CEX.io "Suspends" Cloud Mining

It's been an interesting day to be sure, with PayBase announcing ways to improve their price and profitability long-term on the one hand while cloud mining services have been going belly up at a rapid pace. With the falling Bitcoin prices and continued high difficulty, it was inevitable that one of the biggest cloud mining services, CEX.io, would run into problems. Today in a blog post, CEX.io states that they are "temporarily" suspending their mining services. I put "temporarily" in quotes because there are really only a few scenarios that will lead to CEX.io resuming mining:

1. The price of Bitcoin climbs to the point where it's profitable again.
2. The difficulty of Bitcoin falls to the point where it's profitable to mine again.
3. CEX.io gets more efficient hardware that makes it viable to mine even at the current price/difficulty ratio.

I actually noticed the problems with CEX.io over the past month, when I saw that my BTC balance would sometimes drop, and the past week in particular has been bad. Now, I have long since pulled out of CEX.io, so I only had 0.5GH left on the service, but over the past week my balance dropped about 5% (maybe more?) due to maintenance fees. Even worse, selling all hashing power still seems to have only partially stopped the hemorrhaging, as referrals can still result in fees. Nice, isn't it?

The real question is whether the maintenance fees are even reasonable, or if they're just high in order to secure a profit for CEX.io. I've looked at quite a few cloud mining options over the past couple of months, and without fail those focused on Bitcoin mining have looked like they would never come close to ROI. Even the best ASICs are looking rather questionable right now, as the initial cost is too high to justify.

My prediction this round is that we're due for the first real drop in difficulty in a long time for BTC. We finally reached the point where all that hashing power was using too much electricity to sustain, and with falling BTC prices suddenly everyone is in the red. Note that we did see a few small drops in December (-0.73% and then -1.37%), but these were followed by a 3% and 8% jump in difficulty on the next two cycles -- and that last one coupled with a falling price really pushed things over the edge. People who own their own ASICs can keep running them, effectively paying extra in fiat power bills to avoid the trouble of buying BTC directly, but for cloud mining this is a complete loss: you pay maintenance in BTC and you receive rewards in BTC, so effectively it's like paying 1 BTC per day to get 0.9 BTC back (whatever the exact amount is). There's no reason to continue, period.

This is also part of the bigger problem with Bitcoin: ever increasing hashing power is only possible with ever increasing price. If the latter falls, the former must eventually follow. Assuming things get bad enough, we could actually see difficulty and network hashing power drop so far that a 51% attack would be possible, though I think that's unlikely as anyone with any sort of interest in Bitcoin doesn't want that to happen. Not surprisingly, this flaw is what has driven so many alt-coins -- including Paycoin -- to adopt a Proof of Stake distribution mechanism, as there the total power requirements are relatively minuscule in comparison to Proof of Work.

Long block confirmation times and large amounts of "wasted" power are two real issues in Bitcoin. Could we actually see the cryptocurrency collapse? Well, I doubt it, but nothing is certain. If BTC does end up failing, something else will end up taking over, and more likely than not that something will not use a Proof of Work hashing algorithm. Far more likely is that we're at the point where difficulty is going to become a lot more stable. I don't think Bitcoin prices are likely to drop too much further, but if they do you can rest assured that some big ASIC farms will pull the plug while they wait for the next difficulty adjustment to see if it's worth mining again.

Worst-case, we could actually see a huge number of ASICs shut off in the near future, causing a large drop in difficulty that might take a month or more to happen. Then we'll see a huge jump in hashing power for the next cycle thanks to the difficulty drop, and suddenly all the problems alt-coins have experienced with too-long difficulty adjustment cycles will rear their ugly head in a big way with Bitcoin. There are probably enough "believers" that will keep mining come what may that Bitcoin won't have quite the roller coaster that we've seen with alt-coins, but this could definitely open the door for other cryptocurrencies to gain ground on what was once an unassailable position. It could prove to be a very interesting quarter or two....

Proof of Stake Interest Scaling: WYSINWYG!

So I've bagged on Proof of Stake "minting" before, and I've said numerous times that I don't expect much to happen. Blackcoin has 1% nominal annual interest, but other coins are promising much higher rates. What if I told you that the actual interest you'll receive may be far less than the stated PoS interest rate? You'd probably think, "That's terrible -- there's no reason to hold any PoS coin unless you're simply speculating!" Well, it appears after further review that this is exactly the case with some of the PoS coins out there! Case in point: Piggycoin 2.0 (PIGGY).

