Nobody needs Counterparty - a discussion on needs and wants

About a month ago, I had a comment exchange on /r/Bitcoin with /u/brighton36, the community director of Counterparty. A lot of different points were discussed, but the general argument was that /u/brighton36 believed that there isn't a convincing argument for the use of smart contracts and turing complete language in general, thus making Ethereum an unnecessary project. However, just like that logic could be used to claim "nobody needs Ethereum", similar logic could be used to make a statement that "nobody needs Counterparty". Lets explore whether any of this holds water...

Nobody needs Counterparty

Counterparty was launched around the start of 2014 and is one of the Crypto 2.0 platforms that runs on top of Bitcoin. Their notable feature that sets them apart from most other Crypto 2.0 platforms is their reliance of Proof-of-Burn to issue their currency. The platform offers decentralized exchange between XCP, BTC, and user created assets, although no direct asset-asset exchange, as well as some financial contracts. Their most notable and active assets include LTBCoin, Gemz and BitCrystals, which seem rather negligible in comparison to other platforms.

All in all, Counterparty is a decentralized asset issuing platform for centralized assets - loyalty points, presale currencies, etc. Since it relies on the Bitcoin network, the transactions are slower than the competition, there are no real gateways on the network offering fiat currencies. The network doesn't support asset-asset trading, making it pretty useless for direct FX trading. While Counterparty tried to woo Overstock into using its platform, but that didn't work out too well. The most notable proponent of Counterparty appears to be Adam Levine with his Tokenly project, but hearing what he aims to accomplish with it during a Decentral Vancouver meetup, both myself and other listeners said "you're reinventing Ripple!".

So in general, nobody needs Counterparty - you can issue the same currencies on faster, more established platforms, you can issue them privately on a centralized platform, on semi-centralized Open Assets, partner with some exchanges, etc. There are many other, better ways you can accomplish the same result without using Counterparty. So all in all, you don't need Counterparty, right?

Nobody needs Ethereum

In similar vein, one could criticise Ethereum's smart contracts. They offer unambiguous code execution, you know the code will not be changed during execution, and you can run long-running pieces of software that can use persistent storage on the blockchain. As /u/brighton36 pointed out:

"Unambiguous code execution is already in ubiquitous use today. Package management systems use code signing to detect whether the code being executed is asserted as valid by the issuing party. Open source scripts are in abundance. "

Beyond that, Counterparty has recreated Ethereum on its platform (and Ethereum responded in kind by recreating Counterparty in 340 lines of code). So all in all, you don't need Ethereum, right?

It's not about the need, but the want

When you think about it really, focusing on whether you need something or not because you can accomplish the same task with something else is a silly argument. That's like saying "you don't need Goland, you've got C++", or "nobody needs a screw, you can use nails". So no, nobody needs Counterparty and nobody needs Ethereum, but they are both useful tools in their own right. As long as they are functioning as intended and fulfil a need people have, not necessarily optimally, they are useful. I might prefer to use Ethereum to say, publish my blog because I can / feel like it / it's cool to do that, or Counterparty to issue my local currency because it's convenient / good enough / I like the project. Sure, you can do better in both cases, and in time you might optimize and choose a better platform, but that doesn't mean those projects aren't useful in one way or the other.

The only obvious caveat here are pumps, scams and similar attempts at getting people's money illicitly. While PayCoin might be as useful to transfer money as Tether, it wouldn't be advisable to give money to the former over the latter.

Good projects can flourish if people want to use them, or die if people don't care. Bad projects will most likely burn themselves out eventually. If Ethereum, Counterparty or whatever other project is out there is used by people, even if you can accomplish the same things with something else, let them use it. Claiming a project is "full retard" won't get you very far.

Conclusions

Claiming that "nobody needs project X" because you can accomplish the same task with some other tool or technology doesn't make the project itself useless. People might have many reasons to use the various alternatives, and as long as you can accomplish what you set out to do, that might be good enough for a lot of people.

EDIT:

- It looks like Counterparty has started supporting asset-asset exchange since the last time http://tiny.cc/Crypto was updated.

- As some have pointed out, Counterparty is also used by Storj and Spells of Genesis trading cards, although they haven't been trading much recently, hence why they weren't mentioned

More discussion on the topic can be found here:

- https://np.reddit.com/r/Bitcoin/comments/4gcb6a/nobody_needs_counterparty_a_discussion_on_needs/

Uphold - a follow-up

Two weeks ago, I wrote a blog post about Uphold's proof of solvency. Since then, I was in contact with Rebecca Geller, a PR, and by her proxy, with Jorge Pereira, chief product & engineering officer at Uphold to discuss the recent concerns with their platform and the perceived insolvency. Having exchanged a few lengthy emails, I would like to present what I learned about the situation and give a more informed opinion on the matter.

Voxels

While Voxels appeared to be an important part of the insolvency claim early on, they don't seem to play an important part anymore. As they are currently held separate from the main currencies and not counted towards the solvency anymore, it should be impossible for them to be used as an asset to cover the liabilities of currencies other than itself.

It is very unfortunate there isn't much publicly available historical data to draw on in trying to evaluate whether the Voxel balance was consistently counted towards the solvency proof when other assets were not enough to cover the difference, or was 2016-02-14 an anomaly. While archive.org does have some records of that page from before February, it doesn't render correctly. Retrieval of the data would be possible, but would take a skilled web developer to decipher. Perhaps in the future, we could see the transparency data being regularly exported to say, Factom, where it could be used for analysis in the future (disclaimer - I work at Factom).

Beyond that, Uphold handling Voxels appears to be a simple deal - Voxelus paying Uphold to list and handle their currency, handle the currency conversion, etc. As long as the currency itself is handled separately from everything else, I personally see nothing wrong or shady in the arrangement.

$38k deficit into a $57k surplus

While the Voxels can be ignored, we are still left with probably the main problem that needs addressing - the $38k deficit turning into a $57k surplus.

On 2016-02-14, Uphold's total obligations to their members was $115M, and assets - $116M. Subtracting the value of Voxels ($109M, $110M), the totals were $5.7M and $5.6M, with a deficit of $38'145.29. On 2016-03-27 Uphold's total reserves were $5'359'978.76 in obligations and $5'417'435.54 in assets, with a surplus of $57'456.78.

In other words, $95k worth of assets appeared seemingly out of nowhere in a span of a month and a bit. This either meant that either:

1. Voxels were indeed counted towards the solvency in February
2. The transparency website misreported some numbers
3. The balances were mismatched due to some recent trades or money movement
4. The numbers were fabricated

Either one of the four outcomes would show the platform in an unfavourable light, but some would be more damning than the others. 

Uphold explained the issue with option number 3 - the money was in transit between bank accounts and exchanges, and thus wasn't taken into account by the automated system tallying everything and publishing the numbers onto the transparency page. When asked for a proof that the funds were indeed in transit at the time, instead I received an a reply of

"To some extent, that’s a fair request, but if you trust the data illustrating what is perceived as a shortage of $38k, it’d stand to reason you’d trust the same source presenting an additional explanation, particularly seeing as the issue resolved itself within hours. The explanation we have provided rests on the same logic and transparency as the data you believed that illustrated the shortage."

