Off-chain Transactions

[acoindr]

I want to get dialogue going on off-chain transactions. I think I have helpful info on solving the block size issue which doesn't necessarily require off-chain transactions, but I want to discuss the concept.

I've said off-chain transactions should exist with Bitcoin. Primarily I had scalability in mind, but also think of the progression of money. People once traded physical gold. People then traded claim checks for the gold instead since that was more effective (easier to carry, not subject to shaving, etc.). Today we use credit cards, PayPal and other methods to trade digital claims on paper dollars since that's even more effective than trading the paper.

Why couldn't the same happen with Bitcoin? Why can't people trade digital claims on bitcoins instead of the actual bitcoins?

Member retep posted:
   
Fidelity-bonded banks: decentralized, auditable, private, off-chain payments.

While I'm still considering the viability of that model I've also had a far simpler transfer method in mind which I call Bitcoin Clearing Houses (BCH).

A BCH starts with an entity that can garner general trust, say MtGox, Blockchain.info, the Bitcoin Foundation, etc. The BCH sets up a server with website interface allowing users to register with email addresses and deposit or withdraw bitcoins. Those transfers take place on-chain. However, since the BCH is widely visible many other users and merchants could also have accounts there. Then coin transfers happen within the BCH, or between multiple ones. A BCH also provides an API so that eWallets like WalletBit or MtGox can pass on transfers from their members without the members having accounts at the BCH.

Using a BCH has obvious advantages. Transfer is instant, no waiting for confirmations. Transfer is free or very low cost (profit might come from ads or features). Finally, of course, is scalability is helped greatly. (people could also send to email addresses eschewing wallet addresses)

While I think this is a strong case people raised concerns that this tends to centralize things and provide a target for authorities, noting Bitcoin exchanges are probably the biggest weak point. However, I don't think that's a concern. A BCH centralizes things no more than exchanges do currently, that is, they can come and go anytime and anywhere. A BCH has even more flexibility because all info is digital whereas Bitcoin exchanges have to merge in part with the traditional regulated system. Also, a BCH has no ability to create bitcoins or prevent their transfer since users could revert to the old system.

The largest concern I see is security of coins held or possibly manipulation or dishonesty with claims of coins backing transfers. However, that can be mitigated by users storing minimum balances (usual amounts for transfer) and withdrawing their balance periodically, and maybe even using different BCHs.

Thoughts?

[Zeilap]

I want to get dialogue going on off-chain transactions. I think I have helpful info on solving the block size issue which doesn't necessarily require off-chain transactions, but I want to discuss the concept.

I've said off-chain transactions should exist with Bitcoin. Primarily I had scalability in mind, but also think of the progression of money. People once traded physical gold. People then traded claim checks for the gold instead since that was more effective (easier to carry, not subject to shaving, etc.). Today we use credit cards, PayPal and other methods to trade digital claims on paper dollars since that's even more effective than trading the paper.

Why couldn't the same happen with Bitcoin? Why can't people trade digital claims on bitcoins instead of the actual bitcoins?

Member retep posted:
   
Fidelity-bonded banks: decentralized, auditable, private, off-chain payments.

While I'm still considering the viability of that model I've also had a far simpler transfer method in mind which I call Bitcoin Clearing Houses (BCH).

A BCH starts with an entity that can garner general trust, say MtGox, Blockchain.info, the Bitcoin Foundation, etc. The BCH sets up a server with website interface allowing users to register with email addresses and deposit or withdraw bitcoins. Those transfers take place on-chain. However, since the BCH is widely visible many other users and merchants could also have accounts there. Then coin transfers happen within the BCH, or between multiple ones. A BCH also provides an API so that eWallets like WalletBit or MtGox can pass on transfers from their members without the members having accounts at the BCH.

Using a BCH has obvious advantages. Transfer is instant, no waiting for confirmations. Transfer is free or very low cost (profit might come from ads or features). Finally, of course, is scalability is helped greatly. (people could also send to email addresses eschewing wallet addresses)

While I think this is a strong case people raised concerns that this tends to centralize things and provide a target for authorities, noting Bitcoin exchanges are probably the biggest weak point. However, I don't think that's a concern. A BCH centralizes things no more than exchanges do currently, that is, they can come and go anytime and anywhere. A BCH has even more flexibility because all info is digital whereas Bitcoin exchanges have to merge in part with the traditional regulated system. Also, a BCH has no ability to create bitcoins or prevent their transfer since users could revert to the old system.

