Blockchain Bitcoin & Crypto Weekly CXO Briefing for week starting 6th November 2017

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The Blockchain Bitcoin & Crypto Weekly CXO Briefing is all you need to know, each week, jargon free for CXO level business leaders and investors who will use this technology to change the world. Each week we select the 3 news items that matter and explain why and link to one expert opinion.

For the intro to this weekly series, please go here.

News Item 1: Simplicity Itself for Blockchains

DecryptedBlockstream introduced Simplicity, a new programming language, designed to become the alternative to existing languages that are used to create smart contracts. It is intended for inclusion in Blockstream’s sidechains, but it is assumed that Simplicity may eventually be implemented into the Bitcoin protocol.

The new language was presented by Dr. Russell O’Connor in his paper on “Simplicity: A New Language for Blockchains” as part of a session on new languages and tools at PLAS 2017.

Our take: Sooner or later smart contracts would come to Bitcoin one way or another. While the Bitcoin has its own built-in smart contract language, at a very early stage some of the opcodes for Bitcoin Script were disabled. For example, in Bitcoin Script, you can only add numbers, but you can’t multiply them.

Simplicity is a low-level, typed, functional, native MAST language, where programs are built from basic combinators. Each Simplicity expression is associated with two types, an input type and an output type. Every expression denotes a function from its input type to its output type. Like Bitcoin Script, Simplicity is designed to operate at the consensus layer. While one can write Simplicity by hand, it is expected to be the target of one, or multiple, front-end languages.

Bitcoin script is limited by design and unsuitable for complex smart contracts that need more than a small set of simple templates to perform tasks like digital signature verification. Ethereum, on the other hand, includes a more expressive and flexible, Turing-complete programming language, which allows for arbitrarily complex smart-contracts in principle.

Simplicity is based on the algorithm of sequential calculation and offers several important improvements. The language also brings operational semantics defined with an abstract machine called the Bit Machine. This tool is used for measuring the computational space and time resources needed to evaluate Simplicity programs.

Simplicity is very restrictive, which will probably make it difficult to learn how to write scripts, but even harder to screw them up. This exactly what you want from a scripting language, that’s supposed to handle billions worth of transactions. Simplicity is a flexible alternative to Bitcoin scripting, not Turing-complete, but expressive enough to build useful smart contracts for blockchain applications, or as an alternative to Ethereum.

But, Simplicity is not alone in this quest. Other projects have been working on smart contracts for Bitcoin. Rootstock has been trying to implement Ethereum’s EVM as a Bitcoin sidechain, however it has been facing some resistance and appears to be delayed.

The new language is at a very early stage, but once its ready, it will be deployed in Blockstream’s side-chains and we can expect it will probably be deployed into Bitcoin. Simplicity is a safe language, which makes it important, not just nice to have. It has the potential to bring in serious business and give Bitcoin an edge over Ethereum, at smart contracts.

News Item 2: “I forgot my PIN”: An epic tale of losing $30,000 in Bitcoin

Decrypted: The Bitcoin price continues to rise, almost reaching $8,000. Coinbase added 100,000 new Bitcoin users in 24 hour period, a few days ago, Rumors are floating that Amazon plans to accept cryptocurrency as a means of payment.

In an interesting story, Mark Frauenfelder, co-founder of Boing Boin, describes his desperation to recover $30,000 worth of Bitcoin stored on a Trezor hardware wallet. He talks about how he lost and finally recovered the secret passcode to his hardware wallet.

The story presents the risks any investor could face, if he doesn’t take the necessary precautions. While our coins might be protected against hackers, some times we can be our worst own enemy.

Our take: There is a growing number of threats that could put your cryptocurrencies at risk. Anyone that owns or trades Bitcoin or other cryptocurrencies should make sure to keep them safe.

If you plan to get involved with the world of cryptocurrencies, you need to understand things like secure passwords, two-way authentication, and in general feel confident with direct control over the security of your Bitcoins. It can be difficult, especially in the beginning, but this is the price in order to be independent from banks and other centralized institutions.

Bitcoin wallets store the private keys that you need to access a bitcoin address and spend your funds. Bitcoin wallets come in a variety of forms. You can even use paper storage to avoid having them on a computer at all. Of course, it is very important to secure and back up your Bitcoin wallet. What you store are the secure digital keys, used to access your public Bitcoin addresses and sign transactions. This information is stored in a Bitcoin wallet.

There are four main types of wallet: software (desktop, mobile), online (or web), paper and hardware. Also you can classify wallets into hot and cold wallets.