Shorting Bitcoin, speculating with customers' funds

Another important accusation levelled against Uphold was the issue of their Bitcoin balances being short in favour of fiat currencies.

On 2016-02-14 Uphold's BTC obligations were listed as 5'834.056BTC, and their assets as 4'594.390BTC, short 1'239.666BTC, or 21.25%. On 2016-03-27, their BTC obligations were listed at 4'944.479BTC and assets at 3'652.980BTC, short 1'291.499BTC or 26.12%.

This raises a few questions - why was this done in the first place, what was the contingency plan in case of a price swing (with their $57k surplus, a 44.5BTC/USD price swing would turn the website insolvent again) as well as whether the company is speculating using their customer funds.

The reasoning behind the short balance was stated as trading sideways to save on exchange fees. As Uphold doesn't charge a conversion fee, they focus on lowering their operational costs by not immediately covering their customers' trades. In a perfect system, the trades would be going back and forth, allowing Uphold to only correct a fraction of the total trade amount on an external exchange, thus lowering the fees they pay. However, when the trades are more one-sided, the balance discrepancy grows further and further apart and needs to be corrected eventually.

Second question had a fairly straightforward answer - stop-loss mechanism. When the price swings too wildly, automatic trades are executed to protect the reserves.

Lastly, the company stated it does not condone the practice of speculating with one's customers' funds without an explicit permission from them. As such, Uphold is claiming not to engage in such a practice, and does not aim to make a profit by being over-exposed to one currency or another.

All in all, we seem to be running into the main trade-off that might have been the cause of this BTC shortage - whether one should prioritize keeping the fees low, or the reserves rigid. Neither one is a wrong answer - they both have their merits and drawbacks, but they do send a message about the company's priorities and values.

Interestingly enough, between 2016-03-27 and 2016-04-01, during my email exchange with Uphold, their BTC reserves seem to have corrected themselves:

Uphold BTC balance, 2014-04-01

Whether this balance correction was coincidental after over a month of running on a BTC deficit, or it was a deliberate action by the company, it can be hard to prove. Despite asking about "What is the threshold before your company would consider itself over-exposed on Bitcoin?", no direct answer was provided. At least I can take comfort in Uphold's statement to consider their BTC reserves more closely:

"This is feedback we’ll incorporate, and in all likelihood will just result in us adding a bit more of our own funds to the reserve surplus on the asset side of Bitcoin, to ensure it’s always close to over-reserved. "

Proof vs claim

A few times during the email exchange the topic of proofs came up. As Uphold is focusing on providing "a public, real-time, traceable and verifiable proof of solvency", it is important to distinguish between what constitutes a proof, and what is just a claim.

A proof needs to be independently verifiable and falsifiable, while a claim does not. Whether you use a send-to-self transaction, use a set of addresses and balances, or do something else an independent third party (or better yet, the public) can verify and possibly disprove, that can constitute a proof. Self-reported balances as is the case with Uphold's current transparency page, do not constitute any proof, but are merely a claim of solvency.

While Uphold is claiming that their reserves are independently audited on a quarterly basis and are currently working on publishing those audits in the future, as of the time of writing, I have no evidence of this, despite Uphold being asked to provide "independent, verifiable, sources for the information" for this article. I would exercise caution until such proofs are provided, even if this might be erring on the side of overt caution.

All in all, in an ideal world, I would like to see the following proofs:

• Proof of liabilities - allowing anyone to verify that their assets are counted in Uphold's total liabilities and that everything adds up
• Proof of reserves - independently verifiable proof that Uphold does indeed own the stated currencies and assets, crypto or otherwise
• Proof of existence / records - Ideally, the other proofs would be timestamped or published on a platform like Factom to prove they weren't altered in the future
• Proof of exchange rate - while one is able to claim they are not charging an exchange fee, a crafty party could hide the fee in the exchange rate spread and charge it covertly. While I don't know of any company that incorporates such proof, shy of using an open ledger, it might be a mark of the highest standards of transparency

At the current time, one can only wait for the first two or three to be eventually published...

Everything else

During the email exchange, a few less important topics were discussed. Some of the statements make the company appear fragile to criticism:

When asked whether Uphold stands by their CEO's tweet labeling the first Reddit post about the company's possible insolvency as "ridiculous, untrue & libellous lies", I was reassured:

"Absolutely, and it’s unfortunate that people end up misinterpreting the information we make available in good faith, without offering us the chance to clarify it. I can understand the confusion regarding VOX, and I hope our updates  address that.

Our CEO Anthony Watson is an award winning social  advocate, who does a great deal of good in the world to support people's basic human rights. He’s got no interest engaging with an anonymous Reddit poster who set up an account up several hours before he made this post seemingly only to cast doubt upon Uphold, without making any effort to engage with us to clear up these questions. "

The middle part seems like an appeal to emotion. In their closing remark, another two quotes appear to be putting the company in a victim role:

"[...] while some people may see us as “just a corporation”, we instead see ourselves as a group of people on a mission. We want to do the right thing, and being so poorly perceived is damaging to the morale of those working hard to make Uphold a reality. "

 "[...] We’re building bridges, so we’re bound to find trolls, but we see no value in taking part of a conversation where the conclusion has been decided beforehand and there is no opportunity for open dialogue."

While I'm glad that despite that the company decided to address some of those criticism in their blog post as well as answer my doubts and questions on the matter, failing to address the criticism head on because they came from an anonymous user while taking that criticism to heart and letting it lower your morale might not be the healthiest approach to take on the Internet.

Conclusions

Having had the chance to discuss the insolvency accusations with Uphold, I remain cautiously optimistic for their platform and their customers.

While they failed to provide any verifiable proof of their platform's solvency or where the $95k of extra solvency came from between February and March, their promise of publishing audits in the future might address similar issues in the future. 

Uphold's changed commitment to maintaining a more rigid BTC balance should similarly keep that issue from cropping up again.

While the company might not wish to engage "trolls" raising criticisms of their platform, it is at least good to see them addressing the concerns raised and improving themselves based on that feedback. One could see it as either being wise enough to reconsider one's stance, or desperate enough to pander to critics however.

So here's for hoping we'll get our proof of solvency soon enough and Uphold will be a shining example of transparency, rather than turning into another cautionary tale in the Bitcoin world.

Transaction data vs metadata - interpreting what has happened

With Bitcoin as well as most "Crypto 1.0" currencies, the transactions are simple and elegant. You specify which coins you're spending, what are the redemption requirements, and that's about it. A transaction either goes through, is included in a block and can be spent, or it never gets included and can be safely ignored. However, when we look at the more complex Crypto 2.0 systems, things start to get more complicated - there are many more states a transaction can be in, and we require additional metadata to figure out what really happened.