The largest concern I see is security of coins held or possibly manipulation or dishonesty with claims of coins backing transfers. However, that can be mitigated by users storing minimum balances (usual amounts for transfer) and withdrawing their balance periodically, and maybe even using different BCHs.

Thoughts?

By creating centralized points of trust, you provide profitable points to attack, either by people who want to steal the bitcoins, or governments or companies like PayPal who might want to damage Bitcoin. Compare to peer-to-peer file sharing, the centralized ones were attacked successfully, the decentralized ones are nearly impossible to stop.

The reason Peter's proposal was more complicated was to reduce the profitability of an attack on any of the Chaum banks - the worst that can happen is that the account holders would not have access to their funds for some period of time, but they are *guaranteed* to get it back.

Having said that, I expect we'll see what you propose in the future when/if Bitcoin becomes very popular, because the majority of people prefer simplicity over security/privacy, and the majority will have come to Bitcoin because it is popular rather than because of any of its inherent advantages.

[odolvlobo]

Off-chain transactions already exist. Places where you deposit bitcoins (such as BTC-TC) do transactions internally without going through the block chain. The block chain is involved only when you deposit or withdraw.

Bitcoin-based credit cards will do internal transfers without going through the blockchain. It is certainly possible that banks (if they ever deal with bitcoins) might set up a separate clearing house for inter-bank transfers.

[phatsphere]

there are mtgox and bitstamp redeemable codes ... probably also others. please look into that …

[acoindr]

By creating centralized points of trust, you provide profitable points to attack, ...

That's no different from MtGox now. MtGox and other exchanges are profitable points to attack, which is why they have been. However, that doesn't stop exchanges from continuing, with lessons learned and better security.

... either by people who want to steal the bitcoins, or governments or companies like PayPal who might want to damage Bitcoin. Compare to peer-to-peer file sharing, the centralized ones were attacked successfully, the decentralized ones are nearly impossible to stop.

Note that adding BCH's on top of the network doesn't replace the network. The core network and coin options remain, so things are still decentralized and impossible to stop (without shutting down the Internet).

The reason Peter's proposal was more complicated was to reduce the profitability of an attack on any of the Chaum banks - the worst that can happen is that the account holders would not have access to their funds for some period of time, but they are *guaranteed* to get it back.

Having said that, I expect we'll see what you propose in the future when/if Bitcoin becomes very popular, because the majority of people prefer simplicity over security/privacy, and the majority will have come to Bitcoin because it is popular rather than because of any of its inherent advantages.

I too expect we'll see something similar to what I propose in the future. I think the advantages are too great not to. This thread is to see if we should be looking at setting such things up sooner than later, in light of the block size issue, and in order to determine the feasibility.

Off-chain transactions already exist. Places where you deposit bitcoins (such as BTC-TC) do transactions internally without going through the block chain. The block chain is involved only when you deposit or withdraw.

Correct. I agree totally. BTC-e is a great example of users exchanging crypto-currencies amongst each other without using the block chain. I believe that should be expanded.

Bitcoin-based credit cards will do internal transfers without going through the blockchain. It is certainly possible that banks (if they ever deal with bitcoins) might set up a separate clearing house for inter-bank transfers.

I agree.

there are mtgox and bitstamp redeemable codes ... probably also others. please look into that …

Yes, I agree. In fact I referred to that in response to someone's reply when I mentioned clearing houses:

...
A rudimentary form of this already exists. See https://en.bitcoin.it/wiki/Green_address

Mt.Gox provides green addresses and a few merchants recognize them (see bottom of the above link). Mt.Gox also conducts an estimated 80% of all bitcoin currency exchange. It probably holds sizable coin storage for the community too.

Mt.Gox could already act as a Bitcoin Clearing House, in other words. That doesn't mean Bitcoin is centralized.

[Zeilap]

By creating centralized points of trust, you provide profitable points to attack, ...

That's no different from MtGox now. MtGox and other exchanges are profitable points to attack, which is why they have been. However, that doesn't stop exchanges from continuing, with lessons learned and better security.