Let me give you an example of what I previously thought was happening, then some numbers that prove this is absolutely not the way it works. (I've been digging through the source code, and frankly it's tough to follow so I have not yet quite figured out where things "go wrong".) Let's start with something simple: 15% annual interest.

If you have $1000, at the end of the year if it's compounded yearly, you'll have $1150. With PoS I assumed things would function in a similar manner, but with more frequent compounding, and that seems to be the way most people expect it to work. So if you have 1000 coins and the PoS rate is 15% yearly, then if your coins hit a PoS block and their coin age is 1 day, you'd receive (1000 coins * 0.15 /365) coins from PoS daily on average, which would be ~0.411 coins. What happens if you don't hit a block for a day is that your coins continue to age, so if they don't hit a PoS block for 10 days then their coin age is 10, so you'd get 10X the PoS reward -- 4.11 coins every ten days. Thus, in theory at the end of a year you'll average out to the 15% figure -- and if you hit a block every day, you're effectively getting compounded daily interest, so slightly more than 15% yearly.

Here's the problem with PIGGY: that's not actually what's happening! I know this because I mined about 212K PIGGY, and I talked about the features of the wallet. PIGGY is basically yet another alt-coin, with the biggest claim to fame being that it has a somewhat more advanced/useful wallet. (It has things like an integrated block explorer, a Statistics page, and even a chat client.) My analysis is that, despite the improved wallet, I just don't see PIGGY going anywhere. Naturally, the staunchest PIGGY supporters think I'm an idiot/jerk/[insert derogatory name]. I posted my "review" in their ANN thread, which obviously doesn't help much, but here's where things take a turn for the worse.

One of the users said something to the effect of, "I just bought 500K PIGGY and I should be getting around 205 PIGGY every day from PoS, but I'm not. What's going on?" Someone tried to explain what was happening ("The difficulty of PoS blocks is higher now!"), but their explanation didn't make sense. Then I looked at my wallet, and what do you think I found? I mined PIGGY initially on IPOminer and then transferred 212,192.5036 PIGGY to my personal wallet at 2014-6-19 12:12:43 (feel free to look that up in the block explorer). On 2014-6-19 23:53:10 I hit my first PoS block, which means according to my previous understanding I should have seen a PoS block reward of 42.42033355. (The 212K coins had accrued precisely 0.486458 days of coin age, and with 15% annual interest that would be 0.019991% interest for the time elapsed.) My actual block reward from that first "minted" block after just under half a day: 2.06481019 PIGGY. The rewards are about 5% of what I was expecting to see, or off by a factor of 20X, just like the other user!

I dug through the source code at this point and still didn't come up with a clear understanding of what's going wrong, but since we have coins that have been doing PoS minting for a while, I figured I'd go check one of those. Enter Asiacoin. (Why Asiacoin? Well, it's 100% annual interest, and the block explorer shows the number of outstanding coins quite clearly.) Let's start first with the end of the PoW phase, at block 20160. The total number of AC mined in the PoW phase is 171370113.067912, and that was on 2014-05-01 06:47:30. Asiacoin was created by a complete scammer, but the PoS transition went more or less smoothly and so the first PoS block of 20161 came at 2014-05-01 07:53:44. The block reward from PoS? A whopping 3.562109 AC from 137.55704 AC that was mined/transferred in on 2014-04-17 04:44:56 -- so it had a coin age of around 14 days. 100% * 14 / 365 = 3.83%, so I would have expected 5.27616 for the PoS block reward. The returns get worse as time goes by, unfortunately.

Asiacoin launched at 2014-04-16 16:00, and the PoS phase has been going on for around 9.5 weeks now. During that time, the total number of AC has increased from 171,370,113 to 182,981,295 (at the time I write this we're on block 114262). That represents an increase in the total number of coins of just 6.77%, and 9.5 weeks (slightly more) represents 18.2% of the year. So, even if only half of coins are staking (which is possible) the returns from PoS minting are less than one half of the stated 100% nominal annual interest. That's actually not bad if we were dealing with fiat where the value is more or less static, but that's not the case with cryptocurrencies obviously. AC was still valued at over 500 satoshi after the scam was discovered, back on May 13. Today, AC is valued at roughly 150 satoshi (give or take 10 satoshi). So even if you were getting 100% returns annually, in just one month the value has dropped by by half, fully offsetting (and then some!) any returns from interest.