Transaction data vs metadata

The way Ripple handles its transactions is a good example of the data vs metadata. When submitting a transaction, we submit its data - our intent of what we want the transaction to do. For example:


{
"TransactionType" : "Payment",
"Account" : "rf1BiGeXwwQoi8Z2ueFYTEXSwuJYfV2Jpn",
"Destination" : "ra5nK24KXen9AHvsdFTKHSANinZseWnPcX",
"Amount" : {
  "currency" : "USD",
  "value" : "1",
  "issuer" : "rf1BiGeXwwQoi8Z2ueFYTEXSwuJYfV2Jpn"
},
"Fee": "10",
"Flags": 2147483648,
"Sequence": 2,
}

Indicates that we want to send 1USD from rf1... to ra5... and we pay the fee of 10. Now, when we submit the actual transaction, we also see its metadata:

{

  "id": 6,

  "status": "success",

  "type": "response",

  "result": {

    "Account": "rf1BiGeXwwQoi8Z2ueFYTEXSwuJYfV2Jpn",

    "Amount": {

      "currency": "USD",

      "issuer": "rf1BiGeXwwQoi8Z2ueFYTEXSwuJYfV2Jpn",

      "value": "1"

    },

    "Destination": "ra5nK24KXen9AHvsdFTKHSANinZseWnPcX",

    "Fee": "10",

    "Flags": 2147483648,

    "Sequence": 2,

    "SigningPubKey": "03AB40A0490F9B7ED8DF29D246BF2D6269820A0EE7742ACDD457BEA7C7D0931EDB",

    "TransactionType": "Payment",

    "TxnSignature": "3045022100D64A32A506B86E880480CCB846EFA3F9665C9B11FDCA35D7124F53C486CC1D0402206EC8663308D91C928D1FDA498C3A2F8DD105211B9D90F4ECFD75172BAE733340",

    "date": 455224610,

    "hash": "33EA42FC7A06F062A7B843AF4DC7C0AB00D6644DFDF4C5D354A87C035813D321",

    "inLedger": 7013674,

    "ledger_index": 7013674,

    "meta": {

      "AffectedNodes": [

        {

          "ModifiedNode": {

            "FinalFields": {

              "Account": "rf1BiGeXwwQoi8Z2ueFYTEXSwuJYfV2Jpn",

              "Balance": "99999980",

              "Flags": 0,

              "OwnerCount": 0,

              "Sequence": 3

            },

            "LedgerEntryType": "AccountRoot",

            "LedgerIndex": "13F1A95D7AAB7108D5CE7EEAF504B2894B8C674E6D68499076441C4837282BF8",

            "PreviousFields": {

              "Balance": "99999990",

              "Sequence": 2

            },

            "PreviousTxnID": "7BF105CFE4EFE78ADB63FE4E03A851440551FE189FD4B51CAAD9279C9F534F0E",

            "PreviousTxnLgrSeq": 6979192

          }

        },

        {

          "ModifiedNode": {

            "FinalFields": {

              "Balance": {

                "currency": "USD",

                "issuer": "rrrrrrrrrrrrrrrrrrrrBZbvji",

                "value": "2"

              },

              "Flags": 65536,

              "HighLimit": {

                "currency": "USD",

                "issuer": "rf1BiGeXwwQoi8Z2ueFYTEXSwuJYfV2Jpn",

                "value": "0"

              },

              "HighNode": "0000000000000000",

              "LowLimit": {

                "currency": "USD",

                "issuer": "ra5nK24KXen9AHvsdFTKHSANinZseWnPcX",

                "value": "100"

              },

              "LowNode": "0000000000000000"

            },

            "LedgerEntryType": "RippleState",

            "LedgerIndex": "96D2F43BA7AE7193EC59E5E7DDB26A9D786AB1F7C580E030E7D2FF5233DA01E9",

            "PreviousFields": {

              "Balance": {

                "currency": "USD",

                "issuer": "rrrrrrrrrrrrrrrrrrrrBZbvji",

                "value": "1"

              }

            },

            "PreviousTxnID": "7BF105CFE4EFE78ADB63FE4E03A851440551FE189FD4B51CAAD9279C9F534F0E",

            "PreviousTxnLgrSeq": 6979192

          }

        }

      ],

      "TransactionIndex": 0,

      "TransactionResult": "tesSUCCESS"

    },

    "validated": true

  }

}

Which specifies, among other things, AffectedNodes - the actual state change exacted on the system. It specifies the balance change of multiple addresses the transaction rippled through. This can be especially important when there are multiple paths a transaction could take, possibly even spanning many different currencies and entities.

How Ripple Works - Gateways and Pathways

All in all:

• Transaction data specifies what we want the system to do
• Transaction metadata specifies what did happen in the system

Lets look at a few examples of why this distinction is important.

Blockchain interpretation in Bitcoin 2.0

Some people use the term "Bitcoin 2.0" and "Crypto 2.0" interchangeably. I personally make the distinction of using the first term only when referring to systems built on top of Bitcoin itself - Mastercoin/Omni, Counterparty, Colored Coins, etc., while using the second term for all cryptocurrency systems allowing one to issue custom currencies (which includes Bitcoin 2.0s as well as systems like Ripple, Ethereum, etc.).

The distinction is important here because Bitcoin 2.0 systems inherently have no control over which of their transactions are included in the Bitcoin blockchain they are using. Unlike Bitcoin, two conflicting transactions can be included in the block and the system has to be able to interpret them correctly. Without transaction metadata, it is hard to tell at a glance whether a transaction is valid and spendable, or whether it is a double-spend and should be ignored.

A cautionary tale of the partial payment flag

In 2014 JustCoin, a Ripple gateway, got into a lot of trouble due to a small feature in Ripple very few people noticed before then - the partial payment flag. When a transaction is created with that flag, it signals to the network "I want to pay the person as much as I can up to the limit specified", rather than "I want to pay the person exactly this much". So for example if my transaction data specifies the amount I'm paying to be 1'000'000USD, but my balance is only 10USD, without the partial payment flag the transaction would fail, and with the flag it would succeed but only give a person 10USD.

The big problem JustCoin ran into was that the transaction data still would quote the big number, even if very little was sent, and only by examining the metadata would they be able to see how much money was actually sent. This meant their attackers could rack up bogus deposits and cash out of the gateway, leaving it short on funds.

Transaction successful, payment failed

While working on a Ripple gateway in the past, I got to explore a few different end states a transaction can end up in - a transaction can be not included in a block and be in an undefined state, it can be included in a block and be successfully applied, included in a block and partially applied (partial payment, open exchange), or it can be included in a block but still fail. In the context of Bitcoin, the last state would be unthinkable.