... either by people who want to steal the bitcoins, or governments or companies like PayPal who might want to damage Bitcoin. Compare to peer-to-peer file sharing, the centralized ones were attacked successfully, the decentralized ones are nearly impossible to stop.

Note that adding BCH's on top of the network doesn't replace the network. The core network and coin options remain, so things are still decentralized and impossible to stop (without shutting down the Internet).

When I say attack, I don't just mean hacking, in fact, I see hacking is the smallest problem. Undermining people's trust is a much better attack. If a large number of people lose a significant amount of fiat and/or bitcoin, then it still looks bad for Bitcoin from an outsider point of view, even if the cause was nothing to do with the Bitcoin network.

For instance, it would be easy to set up a system like you suggest, get as many people as you can to deposit, and then delete your private keys so that the funds are impossible to retrieve, and claim you got hacked or some other story. Or, for added effect, delete the keys and tell everyone that's exactly what you've done (assuming no legal ramifications) just to add insult to injury.

If the Japanese government decided that MtGox was doing something it didn't like, like enabling money laundering, it could force MtGox to cease trading and seize all of the fiat and servers.
Anyone with an account there would potentially lose everything in their account, pending investigation.
I don't think that people would shrug it off and move to another exchange - they'd seriously consider quitting Bitcoin altogether if they lose significant money or have to fight accusations of money laundering.

[tvbcof]

...

If the Japanese government decided that MtGox was doing something it didn't like, like enabling money laundering, it could force MtGox to cease trading

Mt Gox complies with AML which makes them greatly valuable to the Japanese government and other governments with whom they cooperate.  Of course Mt. Gox is used for money laundering to some extent which is part of what gives it value because, being something of a choke-point in the Bitcoin ecosystem, Mt. Gox vastly more useful alive than dead.  The minute Mt. Gox stops playing ball they will be shut down.  Of this I have little doubt.

and seize all of the fiat and servers.
Anyone with an account there would potentially lose everything in their account, pending investigation.
I don't think that people would shrug it off and move to another exchange - they'd seriously consider quitting Bitcoin altogether if they lose significant money or have to fight accusations of money laundering.

I never kept anything on any exchange that I could not afford to lose.  Doing otherwise would be utterly stupid in my opinion.  It was quite easy to move the bulk of my BTC assets into deep storage, and I don't see that changing even at a low processing rate and irrespective of what happens with fees.

If simple and lazy people abandon Bitcoin because they get ripped off (as a result of said deficiencies) I say goodbye and good riddance.  In a lot of ways such people are useless baggage which limits the potential of the solution.  I may feel that way in part because I personally have no plans to try to exploit them though.

Edit: word fix.

[MoonShadow]

While I agree with the perspective of the OP, the greater gain would be to develop some kind of standard overlay network, across which many smaller BCH's, wallet services, exchanges, etc could interact off of the bitcoin network; and periodicly settle up upon the main blockchain.  I don't really know how to do this, but I imagine it would work something like how Ripple is intended to work, so that for any given BCH, the ownership only needs to prove identity and credit-worthiness to however many of it's peers as may be required, and not the entire p2p network at large.  This, unto itself, would limit centralization of the greater bitcoin economy by providing a standardized means that any one person, or group of people, with the right kinds of resources could set up such a BCH for their own membership.  For example, vendors on SilkRoad could buy something by providing their BCH crypto-ID, which could be something as simple as a copy of a specially chosen bitcoin address (probably one attached to their internal account at SilkRoad), which has also been digitially signed by SilkRoad's BCH crypto-ID.  IF the vendor could scan such a QR code, submit that data to their own BCH server, and then that server be able to determine 1) if both the ID's were real 2) the unnamed BCH (silkroad) has the ripple-credit to back up this transaction and 3) if there are any unresolved disputes between this address and any others on the BCH network. 

If we can do this, then the rest will follow.

[organofcorti]

While I agree with the perspective of the OP, the greater gain would be to develop some kind of standard overlay network, across which many smaller BCH's, wallet services, exchanges, etc could interact off of the bitcoin network; and periodicly settle up upon the main blockchain.

This sounds like an interesting idea.

