Overview of blockchain and bitcoin (Part 4)

Threats

Bitcoin protocol is not stable yet, its version is now just 0.15.1. The first stable version usually starts at 1. Bitcoin developers say that *“Bitcoin is an experimental digital currency…”* Bitcoin price is going up nowadays, people are putting their money into it. They should know that in case of security leak, or technological failure, their assets may disappear.

For being able to trade at cryptocurrency exchange platform, people must give bitcoins to them, immediately give up their ownership. They own only a non-contractual IOU (I Owe You). If something unexpected happen, they will lose everything they deposited. IOU does not have any legal constraint. When Mt. Gox was hacked, traders lost $400mil bitcoin (which is several billions now).Mt. Gox just bankrupted, closed. Nobody can found their money back. This year, similar situation happened to Youbit, a South Korean cryptocurrency exchange. They lost 17% total assets after being hacked, and cannot make anything of it returned.

Although blockchain itself has never been hacked successfully, but applications and services around it have. Someone may say that blockchain is secure. It is. But attackers usually intend to hack people and applications, because doing so is easier and cheaper than attacking blockchain. So you must trust services you are using. Chose them very carefully.

Bitcoin wealth distribution

A big minus point to bitcoin community is its wealth distribution. Small number of holders are owning majority of market. This is because great mining rewards paid out in early days to a few people. In that time, constructing a block get 50BTC reward. Very few miners joined the game. Those people at that time, now have assets which worth billions of dollars.

Distribution of bitcoin wealth

Cryptocurrency wealth distribution is not transparent. Owners and their transactions are hidden to public. That is not good for small traders. When whales do something, everybody affected. When these whales cooperate, they can drive direction of market without restrictions.

95% bitcoin are owned by about 4%; 1% control half the entire market


Whales are holders of large amounts of bitcoin.


Real life have similar wealth distribution model but with more control and restrictions. Big shareholders and managers of a company must public their buying/selling deals. In stock market, if someone use internal information for trading; or use many accounts (of one or many people) to manipulate stock price, that person can be arrested. These activities are illegal in real world. But in cryptocurrency exchanges, these illegal-in-real-world methods are not considered carefully, they are still valid, and there is nothing out there to protect small traders. People must aware and protect themselves.

Trade at your own risk.

Protect yourself

Cryptocurrency world is unsafe, but there are several methods that people can use to protect their money. Although these methods are not easy to adapt, but helpful at the moment. Some of them are:

  • Choose service provider carefully. You totally depend on them. All your assets are in their wallet. If they are hacked, or they intentionally steal your money, or just accidents, you have no way to get your money back. An apologize from service provider is all what you get. Similar to applications and wallet softwares.
  • Keep only small portion of asset on computer/mobile for daily use. If that computer is hacked, or mobile phone is lost, remaining money still safe elsewhere.
  • Backup wallet regularly, and encrypt it. If losing computer or getting hard drive failure, data is still recoverable. There was a person who threw hard drive, which stores hundred-million-dollar bitcoin, to garbage. He is trying to get government acceptance to find that drive in city landfills.
  • Remember to encrypt. Without encryption, anyone has data can get money. Make sure to remember strong, hard-to-remember passwords, even after years without using. If you lose that password, you will lose everything. Someone printed that password, split it, and keep in vaults.
  • Use cold storage. It is a computer which is reseted to manufacturer configuration, always disconnected from network, and only store sensitive information. You can use it like this: create a transaction on online computer, copy that transaction to a USB, put that USB to cold storage, sign transaction, put USB back to online computer, and proceed transaction.
  • Use hardware wallet. These devices only have one functionality: signing transactions. They are safe to virus because no software can be installed on them. But keeping them like keeping physical keys.
  • Have a backup plan for family, in case of death or disability. In real world, law can help. But in cryptocurrency world, without private key, your relatives cannot do anything. Your asset will still there forever. But nobody can access it, forever.
  • Get updated with your softwares. Newer versions fix security problems. Bitcoin environment is not stable, there are many things to examine, and improvements are announced regularly.
  • Get updated with news. Cryptocurrency world is vulnerable to news.
  • Get updated with new new methods and techniques. Bitcoin and blockchain are now researched by many organizations.

Not only bitcoin

Many people think bitcoin is the only application of blockchain, but it is not. Cryptocurrency is one of thousands application that blockchain can bring. Let’s take a look, and see what blockchain can do:

The most famous one is smart contract. Every rules are put clearly inside source code. Any modification related to contract is recorded in blockchain, publicly visible and irreversible. Contract is coded, run by computer, so it cannot be cheated (assumes code is correct). That kind of contract forces participants to comply, without intermediate organization – like government, or law. Rules in contract are self-executed, fast, and trustworthy. Examples are:

  • When a car drive onto a space, it can automatically purchase that parking slot.
  • A licensed song is delivered to blockchain. If someone want to listen or remix it, they have to pay a specified amount. Payment conditions are coded and executed right after action occurred.
  • When a package arrived, system will automatically send 1BTC to merchant, and 0.1 BTC to shipper.

Another application is supply chain. Blockchain can be used to track position and status of containers all around the world, using IoT (Internet of Things). Not only containers, it can be used to verify origin of products, checking status of packages, and customs services.

Blockchain can be used in healthcare. Health records are stored in blockchain, accessible everywhere, synchronized. It becomes the single source of truth. It is public, but anonymous. Health data can only accessed by patient and doctor. Anonymous data in blockchain can be used for medical researches.

Blockchain can be used by government for citizen records; or in schools as student scoreboards. It can be used for reputation system of people (for small loans), products, or services.

Data in blockchain is responsive, updated in real time. It is open, but keeps anonymity. It is useful for small startups and large enterprises. The most imaginative mind cannot think what people can do with these data.

Blockchain is not only digital coin, it can be any kind of digital asset, or any digital representation of any physical asset.


Real world maps into blockchain
Blockchain represents real world


What is next

Blockchain has grown to version 2.0, 3.0. Besides bitcoin, thousands of cryptocurrencies are in market, each solve some specific problems. There are many blockchain frameworks are published to the society, some are in development. Bringing huge number of applications, solving several real-world problems, making our lives easier. Some limitations of blockchain first version have been solved, leading to new era of technology.

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