A scenario where a transaction is not applied to a block is similar to Bitcoin's unconfirmed transaction - it is in a state of limbo. However, with Bitcoin one can still spend other outputs without worrying about the transactions interfering with one another - each transaction output can be spent independently. For systems relying on address balances rather than transaction outputs, a dangling transaction can be a blocker. This is why professional transactions are sent with an expiration date (after which the transaction will definitely fail and not do anything), as well as sending a NOP transaction to overwrite the expired transactions to allow everything else to go through.

Successful transactions that applied fully are pretty straightforward - everything went through (or as much as could in case of partial payment flags).

Open-ended transactions are initialized by one transaction, but end up being fulfilled by other transactions. This applies mostly to the decentralized exchange offers - it's similar to placing a bid on a market and waiting for one or more asks to fulfill it. The transaction only closes when it is fully fulfilled, or it becomes invalid due to low balance, etc.

Failed transactions being included in a block mostly apply to Bitcoin 2.0s and balance-based cryptocurrencies. Those transactions either are inevitable - any valid Bitcoin transaction can be included in a Bitcoin block, but it can be an invalid Omni transaction -, or they are there for simplicity's sake - to do nothing, consume a sequence number and allow next transactions to be committed.

Conclusions

Transaction data specifies what we want the system to do, while transaction metadata specifies what did happen in the system. While not as important to Bitcoin and other first generation cryptos, the transaction metadata becomes more and more important for more complex Crypto 2.0 systems.

How not to do Proof of Reserves - a look at Uphold / BitReserve

Uphold, formerly known as BitReserve, recently came into some people's attention thanks to a Reddit user by the handle of askwhy10, who noticed the company might be somewhat insolvent according to their own Proof of Solvency. Anyone that has been around the Bitcoin world when MtGox has collapsed will know how important maintaining solvency is in our little corner of the world. But before we delve into that issue, lets have a retrospective on Uphold / BitReserve.

What is BitReserve?

BitReserve has been an interesting project for me to observe from a distance every now and then. Early on it was mostly a project about creating hedged accounts - you would deposit BTC, and then you could convert it over to USD or other currencies. In that sense it was similar to Locks from Coinapult or CoinJar's Hedged Accounts - BitReserve would dictate the exchange price, and it looks like you could only move money in and out of the system using BTC. One advantage it had over the other hedged accounts at the time was that one could transact directly in those hedged currencies, making it a bit more usable.

While lacking the free flow and exchange of money that systems like Ripple provided with their gateways, BitReserve still had a good idea to focus on the Proof of Reserves / Proof of Solvency to avoid insolvency:

"What people do with their money is their business,

what we do with people's money is everyone's business"

As BitReserve put it: "When you transfer your Bitcoin to your dollar card, we actually take your bitcoin and we sell it and we put those dollars in our reserve. And then, through our transparency system, we show that you are now actually holding dollars, not Bitcoin.", etc.

It is a very reasonable strategy for any financial service to take. In the Bitcoin world, you don't want to get caught in a swing holding the wrong currency and end up insolvent like MtGox. As long as you have 100+% reserves on all outstanding balances in all currencies, you can call yourself solvent. If you want to be strict about it, you combine Proof of Reserves with Proof of Liabilities, etc. So, how solvent is BitReserve / Uphold?

Uphold's solvency question

BitReserve, rebranded as Uphold in late 2015, seems to have shifted their focus away from Bitcoin and focus more on a PayPal-like model - allowing users to directly deposit and withdraw in fiat currencies as well as precious metals. They also seem to have expanded their trademarks to include such entries as bitdollar, bitgold, bitelectrum, reservechain, reserveledger, etc. and getting on the bad side of people like Andreas Antonopoulos. But lets go back to the issue of solvency.

Askwhy10 has made a post on 2016-02-15, in which he calculated that Uphold was insolvent at the time. It was short about $120k out of its expected balance of $5.6M (without Voxels, more on that later), so about 2% of total money was missing. But that was the total difference in balances. Looking at individual currencies, the company had only 4'594 out of 5'834 BTC (short 1'240BTC, 21%, or just shy of $500k). Missing 21% of your reserves in a currency that can swing by 10+% on a rough day is essentially gambling!

Uphold's BTC balance, 2016-02-14.

Columns: Currency, Obligations to our Members, Assets in Reserve, Exchange Rate.

Screenshots of Uphold's transparency pages - 2016-02-14 and 2016-03-27.

Despite those glaring omissions, Uphold's transparency page on 2016-02-14 stated it had "101.0% Full reserve status". Most of that came in the form of Voxels, an "official coin of virtual reality".

Reading into this I am reminded of the timeless Bitcoin tale - "Story of Bob Surplus", wherein an altcoin pumper would create elaborate stories to attach to worthless currencies in order to pump them. Voxels looks like an altcoin looking for a problem - in this case, "wouldn't it make sense if Unity's Asset Store had it's own currency?", missing the point that you can just use Bitcoin...

Going back to our topic, with $350k worth of Voxels sold at the presale, Uphold evaluated that their share is worth, I kid you not, $110M. They hold 314 times the value of Voxels as were sold at the entire presale, with a surplus of $1.2M:

Uphold's Voxel balance, 2016-02-14

As the story went on, Uphold apparently became solvent again within a day of askwhy10's post, has removed Voxels from their transparency page, but they apparently are still going short on Bitcoin (holding 3'652 out of 4'944 BTC, 1'292 BTC or 26% short, worth $537k):

Uphold's BTC balance, 2016-03-27

While it may be understandable to hold some small imbalances between a few fiat currencies that won't swing more than a few percent per day in relation to one another, having such a short position on Bitcoin is a MtGox waiting to happen. At least Uphold is insignificant in the Bitcoin economy, but if I were someone holding Voxels...

Conclusions

Any company that doesn't hold at least 100% reserves on EVERY currency it operates in is gambling with their customer's money at least, and posing themselves to be the next MtGox at worst. Full Proof of Solvency is a requirement we should challenge all Bitcoin financial companies with and not accept any shortcomings or deficiencies. Lastly, if a company's CEO thinks Bitcoin won't exist in five years, especially if they are going short on BTC, they are not running a Bitcoin-friendly company and don't deserve your business.

Related discussions:

• Strong Indications that Uphold (formerly BitReserve) is Insolvent.
• Uphold is solvent again
• Uphold (formerly Bitreserve) on the verge of insolvency!!

It's all about trust, context and timeliness - reinventing social media with blockchain

In the recent week after posting about my experience as /r/Bitcoin moderator, doing an AMA on the subreddit, and the subsequent discussion that followed in the related topics (1, 2, 3, 4, 5, 6), I've heard a lot of people voicing their opinion that the way Reddit works is rather broken. This further amplified by the recent research by BashCo into possible vote manipulation that might be going around in our subreddit, as well as a few people noticing that some of the most popular subreddits seem to be both heavily moderating the content about the Brussels terror attack, removing some highly-voted submissions and a lot of comments on the subject. Long story short - it looks like a lot of the discussion on Reddit is swayed and controlled by a handful of people controlling the subreddits (/r/Bitcoin notwithstanding). So would it be possible to reinvent Reddit and similar social media in a way that would make vote manipulation, trolling, spamming and centralization of power irrelevant?

