Blockchain
Blockchain and Digital Assets – The Primer
TL;DR – When we think of innovations like cryptocurrencies and blockchain technology, we often wrongly think of them as being one in the same. But what we actually think of as ‘blockchain' is actually a wider array of technologies that when blockchain is placed together, it can be used in various combinations to provide unique and exceptional applications.
What we intend to do with this piece is to cut through some of the noise involved with blockchain technology and virtual assets, ranging from the smaller scale projects, high-specification blockchain or smart contract applications. Some of the areas that we will be delving into areas directly related to blockchain such as consensus algorithms, smart contract solutions, material / virtual incentives, digital assets, cryptocurrency mining, crypto valuations as well as the distinctions between public and private blockchain solutions.
Overall, the underlying goal of this piece is to give a much clearer distinction of what blockchain technology is at a fundamental level, as well as how it can be put to use in a myriad of ways. And why there needs to be a comprehensive level of education in order to better understand just how blockchain technology can immensely benefit from knowning about blockchain.
Primer – an Introduction
Why Should We Pay Attention?
The world is increasingly and rapidly becoming one that is highly digitalized and, as a result, performs at a far faster basis than anyone cares to mention. And it is dramatically pouring into our daily lives, from how we complete transactions, the ways in which we communicate, even to the ways we store financial, personal information and approaches to investing.
So what is it that brought about the advent of blockchain technology? It comes down to the transformation, over the years, of the underlying architecture of the internet. What also helps is the growing accessibility of the technology, with the dawn of innovations like mobile technology. It's been thanks to these kinds of advances that blockchain has been considered more and more to be a crucial piece of the puzzle in cracking the matter of complete digitalization.
Bringing together blockchain technology with the already existing kind of infrastructure of technology means that there have been some dramatic improvements to the kind of architecture that can be used for blockchain. As we are only seeing the very beginning of this so far, this is all part of a year by year evolution that will see increasingly vast amounts of industries augmenting blockchain in order to further improve areas like financial transactions, supply chain management, logisitcs, even the field of medical information and money as we know it.
What is the story behind blockchain? And why is there this belief that it and cryptocurrencies are joint at the conceptual hip? It's because it was pulled along for a financial joy-ride by crypto. We see this with the veritable tulip mania that took place over the last few years, this mania and correlation between crypto and blockchain was not at all helped by the fact that journalists from the technology world to the financial were all too enthusiastic to trumpet the success of these virtual currencies and wax enthusiastic in order to generate clicks.
Along with the technical elements being thrown under a bus in the name of hype, it isn't helped either by the fact that blockchain is such an overly deep and vast word that it just cannot be described in a quick and concise way. As a result, anyone trying to get a skin-deep reading of what it is and how it works will end up just pointing at Bitcoin and saying ‘it's that,' which is not good news for blockchain enthusiasts (like myself).
One of the first and more important lessons that users and onlookers should bear in mind when talking about blockchain in contrast with Bitcoin is that the former is something associated with it, but not directly linked – with Blockchain having the ability to dramatically alter the way in which we use the internet, financial services, industries and beyond. In order to break down blockchain in a more distinct way, however, it's important that we break it and its impact down into three separate segments.
Opening Up the World of Money
Anybody that is even tenuously grasping at the news will understand the kind of impacts that the Global Financial Crisis of 2008/9 had on our relationship with financial institutions like centralized banks. To summarize it, it shattered the confidence and trust that they once had, dragging down with it the associated belief that we also had for various commercial, investment banks, and even government leaders of the time and even afterwards.
On a more deep level, this would set the stage in motion for a large-scale, never before seen level of expansion for international monetary policy, and it's one that countries across the globe still haven't been able to wrap their head around fully just yet. With this great financial experiment taking place with an untrusting, sometimes hostile community, the financial crash has also served to send the volume of sovereign debt surging upwards, while simultaneously sending public spending ever downwards.
It was only really moving years on from the financial crisis that a people began to seriously question or criticize in some cases, the way in which central banks, not only approched the management of monetary solutions and markets, but also the kind of relationship that they have with the individual customer. One of the unspoken truths about central banks or otherwise is that the government, and big companies or individuals are their best customers, while small-time users are not.
It's for these reasons that there was a broader desire to pull the kind of control that these banks have away from them, and place it into the hands of the billions of users across the world, thereby creating a system that is far more trustworthy and objective. In transforming something like this into an immutable, peer to peer solution, this would eliminate any need for an overly expensive, untrustworthy, and often highly inefficient wave of third parties when the average user just wants to make their transaction with their money.
Enter Bitcoin.
Bitcoin itself emerged at the perfect time as a scarce, decentralized solution to peer to peer digital payments that have and never need a third party to validate what's going on. Built into its programming, it will only ever have a fixed supply in circulation, along with an incremental challenge curve built into the mining of it by digital asset miners. This two-pronged system means that it can seriously limit any fluctuations in stock to flow ratios, regardless of its growth over time.
Where it significantly splits off from the previous system of monetary transactions is the fact that it uses blockchain to provide a permissionless, peer to peer solution for users, and allows individual holders to exert a far greater level of financial sovereignty, allowing users to have complete control of how much Bitcoin they have and how they make use of it, in stark contrast to centralized, commercial or investment banks.
Along with coming out to an online community, Bitcoin emerged in a perfect financial and political storm, and kicked off a broader search for what we know as ‘Sound Money', which comes from the Ancient Athenian philosopher – Aristotle. Bitcoin also started a further search, for ‘Sound' payment systems, and coincides with an optimism attached to the prospect of creating a truly free, decentralized and highly accessible market for money to the average individual across the world.
Internet – a New and Open One
To the average person, the internet is a realm where people are well and truly anonymous, and operates as a completely decentralized entity. The unfortunate reality for these individuals is that the truth is far more disconcerting – as the internet is another space where your information is well known, stolen, managed and controlled by a series of centralized entities. With massive internet service providers holding your information, along with countless billions of other pieces of info within its data centres.
One of the added disadvantages of these systems is that they make exceptionally easy targets for sophisticated hackers to attack and often doing so with a great deal of success. And where companies can often have shareholders and trust to lost if they let that news go public, it can often be months, even years before companies will confess to being subject to an attack.
How often do these kinds of attacks take place against these targets? More than you would care to know. It's almost as frequent as every week that there is a hacker attacking a server farm or provider, impacting tens of, if not hundreds of millions of innocent people in the process. It's not just the security of these providers that should concern us, either. These businesses turn a profit by selling to social media providers. What do they sell? Information, which can be in shockingly high volumes and depth for the individual to want to sell off if they knew. This has a dramatic amount of longer term implications for the individual online, especially where it throws into question their independence, security and privacy online.
The only real way that there will be a decentralized ecosystem is through innovations like blockchain technology, which is also known as Distributed Ledger Technology, and it provides a highly secure, peer to peer alternative to the centralized system that we commonly use now. It also provides a much better back-end architecture as well than the current internet that we use too. Just how it does this is through the secure storage of information in a decentralized ledger, one that is cryptographically secured so as to make it immutable, or unchangeable by unwanted parties.
The Future Of Digitalization
While we do have to concede that mainstream markets in operation are highly efficient and easy to use. This is partly thanks to the fact that information flows at, not only a far faster rate, but also in a more transparent way than it ever has done throughout history. It also provides a high level of liquidity as well: with buyers having a feverish appetite for information, and sellers having plenty of it to provde for them. Even then, there is a great deal of friction that still prevails.
The process that goes behind the world of investing, for example, remains one of the more time consuming and overly complicated systems out there, and it runs the entire range from loan settlements, to private subscription documents. Markets are also held up with artificial and overly rustic traditions as well – with various stock exchanges opening and closing at arbitrary times, and even unecessarily closed during holidays and weekends, when the vast majority of investors are online now more than ever, and are completely agnostic to the notion of opening and closing times.
