After only giving hashing and the digital signature process a single paragraph in a previous article , it is time to revisit these two topics on their uses past Bitcoin transaction verification alone.
Diving right into some technical details made as simple as possible, the first step to signing anything digitally is to hash the contents of what is being signed. To securely hash is not easy, and the 256-bit secure hash algorithm (SHA-256) ensures two critical concretions.
(1) First, a brute force attack on the hashing algorithm must be as computationally expensive as going through all binary combinations of 256 bits. It is currently unrealistic, however, to expect an attacker to accomplish such a search for small Bitcoin transactions, for example, since 2^256 combinations exist for 256 binary bits (2*2*2*…256 times).
It’s a big number.
Second, a different kind of brute force attack on the hashing algorithm must be as computationally expensive as going through *a large fraction* of all binary combinations of 256 bits. This large fraction is some complex, provable formula related to the theoretical input size (which for SHA-256 is not bounded, other than by what is typically used in the world wide web) and the fact that 256 bits will undoubtedly need to have collisions to support this.
Collision? What is That?
9 inputs must collide for a 3-bit hash, with 8 “holes”.
This simplified example produces a 3-bit hash as opposed to 256, for simplicity and clarity. There are 2*2*2=8 combinations for 3 binary bits (each is either 0, or 1). If, however, there are 9 items to hash, then there has to be at least two inputs that lead to the same 3-bit hash output. By general logic, it’s visible immediately that some inputs will therefore have to hash to the same output.
With hashing better understood, back how it’s used: legal contracts are one use, but miners of bitcoin, and forgers of Ethereum, also rely heavily on hashing for their livelihoods. Cryptocurrency investors also use them in some way by transitive property (Transitive property, simplified: A=B, and B=C, ergo A=C).
Tampering with a digitally signed legal contract is so obvious, it never happens. Even a single character change generates drastically different hashes with SHA-256, for example:
“bitcoin blockchain” -> b43636e6232a977b6a614c93da701f938f9faa90d355a74d71aa8210474c8ebf
“Bitcoin blockchain” -> 7c96cf30947914ab1d9844d93707baf2435f9d9b290c8258622ab635054c8041
Just a single character difference – the capital “B”- and the hashes are completely different sets of bits.
Proof of Work vs Proof of Stake
For the proof of work (PoW) method of network distribution of network computational resources in a blockchain type network like bitcoin, hashing is used heavily in the reverse direction. As described before, a brute force method is computationally intensive. There are therefore sub problems to a full hacking attack that can be measurably difficult. By continuously upping the problem difficulty, but only slightly, Bitcoin operates on a proof of work model in which miners prove they have spent considerable resources and power towards operating the network by solving these super hard problems (and being first, claiming a “first comers reward”). This model is extremely energy inefficient, however, and is not in the purpose of Bitcoin and blockchain technology.
Proof of Stake (PoS) is however much less energy inefficient, since the “miners” (in a proof of stake network, those performing the network capacity are referred to as forgers) are not rewarded any first comer’s fees, but instead through a deterministic system provide computational resources to the network and in return forge their own new coins. In an economic sense, miners are rewarded for their work, while forgers literally mint their own money.
In both cases, though, hashing is used to provide these computationally intensive problems which provide a natural distribution of new currency into the network. Remember, Bitcoin will only ever mint 21 million coins, and many of those are already in circulation already, since there is an exponential backoff function built into its code. Ethereum, a big PoS cryptocurrency, similarly will have to limit its new currency outflow as forgers join the fray since this could otherwise lead to undesired inflation if not properly controlled.
So, hashing provides a robust mechanism by which to obfuscate data, specifically used in digital signing but in other applications as well. On top of this, through the exact reason hashing came to be, its reverse problem (to decode a hashed value) is now being used to democratize the use of network resources on a blockchain based network.
Two New Blockchain ETFs, So What?
With the recent failure to get cryptocurrency Exchange-Traded Funds (ETFs) up and trading, the Nasdaq has listed ETFs this week by two companies that have shifted their focus to building portfolios of publicly listed companies with their hands in blockchain technology.
On its face, this might seem like exciting news for blockchain and crypto enthusiasts looking to get some investment exposure in the technology. However, anyone reading the headlines should temper their expectations upon a deeper look.