Filter bubbles and Web of Trust

We consume a lot of the media and news. The more relevant something is to our interests, the more likely we are to consume it, so logically a lot of companies try to give us "filter bubbles":

In short, a filter bubble personalizes the news and stories we see in our social media feeds based on what we enjoy and have consumed in the past. If we're pro Bernie Sanders, we might hear more news from /r/SandersForPresident/ rather than from /r/The_Donald/. Companies like Facebook do this more covertly, while Reddit is more explicit about allowing you to subscribe to whichever subreddit sparks your interest the most.

We could use the concept of explicit and personalized filter bubble to figure out what news would be relevant to us. We would have to pick which things we're interested in (tech news, pictures of cute animals, videogames, etc.) to create the "context" for our interests (more on that later). However, this would only be as useful to us as the quality of the content to consume, which can be filled with spam and manipulated. Here is where the idea of Web of Trust comes in.

Web of Trust is a formal way of stating who do you trust, and creating a network of trust-based relationships between the users. This applies to both finding trustworthy websites as well as money. In our context, we would create our digital identity (or multiple identities), and then state which other identities we trust or distrust. Whether it would be family members, celebrities or just some random stranger on the internet posting funny pictures, we could cherry pick who is relevant to our interests. Those people, and the people they are connected with would allow us to access the relevant data feeds.

The Web of Trust can also be resilient against sybil attacks and vote manipulation - it wouldn't matter if I created a million identities and they would all "Like" some post if you wouldn't trust anyone trusting those puppet accounts. Trust could also be diluted in a PageRank fashion - if I trust a million people, I might be less reliable than someone that trusts only a handful.

Context is also important for trust. While I might trust someone to provide me with animated book reviews, I wouldn't be taking technical advise from them. Similarly, if someone was blatantly in opposition to my views, I might explicitly distrust them in that field. This would allow us to mix and match who do we trust and under what circumstances to make our filters and web of trust more explicit. For example, my trust might look like:

	[Self]	Videogames	Wrestling	Bitcoin	Astronomy
TotalBiscuit	0.1	0.9	0	0	0
LukeJr	0	0	0	0.2	-1.0

In this example, I would value TotalBiscuit's opinion on videogames to a strong degree - he's a competent critic with years of reputation. While he might also be a fan of wrestling, I don't share his passion for the topic so I'm indifferent to anything he would share in that content. He's not an expert on Bitcoin, so I'd also give him a 0.

LukeJr's opinion on Bitcoin I would trust a bit - he's a competent developer, although his abuse of trust in the Gentoo story leaves something to be desired. Similarly, his view that the Sun orbits the Earth makes me distrust whatever he has to say on the subject of astronomy.

The [self] variable would be a category about the person - in this example I would be interested in hearing a bit about TotalBitscuit's general life (similar to a Twitter feed).

Evaluating content

By establishing our web of trust with the proper context, we can create proper filter bubbles for the content we want to consume. If the web of trust data would be public, say, living on an Ethereum smart contract, we could pre-compute all the values we would assign to everyone relevant to us on a given topic. People we directly trust would get full score, whoever they trust would be counted as a product of the two trusts plus some discount on how far they are away from us. Doing the same for further connection levels we would eventually tend towards zero trust - irrelevance.

Every submitted piece of content would have a context - just like hashtags on Twitter or subreddits on Reddit. Generic content would have a context of the person posting it - just like a Tweet without a hashtag. The content itself could be a post or a link like on Reddit.

Now, when someone would consume a piece of content, they would give it a upvote or a downvote, affecting how the people that trust them would view the content. For every person, the aggregate score of a given piece of content would depend on everyone in their web of trust, and only that. So if I trust say, 10 movie reviewers and they all upvote Cloud Atlas, it would have a score of 10 for me. If they disagreed on The Revenant, it might get a score of 2-3. If someone posts a picture of a cat in the "movie" category, that would get a score of -10 - it might still be a cute picture, but it's not a movie.

Just like on Reddit, the concept of timeliness also needs to be taken into consideration. A lot of people would be interested in getting the latest news and the newest cat memes, so similarly to Reddit the overall position of a submission should fade away with time to leave room for fresh content.

All of these things can be weighted depending on how one wants to browse the data feed. We could see the most relevant submissions, the newest ones, the most controversial, or the top submissions of all times.

Lastly, one's votes on various submissions might also slowly tweak the Web of Trust of that individual. Every upvote might add 0.01 to a trust for a given person in a given context, and every downvote would subtract as much. This way we would organically adjust our filter bubble based on the content we consume discovering new content curators as we go along.

Technical aspects

From a technical perspective, things might be a bit complicated. The biggest challenge I would see for a system like that being deployed on a distributed network with proper cryptography to run everything on would be the overhead. While a simple system would just tally a score for every submission and update it every now and then when new votes come in, here every vote would have to be registered and parsed separately. Seeing how Reddit can have ~30 million votes per month (over 10 votes per second) and 230 million unique visitors, that can mean a lot of data to synchronize. A lot of it could be broken down based on the context - if you're not interested in Bitcoin, you don't have to synchronize the Bitcoin sub-branch, etc.

Probably implementing something like segregated witness could strip a lot of data that could be later pruned off, making the overhead a lot smaller.

One would also need to address the issue of bootstrapping new users onto the system - if only people that someone trusts would have their content viewed, it might mean a lot less content is posted in general. It could be solved for example by proof-of-burn - anyone joining the website could burn some small amount of money (or donate it to the network creators) to gain a bit of reputation from the generic account everyone would trust by default. This would allow users to start growing trust in themselves.

All in all, the concept might look a bit like Synereo, although a bit less focused on absolute reputation scores and tokenization:

Conclusions

The current social media can be heavily controlled and censored by a few individuals. Discourse on Reddit is further hampered by vote manipulation and spam. It might be possible to change how we discover content through the use of public Web of Trust and a decentralized network to submit the content through.

On /r/Bitcoin moderation - three years in review

In the past few months the moderation of /r/Bitcoin has become a contentious issue. Ever since the ban on discussion of alt-clients like BitcoinXT, the community seems to have fractured into a  few camps, sometimes vilifying one another. I was asked to clarify where I stand on this and a few other issues, so I might as well roll a few /r/Bitcoin-related topics into a blog post for future reference.

The XT censorship

As many /r/Bitcoin moderators might tell you, the decision to censor BitcoinXT was made solely by Theymos. Along with justification as to why this would happen, the message was pretty clear:

"[...] I currently intend to remove all XT submissions single-handedly if necessary, and to remove any moderator who undoes my actions, even if all other /r/Bitcoin moderators disagree."

Some moderators decided to quit out of principle, others found out later that Theymos wasn't kidding with the threat of removals.

So, the big question a few people have asked me - what is my stance on the matter?