Software wallets: These are hot wallets that require the download of software clients to create and use a wallet. They available for both desktop and mobile. Desktop software clients like Bitcoin Core usually require downloading the Blockchain, which is more than 100 GB is size. This could be a real deal breaker if you’re on a limited bandwidth or limited storage space. Thankfully, desktop software clients like MultiBit allow you to create and use a wallet without requiring you to download the Blockchain information. Armory is another popular alternative, but it can be little difficult for non-technical users to set-up. All these software wallets are cross-platform and highly secure.

Online wallets: Also know as web wallets, these are the easiest to use amongst all the different kinds of hot wallets. Creating an online wallet is as easy as signing up for a new account on Coinbase or any other similar service. Also, you can access your wallet from any device connected to the Internet, so making transactions couldn’t get any easier. But there are certain trade-offs of using an online wallet. Most importantly, your private keys are stored on another server, which could lure hackers all-around the globe to steal them. For instance, back in 2014, hackers stole Bitcoins worth $460 million from Mt. Gox, a popular Bitcoin exchange site. Online wallets should be used only for making small everyday transactions. If you hold a large number of Bitcoins, you may want to stay way from online wallets.

Paper wallets: A fancy term for printing out your public and private keys on a piece of paper. Paper wallets are more secure than using software or online wallets because you physically have your keys printed on a piece of paper. As you might have guessed, it is a Cold Storage method, as it is offline. While more secure than online counterparts, a paper wallet can be damaged, destroyed or even lost. Therefore, it is important to make multiple physical copies of this paper and make sure you keep it inside a locker or another secure place.

Hardware wallets are stand-alone hardware cold-storage devices that generate keys on the fly while making a transaction. They are USB shaped devices, which have to be plugged into your computer while making a transaction. Hardware wallets are secured from your regular computer malware because it generates private keys offline, on the device itself. They are extremely convenient to use and do not require the understanding of complex technical details. They also provide sturdy backup options, so you do not lose access to your wallet. They can be also secured with a password to combat theft. Overall, as you carry your private keys along with you all the time and it is prone to computer malware, hardware wallets are the most secure option.

What wallet should you choose to keep your crypto safe?

It really depends how you manage your cryptocurrency. The private keys stored in your wallet are the only way to access the transaction data stored in a Bitcoin address. If you lose them, you lose your Bitcoins. They are only safe, as long as no one else can access them, or they don’t get lost. If you use Bitcoin to make small transactions frequently or you are little off-tangent when it comes to technical skills, online wallets are the easiest to use.

When it comes to online wallets a number of services support multi-signature wallets. Multi-signature wallets require multiple parties to sign the transaction in order to spend some Bitcoin. This means that you and and the service, each have a key, and both are required to execute a transaction with your cryptocurrency.

Now, if you’re completely against the idea of using technology or trusting a third-party with your private keys, then paper wallet is the way to go. But, remember, you’ll be in charge of keeping the paper wallet safe all the times.

Personally, I think that hardware wallets are the best way to go. Investing in a hardware wallet is perhaps the most secure option available right now.

News Item 3: New York Preschool Accepts Bitcoin, But Not Credit Cards

Decrypted: When Bitcoin first appeared a few years ago, it was believed it could replace cash and credit cards as a way to pay for things. But its extreme price volatility, made many hesitant. Bitcoin became more suited to the speculators who day-traded it. But data suggests that Bitcoin payments are gaining traction, as its volatility has fallen and its value has rocketed.

Two private preschools in New York City now accept bitcoin and two other cryptocurrencies for tuition payments. Montessori Schools, based in the Flatiron and SoHo neighborhoods in Manhattan, began accepting Bitcoin, Ether and Litecoin by  integrating with digital currency startup Coinbase, to automatically convert the crypto payments to US dollars.

Our take: Many companies are beginning to see cryptocurrencies as a valid payment option for the products they sell. An increasing number of organizations around the world, including universities in Switzerland and Cyprus, are taking the digital currency as payment.

Yet, a report published by Morgan Stanley earlier this year, showed that only 0.6 percent of the top 500 online retailers accepted Bitcoin.

The currency’s extreme volatility coupled by concerns that some governments could try to crack down on its usage, have generally scared away institutional investors and merchants.

But the price of Bitcoin has been on a tear over the last few weeks and it has become too big to ignore.

There is already a trend among enterprise-level tech companies that have moved toward cryptocurrencies. Similar rumors have surfaced about Google potentially accepting Bitcoin within its Google Store. PayPal, Stripe and other similar companies already accept this Bitcoin as a form of payment. Beyond that, Amazon users have been petitioning CEO Jeff Bezos to begin accepting cryptocurrency payments and there is speculation that we’ll soon see Amazon accept crypto for payments.

It’s difficult to know how many merchants actually accept Bitcoin. Coinbase has posted on their site, that over 47,000 merchants use them to integrate Bitcoin payments.