The mainstream market isn't wholly oblivious to these matters, however. With the securitization of areas like the bond markets, financial service providers have placed a greater focus on creating more innovative, and frictionless structures for investors. These same organizations understand the high demand placed on frictionlessness by the veritable explosion of the global market surrounding Exchange Traded Funds as one of the more prominent examples.
So what is the most reasonable and natural next measure to take here? For markets looking to re-invent themselves with efficiency in mind, that is taking these same assets and digitalizing them. Thats been one of the big steps to take for markets, and it only makes sense for markets to innovate in a way that involves the direct digitalization of assets. Much like paper money, these digital assets, or tokens merely operate as a ‘digital' wrapper for the already existing market risks associated with the asset, but it allows the same asset to be traded over an international market, as opposed to being restricted.
If digital assets are to become the financial ‘norm' as opposed to being the exception, this would dramatically simplify the process of secondary sales for private placements, while also allowing for investors from anywhere across the globe to have access to, often highly desirable markets such as the UK and US. This can also include the digitalization and investment in asset classes that were otherwise inefficient classes. These include assets like precious artwork, allowing them to be more broadly acceptable to an increasingly proletarianized investment market, resulting in the blurring of the lines between what is a private asset and what is public.
Digital securities that are built on top of innovations like blockchain technology and smart contracts are what serve as the bridging point between traditional financial products and services and future digital assets. Introducing these kinds of innovations can do a lot for improving the overall functionality of services, while streamlining and simplifying the entire process, additionally, digitalization can contribute towards lower fees as well as ensuring that trust based elements like digital compliance, deal execution and regulation are adhered to.
One of the added positives of bringing assets that do not presently have any digital iteration, like interests in private funds, artwork or receivable assets, once digitalized, will be able to bought and sold to a far bigger investor base, while exponentially increasing its overall liquidity. Along with digitalizing assets, there is plenty of potential in digitalizing data and transactions, from organizing how digital records are secured, logged, stored and kept safe from unwanted third parties. In doing this, you can remove wholesale, the need for inefficient intermediaries, streamline the entire logging process, while bringing costs down significantly.
Is it Blockchain or a Digital Ledger?
First of all – What is it?
While many out there would likely equate blockchain and Bitcoin as being one and the same. It's far easier to think of it as though its an Excel spreadsheet, which each of its various tabs being a comprehensive list of various records kept in order, signatured and timestamped with who logged it when and where. Each of these tabs is also linked to one another in a set sequence with distinct elements that set them apart.
In summary, that is the way in which blockchain operates – as a robust data structure for the secure containment of information and data in a very specific format. A Digital Ledger, Or blockchain allows for the direct linking of large amounts of records and transactions, these are then added into aggregated ‘blocks' and provided with a digital timestamp and identifier code that allows users to easily identify it through a block explorer from any other blocks within the ledger (blocks are also known as a ‘hash').
These same blocks are then linked together with other hashes within the ledger in order to create a ‘chain' of various blocks. These hashes operate as the practical application of a concept within the world of mathematics which is known as Cryptography, which, when it is applied to technological fields like data integrity, user or transaction authentication, data confidentiality and non-repudiation, can provide a powerful data storage solution.
This same blockchain ledger, from being created, is then distributed to a wide range of other participants within the network in order to create a mutually agreed upon consensus for each transaction that takes place. What this allows to happen is for the blockchain to create a highly immutable, permanent record that is unable to be modified, tampered or altered in any way, meaning that it is a highly secure way to log and maintain an extensive data history.
What Purpose Does This Serve?
It is safe to say that we currently live in a rapidly digitalized and digitalizing world, where all of the data that we are responsible for producing, storing and moving between users on a daily basis is highly disorganized, with little to no structure, and is often the subject of unwanted observation, appropriation and malicious or simply unwanted alterations.
It is because of this that any solution in which digital records and their associated data that provide a clearer structure, are verifiable, immutable and still sharable on a far more efficient level are solutions that are highly sought after – and this is before we've even delved into the kind of benefits it would provide for a world of finance where transactions, logistics and commerce are still dominated by paperwork, such as remittances, regulation, investment among them.
There are plenty of ways in which digitalization can be put to work for different industries, and provide an immense amount of benefits, with a few of the following being just some examples:
Money – Introducing a system of shared records and broader digitalization of this would allow for the creation of a system of permissionless money solutions, while also providing open, immutable verification.
Home Ownership and Deeds – Digitalizing these would remove any need for expensive overheads such as home title insurance, or even the extra risks associated with losing a paper deed, or having it be accidentally destroyed, lost or stolen.
Trading Finance – Digitalization would allow for the eradication of the vast majority of expensive intellectual mistakes and actually improve the rate of settlement.
Voting – Creating a digital solution for voting would almost completely eliminate the joint risks of voter fraud or tampering. A distributed ledger means that secret ballots could take place on an international basis as well, and cut down on logistics and costs.
Provenance over Products – This would prove and improve the supply chain logistics of products being shipped and transported overseas While also encouraging the facilitation of conflict free supply chains.
Asset Ownership and Proof of Ownership – A Digital solution to this would remove any competing claims that exist over various assets where ownership is otherwise uncertain.
Blockchain Digitalization – Is it Really That Simple?
Well the answer is more complicated than can be answered with a yes or no. Blockchain itself operates as a data structure – the innovation doesn't come down to just how the data is organized, and there are plenty of ways in which data can be structured so as to make it more efficient or effective. The true power of blockchain comes from the fact that it provides innovation in three ways:
- The complete automation and streamlined completion of agreements and transactions in a peer to peer format
- Blockchain serves as a verifiable solution which is mutually verifiable through its participants successfully obtaining consensus on these records
- Blockchain in its broader application of programmable value provision of information.
Thinking About Smart Contracts
So, What Are These?
Smart contracts are commonly discussed along with distributed ledger solutions, so we will go into what these are. Smart contracts operate as a complex of computer code that operates on top of the underlying blockchain, and holds a set of intrinsic rules that allow for the efficient faciliation, verification and enforcement of guidelines in order to make sure that a mutual agreement or transaction is reliably completed by both parties.
If and when the previously agreed upon rules are completed by both sides, the agreement will by fully enforced thanks to the smart contract.
Smart Contracts – Are They Useful?
These serve as decentralized, pre-agreed upon tasks, transactions and a means of conducting automated operations between users. Some of the important attributes of smart contracts is the fact that they operate as wholly self-verifying systems thanks to their pre-coded design, they are self executing systems, meaning that they cut out a now redundant and overly expensive third party in the completion of a digital agreement. Lastly, they are a completely tamper-resistant solution; with each of the inputs, functions as well out outputcs conducted by these contracts are immutable, verified and are fully protected against unwanted manipulation.
One of the added advantages of these smart contracts is that they can take on complex tasks such as the automation of legal obligations, removing the over-reliance that companies have on intermediaries to serve as guarantors or invigilators of contracts, while ensuring a higher level of security between parties.
How Can Smart Contracts Be Applied?
Let's use the example of applying a smart contract into the world of insurance. While travelling for business, you buy flight insurance for your trip. In the process, however your flight is cancelled, leaving you unable to make your meeting. Where a smart contract comes in is that it takes the input information (validation from the airline company that the flight was cancelled), it then performs the agreement as previously set out within the digital contractual agreement (for example – that you are entitled to a complete refund of your flight), it then acts upon this and pays out to you directly without any needed input from you.
Through the delegation of this information over to a smart contract, there is no need to bring in a third party or agent in order to physically go through the information in order to validate that you had, in fact, missed your flight, or take advantage of loopholes to avoid paying out. There is also no need to wait for an arbitrary number of business days for the insurance company to write out a check and mail it to you.