I started to wonder if daughter alt chains (specifically made for the task) could provide the off network transactions, with the main bitcoin network remaining only to periodically combine the last n txs from a daughter chain into blocks. This way a client would only need to keep a copy of the chain to which they were subscribed. Then I realised that each daughter chain would be less secure than the main network, and since this is not something of which I have an indepth understanding, there will probably be other reasons this can't be done.

So maybe alt chains (if only the term "alt chain" didn't have the connotations it unfortunately has). If the block size problem becomes an issue for miners or users, alt chains like litecoin may see greater use. Or maybe geographically local alt chains that are otherwise identical to bitcoin?

[MoonShadow]

While I agree with the perspective of the OP, the greater gain would be to develop some kind of standard overlay network, across which many smaller BCH's, wallet services, exchanges, etc could interact off of the bitcoin network; and periodicly settle up upon the main blockchain.

This sounds like an interesting idea.

I started to wonder if daughter alt chains (specifically made for the task) could provide the off network transactions, with the main bitcoin network remaining only to periodically combine the last n txs from a daughter chain into blocks. This way a client would only need to keep a copy of the chain to which they were subscribed. Then I realised that each daughter chain would be less secure than the main network, and since this is not something of which I have an indepth understanding, there will probably be other reasons this can't be done.

So maybe alt chains (if only the term "alt chain" didn't have the connotations it unfortunately has). If the block size problem becomes an issue for miners or users, alt chains like litecoin may see greater use. Or maybe geographically local alt chains that are otherwise identical to bitcoin?

I hope not.  Part of the benefit of bitcoin is the network effect, which is damaged, not improved, by the growth of alt-coins.  The idea that I just described still uses bitcoins as it's underlying asset.

[Zeilap]

If simple and lazy people abandon Bitcoin because they get ripped off (as a result of said deficiencies) I say goodbye and good riddance.  In a lot of ways such people are useless baggage which limits the potential of the solution.  I may feel that way in part because I personally have no plans to try to exploit them though.

Here here - currencies are so much more useful when fewer people use them. 

[tvbcof]

If simple and lazy people abandon Bitcoin because they get ripped off (as a result of said deficiencies) I say goodbye and good riddance.  In a lot of ways such people are useless baggage which limits the potential of the solution.  I may feel that way in part because I personally have no plans to try to exploit them though.

Here here - currencies are so much more useful when fewer people use them. 

If by 'useful' one means 'stable', I would certainly say that Bitcoin is.

I've got no use for a currency which is going to be ripped apart and subverted due to some nebulous and wistful hopes of destroying the most powerful entities that the earth has ever know (our current banking institutions) and/or being able to cheating on one's taxes.

[Monster Tent]

One could say LTC is a giant off chain transaction ledger.

Having multiple chains makes money laundering a lot easier 

[markm]

Litecoin also has four one-megabyte blocks per ten minutes, doesn't it?

So already offers four times as much transaction-space as bitcoin?

I am also not convinced that "one world currency" constitutes "decentralisation" of the world's financial systems.

Possibly it is better to be able to move elsewhere each time the powers that be grab control of some huge majority of the money in any particular system, maybe even go for agility where they are constantly on a treadmill trying to grab a majority of more and more and more new systems until maybe in some distant era they will realise no matter how much they want to control everyone, some people will (one maybe hopes?) find some way to retain some freedom despite them.

-MarkM-

[marcus_of_augustus]

Is anybody working on a re-incarnation of Blind-bitcoins or anything similar?

I thought that had excellent potential for solving parts of the Off-Chain transaction problem.

[giszmo]

I read the OP and BCH sounds like hosted wallet to me. The hosted wallet used by the reddit bot allows people to send bitcoin off the chain. If now gmail also had such a bot and the people running these bots were the same or agreed on an API, you could send from a@reddit to b@gmail off the block chain and in case these are two entities, they re-balance with one transaction per day or week.

Sure, this can and will be done (I programmed a facebook wallet that allowed you to accept it as a facebook app and then you could charge your balance via the block chain and send to other facebookers off the block chain. Simple didn't go life for lack of design and fear of getting hacked).

