Breaking: Failed Bitcoin Exchange Mt. Gox CEO Mark Karpeles Indicted for Embezzlement

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Breaking: Failed Bitcoin Exchange Mt. Gox CEO Mark Karpeles Indicted for Embezzlement
karpeles

Early reports indicate that the Tokyo District Public Prosecutors Office has indicted Mark Karpeles, the CEO of the collapsed bitcoin exchange Mt. Gox, with embezzlement. These formal charges follow months of allegations of fraud, which culminated in Karpele’s arrest by the Tokyo Metropolitan Police.

Karpeles was arrested on August 1st but had not been formally charged until today. Liquidations proceeding for Mt. Gox are ongoing and a report detailing creditors claims of $22 billion against the company was released earlier this week. Mt. Gox filed for bankruptcy in February 2014, citing losses of over 750,000 bitcoin held on behalf of customers.

According to the indictment, Karpeles is charged with embezzling over $50 million from Mt. Gox company accounts. This is a developing story and Bitcoin Magazine will continue to update it as more information becomes available.

 

Photo via FNNnewsCH/Youtube

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Adam Back on 3 Forms of Centralization That Have Crept Into Bitcoin
nodes

At the crux of the block-size limit debate in Bitcoin is an argument between scaling and securing the network. Although raising the block-size limit would allow more transactions to be processed in each block, it could also limit the ability for individuals in some parts of the world to run a full node or participate in the mining process. This problem would arise due to the increased costs of processing a greater number of transactions every 10 minutes as a full node.

Blockstream co-founder and President Adam Back recently discussed the security vs. scalability debate on an episode of Epicenter Bitcoin, noting that increased centralization due to a raised block-size limit could be even more problematic when factoring in all of the other forms of centralization that already exist in the digital cash system:

“One of the challenges we’re facing right now with the block size is that decentralization is already under stress. There’s a certain amount of centralization that’s crept in — sort of boiling the frog.”

Back, who created Hashcash (the proof-of-work system used by Bitcoin), then pointed to three specific areas of Bitcoin that already are experiencing problems related to centralization.

Mining Pools

The problems associated with the centralization of Bitcoin mining pools are generally known by the overall Bitcoin community. Whenever a mining pool gets close to 51 percent of the overall network hashrate, there are usually more than a few panic-induced posts on various Bitcoin forums warning of a possible 51 percent attack.

When it comes to the fundamental problems associated with large mining pools owning a majority of the network hashrate, Back seems concerned about the ability of those pools to introduce restrictions on certain types of transactions on the Bitcoin network. He stated the following during his interview:

“There are a number of quite high percentage hashrate pools and vertically integrated miners such that, arguably, it would only take a policy decision by maybe three to six of them to fairly, practically implement a policy.”

Back also was quick to note that such a policy implementation would not be completely successful due to the reality that the nefarious mining pools would not be mining every single block on the blockchain:

“Part of the way that Bitcoin achieves policy neutrality is that there are different people who process the transactions, so potentially even if 75 percent of the hashrate wanted to freeze or block a Bitcoin payment — let’s say Wikileaks had received a payment and someone wanted to stop them spending it — still, the remaining 25 percent would eventually process the transaction. So, it would just be delayed, not blocked. Nevertheless, there is a degree of centralization there.”

ASIC Mining Hardware Manufacturers

Another problem Back sees for Bitcoin in terms of centralization has to do with the companies building the hardware that people use for bitcoin mining:

“Another kind of metric is the number of ASIC manufacturers that are selling direct to the public or to small businesses or people that would buy $10,000 or $100,000 worth of mining equipment and put it in a small warehouse or garage or something. The number of independent ASIC manufacturers is, I think, decreasing. There are still a couple that will sell to the public, but there are also more that have turned their attention to vertical integration or have merged or been bought and a few that have gone bankrupt through poor timing in the market.”

One of the key issues here is that the most efficient mining equipment is becoming centralized in fewer and fewer hands. The fear is that it is becoming much more difficult for the average person to get involved in securing the Bitcoin network through mining — even if they’re willing to put up the relatively large amount of capital needed to build a mining facility. This could eventually lead to issues similar to the policy-related problems covered by Back when referring to mining pools.

