"Crypto, motherfucker, do you speak it?"
Understanding cryptoeconomics is a must. Just like basic financial knowledge, it's important you're able to grasp how cryptography is changing the world and how the worldwide adoption of a new, decentralized protocol will improve, literally, everything.
As the insane Shaun T. (pun intended) would put it:
“Are you ready y’all? Dig deeper!”
--This article only represents my opinion. Don’t dive into cryptocurrency trading or long term investing without fully understanding how coins work, their purpose and technology. White papers are a great source of information. Speaking of sources, you can find them at the end. Bear in mind this one expands a bit more than usual, on different subjects, so please be patient and may the force be with you. As always, comments are welcomed and encouraged--
Maybe in previous articles I might have skipped a few important steps. I’m referring to where does cryptocurrency come from. I’ve discussed the blockchain, how proof of work, stake and the tangle work, how are they different, heck, on the last one there was even a sort of weird conspiracy look-a-like, that just seems to make me believe even harder that “speculation” is not actually speculation, but simply market forces adjusting to supply and demand.
Right, let’s start from the beginning. “Why do we need cryptocurrency”, “how is this different from fiat-currency” or “what’s going to happen if cryptocurrency starts to get used more and more” are just some questions I intend to try to answer as best as I can. Will there be weird examples related to various themes with absolutely no connection to crypto? Yes. Otherwise this wouldn’t be fun at all.
What is money?
Money is a means of trusting another party in order to exchange tangible goods, like actual products or intangible goods, like work or time. It’s also a way of storing value, as it’s easier to have a bunch of money stored in a bank, rather than physical notes or coins under the mattress. I know, this is a very basic definition of money. Money’s last role is connected to its first. It’s a consensus mechanism between market participants. We can see money as a simply trust mechanism. If I decide to accept bananas as money, which in theory I could, that wouldn’t really be helpful as bananas decay quickly. Maybe something more durable like sand or dirt! So let’s say I start to accept jars of dirt instead of GBPs or EURs or whatever currency you choose to accept, for trading my services or buying products. That’s all fine, but most likely no one will accept jars of dirt as it holds no value. Maybe if you’re a pirate. From the Caribbean’s. Lol. Ok, so dirt is no good. What can I get, that people might want, that’s not just some currency attached to some country, government or central entity? Uh! I know, so obvious. Gold! People like gold. I’m sure nobody minds receiving gold as money. But jeez, storing that much gold and keeping track of it can't be easy. Plus, carrying it around.. maybe that’s not the best idea.
“What can you accept as money, that’s also accepted by others and can store value?”
This is where cryptocurrency comes in. I know, we’ve already discussed the role of Satoshi Nakamoto, the creator of the blockchain and bitcoin, rather this time I will address the same subject from a different perspective. The greatest realization from this man (or group of people) was the simple fact that everyone wants money; the more the merrier. There is no circumstance where having more money is worse than having less. He also proposed this new digital ledger mechanism didn’t have to be connected to any central entity. It would be a trusted network that could encrypt, validate and share messages among its users, without revealing any information about them. A public distributed ledger among all nodes.
“WTF?!”
Well, yes. I mean essentially that’s what most cryptocurrencies are. And this network is nothing more than a protocol. Like the IPv4 or IPv6, both internet protocols. It tells your computer that it must follow a bunch of rules in order to send a message to another user of the network. What really makes the bitcoin protocol different, from other protocols, is the fact that its rules (a) work with economic incentives for the nodes to validate transactions, (b) miners create coin by selling bitcoin rewards to the market, they get from mining blocks and more importantly, (c) it was created with cryptographic algorithms that allow for private communications to be send by users across the network, although still sharing publicly the information among the nodes. Blockchain (bitcoin) transactions are simply public encrypted messages.
“Ok, I think I get it, but just in case I don’t, can you explain that again?”
Sure thing buddy. Let’s use a pratical bitcoin example this time. Bitcoin is a message. If Luke wants to send Ben bitcoin, the protocol just dictates that for that message to be accepted in the network, it must (1) obey the network rules, so Luke must have 1 bitcoin and that bitcoin can only be sent to Ben (to avoid double spending) and (2) Luke must have access to the public key (or wallet address) by owning the private key of that public key (or wallet address). So Bitcoin is just a message that says “Address Y sends X bitcoins to Address Z”.
“And the blockchain is the ledger where those messages are stored?”
Fuck-yes! Nice! Spot on! You did dig deep! Good job pal! Well done! *insert whatever compliment makes you all excited and aroused*
The blockchain is indeed the ledger where all transactions are stored. And guess what. Transactions are stored in immutable blocks. Whatever you send, receive or create on the blockchain will never change. No taksies. If you send 1 bitcoin to me (please do), that will remain on block XXXXX forever and ever. Those blocks also have a time stamp for the entire batch of transactions, as each block holds many transactions and each transaction is time stamped and linked to a block. Right, maybe it will make more sense if you actually see what I mean. Look below. You can see how a transaction looks like. There are many transactions attached to that address. No, it’s not my address. Some random address I checked on the blockchain. That also proves blockchain's transparency as you can check any address, at any time.