The implementation of a smart contract in the place of older insurance providers means that the costly overheads of human labour and other costs are dramatically reduced. There are plenty of other ways in which smart contracts can be put to use, with some of these including:
- Smart contracts allow for the full automation of copyright privileges, meaning that it can automatically create royalty payments whenever the copyright is used within the digital world.
- These allow for the complete automation of escrow as well as the transfer of various titles and certifications from one party to another such as a mortgage, artwork, supply chain logistics and so on.
- These can also automate the process of meeting and / or exceeding contract performance in employment, interest rates, dividend yields, etc.
- These contract are also being used for the tracking of shipping, package deliveries as well as the authentication of various products through the use of sensors within the Internet of Things (IoT).
Delving Into Vocabulary – Consensus, Incentives, Open Protocols and Permissionless Innovation and What They Are
Now that we have gone through the structure of automated solutions that things like blockchain and smart contract solutions can allow for, we will now go through how these digital records can then be authenticated and verified through consensus by its various participants.
Within the Ledger – Consensus
Blockchains fundamentally operate as a structure for the storage of data. These structures can then operate in two distinct ways – the first being as a wholly public system, like what we see from digital assets and currencies like Bitcoin and Ethereum. On the other hand, these same data structures can also function in a private or selective formatting, meaning that only one individual, organization, or a select group.
While there is an agony of choice over the structure of a blockchain and consensus, it is the nature of the kind of transactions and applications that truly determines how it should be authenticated. In other words, how the various users should be able to obtain ‘consensus.' For example, if you wanted to keep a continued ledger of personal spending, you would want to create a spreadsheet of all of your transactions and aggregate the different transactions by months in various tabs. It is in this scenario that there is not really a need to have other users come into this equation and validate the information – only you need to be in this intellectual equation. Additionally, this information that you are inputting and storing does not exactly have an intrinsic value to anybody, so it is a far better idea to simply authenticate the information by yourself, making this a private ledger solution.
But what kind of solution works if you are part of a collected group? Say, for example, if you are part of a collective group of banks or companies that want to share their records of transactions or trades over a certain period of time with one another to compare trends or activity. In many cases, for banks, there are logistical issues for them upon looking back at trade blotters, and these same institutions take a great deal of time, resources and money in reconciling this data.
If, for example, they could create a master blotter and allow for one bank to assume the responsibility of writing and inputting this data into the ledger in order to prevent any discrepancies between the various banks. If something does happen to the banks computer, for example, such as if it is unexpectedly shut down, afflicted with a virus or hacked – the information would not be valid or would be corrupted. In summary, this is not an ideal or safe way to deal with the management of records like this – with one orgnization being responsible for the inputting and storage of data, that means there is one point of failure. What would also happen if there was false or corrupted information thanks to malicious entities that were also present on the network? How is the network supposed to come to a consensus on the ledger in order to ensure the validity of the information placed into it?
For as long as computer science has been a intellectual pursuit, the chronic issue of consensus has been around, and is a continued question asked of various ledgers of storage. There is always a conundrum that comes with achieving consensus between peers; some of these participants may be unreliable or fail to adhere to protocols put in place, meaning that these consensus protocols need to be tolerant of faults, highly resistant and stable.
What a consensus process needs to do is put forward its values, while effectively communicating with one another, and allow them to agree on a single, unifying consensus value. It is extremely important that a system be successful in conducting consensus, especially when it comes to fields where it is crucial and highly time sensitive. For example, imagine that you're working in a nuclear energy facility or reactor with three sensors – two of which inform their operators that things are operating perfectly fine, while the third is alerting its operators to a leak. Between these three sensors, how are operators supposed to know with certainty the overall condition of the reactor?
One of the solutions to this is to provide a system in which these agents or operators can obtain consensus by agreeing on value through clear majority. When it comes to the previous scenario where banks are operating in concert to create a ledger for tradeblotters, a majority of these banks could vote on the current validity of the ledger and records. The drawback to this is that if there are one or more faulty processes in the ledger, this can drastically skew the result and, as a result, hamper the likelihood that consensus would be reached or if it is incorrectly reached.
Another term that follows swiftly behind the consensus is the process of ensuring effective consensus mechanisms. These mechanisms refer to the various processes and regulations in order to maintain the fault tolerance of the system. These consensus protocols are actually present in our daily lives more than we think. For example, with internet services like Ebay and Amazon, they rely on a system of single party confirmation and consensus, this being the confirmation of your orders and providing your order history. Meanwhile, others, such as the digital currency – Bitcoin – make use of the Proof of Work Consensus mechanism, this being due to it having a global ecosystem of participants that seek out a fair, effective, stable, secure and real-time mechanism. This is all in order for Bitcoin to ensure that all of the transactions taking place on the network are valid.
The Incentives
The value of data and information is only truly valuable when it is true, and while participants are reliable producers and providers of data, these same people need to be given the right incentives in order to ensure the continued integrity of their data and achieve consensus. For many systems, there is a reliance on the ‘better nature' of individuals, this is the case for companies like utility provides, whom we trust to give us as accurate information on our utility use as much as possible. While this works for these kinds of companies, it is very much the case that other systems and service providers simply cannot rely on this system of altruism. The alternative, therefore, is to provide incentives for good behaviour.
There are usually a series of ‘carrot and stick' methods that participants on networks have when it comes to incentives. With this kind of analogy, the stick represents faulty trading data which spells expensive reconciliation, a waste of resources, time and possible legal action, with carrot of valid, rapidly recieved data resulting in a saving of cost.
For the digital and crypto asset networks, these rely on a very similar kind of framework for its incentives – with the carrot being the successful validation and verification of information and transactions, this results in the compensation of the other party in crypto assets and a continuously secure network. However, the stick is the underlying financial cost of validating transactions; with the proof of work consensus system, which is commonly used with digital asset networks like Bitcoin, there is a continued cost, monetarily speaking in capital investment as well as the expenses associated with validating these transactions. With the use of dual structures of incentive, participants are given the proper incentives in order to obtain consensus, validate new and current records while also maintaining the network overall.
Permissionless Innovations and Open Protocols
These kinds of networks can operate in a public or private setting, meaning that achieving consensus on either of these and subsequently enabling private or public facing innovation. So when we talk about public networks, these tend to be open, decentralized and makes use of peer to peer connectivity without the need for a single and central hum. These public networks provide highly efficient creation of information as well as sharing without the need for a centralized entity which could easily manipulate, censor or sell off the data, or even stifle competitors.
These same open networks also remove an potential for asymmetry when it comes to information and influence that can be prevalent in the internet that we know today. Anyone can actively join, participate and contribute to a public network like this, with development within it is no longer limited to a centralized entity. Through these networks, people can effectively and efficiently agree on anything within this ecosystem without the need for intermediaries, with an economic incentive which aligns both network keepers and users.
The internet that we use today presents a major intellectual and security based concern. This is due to the fact that, with a centralized entity, is presents a single point of failure which has a knock-on effect of placing every other user within this ecosystem at serious risk as well. Without any rival forces within the ecosystem to compete against a centralized entity, they wield a disproportionate amount of control over users of the internet, and have little to no incentive to innovate in any way in order to secure and safeguard private information online. By providing users with a neutral and stable alternative, these open protocols and networks provide a good number of solutions to these issues causes by centralized systems, while providing a lot of potential for innovation long-term, paving the way for the next generation of the internet.
Digital and Crypto Assets – What Are They?
While there has been a lot of hype surrounding digital assets such as cryptocurrencies over 2017 to now, but what are they? Essentially, they are assets which hold a value that can be programmed. These same assets can then be natively issued to users, like the way we see Bitcoin being distributed or issued shares within a company. Alternatively, these digital assets can translate to real world value as we see from digitalized deeds to real estate or artwork.
