LETS TALK BITCOIN

Episode 115 Revisiting Pompeii

Participants:

Adam B. Levine (AL) Host
Andreas M. Antonopoulos (AA) Co-host
Stephanie Murphy (SM) Co-host
Scott Maxwell (SMax) Founder of Cryptocurrencymadesimple.com
Kai Chang (KC) Analyst of MtGox 500



Today is June 3
rd
2014 and this is Episode 115.

This program is intended for informational and educational purposes only.
Cryptocurrency is a new field of study. Consult your local futurist, lawyer and investment
advisor before making any decisions whatsoever for yourself.


AL: Welcome to Lets Talk Bitcoin, a twice weekly show about the ideas, people and
projects building the digital economy and the future of money. My name is Adam B. Levine
and were joined, once again, by the other hosts of Lets Talk Bitcoin, Stephanie Murphy.
[0:36]

SM: Hello. [0:37]

AL: Andreas M. Antonopoulos. [0:39]

AA: Hello. [0:40]

AL: MtGox is dead, may it rest in pieces. Recently, new information has shed some light on
the inner workings of that mess in the months and years before the crash but it doesnt look
good. Weve got a pair of guests on to help us explore this topic. Scott Maxwell is the
primary over at Cryptocurrencymadesimple.com. Scott, thanks for being here today. [0:58]

SMax: My pleasure. [0:59]

AL: Rounding out todays panel, weve got Kai Chang of the MtGox-500 analysis over at
Bitcoin.stamen.com. Kai, thanks for being here. [1:07]

KC: Thanks Adam, its a pleasure. [1:09]

AL: Scott, lets start from the basics. What happened here? [1:13]

SMax: Well, what were looking at is an attempt by the community around MtGox to make
some kind of sense about where all of that cash went. At the end of the crash, we were
roughly 650,000 bitcoins down and very little fiat currency to show for it. Now, either there
was a hack or there was an exploit through DDoS, which many think or maybe there is
something else going on here. Over the last couple of days, some data has been published
which suggests that its something else. That its an insider job. [1:48]

AL: The official story that we got was that this was transaction malleability. It was, as we
talked about in an earlier episode, it was people attacking a store with fraudulent return
slips essentially, and getting back more money than they rightly deserved. Is that at all
plausible in this explanation, based on this new information? [2:09]

SMax: Its looking less and less likely. The data doesnt lie. The transaction malleability, if
you analyse the same data, accounts for maybe about 30,000 clash transactions which,
when you take into account the fact that transaction malleability, more often than not fails,
that drops down to about 1,000 transactions. Maybe 6-700 of those were actual thefts, so it
just doesnt account for the order of magnitude of the loss were seeing. [2:39]

AL: What was the information that actually became available? How was this analysis
possible where previously it was not? [2:47]

SMax: The data that is being analysed has been around for over a month now. There are
two data sets. One is a leaked set of logs which has come round about the time of the crash
itself and the second is the same logs but with very specific differences. Its those
differences that have allowed the analysis. [3:09]

AA: Were these logs leaked at the same time, by the same person or were they two
different leaks? [3:14]

SMax: It looks like the same log has been edited, that one has been leaked by an MtGox
insider but the second one has got out through another route. This second one is the non-
anonymized set of logs. For the first time, we see user IDs. We can see a lot more detail
about the transactions and we can start to analyse them properly. Before that, the bots
that were talking about, and it does look to be a few accounts that these bots have traded
in, were deleted so they simply werent there in the data. What were now seeing is those
bots had been there all along. [3:55]

AA: Thats a pretty strong signal. The absence of bots in the first place, presumably, those
were in the logs so someone deliberately deleted their tracks? Is that a likely explanation
for why they were missing from the first set of logs? [4:13]

SMax: Its certainly one set of explanations that are around someone trying to hide whats
going on here. Its not necessarily the only way that that information could have been left
out but it certainly is suggested. [4:27]

AA: Let me ask you Scott, these logs, are these logs of the database or are they logs from
the software application, the trading application itself, are they assist logs, what type of logs
are they? [4:39]

SMax: These are transaction logs. These are logs from the database of actual transactions
completed. [4:45]

