Thursday, January 10, 2019

#114: A pivotal blockchain hack, and the way of the Winklevosses

To catch a blockchain hacker: Coinbase shocked the crypto world this week with an announcement that it had "detected" a so-called 51% attack on the Ethereum Classic (ETC) blockchain network. The exchange said it had "paused interactions" with the blockchain after the attack, in which over a million dollars worth of cryptocurrency was stolen. It's the latest reminder that, contrary to widespread perception, blockchains are hackable. This story is far from over, however: a security firm has located the breadcrumbs the attackers left on the blockchain, and it may be possible to track them down.

The mathematical rules governing blockchains make it very difficult to manipulate their transaction records. But in the case of "proof-of-work" systems like Bitcoin, Ethereum, and Ethereum Classic, if one miner can gain control of the majority of the network's computing power, they can defraud other users by paying them in cryptocurrency before creating a new version of the blockchain in which the payment never happens. Such a "double spend" attack is what Coinbase says happened in this case. (see "How secure is blockchain, really?")

It is much easier and less costly to attack smaller coin networks, and Ethereum Classic is significantly smaller than Bitcoin and Ethereum in terms of computing power. As we learn more about the attack, Coinbase and other exchanges will face some big questions about the risk of future attacks on the other, similarly-sized coins that they list on their platforms. For now, Chinese blockchain security firm SlowMist has presented evidence that it says not only corroborates Coinbase's diagnosis of a 51% attack but also makes it possible to track down the attacker—provided "relevant exchanges are willing to assist."

The Winklevoss Doctrine. Crypto Twitter has been in a tizzy of late over a new ad campaign that Cameron and Tyler Winklevoss have unveiled touting Gemini, their popular cryptocurrency exchange. The reason the ads—which have graced New York City taxis, phone booths, subway cars, and a full page in the New York Times—are controversial is that they celebrate regulation. They call Gemini "the regulated cryptocurrency exchange," and say things like "Crypto Needs Rules," "Money Has a Future," and "Crypto Without Chaos."

Critics haven't taken kindly towards this perceived cozying up to financial regulators, many of whom are perceived as being unfriendly to cryptocurrency innovation. The approach is also seen as running counter to the ethos of crypto, which celebrates mathematical rules instead of those created by bureaucrats. But why was anyone surprised? The Winklevoss twins have been trumpeting this message from the get-go. The ads just imply they still think it's working.

Upon announcing the launch of Gemini in 2014, Cameron Winklevoss called it a "next-generation" exchange. "What do we mean by 'next-generation'? We mean a fully-regulated, fully-compliant, New York-based Bitcoin exchange for both individuals and institutions alike." The following year, when Gemini got approved for a BitLicense, the New York requirement that many crypto enthusiasts see as governmental overreach, the twins told Fortune that their approach was to "ask permission rather than ask forgiveness." Last year, they set out to create a self-regulatory organization aimed at taming the Wild West-style crypto exchange scene, and launched a "regulated stablecoin" with the official blessing of the New York Department of Financial Services.

The Winklevosses long ago chose to work with the old guard instead of circumventing it, and to make Gemini's brand inherently (and sometimes loudly) pro-regulation. Political ideology aside, the strategy seems to make particularly good sense in 2019. Regulators are zeroing in, and have already exposed the exchange scene as plagued by poor customer protection practices and lacking in tools to police fraud. This has likely contributed to a negative perception that has hindered mainstream adoption. Cryptocurrency users and potential users are looking for platforms that appear trustworthy, and many still trust traditional institutions. That creates a niche that Gemini is apparently quite happy to fill. So, sure, we can all question whether the expensive ad campaign was worthwhile. But get used to the Winklevoss doctrine.

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Loose Change

Fill your pockets with these newsy tidbits.

EU financial regulators: "blah blah...probably need more cryoto rules… blah blah."

(Reuters)
Digital currency pioneer Nick Szabo suggests that central banks may soon start to invest in cryptocurrency to supplement their gold reserves. (Finance Magnates)

Some counties in Nevada are using public blockchains to store digital birth and marriage certificates. (AP)

Crypto exchange ShapeShift has laid off 37 employees, a third of its staff, blaming a rough 2018 and "this latest bear market cycle." (Medium)

Coinbase might soon be focusing less on Wall Street and more on Silicon Valley. (The Block)

The Ethereum Foundation has awarded a $5 million grant to Parity Technologies, one of the startups building "Ethereum 2.0." (CoinDesk)

The Money Quote

"The bubble has already started to collapse and maybe we should just see how far this collapse goes, and what is left when we've reached a new kind of equilibrium. I think we will come back a few years from now and say how could we ever have gotten into this situation where we believed this kind of a fairy-tale story."