My stance

I had a few phases of thinking as I learned more and more about XT. In my initial reaction - I was against the censorship of BitcoinXT - it was a project by a respected Bitcoin developer and it was proposing changes that needed to happen.

After debating it with Theymos and learning his point of view - I agreed with his logic that XT could be considered an altcoin that branches off of Bitcoin and that in future we could have similar forks by less reputable developers that change other contentious parts of Bitcoin - coin limit, redlisting, etc. However, that still wasn't the full story.

I've reached my final conclusions after discussing the topic with the community and learning that BitcoinXT would only fork when it is in the super-majority and becomes the de-facto Bitcoin network. For me, that was a good enough reason to not consider XT and similar clients altcoins - they don't just fork in a "revolution" and create their own network at a whim, but instead they take a reformist approach of winning the network over in a more "evolutionary" approach.

So in the end, my stance is - a client that attempts to introduce a hard fork into Bitcoin through super majority should be on topic for /r/Bitcoin.

As such, I have never removed any such topic or discussion, and I am participating in both the /r/Bitcoin subreddit, as well as the alternatives of /r/bitcoin_uncensored and /r/btc .

Unfortunately, even if I'm in favour of allowing discussion of BitcoinXT and similar clients, this decision is not in my hands. Which leads to another question - why don't I resign in protest?

Protesting

Some people have suggested that I and other moderators should resign in protest against the censorship rules. I personally disagree with this logic on the following basis - if you resign, you are showing that you don't support a given decision, but once you're out, you've basically done everything you could in the matter. You will get replaced by another mod sooner or later, and the capacity of a subreddit to function will be restored. The only difference you will make is to remove the voice of opposition from the pool of moderators, hurting your position in the long run.

So my approach is to remain a /r/Bitcoin moderator, continue moderating it like I was doing up until now, stick to my conviction of not censoring the discussion of BitcoinXT and similar clients, and voice my disagreement with the policy as appropriate in the future.

It might not be as glamorous as taking an umbrage, throwing a tantrum and leaving the moderation team as some would prefer, but this is the approach I prefer.

"Lets not moderate anything" - a day in life of a moderator

Every now and then, some people propose that we shouldn't moderate any discussion on /r/Bitcoin or similar subreddits. While the idea might be in-line with the semi-anarchist nature of Bitcoin, it doesn't really work. This is what moderation has to deal on a daily basis:

Just another day of modqueue...

Sometimes, the spam is more organized - there are some communities that use Reddit for promoting their coin of choice. Over at /r/CryptoCurrency for example, we had to start limiting Reddcoin spam because the astroturfing was getting out of hand.

Some of the spam moderation can be automated - we have a fairly extensive automoderator script running on /r/Bitcoin that takes care of a lot of bad submissions for us.

When we're not dealing with spam, we're dealing with trolls. Some people would see this as more of censorship, but the truth is - too many trolls can spoil the community and drive away the good people you want to have around. A few years back I had a conversation with one of the "Bitcoin celebrities", and he told me that he doesn't post in /r/Bitcoin any more because of a number of trolls dogging him each time he posts. Trolls can also derail conversations and generally make the comment section a place you don't really want to venture into.

Initially /r/Bitcoin didn't ban anyone - Theymos was against it years back since the same trolls can come back again and again under new usernames. However, after getting a lot of complaints about a single, prolific troll, we started banning the trolls. The guy in question went through a lot of different usernames, got banned reddit-wide and even had to resort to switching IPs to avoid IP bans. While as it turns out - we didn't manage to drive him off completely (he resurfaced in some comment section a year or two after we started banning him to have a small chat), we did manage to make him lose interest in trolling every thread on the subreddit.

The last activity that takes up a bulk of moderation is answering to people complaining. Some rightfully so when their submission gets caught in some spam filter when it shouldn't, some less so when they decide to tell us that we can go and die since we won't be able to ban all of their accounts.

The remaining 1% of time of being a mod is where everything else happens - discussing rules, answering some questions, etc.

All in all, moderation is a pretty boring, thankless job.

A comic on Reddit moderation

Bitcoin memes and my biggest mistake

Now that we've talked about /r/Bitcoin censorship and how moderation works, let's talk about memes. Reddit and memes seem to go together hand in hand. However, this doesn't always work for every situation. If you want to have a subreddit focused on having serious discussions, memes can have a detrimental effect.

Checking out a photo or reading some short, witty meme can take a few seconds, after which a user would be able to vote confidently whether something is good or not. Page-long thought-provoking discussion about the meaning of live, the universe and everything on the other hand can take minutes to read before someone can say whether they consider the submission good or not. Because of this, memes get more upvotes faster, meaning they bubble up to the front of Reddit, getting even more exposure and votes, drowning bigger posts in their wake.

Worse than that, people then turn around and proclaim "memes seem to get a lot of upvotes, which must mean this is what the subreddit wants!". This can create a further self-fulfilling prophecy. The argument also ties to the above mentioned notion that we should just use votes to decide what should be posted on a given subreddit. Here is a comic explaining this.

This is why some communities choose to ban memes altogether - moderation and removing submission is not about what gets the most / least votes, it's about what fits the given subreddit. How does this fit in to /r/Bitcoin?

Bitcoin memes

Bitcoin and memes have a complicated relation. Some people believe that Bitcoin should be all about serious business and memes have no place in /r/Bitcoin. Others embrace the internet culture and the light-hearted nature of Bitcoin that has been around ever since the Alpaca Socks (heck, a meme is the origin of Dogecoin). As far as anyone can tell, the community is pretty evenly divided on this issue - none of the sides are in a decisive majority. So while we have a meme-centric Bitcoin subreddit, /r/Bitcoin is also welcoming of the memes and silly photos.

Most of the time, the subreddit is fairly balanced and you don't have a flood of memes. This, however, changes every now and then....

Price memes

Bitcoin price meme, circa late 2013

When the Bitcoin price swings rapidly, the Bitcoin subreddit tends to fill with numerous posts of either elation or woe. There are numerous posts shouting out the newest price (usually 5-10 of very similar posts at a time). Understandably enough, there were a lot of people that didn't like when this happened and called for ban on memes. One such person, with his post on 2013-12-07 was /u/ShakeThatBass .

For those that haven't been around /r/Bitcoin in 2013, that username might not mean much. ShakeThatBass was an anonymous early Bitcoiner that organized one of the biggest Bitcoin givaways in history, giving away 350BTC (worth at the time $7000) through Bitcointip to people that donated to various charities. The giveaway was held on 2013-03-04 on /r/Bitcoin. This act of generosity has earned him a lot of respect from a lot of people, myself included.

Back to price memes. So having read his highly-upvoted post 11 days prior, on 2013-12-18, when the "news" of China cracking down on Bitcoin was swung he price plummeting down to about $500 from the high of $1100 just two weeks prior, a number of Bitcoin price memes started to surface again. Then, I made a decision that I still consider my biggest mistake in my /r/Bitcoin moderating career - I issued a temporary ban on memes and price posts that lasted for about a day.