What do digital assets provide? They offer a means of authenticity for assets that didn't previously have them, while offering a previously non-existant proof of ownership, provenance as well as offering the user flexibility in what were previously highly complex financial transactions and contracts. If we are to imagine digital assets as, for example, digitally native interest within a credit fund – where borrowing companies can send interest payments via a smart contract – all without the need of time consuming paperwork.
These digital interest payments, secured through a smart contract can then be added to an existing credit fund at a mutually agreed upon date to the designated fund manager, while a corresponding smart contract could automatically deduct fees and outstanding expenditures before the income can then be distributed to valid owners.
These kinds of innovations can help significantly reduce the kind of existing inefficiencies within financial services, while it can also remove any need for intermediaries and facilitate the creation of contracts that can provide a high level of connectivity in an increasingly digitalized world, and operate in a completely trustless environment. Digital assets can then be put to use for some of the following:
- Create liquidity
- Enable divisibility
- Speed up settlement
- Govern assets
- Permit compliance
- Automate service functions
When we use the phrase ‘digital assets', it can be used to define a vast range of assets with programmable value such as crypto assets, which operate as native assets within a public blockchain that can make use of further technological innovations such as Cryptography, these include the likes of Bitcoin and Ethereum.
Interestingly enough, the term ‘Cryptocurrency' is also used as a catch all term for a range of assets that have no real intentions of becoming or being a currency. As a result, it is worth referring to these natively issued assets operating within a public blockchain as ‘crypto assets.'
It is worth highlighting two of the major digital assets, these being Bitcoin and Ethereum. We will go on to illustrate how their underlying technology serves to compete with more traditional iterations.
First of All – Bitcoin
What is it?
Bitcoin has prided itself on being an entirely independent system of digital money, a wholly objective and independent system for globalized money that requires no third party entities to successfully complete transactions thanks to its smart contract application.
For Bitcoin users, it serves as a highly beneficial combination of digitalization, the assured security of cash settlements, while establishing a means of completing borderless payments for users internationally. In summary, Bitcoin provides the following for users:
(1) utilizes a distributed, verifiable ledger,
(2) is cryptographically secure,
(3) is practically resistant to threats, and
(4) bears no counterparty risk or reliance on a trusted third-party.
Bitcoin's own method of digital consensus as well as providing users with an immutable public ledger provides a highly effective solution to the previous problem of ‘double spends' within a digital ecosystem. Double Spend refers to an intrinsically possible flaw within the system of digital currency, where the same digital unit can be spent more than just the one time.
Why does this happen? It is made possible due to the fact that each digital token consists of a corresponding digital file which can be subjected to duplication or falsification. Imagine, for example, duplicating a file for digital cash which essentially allows you to mint currency at will. Seeing as though Bitcoin operates as an entirely decentralized entity, there is no central organization in order to ensure that a digital unit is not spent more than once, meaning that there is a persistent risk that a unit within this ecosystem will be spending more than this.
The author and progenitor of Bitcoin and its associated white paper – Satoshi Nakamoto – initially proposed that a publically accessible mechanism which offers with a timestamped and log-based solution, all in order to generation computational proofs which could then serve to validate the authenticity of all transactions that take place on the public network in order to prevent any instances of double spend, thus allowing for the achievement of a fully valid network consensus. In doing this, Bitcoin can then solve the entire issue of double spend through the use of a publically verifiable ledger.
Should there be an individual within the ledger that attempts to spend his, her or their Bitcoin more than just the one time, the mining community will reject it as an invalid transaction. With ledgers like the one that Bitcoin makes use of, it is updated with each and every new block that is generated and subsequently mined, this allows for each participant to calculate rach individual's balance and find out whether a specific user is attempting a double spend.
The way the Bitcoin was previously designed was with an intrinsic scarcity, thanks to a previously known and fixed issuance supply of 21 million Bitcoin, with the supply level being fixed in a constant state relative to the programmatic declines in supply issuance every four years. This is in contrast with the system currently in place with central banks which make use of newly minted money in order to finance government spending and borrowing over time, any Bitcoin that is newly issued are used to compensate individuals who has served to expend their own resources in order to better secure the ledger.
One of the ways in which Bitcoin is capable of modulating the creation of more Bitcoin along with dealing with the increased resources of the network is through its system which is referred to as the ‘difficulty adjustment,' which limits the possible fluctuations or changes in stock to flow ratio, thus making Bitcoin a wholly unique system of value when compared to other kinds of money out there.
Whenever there is a change in the value of Bitcoin over time, it is designed that it cannot actively increase or decrease its supply or impact upon its rate of issuance, thereby artificially providing a baseline value for it. The supply of Bitcoin is bound by the algorithm that is within the code and the dyanamic adjustment of difficulty over the time within the network. The security of the network interestingly relies on an accepted asymmetry that exists within the costs of performing the proof of work needed in order to validate transactions and the overarching costs in verifying that it is complete and truthful: as a result, it is challenging and increasingly expensive to perform these kinds of calculations, but also trivial by contrast to verify the correct associated computations.
The Volatility of Bitcoin – Some Framing
This use of an otherwise conservative approach towards its monetary policy, as well as the presence of the difficulty adjustment system means that Bitcoin can perform effectively as a means of storing wealth digitally and serve as a form of money internationally. The underlying volatility of Bitcoin comes from the fact that it is boasts a programmable inflexible supply as well as a predetermined growth rate. We can expect all of these factors to culminate in initial volatility due to it still being early in international adoption. So while volatility takes place, demand changes of the units overall do not influence in any way the creation or destruction of these same units.
What this means is that, while the rate of adoption for Bitcoin steadily increases, each incremental adopter will provide a steadily diminishing influence on the price of Bitcoin overall, which also leads to the overall dampening of financial volatility over a long range of time. Bitcoin and its volatility is perfectly normal and is something to be expected within this early period of time, but we ought to bear in mind that this volatility should not be mistaken with later volatility from the adoption of a more mature audience.
In summary, Bitcoin is one of a limited pedigree of assets out there with a strict and limited level of scarcity which cannot be subjected to financial debasement of any kind. Bitcoin also does not and cannot have any of the intrinsic drawbacks that we see from more physical stores of wealth out there like precious metal of fiat currency: along with this, the cost and underlying speed in which Bitcoin can be transferred locally and internationally, and as a digital storage solution, is a profound improvement over conventional mediums.
Bitcoin – The Matter of Value
In the above information, we have seen a lot of reasons for why Bitcoin provides a highly effective, secure system of storing value and completing peer to peer transactions. When we compare this to government issued money, for example, the latter is highly vulnerable to dramatic increases to its underlying supply in contrast to the existing stock through activity from central banking institutions. As a result, it has the potential to lead to a massive loss of salability, a depleting level of purchasing power, as well as the depreciation of wealth within current holders of the assets, as has been previously seen during the great depression over 1929-1938, and more recently with 2008/9 thanks to the suspension of the gold standard.
While there is a continual amount of risk that persists within and across all financial portfolios that own a range of traditional assets considering the intrinsic links that exists between financial markets and macroeconomic issues across the world. As a result, the allocation of Bitcoin, which is a digital asset that is limited to inflation and untethered from the global impacts of central bank activity, global economics, as well as financial markets. These digital assets can then diversify some of the risks which are inherent within modern portfolios.
‘The King of Smart Contracts' – Ethereum
What is it?
While the first thing that the average person thinks of when it comes to cryptocurrencies or blockchain is either ‘what?' or ‘Bitcoin.' Ethereum is one of the more significant challengers which arose back in 2015 as another open blockchain solution, much like Bitcoin, but operates as a distributed computing platofmr as well as operating system for the application of smart contracts.
What Ethereum provides for users is decentralized computing power, allowing it to execute financial transactions, implement smart contracts, as well as provide applications with a global public network of decentralized nodes.
