Coin Validation misunderstands fungibility and could destroy bitcoin

[User705]

Coin Validation strikes to the heart of what Bitcoin is and that is who really owns your money/coins/assets.  The Bitcoin method which is anathema to the modern financial system requires no third party to validate your ownership rights.  It can be said that with such validation you don't truly own your money/coins/assets which benefits the current money controllers elite at the expense of users.  This proposal is a veiled attempt disguised as crime prevention to bring Bitcoin back down into the current system.  Not a surprise.  Bitcoin is either a monetary revolution or a ponzi trading card fad.  If it is a revolution then it is simply incompatible with the old system.  Jim Crow laws were separate but equal too.  I guess colored coins is an appropriate moniker then.

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[gmaxwell]

Most bitcoiners are against address censorship. Software solutions are the defense and need to be built.

The strongest defense is complete immunity.

Within the design of Bitcoin today we cannot (yet) have the kind true anonymity which would make Bitcoin completely immune to censorship. Instead, Satoshi envisioned a system of pseudonymous addresses (Bitcoin.pdf (section 10: Privacy)) where your non-anonymity was inconsequential because the addresses were meaningless.

Unfortunately, to enact that vision original Bitcoin wallet software needed to use pay-to-ip-address to fetch a new address for every transaction. Pay to IP had issues and so it was largely replaced with addresses. Convenience and ignorance, distractions like vanity addresses caused people to begin constantly reusing addresses. Wallet software was release that made avoiding reuse hard or nearly impossible.  The vision of privacy through pseudonymous addresses has been broken, Bitcoin has lost its privacy. The result is that white/green/black/red/etc listing addresses is not technologically impossible in our ecosystem today.

But, no biggie, we can fix that. Tools like BIP32 let third parties generate fresh, never before used addresses for you without your help, etc.  Of course, this has been possible before, but there was no immediate benefit to fixing your privacy for the bulk of the users— who aren't paranoid enough to worry about their privacy. But to stop the colored lists we need the _default_ behavior of nearly everyone to be behavior that will make those lists ineffective. Only by changing what most users do can we gain immunity.

Thats why I think it's a good step forward that we now have a large mining pool (Eligius) experimentally giving priority to transactions which use never-before-used addresses. Now people who were squishy on the benefits of privacy and immunity to censorship (and the resulting loss of fungiblity) can get a concrete benefit from switching their software or practices to ones which improve everyone's privacy.

[justusranvier]

Unfortunately, to enact that vision original Bitcoin wallet software needed to use pay-to-ip-address to fetch a new address for every transaction. Pay to IP had issues and so it was largely replaced with addresses. Convenience and ignorance, distractions like vanity addresses caused people to begin constantly reusing addresses. Wallet software was release that made avoiding reuse hard or nearly impossible.  The vision of privacy through pseudonymous addresses has been broken, Bitcoin has lost its privacy. The result is that white/green/black/red/etc listing addresses is not technologically impossible in our ecosystem today.

When is Blockchain.info going to implement BIP32? They are the single worse offender when it comes to promoting address reuse.

[jedunnigan]

This is what I thought too, but now I am looking closer and it appears that Forbes may have misrepresented the tech. Read Alex's reddit posts from the previous day: http://www.reddit.com/user/alex_waters :

He probably is spinning PR or focusing on short-term implementation plans to avoid discussing the longer term plans discussed in the article.  If you read it with the PR-interpretation mindset its not so good.  

Whatever his intentions, he is not thinking through the implications or just selfishly doesnt care for quick buck reasons,  I dont know him so I cant tell.  Either way I think this will not end well.  I've been in the privacy tech / crypto business for 15 years, its quite common to encounter and have to navigate around people of all stripes: well meaning, neutral, dont care, and anti-privacy.  Even the ones that are neutral or well meaning often dont think about the long or even mid-term implications of what they are doing.  Thinking about implications is complex, requires concentration, deep understanding across many fields, and may conflict with short term objectives (ie rush something ill-thought-out but  "pragmatic" to get something out the door).  Sometimes making a buck even conflicts with user interests, or even the survival of the system.  Some of these people might even show concern and genuine remorse afterwards when it predictably blows up (to their genuine surprise because they didnt think more than the first chess move.)  Most probably though they'll be onto their next venture and pretend it never happened or more likely not even make the connection between their actions and the outcome.