—Ardo Hansson, a governor of Estonia's central bank and member of the European Central Bank's governing council, speaking about cryptocurrencies at a conference in Latvia. It's safe to say the views of this technology by central bankers are mixed. (Bloomberg)

Blockchain—You've heard the term, now understand the impact.

Business of Blockchain
May 2, MIT Media Lab
Cambridge, MA

Confirmed and Reported 🔎

January 10, 2019

New Evidence Emerges Confirming 51% Attack on Ethereum Classic

Up in the air

Earlier this week rumors spread that Ethereum Classic had fallen victim to a 51% attack - an event in which the blockchain's history can get rewritten.

Developers and exchanges were reluctant to confirm if the rumor was true and a handful of them stood aside before was more information surfaced.

Now, Gate.io, an exchange affected by the hack, has come forward with an analysis that explains what happened on its platform.

Down 40k ETC

In the span of 4 hours on January 7th, the hacker was able to transfer over $250,000 worth of ETC between the Gate.io platform and his addresses.

Though each transaction was actually flagged by the exchange's security system, the transactions were allowed to go through because they were confirmed by the Ethereum Classic blockchain

I'm total, this accounted for a loss of over 40,000 Ethereum Classic for the platform, however, they will be fully refunding customers affected by the attack.

Confirmed by peers

Today, another published report by the SlowMist team confirmed the same findings.

Meanwhile, Ethereum Classic developers have released a new statement that summarizes new priorities after the attack including:

Conducting a full analysis of the event that took place
*Not* reorganizing the chain to reverse the attack
Creating an alert system for future attacks

Still, however, the development team has avoided the use of the term 51% attack even though it may be clear that's the case.

EXCHANGE

ShapeShift Announces Layoffs, Blames Market Conditions

Trimming staff

Cryptocurrency exchange ShapeShift recently announced that it has laid off 37 of its employees.

The company cites the weak market as the reason it must trim its staff.

ShapeShift's CEO, Erik Voorhees, describes the action as "a deep and painful reduction, mirrored across many crypto companies in this latest bear market cycle."

Everyone is downsizing

Layoffs in the crypto space are not quarantined to ShapeShift. Other companies in the industry are making similar layoffs during this bear market.

Most notably, Ethereum incubator Consensys and mining hardware manufacturer Bitmain downsized significantly in the past few weeks.

CRIME

Ransom Demand in Monero After Kidnapping of Wife of Norwegian Billionaire

Anne-Elisabeth Falkevik Hagen, the wife of the Norwegian billionaire Tom Hagen, was recently kidnapped.

The kidnappers detaining Hagen are demanding that a ransom of 9 million euros (~$10.3 million) be paid in Monero.

The amount demanded by the kidnappers is more than 1% of the total supply of Monero.

To no surprise, the kindappers chose Monero for its anonymity. If the ransom is to be paid, authorities would have no way of tracking the funds in hopes to find the kidnappers.

There is no indication if Hagen's husband intends to pay the ransom, but hopefully authorities are able to crack the case before that is necessary.

SPECIAL PROJECT

In celebration of Bitcoin's 10th birthday...

After months of brainstorming, planning and designing, we are so excited to launch something special from a fruitful collaboration between Unbankd and Abra. We both believe education is an extremely important piece to the crypto puzzle. So, to celebrate the 10th anniversary of the launch of Bitcoin's network, we created an illustrated book that breaks Bitcoin down in three lucid parts:

🕵 The Beginning: Get to know the foundation that was laid up until the launch of Bitcoin!

🎢 The Rise: Ride through the ups and downs of the past decade on the Bitcoin rollercoaster.

🔮 The Future: Envision a global economy with true economic freedom made possible by Bitcoin.

We hope you love reading this as much as we loved making it! After you're done enjoying it, send it to those relatives that were asking you about Bitcoin over the holidays. Or maybe those friends who don't quite get why you talk about crypto all the time. Who knows, maybe this will end up as a book on your coffee table one day.

CHECK IT OUT 🚀

BITS