AA: Are these generated by a specific sequel query, do you believe in terms of reporting or
do you think these were routinely dumped to a text file as they were happening? [4:56]

SMax: The data looks like its the sort of data youd want to keep if you were, at some
point, to go back and audit and understand exactly who owns what. Now, the fact that the
logs have been there building up for some time and the fact that there have been
discrepancies which werent found for some time, suggests that they werent actually used
for auditing, or certainly not by external sources. Thats the sort of use that this information
would have been put in another exchange. [5:25]

AA: You said that, in the second set of logs, there were bots. What do you mean by bots
exactly? [5:31]

SMax: These are automated trading algorithms and the algorithms would work on a set of
rules, a set of buy orders and a set of sell orders and can be, more or less, sophisticated.
Were looking at two types and both types show up very clearly in Kais data, which we can
show there and look at the visualization later on. The Willy bot is the one that gives the
name to the Willy Report. This appears to have done nothing but buy bitcoins slowly,
steadily, slightly randomly between 10 and 20 bitcoins every 5 to 10 minutes but the trading
bot sat there buying the bitcoins, come what may, for some time. It actually bought into
multiple accounts, which is quite interesting, so whenever it got to the point of having about
$2.5m worth of Bitcoin, it would open a new account. The second trading bot shows up as,
what almost looks like a glitch in the system. It always buys for zero fees which is unusual.
It buys them to a single account but the money that it generates, or is generated in that
transaction, appears to be random. Part of the analysis is trying to understand why that is
so, regardless of the number of bitcoins being bought, the money being paid for it, doesnt
seem too correlate. In some cases, a large number of bitcoins are bought for very little and
in other cases, the reverse. What appears to be happening and, this is an old coding gotcha
is the previous value in the log is the one thats been used as the fiat spend. If the person
who transacted immediately before you happened to spend $15, then this transaction is
also worth $15 exactly. That points to something thats actually not using fiat money at all
to buy. [7:31]

AA: Kai, can you tell us a bit more about the analysis and how did you arrive at these
conclusions? What was your methodology? [7:40]

KC: Well, lets just go back a little bit to when the data was leaked. This is in March of 2014
that I took this data. I found it in a torrent on Reddit and the data was trade data so for
every trade there would be two parties, a trade consists of a buyer and a seller and you are
put buying and selling opposites, whatever you put in the other will get out. This is what
this data contains. There is a lot of duplicate data and data issues. [8:09]

SM: Tell us about those duplicate data sets. [8:13]

KC: The duplicate data is if you run a sequel query, you get a bunch of rows back, basically
this array of rows and if you just took the database and loaded it in and started feeding
some, youd see that there about 20 million trades. I would say, maybe, 4-5 million where
just same data have been returned twice and ended up in two files or sometimes would end
up in one file, 17 times. Your totals are going to be wrong because you dont have the right
set of trades that took place. Of course, if there is a bug in MtGox, maybe those trades did
take place and that money was paid out. What is data and what is wrong or incorrect is
difficult to work out in this case. [8:58]

SM: You were drawing your data from one of the leaks. Is that correct because there were
two leaks and they were separated by information that was contained in one of them but
not the other and a period of time, right? [9:11]

KC: This was in March of 2014, so two months ago. [9:16]

SM: Your dataset had the user IDs or it didnt have them? [9:20]

KC: It had user IDs and it also had deposit/withdrawal data. The deposit/withdrawal data
had transaction IDs. It didnt have transaction IDs but it had an amount and a time. Its the
sort of thing that you could take the withdrawal data and go the Bitcoin blockchain and see
if this user account, basically, withdrew at this time and tried to do this sort of identity
attacks on the Bitcoin network. This is not part of the data that I visualized. I only visualized
about the trade data because there are these ethical issues really exposing the whole sort of
community to these identity attacks. [9:55]

SM: You were working with the data that included the data from these bots, Willy and
Markus? [10:03]

KC: It did, yeah. I didnt quite do analysis; I sort of took the top 500 users by volume and
did this with my partner, Mary Becica. We just ordered them by volume and just tried to
plot every single trade that they made. I told these stories around Bitcoin Barons and
Greater Fools and bots and this really strange user. I wouldnt say its analysis and its not
conclusions; theyre sort of this kind of fairy tale I made up. I dont treat it as evidence.
[10:34]