What are They?
BLOK is an actively managed portfolio run by the company Amplify ETFs. Under Amplify’s original registration statement prospectus with the Securities and Exchange Commision (SEC), the ETF was originally going to be called Amplify Blockchain Leaders ETF.
However, with good reason, the SEC was cautious to allow the fund to be listed with blockchain in its name over fear of having its stock price increase exponentially. Thus, Amplify settled on the name “Amplify Transformational Data Sharing ETF.” Since BLOK is actively managed, as opposed to its counterpart BLCN, the fund claims that this style of management will allow the fund to actively respond in real-time to blockchain related events and news such as IPOs, acquisitions, partnerships and strategic announcements, which could have an impact on the valuations of companies in the blockchain space. Amplify defines BLOK as a portfolio of “publicly-traded global equities actively involved in blockchain technology via investment, research or revenue creation.”
So, what are you buying if you decide to invest in the BLOK ETF? Well, many brand name tech companies that aren’t necessarily directly impacted all that much by blockchain technology. BLOK’s top holdings consist of giant tech companies such as IBM, Microsoft, Intel and NVIDIA, the e-commerce site Overstock.com, a payment processor Square, and the banking conglomerates Citigroup and Goldman Sachs.
Of those listed, only a few actually have heavy investments in blockchain. The two leaders being IBM, which has a department of 1,500 employees dedicated to blockchain technology, and Overstock.com, which is quickly transitioning from an e-commerce to a blockchain Bitcoin company. That is not to say that these companies can’t indirectly benefit from the developments of blockchain and the growing popularity of cryptocurrencies.
For example, NVIDIA’s stock price has increased by over 400% in the last 2 years because of the strong demand for its graphics processor units (GPUs). NVIDIA’s GPUs are among the most popular computer chips used by cryptocurrency miners who are looking to get rich and act as nodes for blockchain networks such as bitcoin. In fact, all of the holdings of BLOK do in some capacity have exposure to blockchain – although some are slight. However, any investor wanting to gain real exposure to the technology should look elsewhere, because the ETF resembles something more of a tech ETF, with some random payment processors and banks thrown in the mix, than an actual blockchain ETF.
Unfortunately, BLCN hasn’t distinguished itself from BLOK and a real blockchain ETF. BLCN is a passively managed ETF from the company Reality Shares ETF. Reality ran into similar trouble with the word blockchain being in its original name, Reality Shares NASDAQ Economy ETF, in its registration statement prospectus with the SEC. Reality settled on the name “Reality Shares Nasdaq NextGen Economy ETF.” Unlike its counterpart BLOK, BLCN is a passive index tracked ETF that will track an index, similar to the S&P 500, on the NASDAQ and will not be actively managed. The holdings in the index are very similar to the current holdings of BLOK, and features names such as IBM, Overstock.com, Intel, Microsoft, and NVIDIA. This leaves investors without real hard blockchain exposure.
Even though the two new ETFs aren’t exactly what blockchain enthusiasts were hoping for in terms of gaining easy access and a more diversified exposure to companies that are specifically focused on blockchain tech, it is a good start for those looking to perhaps dip their toes in the water of the blockchain world. However, it still remains that, outside of investing in the Bitcoin Investment Trust from Grayscale traded under the ticker GBTC, purchasing bitcoin and other cryptocurrencies outright on Coinbase or a purely crypto exchange like Bittrex or Binance is the only way to get a true exposure to blockchain and the crypto economic world.
Cryptos Rally Slightly
Following one of the worst crypto crashes since 2015, cryptocurrencies posted moderate recoveries.
Editor’s Remarks: Bitcoin dipped into four-figure territory at the nadir of the short-lived crash that many touted as the “end of cryptocurrencies”. However, most major currencies were up yesterday as they commenced a recovery. Ripple, which fell as low as $0.90, was up to $1.40 by midday, while NEO resumed its upward trend. Bitcoin’s recovery has been notably weaker than its smaller cousins, some of whom are up 60% in the last 24 hours against bitcoin. Ethereum gained back some of the ground it lost too and is settling in once more above the $1,000 mark.