Within the Ethereum ecosystem, the digital asset natively used for completing transactions is known as Ether or ETH; this can be transferred between various users on the ecosystem as a means of compensation for participant activity, such as validating records and any transactions that take place, much akin to Bitcoin in this regard.
It is in this way that Ether almost operates as a kind of commodity which is used to access a network and its scarce range of resources. Kind of like the way oil is used: Ether is almost like a virtual fuel for this decentralized system, like oil being used in order to operate cars or other vehicles for a particular business.
With Ethereum, among other platforms which provide a greater focus on smart contracts, these have the ability to transform the currently existing layers of the internet that we know of by allowing the operation of consumer facing and business based applications in a way that requires zero permission while guaranteeing high reliability, along with un-ending operations and contract execution.
Coming to Consensus – How Crypto Asset Networks Achieve this and What on Earth is Mining?
So, what we had previously touched upon with the two earlier subjects are elements that are pretty important for crypto assets – these, of course being Consensus and incentives. For crypto networks like Bitcoin, these confirm transactions and allow its community to come to a broader agreement about the overall condition of the ledger through the use of a deidcated consensus mechanism as well as incentives. With this whole process of consensus of transaction processing as well as validation, this is commonly referred to as ‘mining,' which comes in a wider range of forms, but the most common among them is the consensus solution used by Bitcoin, which is known as the Proof of Work consensus solution.
In order to successfully apply this mechanism, Bitcoin transactions had to be structured into blocks. When it comes to the consensus solution – Proof of Work – it involves a computational application of brute force with guessing and checking with a mathematical puzzle involving transaction processing hardware, or what we refer to as miners in order to compete for who will solve it first.
With the parameters of the amount of effort computationally as well as electricity have been reached in order to satisfy the guidelines of proof of work, the transactions would then be confirmed and subsequently processed, his block is then chained together with other, older blocks and catalogued within the ledger. Once it is added, the block cannot be altered in any way without repeating all the work that was done. With the inclusion of other blocks to this chain, the amount of work needed in order to change a block would also demand the re-completion of all of the associated work calculations for blocks which came after it as well. The network can then broadly validate all the work the miner has accomplished by conducting a single calculation.
With every new block that is introduced to the system, it updates the existing ledger of transactions, allowing its user to calculate whether or not a user is attempting to conduct a double spend. Along with providing work on the computation behind each verified transaction, miners are then compensated for their efforts with the issuance of new Bitcoin, which is also known as block rewards as well as transaction fees. This payment of Bitoin provides an effective and intrinsic system of incentive for miners to verify transactions within the blockchain.
One of the ways in which the network provides a stop-gap measure against bad behaviour is with this same incremental difficulty created with the economic cost of expending electricity. Meaning that if a miner attempts to act dishonestly, they will not be compensated for the work or electricity they have expended. And these costs can often be exceptionally high – the loss of electricity, investments in often highly specialized mining hardware, bandwidth storage, operational expenses among them. These compensation payments, much like any payment through blockchain, these compensation payments are irreversible with the consensus of the network.
What allows for the continued security and stability of this system are a range of these carrot and stick approaches to incentives, and the continued honesty of miners, and so long as these kinds of miners are in a clearer majority compared to any co-operating organization of attacking or malicious miners. Through this system, Bitcoin manages to provide a solution to the endemic issue with double spend through the application of a ledger that is transparent, immutable and publically verifiable. This means that if any individual does attempt to spend their bitcoin on more than one occasion, these miners will be rejected as an invalid transaction.
While the consensus mechanism being used by blockchains like Ethereum and Bitcoin are proof of work, this is not the only kind of consensus mechanism that public blockchains can put to use. One of the newer iterations and one that Ethereum is steadily pivoting towards is known as proof of stake, wherein the processors of any transactions stake a deposit of tokens as a form of insurance against any bad behaviour on the network. What this allows for is the elimination of costly, but often necessary energy expenditure in validating transactions, while still continuing a system of incentive needed in order to continue the effective performance of the blockchain.
Crypto Assets – Can These be Valued?
Conventional assets, from commodities, to precious metals and forex are all subject to a system known as Valuation Theory, which is a common practice in order to find the true theoretical value of any kind of asset being bought and sold. Having been steadily built upon since at least 1976, it has commonly been applied and subsequently been accepted as a means of assessing valuation of any assets.
If we are to contrast this tried and tested method with the application of valuation theory as well as other kinds of ‘conventional' methodologies to the world of crypto-assets, we see that there are still some limitations that need to be ironed out to be effectively applied. This fact is mainly because there are a range of characteristics exhibited by crypto asssets which are not normally seen from conventional kinds and, as a result, means that the former cannot fit into the older methodologies of Valuation theory.
One of the insights that has been provided about the valuation of cryptocurrencies and crypto assets, in general, is the fact that conventional economic approaches and older valuation frameworks do apply: but they require a meticulous understanding of the typical use case on the way a crypto asset behaves and how it functions on an economic level.
it is worth noting with this in mind that it is still very early in the life of crypto assets, meaning that the kind of empirical proof and use cases needed to hammer out an effective valuation theory still need time to be formalized. Compared to any other kind of asset out there, innovation is taking place at an astounding speed, and crypto assets / blockchain are among the fastest moving. Therefore, we need to cut some time related slack to any valuation concepts which may attempt to affix a stress-tested theory to these assets. They simply need time in order to evolve and be cemented as trusted theories.
Some of the theories that can prove highly effective include relative valuations as well as utility theory which can prove applicable to the world of crypto assets. We can effectively apply these frameworks thanks to their continued application of them within the realm of commodities and currency trading. Dipping into the realm of commodities and money, the value of these kinds of assets are primarily based upon how much we value each as a kind of utility that it confers; these being direct utility for the likes of commodities and indirect utility for money.
Even then, these kinds of valuation frameworks and theories can prove to be effective for the world of crypto assets. Through the use of a similar construct used for commodities and currencies, we can affix what is referred to as an ‘objective value' for each crypto asset which is linked with its underlying usage, which is also driven by its network effects and underlying social acceptance. Along with this, these can also help to find a ‘decentralized premium', which is how much an individual is willing to pay for this kind of decentralization to take place using these assets.
Out of these theories, attempting to uncover the ‘objective value' can prove the more challenging to try and calculate within the early stages, over time, the value of elements like money printing to social media institutions have proven their value. The decentralization premium is the kind of value affixed to the benefits that come with decentralization such as fault tolerance, resilience to failure, attacks, censorship as well as collusion resistance, and the kind of ownership and autonomy that users can have over their data and information.
Through the leveraging of traditional frameworks such as the value proposition for crypto assets, we can start to build up cohesive valuation methods for crypto assets which can prove effective over time. When it comes to those assets that were designed predominantly to be a medium of exchange and to serve as a support system for an economy, as is seen with the classic Theory of Money, Cambridge and Keynesian economic approaches can also help to create a model based on aggregate demand or Gross Domestic Product, based directly on the indirect demand for various kinds of goods and services.
When considering the kind of assets that are designed, or evolve to become a store of value, such as Bitcoin, one of the potentially effective valuation models that can be used is the ‘transfer of wealth' theory; in which stores of value operate as a ‘flight to safety' tool during periods of time when economic or political stress hamper other asset classes. There are certainly times in the contemporary memory where these stores of value have been used in order to pull money out of markets where economic or political stress threatened to do harm. We can at least see this with some anecdotal evidence, which suggests that this could be the case for Bitcoin: Buying volumes of crypto assets had surged in comparison with the rest of the world during the economic turmoil's seen within Venezuela, Cyprus, Turkey and Argentina over the years, and with the Greek banking crisis in 2015.
With the application of this kind of system, the underlying value of a specific crypto as a store of wealth during periods of time when more conventional investment avenues are undergoing stress is the probability weighted transfer of wealth. Along with this, using a construct similar to a relative valuation can also be applicable for digital assets. Bitcoin itself can serve very much as it has professed to act in the past – as a digital manifestation of gold, an asset that is proven to be finite in quantity, deflationary and wholly democratic in nature, making the direct comparison to gold quite appropriate when it is all considered.