SM: Youve taken the top 500 users from this leaked data from MtGox and youve graphed
it in a visual form, in a way that makes it easier for people to understand. You said that you
got a story out of that. I mean, what is the story, basically? [10:49]

KC: The story to me is that when people look at this data, they sort of see these trends. I
didnt do any trending; I didnt do any statistics or regressions or any sort of this formal
analysis. All I did was plot data. If you look at this data and you may be heavily influenced
by these example stories we created at the top, which are not necessarily true. This Greater
Fool one, we suggested they may investment groups and in the Willy Report, its suggested
that these are bets by Willy. Although, these Greater Fools generally make really large, big
trades, whereas I think Willy made about 10-20 bitcoin... Willy was a trading pattern that
was observed, this was back in November/December 2013 of last year and the public
trading feed coming out of MtGox. People would notice that MtGox was down but every
couple of minutes there would be a buy for 10-20 bitcoins even when no one else could
trade. This activity - the community at Reddit especially, decided to call Willy. [11:52]

SM: Yeah and that was unusual because this bot was trading when MtGox was supposedly
down. [11:58]

AA: When you say that Willy was trading while the network was down, was Willy also the
one that was occasionally trading without paying fees or is that a different bot? [12:07]

SMax: Willy was paying fees. It was Markus that was trading without paying anything.
[12:16]

AA: Essentially, those two data points, point that both of those bots had positioning in the
market that was quite distinct from any of the bots that might be operating via the regular
APIs. They had insider status somehow, either maintaining network connectivity where
there was none for anyone else or being able to achieve trades without fees that nobody
else was able to do? [12:42]

SMax: Exactly. In the logs, the activity during the downtime is quite stark. The only bots
trading, the only people trading on MtGox were these bots. [12:53]

AA: Thats pretty damning evidence. [12:55]

SMax: I think its quite important to be somewhat circumspect about what it points to.
What it does show is that something inside the perimeter was running these bots. It doesnt
necessarily point to any individual or group. The potential that a hacker has got in and has
compromised the system to such an extent where its installed these bots and can make
trades and create accounts and create US dollars at will, just by changing the database.
Although that kind of exposure would be very dramatic, its not out of the question. There
have been a few people pointing to the lack of security and the lack of patching in the Linux
builders used. The general lack of professionalism around it; if this were a trading platform
in New York or London, then the physical security, the IT security around it would have
made this sort of thing impossible, even if there had been activity that was unexplained, the
logs themselves would have been logged and made secure in such a way that they would be
unimpeachable. [14:07]

KC: It really shows what an advantage Bitcoin is in that we have a public ledger that is
constantly being verified every 10 minutes and whenever you download it, you verify every
transaction on the blockchain, whereas here we have a private ledger and we get a leak of
the private ledger and we find its very problematic. Its something we would have all
agreed to. [14:29]

AL: How long ago did the trading start for these bots with this abnormal behavior? Was this
from the beginning of MtGox? How far back does it go? [14:37]

SMax: Its difficult to see. The log data itself isnt complete and, in the Willy Report, weve
only got two days towards the tail end of November where its very clear whats going on.
The author, the anonymous author says that he first became aware of it in December 2013,
3
rd
January. Then Markus picked up 7 hours after the Willy bots stopped and took it from
there. Whether it goes back before that, it gets more circumstantial. Certainly, there seems
to be evidence to say that these bots moved the market and thats the important point
here, it manipulated the price of Bitcoin. The April bubble may well have been caused in the
same way, but there is far less data. [15:23]

SM: The timeframe, as I understand it, thats been analyzed here goes back, I think, to
about summer 2013, or maybe back to April 2013, and it stops at the end of November
2013. Is that correct? [15:38]

KC: The torrent that was released on Reddit, two months ago, actually goes back to April
2011 and goes to November 2013. [15:47]

SM: OK. [15:48]

KC: If you look at any of these graphs on Bitcoin.stamen.com, youll actually get a time axis
on the bottom and youll see the couple of months that it goes back. [15:55]