Read more on Cryptocurrencies:
Crypto Carnage: Blood on the Dance Floor
It is said that ‘Blue Monday’, typically the third Monday of January, is the most depressing day of the year. This has, undoubtedly, been the case for cryptocurrency owners worldwide; from Monday onwards, almost all of the world’s major cryptocurrencies have seen a drastic slump in their prices.
Having reached the $14,000 mark last week, Monday onwards marked a severe fall in Bitcoin’s value. On Wednesday, the dubbed ‘king of cryptocurrencies’ dropped to below $10,000 for the first time since the end of November, before making a small recovery on Thursday. It stands at $11,500 at the time of writing, but the day is still young.
And Bitcoin has only been leading the way. At this point last week, the price of Ethereum, the second most valuable cryptocurrency, was approximately $1,200; a slump on Monday saw it fall to a low of $800 on Wednesday before pushing through the $1,000 threshold again, and reaching $1,030 a day later.
Ripple’s XRP also followed suit; the cryptocurrency has almost halved in value over the past week – from around the $2 mark to a low of $1.20 on Tuesday. Since then, it has marginally recovered in price, to $1.48 at the time of writing.
Monero, IOTA and Cardano were also impacted – since Monday, they have declined in price by 35%, 22% and 21%, respectively. Litecoin now sits at $195, down from $240 at the beginning of the week.
The crash occurred at a time of optimism and hope for cryptocurrency owners. Just earlier this week, US money transfer company MoneyGram announced a partnership with Ripple in the aim of streamlining money transfers. Yesterday also marked the expiration of the first Bitcoin futures contract that had been listed by the CBOE.
Still, China’s offensive rhetoric against Bitcoin and other cryptocurrencies in the last seven days is likely to have stoked fears amongst investors, causing a major sell-off. The country confirmed earlier this week that it was seeking to further clamp down on its restrictions against virtual currencies by eliminating cryptocurrency trading.
It has also recently announced plans to further restrict Bitcoin mining within the country. Recent statements coming from Chinese governmental circles could go as far as to suggest that China wants to eliminate cryptocurrencies outright: the People’s Bank of China (PBoC) vice governor, Pan Gongsheng, purportedly encouraged the state to introduce a total ban on cryptocurrencies.
China is by no means the only country to have espoused hostility toward cryptocurrencies. Russia also partially echoed China’s scepticism – President Vladimir Putin noted this week that “in broad terms, legislative regulation will be definitely required in future”.
South Korea’s unreceptive stance toward digital coins – it was reported earlier this week that its finance minister, Kim Dong-yeon, had stated that the government would be introducing measures to clamp down on the “irrational” cryptocurrency investment rage – may have also played a part in driving prices down.
Still, for every bear, there seems to be a bull. Time shall tell whether increasing restrictions on cryptocurrencies from different governments will further impinge on their price, or if they will find a way to adapt to the new obstacles and prove all those championing them (and making millions in the process) right.
More on Blockchain Technology
The Future of International Wire Transfers
After years of stagnancy in the traditional banking sector, major changes are rapidly taking place. As the world heads into...
Blockchain: Could It Improve the Quality of Financial Reporting?
Bitcoin has rapidly become one of the hot topics in the economic debate. Its valuation skyrocketed from $1,000 up to...
The Cryptocurrency Bubble: Not Bursting Anytime Soon
The recent Bitcoin rally has turned many sceptics’ heads to the potential value of cryptocurrency as a serious investment alternative....
Cryptocurrencies5 days ago
Ripple and MoneyGram: A Proof of Concept for the Use of XRP?
Cryptocurrencies4 days ago
XRP, NEO, Monero, IOTA: Can One of the New Kids on the Block Dislodge Bitcoin?
Cryptocurrencies3 days ago
ICOs: The New Gold Rush
Europe2 days ago
Silvio Berlusconi: Why Italy and Europe May Need Him
Americas5 days ago
US Healthcare: Income Disparity and the ‘$1trn Toll’
Cryptocurrencies4 days ago
Bitcoin Bubble: Cryptocurrency Values are Plunging
Cryptocurrencies5 days ago
Blockchain: Could It Improve the Quality of Financial Reporting?
Global Affairs4 days ago
The Migrant Crisis in Europe: What Will 2018 Bring?