Crypto assets out there that operate in a way that powers smart contract platforms often serve as commodities which can offer access to the scarce resources within a specific network much akin to a single currency. These can include operating and/or capital expenses, computational power, data storage as well as the security or maintaining of the underlying decentralized infrastructure. One of the additional ways in which an external value can be attached to smart contract assets is to value them by the sum of all the resources provided by the specific network, in addition to a decentralized premium for round the clock permissionless operation and benefits that come with decentralization.
The best kind of example that we have for this kind of valuation solution would be Ethereum – thanks to the framework that it has for its operators; these users pay network operators through the use of its native currency – Ether. The price is also subject to change based upon the supply and demand for the resource in question, which is a very similar dynamic that is in play with older commodities. This is a similar kind of valuation equation that will be coming into play with the introduction of Proof of Stake to the network too.
It is in this way that the value of Ether relative to the US Dollar increases, even if the underlying cost of digital inputs such as storage or decreases in the computational power required.
While these serve as interesting conceptual ideas for the valuation of these digital assets, they are certainly not complete frameworks for assuring value over time. And much like any ecosystem, they are in a constant state of motion, change and evolution. With the transformation of existing crypto assets, the rise of new technology and the prospect of hard forks mean that there is a vast space in which to delve into new areas of research, such as providing new and clearer theories and guidelines for economics, more coherent valuation systems, as well as pricing of newly launched systems through higher daily active users and increased network usage over time, to the provision of more substantive methods of conducting quantitative analysis of decentralized premiums and underlying value of decentralization.
Blockchain Technology – What are the Value Propositions and Applications for it?
At the core of blockchain technology, the value proposition which rests at the foundation of both it and our daily lives include the creation, sharing and securing of information, as well as being the technology which enables the direct transfer of value and information which provides stepwise changes in the total progress of technology and society.
Going Public and Private – Blockchains
Selecting and combining various elements from the above can allow for the creation of new applications and, therefore, altering value. For example, with a private ledger, there is a simpler consensus model being used which places limitations on the participants and what they can do: such as limiting them to writing, editing or reviewing records like in a previously mentioned banking record.
If we are to contrast this with an open ledger: anyone is able to contribute in a broader way, they can enable anyone to authenticate and submit data as we commonly see from Bitcoin and its users. Between both public and private blockchain solutions, each provide the same kind of overarching architecture, with the exception of different elements and design choices, meaning that they create value in a unique number of ways.
For both public and private blockchains, each are designed to operate as peer to peer network solutions where each participant has access to a copy of the whole shared ledger of transactions which have been signed digitally and added to the ledger over time, and are all kept synchronised through a pre-existing mechanism for obtaining consensus. Whether it is private or public, either provide intrinsic guarantees of the immutability of the distributed ledger overall, while private blockchains may provide more flexibility for any changes to the data over time.
One of the profound differences between private blockchains or public ones, is who exactly is allowed to take part within the network and complete activities such as performing in consensus and working to support and maintain the ledger. By contrast, a public blockchain network is wholly open and accessible to anyone who would want to join and get involved within the network while private blockchain requires permission from existing users as well as an invitation which has to be validated by the creator and administrator behind the network in question.
The latter's regulations mean that there is a limit to who exactly is allowed to participate within the network and what kind of transactions will be allowed within it. Even then, the kind of mechanism attached to access and controls can differ significantly – those already operating within the network could also be prospective voters on who gets to join the network later on, operate as part of a regulatory authority that could issue permits or invitations to others to collaborate on it, or even create a collaborative consortium in order to make decisions on invitations.
One of the common misunderstandings associated with public blockchins is that they don't allow for the development of permission systems when, in reality, they do. Public blockchains function very much in a very open, highly flexible way, allowing people to create and launch applications that function in an open way – such as a open ledger for voting system, or closed ones for the reporting of more exclusive, sensitive information. The only really concievable difference is that with a private blockchain, this has permissioning as a core element of the platform from the outset. It should be said that, with the fact that public blockchains offer support for identity management, through a system of public to private keys which we will go on to delve into, developers within a public blockchain will be able to develop an application which requires permission.
When comparing both public and private blockchains, there are some differences when it comes to their comparative performances and trasnaction speeds too. With private being the more secluded of them; on account of its application of permissioned chains, this means that they will almost always have a smaller population of users, which speeds up the whole process of maintaining the underlying ledger and obtaining consensus. It is thanks to this ability of rapidly coming to a consensus that means that the ledger will perform and log information faster, thereby making the blockchain throughput (which refers to the speed in which new data is added to the ledger) comparatively faster in contrast to public blockchains.
It is thanks to this smaller pool of users within a private network that means that obtaining consensus is usually a lot quicker in contrast to a public blockchain than can often have hundreds or even millions of people participating within a ledger like Bitcoin within a proof of work system. So what is the trade-off associated with this kind of speed? Where there are fewer participants means that there are fewer people working to maintain the ledger, making it far more vulnerable to faults and failures which would also make it more vulnerable and less secure that public blockchains which can have millions on its network updating and securing it.
Public chains have also had a range of changes and newer innovations introduced to their ecosystems over the past few years in order to take on the endemic issues that they face with speed and scalability. These include upgrades to the underlying structure of this data and messaging solutions, which have since conributed to the overall improvement of scaling on public and especially on private chains, but the real improvements come from the introduction of new technology which is being known as side-chains or layer 2 solution technologies. These ‘side' blockchains operate as an associated ledger which runs alongside the primary blockchain, with any entries going into the primary blockchain being able to link up and be replicated on the sidechain.
For example, if you had a tab with a friend, rather than just paying for each drink as they come consecutively, meaning that you would ultimately have to confirm with each and every payment, you can establish a means of perioditclly settling the outstanding transactions and summarize a number of transactions and resolve them at the same time. Meaning that there only needs to be one transaction which allows you to settle the entire economic matter, and places a lot less stress on the public ledger and chain as a whole.
The most commonly know example of this side-chain solution in action includes Bitcoin and its Layer 2 Lightning Network, which operates alongside the Bitcoin Ledger and operates very much the same way as in the bar tab example used. A layer 2 solution like this allows for the creation of side ‘channels' in which transactions and payments can be sent back and forth between other users without any need on the networks part to confirm anything. Every so often, these balances are then settled and there is a single confirmed payment made in order to settle the economic transactions. It is thanks to these kinds of layer 2 solutions that there have been some big steps take in addressing the joint matters of transaction speed and scalability, which are still present in public blockchains.
So, How About Their Security and Privacy?
There is a good deal within this piece in which we have gone into detail about the sharing of records in a more open way. But there is a great deal of information out there, especially where it pertains to us as individuals that simply cannot and should not be openly shared within a public network. These include personal transaction data, financial records, medical and employment records and private business financial information, with many more examples. We are fortunate in that these technological innovations provide a great deal of privacy and personal sovereignty over data stored within it.
For private ledger applications, for example, these have a wide array of permissioned layers, meaning that only verified individuals will be able to review, move and edit information stored. For example, if a private company stored its financial ledger within a private blockchain, it could allow for board members of the CFO to go through these records without any need to open it up and render it vulnerable. Accountants, meanwhile will only be able to look into segments of these records by contrast.
Public ledgers also allow for more privacy through a range of other innovations which can be brought in. These consists of further document encryption, cryptographic keys and algorithms, as well as Zero Knowledge, which is another branch of computer mathematics.
Introducing key algorithms allows for the security of a large segment of our current digital, international infrastructure as we know it, and simply serve as another kind of password in order to assure better security. These algorithms come in two kinds – symmetric and asymmetric.