SM: Back to the idea that there were these two bots that had very unusual trading activity,
trading when MtGox was supposedly down and paying zero fees, its kind of hard to imagine
that that would go unnoticed. [16:10]

SMax: Yes, it is isnt it? Either there was wanton blameness, frankly, on the part of the
people whose responsibility it was to the customers, to make sure that this system was
secure or there was something, perhaps, more nefarious going on. [16:32]

KC: What do you think? Incompetence or misunderstanding of how this would play out.
There could be legitimate reasons why... you know, there are two more bots, there is also
THK, which was a really, really strange one. Thats user one in the Bitcoin 500. That actually
only sells; it sold like 2.9 million bitcoins. There were some posts when this data was
released on... they were posted on WordPress, posted on Reddit, about what this user was.
Theres one more too, its a bond limited HK which I did not graph because it basically only
trades with itself. People suspected that was a currency exchange buyer. There is more.
Its the whole market here. Its all the MtGox trading data from 2011-2013. Thats like
three Bitcoin bubbles. Its everyone trading on this marketplace. [17:17]

AL: Can you talk about a couple of the more interesting traders that you came across in
graphing these various individuals? [17:24]

KC: Yeah, the first one I called Bitcoin Barons and I put it at the front. I started calling a
Bitcoin Baron who started selling Bitcoin early, especially people who ran in the mining
client early on in 2011 on an either CPU or graphics card. These are people who were
trading for a long time. User 145 is like this. User 30, 33, 34, 35, 36 there are dozens of
them. They could be mining pools; BTC Guild is on here. [17:57]

AL: The thing that distinguishes these Bitcoin Barons, as youre defining them, is that they
got involved in the market early or that they sold when the price was high before it went
down consistently. [18:09]

KC: You know, you could come up with your own rules because everyone is sort of a mix of
these different archetypes that are trying to create value for themselves and not with
Bitcoin and they have other currencies that they want to trade and everyone is trading. As
time goes on, what you do changes. User 40 is really interesting. User 40, for instance, sold
little bits of Bitcoin in 2011 for small amounts of money and then, in 2013, just started
buying Bitcoin like crazy but he sold when it was super valueless and just started buying tons
of Bitcoin when it was worth a lot. Something changed in this users buying that they
decided to use their account to do (??) activity. [18:52]

AA: One of the things I was reading about this analysis and, again, I think its right to not
take any positions as to whether this was just gross incompetence, which is certainly no
good judgement of the outcome, or it was outright fraud, inside a fraud or a hack or
something else. One of the things Ive been reading is the possibility that some of these
bots essentially represented market making VIP clients or big whales who had some kind of
agreement with the trading exchange to get specific trades done automatically on a priority
basis, essentially front running trades, which is a different judgement on what the bots are
doing because maybe they were actually representing clients, still in a way thats highly
unethical and preferential towards some people and making an uneven market. Whats
your opinion on that? [19:51]

SMax: Thats true for some of the activity; for some of the Willy spends and especially late
in the day, there does appear to be bitcoins trading at far lower than the market rate and
that may well be the platform trying to increase liquidity when they were having difficulty
with people trying to withdraw funds. It doesnt explain how markets managed to buy so
many bitcoins without any money backing it up whatsoever. A VIP would still have the fiat
funds and that would be represented in the system but the Markus buys had no funds
behind them. [20:29]

AA: Theres also the possibility that its not one explanation that fits all of these bot
behaviors. Maybe some bots were, essentially, known to the owners or known to represent
clients, other bots were unauthorized, maybe some were run by hackers, maybe some were
run to do fraud, some were run to do market making. There could be different explanations
for different bots, correct? [20:56]

SMax: Thats right. [20:57]

SM: Thats an interesting idea because I was kind of confused reading the Willy Report
about why would there be these two major bots, and probably lots of other littler ones, that
were influencing the market so much but that explanation makes more sense. [21:13]

