Cryptocurrencies, Bitcoin, Ethereum & A World Of Possibilities

Benjamin Walter
Jul 10, 2017 · 15 min read

TL:DR: I wrote an article on Bitcoin last year. Mainstream media have an inability to portray this technology — like this poor excuse for an article by Alan Kohler — Finance guy on the ABC and Business Editor. I recently completed this 3 month course from Princeton on cryptocurrencies. This is my attempt to bring some sanity and articulation to this space for the folks at home.

There are new waves of investors and amateurs (much like myself) flocking to cryptocurrencies, without really understanding it. Often, the best that people can do is ground their understanding in a metaphor like — it’s the same as gold, but digital. Unfortunately, we are rapidly moving beyond this being a useful answer - especially now that people are starting to pump their hard earned money into exchanges.

In this article, I will attempt to remove the generic metaphors and provide a little moresubstance without being too technical.

Never invest in a business you cannot understand” Warren Buffet

Credit: http://www.gratisography.com/

DISCLAIMER: For those who don’t already know, I’m not a professional and everything written in this article should be taken with a grain of salt. Never invest money you can’t afford to lose.

The TECH

Society has grown leaps and bounds thanks to double entry accounting, but it’s corruptible and requires trust.

In the Bitcoin protocol, let’s say there was a value exchange from Alice to Bob. Three records are created; the credit to Bob’s address, the debit from Alice’s and the receipt all logged into an immutable ledger.

This ledger is held across thousands of incentivised computers on a global network designed in a way that makes altering previous entries virtually impossible, by linking previous blocks of transaction to the next block. This is known as a blockchain.

A blockchain removes the element of trust required in double entry accounting while also removing the need for third party services, such as banks, lawyers and government.

Think of this as the beginning of a new wave of technology. The success of such a trustless system in practice is a revolution. As big as the first transmission of the internet — in the late ‘80s’ when the internet was first used to send an instant message to someone through a computer — It was huge!

Little did we know that after 25 years of that technology evolving, we would be holding a little device in our hand and talk face to face with someone on the opposite side of the world in real time.

TRUSTLESS

By removing the need for trust in a transaction, we open up borders to our neighbours, which on this small planet is an innovation that has the potential to solve a lot of real problems

Now lets use this as a method to hypothetically improve other systems that previously have required an intermediary to act as the trust in a relationship. These analogies are highly simplified, but they give us an idea of what we can expect to see over the coming 20+ years.

DEMOCRATIC VOTING

credit: https://unsplash.com/@samuelschneider

We use trust of our government and voting systems to account for our vote. Thankfully in Australia we can confidently place our trust in this. However many third world countries struggle to have a democratic election process — even America’s elections have raised questions from time to time. Without the ability to confirm your personal vote was correctly counted, can we really be sure it was done correctly?

What if as an individual voter you’re able to go back and view your vote within the ledger that’s cryptographically signed = only you can view it in the ledger. We now have the technology to make this a reality and some third world countries will be rolling out a similar system in the coming years.

Imagine if we had political parties that did this as well. Using true consensus from the people to vote on real issues and policies. As it turns out we already have one in Australia — Flux

Government isn’t the best example for this technology as governments are far more complicated than a decentralised ledger - but you get the idea.

https://stocksnap.io

The DAO

It was stateless, open source and raised over $150 million — some of which was my money (and my parents — yeah I can be pretty persuasive). At the time I didn’t have the ability to pull off the investment so I enlisted some assistance from a computer guy who knew his stuff. Cheers Noah.

Unfortunately, as it was a new untested technology, it had a major security vulnerability and only lasted a few month. The whole experience for everyone involved provided many things, including a lot of lessons about how something like this will work in the future. Thankfully all the money I invested I got back in the form of Ether (I’ll get to what this is as well). It’s increased 1750% since May last year when I bought it and been as high as 2750% (what type of crypto article would this be if there wasn’t some silly figures included?).

Okay, now that we have a very simple idea of how this works, I’m going to introduce the current climate of how this technological revolution is maturing. Keep in mind we are only in its infancy. The things this technology will do in the future, can’t be comprehended today as my earlier internet example suggested.

I’ll also mention that there is a lot more depth in how this actually works. Id suggest reading white papers of the specific crypto’s you’re looking at. They should provide sufficient information.

