money to be spent on double spending. Today hashrate of Bitcoin is many-many times more expensive than that of Litecoin. So one block confirmation in Litecoin is not just 4x less secure, but hundreds times less secure: you need smaller investment to fork the chain, than with BTC. So anyone who brings up security argument is lying to you.

2) Litecoin is not “faster” either. For the same level of security as in BTC, you have to wait hundred times longer (see #1). Instant transactions are the same and also less secure than in BTC: zero-conf, with less nodes and less connectivity between them to limit double-spend attempts. Anyone bragging about “LTC being faster” is a liar. It can only be slower due to less number of nodes and currently lower hashrate, not faster. LTC can only be faster if BTC is being abandoned and people switch to LTC.

3) “Scrypt protecting against concentration of power due to ASICs” is bullshit. If LTC wins over BTC, there will be ASICs and whole factories making chips and plugging them in on-site right away. Just like it will be with BTC or ShitCoin or else. Long-term LTC is either dead or is full of chinese ASICs, like BTC. Anyone arguing otherwise is a liar.

4) “Scrypt more secure than SHA256” is bullshit in the context of mining. If there’s a better optimization in SHA256, it’ll be like a better hardware. But this can equally happen to Salsa in Scrypt too. If the breakthrough is significant, all BTC stakeholders will vote for adjusting the protocol to fix the problem, not lose everything by panic selling. Huge price of BTC is a great motivator to find the weakness in double-round SHA256 and mine faster. Every day it doesn’t happen is only a practical proof it’s as good as it can be (just like Scrypt or whatever), everything else is unfounded FUD.

5) “More fair distribution of wealth” - this is unfounded FUD. For average Joe, LTC is less widely accepted, so its concentration, however “fair” it was, is still higher than in BTC. And who knows how much of early mined BTC are lost forever (we know that’s a lot) or were sold during 2011 bubble and slow price rundown the same year. I bet very few were sticking to their holdings that time and thus were taking huge risks “fairly”.

6) “Diversification” (based on all points above) - newbies who don’t know economics are made to think they diversify by investing in some altcoins. But the risks and costs are all the same for all coins. If Bitcoin is completely broken, most likely altcoins are broken for the very same reason. Otherwise, all Bitcoin holders will simply agree to upgrade the protocol. Especially so as Litecoin is on the same codebase.

The only real argument about LTC and BTC is that there’s no functional difference between them. LTC could only be 4+ times costlier to miners due to faster blocks and more “decentralization” of individual miners (slower connectivity, faster blocks => more orphans). If LTC was released before BTC and took off, everyone would be using LTC no problem. The only thing that matters here is liquidity, number of holders of money. If people are betting it is BTC with more hands, they send a signal to others about that by holding too. This moves all the “cryptoinvestments” into BTC in long term. If people see that LTC is gaining more hands, then everyone will converge on LTC. LTC and BTC cannot coexist together, it makes no economic sense both for miners (who want to invest 100% in the most valuable currency in long term) and for users (who want money only because it’s widely exchangable for many goods at any later dates).

Right now there’s a lot of excitement about Bitcoin and not many people understand economics. Some folks are lied to and “diversify” into altcoins, which gives them short-term bubble. But in years to come, when they see, that Bitcoin has bigger adoption, they’ll move their savings to BTC and then all altcoins will crash. Or for some mysterious reason BTC will not be viable and people jump to LTC en masse and abandon BTC.

People often talk about privacy problems with Bitcoin: all transactions are public and every move is watched by millions of eyes. Where’s a problem, there’s a solution.

Lets first define the problem more rigorously. There are two situations (ok, three) when you want to launder your coins.

First: you receive monthly salary on a single address and then want to do regular purchases with it. When buying a cup of coffee, shop owner will see how much money do you have which might be unsafe.

Second: you want to buy something expensive, so you have to combine “change” from various addresses in a single transaction. This may link many of your private payment histories in one. Someone may connect the dots and make a full profile of a single person: what he eats, where he travels and so on. It’s being done with credit cards already and people seem not to like it very much.

Third: you sold something anonymously and your payment is being watched. If you later spend that money in the open, your identity may be revealed.