AA: Think of a scenario, perhaps, where one bot was created to do a market making job and
then someone broke in or an insider took advantage of that and then created a second one
based on the same codebase that was doing something very different, something very
nefarious. On the surface, perhaps, they appear and operate very similarly but one actually
has trades, real trades and the other one does not. Again, it could be the same person who
created both bots, or it could be someone copying the bot and then using it to do something
with very different goals. [21:45]


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SM: How much US dollar, basically, fake liquidity from Markus are we talking about here?
[23:22]

SMax: It looks like in the region of about $110-112 million. [23:27]

AL: What happened to those bitcoins? Thats the thing Im sitting here thinking and Im like
Oh, this sounds like there are a lot of movement here on both sides, on the buying and the
selling side but yet youre saying that no money was actually changing hands in these cases.
These bots didnt actually buy in and one of them didnt even pay trading fees. Were any of
those bitcoins ever pulled out by the bots? Were they sold? Did they just buy and hold to
lower supply? [23:53]

SMax: In the large of it, it looks like most of them stayed in the system and this is the
interesting thing about what the bots were doing. It does speak to a story. In effect, we had
a bot buying bitcoins and, at first, it was backed up by real money and then it was buying it
with fake money which, frankly, was just a database number which was increased. The
result was the value of Bitcoin is pushed higher for everyone. If you imagine youve got two
funds one is real money, the other one is magic money. If you spend the magic money
and the price goes up, the value of your holding in real terms also goes up and you make
money on the margin. If anyone tries to cash out of the trade that youve just bought their
bitcoins for, thats fine so long as youve got the Bitcoin value going up. That is the Ponzi
scheme part of it. The problem comes, is you are betting on the price always going up and
an event, such as the Silk Road crash which pushed the value down, would have reversed
that. What we could be also seeing is an attempt to right a wrong position. Its something
that happens in commercial banks as well. If you find yourself exposed on the wrong side of
the rules, then you try and break more rules to get yourself back in. [25:13]

AA: In fact, thats really the most common story of how insider trading Ponzi schemes, and
things like that, develop. It starts with an overleveraged position that turns sour and then
crossing the line, wants to try to fix it and then getting increasingly desperate and pushing
more and more money until the mistake can no longer be hidden. Its not the initial
mistake, its the attempt to cover it up by, essentially, doubling them on the bet with
increasing margins until eventually, it becomes unsustainable. We saw that with a UBS
trader, who got into a position, in over a year, trying to cover that up and ended up
multiplying that position by almost 100 fold. [26:01]

SMax: Exactly. Nick Leeson as well and Barings. There have been quite a few examples of
people that have started just bending the rules to some extent and the temptation must be
there, at this point, is lightly regulated and the database is simply there, to the point where
actually now, people cant get their money out and then it becomes headlines and then you
start to risk everything. Again, were hypothesizing here but certainly the trading towards
the end looked like the bots were trying to increase liquidity inside of MtGox. Now, if you
were a hacker, you wouldnt care about MtGox going down, youd have your money and
youd be out. If, for whatever reason, you did care about that, youd right it by increasing
liquidity, by spending or selling some of those bitcoins that you bought with fake money to
turn them into real money. [26:59]

KC: For some context here, this is back earlier this year where the activity, which we call
Willy, was just selling Bitcoin and providing way too much liquidity in Bitcoin, which people
didnt take seriously, to the point where people called it Goxcoins they fell to $160, $100.
The price was just totally at variance with what real bitcoins were selling at on other
exchanges. [27:26]

AL: That didnt seem to have much to do with the bots so much as it seemed to have to do
with the banking problems at least, that Gox was talking about having at that point. It
became later that Bitcoin was restricted but earlier it was just dollars and getting other
types of fiat currency out, right? [27:43]

KC: There were liquidity issues on all sides at MtGox, at that point. [27:47]

AA: Wherever the liquidity issues got worse, the withdrawals had to be stopped in order to
prevent, essentially, default in a way that revealed the entire problem. If we follow this
train of thought and assume that this is the oldest of all Ponzi scheme failings which is trying
to cover up for a small mistake by making bigger and bigger mistakes, then the dollar
positions and liquidity problems had to be stemmed by turning off withdrawals there, which
means really that the transaction malleability was a red herring. It was simply an excuse, a
convenient excuse at the time, in order to cover up serious liquidity problems that
prevented full withdrawals in Bitcoin and to maintain the scheme for a bit longer, in the
hope that the market rectified itself to the point where the cover up would be complete.
[28:44]