REPORTERS & THE MEDIA

Credit: http://www.gratisography.com/

The 101 of new technology is to avoid mainstream views. Every news report or publication I’ve read from mainstream news only portrays half the story. I don’t blame them either, I spent two years of reading forums and recently 3 months of study just to get to a low level of understanding. (If anyone else is interested, I’d strongly recommend this free course)

The current ecosystem

UTILITY

CRYPTOCURRENCIES

I would suggest that Bitcoin’s success (beyond the innovation behind blockchain) has come from its ability to overlap into our traditional financial systems.

An example of this is its regulation in Australia. I’m able to sign up to an exchange, where they verify my identity and within 24 hours I can use Poli Payments to withdraw AUD directly from my bank account. I can then trade my Australian Dollar for Bitcoin — taking a couple of minutes for the AUD in my account to become Bitcoin on an exchange. The same works in reverse. I can trade Bitcoin back to AUD and have it in my bank account within minutes.

With a Bitcoin I can do a growing number of things, like trade it for Altcoins. I can also travel to Japan and use it as legal tender.

Yes that’s correct, Japan has recently made Bitcoin legal tender and it seems a few other countries aren’t far behind them.

I can also purchase goods online or I can move it to a USB stick/CD/hard drive and keep it in my safe as an investment — I’ll touch base on why this might be a good idea when we get to security.

ALTCOINS

Something regularly confused as an altcoin is Ethereum,or its token ‘Ether’. It didn’t hardfork Bitcoins code, instead developing their own coin from the ground up — therefore it is not an altcoin. It has brought many more altcoins into existence with it’s smart contracts capabilities and is now the go-to for ICO’s. Ethereum was created with the goal of being a high-utility blockchain that could handle complex configuration, i.e smart contracts (‘autonomous agents’ is a better term for this).

Think of Bitcoin as a currency for other cryptos or goods. Also note Bitcoin has a finite supply which is why the gold metaphor exists.

It’s important not to think of all cryptos as currency, at least, not in the way we see currency in today’s society

CURRENCY

https://unsplash.com/@acharki95

According to the Oxford dictionary (2017), currency is “a system of money in general use in a country.” A simple definition of crypto is “hidden” or “secret.” So the term ‘cryptocurrency’ taken literally is “hidden/secret system of money”. The problem is that cryptocurrencies are more of a value exchange, with suggested utility. Many altcoins which fall under the cryptocurrency banner have points of difference beyond how they modified the base code they forked from or their governance model executed through smart contracts. I’ll provide a few examples which will lead us into the bubble.

SIACOIN (SC)

Instead you’re relying on decentralised incentivised computer power on a global scale, which holds your data fully encrypted at a fraction of the current prices that you’d pay a centralised provider, such as Google who make money from your subscription, and using your data. This is an example of an Altcoin that when understood isn’t exactly a cryptocurrency, as earlier defined.

IOTA

IOTA aims to use a number of fringe technologies (like ‘the tangle’) to connect the emergence of the Internet Of Things. All for free, and trustless. The whitepaper highlights a number of theories that have existed for a while within the crypto space. Attempt to use any form of standard valuation tools on it and you will be left dumbfounded. It leaves many questions that can only be answered through practical application which as of today, isn’t available.

Monero (XMR)

BITCOIN (BTC)

Ethereum (ETH)

Credit: https://bitcoinmagazine.com

A quick explanation: Ethereum is an open-source, public, blockchain-based distributed computing platform that is created to hold and develop all of the crazy ideas mentioned earlier, like democratic voting or a growing list of over 544 new concepts, called Dapps or decentralised applications.

Think of it as a global computer resource that cannot be subverted denied or censored — something that is becoming increasingly important in today’s age.

Furthermore it’s open source and its barriers of entry are open for all.

It’s the blockchain that smart contracts can easily be built and executed on. Its the first version of taking the complicated, difficult stuff lawyers and governments do, and doing it through a small line of code. With any programmer in any country being able to use and build their own smart contracts.