“Oh cool. It looks weird and complicated. Thanks. But again, what has all this to do with money, man? We were talking about money and here we are again discussing the blockchain”
It was important, I swear. Money and this distributed ledger technology are connected. The same way as bitcoin is supposed to be used as some sort of money. Maybe not “paper-money”, or even “digital money”, but more like a digital immutable account which stores value. In a sense, I see it as..
“If you say gold one more time, I swear(…)”
Gold! Digital gold. I said it again.
Wait, don’t leave just yet. I know I’m constantly saying this but bitcoin is digital gold, or the most similar asset to digital gold that I know of. (a) It has a finite amount of 21 Million, (b) is expensive to get and (c) is hard to mine. It seems a very good way to store value don’t you think?
Bitcoin is money. We can, with some certainty, proclaim that. Not only because it holds value but also because other people accept it. Actually, not only people start to accept cryptocurrency as a means of payment, but also want to invest in it.
“But I've read many times bitcoin is a bubble, and it will explode and(…)”
Shhhhhh. Don’t be another “bitcoin-is-only-for-illegal-stuff” jackass. You can believe that, which is fine. Anyone’s entitled to their own wrong opinion, but please, please, try to understand my reasoning. Is the price of bitcoin a real estimation of its value?
Before we dive into that “issue”, why don’t we ask ourselves: how is data stored today? Where is it, physically? Do you, dear user, own it? Do you own all data you’ve inputted in any website? Or do you forfeit your right to your data when you join most, maybe all, major websites like google, amazon, facebook, twitter, snapchat, netflix, etc, etc, etc. Data is a natural resource for almost all businesses today, don’t you think? So how come your data is not correctly monetized?
Ask yourself: “Is the price of my data a real estimation of its value?” – Oh, and if you would like to know the current price of your data let me help you with that. It usually is: I agree to the terms and conditions.
This simply means the fact that your data is not correctly monetized, is directly linked to one simple reason: ownership. Look, are we really in a crypto bubble? There are some signs that could point in that direction, like the exponential market capitalization growth or the huge price fluctuations. The one thing that actually concerns me is: people who do not understand what bitcoin is, what is used for and still put money into it. Or worse, follow the advise of JP Morgans and alike on the “dangers” of cryptocurrency.
--on a quick note I do realize institutions like banks are needed. And cryptocurrency won’t replace the banking system. Banks were one of the most important pieces in bringing people together, helping financial growth, allowing for people to store value and many other things, up until the beginning of the 21st century. But as it happens with everything that is good, it must come to an end--
In the other hand, if you want to understand what cryptocurrency investors are doing, just look at this sweet piece of graph right here. Look at it. Devour its content. Do you like it? Are you excited? Slightly turned on, I dare?
Do you know what it means?
“ICO?? What is that? I don’t… What?”
ICO = Initial Coin Offerings. Just like Initial Public Offerings or IPOs, ICOs are a way of raising funds. As of June 2017, yes it did surpass regular venture capital investment in initial startups. We’re talking about a cumulative investment that already surpassed the billions. Look, in less than 4 months, ICO cumulative fundraising raised from an average slightly higher to USD 1 billion in 2017, to almost USD 4 Billion in October 2017. That’s absolutely insane! Look below. You’ll go nuts.
Initial coin offerings are an unregulated way of many blockchain related startups raising funds. Does it raise ethical and moral questions? Nope. But it raises questions in terms of transparency, regulation and cryptocurrency acceptance. See, when you invest in a cryptocurrency or an ICO, you don’t really own anything. You don’t own any equity, you may not have any rights and if the company disappears that’s it. Money’s gone. It doesn’t seem safe at all, right? Well, although the lack of regulation around ICOs, people disagree. The numbers speak for themselves. Cryptocurrency proved the world is ready and hungry for investing. Traditional VCs couldn’t cope with it, banks couldn’t cope with it, crowdfunding and Crowdlending platforms couldn’t cope with it. But magically cryptocurrency seems to have done it.
Would you call it a bubble or the absolute proof people simply want more money?
There were, yes, multiple schemes stealing millions of dollars from investors, who were basically tricked by phishing hackers or fraudulent webpages; ICO companies that disappeared after raising funds; or even products that didn’t get developed. But still, with all this uncertainty, people said: “Fuck it. We don’t care, we still want more money!”. The easiest way happened to be investing into this unregulated market, most investors do not really fully yet comprehend. And that comes at a price: there is a slight chance you’ll get screwed over.