The technology space is littered with implications from ill considered decisions.  Eg web pages are not signed, and jscript is not signed; a single server key is used for combined tunnel auth/encryption but no transferable signature on the content.  So people can hack servers and modify and replace code and steal eg jscript bitcoin wallets.

These things matter because architecture defines the internet.

“We don’t want to be the sheriff of the Bitcoin community. We just want to create an ecosystem of clean addresses.”

So first they want to identify clean addresses (from the forbes article).

Please stop confusing "clean coins" with KYC'd Bitcoin addresses.

And then they want to distance themselves from clean addresses (from reddit).

So whats a clean address?  Its one that according to them has not got taint on it according to some threshold they decide against some blacklist.  Seems squarely what we are talking about.
Thats my interpretation.  Waters or the other people at CoinValidation are welcome to clarify.

It is beginning to sound a bit more like what you proposed Adam.

The KYC part yes, the clean coins I am not so sure - they really do seem to think longer term that tracing coins is somehow a useful thing to do, which can only harm fungibility.  We may need a priority deployment of CoinJoin option into multiple clients before they get far with that.

DarkWallet could probably do with some funding help also.

Adam

Thank you for that thoughtful analysis. There are clearly mixed signals being sent; given their limited response it appears that they may purposely disseminating varying information to create a smoke screen while they speak with the DHS.

Either way, like you I am deeply concerned and the community response to this will make or break this moment. Interesting times ahead; this is good that this is happening now, we need to face these hurdles.

[tspacepilot]

Almost everything I've read on Forbes about bitcoins has been misguided or wrong.

[btcdrak]

Unfortunately, to enact that vision original Bitcoin wallet software needed to use pay-to-ip-address to fetch a new address for every transaction. Pay to IP had issues and so it was largely replaced with addresses. Convenience and ignorance, distractions like vanity addresses caused people to begin constantly reusing addresses. Wallet software was release that made avoiding reuse hard or nearly impossible.  The vision of privacy through pseudonymous addresses has been broken, Bitcoin has lost its privacy. The result is that white/green/black/red/etc listing addresses is not technologically impossible in our ecosystem today.

When is Blockchain.info going to implement BIP32? They are the single worse offender when it comes to promoting address reuse.

Create pressure on reddit....

[amincd]

It is also a ridiculous approach.  If they want to certify users, they should do that as optional KYC, AML certificates that regulated merchants in respective jurisdictions can request, which could be attached to wallets/identities, not to fully fungible coins.  The certificates should be non-transitive they attest to the identity of the user, not the coins.

+1

If they take Adam's advice and change their approach, they will have proven that they're not out to harm Bitcoin. If they don't, then it's evident they don't care about Bitcoin.

[adam3us]

[...]The bitcoin user is far from anonymous.  The full transaction log is public.  (Bitcoin really is not that private nor anonymous: if someone offered to make your bank account or credit card statement as public as bitcoin does we would be angry about it.) [...] It means only parties to the communication see the value and decide what level of identification they want if any.  This supports buying ebooks without a dossier of what books you read.  Its no ones business.  And it supports AML/KYC for large for regulated businesses.  And identifying the customer account so the business can account eg with repeat customers.   And it supports criminal investigation also.  The police go subpoena information from businesses the criminal interacted with to track him down.  Same as in real life.

This thread has focused on technical reasons why coin-level privacy is necessary for fungibility and bitcoins value (and that CoinValidations proposals seem likely to sabotage both).  

User level identity privacy was mentioned in passing above.  Privacy does not prevent legal investigation.  The system of courts and subpoenas for information, is societies way of balancing and asking unrelated people to disclose information that may hep track a crime.  

A better background explanation of the motivation and reason society includes privacy as a fundamental human right, and why financial privacy is actually important and necessary for individuals, businesses and finance to function is given by gmaxwell on this thread.  