SMax: Thats right. Thats what is supported by the analysis of whether transaction
malleability was at the core of this. Interestingly enough, when the exchange was finally
closed, there was plenty of liquidity, in terms of being able to get yen out of the bank. It
was never the banks stopping the currency leaving or certainly be indicated by that. It
simply was that there wasnt enough liquidity inside MtGox to pay for everyone who
wanted their money out. [29:18]

AA: I have to admit that back then, when I saw this problem evolving with transaction
malleability, one of the things that was evident was that this wasnt a very serious technical
problem and that all of the other exchanges, that were affected by the rush of bots to try
out that same trick, were able to fix it relatively quickly. I was under the impression that if
transaction malleability was a problem, it would be fixed pretty soon because it wasnt a
very serious problem. Of course, now we know that wasnt the problem. The problem had
started possibly more than a year earlier. [29:57]

AL: Its certainly been compounded by the pricing action that occurred in October. Looking
at what happened with MtGox over the years, that was really the big difference is that
previously, the price of Bitcoin hadnt gone up so high. If they had a problem where they
were trying to get back Bitcoin, then their problem would have been exponentially made
worse by the increase to $1000-$12000 and nothing besides that really matters. [30:21]

SM: I dont know, was MtGox the highest volume exchange? Were they actually making
the entire market, including for other exchanges? Were they setting the price? [30:31]

AL: It depends on what your timeframe is, right? If youre talking about before 2013, then
pretty much, yeah, MtGox was most of the market. [30:37]

KC: This is something thats just interesting about the data because you really get to see
this market unfold all the way back from April 2011 and Gox was like 90-95% of the trading
volume of Bitcoin back then, at least online in these exchanges. [30:50]

SMax: The interesting thing to remember is, it doesnt take too much activity to push a
price if its done at the right moment. For example, if were talking about buyers wanting to
buy into Bitcoin, and certainly as the price was going up and the bubble was going up thats
what was happening, the lack of sellers would push up the price faster than would
otherwise be suggested. If youve got something sitting there quietly buying the excess
Bitcoin, then the price is going to be leveraged higher. [31:22]

AA: Thats a really great point. I think its important to distinguish between Gox being
responsible for signalling the market that was already predisposed to a big buying spree and
the other exchanges following through on that initial signal and perhaps accelerating it a bit.
Certainly, the number of trades and the volume dont say that all of the price increase we
saw was due to Gox but it may have precipitated and accelerated a buy sentiment that was
already there, to the point where it became much bigger than it would have otherwise.
[31:59]

SMax: It appears, at least on one occasion, to have reversed a downward trend. [32:07]

AL: Is this, essentially, the tail wagging the dog at MtGox? [32:12]

SMax: In a way. Markets are notoriously complex things and any attempt to alter those
markets, you do at your own risk. [32:20]

KC: We all have to participate in markets, you know? Its the only way that rational actors
can cooperate. [32:27]

AL: Lets assume for a second that this did have an impact on the Bitcoin price and possibly
even caused these bubbles. What does that mean for the world that we live in? Does
anything change? Do I need to think about anything differently? Is Bitcoin less serious or
more serious because of this? [32:41]

KC: Many of the actors who were trading on Gox still exist and still have large positions in
cash, or Bitcoin, or whatever kind of capital. These agents and these kinds of activities are
all out there and theyre all happening at every moment. [32:55]

SM: That is what the Willy Report says that... the conclusion is that Willy caused the
November bubble. [33:01]

SMax: I think the thing that it teaches us is, at this stage in its development, Bitcoin needs
to move from being almost entirely unregulated to having some form of regulation. The
temptation for any exchange, or any exchange owners, or anyone in a position to
manipulate the market, the temptation is massive. People being who they are, this sort of
thing may well reoccur unless controls are put into that and doing everything broad daylight
certainly helps. I think, I mentioned earlier on the benefit of the public ledger but also
requirements to audit, also requirements to hold a minimum amount of fiat currency, in
order to have a position of any kind. These are the basis for any kind of currency or asset
trading and thats where Bitcoin needs to go. [33:56]