That reminds me of a familiar story. Do you guys remember all those banks that were fined for fraudulent acts and other shady moves?
Yeah, me neither.
“Can we get back to the ICO thing? What type of ICOs are there? If you don’t get equity what’s the point? How is it safe?”
Again, it’s not safe. It’s a bet on something you don’t control, but still expect to make a profit from. You trust that a group of people, who wrote a whitepaper explaining their idea/project/product, will actually follow through with their plan; or maybe adapt to a new reality if things go bad and be able to quickly change goals and processes. Afterwards, you pray the product works. Then you hope it grows and gets a wider user base. Just like any other company. Except, yes, you do not own equity so you’re not, legally, an owner of anything. But you still hold their tokens. And tokens are what drive the company product on the blockchain. Well, most times.
“Tokens?”
So you have different types of tokens. They can be (1) a cryptocurrency which goal is to be used as money, or as a means of payment; (2) you also have usability tokens, which are tokens that have some connection to the product or the platform. Imagine, you might have a crypto-token that allows you to buy something on their platform, maybe resources, or power, or data, or whatever you decide. So it’s a token that must be spent in order to use the final product, somehow. Does it make sense? Hope so. (3) Finally you have crypto-sharing tokens. It works like dividends. Except, again, you do not own any equity. So a company might announce that they will share revenue to token holders. If you hold X tokens you receive X USD, EUR, btc, eth, etc per token. There are other types of tokens like (4) DAOs or Distributed Autonomous Organizations, which can also be simple crypto-contracts that give its owners the power to vote. On whatever matters the company decide. Like if you were a shareholder. But you’re not. Another example (and the final one, ladies and gentleman) are (5) tokens which goal is to be used for micro-payments like IOT payments and transactions. IOT stands for Internet Of Things. It relates to all devices connected to the internet. From your phone, to your fridge, to your tv, to the vending or elevator at your office. Most devices can be connected to the internet and communicate with each other. So yes, there are cryptocurrencies (or tokens) like IOTA, which goal is to allow for machine-to-machine transactions, without human interaction. I know it’s a whole new world which can be scary sometimes. IOTA and many other projects are still being developed which means, yes, still many bugs to fix. The overall goal is incredible so we endure.
--On a personal note, if you decide you want in on all this crazy action please remember patience is key. And be prepared for Morty-like feelings of desperation. Something like: “Get your shit together, get it all together and put it in a back pack, all your shit, so it's together. And if you gotta take it somewhere, take it somewhere, you know, take it to the shit store and sell it, or put it in the shit museum. I don't care what you do, just get it together. Get your shit together”--
The goal of cryptocurrency is to connect people in a way thought to be impossible (via decentralization). Many coins will come and go. Want to better understand an ICO then question, at least,the following:
1. Do you understand the technology? (whitepaper/yellowpaper)
2. Do you understand the protocol? (if applies)
3. Do you understand the problem they’re solving? ( competitors can be a good sign)
4. Does it actually make sense? (Why blockchain? Tokens purpose?)
5. Are they greedy bastards who just seem to want millions for a shitty product?
6. How solid do you think the team is? (github/stackoverflow/slack/linkedin/reddit/medium/telegram/etc)
7. How many tokens are they offering? And issuing in total? Is there a supply limit? More importantly,
8. What is the market cap? (quite key!)
Most of it is common sense.There are many awesome websites (sources) that can guide you and help you understanding each ICO and cryptocurrency.
To wrap up this roller-coaster of information let’s speak, once more, about wallets and how blockchains work. I will try to connect the whole thing to make sense of it. Now, wallets are basically what allows you to store and hold your cryptocurrency or make transfers to other addresses. An ethereum wallet can look like this:
It’s important that whatever you do, you learn about wallets and don’t keep funds in exchanges. If you want to buy, use coinbase or any other EUR-USD/btc-eth exchange like bittrex, bitfinex, polinex, etc, but don’t keep your funds there. You do not have a private key for those exchanges wallets. A wallet is nothing more than an identifier of a private key. So for you to own a wallet you must have a private key for the public key. When you create a wallet you basically get something like:
In case you do not have that information, you do not own that wallet. So find a trustable wallet service provider for that currency as soon as possible. If you can’t, oh well. I’m sure it will be ok.
Also very important: a wallet is a representation of your public key, for which you possess the private key. The private key only you see and it’s part of the hash that is encrypted on your transactions. For you to buy most cryptos, transactions have to be validated. Who does that?
“Yes, miners, I know that already”
Nice. Any coin that uses proof of work as a trust mechanism and economic incentive must have miners. People who, in a way, buy hardware that allows them to have computers running as nodes, validating transactions, by solving cryptographic problems through randomly inputting numbers until they get the correct string and a block gets created, hence rewarding the creator. The cryptographic mechanism has certain rules to allow for an average block creation time. Bitcoin’s around 10 minutes. What are the other proof mechanisms?