Let's do another example with AC, though. Here's an address with 1.945 million AC. The AC was added after being purchased from MintPal, it appears, in two large chunks of 1.25M and .45M. Since then, the wallet has mostly been offline, with only a couple online sessions to get some of the coins due from staking. On 5/30, the 1.25M AC staked and became 1.34M AC. The next time that chunk of coins staked was on 7/5 when the 1.34M AC became 1.43M AC. Looking at that second transaction, 35 days had passed so the interest should have been 9.59%; the actual interest was 7.14% -- it's not off by a massive amount, but again it's still not giving the expected 100% annual returns (plus compounding interest).

I strongly suspect if I were to take the time and check on the dozens of other PoS coins I'd find similar problems with many of them. After all, many of these coins are simply taking an existing coin, cloning the source, modifying a few parameters, setting up some seed nodes (and a premine), and calling it a day. If the original source has some bad logic, all of the clones inherit those flaws.

Bottom line on PoS coins: it's definitely not at all about the PoS interest -- that's basically worthless on most coins to begin with (hello 1% Blackcoin, 2% Whitecoin, etc!). What will make PoS coins profitable is if they somehow become useful. That's not really happening with any that I can really see -- BC is doing "okay" perhaps, but it's one of the best examples and it's not even really healthy in my book. NXT is pretty much a joke as far as I'm concerned, and everyone holding NXT hoping it will increase in value would be better off trading it and figuring out ways to get more places to accept NXT for goods/services. But wait...why would you want to accept NXT if you could just accept BTC, LTC, or any number of other cryptocurrencies instead? Hmmm.... What's really driving the price on all of these PoS coins seems to be pure speculation more than anything, not to mention market manipulation.

Again, I want to note that not all PoS coins have problems with the amount of interest they're generating. Blackcoin seems to be on target, and CAIx looks right as well. HBN scales the PoS rewards, but it's clearly visible in the code and it's part of the specifications. If someone wants to figure out precisely why the returns from PoS on AC and PIGGY are broken and drop me a note about where in the source code it's happening, I'll be happy to update this. Personally, I feel if a coin promises 15% interest yearly, that's what it needs to deliver -- let the market dictate the price, but the interest rate should be set in stone -- WYSIWYG (What You See Is What You Get). This business of scaling interest rates without publicly stating how the scaling happens is just one more shady practice that will result in people getting burned.

Piggycoin 2.0: How Far Can a Good Wallet Take You?

I'm not going to do a full deep dive on Piggycoin right now, but Piggycoin has so many similarities to other coins that I felt it was worht a discussion at least. You see, recently the original PIG was converted into PIGGY (at 1:1 trading), switching from Scrypt PoW to X11 with Proof of Stake. CAI/CAIx basically pioneered this sort of "bait and switch", and it worked... well, it more or less worked, but CAIx isn't exactly the hottest cryptocurrency right now. (DRK or XMR on the other hand...but those are topics I cover in my newsletter so I won't spoil them here.) Anyway, here are the quick specs for the two versions of Piggycoin, starting with the initial release:

Piggycoin 1.0 Specifications (6/19/2014)
Symbol	PIG
Launch Date	2014-02-25
Proof of Work	Scrypt
Starting Difficulty	0.000244 (ugh)
Block Time	2 minutes
Block Reward	4,000
Premine	1% (21 million)
IPO	No
Difficulty Adjustment	Every 120 blocks initially KGW from block 2000
Reward Adjustment	Never? (Changed to 62500 at some point)
Max Coins	2.1 billion at ~729 days
Forum Threads	Bitcointalk (Old Thread!)
Block Explorer	Yes (Alternate)

Note that the block explorers for PIG may shut down in the future. Also, the block reward was changed at one point, but then it appears it changed back, as blocks 62500 through 62827 have a reward of 0. My guess is there's a group of users that want to stay on the original PIG, but I don't see it going anywhere as all of the exchanges have converted to PIGGY. Anyway, the original design seemed a bit...lacking, and the code was changed a few times in the early going, so when it was altered most felt it was for the best. Here's the new version.

Piggycoin 2.0 Specifications (6/19/2014)
Symbol	PIGGY
Launch Date	2014-06-10
Proof of Work	X11
Starting Difficulty	0.00024414
Block Time	1 minute
Block Reward	23,700 for PoW 15% for PoS
Proof of Stake	8 hours minimum staking age Unlimited maximum stake age
Premine	1% (265,353,096 added to previous 21M in block 3)
IPO	No
Difficulty Adjustment	Every block
Reward Adjustment	10,000 PoW blocks before PoS
Max Coins	500 million at ~7 days +75 million per year indefinitely
Forum Threads	Bitcointalk
Block Explorer	Official

Honestly, there's still not a whole lot that would make me look at PIGGY and say, "Wow! There's a coin that's going places!" But here's the thing: they've done a decent amount of work on the GUI wallet to make it more useful, and they also have an Android wallet app, as an added bonus. So how much is that worth? I have no idea really, but right now the price of around 30 satoshi seems rather low. I mean, DOGE doesn't have much going for it these days and there are already 83+ billion DOGE, each worth twice as much as a PIGGY.