[...fungibiility...]
Financial privacy is an essential criteria for the efficient operation of a free market: if you run a business, you cannot effectively set prices if your suppliers and customers can see all your transactions against your will. You cannot compete effectively if your competition is tracking your sales.  Individually your informational leverage is lost in your private dealings if you don't have privacy over your accounts: if you pay your landlord in Bitcoin without enough privacy in place, your landlord will see when you've received a pay raise and can hit you up for more rent.

Financial privacy is essential for personal safety: if thieves can see your spending, income, and holdings, they can use that information to target and exploit you. Without privacy malicious parties have more ability to steal your identity, snatch your large purchases off your doorstep, or impersonate businesses you transact with towards you... they can tell exactly how much to try to scam you for.

Financial privacy is essential for human dignity: no one wants the snotty barista at the coffee shop or their nosy neighbors commenting on their income or spending habits. No one wants their baby-crazy in-laws asking why they're buying contraception (or sex toys). Your employer has no business knowing what church you donate to. Only in a perfectly enlightened discrimination free world where no one has undue authority over anyone else could we retain our dignity and make our lawful transactions freely without self-censorship if we don't have privacy.

Most importantly, financial privacy isn't incompatible with things like law enforcement or transparency. You can always keep records, be ordered (or volunteer) to provide them to whomever, have judges hold against your interest when you can't produce records (as is the case today).  None of this requires _globally_ visible public records.

Globally visible public records in finance are completely unheard-of. They are undesirable and arguably intolerable. The Bitcoin whitepaper made a promise of how we could get around the visibility of the ledger with pseudonymous addresses, but the ecosystem has broken that promise in a bunch of places and we ought to fix it. Bitcoin could have coded your name or IP address into every transaction. It didn't. The whitepaper even has a section on privacy. It's incorrect to say that Bitcoin isn't focused on privacy. Sufficient privacy is an essential prerequisite for a viable digital currency.

So, again, I ask—let's see your bank records; I'm sure there is an export to CSV.  Mtgox transaction dumps? Stock trading accounts. Let's see you—even just you—post all this before you presume to say that you think that's what the public wants forced on everyone.

Adam

[bitjoint]

http://www.forbes.com/sites/kashmirhill/2013/11/13/sanitizing-bitcoin-coin-validation/

Its based on significant misunderstanding about bitcoins value proposition - destroy its fungibility and the costs float up to meet credit cards and paypal.

It is also a ridiculous approach.  If they want to certify users, they should do that as optional KYC, AML certificates that regulated merchants in respective jurisdictions can request, which could be attached to wallets/identities, not to fully fungible coins.  The certificates should be non-transitive they attest to the identity of the user, not the coins.  They should be optionally sent - if the recipient does not request it, it is privacy destructive and a security risk to send identifying information to unregulated businesses and individuals.

Their technical representatives of Coin Validation should be ashamed.  How can someone who doesnt understand a concept as basic as fungibility and its relation to transaction costs, and the difference between identity and coins hope to exist in this ecosystem.  

What they are proposing so far at least as explained by the Forbes article is stupid, dangerous and just wrong.  

+1000

Adam for president!!!

[qwk]

WE CAN FIGHT THIS, though. With the miners. Miners must be encouraged to reject clean addresses from the blockchain, it's the only way to kill this.

Rejecting "clean" addresses would be the same as blacklisting, though.
I don't see how fighting fire with fire will get us anywhere close to a solution of the underlying problem.

[wtfvanity]

I think Satoshi's arguments should be seriously entertained. Adam has spent many years, long before Bitcoin, developing the proof of work idea and continues today to stand for the principles of the bitcoin white paper. Of course, Bitcoin is going to change. The original implementation has developed considerably. Keep up the good fight Adam.

[Carlton Banks]

WE CAN FIGHT THIS, though. With the miners. Miners must be encouraged to reject clean addresses from the blockchain, it's the only way to kill this.

Rejecting "clean" addresses would be the same as blacklisting, though.
I don't see how fighting fire with fire will get us anywhere close to a solution of the underlying problem.

