Bitcoin Units – Part 2

The Bitcoin unit is probably one of the most overlooked subjects in the Bitcoin space. As with most things in Bitcoin, origin at best is unclear. In their July 1st blog post titled Breaking It Down: Bitcoin Units of Measurement, established that 10 satoshis can be expressed as 1 finney. My assumption is that this unit was named after the late Hal Finney. This was an introduction that surprisingly did not get much attention, which is why I’m choosing to shed some light on it.

I first wrote about this back in September 2013 in a blog post titled Bitcoin Units. My then explanation of Bitcoin units, for the most part, continues to be consistent with standard use (accept for the addition of finney). Back then, everything was referenced in either satohis (シ) or whole BTC’s (Ƀ). Then Coinbase solidified bits as a more realistic unit of measurement given where the BTC/USD exchange rate continued to hover at.

The breakdown

Taking’s recent analysis into consideration, I will provide an updated unit chart:

Unit name BTC value
Bitcoin (BTC) 1 BTC
Centibitcoin, Cent-Bitcoin, bitcent (cBTC) 0.01 BTC
Millibitcoin, Milli-Bitcoin, millibit, mbit (mBTC) 0.001 BTC
Microbitcoin, microbit, bit (μBTC) 0.000001 BTC
finney 0.0000001 BTC
satoshi 0.00000001 BTC

Although from time to time I’ll hear people express Bitcoin value in milibits, today the most popular units used are BTC and bits. Amounts expressed in satoshis are common more among the bitcoin development community where numbers and the calculations behind them warrant more precision. In general, the least common references are centibitcoin(cBTC) and finney, however this is always subject to change.

Setting the rules

There is no governing body (yet) that dictates what Bitcoin units should be. As of now, there have only been a handful of players that have possessed the necessary influence in setting the Bitcoin units agenda. Other than that, most of the Bitcoin community has been content with referencing value in whole BTC, divisible by 8 decimal places. Although it would be nice to have a somewhat uniform approach to labeling each descending Bitcoin unit, this approach goes against Bitcoin’s grain and is probably too early to implement if it were possible at all. The closest we have to come to any form of Bitcoin uniformity as a currency is Bitcoin’s ISO 4217 currency code: XBTC. ISO 4217 is a currency code standard set by the International Organization of Standardization.

Nothing is written in stone

If Bitcoin ever approaches a serious level of world-wide adoption either as a currency or a store of value, I imagine there would be hundreds of thousands of unit names that compliment the world’s political and linguistic diversity. In the end, the innovation on top of the blockchain will translate into world recognition of this publicly audited ledger. For instance, Americans do not officially use the metric system, but regularly share flights with European nationals, who DO use the metric system. However we still manage to figure out how much fuel is needed for a cross-Atlantic flight. We share the same air and natural resources even though we have different time zones, and it seems to work.

The issue of naming Bitcoin units is one that will work itself out naturally. While now seen as a relatively minor issue, unit names will require providing education for those who plan to conduct activity on this network. Right now, a “finney” might not be a realistic unit to use for everyday activity simply because it represents value worth less than a penny ($0.01 USD). But there may be a place for it in the future as the Bitcoin network increasingly becomes a reliable transaction layer for exchanging value of the internet.

A Closer Look at Transactions on the Blockchain

Given the ease with which we can send and receive bitcoin from our smartphones, it is easy to take for granted how the bitcoin network actually handles transactions. For most, including myself, it’s convenient to assume that Satoshi’s magical internet money teleports from one device to another, ignoring borders and the politics that justify them. On our digital wallets, we see the words “balance”, and track the amount of value we have access to in the form of a specific amount of “bitcoin.” But if bitcoins are not tangible, what does this amount really mean and how accurate is it?

The transaction

When a bitcoin transaction occurs, it is broadcasted to the bitcoin network and is validated through a process called mining (carried out by miners). The mining process is a rather complicated one, something we will save for another day.

When you look up a particular address on a blockchain explorer, the figure stated as the Final Balance does not represent an amount of bitcoin, because technically bitcoins do not exist. What this Final Balance figure represents is the collective amount of unspent transaction outputs (UTXO) – a record of previous transactions associated with that address, with a particular amount of outputs associated with each receiving transaction. When you want to send bitcoin to another address, your wallet application will gather all of these UTXOs and figure out which ones to use.

For example, let’s say you had a bitcoin balance of 6 BTC, which was the result of 3 separate payments you received from other people.