The decision came only from myself (no other mods were consulted), driven by the will of the community. When the dust settled and everything got calmer, I learned an important lesson in moderation and added another rule for myself to follow - don't make big decisions single-handedly. Everyone makes mistakes and at the heat of the moment a decision might seem justified, but other peoples may disagree. This is why when it comes to important moderation decisions I consult with other mods to hear their opinion and see if they agree - now even if I'm the second most senior mod I wouldn't do such things again without another mod's backing. While not necessary for the mundane mod chores like approving / removing submissions or banning obvious trolls, it is useful for the big decisions.

Moderation consistency

The last rule I follow is moderation consistency. /r/Bitcoin is currently moderated by 10 people and one bot. Everyone can have their opinion on various matters, but at the end of the day we have to act consistently to avoid moderation wars:

Months of moderation wars for Tonal Bitcoin discussion page between Luke-JR and Aleš Janda.

To avoid such petty squabbles, moderators should first discuss a contentious issue and then apply the consensus in practice (or at least, become a conscientious objector, rather than engaging in mod wars), even if they hold an opposing view. Whether it comes to banning trolls, removing spammy websites or the like, consistency is important.

Conclusions

Being a subreddit moderator is a thankless job. It takes a lot of work to remove spam and trolls. Sometimes we make important moderation decisions, and sometimes we make mistakes in our judgement like everyone else.

Overall, my personal moderation stance is as follows:

• Moderation is essential for combating spam and trolls, as well as keeping the subreddit on-topic
• Moderation consistency is very important and mod wars should be avoided
• Important decisions on moderation and the direction of a subreddit should be made by at least two moderators, or a consensus for really big decisions
• I disagree with the ban on BitcoinXT and similar clients, but for moderation consistency, I remain a conscientious objector
• I don't believe in leaving a moderation team over a disagreement on moderation policy as it can remove the voice of opposition from the future discussions
• Everyone makes mistakes, admitting to them is not the end of the world

I hope this covers some of the questions people might've had over the last three years of me being a /r/Bitcoin moderator and gives something for other cryptocurrency subreddit moderators to think about.

Big blocks, small blocks, side-blocks, off-blocks...

In the recent week Bitcoin has experienced another "stress test" in form of a lot of transaction spam (see below for a chart of the amount of transactions in mempool), although this time the spam was not scheduled and it's not clear who was responsible for it. Along with the continuous debate on whether or not to increase the Bitcoin block size, a lot of people have started looking at what are the potential outcomes of the situation. I have covered a similar topic over a year ago, but it might be a good opportunity to revisit the topic and bring everyone up to speed.

A mockup of "Bitcoin surge pricing", inspired by Uber.

The problem

As some of you know, the Bitcoin blockchain was initially designed to have a limit of 1MB per block. This was done due to prevent the bloat and abuse of the network. However, if this limit is strictly enforced, the Bitcoin network would only be able to support a small number of transactions, about 7 transactions per second (compared to Visa's 2000 tps). Clearly, this won't be enough for a payment network that is supposed to replace the banks and credit cards. Either we will increase this size in some way, or we will see Bitcoin become a much different network.

The outcomes

Depending on whether the block size is increased or not and by how much would dictate how the Bitcoin network is shaped. Lets look over some possibilities.

Block size remains rigid

In this approach, the 1MB block size is rigid and remains unchanged. When we start hitting this limit, the miners will be able to pick and choose which transactions to include in the block. Rational miners will pick the transactions that pay them the most in fees (proportionally to their size), thus there will be a bidding war to get into the next block.

Due to the increased cost, fewer people will opt to send transactions themselves, either leaving Bitcoin entirely, or by performing some off-chain settlement. Wallet services such as Coinbase could become more like banks - offering their customers settlement with other people on their platform and other platforms that accept off-chain settlement.

In this scenario, Bitcoin becomes a settlement method for large bank-like wallets and large corporations.

Block size limit is abolished

A polar opposite of the previous approach. The block size limit is completely abolished and miners can create arbitrarily big blocks. While anyone can create a transaction for cheap, the network would soon be attacked by malicious entities trying to push the limit. Someone could decide to generate a 1GB block for example and cause the network to grind to a halt while synchronizing.

Quite quickly running a full node becomes a luxury or a business. We see more reliance on Stratum-like supernodes. The functionality of the network is dictated by them.

In this scenario, the Bitcoin network turns into something like the modern Internet - only big players can access it directly and everyone else has to rely on something like Bitcoin-Internet Service Providers.

Middle of the road

The most likely scenario would be somewhere in the middle of the road - raising the block limit, but doing so gradually. Dedicated users could run their own nodes, but most of us would rely on third parties for helping our wallets function.

Alternative solutions

Bitcoin is both an independent currency and a settlement network for that currency. Whether the block size increases or not, there are a lot of ways one could try enhancing the settlement aspect of Bitcoin.

Soft forks

There are some proposals on how to improve the scalability without hard forking the network. Some of them include softforks such as Segregated Witness , or Sidechains (allowing value to be moved in and out of the Bitcoin network without a trusted third party).

Segregated Witness, or "SegWit" is a solution focused on slimming down the transactions by moving the signatures off-blockchain. This can slim them down to about a quarter of the size, essentially allowing the Bitcoin network to process 4MB of transactions in 1MB blocks. The idea appears to have a lot of support, but since it's mostly streamlining what Bitcoin can currently do rather than creating a whole new solution, there isn't much left to explain without going into technical details.All in all, SegWit can buy Bitcoin some breathing room with its current block limit.

Sidechains is an idea focused on on being able to move the value in and out of the Bitcoin network without depositing the coins with a third party. While this doesn't sound like much, sidechains can lead to a lot more than just scaling Bitcoin - they have a potential of recreating networks with the features of Ethereum or Ripple without having to bootstrap those networks with new coins. These sidechains could be used to settle BTC transactions outside of the network while still not having to worry about the counterparty risk.

Payment channels

Payment channels in general or Lightning Network specifically are an interesting approach to allowing a large amount of transactions to take place outside of the Bitcoin network while everything would still be settled on-chain. The idea was discussed as early as 2011, and today we have some companies that even start advertising it on their websites:

21.co advertising their payment channels right above telling everyone how many blocks it might take to confirm various transactions during the recent spam attack

A payment channel is a way for two nodes to pass payments back and forth between one another using unbroadcasted Bitcoin transactions. Each payment adjust the balances between the nodes - shifting the balance back and forth accordingly. Only the final transaction gets published to the whole world, thus potentially saving a lot of space in a block. While the use case for this solution might be limited (who sends another person multiple transactions over a short period of time?), it gets more interesting when you add the network effect to it.