And let's not forget the cute piggy bank. Will this coin really teach children anything about investing? Probably not, but I figure I can keep my PIGGY and earn 15% per year -- as long as the network keeps going. When my two year old enters college in 16 years, I will have about ten times as many PIGGY as I do right now. Which means if I currently have the equivalent of about 0.066 BTC of PIGGY, the $40 I "save" today could be worth a whopping $400 in sixteen years. Good luck finding a college that costs less than that! There's also the Piggycoin Foundation, which is undertaking charitable goals. Right now they're gathering PIGGY to buy bikes, but what that usually means is they take PIGGY, convert it to BTC, then convert that to fiat, and then donate the fiat.

Let's just hope that the price doesn't collapse -- and perhaps even goes up. And let's hope the network keeps going. And let's also hope the exchanges keep accepting PIGGY and don't forget about it as hundreds of new coins flood the network. Need I go on?

In truth, my outlook for PIGGY isn't too promising. Other than the improved wallet (see above), there's little to differentiate it from all the other PoW->PoS coins. 15% is at least a decent interest rate, but there's a very real chance the price of PIGGY will fall more than 15% per year. Restarting as a new coin also doesn't lend me confidence in the developers -- will Piggycoin 3.0 switch to a new PoW algorithm in a few more months? Let's hope not!

What I'd like to see from PIGGY right now is a better integrated ABE-styble block explorer, that shows difficulty, block reward, value, transactions, etc. instead of just some raw hashes. And if you really want to take things to the next level, integrate a way for users to trade PIGGY for BTC directly in the wallet -- have an internal exchange that runs on top of the network and doesn't require any intermediaries! That would be sweet, though I'm not sure how you tie that in to BTC exactly, and more likely than not you'd have hackers compromise the network at least a few times before everything worked properly.

Anyway, good luck my little PIGGY -- I expect big things of you, and we'll see if my children are actually able to use you when they hit college in 15 or so years. And if you'd like to donate to their PIGGY college fund, I promise I won't move the coins anywhere: pWf3PEfPuxRwed5dNtutrWndUZckXYdP8r


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Goodbye CAI, Hello CAIx!

 

As I've mentioned, the current "short-term PoW stage transitioning into PoS" is all the rage. It started with Blackcoin, got cloned by Whitecoin, Asiacoin, Yellowcoin, Orangecoin, and probably a dozen or more others, and along the way several other coins that were formerly PoW-only decided to switch to PoS. One of the more interesting coins to do this is CAI, which is a Scrypt-N coin from the same team that helped to create Ultracoin.

The official change to PoS has already begun, and CAI (Caishencoin) has now officially become CAIx. Interestingly, if someone were really determined they could actually keep mining CAI and reject the wallet updates that halt mining and such, but I don't think there's enough impetus to make that happen. The reason I mention it however is that from the launch of CAI to the switch to CAIx, we've seen quite a few changes, so let's quickly cover them.

First, CAI launched with a maximum circulation of 28 million coins, to be distributed over a long period of time (similar to BTC, LTC, etc.). There was an IPO involved as well, with a premine of 2% used for the IPO as well as other bounties and marketing. (I think 1% went to the IPO, but I can't be sure as the original information has been deleted.) What that means is that the developers created a genesis block worth 560,000 CAI before releasing the coin to the general public. Now here's where things get interesting.

After about two weeks of mining, CAI was doing "okay" but not much was really happening. Then the developers announced their intention to transition CAI into a PoS coin, and the result was initially higher prices. The IPO price of CAI ended up being at most 0.0008 BTC per CAI (with earlier IPO investors paying less). Shortly after launch, CAI was trading at around 0.0003 BTC, then a week later it was 0.00055 BTC, and when they first announced their intention to take the coin PoS CAI was trading at 0.0007 BTC. It dropped from there back into the 0.0004-0.0005 BTC range over the coming weeks, and now that the move to CAIx is fully underway we have CAIx prices of...wait for it...0.00083 BTC (with short spikes to as much as 0.0011 BTC).