  • 1st  transaction – you received 2 BTC
  • 2nd transaction – you received 1  BTC
  • 3rd transaction – you received 3 BTC

Now let’s say you want to send 4 BTC to your sister, and because you have 6 BTC, you know that you have enough to cover the transaction. If you had one unspent transaction output of 4 BTC, your wallet application would be inclined to choose that output to sign away to your sister’s bitcoin address, but because this individual transaction amount does not exist, your wallet application will choose a combination of unspent outputs to satisfy the 4 BTC amount. In our example, the application would choose the outputs from the first transaction (2 BTC), and the third transaction (3 BTC). While the combination of the 2nd and 3rd transactions equals 4 BTC, this would not be enough to cover our intended transfer to our sister’s wallet for one simple reason: the transaction fee. With each transaction on the bitcoin network, we must pay a fee to compensate miners for accepting and verifying the transaction. In our case, let’s assume the transaction fee was 0.0001 BTC. Our wallet application would collect the bitcoin amount associated with the first and third transaction (collectively 5 BTC), send 4 BTC to our sister’s address, deduct 0.0001 BTC as a transaction fee, and return 0.9999 BTC back to our wallet address. Our new balance would be 1.9999 BTC. Transaction fees are contingent on a number of variables and conditions. At the time of this writing, transaction fees in general are increasing; in reality this fee would be somewhat higher.

Your outputs become my inputs

To get a basic understanding of what goes on in a bitcoin transaction, a great place to start is a focus on transaction inputs and outputs. Whenever you want to initiate a bitcoin transaction, your bitcoin wallet application is tasked with gathering up enough funds in your wallet to cover the transaction. Most would think that this involves a gathering of units of digital currency we call bitcoin, but as stated earlier, the wallet application is gathering outputs that have not yet been spent (unspent outputs). In many ways, Bitcoin can be seen as a ledger system where we can monitor our transaction activity in double-entry bookkeeping form.

Transaction inputs are importing bitcoin from outputs in order to transfer value to another address. After being sent to another address, these outputs will be referenced by other inputs for someone else’s future transactions. Think of transaction inputs as being the result of a previous transaction and the value you received from those previous transactions, where transaction outputs represent the value that is being signed away (sent) to another address.

Unspent transactions outputs (UTXO)

The balance in your wallet is appropriately referred to as the amount of UTXOs available to your address; this is the amount of value that has not been spent yet. UTXOs are what the bitcoin protocol recognizes as units of bitcoin, where we usually recognize such units as “BTC”, “mBTC”, or “bits.” In a previous post, I give a quick breakdown on Bitcoin units. In bitcoin there is no spending per se, but rather the power to sign a transaction in order to transfer value (unspent outputs) over to another bitcoin address. These transaction outputs are essentially assigning new ownership to the bitcoin by associating that value with a key. The private key is what allows for the signing of transactions, and without it you have no signing power (no access to your bitcoin).

The intricacies of bitcoin transactions enable the protocol to operate with a certain degree of autonomy. Some have argued that this autonomy allows for security and transparency while others highlight the inherent risks that can be found in a decentralized financial system.

I see transactions as being one of the most intriguing aspects of the bitcoin protocol. Because we are dealing with programmable money, it is possible to build applications that perform transactions at a certain future date under predefined conditions (i.e. smart contracts). The input-output chain-linking activity responsible for the movement of value on the blockchain is what makes this technology rather promising.

Bearer Assets on the Blockchain

Blockchain sans bitcoin has been a recent slogan among those advocating the potential benefits of “the blockchain” while trying to avoid the perceived Silk Road aroma of Bitcoin. Without going into great detail about this debate, and based on what has been delivered to the market thus far, I will say that I do not support the argument that private blockchains can offer the same benefits the bitcoin blockchain provides without the use of Bitcoin as an underlying token. So when I refer to “the blockchain”, you can assume that I am speaking of the Bitcoin blockchain. I use the term bearer instrument (or bearer asset) and not bearer security in order to avoid the assumption that my definition of a crypto bearer instrument satisfies the definition of a security found under the Uniform Securities Act and the U.S. Supreme Court case SEC vs. W. J. Howey Co.

Quite simply, bearer instruments are types of investments that exist without the official recording of the instruments’ owner. When it comes to bonds, we should compare bearer bonds to book entry bonds for a better understanding. With book entry bonds (mostly used today), ownership is documented and maintained by an official record. The owner of a book entry bond cannot trade his/her bond without passing title. In contrast, bearer bond owners can trade their bonds without having to worry about documented ownership because whomever maintains the physical bearer bond will have claim on future interest payments. There are also bearer shares that act in a similar manner. When it comes to bearer instruments, the term bearer indicates that an instrument is not centrally registered for the purposes of recording title and ownership. From the perspective of Bitcoin, the exchange of crypto bearer instruments would be as simple as scanning a QR code and waiting for six confirmations.