Bonus track: some people think that “money laundering” is not sinful enough, so they invented “structuring laws”, that is laws that forbid not only buying bad things, but also to hide the monetary trails even if you don’t do anything illegal at all. If your method to launder bitcoins is screaming “LAUNDERING” on the blockchain (like with Zerocoin, using shared addresses or CoinJoin transactions), it’s not good for you. You may get your privacy, but you also go to jail for “structuring”. To be a law-abiding citizen you should not hide your financial history. The rest of this article is for pure entertainment only.

To address all of these issues we need to disperse and mix the funds in way that their source or destination becomes statistically indistinguishable form any ordinary transaction.

You might do that with these ingredients: discover, insurance, split and swap.

Disclaimer: this is not an advice, it’s a technological overview for all those who are interested in privacy aspects of Bitcoin. Anyone can implement this or come with even a better idea. This is not even my original idea. I recommend governments to shut down the entire network to prevent people from doing nasty things with Bitcoin. At the same time, there’s an opportunity to use this scheme by undercover FBI agents to detect anyone mixing their bitcoins. Dear reader, please obey the laws and be good, socially responsible person.

Step 1: Your wallet app discovers random nodes on the P2P network (other instances of the same app) and posts a request to launder some bitcoins. When two wallets meet with similarly sized requests, they exchange information about some of the available coins. Each of them does statistical analysis of those coins and decides if the coin is “good enough”. For instance, if this coin’s history correlates as little as possible with the histories of the coins already owned.

Step 2. When both nodes like each other’s coins, they enter an insurance contract. Each party locks up equal amount of coins in a single special transaction where coins can only be unlocked atomically and by mutual agreement. At the same time, each party can destroy both deposits (e.g. in case of timeout or misbehaviour of another node). Amount of each deposit should be 200-300% of the amount to be exchanged. I wrote about such contract here: http://blog.oleganza.com/post/58240549599/contracts-without-trust-or-third-parties

Step 3: Each node splits their coin in two parts. One part is to be exchanged now, another part is to be exchanged with some other node later. Parts of the coins should be equal. (This produces some correlation detectable on blockchain, but that’s easy to fix with multiple independent transactions instead of just one.)

Step 4: Each node tells another one an address on which to send a part of the coin. Each of them does that transaction. All the other nodes don’t know about this swap of coins and therefore cannot link them together. If your coin was “tainted” (watched by adversary), half of it anonymously goes to someone else and in return you get some absolutely different coin. Insurance contract prevents a node from receiving a payment, but not making a payment back. Since there is no human supervision, anyone trying to cheat the scheme will get punished by an automatic destruction of his deposit (which is worth much more than just received money).

During one session (one insurance contract), nodes can swap more coins until they run out of coins or cannot provide each other with a statistically good ones. When the session is over, insurance deposits are unlocked and nodes go talk to other nodes.

Think about it this way: you split all your money in 1000 pieces and send them to 1000 different random strangers via regular, statistically innocent transactions. In return you get 1000 pieces from all around the world, that are not connected to each other in any meaningful way. 10 rounds splits money into 1024 portions, 20 rounds into over a million. In a short period of time you never expose more than a fraction of your funds and never receive more than a fraction of someone else’s history.

How does this address our examples?

When you receive a monthly salary payment, you mix it with 1000 random users and in return get 1000 smaller pieces. It’s like exchanging one $1000 bill for a thousand $1 bills. Then, you can go buy your coffee and no one will know how much money do you have.

When you need to spend a lot of money at once, you do the same: take all your small coins, swap anonymously for other small coins and make a single payment. Your individual spending histories will be dispersed among thousands of random people. And the recipient of your payment will link together totally uncorrelated histories having nothing to do with you personally.

Finally, if some of your money is being watched (“tainted”), it will be moved to someone else completely. You yourself has little risk of getting someone else’s tainted history because you never get more than 0.1% of it due to multiple rounds of splitting.

The UI for this can be quite simple. You install a special kind of wallet, load it with bitcoins, connect to the internet and click “Mix coins”. Next morning all your coins are perfectly mixed with thousands of random strangers.

Again, this is not a ready solution, but a theoretical possibility for those who are interested in solving puzzles. Don’t use this if the law forbids it. The law is very important.