The results so far have been relatively minor in terms of price movement, but long-term any IPO investors basically went from holding around 1% of all CAI (28 million total) to potentially holding a much larger percentage of CAIx -- there's currently a 1-to-1 trade available at Coin-swap.net, so if you bought as an example 10% of the IPO coins and thus ended up with 0.1% of all potential CAI, you now have over 1% of all potential CAIx (depending on how long the PoS staking lasts) -- neat, isn't it? The developers are "still trying to determine the best way to use the remaining premine funds", so it will be interesting to see what they come up with. At least this is one case where the coin is clearly being actively developed, though, so they haven't simply taken the premine and disappeared, and I don't think they will.

Other initiatives to increase the value of CAI/CAIx include making games (e.g. Tiny Elementals is available for iOS and Android now), but I tried that game and frankly I can't see why anyone would spend money on it -- there are many better "free" games around. The developers are also involved with Ultracoin (UTC), so we might see a PoS transition there as well -- which might be for the best, as scrypt-jane seems to be going nowhere fast, and UTC in general is quickly fading into obscurity.

Lessons to be learned from this? I'm not really sure. Apparently pulling a "bait and switch" in the cryptocurrency world is simply par for the course. At least it's a step from an outright scam like the initial Asiacoin launch, and it's interesting to note that even Asiacoin is holding steady after the fixes were applied to nuke the 3.2 billion hidden AC premine. In the meantime, if you're holding CAI (like I was), you'll want to exchange that -- for free -- to CAIx sooner rather than later. I believe there's a two week window before the Coin-swap exchange goes away, and at that point I suspect that any remaining CAI will be largely worthless -- so unless you want to collect them as a souvenir, act now.

The Rise and Fall of Whitecoin

It's funny: after my last public post about why I didn't really like Proof of Stake as a solution, PoS decided to become the Next Big Thing (tm). [Note to self: find another idea to bag on, and then invest in that idea as it appears people like to be contrarians to my opinioins.] This was thanks in no small part to Blackcoin and Blackcoinpool -- the latter being a multi-coin pool that mines whatever is most profitable and then auto-trades for BC. That puts a constant buying pressure on the coin, at least as long as there are large numbers of miners, resulting in higher profits.

The thing is, at the end of the day the PoS stuff is still just encouraging people to hoard coins in the hope of higher profits, while realistically many of these coins will end up dropping more in value in a month than you can possibly hope to gain on the PoS annual percentages. BC for example is 1% nominal annual interest -- and don't get confused by talk of "compounding interest"; you could compound every second but with a nominal 1% annual rate, you'd only end up earning... wait for it...1.00501671%.

Anyway, I was talking about Whitecoin and what has happened since it launched. First off, Whitecoin is basically a clone of Blackcoin, except instead of a 1% nominal annual interest rate it's a 2% rate. Also, the distribution of coins was 300 million WC instead of 100 million BC, with block times of 1.5 minutes instead of 1 minute. (Yawn! It took the developers how long to manage all of this amazing work!?) But WC apparently didn't clone BC, instead choosing to clone some other coin I guess, so they had some errors. With the BC mania in full swing, and the yin-yang aspect of Black vs. White, everything was primed and ready and WC took off like a rocket to the proverbial moon.

Do you know what happened next? After the initial PoW distribution phase concluded roughly 11 days after the launch, as planned, the PoW block rewards continued... only at 10 WC each instead of 30K WC. PoS wasn't happening at all! This should have been the first PoS block, but instead it was still PoW. What was going on?

Funny thing is that I believe I was the first person to notice the problem and comment on it; I posted about it here in the WC thread. However, there was so much excitement about ChunkyPools and Whitecoinpool doing for WC what Blackcoinpool did for BC that everyone totally missed/ignored my post. So 30 minutes later after looking into things a bit more, I followed up with a second post on the subject of PoS. And we had a bunch of people shouting, "Who cares about PoS? Push the coin and let's get to 2000 or 20000 satoshi!" Well, I cared, and the reason was simple.

I am (was) a computer programmer; I haven't done a whole lot of actual coding of late, but I can read other people's code fairly well and figure out what's going on. More importantly, one of the things you learn in studying computer science is that if a major feature of an application is broken/buggy, there will be a ton of secondary effects and basically the whole thing turns into a worthless PoS (that's not Proof of Stake this time). I worked at a company where there was a lot of talk about creating the "Next Generation Internet" clear back in 2000, but the code was a steaming pile of dung and the CEO was a complete disaster. His claim to fame? "Completing final exams in his first year, he became one of the highest grant earners for [George Mason] University." Basically, he had no real skills other than the ability to spew BS and convince the government to fund his pet projects (with the help of his influential father, of course), which went nowhere. Hooray for government bureaucracies!