Lack of Full Nodes

The third type of centralization that Back sees in Bitcoin is the dwindling number of full nodes. A full node is a node that enforces all rules of the Bitcoin protocol and contains a full copy of the blockchain. Back explained that these nodes are helpful in keeping miners honest:

“Another very interesting one that people are, I think, largely not aware of — which is behind some differences in opinion, I think, at the protocol level — is this concept of running a full node (sort of an auditing node). The percentage of economic interest in the network that is validating transactions that it receives via its own full node — I think we’re seeing evidence that that is falling as well. That is an interesting and necessary part of the Bitcoin security picture — that the proportion of economic interest in the network that is relying on a full node that is under its control or is trusted by it should be relatively high. If it falls too low, there is no longer a security assurance for users because the miners are providing a service to users — particularly for SPV users. If there are no auditors, there’s no kind of checkpoint; there’s only miners balanced against other miners.”

When asked to define Bitcoin at the start of the Epicenter Bitcoin interview, Back was sure to make the point that decentralization is the core value proposition of the peer-to-peer cash system. Censorship resistance is what separates Bitcoin from other online payment systems, such as e-gold and PayPal, so it’s easy to see why Back believes the preservation of decentralization is of the utmost importance.

 

Photo yaph / Flickr(CC)

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The Decentralist Perspective, or Why Bitcoin Might Need Small Blocks
decentralist

 The block-size limit debate has dominated Bitcoin blogs, forums, chat rooms and meet-ups for months on end, while many of Bitcoin’s brightest minds are gathering in Montreal to discuss the issue face-to-face at the Scaling Bitcoin Workshop this weekend.

So far, however, the two sides of the debate have made little progress coming to a consensus. At least for some part, this seems to result from a difference of visions – visions that are based on a different set of priorities.

One of these visions – represented by Bitcoin XT developers Gavin Andresen and Mike Hearn – is straightforward and clear. For Bitcoin to succeed, they believe it needs to grow, preferably fast. And for Bitcoin to grow fast, it needs to be cheap, accessible and easy to use. This, in turn, means that the block-size limit needs to increase in order for more transactions to fit on Bitcoin’s blockchain, for fees to remain low, and without having to rely on complicated and far-off alternative solutions. This could mean that some aspects of the Bitcoin ecosystem need to specialize further, but that was always to be expected.

On the other end of the spectrum, a majority of Bitcoin’s most active developers think it’s not that simple. For them, Bitcoin’s decentralized nature is sacrosanct, and they believe that an increase of the block-size limit represents a trade-off with this core feature. Some of these developers – perhaps best described as Bitcoin’s “decentralists” – even warn that too big an increase could destroy the system as a whole.

But for many outside this select group developers it still seems unclear why, exactly, big blocks could pose such a grave threat. To find out, Bitcoin Magazine spoke with four of the most prominent of these decentralists: Bitcoin Core developer Dr. Pieter Wuille, Bitcoin Core developer and long-term block-size conservative Peter Todd, hashcash inventor and Blockstream founder and president Dr. Adam Back, and well-known cryptographer and digital currency veteran Nick Szabo.

Mining Centralization 

According to decentralists, the problem of big blocks is essentially twofold. On one hand there is the basic assumption that bigger blocks favor bigger miners – presumably mining pools. On the other hand is the fact that bigger blocks complicate mining anonymously.

The main (though not only) reason bigger blocks favor bigger miners has to do with latency. As the block size increases, so does the time it takes for a newfound block to transmit through the Bitcoin network. That is disadvantageous to all miners, except for the miner that found the block. During the time it takes a new block to make its way through the network, the miner who found the block gets a head start mining on top of the new block, while other miners are still busy mining on top of an older block. So as a miner find more blocks, it gets more head starts. And as a miner gets more head starts, it finds more blocks. Meanwhile on the other end of the equation, smaller miners find fewer blocks and, as a result, have more trouble turning a profit, ultimately causing them to drop off the network. Bigger blocks tend to centralize mining.

This problem is worsened, moreover, if a miner wishes to remain anonymous, and wants to use Tor. Since latency on the Tor network is always higher, the problem as described above is simply magnified. If smaller miners are disadvantaged by bigger blocks to the point where it’s hard to remain profitable on a regular connection, miners using Tor don’t even stand a chance.