“Proof of stake and the weird tangle thing”
Rick Sanchez would be proud of you! Proof of stake states that in order for an agent to participate in validating transactions, that agent must bet a stake on the transaction approved. In case he/she tries to trick the system, bang! They lose everything, so there’s no economic incentive to act malicious. There are other proofs of stake, that work differently, but to me this is the one that makes most sense (thank you Vitalik). Then you have the tangle, or DAG (distributed acrylic graph) which basically is a map of all transactions. There is no time stamp, as this proof of consensus mechanism allows for off-chain transactions, but it has the advantage of not needing an economic incentive. If you want to use the network, you must participate in it. Whenever you want to send a transaction, you (or your machine) need to approve 2 (or more) transactions. And it also works with indirect approvals like: If Luke approves Ben‘s transaction and Ben approves Jabba’s, then indirectly Luke has approved Jabba’s transaction. That’s how the tangle kind of works. If you’re curious see below a picture of the tangle distributed ledger:
Another interesting feature of some blockchains, like the ethereum protocol or the NEO protocol, is the possibility of powerful smart-contracts and semi smart-contracts to be built over this first layer. Most ICOs are simply building a product on top of a bigger blockchain. They run smart-contracts to create tools that allow for asset integration, voting or autonomous contracts with autonomous rules that enable, for example, autonomous and scheduled payments, which cannot be interfered with (good for salary payments maybe?). Many other use cases exist like tokens with revenue sharing based on users data and activity (Bitclave, Etherparty, Indorse or Basic Attention Token), tracking and data sharing on the blockchain (Modum, Provenance or Aeron), decentralized social media that rewards its users for content (Steem, ClearPoll or Snip), supply chain management and quality assurance (Amborsus or IBM Blockchain)among other business areas. It’s quite an interesting world of opportunities, ideas and awesome technology use cases.
Right, let’s wrap this up. I’ve been going on for a while now and before this gets too confusing and boring, shall we connect the dots?
Money is a means of trust. A consensus mechanism between participants, so they can exchange goods, services and store value. More however, there is no property of money that dictates it needs to be centralized and connected to a single ruling entity. Money is nothing more than a protocol. And protocols do not need to be (1) centralized or (2) attached to a specific economy, government or bank; (3) Protocols are also inclusive of all participants who respect its rules and (4) cannot be changed without a majority consensus. (5) Lastly, decentralized ledgers and cryptocurrencies give its users privacy over their money and assets. Remember that problem i mentioned a bit earlier, about the role of ownership on data monetization? Exactly, it can be fixed.
Finally, although tokens do not entitle you to any legal rights, you're able to participate in a network and community, made of people who also believe that the currency you're investing in has value.
Henceforth, can we just agree that any form of cryptocurrency is, in fact, money?
Basic Ref:
@investopedia.com/insights/what-is-money/
@investopedia.com/news/what-distributed-ledger/
@investopedia.com/articles/investing/043014/what-bitcoin-mining.asp
@investopedia.com/terms/i/initial-coin-offering-ico.asp
@investopedia.com/terms/c/cryptocurrency.asp
@en.wikipedia.org/wiki/IPv6
@en.bitcoin.it/wiki/Protocol_documentation
@en.wikipedia.org/wiki/List_of_banking_crises
@cnbc.com/2015/04/30/7-years-on-from-crisis-150-billion-in-bank-fines-and-penalties.html
@moneytransfercomparison.com/uk-banks-overview/
(Blockchain graphs)@blockchain.info/en/charts
(Tangle graph)@thetangle.org/
(Bitcoin wallet)@blockchain.info/en/wallet/#/
(Ether wallet)@myetherwallet.com/
(Crypto price/marketcap)@coinmarketcap.com/currencies/ethereum/
(Crypto price/marketcap)@coinmarketcap.com/currencies/bitcoin /
(Crypto price/marketcap)@coinmarketcap.com/currencies/iota /
(Crypto info, graphs)@coindesk.com/
(ICO Reviews, crypto info)@hacked.com/
(Crypto info)@cryptocoinsnews.com/
(ICO Reviews, crypto info)@crushcrypto.com/
(ICO Reviews)@icorating.com/
(Andreas Antonopoulos)@youtube.com/user/aantonop
(Data Dash)@youtube.com/channel/UCCatR7nWbYrkVXdxXb4cGXw
(Ivan on tech)@youtube.com/channel/UCrYmtJBtLdtm2ov84ulV-yg
(Decypher Media)@youtube.com/channel/UC8CB0ZkvogP7tnCTDR-zV7g
(Boxmining)@youtube.com/channel/UCxODjeUwZHk3p-7TU-IsDOA