KC: For us as users, dont treat these exchanges as banks. You cant just leave your Bitcoin
in there and expect it to be safe. You have to take control of your Bitcoin and learn about
the protocol. [34:05]

AA: Im going to challenge you a bit on that and I would say treat them exactly as banks
which means dont trust them because banks fail all the time. (Laughter) The reason we
have all of these regulations is because, when you centralize control over money, people
steal it. Everything built in the regulatory system is to prevent that exact thing from
happening. When you say regulate Bitcoin, lets be more precise. Bitcoin didnt fail here.
Lets regulate Bitcoin exchanges that are centralized and do not provide a public ledger. A
decentralized exchange wouldnt suffer from these problems because people wouldnt have
the keys. A public ledger wouldnt suffer from these problems because you cant fake
possession of Bitcoin. The failures of a centralized institution holding custodial accounts in
the old way and failed in exactly the same way as every bank and exchange has failed in the
history of failure. Yeah, that needs to be... [35:00]

SM: Every regulated bank and exchange. [35:02]

AA: Right... that needs to be regulated but it needs to be regulated because of the failures
of centralization and has nothing to do with Bitcoin. [35:08]

SMax: I couldnt agree more and youre absolutely right. The precise point, there are three
things here at work isnt there? There is the Bitcoin network and the exchange of crypto
assets and using the public ledger. There is the Bitcoin currency itself, which is the one
thats taking the pounding that other currencies havent and then there is the medium of
bringing people together and having the convenience of the service. Its this last which has
been at fault here, none of the other two. [35:40]

AA: In some cases, youll see altcoins point and laugh at these failures of Bitcoin which
leaves them really exposed to a blind spot. The issues, for example, transaction malleability
exists in every alt currency out there because theyre all based on the same codebase. More
importantly, the issues of centralized trading (??) boy, is that a can of worms and the only
reason we havent seen it exposed in other parts and other cryptocurrencies is a matter of
time and scale. I would say its probably a very good time to open our eyes wide and look
very carefully at some of the big players in other coins. There are some big issues in Doge
and specifically one of the big players in that space, where weve had quite a lot of issues
with transparency, accountability, secrecy and some concerns by the users in that
community. I think its premature to point fingers but its certainly provoking a lot of
questions and people should be open to those. [36:41]

KC: There has been a lot of web wallet hacking in Doge where users just lose all the funds in
their account. These are web wallets that were recommended as the main wallet you
should try if you want something easy. [36:53]

AL: It sounds like early Bitcoin. Does anybody remember MyWallet? [36:57]

AA: Right. Web wallets? [36:58]

SM: Yeah, definitely. You know Andreas, not all altcoins are based on the same codebase
as Bitcoin. I agree the vast majority are but there are a few that arent and then also you
mentioned centralized exchanges. We talked about Nxt on our 2.0 show, a little while ago,
and theyre not based on the same codebase as Bitcoin and they also have a decentralized
exchange and there are more coming. [37:20]

AA: Yeah, thats the right way to do it. Lets really focus what is the issue here. The issue
here is taking a decentralized currency, artificially creating a single point of failure, a single
point of control and a single point that requires trust by centralizing a specific function,
whether thats the exchange function, whether thats a wallet function, custodial access to
keys and then that brings with it the need to centralize regulation around that. Once you
start down that path, then you need to carry in all of the baggage of traditional fiat
currencies with all of the centralization that implies. Thats a mistake no matter which
currency you do it in and it will bring all of the same failings that weve seen in the past,
both in fiat currencies and learn from in Bitcoin. Its bad to centralize wallets, its bad to
centralize exchanges and the solution to that is not to layer on regulation to build layers of
centralized trust on top of that, its to not centralize in the first place its to keep the spirit
of decentralization pure and not recreate the errors of the past. [38:30]