Neither of these arguments against bigger blocks is controversial in itself. The controversy lies in the question how big is too big. Andresen and Hearn believe an increase to 8 megabytes or even 20 megabytes should be OK, and assume that it’s fine to grow this limit to 8 gigabytes over a 20-year time period.

Speaking to Bitcoin Magazine, Bitcoin Core developer and Blockstream co-founder Dr. Pieter Wuille explained why this assumption is not shared by decentralists.

“It is obvious that block propagation is too slow already,” Wuille said. “A recent software update revealed that several mining pools maintain arrangements where they share block headers – the minimal required part of an actual block – the moment they find a new block. All miners in on the deal then start mining on top of that block header instead of waiting for the full block to propagate over the network – waiting would cut into their profits too much.”

Explaining why this is a problem, Wuille continued:

“This practice is harmful for Bitcoin, as it requires a lot of trust among miners. They no longer verify the validity of blocks individually, and instead just rely on their peers. But validating blocks is supposed to be a miner’s main task on the Bitcoin network…”

Moreover, decentralists warn there might be no turning back once bitcoin mining has become too centralized. At that point, the remaining miners could have created a deadlock on the mining market, essentially preventing newcomers to compete profitably.

Core developer and long-time block-size conservative Peter Todd told Bitcoin Magazine:

“The big concern we have here is, as we reduce these security margins, we’ll see the already worryingly small number of pools decrease even further. Even more concerning though, is that while currently it’s pretty easy to start a new pool if an existing one ‘goes rogue,’ bigger blocks can make it much more difficult to do so, because from the beginning you’ll be much less profitable than the big pools.”

And while it has been suggested that miners can connect to a VPS if they prefer to remain anonymous rather than connect through Tor, this is not quite satisfying for decentralists either. Speaking to Bitcoin Magazine, hashcash inventor and Blockstream CEO Dr. Adam Back explained why.

“It is technically possible to mine using a VPS (Virtual Private Server), but miners who do so are not choosing their own transactions,” Back emphasized. “Instead, they connect to a server that does this for them. It’s another form of centralization, at the extreme. And we already see this happening due to bad connectivity in some countries, where miners use VPS services set up in another country to win some time and increase profits…”

Regulation

Decentralization – and anonymity – might be sacrosanct for decentralists, but that does not mean they are goals in and of themselves. Instead, decentralists cling to these properties because they believe the health of the Bitcoin network relies on them. It’s only through decentralization and anonymity that the system can remain free from outside influence, such as government regulation.

“Bitcoin achieves policy neutrality by decentralization of mining,” Back explained. “If one miner won’t mine your transaction, another will. It’s an additional benefit if miners are many, geographically dispersed and anonymous, since it’s complex to coordinate a policy imposition on many small geographically dispersed miners. And it’s even more complex to impose policy on someone who is anonymous.”

If, on the other hand, Bitcoin reaches the point where only a handful of professional miners will be able to profitably partake in the process of Bitcoin mining, and if these miners are no longer able to do so anonymously, decentralists worry that Bitcoin’s fundamental properties might be at risk.

“It is pretty clear that forcing the Bitcoin protocol to implement anti-money laundering policy and blacklisting of funds is a long-term goal of governments, which can be done by pressuring mining pools,” Todd explained. “Being able to tell regulators that pressure will simply cause pools to leave regulated jurisdictions is important, but without anonymity, there really aren’t that many jurisdictions to run to.”

Furthermore, once more that half of all hashing power is effectively regulated, authorities could even demand a complete freeze of certain funds, Back explained:

“If more than 50 percent of mining is subject to policy, it can actually censor any transaction by ignoring – orphaning – blocks made by other miners. We don’t know if that would happen or not, but given the fact that it would be within their technical power to do it, it should be expected that regulators demand their regulations achieve an effect.”

Moreover, once this sort of regulation does set in, decentralists believe it will probably be too late to fix. Bitcoin would be caught in a regulatory trap without even noticing it – until the trap closed.

Back continued:

“If Bitcoin is already at high policy risk – sort of effectively centralized but not experiencing the side-effects of that yet – and then the policy problem arises, the properties of Bitcoin are lost or eroded. How can you fix it at that point? Suddenly decentralize it? It’s uncertain that the parties who are at that point under central control over the Bitcoin network have the free choice to work to decentralize it. They would have been regulatory captured.”