Also with initiatives like W3C’s Payment Request API, we will see more and more online merchants using a simple standard “in-browser API” to initiate payments from their checkout pages, streamlining the checkout process and making the experience consistent and faster for users.

With the Segwit2x hard fork coming in November,  we could see more big companies jumping on board. In the early years of Bitcoin, merchant adoption was limited to a few brave e-commerce stores, usually run by early-stage Bitcoin enthusiasts.

The arguments for online merchants to accept Bitcoin are very strong; lower fees compared to credit card payments, chargeback fraud is entirely eliminated, new customers can be reached in underbanked regions and a new, tech-savvy consumer base can be attracted. Also, as merchant adoption increases, demand for the currency will be more regular and stable, minimizing price volatility.

Massive change is not likely to happen overnight. In just eight years Bitcoin has become a legitimate, recognized global currency, not only with huge investment potential, but also with multiple potential benefits to e-commerce businesses.

OpinionSMEs Dismissed by the Banks, Beginning of the Era of P2P Finance

Jamie Dimon, JP Morgan’s CEO, famously said to his Wall Street pals: “Silicon Valley is coming to eat our lunch”. Banks are reacting to this is in different ways . Some are launching incubator programs, some are buying up stakes in fintech companies, while others are just ignoring eveything, hoping it will just go away.

But, one of core functions of banks is being completely disrupted. Peer-to-peer lending is leveraging new technology and regulation to attack the advantage that banks have over new market entrants, when it comes to lending. Consumers are increasingly willing to experiment with new providers. This is creating ideal conditions for new services to challenge one of the core profit-generating activities of banks.

Peer-to-peer lending platforms enable investors to lend to retail and commercial borrowers. As the banking middle-man is cut out, borrowers often get slightly lower rates, while savers get far improved headline rates, with the sites a profit by charging a fee for their service. Unlike banks, these platforms do not take deposits or lend money themselves. They don’t take any risk onto their balance sheets. They make money from fees and commissions received from borrowers and lenders.

P2P lending is one of the fastest growing areas of finance worldwide.

A report by Deloitte last year estimated that P2P in the UK will account for £35.5 billion, 6% of lending to individuals, small businesses and the retail buy-to-let market by 2025. It concluded that P2P is therefore not a “major threat” to banks.

P2P lending for SMEs is growing and expected to grow steadily. Research by Cambridge University shows that in 2015 the crowdfunding and peer-to-peer lending market grew by 92% throughout Europe, reaching a total trading volume of 5.4 billion Euros.

However, P2P lending in Southeast Asia is still in a nascent stage: less than 0.1% of all loans are originated through P2P lenders. Southeast Asia is the next big frontier, as it is the home to a huge population of 620 million people, with a combined GDP of $2.4 trillion in 2013.

But like anything else, peer-to-peer lending has divided opinion.

On one end, many praise it, because it offers solid returns and raise investment for businesses. The advertised rates of return on P2P lending are about 10-12% a year. But P2P lending also faces criticism, with many saying it’s a disaster waiting to happen. The industry is still in its infancy. While default rates are extremely low, around 1–2% industry average, there haven’t been many loan life-cycles in peer-to-peer lending’s 10 year existence.

Detractors highlight some of the risks for P2P lending:

  • Adequate development and communication of risk measures, especially the possibility of substantial increase of default in a major business downturn
  • The related problem of enforcement of contracts following loan default and ensuring maximum possible loan loss recovery
  • The need to deal with potential platform failures without losses to lenders
  • Potential liquidity risks, especially from involvement of institutional investors subject to ‘mark to market” valuations who are unable to absorb short-term losses
  • Fraud, cryptographic security and operational risks

Anyone considering such an investment, should understand there’s risk involved. With more entrants getting into the market, there’re fears that the market will get overheated, pushing down the pricing and quality of credit. In other words, the borrowers who take your money don’t pay as much interest as before and possibly have a bigger risk of failing.

The market is developing fast, with lots of new services popping up. Each platform works differently and has its own way of mitigating risk.

Should investors be worried? No!

Investor’s need to do their homework and assess risk, while the platform needs to present all the facts and measures to mitigate risk.

While P2P lending entails risks, it is extremely important for economies, because it helps SMEs, allowing them to innovate and become more competitive. Peer-to-peer lending is a growing industry and its here to stay. For now younger generations are more likely to invest in P2P because of the higher level of risk, but as the industry grows in size and diversifies even more, we will see older investors joining to benefit from the income generated by P2P loans.

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Ilias Louis Hatzis is a Blockchain entrepreneur who writes the Blockchain Bitcoin & Crypto (BBC) Weekly CXO Briefing each Monday.

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