A great explanation of smart contracts is thanks to veteran Vinay Gupta taken from his post

A smart contract can store records on who owns what. It can store promises to pay, and promises to deliver without having middleman or exposing people to the risk of fraud. It can automatically move funds in accordance with instructions given long in the past, like a will or a futures contract. For pure digital assets there is no “counterparty risk” because the value to be transferred can be locked into the contract when it is created, and released automatically when the conditions and terms are met: if the contract is clear, then fraud is impossible, because the program actually has real control of the assets involved rather than requiring trustworthy middle men like ATM machines or car rental agents.

COMMUNITY

ETHICS

BUBBLE

I’ve taken a very simple approach to this bubble. I know in the long-run the successful cryptocurrencies will far surpass their current value. The definition of success I’m using is “having utility in the future.” Bitcoin has utility as a currency and as a value exchange for altcoins. Ethereum is beginning to have utility as a standard for smart contracts which have massive utility as they figure out how to sync with traditional institutions and markets. Paving the way for smart property, decentralised prediction markets, storage and on it goes.

From my observations of Bitcoin over the years, there are a number of things that can cause the bubble to pop. The best one I can figure for now is a hack.

HACK

* I’m not going into how a 51% attack could happen or other attacks on different blockchain protocols.

Mt Gox (an exchange) which has been speculated as a US government lead hack (cue tinfoil hat) saw 35% plunge of Bitcoin’s value in under 24 hours. This was a hack that didn’t actually touch Bitcoin itself, although at the time it was estimated Mt Gox processed 70% of Bitcoins daily transaction volume.

With such rapid growth and network adoption, some of the blockchains are beginning to be put under pressure — I’m looking at you Ethereum! In saying this, Ethereum was aware this would happen and its next major update will actually reverse this — more computers = more speed, instead of its current state of more computers = more security.

There are yet-to-be-solved problems in each blockchain as they look to prepare for a future as unpredictable as their current price. When problems do occur, price fluctuations and gradual corrections happen. As new markets open up and countries regulate (or deregulate) you’ll see price spikes.

The market’s the market.

Some cryptocurrencies are undervalued, some are overvalued and only time will show which lead the pack and build the future of the web 3.0.

SECURITY

Holding your cryptocurrencies on an exchange or through third party software, removes security from your hands.

Cold storage is a method of removing your tokens from a third party and off the blockchain onto a USB or paper wallet (literally a piece of paper with a QR code on it). Meaning the security is in your hands, by not losing the USB/paper wallet.

Depending on the amount of money you’re putting into this and the length of time you’re looking at holding for (which is something you should decide prior to purchasing simply because of its volatility).

The method I use — which is the true tin-foil-hat method — sees everything as a security compromise from your computer’s operating system, to your MAC and IP addresses. As much as I love the NSA, I don’t believe they have our best interests at heart, despite the hidden Big Brother program they’ve been running for countless years now. For this reason, I use a method far more complicated than the scope of this post. But if you’re interested, feel free to ask!

Here are a couple of tutorials that do most of the steps I do:

Bitcoin

Ether

Monero

CONCLUSION

Cryptocurrencies are technological alternatives to human institutions.

These institutions can be loosely broken into financial (fintech) legal (smart contracts) and social (governance). These institutions are integrated in all first world countries. Many third world countries dream to have stable ones.

It’s these institutions that cryptocurrencies have the most promise for. Allowing lower barriers of entry for third world countries and providing an equal playing field for everyone to get involved in the next wave of technological advancement.

To be clear, I don’t believe cryptocurrencies will replace the state. I do however see them as a way to make the state more efficient, less intrusive, more secure and compatible on a global level — Competition is a healthy thing right?

I’m currently upskilling in computer science to move from a beginner in the crypto space to developing on my own DAO powered by Ethereum. Donations are always welcome!

ETH: 0xe339fbfd849d047c82ae92bcd0e07dbd0adb13ba

BTC: 153kE8Tt8pH1mynkJLkuEUMAGWPBALxgb1

XMR: 3b95e25013fd4568fc8de1b802e2f88cf6c7a5bb6caae4ee5456db551a739223

XMR Payment ID: 4BCeEPhodgPMbPWFN1dPwhWXdRX8q4mhhdZdA1dtSMLTLCEYvAj9QXjXAfF7CugEbmfBhgkqHbdgK9b2wKA6nqRZQCgvCDm

Benjamin Walter

Written by

Australian — Small Business Advocate, Technology Lover, Location Independent Business Owner: https://myera.com.au

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