Full-Node Centralization

But even mining centralization and regulation might not be the end of it, decentralists warn. Ultimately, over-sized blocks bear with it another – perhaps even bigger – risk: full-node centralization.

Full-node centralization could be an even bigger risk than mining centralization, decentralists argue, as full nodes effectively verify the consensus rules Bitcoin plays by. These consensus rules enforce that Bitcoin has a 1MB block-size limit, but also that the block reward halves every four years, or that the total supply of bitcoin will not exceed 21 million. And – importantly – being able to verify these rules is what makes Bitcoin a trustless solution. In essence, full nodes allow users to check that Bitcoin does as promised.

But as it becomes expensive to run a full node, decentralists worry that verifying the consensus rules could become reserved to a small elite. This could have several consequences.

An obvious consequence would be that it injects trust in the system. Instead of using trustless full nodes, users would, for instance, use web-wallets – which obviously require a lot of trust in the service. But even solutions such as Simplified Payments Verification (SPV) nodes are no better in this regard, as they do not verify the consensus rules either.

Peter Todd explained:

“SPV nodes and wallets are not a trustless solution. They explicitly trust miners, and do no verification of the protocol rules at all. For instance, from the perspective of an SPV node there is no such thing as inflation schedule or a 21 million bitcoin cap; miners are free to create bitcoins out of thin air if they want to.”

And while the cheating of SPV nodes could be seen as a short-term problem, some decentralists argue that a drop in full nodes might even have more severe consequences in the longer term.

According to Wuille:

“If lots companies run a full node, it means they all need to be convinced to implement a different rule set. In other words: the decentralization of block validation is what gives consensus rules their weight. But if full node count would drop very low, for instance because everyone uses the same web-wallets, exchanges and SPV or mobile wallets, regulation could become a reality. And if authorities can regulate the consensus rules, it means they can change anything that makes Bitcoin Bitcoin. Even the 21 million bitcoin limit.”

It is of vital importance for the health of the Bitcoin network, therefore, that it remains possible to run full node anonymously, Todd urged:

“Like mining, having the option to run full nodes totally ‘underground’ helps change the discussion and gives us a lot of leverage with governments: try to ban us and you’ll have even less control. But if we don’t have that option, it starts looking like regulation efforts have a decent chance of actually working, and gives governments incentives to attempt them.”

Commenting on the block size limit debate itself, Back added:

“I believe that the unstated different assumption – the point at which views diverge – is the importance of economically dependent full nodes. It seems that Gavin thinks a world where economically dependent full nodes retreat to data-centers and commercial operation – and basically all users can only get SPV security – is an OK trade-off and cost of getting to higher transaction volume a year early. But most of Bitcoin’s technical experts strongly disagree and say this risks exposing Bitcoin to erosion of its main differentiating features.”

Trade-Offs

So what if decentralists are right? Bitcoin mining, and perhaps even running a full node, is reserved to specialists working from data centers. Anti-Money Laundering and Know Your Customer policy might be imposed, and perhaps the protocol rules are regulated to a certain extent. Sure, it would be a blow for drug dealers, CryptoLocker distributors and extortionists, but Bitcoin would still be a global, instant and cheap payments system. In a way, Bitcoin might actually be better of without these outlaws. Right?

Well, not according to decentralists.

Most decentralists maintain that Bitcoin’s distinguishing features are not its global reach, its instant transactions, or its low costs of use. Instead, they argue, Bitcoin’s single most important distinguishing feature is its decentralized nature. Without it, there would be no reason for Bitcoin to even exist.

Well-known cryptographer and digital currency veteran Nick Szabo explained:

“In computer science there are fundamental trade-offs between security and performance. Bitcoin’s automated integrity necessarily comes at high costs in its performance and resource usage. Compared to existing financial IT, Satoshi made radical trade-offs in favor of security and against performance. The seemingly wasteful process of mining is the most obvious of these trade-offs, but it also makes others. Among them is that it requires high redundancy in its messaging. Mathematically provable integrity would require full broadcast between all nodes. Bitcoin can’t achieve that, but to even get anywhere close to a good approximation of it requires a very high level of redundancy. So a 1MB block takes vastly more resources than a 1MB web page, for example, because it has to be transmitted, processed and stored with such high redundancy for Bitcoin to achieve its automated integrity.”