See more questions and answers in this discussion on HN: https://news.ycombinator.com/item?id=6787603

Bitcoin will eventually replace gold as a globally recognized “store of value”. Gold prices will go down 90-95% to the levels supported by the use in production as “reservation demand” for gold would essentially disappear.

When Bitcoin becomes the world money there will be little reason to own gold. Bitcoin is as limited, as fungible and as non-counterfeitable as gold. It’s even cheaper to verify, store, transfer and divide.

Gold is always as difficult to protect as it is to confiscate. It’s symmetrical. That’s why throughout history only the strongest were accumulating gold. Pirates were robbing merchants, kings were robbing pirates. In the end, massive amounts of gold are owned by the biggest governments and banks. Small folks can only reliably own as much gold as they can keep in their own hands. (In 1933 US government confiscated most of the gold owned by population as an “emergency measure” in a declared attempt to save failing economy: http://en.wikipedia.org/wiki/Executive_Order_6102)

Bitcoin is asymmetrical. It’s much cheaper to personally own it and keep safe, than it is for someone to come and confiscate it (regardless of the amount you have). If you buy some bitcoins from 100 random people, there’s no one except you to know how much you have. There’s no big shiny vault to attract thieves, no bank account for TLAs to peek into. You can perfectly back it up in 10 places, split the encryption key to 10 of your closest friends and even put some money in a “brain wallet” that has no traces anywhere at all.

A friend of mine, Steve, noted that gold-backed economy logically evolved into the mess we are now. Libertarians who advocate return to the gold standard do not realise that the gold standard was the reason of accumulation of gold in few of the world’s biggest banks and everyone else getting worthless IOUs positioned as “sovereign currencies”. Gold is heavy and expensive to handle: only the wealthiest can afford to save a lot of it. And equally to take it by force from less powerful.

Bitcoin changes all of that. Like cryptography, which gives everyone possibility to have privacy, Bitcoin gives everyone equal possibility to save money and use money as they please. Without worrying if someone takes it from them, or censors their transactions. Rich and poor can have equal protection of whatever they earned.

Yes, if someone is against you personally, they will find a way to get you. But massive-scale theft and controls become way too costly. Inflation and QE robs savers without knocking on their doors. Capital controls and bank bail-ins need a discussion with just a couple of bankers, not millions of actual depositors. Taxation happens automatically on the level of the banking system as it’s used both for storage and transfer of money. When everyone personally holds bitcoins, it’s much easier to protest against taxation if it’s unfair or ineffective, it’s possible to avoid capital controls and it’s impossible to redistribute wealth by printing more money.

Bitcoin economy is not a revolution in a sense of violent redistribution of wealth in a “fairer” manner. It is a leap forward by forgetting about how much was destroyed or stolen and focusing on how much can be preserved and protected. It’s a truly peace-making tool for the whole humanity. People who think about Bitcoin as only a money-moving tool, or a get-rich-quick scheme grossly underestimate it. It enables much more than what the web gives. The web gives us freedom to exchange information. Bitcoin gives us freedom to exchange everything.

People are always wondering how safe is buying Bitcoin if there are constant heists on exchanges and no website has perfect reputation. They draw analogy with the banks: which organisation can I trust to handle my money?

The right answer is: with Bitcoin you don’t need to hold your money on an exchange for longer than a minute. You wire your government currency to an exchange (bitstamp, coinbase, bitcoin-central, btc-e, kraken, btcchina), buy some bitcoins at a current price and move them hell out of there to your personal wallet. The exchange can be hacked next day, but it won’t matter to you. You are not storing money there anymore. Your private keys are only stored in your encrypted backups and only you know the password. As long as the applications you use are not infested by viruses or backdoors, and you have enough of separate physical backups, you are pretty safe. PS. Don’t use Windows!

Another question people ask: why can’t I simply use my Visa card like I do with the rest of my purchases? Or PayPal. The answer is because this money is never owned by you and all transfers are reversible. Bitcoin transaction is confirmed by the network and buried in the blockchain in 10 minutes. Visa transaction is reversible within 90 days. There were people who tried to sell Bitcoin (ultra-liquid asset that you can own) for PayPal (highly controlled asset that is owned by a chain of banks and payment processors). People grab your bitcoins and call PayPal to reverse a transaction (“someone stole my password!”).