Same concept, specific target.

All listing is political, it's just that the proposition is to use listing to enforce identity. Not my political opinion, not complying. Most people agree on basic morals, but the trouble is that some people try to conflate morals with political opinions. If using money anonymously were such a big problem all on it's own, fiat cash would be banned.

This is DESIGNED to act as a digital cash system. That was always the point. Buyer beware. If you can't handle the risk and responsibility, using your intellect, of being scammed or robbed then don't get involved. Everyone, all the way from the main Qt wallet's lead developer all the way out to the conservative financial press, says this is a risky system. 

[notthematrix]

Clean bitcoins PLEASE , it is not possible to do this its a misunderstanding of the protocol.
why?
Bitcoins dont MOVE ...... its like http://quezi.com/14671 YAP STONE MONEY , in 2 weeks all bitcoins are dirty
its like the coke traces on the $ bill! 96% has them.....
But new billes can be printed new bitcoins CANT.

 

[Voodah]

100% Agree.

+1

[xavier]

Coin Validation strikes to the heart of what Bitcoin is and that is who really owns your money/coins/assets.  The Bitcoin method which is anathema to the modern financial system requires no third party to validate your ownership rights.  It can be said that with such validation you don't truly own your money/coins/assets which benefits the current money controllers elite at the expense of users.  This proposal is a veiled attempt disguised as crime prevention to bring Bitcoin back down into the current system.  Not a surprise.  Bitcoin is either a monetary revolution or a ponzi trading card fad.  If it is a revolution then it is simply incompatible with the old system.  Jim Crow laws were separate but equal too.  I guess colored coins is an appropriate moniker then.

Massive +1

Coin Validation really has the potential to screw up bitcoin. Anybody who has invested in or holds bitcoin should be worried.

If bitcoin looses its fungability and becomes centralized , it becomes no different from existing payment mechanisms. It can be manipulated at will by a third party elite.

For me , this is a big "plus one" for alt coins. Really, it's no surprise to me that the Litecoin price has doubled alongside the posting of this article.

I have said from the beginning that the Bitcoin Foundation would be the death of bitcoin. The biggest risk to bitcoin has always been it implodes, and we are seeing it begin now.

The biggest oportunity now is for someone to implement Zerocoin or CoinJoin (I am not familiar with CoinJoin, but I understand it is an anonymity mechanism) into an alt coin, to make up for bitcoins failiure in this regard. We need a currency that cannot be manipulated by any elites or manipulators. Bitcoin came close to that, but sadly it looks like it will never arrive. Right now, the door is wide open for an alt coin to take the stage like never before.

Things are starting to get interesting.

[virtualmaster]

http://www.forbes.com/sites/kashmirhill/2013/11/13/sanitizing-bitcoin-coin-validation/

Its based on significant misunderstanding about bitcoins value proposition - destroy its fungibility and the costs float up to meet credit cards and paypal.

It is also a ridiculous approach.  If they want to certify users, they should do that as optional KYC, AML certificates that regulated merchants in respective jurisdictions can request, which could be attached to wallets/identities, not to fully fungible coins.  The certificates should be non-transitive they attest to the identity of the user, not the coins.  They should be optionally sent - if the recipient does not request it, it is privacy destructive and a security risk to send identifying information to unregulated businesses and individuals.

Their technical representatives of Coin Validation should be ashamed.  How can someone who doesnt understand a concept as basic as fungibility and its relation to transaction costs, and the difference between identity and coins hope to exist in this ecosystem.  

What they are proposing so far at least as explained by the Forbes article is stupid, dangerous and just wrong.  

I am also incensed frankly that someone would step into the market with such a muddle-headed thinking, and attempt to sabotage or destroy the core bitcoin feature that gives its value, where the value has been created by Satoshi and a cast of millions of man-hours of contributions of the community and technical wizards developing it mostly on volunteer time.  I am not someone prone to swearing, but this is astonishingly stupid and dangerous.   Please stop now.  In the article it is claimed they sought advice from the Winklevoss twins, if the twins value their estimated $30million bitcoin holding they should advise them to stop: if fungibility is destroyed bitcoins value as a transaction currency is impacted.  