The crucial importance of this trade-off, was seconded by Wuille:

“If we were to allow centralization of mining, we simply wouldn’t need a blockchain in the first place. We could just let a central bank sign transactions. That would allow us much bigger and faster blocks without any capacity problems. No variable block times. No wasted electricity. No need for an inflation subsidy. It would be better in every sense, except that it would involve some trust. Really, if we don’t consider centralization of mining a problem, we might as well get rid of it altogether.”

Szabo added:

“These necessary trade-offs, sacrificing performance in order to achieve the security necessary for independent and seamlessly global automated integrity, mean that Bitcoin cannot possibly come anywhere near Visa transaction-per-second numbers and maintain the automated integrity that creates its distinctive advantages versus these traditional financial systems.”

Bitcoin versus bitcoin

This leaves us with one last question. If “Bitcoin cannot possibly come anywhere near Visa transaction-per-second numbers” as decentralists claim, then what is the point of it all? Why even bother building software, investing in startups, and spend time evangelizing Bitcoin, if it inherently doesn’t scale?

The point of it all, for decentralists, lies in a classic distinction: the distinction between Bitcoin the network and bitcoin the currency.

Bitcoin the network, decentralists argue, is fundamentally designed as a settlement system, not as a network for fast and cheap payments. While maybe not the most typical decentralist himself, a recent contribution to the Bitcoin developer mailing list by Core developer Jeff Garzik perhaps explains the decentralist perspective best.

Garzik wrote:

“Bitcoin is a settlement system, by design. The process of consensus ‘settles’ upon a timeline of transactions, and this process – by design – is necessarily far from instant. … As such, the blockchain can never support All The Transactions, even if block size increases beyond 20MB. Further layers are – by design – necessary if we want to achieve the goal of a decentralized payment network capable of supporting full global traffic.”

But, importantly, this vision of Bitcoin as a limited settlement network, does not mean that bitcoin the currency cannot flourish beyond these built-in limits.

As explained by Szabo:

“When it comes to small-b bitcoin, the currency, there is nothing impossible about paying retail with bitcoin the way you’d pay with a fiat currency – bitcoin-denominated credit and debit cards, for example, with all the chargeback and transactions-per-second capabilities of a credit or debit card. And there are clever trust-minimizing ways to do retail payments in the works. Capital-B Bitcoin, the blockchain, is going to evolve into a high-value settlement layer, and we will see other layers being used for small-b bitcoin retail transactions.”

Or as Garzik elaborated:

“Bitcoin payments are like IP packets – one way, irreversible. The world’s citizens en masse will not speak to each other with bitcoin (IP packets), but rather with multiple layers (HTTP/TCP/IP) that enable safe and secure value transfer or added features such as instant transactions.”

Moreover, decentralists contend that even these upper layers could include most of the advantages that the Bitcoin network introduced. Once fully developed, technological innovations such as the Lightning Network and tree-chains should allow users to transact in a decentralized, trustless, and even instant fashion – while ultimately settling on the Bitcoin blockchain. While it is true that on-chain transactions will cost more as room in blocks becomes scarce, decentralists maintain that it is the only way to keep that chain decentralized and trustless – and that that does not need to be a problem.

“Yes, on-chain transaction fees will rise,” Todd acknowledged. “But that changes what you use Bitcoin’s underlying blockchain layer for, and how often – not whether or not you can transact at all. A world where you can send anyone on the planet money directly on the blockchain for five dollars – or for near zero via caching techniques like Lightning – is a very good option, and it will buy us time to develop techniques to make blockchains themselves scalable …”

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Bitcoin Venture Capital Markets Heating up as Five Bitcoin Startups Raise $45 Million
fire-money

This week, five Bitcoin startups, including Chronicled, Chain, Abra, Case and Coinalytics, have raised more than $45 million in funding from Wall Street investors and banks, Silicon Valley venture capital firms and angel investors. The recent funding rounds also showed a significant increase in corporate investors, rather than just traditional venture capitalists. These five funding announcements follow several months without any big fundraises and may signify that the bitcoin investment market is beginning to heat up again.

Chain Inc. Raises $30 Million from Visa and NASDAQ

Chain Inc., a blockchain software company, has raised $30 million from Wall Street investors and companies, including Visa Inc., Citi Ventures and NASDAQ Inc., to enable developers and financial institutions to design, deploy and operate blockchain networks to trade and transfer financial assets and smart contracts.