[acoindr]

When I say attack, I don't just mean hacking, in fact, I see hacking is the smallest problem. Undermining people's trust is a much better attack. If a large number of people lose a significant amount of fiat and/or bitcoin, then it still looks bad for Bitcoin from an outsider point of view, even if the cause was nothing to do with the Bitcoin network.

For instance, it would be easy to set up a system like you suggest, get as many people as you can to deposit, and then delete your private keys so that the funds are impossible to retrieve, and claim you got hacked or some other story. Or, for added effect, delete the keys and tell everyone that's exactly what you've done (assuming no legal ramifications) just to add insult to injury.

If the Japanese government decided that MtGox was doing something it didn't like, like enabling money laundering, it could force MtGox to cease trading and seize all of the fiat and servers.
Anyone with an account there would potentially lose everything in their account, pending investigation.
I don't think that people would shrug it off and move to another exchange - they'd seriously consider quitting Bitcoin altogether if they lose significant money or have to fight accusations of money laundering.

This doesn't sound like you are specifically talking about clearing houses, but rather questioning the stability of the Bitcoin concept overall due to part of the system using exchanges like MtGox.

The answer to that is the same as it has always been. One exchange (or incident), or what happens with it, doesn't equal Bitcoin in its entirety. MtGox and other exchanges have been hacked in the past. People have lost money to hacks, scams, and mistakes. Still Bitcoin continues. However, people (hopefully) learn and take precautions to guard coins better, which I think has happened.

While I agree with the perspective of the OP, the greater gain would be to develop some kind of standard overlay network, across which many smaller BCH's, wallet services, exchanges, etc could interact off of the bitcoin network; and periodicly settle up upon the main blockchain.  ...

I like this direction too although I'm not sure how to implement it. It sounds like decentralized accounting which I think would be great, but it seems to me more practical to set up private controlled servers.

While I agree with the perspective of the OP, the greater gain would be to develop some kind of standard overlay network, across which many smaller BCH's, wallet services, exchanges, etc could interact off of the bitcoin network; and periodicly settle up upon the main blockchain.

This sounds like an interesting idea.

I started to wonder if daughter alt chains (specifically made for the task) could provide the off network transactions, with the main bitcoin network remaining only to periodically combine the last n txs from a daughter chain into blocks. This way a client would only need to keep a copy of the chain to which they were subscribed. Then I realised that each daughter chain would be less secure than the main network, and since this is not something of which I have an indepth understanding, there will probably be other reasons this can't be done.

Right, I agree that probably wouldn't work. Block chains are not ideal for transactions which is the subject of this thread. Using a block chain requires waiting for confirmations, and then the other considerations of dealing with security by adequate hash rate, etc.

So maybe alt chains (if only the term "alt chain" didn't have the connotations it unfortunately has). If the block size problem becomes an issue for miners or users, alt chains like litecoin may see greater use. Or maybe geographically local alt chains that are otherwise identical to bitcoin?

Bingo. You're very close to a proposed solution for the block size issue I plan to write up this week.

I hope not.  Part of the benefit of bitcoin is the network effect, which is damaged, not improved, by the growth of alt-coins.  ...

Not true. I plan to detail why in the write up I mention above.

Litecoin also has four one-megabyte blocks per ten minutes, doesn't it?

So already offers four times as much transaction-space as bitcoin? ...

Yes, but 4 times more than 7 transactions per second is still not enough.

...
I am also not convinced that "one world currency" constitutes "decentralisation" of the world's financial systems.

Possibly it is better to be able to move elsewhere each time the powers that be grab control of some huge majority of the money in any particular system, maybe even go for agility where they are constantly on a treadmill trying to grab a mjaority of more and more and more new systems until maybe in some distant era they will realise no matter how much they want to control everyone, some people will (one maybe hopes?) find some way to retain some freedom despite them.

-MarkM-

Bingo. I plan to describe this in the write up I mention above.

I read the OP and BCH sounds like hosted wallet to me. The hosted wallet used by the reddit bot allows people to send bitcoin off the chain. If now gmail also had such a bot and the people running these bots were the same or agreed on an API, you could send from a@reddit to b@gmail off the block chain and in case these are two entities, they re-balance with one transaction per day or week.

Sure, this can and will be done (I programmed a facebook wallet that allowed you to accept it as a facebook app and then you could charge your balance via the block chain and send to other facebookers off the block chain. Simple didn't go life for lack of design and fear of getting hacked).