Over the next day, the problem with PoS not working became a lot more serious, as the hash rate on the WC chain dwindled to nothing. The reason this is a problem is that if you drop too far in hash rate, anyone with a reasonable amount of hardware can perform a 51% attack -- gain 51% of the hash rate and you can perform a double spend. It's not a trivial task, but if you know what to do it can certainly be done. So the PR guy for WC announced over the past weekend that everyone needed to "protect the block chain!" and mine on a specific port of ChunkyPools in order to prevent a 51% attack. Here's my response, again from the WC thread:

So I have a simple question: why do we need to protect against a 51% attack if we're going to hard fork the coin? This is really quite simple:

HARD FORK THE COIN AT BLOCK 10000. Done.

Okay, maybe not 10000, but there's nothing stopping anyone from doing that. We have the block chain right now going past block 10000, but everything happening there is basically meaningless as far as mining. So if not 10000, because of the latest trades and such, then fork it at the current block or one in the very near future (e.g. 12000). What people fail to understand is that if someone were to execute a 51% attack, you could simply unroll the attack by hard forking to before it happened (according to the block chain). In the meantime, all this hand wringing is silliness.

Given that WC is largely based off of Blackcoin, I don't see why it can't just fork to a clone of BC, though there's more work involved than a simple cloning job obviously. Also note that the current WC block explorer is apparently off by a factor of 100 -- the initial blocks up to 10000 were 30000 WC PoW mining each, and now we're seeing 10 WC blocks (not 300 and 0.1 WC blocks, which is what the explorer is showing). So we have a buggy coin with a buggy block explorer. LOL

Anyway, as I see it the hard fork process is a democracy, and it's very simple: you vote by running the wallet you support. Given the source code is already available, anyone could create a new WC wallet, but that doesn't do them any good unless people (and more importantly, pools and exchanges) use the wallet. Since WC is currently broken, nothing good is happening right now regardless. All the exchanges listing WC should freeze all transactions, all WC pools (including ChunkyPool) should do likewise, and we should basically just leave the coin as dead for the couple of days it takes to get a fixed wallet in place -- or maybe a week at most, assuming you have any halfway competent programmer.

It will be painful in the short term, but fundamentally this is a coding problem and it can be best solved with coding, not by "protecting the block chain". Modifying the source code to restart after a specified block and roll things back seems better than wasting hashing power on a useless and unnecessary move to "protect" a coin that is going to be hard forked one way or another. If in the interim someone gains a 51% share and executes an attack, then when a wallet is released that forks the block chain before that attack happened, the community just votes for that wallet (by running it) and we all move on. Just please make sure to test the new wallet properly before starting up trading and mining again, or we'll be back in this same spot.

The real problem is that with several other BC clones, and with WC having proven that it did not have a proper developer, it will take a lot for it to recover. Why in two years would anyone want to use Whitecoin as opposed to Blackcoin, or whatever other coin you want to name that didn't have major problems with it's initial release and wasn't created by a scamming developer? The only reason I'm holding WC is because... well, I'm holding lots of bags (small ones, mind you), and if a few of them take off they can cover for the dozens that suck.

That post comes from four and a half days ago, and in the meantime the WC devs have managed to not release a public wallet. Do you know what happened next? Well, first off, a few exchanges closed down deposits/withdrawals of WC temporarily, but Cryptsy kept their WC exchange running and then several other exchanges decided to join them. With such low hanging fruit, the result was inevitable: someone orchestrated a DDoS attack on Whitecoinpool/ChunkyPools, the network hash rate on WC plummeted even further, and they were then able to execute a 51% attack and apparently performed a double spend. So the WC exchanges (except Cryptsy still?) are apparently closed again.

What happens next is the real question. A fixed wallet will come out, hopefully in the next 24 hours, and at that point the 51% attack can be rolled back. Hopefully Cryptsy and the other exchanges didn't accept any double-spent WC, but considering Bittrex at least saw a price of 1 satoshi for a moment, I'm guessing we'll see a lot of pandemonium before this is all done.

Some will be glad that things rolled back, others will whine, "I bought a bunch of WC at 1 satoshi and they got taken from me!", but really the exchanges shouldn't have even been running. Here's a thought for you exchanges: if the price of a heavily traded coin drops by more than 50% within a matter of minutes -- or even an hour -- you should put a temporary halt on all trading! That flies in the face of profiteering, but it's better that than "pulling a CryptoRush" and going insolvent, wouldn't you say?