A crypto bearer instrument, by itself, would reflect the decentralized nature of the Bitcoin network and wouldn’t be much different than any other type of bearer investment when it comes to the tracking of ownership. However, if such assets were traded on the decentralized Bitcoin network, the issuance of the asset would be far from decentralized. You can expect that a company, project, municipality, or fundraiser that issues a bearer asset on the blockchain will be keeping tabs not on those who have the asset in their possession at any given time, but of the very existence of those securities. Unfortunately, such book-keeping would come short of meeting the demands of the regulatory oversight investment professionals and institutions face today.

I had recently come across an email from a group claiming to be Pantera Capital (it was not actually Pantera Capital; the email turned out to be a hoax). The email contained three qr codes with a description for each. Essentially the email sender stated that by sending bitcoin to any of those QR codes, one would be investing in a fund that would yield a certain return over a particular time period. No personal information would be required! Just scan the qr code, select a Bitcoin amount, press send, and then you’re done. For a few seconds, I thought I had just witnessed Bitcoin’s new killer app. And then those six letters popped into my head: AML/KYC. But for those few seconds, I encountered a completely different method of investing than what I had been taught at business school.

One great benefit of having this as a potential investment option is the ease of use it brings to the investor. Recordkeeping would be seamless with minimal effort. The benefits attached to the crypto bearer asset (i.e. interest, public recognition, dividends, free t-shirts, etc.) would always be attached to the investment, assuming that the asset benefits from the network effect of the blockchain and the investor has sole possession of the private keys. I see no reason why governments could not effectively build tax collecting applications on top of this publicly audited ledger. Crypto bearer assets could also be a boon for cross-border, grassroots political fundraising.

At this time there seems to be little room for this kind of financial innovation when it comes to Dodd-Frank legislation. The record-collection requirements being placed on financial institutions seems to becoming increasing rigorous, and this rigor doesn’t appear to be tapering off any time soon. The government expects you to (1) know what you’re selling/issuing, (2) pay your annual compliance dues, but more importantly, (3) who you are selling to. I am a firm believer in the power of a vote here in the United States, and government policies will more often than not reflect the people’s general attitude and position on a matter. This leads me to believe that most people are not yet comfortable treating their money like email.

A world where money moves at email speed will require us to review our approach to the transfer of value and the degree to which this value can represent a voice (i.e. money = speech). Bitcoin, as a form of value, exceeds the definition of money. In order to benefit from the technological innovation it seems to provide, I think it would be ideal to test the crypto bearer asset idea in a small and relatively controlled environment. This might help uncover regulatory bugs within the system. Looking at the speed at which information travels throughout the world today, there’s an increasing need of having to attach value to that information.

The internal combustion engine does not come with wheels. How on Earth could it compete with the horse and buggy?

The Achilles’ Heel(s) of Crypto P2P Lending

Peer-to-peer lending (P2PL) comprises of the lending activities between unrelated parties (peers) without the need for third party intermediaries (i.e. financial institutions). The recent advent of bitcoin within the P2PL concept has given rise to numerous crypto-lending platforms striving to establish their presence as first movers in this uncharted territory.

In a world where it is becoming increasingly difficult for the non-HNW individual to obtain a bank loan, P2P lending has been proposed as a possible alternative to the traditional financing for the average Joe that is not in the form of a credit card, friend, or family member. However, this is not to say that P2P is ready to replace credit cards. Crypto P2PL allows investing by those seeking yield with relatively little capital. On top of such low barriers to investment entry, crypto P2P lending platforms have provided automation services in the form of auto-investing, where returns are reinvested into new loans according to the investor’s objectives and pre-defined parameters.

As exciting and forward-thinking a concept P2P crypto lending may be, it is not quite ready to take on the fixed income investment industry and claim legitimacy in the eyes of the investing world. To begin a list of reasons why I find this to be the case, I will recall my experience when I visited a crypto P2P lending platform’s website (whose name I will not mention). As I was browsing loan listings, I found some of the prospective borrowers’ usernames to be somewhat disconcerting. The level of childishness and immaturity behind these screen names would scare off any rational investor. A point I think many crypto-anarchists seem to disregard is that investing has more to do with love and trust and less to do with 1s and 0s. For crypto P2PL to gain adoption as a legitimate avenue for fundraising and investing activities, these platforms will have to resemble more of a secure marketplace with with a stellar reputation, and less of a Magic: The Gathering online chat room.