For symmetric keys, you use a ‘secret', which is effectively a secret special password that is presented as a long string of text with numbers and letters in a completely randomized order, these are then used in order to further encrytp or decrypt your information. These secrets can either be kept to yourself, or provided to selected and trusted individuals within your circle, allowing you to have a highly secure means of sending and receiving information.
Hypothetically, if you had a CEO and CFO looking to send one another sensitive technical or financial information ahead of the annual or quarterly release of earnings: these two could share a Symmetric key which allows them to encode or decode and read these pieces of information in order to prevent unwanted entities from seeing valuable information.
In a similar fashion, public ledgers can be responsible for the storage of encrypted data, messages and information, allowing only those with the secret code to encrypt and access the information. In contrast to the previously mentioned Symmetrical Key, there is Asymmetric Key Cryptography, which is also referred to as public-key cryptography, which allows for the enabling of security and privacy, and serves as a foundational technology for open digital blockchain solutions.
This public key cryptography makes use of a system of both public and private keys – the former of which is, or can be distributed across the network, while the private ones are held only by the sole owner of that information and should be kept close to the figurative chest.
The only person, therefore, that can decrypt and access the message or information therefore, is the one with the paired private key. The public key, while it can be widely distributed, allows for the broader verification that the message was sent by the holder of the private key. The public key can be subject to broad distribution and will not have a negative impact on the outstanding security of this encrypted file. This kind of technology is an iteration of cryptography and is commonly known as elliptical curve technology and it allows for the inclusion of digital signatures, which provides yet another important element in our digitalized lives. These digital signatures operate as a means with which to validate that a specific message comes from a validated sender, preventing any impersonators from tricking other users.
One of the previously mentioned disciplines of mathematics includes the kind known as ‘Zero Knowledge,' otherwise known as the means by which one party (known as the prover) can prove that they know a particular value without giving away any other kind of information other than that they know the value to the other party (the verifier). In its very essence, Zero knowledge proofs serve to prove such information without the need of disclosing the underlying information being sent, hence the name of the mathematics branch.
There are a lot of reasons for why the application of a system like this would be highly impactful and beneficial: hypothetically, a hospital could allow for the quick validation that it owned a particular patience medical information without ever needing to disclose any of the information that would otherwise be confidential. The same goes for insurance providers or banking companies.
To summarize, these kinds of technologies which are already in existance can provide a whole new level of securely transferring information and its value in both Public and private formats.
Their Applictions and Value Propositions – Blockchain
These kinds of technologies allow for programmable value and information from a larger level. Developers can then make more deliberate choices in the design of these applications in order to obtain a wider array of values.
Application Examples for Public and Permissionless Blockchain
Digitalized, Internationalized money – Bitcoin is one of the more pre-eminent examples available for a functional concept of digital, international money. Businesses which are based solely on the internet have managed to skyrocket with FAANG being a growth and value powerhouse for global financial growth. The internet has managed to already dramatically transform the economy, but there has not been a digital money operating within the internet realm which could compare to Bitcoin in terms of scale.
Public blockchains in particular, offer decentralized, digitally indigenous money system which is global, permissionless, borderless and continuous. With these kinds of payment systems, they make use of an open easily verifiable ledger equipped with cryptographic and very practical security and do not host the risks associated with an over-reliance on another or third party.
A Global Platform for Computing – The likes of Ethereum and EOS are among some of the more popular examples of decentralized computing platforms. The sheer rapidity in which the internet has grown is thanks to the emergence of open and peer to peer networks. But with the rapid rise of these networks and the internet as a whole, the commercialization of it by companies has since hindered the speed in which permissionless innovation has taken place.
Through the application of decentralized, globalized computing platforms, this would allow for anyone to create, develop and implement applications for consumer and business facing application. These kinds of platforms can then create and execute smart contracts and make use of applications through a globalized network of public nodes which are built to outlast any single governmental entity, company, conglomerate or individual.
Examples of Private, Permissioned Blockchain Applications
Digitalization of records, agreements and contracts – in spite of our rapid transition over to a highly globalized, digital infrastructure, the vast majority of our information, data and records are still in an unstructured, inconsistent, poorly filed state. As a result, they are highly vulnerable to accidents, theft, losses and even manipulation, and have not since been taken and digitalized from their current paper forms.
The enforcement and performance of agreements remain exceptionally inefficient, expensive and highly dependent on the work of third parties, middlemen and invigilators. By digitalizing, automating and sharing these kinds of agreements, businesses, governmental institutions would enable a high level of efficiency, rapidly speeding up the rate of execution, allowing for correct performance as well as significantly cutting down on the costs by removing third parties. Such applications for this include trade finance, supply chain, insurance, and payments.
The Digitalization of Securities – Digital securities which are based on top of smart contracts and blockchain, as a result, are at a particularly interesting intersection between traditional products in the financial world and digital assets in general. Implementing this kind of solution would allow for a significant reduction in the kinds of fees investors would incur, while automating other service functions, all through the reduction of the complexity, paperwork and costs incurred with security management, including deal execution validator, compliance and regulatory governance.
In addition to this, these assets that do not exist in a digital format, due in large part to the complexity of doing so, such as receivables, interests from private funds or artwork, can eventually be digitalized, bringing in a far larger investor pool and subsequently – more liquidity.
Piecing it all Together in Conclusion
Blockchain solutions and the technology as a whole has some seriously positive implications for the way in which payments, savings, banking, among other fields operate. They provide a large number of opportunities for a broader range of applications across the world too. This field is still very much in its infancy, but it is a compelling and highly optimistic fact that, even in this young state, the benefits are clearly visible already.
Among these, blockchain and digital asset ecosystems sit at a truly remarkable point of inflection when it comes to the continuing technological innovation over the range of private and public blockchains. For public blockchains and the crypto asset space by extension, some of the largest crypto asset networks out there are undergoing a significant rate of growth when it comes to their overall network usages, including in redressing its scalability and the volume of institutional interest and adoption that it is receiving:
There is a continued growth in both the payments and transaction volumes, with major companies and firms like Fidelity, CME, NASDAQ, ICE, Microsoft, and Starbucks are engrossing themselves in the application of blockchain solutions and businesses.
For the world of private blockchains, fintech companies and applications are creating their own financial products and assets, serving to improve operational processes while simultaneously cutting down on costs by making use of private blockchain solutions from companies like IBM and its Hyperledger, Microsoft’s Azure, Amazon’s Managed Blockchain, R3, among others
For the future, there are clearly a range of public and private blockchain projects which will come to be pre-eminent use cases. With many of todays applications of blockchain technology undergoing continued development and evolution, meaning that they will increasingly work and evolve to become increasingly efficient, secure and value creating in the infrastructure.
8 Common Myths About The Blockchain Busted Wide Open [GUIDE]
The blockchain, or distributed ledger technology as it’s sometimes called, has been the subject of intense curiosity, scrutiny and speculation. Some have said the blockchain will change the world, signaling a new era of decentralized payments without the need for banks or financial institutions. While others are more skeptical, as this technology is experimental and has been slow to be adopted by the public.
Whatever the future is of the blockchain exactly is, no one knows. But we do have a few concrete facts about the blockchain that challenges the myths and uncertainty that surrounds this new technology.
1. Cryptocurrencies Have No Value
Rather than being a myth, saying that cryptocurrencies have no value is largely a misunderstanding. While cryptocurrencies are not backed by assets like gold or silver, neither is the US dollar. The gold standard for the US dollar was weaned out in 1933 by President Roosevelt, but that hasn’t stopped the American economy from being the dominant force we know today.
What gives any form of currency its value is the trust and faith people have in it – even when a currency is backed by nothing. So provided there are enough people who believe in a currency’s ability to be used as a form of payment or store of value, these tokens will continue their rise.