Yes, that's essentially all a Bitcoin Clearing House is - a way for one user to send bitcoins to another user while both of them have accounts somewhere that are linked in a way enabling the transfer to happen off-chain.

[MoonShadow]

While I agree with the perspective of the OP, the greater gain would be to develop some kind of standard overlay network, across which many smaller BCH's, wallet services, exchanges, etc could interact off of the bitcoin network; and periodicly settle up upon the main blockchain.  ...

I like this direction too although I'm not sure how to implement it. It sounds like decentralized accounting which I think would be great, but it seems to me more practical to set up private controlled servers.

No, no.  Bitcoin is already decentralized accounting.  What I'm proposing would basicly be a VPN for BCH's of many types, some decentralized, others dedicated servers that function like banks.  In reality, this is going to happen eventually should the transaction fees ever hit anything that these guys can consitantly undercut.  One way to do it now, would be for the ownership of a couple of major wallet services; say MtGox and SilkRoad, were to get together and form a direct relationship, wherein the membership of one institution could send funds to any member of the other institution, and rather than it creating a blockchain transaction, both servers recognize that they are trying to send money to the other, and each credits & debits the appropriate accounts based upon the two institutions' mutual credit.  This could be done simply with a set of code on each server that could identify the addresses of the other institution, or simply by clicking the 'use green address' button.  These two institutions would have to be willing to hold a balance with each other, up to some point which triggers a settling up.  Say, 100 BTC.  If buyers on SilkRoad were transfering funds from their accounts at MtGox, buying things from SilkRoad, and a portion of those vendors were transfering funds back towards MtGox on a continuing basis; a large enough mutual credit limit can result in many tranfers between those two institutions balancing out, and thus completely avoiding a blockchain transaction at all, but they are still using Bitcoin.  They may not even be aware of the cost saving agreements that their institutions employ.  However, in order to do this, these institutions must both be large (in both revenue and membership) and have access control over members' funds.  I can't see a way that milti-sig works here.

My proposal is for a standard way of setting up these mutual credit agreements, as well as extending these aggrements in a similar way that Ripple works between individuals.  Ripple is actually more powerful between institutions than individuals, IMHO.

[acoindr]

No, no.  Bitcoin is already decentralized accounting.  What I'm proposing would basicly be a VPN for BCH's of many types, some decentralized, others dedicated servers that function like banks.  In reality, this is going to happen eventually should the transaction fees ever hit anything that these guys can consitantly undercut.  One way to do it now, would be for the ownership of a couple of major wallet services; say MtGox and SilkRoad, were to get together and form a direct relationship, wherein the membership of one institution could send funds to any member of the other institution, and rather than it creating a blockchain transaction, both servers recognize that they are trying to send money to the other, and each credits & debits the appropriate accounts based upon the two institutions' mutual credit.  This could be done simply with a set of code on each server that could identify the addresses of the other institution, or simply by clicking the 'use green address' button.  These two institutions would have to be willing to hold a balance with each other, up to some point which triggers a settling up.  Say, 100 BTC.  If buyers on SilkRoad were transfering funds from their accounts at MtGox, buying things from SilkRoad, and a portion of those vendors were transfering funds back towards MtGox on a continuing basis; a large enough mutual credit limit can result in many tranfers between those two institutions balancing out, and thus completely avoiding a blockchain transaction at all, but they are still using Bitcoin.  They may not even be aware of the cost saving agreements that their institutions employ.  However, in order to do this, these institutions must both be large (in both revenue and membership) and have access control over members' funds.  I can't see a way that milti-sig works here.

My proposal is for a standard way of setting up these mutual credit agreements, as well as extending these aggrements in a similar way that Ripple works between individuals.  Ripple is actually more powerful between institutions than individuals, IMHO.

Okay now I see what you mean. Yes, that's another way which works

Instead of a private entity setting up a server and matching up transfers large entities network with each other to do it voluntarily. In order to encourage that maybe all we need is to propose a protocol and ask entities to maybe put a badge on their site saying they're open to the method.

Something like that especially works well now while the community is small. Like you say all you need is a couple major players, like MtGox and SilkRoad, and you've probably covered 25% or more of all transactions lol.