The bottom line right now is that Whitecoin was a clone of an existing idea, and the people executing on that idea were apparently not as skilled as they should have been. Instead of repeating what BC did, WC has failed on so many levels that it's difficult to see how it can recover. They could release a perfect wallet at this point, and many people are still going to be gun shy. And rightly so! If they had just listened to my advice early Sunday morning, we could have at least avoiding the past five days of grief, anguish, scams, double spends, etc.

At this point, WC is past block 15000, which means that over one third of all blocks on the block chain are "bad" -- in that they should have been PoS but instead are PoW valued at 10 WC. There are still 300 million WC out there, and a nominal 2% annual interest means we should have had PoS blocks doing around 0.00000570776% per block... which would only have been 17.123 WC PoS per block assuming every single coin of the 300 million WC was properly staking. The difference of course is that you could have 20 wallets running PoS coins and still have only 10-25% CPU load on a quad-core Core i7 system, drawing maybe 15W total for Proof of Stake "work"; instead, we've had hundreds of people throwing 100 times that much power at the problem, and getting 40% lower returns for their trouble.

Can WC recover? Yes. Should it recover? That's debatable. WC looks like a quick money grab by the original developer(s), and it certainly succeeded in that regard. Now the community is left to try and pick up the pieces. The real question is: what will be the next Whitecoin? We have dozens of new candidates every month, and I can guarantee that we have not seen the last catastrophic failure in cryptocurrency, thanks to poor coding, greedy developers, greedy miners, and -- dare I say it? -- Proof of Stake. The only real winners -- other than the developers -- are the people that mined on places like Hashco.ws, Middlecoin, etc. where the WC was already traded, often at relatively high rates, for BTC.

Proof of Stake (PoS) - Examining NXT and MINT

"Proof of Stake" mining, or "Piece of [Bleep]" mining? This is probably a subject to tackle in more depth, but the key tenets of PoS mining are that you secure the network (those with a "stake" are less likely to compromise the network security and fork the block chain) and you don't have to "waste" lots of power. Many coins have tried this (NXT, MINT, THOR, ZEIT, BC... probably a bunch of others as well), and really the only major success story I can think of -- and I'm using that term loosely -- is NXT. Let's talk about a couple of them, specifically NXT and MINT.

The initial IPO to distribute all NXT coins was around 21 BTC, so at the highest price of BTC that would be roughly $25,000. Now there are 1 billion NXT (initially distributed among the IPO holders) worth approximately 61090 BTC. Seriously? Yes. And that's why every new coin these days seems to be trying an IPO. "Golly -- look at how well NXT did! From the IPO price to the current price is an increase of 2900+!" Who wouldn't like turning $1 into $2900 overnight -- or $1000 into $2.9 million? That's the "success" side of the story, but now that NXT exists, what are people doing with it?

I don't know how many of the initial NXT coins have been given away -- I received 3 NXT from a faucet at one point, which is basically worthless -- and frankly the whole Java-based "forging" client thing is terrible. With the source code now released, hopefully we'll see some better clients. Then again, why build a better client if something isn't really worthwhile? That's the difficulty I'm having. So let's get back to Proof of Stake mining/forging/minting/whatever.

With NXT, your chance of "forging" a block is based on how many coins you have that are "active" (1440+ confirmations since they were last transferred between NXT wallets), along with how many wallets/coins are active on the NXT network. Let me pause for a second to say that I admire the tongue-in-cheek quality of calling the creation of money "forging"; I'm not sure if it's supposed to be humorous or serious, but I choose to view it as the former. Anyway, let's assume that only about 10% of the NXT coins are active as an example. That means 100,000,000 NXT are actively "forging" and your chance to forge a block is the number of NXT you have divided by the active number of coins, times 1440 (the number of blocks per day).

You can find out how much of the NXT network is active by looking at the "target" icon next to new blocks in the NXT client, which lately is ranging from as low as 400% to as high as 7000% for the blocks I'm seeing. Divide 100% by that number -- so we're looking at 0.25 to 0.0143 -- and we get a range of 1.43% to 25% of NXT coins actively forging. That means somewhere between 14,300,000 NXT and 250,000,000 NXT are online right now. Let's just go with 10% being active, though. If you happen to be holding one BTC's worth of NXT (around 16000 NXT), then you should forge roughly one NXT block every four days (using the 10% active estimate).