A simulation of 6 networked payment channel nodes

Now, when you introduce a few "supernodes", possibly in form of Bitcoin exchanges and big companies, you start mimicking the Gateway model of Ripple:

An illustration of the Gateway model of Ripple

Instead of settling directly on the network, anyone can potentially save a bit of fees by connecting to one of the supernodes and establishing a payment channel with them. This would allow you to transact with anyone in the network fast and cheap, while still being able to settle your balance on the Bitcoin blockchain as needed. If the payment channels are open for a long period of time, a lot of people could begin to operate solely within the network. This might be especially important for cross-exchange settlement, or for shared ewallets like Coinbase or 21.co.

Alternative networks

Last but by no means least, we have the alternative networks. A lot of them stand to benefit when the Bitcoin network falters.

Simplest ones would be the altcoins - Litecoin and the like. They reason that if Bitcoin blocks are full, people will join other networks and use other coins instead. I'd take that with a grain of salt, after all, Bitcoin is a better currency in terms of price and market cap than its alternatives, but the other networks might have a higher throughput.

How /r/dogecoin sees the situation

A much more compelling alternative would the the Crypto 2.0 networks and permissioned blockchains - Ripple, Open Transactions, Liquid. Those networks can use the above mentioned Gateway model and move the settlement completely off the Bitcoin network. The only transactions that would need to be included in the blockchain would be deposits and withdrawals. While certainly more rigid and centralized than the payment channels, there are ways of preventing the gateways from stealing one's coins (such as Voting Pools). Moreover, such networks could also be used to issue fiat-denominated IOUs, which might be very attractive for some applications.

Conclusions

The Bitcoin block size debate is still going on, while the blockchain limit is being hit more and more often. Either the Bitcoin network will scale to larger blocks, or higher fees. There are many solutions out there focused on providing alternative means of settling with BTC without having to further burden the Bitcoin network. Only time will tell how our current problems will be addressed and which solutions will be used.

An Ethical AdBlocker - a Bitcoin killer app?

Ads suck. TV ads suck, internet ads suck, pretty much all ads suck (well, perhaps except for some Super Bowl ads and a few rare gems). Moreover, ads don't work as well as they used to, so they have to get more aggressive. We hate ads, so we create software to block ads, and the software creators then charge a toll to let companies display us ads anyway.

A lot of content creators need ads to support their work, they appeal to their viewers not to use adblocks, and some websites make half-assed attempts at getting us to pay instead of viewing ads.

If you don't use adblocker, your viewing experience on most sites is abysmal, and the loading times, especially on mobile, are abysmal. If you use adblock, you feel bad for not supporting the content creators. Perhaps instead you decide to use "ethical adblocks" and only view websites that are not ad supported?

All in all, the current ad industry is a struggle between ad creators that want you to see their ads, content creators that don't want to show you the ads but have to to earn a living, and the viewers that don't want to watch the ads but still want to support the content creators.

Perhaps there is a way to support the content creators AND not have to rely on ads? There have been many approaches to this in the past, so lets see what we can learn from them and what can be improved...

Tip-based support

One of the first ideas that come to mind when one thinks how to support a creator is tipping. The idea is not new - companies like Flattr have been around for many years.

The problem with tipping, is that quite often you have to set a tipping jar up first and hope your users will be using the same platform. Without critical mass, you don't have much. This seemed to be the reason Flattr failed - it hasn't reached a critical mass, so it fizzled out mostly.

A better idea came around with BitcoinTip and later ChangeTip - tipping solutions where you could tip anyone, even if they haven't set up an account with the company. Combining that with being able to tip anyone on various social websites like Reddit, Twitter, Twitch, etc. Now suddenly you were able to even tip famous people, such as Garry Kasparov, and know they would receive their bits.

However, tip-based support also has a downside - you can't make a predictable living with them. They are by their very nature a flash in the pan. Moreover, just like upvotes on Reddit, short, witty jokes and memes might get content creators more tips / upvotes than large submissions of substance. We need something better that encourages creation of "wholesome" content, not just pictures of cats.

Patronage

An alternative to tip-based support is patronage, made especially easy through such platforms as Patreon or SatoshiVote. This form of support is suitable for a much broader set of work - from hobbyist book reviews up to high-quality educational videos.

This models fosters consistently high-quality work. Creators get paid more the more people enjoy their work on a regular basis. One-hit wonders don't translate directly into money as it would with ads on a highly-popular video, but the extra exposure can translate into a bigger stream of money down the line.

While this model is good for continuous series, it might not be ideal for infrequent releases that get a lot of views over time (say, the song "Friday" by Rebecca Black is getting a good amount of searches every week on Friday), or frequent but very minor releases (such as most of the top contributors to Reddit).

Subscription model

Similar to the patronage model, in the subscription model every user pays a certain amount per month to view a website (usually, but not always ad-free). While this model can work pretty well if the user consumes a lot of content from the same website, it doesn't work well if someone visits a page only a few times per month. Since one can only pay for so many subscriptions per month, it tends to promote only the biggest, most established content hosts (similarly to subscription-based MMOs being replaced by free-to-play ones).

A tipping adblocker

A possible solution to most of those problems could be a combination of a few of the above technologies.

The starting point for the solution would be an ad blocker - not necessarily designed to sell your data nor to take bribes to get ads through, but focusing on being the best ad blocker out there - no compromises, user experience comes first.

From there, the software would start tracking which pages its users visit and for how long. All of the time would be divided based on the content consumed - length of the video watched, which submissions on Reddit were upvoted, etc.

Once the data is aggregated, the users would be able to donate a certain amount of money per month. Like on Flattr, the donations would be divided up between the content consumed, but without the extra hassle of having to click on special buttons and so on. Some portion of the money could go to the company maintaining the whole software product.

The content creators would receive the aggregated donations of everyone from the system. If they provide a Bitcoin address - the money can be sent automatically. For websites that support it, the money could be deposited to user's account like through ChangeTip. Other websites could embed payment details directly into the html code, which can be easily scoured like ProTip appears to be doing. If a website doesn't have a payment setup yet, the donations could be stored for the time being. Websites hosting content could divide the revenue up - YouTube could get a cut of the tip, while the video creator could get the rest.

Everything could be optimized through some Interledger-like cross-currency payment protocols if someone doesn't like Bitcoin. Users could also add weight to various sites they are tipping - perhaps prioritizing blog posts over Reddit and so on.

All in all, this setup would improve the user experience by eliminating ads, replacing the revenue stream content creators and hosts lose from the removed ads by essentially donate-per-view (which could be more than a few cents an active user is generating per month). This means a user doesn't have to commit to a subscription if they don't visit a site frequently, they reward the content creator whenever they view the media, not "once-per-video" like Patreon would, and adding an extra tip every now and then would be seamlessly integrated into software (since it already tips everyone anyway, might as well make it easy to tip a bit extra).

Conclusions

Nobody wants to watch ads, thus adblockers are popular. If the adblockers would incorporate some universal tipping solution to replace the revenue stream from ads to support the content creators, it could be a win for both the creators and the users (although not so much for companies that need to advertise). Bitcoin could allow for anyone to receive tips, but different payment solutions could be introduced as well.