SMax: I agree and for me, one of the main takeaways of this is how apparently ordinary the
failings in the system is and it does point to people. Its not the technology, its not the
currency itself, its the same old pressures that weve had, like runs on banks, which has
caused us to get to a point where fiat currency is regulated to the point where it can be
manipulated on a vast scale for national needs. Thats not the place to go back here. Im
very much along the lines of thinking we should be talking about how we agree to be good
neighbors in this network. How do we interact in ways that we need to, in order to make
use of the network? The network decentralizes to some extent but we still need to come
together, in order to make use of this. Whatever happens next, this technology is being
adopted in many, many uses. The idea of a decentralized ledger is going to be key to
currency for the next hundred years, regardless. I think its quite important to agree, at this
point, amongst ourselves, exactly how were going to use this. [39:51]

AA: Trust is at the core of this and the answer, in these cases, is not to say Well, we
needed to add more trust. We should have vetted Karpeles. We should have vetted MtGox
more. We should have added regulations so that we could add more layers of trust on top
of that shaky foundation. The answer really was we should have had less trust. We should
have had a zero trust system where it didnt require us to trust anyone because no one
could steal the money. A zero trust system, where you cant be evil, where you cant steal
the money, where you dont have power and its a public ledger, is a much better system
going forward. Those systems were not possible before 2008 so they dont immediately
come to mind but they are possible now. We need to resist the temptation of
reimplementing the whole of the mistakes of the past by building layers of trust. Dont
build layers of trust. Zero trust is much better. [40:47]

SMax: Hear, hear. [40:48]

AL: Its easy to make that argument now but, at the same time Andreas, its sort of is
experiences like this, painful though they are, that prove to people that thats something
thats important because otherwise decentralized exchanges, trustless exchanges... Ive
been playing around with them for the last couple of months, as I know you have too and
they have some issues too. There is really no magic bullet here thats going to make it so
that all of our trading woes go away. You trade one set of problems for another but yeah, I
agree with you that the trust needs to be sucked out of the system. People need to assume
that everyone is a bad actor when it comes to wanting to hold your money and operate
from there. [41:20]

KC: Part of the story I love is that MtGox created this Bitcoin bubble and it happens every
couple of years, every six months or whatever it is and it gets the medias attention and first
three - its all about Gox, Gox, Gox. We still sort of have this idea of a Bitcoin bubble that
could happen and lives in peoples minds and it gets people thinking about the technology.
[41:39]

AL: That really is an interesting point because that was very true for me. You talked about
the user that sold small amounts of Bitcoin in the early days and then bought lots of Bitcoin
in the later days. I think that, actually, was a lot of people. I think that the thing that
proved, at least to users like myself, that it wasnt going to go away is because it not only
had these bubbles but that it didnt die after the bubbles. It went down but then it would
come back up to something normal. Lacking the bubbles though, I dont know if it would
have pulled me in in the way that it did. I mean, its really interesting to think about how,
even though this is obviously a breach of trust in so many ways and obviously a bad thing
and an immoral thing in so many ways, at the same time, did it serve a good purpose in
drawing attention of users that it might not have otherwise done? [42:24]

KC: It always (??) if theres a Bitcoin bubble. My mind will always go back to these events
that happened. It will never be separate for me. [42:30]

SMax: It could well be that MtGox is there to serve as a warning. Moving from where we
are, which is speculating on the value though, is not making full use of it. Ultimately, were
talking about a network which can give very low friction trades of assets and that doesnt
necessarily need any kind of speculation around it in order to be valuable. [42:58]

AL: Scott Maxwell of Cryptocurrencymadesimple.com, Kai Chang of Bitcoin.stamen.com,
thanks very much for shedding some clarity with us on this kind of convoluted topic.
(Laughter) [43:08]

KC: Thank you Adam. [43:08]

AL: We look forward to continuing this story here. [43:11]

SMax: Thank you. [43:11]

AL: Im sure that this isnt over. [43:12]


____________________________________________


CREDITS:

Thanks for listening to Episode 115 of Lets Talk Bitcoin.

Content for todays episode was provided by Stephanie Murphy, Andreas M.
Antonopoulos, Scott Maxwell and Kai Chang

Music for this episode was provided by Jared Rubens and new artist, Dirty Beats

Any questions or comments? Email adam@letstalkbitcoin.com.

Have a good one! [43:36]