So what would that actually earn? Well, that's where NXT gets a bit difficult: you only get paid the transaction fees for the block you forge, and quite a few (most even!) blocks are empty. Basically, you could earn as many as 255 NXT for a block (if all 255 transaction slots were filled), or as little as 0 NXT for a block (far more common). If 10% of blocks have one transaction (which is at least a reasonable estimate), and if you have 16K NXT and forge a block every four days on average, that means in one year you would forge 91 blocks and earn... 9 NXT. That's an interest rate of approximately 0.05% -- about what most rip-off bank savings accounts give, which is hardly worth the effort involved. Having more NXT doesn't help either -- if you have 160K NXT and forge 910 blocks in a year, you'd earn around 90 NXT, which is still only 0.5%. Yuck!

Perhaps NXT is a bad example, though, as you only get paid transaction fees, and those are quite small (1 NXT). Let's take a more popular coin: MINT. The Proof of Stake payout for MINT is 20% the first year, 15% the second year, 10% the third year, and then 5% for the fourth year and beyond. Currently, after the initial PoW (Proof of Work) scrypt mining phase, there are 18.737 billion MINT in existence. Hold MINT in your wallet for at least 20 days and they become eligible for generating PoS blocks. It's not quite clear how frequently you'll generate a PoS block on MINT (at least to me), but for the first year you are paid on the "coin age" with a target of a 20% annual increase. A 20% savings account would be awesome, right? So what's the catch?

If you hold 1 BTC worth of MINT right now (5.9 million MINT), in one year with no additional mining you should have 7.1 MINT. Neat! Except, the price of MINT is questionable to me even at 16 satoshi; with 70 billion coins planned, why shouldn't we see eventual prices of less than 1 satoshi? THOR only has a target of 15 billion and it's at less than 1 satoshi (though still in the mining phase), so it's not too crazy to think this way. ZEIT is likewise trading in the 1-2 satoshi range (and ZEIT is basically just a total rip-off of MINT, if you're wondering). But even if MINT only drops to 10 satoshi, it would take more than four years of Proof of Stake mining to make up for that drop.

So there's the question: why is Proof of Stake better than Proof of Work? It basically incentivizes people to hoard coins, and if no one uses coins in trading, buying, etc. the only people holding coins are those that already invested in the cryptocurrency. What that usually leads to is a bunch of early adopters spouting off about the "one true coin" and how everyone should by ZEIT, MINT, NXT, whatever and then hold it so they too can starting minting/forging/foraging/whatever. Those who actually benefit are unfortunately the usual suspects: the developers that take a 1% (or 2% or even 3%) share of the total number of coins ever and then dump those at the first opportunity and disappear with a large pile of profits.

TL;DR (that's "Too Long; Didn't Read): I don't get why Proof of Stake minting/forging/whatever are actually going to be worthwhile long-term. The early miners, developers, and IPO share holders will dump at the first chance they get (assuming they can first successfully pump the coin, of course), while the hoarders wait for PoS to kick in. But by the time PoS is really doing much the value of any newly created coins will be in the toilet.

Is anyone out there not holding a PoS coin that actually thinks this is a better solution than PoW coins? Part of the real draw of Bitcoin I think is the massive amount of hashing power it requires I think -- it's using the most power, and it has the highest value. What am I missing here that makes PoS coins "special"?

The only bright point is that minting/forging doesn't require a lot of electricity, but even "low power" coins like MINT and ZEIT still use CPU processor power and require your system to be on. Oh, sure, transparent forging would allow you to only power up on occasion, but that's just more work. "Oh crap, I didn't power on my system and missed my block, and now I got penalized! I guess I'll just run the system and software 24/7." On a typical desktop, I'm seeing a pretty consistent 5% CPU use out of the MINT and ZEIT wallets. That means if my system uses 35W and I leave it running 24/7 "just to be safe", rather than turning it off half the time, I'd be using 175 kWh per year extra.

That's only $17.50 or so for a year of minting, but the potential earnings from MINT are only $0.0000768 per MINT right now (and dropping). That means to at least break even on power and earn $17.50 in a year (at 20% interest and 16 satoshi), I'd only need about 1 million MINT (not much really), and in four years when we're at 5% interest I'd still only need 4 million MINT. But my bet is that we'll see coins like MINT continue a downward spiral, because no one is really going to support 20% interest rates per year, or even 5%. If the price drops to 1 satoshi (and actually stays there), you have to hold 18 million MINT to break even.

Can you think of better things to do with 3 BTC? I sure can... like just sit on it and wait for the next time the price hits $1000 and you've doubled your money. That seems a far safer bet than investing in MINT or some other PoS coin and hoping for 20% annually. Or put another way: I wouldn't bother with minting/forging unless you happen to already have a significant number of coins.