As an investor and a strategic partner, NASDAQ will be using the technology of Chain Inc. to facilitate unlisted companies on its private market, without the involvement of third-party startups and developers.

“We believe in the power of blockchain technology to transform how financial assets are transferred, but it has to be done with the right partners to ensure it gets off the ground,” said Adam Ludwin, CEO of Chain, in an interview with The Wall Street Journal.

Today’s banking and financial systems are extremely inefficient; it takes days to weeks to settle and process the transfer of assets or stocks, which also requires the involvement of intermediaries and regulators in its process.

The blockchain in contrast, enables instantaneous settlement of payments, transactions and assets, thus cutting a significant portion of the cost of asset trading platforms and companies. Furthermore, the integration of the blockchain technology onto today’s stock market trading platforms could rid the services of intermediaries, which account for a large portion of the costs of major stock market trading platforms such as NASDAQ.

Bitcoin Remittance App Abra Raises $12 Million

Global bitcoin remittance startup Abra has raised more than USD$12 million in a Series A funding round participated in by Arbor Ventures, RRE Ventures and First Round Capital, to further develop the iOS mobile application and to expand the reach of its services to as many countries possible before its official launch.

“[Abra] is fully leveraging the potential of the technology by reducing friction in financial services. It’s not about bitcoin for the sake of bitcoin – it’s about how the technology can solve problems for consumers worldwide, even if they don’t know what the blockchain is,” RRE Ventures general partner Jim Robinson told CoinDesk.

Abra, a remittance app launched at the Launch Festival 2015 founded by former Netscape director Bill Barhydt, aims to gather as many trusted “tellers” or users to create a bitcoin-based Western Union type of service that enables users to send and receive bitcoin quickly, anywhere in the world.

During his presentation at the festival, Barhydt explained, “Our mission with Abra is to turn every smartphone into a teller that processes withdrawals. This is not just another bitcoin app. The wallet is a full-fledged digital asset management system, and you don’t have to understand it.”

Hardware Bitcoin Wallet Manufacturer Case Raises Another $1 Million

Hardware bitcoin wallet manufacturer and developer Case has added another $1 million to their seed funding round from Future/Perfect Ventures.

Just yesterday, the Case team announced their involvement with former JPMorgan executive Blythe Masters’ bitcoin startup Digital Asset Holdings and the development of crypto-security for an interactive marketplace that uses public opinion, news, and other data to produce odds on global event outcomes in a variety of categories including sports, finance and politics, called Pivit.

“Bitcoin and other distributed ledger technologies facilitate the transfer of digital financial assets within cryptographically secured, immutable environments. Case acts as a secure signing device that streamlines this process without increasing the risk of compromising sensitive data,” explained Case CEO Melanie Shapiro in a blog post.

Coinalytics Raises $1.1 Million for Blockchain Data Platform

Coinalytics, a “real-time intelligence service” for blockchain platforms, has raised USD$1.1 million in a seed round led by a Palo Alto-based startup incubator The Hive. The startup aims to provide risk management assessments and analysis technologies to help bitcoin startups, wallet providers, payment gateways and bitcoin exchanges to conduct risk assessments using blockchain analysis.

In an interview with Coindesk, Coinalytics CEO Fabio Federici explained that its clients can accept bitcoin transactions before they are confirmed by the bitcoin mining network, through its in-house tools for pattern recognition and its blockchain services.

“We analyze the inputs of the transaction, the structure of previous transactions and pull in metadata around those inputs to get a feel for whether the customer is reliable,” Federici told Coindesk.

Chronicled Inc. Raises $1.4 Million for Blockchain Authenticity Platform

Chronicled announced a $1.4 million convertible note financing lead by Colbeck with Mandra Capital, Pantera Capital, Social Starts and Seattle Seahawks running back Marshawn Lynch participating. The company is building a blockchain-based platform to verify the authenticity of consumer goods, such as branded apparel.

“The secondary market for luxury goods and collectibles is flooded with fakes, resulting in illiquidity and daunting consumer risk,” said Dan Morehead, CEO of Pantera Capital.

“Chronicled’s technology has the potential to make the market safe and efficient, while giving users a better experience. Luxury goods provenance represents a multi-billion dollar sector where blockchain technology can add unprecedented value.”

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