2. Cryptocurrencies Are Untraceable
Although currencies including Bitcoin and other tokens are more private and secure than cash, they do leave footprints behind. These clues have been used in the past by law enforcement to catch international criminals, like the former operator of the Silk Road[1], which was an online marketplace to buy and sell drugs and other contraband.
A major weakness in Bitcoin’s privacy is that each transaction is recorded on its blockchain, which is the equivalent to a public ledger for all to see. Every time someone sends or receives Bitcoin, this is recorded against a wallet address. Although these addresses are random and not linked to people’s real world identities, they can be traced.[2] This is why it’s not recommended to store large amounts of Bitcoin in a single address, as this could lead hackers on a scavenger hunt to uncover the owner’s details, and lead to an attack.
So while Bitcoin and other currencies do provide a layer of anonymity that cash transactions do not, it would be unwise to depend on the security of these tokens if that is your number 1 priority.
3. The Blockchain is Invincible
One of the key benefits of the blockchain is that each record stored is permanently and is transparent for all to see. However, when people learn about this feature of the blockchain it’s assumed that the network could be somehow be immune to outside attacks or tampering with its data integrity. No system or database can be said to be 100% secure, regardless of how well it is coded or the controls used to preserve its security.
The weakness of the blockchain’s security is that it’s only as strong as the encryption and algorithms protecting it are. A breach in any of these protocols for verifying data could collapse the whole system, and has shown to be possible with cryptographic keys in the past such as MD5.[3] and even WPA wireless networking[4].
4. Crypto Exchanges are Bulletproof
One of the most notable crypto disasters to have ever occurred is what happened at the Mt. Gox exchange, which is where more than $473m million was stolen.[5]
Prior to this heist, the Mt Gox exchange was one of the largest in operation, and accounted for more than 70% of all Bitcoin transactions across the globe. But rather than being a breach of security, what happened at Mt Gox was the result of various contributing factors: poor management, dysfunctional engineering, and sloppy code. This let hackers siphon Bitcoin away from the site for years without detection.
Most of the blame for this breach was attributed to Mark Karpeles, who was the CEO of Mt Gox. Critics have pointed out that he was more of an idealistic programmer than a business person. For example, one former employee said that Mt Gox did not employ version control software, and the only person who could approve changes to the code was Karpeles himself.[6]
A lack of version control software was the key reason for a breach in Mt Gox. This made it impossible for the developers working on the platform to keep track of who was doing what, compounded by the millions of dollars worth of transactions that Gox handled per day. The result was a highly insecure platform with vulnerabilities left by a team of scatterbrained engineers.
So what happened at Mt Gox was due to a number of problems of its organizational management style, and not a fundamental weakness of exchanges as a whole.
5. Cryptocurrencies Can Be Hacked Effortlessly
On the other hand, the counter-argument that cryptocurrencies can be hacked without effort doesn’t make a lot of sense either. While certain wallets and exchanges have been breached, those were due to flaws in the programming of these services and not the underlying security that protects virtually all digital assets.
Two of the most popular algorithms used today are SHA256[7] and Scrypt[8]. Scrypt is the proof of work algorithm that is used by currencies such as Litecoin and Dogecoin. Scrypt uses sophisticated hashing to prevent fraudulent transactions on its blockchain. It also verifies the integrity of each block mined. SHA256 is used as part of the SSL certificate that most exchanges and other secure websites use.
The reason why both SHA256 and Scrypt are used in hashing is that these protocols cannot be breached in any reasonable amount of time.[9] Even if an attacker were to use a botnet or supercomputer to do so, it would take years, if not centuries for the algorithms to be compromised.
6. Bitcoin And Altcoins Are Only Used By Criminals
There is a perception held by the general public that Bitcoin and other coins are used exclusively by criminals to conduct shady business deals. Services such as drug trafficking, illegal pornography, and even terrorism have reportedly been acquired through the use of the virtual coins. It’s easy to see how cryptocurrencies could be popular for buying prohibited goods, owing to its anonymity. There have also been reports of illegal financial transactions being carried out through the use of the tokens, such as money laundering, tax evasion and more.
While it’s hard to deny that these coins are being used for illegal activity, it is impossible to keep the transactions completely anonymous, as well as the troubles of reselling these tokens once it’s time to pay out in fiat dollars.
However, certain types of currencies are being sought after by criminals due to their anonymous designs. Tokens such as Monero or ZCash were designed to be untraceable. A transaction on either network leaves no digital footprints behind, unlike Bitcoin that records each transfer on a public ledger that is accessible to everyone.
So while cryptocurrencies certainly makes it easier for criminals to conduct business, there are no reliable statistics to back up the claim that they are used, or are endorsed by the black market. Criminals could abuse cryptocurrencies for their own benefit, but this abuse is hardly limited to cryptocurrencies. Also, criminals are not the dominant user base of these coins either.
There was a time when Bitcoin was an obscure form of payment that was used exclusively in closed communities such as the darknet. This is no longer the case with its continuing adoption by the public. And the more popular Bitcoin becomes, the less it will be associated with illegal activity.
One can also see that the media has slowly changed its mind about Bitcoin. Not even a year ago, all you could read in newspapers about Bitcoin was that it was used by criminals. Now we’re seeing a frenzy of enthusiasm about its value and what this could mean for the future.
7. The Blockchain Has No Commercial Application
Despite the optimism that surrounds the blockchain, some people are adamant in their belief that this technology is useless from a commercial point of view. After all, the blockchain is new, and therefore unfamiliar in the corporate world. This makes blockchains difficult to design, build, and sell to other businesses. Another common perception is that the blockchain is only used when one wants to attempt the next Bitcoin, or to launch an ICO. The technology has been pegged with the transfer of value, although this is only one implementation of blockchain.
How coins and other digital assets are kept track of is through the verification of data, and ensuring those bits and bytes are permanently stored on a ledger. This then creates an opportunity for the blockchain to be used in a range of commercial environments that involves sensitive data. One example could be to verify patient records, as they are often sent from a provider to a range of other parties. The information contained could include one’s social security number, insurance details, and medical history. By creating a unique record with the blockchain, it could ensure that all parties are receiving the right information about the patient, as well as proof that the record is authentic.
8. Bitcoin is Bubble
The rise of Bitcoin has been compared to the .com bubble or the infamous tulip bubble. When the .com bubble burst, it cost more than than 5 trillion dollars to investors [10], while tulips were selling for 5 times the price of an average house their its peak.[11] Skeptics believe that the same fate will befall Bitcoin, with the perception that it is as an overvalued, speculative asset. But the reality is that Bitcoin is no different to any other store of value such as gold, art, or diamonds. What we’re seeing is supply and demand: when the supply of these assets is low, and demand is high, the price will rise in accordance to the market.
It is not just a small group of people putting all their money into Bitcoin either, which could legitimately lead to a bubble; the Coinbase trading platform is adding more than 1 million new [12] traders per month, and there are presently more than 1300 different currencies to choose from.
Some estimates have gauged that 20 million people own Bitcoin, with most of those investors putting in a few dollars each. Another figure is that less than 5% of customers own over 95% of the total Bitcoin supply, meaning there are less than 1 million people who are heavily invested in its future. [13] What this all means is that there’s a lot of room for Bitcoin to appreciate in price, especially as more users buy and trade with the asset.
To put it simply, the reason for why Bitcoin is not in a bubble is because it’s slowly being adopted as a store of value as well as means of exchange. There are only so many Bitcoins to be mined, and once those are gone, no more will enter in circulation. Its limited supply means that it could one day be more valuable than gold, and traded at a premium for various goods and services.
By busting the common myths that surround the blockchain and cryptocurrencies, we can see clearly that these tokens are becoming an important feature of how we will conduct business in the future. Although its adoption has been slow, 2018 could be the year that we see these tokens catapult themselves into our everyday lives and vanquish these misunderstandings forever.
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