I encourage anyone with technical skills to put their thinking caps on to find ways to increase fungibility in the short term like CoinJoin, coin control in wallets, helping less technical people migrate to better wallets, educating people about privacy practices that defend fungibility.  And longer term privacy technologies like zero coin, homomorphic encrypted value and committed (hidden) transactions.

I encourage all bitcoin businesses to shun Coin Validation unless we see some major U-turn or corrections.  If your business depends on the success bitcoin, it depends on the fungibility of bitcoin, and Coin Validation seem to be set on destroying both.

You can quote me on that.

I welcome Coin Validations corrections of the claims in the Forbes article.  Tell me you were misquoted.

Adam

ps For people who have no idea who http://cypherspace.org/adam/ I am https://bitcointalk.org/index.php?topic=225463.msg237167 , my small part in bitcoin is I invented distributed mining in 1997 https://en.bitcoin.it/wiki/Hashcash (you can find the reference in Satoshi's paper) and worked on opensource ecash & crypto currency research & implementation for about a decade alongside Wei Dai & Hal Finney & others.

Correct. I fully agree with you Adam..
If Bitcoin will be not fungible than it is like forking it in more parts.
When the USA makes his blacklist, whitelist, redlist, greenlist, then China and Russia will do it also.
Then we must look for each coin that could be:
USA - black, China - white, Russia - red
USA - white, China - red, Russia - green
Than you must check every time where we pay in what country is and on what list are the coins in this country.
That could be even worse. This lists could be hidden so you transfer your coins and they will be confiscated.
This coins will be then used to confiscate new coins and to finance drone killings in sovereign countries or to finance secret operations to overthrow legitimate governments.

[jedunnigan]

This is what I thought too, but now I am looking closer and it appears that Forbes may have misrepresented the tech. Read Alex's reddit posts from the previous day: http://www.reddit.com/user/alex_waters :

He probably is spinning PR or focusing on short-term implementation plans to avoid discussing the longer term plans discussed in the article.  If you read it with the PR-interpretation mindset its not so good.  

Whatever his intentions, he is not thinking through the implications or just selfishly doesnt care for quick buck reasons,  I dont know him so I cant tell.  Either way I think this will not end well.  I've been in the privacy tech / crypto business for 15 years, its quite common to encounter and have to navigate around people of all stripes: well meaning, neutral, dont care, and anti-privacy.  Even the ones that are neutral or well meaning often dont think about the long or even mid-term implications of what they are doing.  Thinking about implications is complex, requires concentration, deep understanding across many fields, and may conflict with short term objectives (ie rush something ill-thought-out but  "pragmatic" to get something out the door).  Sometimes making a buck even conflicts with user interests, or even the survival of the system.  Some of these people might even show concern and genuine remorse afterwards when it predictably blows up (to their genuine surprise because they didnt think more than the first chess move.)  Most probably though they'll be onto their next venture and pretend it never happened or more likely not even make the connection between their actions and the outcome.

The technology space is littered with implications from ill considered decisions.  Eg web pages are not signed, and jscript is not signed; a single server key is used for combined tunnel auth/encryption but no transferable signature on the content.  So people can hack servers and modify and replace code and steal eg jscript bitcoin wallets.

These things matter because architecture defines the internet.

“We don’t want to be the sheriff of the Bitcoin community. We just want to create an ecosystem of clean addresses.”

So first they want to identify clean addresses (from the forbes article).

Please stop confusing "clean coins" with KYC'd Bitcoin addresses.

And then they want to distance themselves from clean addresses (from reddit).

So whats a clean address?  Its one that according to them has not got taint on it according to some threshold they decide against some blacklist.  Seems squarely what we are talking about.
Thats my interpretation.  Waters or the other people at CoinValidation are welcome to clarify.

It is beginning to sound a bit more like what you proposed Adam.