Another hindrance to the prosperity of crypto P2PL has to do with research analysis. Because of the relative youth of this new technology, there is exists none of the guidance retail investors often look to when judging the merits of an investment. This absence of analytical structure would prevent any investment professional from performing the quality of investment research expected of them. It is quite difficult to find unbiased, quality analysis of crypto P2P loan listings as most of the statistics out there are prepared by the P2P lending platforms themselves. Independent, research-oriented coverage of P2P loans is something that will be needed for the space to thrive. When it comes to risk, there are a multitude of factors that increase the risk of taking on a crypto P2P loan to the point where its utilization as a fixed income investment cannot be justified. The exchange rate fluctuation of the loan’s underlying cryptocurrency alone is enough to make any investor sweat (although there are options to denominate such crypto loans in USD or other fiat currencies).

As I continued my browsing through this website, I realized that most borrowers were seeking to borrow money to fund their crypto mining operations. And to my amazement, many of these projects were getting funded! One does not have to be an investment professional to understand the risk involved with this type of loan. However, a strong possibility for this saturation of bitcoin miners on this platform could be that these were early adopters of the technology who are deeply involved in crypto mining. I also got the sense that the platform’s creators were trying to inject a social aspect to the P2P lending experience. One can follow different individuals and keep track of their activities on the platform via the user dashboard, similar to tweets or Facebook updates. While this splash of social media may one day help serve as a tool in developing a reputation system used as a guide for choosing loans, applying a social media approach to P2P lending activities will continue to be a problem so long as there exists the ability to create and use a fake profile that will hide one’s true identity. When it comes to serious investing involving pensions, IRAs, hedge funds, and individual brokerage accounts, the reality is that most investors (and borrowers) will choose a more serious approach to investing without demanding to know the particulars of the specific borrower’s situation.

Right now we see a lack of recourse for investors on these platforms when it comes to late payments and loan defaults. The screening process platform operators execute for adding borrowers into the system continues to be flawed as one can anonymously fake an identity with “good enough” documentation. Through these weak points, a scammer can skip out on their loan without much response from the platform operators as the investor will ultimately be responsible for finding out a borrower’s real identity and pursuing legal action. This is too time consuming and costly, especially if multiple jurisdictions are involved. To help curtail these problems, I would like to see smart contracts one day play a role in the enforcement of loan provisions in the decentralized environment specific to crypto P2PL. A smart contract is a protocol that will execute terms of a contract based on pre-defined parameters. As it stands, loan defaults will usually result in platform operators directing investors toward a particular arbitration service, washing their hands of the matter. The efforts of developers and entrepreneurs in this space could be put to better use in focusing on investor protection and loan securitization.

There will always be cheats, robbers and crooks. And it is naive to believe that bitcoin, P2PL, smart contracts, or blockchain technology altogether, will eliminate this aspect of human nature. However, instead over-exertion directed towards achieving an unrealistic utopia, the cryptocurrency community should work on trying to solve everyday problems for everyday people. Crypto P2P lending platforms should begin to create a dialogue with legacy system industry professionals to learn more about the nature of lending and help come up with answers to the lingering challenges that have plagued the art of money lending.

Despite all of these criticisms, I do see a genuine effort among platform operators toward making the lending process as fair and equitable as they possibly can. I applaud the creation of an open system where people are able to secure financing regardless of race, religion, credit history, criminal history, socio-economics or education. It is understandably difficult for centralized management teams to monitor blockchain transactions of lightning speed and near infinite complexity being made from all parts of the world 24/7. The hands-off approach of the platform operator only works if there is a replacement of the hands.

Understanding Bitcoin Transactions

BTCjam Blog

Seven months ago I joined BTCJam as Lead Backend Engineer, and I must confess at the time my knowledge about bitcoin was very limited. All I knew was that it was a digital money people use to buy funny stuff, right?

For the past few months I have been reading and learning a lot, and although I am no expert yet, many people including my friends consider me to be a “bitcoin master.” Some of the question they always ask me are, “‘what are all that bitcoin transactions we see on’ ‘Why do I see a lot of addresses on the left side (inputs) and several others on the right side (outputs)?’ ‘Why is there a seemingly random transfer to a weird address along with the amount that I actually transferred?’ and  ‘What about the transactions where I see hundreds of addresses on the right side?'”

If you ever thought of these…

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Internet In 1994 May Be Similar To Bitcoin In 2013

I came across this video earlier today and thought that there might be something to be said about the confusion over the internet in 1994 (as demonstrated in this YouTube clip) and the similarities we encounter when enduring a present-day public dialogue over bitcoin and other virtual currencies. The initial confusion is met with immediate skepticism before complete dismissal of the new concept. Of course hindsight is 20/20, but everyone of those anchors at NBC are most likely embarrassed by this video and probably wish the clip was destroyed forever. Does 1994 and 2013 illustrate people’s inherent unwillingness to embrace change?