People who start learning about Bitcoin should understand one thing. You don’t own your usual money. You may own paper bills to some degree, although, government does devalue them all the time by printing more of them and restricting movement of large enough sums. Your bank account you don’t own at all. Even wire transfers may get reversed, although, rarely. All your transfers are basically promises from one banker to another. The entire banking system is a complex network of mutual promises not backed by anything except desire to not break the law (yet another system of promises to reward or to punish). And these promises are being broken or revisited all the time on every level. Laws and regulations are not consistent even with each other, not only with every particular decision.

Bitcoin, on the other hand, is like air-thin gold on steroids: you can fully control your transfers and the entire network forces everyone to follow very strict rules to ensure validity of all bitcoins and the rate of their creation. The shitty C++ code of BitcoinQT (original and the most used client) is infinitely more compact, rigid, logical and consistent than all regulatory environment with millions of account managers in the entire financial system.

You can also own gold, but that ownership comes with huge costs and risks. Someone needs to guard the vault, transport the vault, verify the purity of the bars and coins. All of this makes it impossible to use gold in the global economy. Which is precisely why we arrived at the modern all-controlling banking system — it grew up out of the necessity to reduce costs of handling gold by entrusting it to the biggest vaults. To use gold as money you have to trust someone to store or transfer it for you. So you are back to the current very fragile system.

The only money you can truly own today regardless of the amount is Bitcoin.

Next Monday, on November 18th, 2013 the Congress of the United States will have hearings on Bitcoin. How it works, what it means and what government should or can do about it.

Here is a gist of what a lawmaker should understand about Bitcoin.

1. Bitcoin is a protocol without central managing organisation. Anyone can issue currency and validate transactions from any place in the world. Censoring transactions will be as effective as stopping Bittorrent file sharing. Technologically, Bitcoin is impossible to control or shut down (in practice and to high degree in theory too).

2. Bitcoin tracks every transaction in a public ledger. If you know identities of certain addresses, then a transaction between them is publicly visible and acts as an immediate proof of activity between these identities. However, identities are not recorded in the ledger and anyone can use as many addresses as they like. Many wallet applications automatically create new addresses for every transaction.

3. Bitcoins can be very effectively split in small pieces and mixed between large number of users thus making any statistical analysis almost useless. So far there are no easy and cheap practical ways to do that, so not many people bother. But that’s entirely possible nonetheless. Those who need to protect their privacy will do so easily as soon as some serious attacks on privacy emerge. It’s similar to how Bittorrent magnet links appeared after attempts to shut down Bittorrent trackers. Now nobody needs a tracker at all to discover available files and access them. Bitcoin mixing will become built-in feature in many free wallet applications if it will become much needed.

4. Bitcoin protocol rules are enforced by the entire network of millions of computers. Changing the rules by one computer will not allow it to participate in the rest of the network. If transaction is not considered valid by everyone, it will be accepted by no one.

5. Black market will become even bigger with Bitcoin. Everything that law enforcement cannot reach will be even safer to trade and many more activities will become possible with Bitcoin that were not possible before.

6. Regulations may realistically only affect law-abiding consumers and producers. And the only thing they can do is to increase friction and costs for both of them. Some legit businesses under regulations will become impossible, while others will go to the black market or foreign jurisdictions.

7. Forbidding Bitcoin completely is just a degree of regulation. It will have no effect on black market that will only grow, but it will shift innovative businesses to other jurisdictions, where there is more freedom. Today, Argentinian government imposes strict capital controls and inflates their currency and forces people to get dollars and bitcoins on black market. Since Bitcoins are much easier to sell and use than dollars, they are being deployed much quicker. If that continues, bitcoins and dollars will completely replace pesos in the entire economy and the government will go bankrupt.

Policymakers are interested in preserving their image of people who protect citizens and need to collect taxes to keep the government running. If one needs to keep innovation and growing wealth within a country and tax it, then Bitcoin transactions should be left as free as possible. Regulators should provide clear and simple guidelines on how to report all taxable revenues and provide assurances that businesses are free to transact as efficiently as they can, provided they pay their taxes. Anything more than that will only increase the size of black market or shift wealth to other places (thus reducing tax revenues for the government).

Countries that embrace Bitcoin will attract enormous amount of capital in a very short period of time. Countries failing to do so will quickly lose that exact amount of capital.