The KYC part yes, the clean coins I am not so sure - they really do seem to think longer term that tracing coins is somehow a useful thing to do, which can only harm fungibility.  We may need a priority deployment of CoinJoin option into multiple clients before they get far with that.

DarkWallet could probably do with some funding help also.

Adam

He has responded to you directly and confirmed my suspicions, although I am with you that this is probably just a primer and we will start slipping down the slope in no time.

[jonat3]

Can't we just build a digital version of something like how the cascasius coins work? With those coins, it's useless to whitelist them, since these coins can change owners. Similarly, instead of using coinmixing, do something like address mixing, where the participants can securely trade their addresses (ideally, with these addresses having the same amount of BC), where these addresses switch owners. Doesn't this essentially solve the problem of whitelisting and blacklisting? The only problem is that the ones doing the switch must be made unaware of what the private keys are, so they don't have access to each other's wallets.

If there's anything wrong with this solution, I would like to know.

[adam3us]

He [Yifu] probably is spinning PR or focusing on short-term implementation plans to avoid discussing the longer term plans discussed in the article.  If you read it with the PR-interpretation mindset its not so good.  [...]
The KYC part yes, the clean coins I am not so sure - they really do seem to think longer term that tracing coins is somehow a useful thing to do, which can only harm fungibility.  We may need a priority deployment of CoinJoin option into multiple clients before they get far with that.

He [Waters] has responded to you directly and confirmed my suspicions, although I am with you that this is probably just a primer and we will start slipping down the slope in no time.

Yifu also responded via tweet.  Now Waters via reddit.  I responded to them on reddit and tweeted also.

https://twitter.com/adam3us/status/402370818232958976

http://www.reddit.com/r/Bitcoin/comments/1qmude/yifu_guo_is_conspiring_to_make_his_own_coins/cdgn3fu

Here is what I put on reddit.

From the Forbes article:

It’s a tracking system for Bitcoin ownership that would theoretically weed out ‘bad actors’ – like the Dread Pirate Roberts – from the legitimate Bitcoin business world. Their plan is to compile a database of the known identities associated with Bitcoin addresses in the hope that Coin Validation will become the one-stop-identity shop for law enforcement when trying to find out who’s doing something nefarious with Bitcoin, while providing a red-flag system for businesses who have customers trying to use Bitcoin that’s associated with illicit use.

Would you be able to explain how the above is not taint tracing? I know you and Yifu (who replied to me tweet) focus now on talking about the KYC, AML certs, however the majority of the article was actually about taint tracing/clean coins/red-flag, which seems something quite different and with potentially dangerous adverse effects on fungibility. The bad actors are not going to buy AML certs, and you cant provide "red flags" to businesses based on absence of AML certs. I do not think you can fairly characterize articulating the risks to fungibility of taint analysis based red-flags as FUD. It seems hard to reconcile the above forbes article quote with what you are now saying. It seems more like you are starting with AML, KYC certs (good) and considering taint-tracing (dangerously bad) for the longer term, and so choosing to focus more on the less controversial former and gloss over the forbes articulated longer term plans. I welcome your clarifications. I see someone posted my full comments and it has worked its way up to the forbes top comments.

Adam

[jago25_98]

When a new technology comes along fighting against it is always going to be an uphill battle.

In this case we're looking at the development of coin tracking. Like it or not there has been various heists and as a result of that people have started coin tracking. This has already happened. It is not a threat for the future, it is a threat that has already been applied. It may have been used by the FBI already.
(If only it was applied to the MyBitcoin wallet thefts and Mt.Gox thefts so I can get some of majority of coins lost back...)

When a technology such as coin tracking starts to come into play you have to go with the flow because fighting it is like trying to make water flow uphill or dam a river. It's better to divert it into something positive.
What would the interpretation of that be in this situation? That's where it gets interesting.

As a start I think the best thing to do is put coin tracking into the hands of community and democracy in order to prevent it from tyranny. In order to do that there has to be a way to easily share feelings of trust regards each address - a distributed credit rating... only this time it really is a credit rather an debit rating!

For anybody reading this thread not up to speed on the history there was a paper written on coin tracking... anyone have the link (I can't find it)?