The Rabbit hole of crypto

Alright, I’ve been trying to write this from quite sometime but was not able to organize my thoughts on paper. Moreover, everyday I’m learn something new which I didn’t know earlier hence not certain when is the right time to share my knowledge, so that it doesn’t look like a trash.

I believe there are 2 main reason for someone to explore the crypto space — curiosity and financial gain/stability. I would touch both the aspects in this write-up. What you would get is helicopter view of this space, which you can then use to research on your own. Crypto is all about DYOR — Do Your Own Research. As a matter of fact, in this fast moving world, if you are learning something in classroom, then you are already late for it. But that discussion is for some other day, so let’s get to the business.

Why people start talking about it lately, why my wife wanted to know what is Dogecoin, while she has no freaking idea of blockchain at all. Two big events happened. First, USD as a universal currency is loosing it’s charm and so is Gold. While debacle of USD is majorly attributed to unstoppable printing, Gold is still a mystery. Many believes institutions which used to keep Gold as hedge are rather using Bitcoin, to which I also tend to agree. On USD, This is not only for USD but many fiat currencies across the world, which are facing same fate. Second, which is more of consequence of first event, many high profile people and institutions from all over the world are openly showing interest in Crypto space. In fact, someone them have applied for ETF also which invests in Bitcoins, Ethereum etc. While the first event get un-noticed by many, second one exploded on social media thanks to father of Tesla cars — Elon Musk.

Now let’s look it from technology perspective. People are comparing this Crypto era with dot-com era. Many dot-com companies failed, yet some are known across the world, part of most of our every day life — who would have though about it back in early years of 2000. Crypto has potential to repeat the same. From banking, to Art, to gaming, e-commerce, real-estate, you name a field and will find a crypto project. It’s not an improvement or new use case of Internet but a destruction of what we see as many centralized internet applications. Have you ever thought, why you need Uber to book taxi, while logically it should be peer-to-peer between you and taxi driver. Why should Google, Amazon, FB have all your data, predicting your behavior and changing complete landscape of Digital marketing. Or question as fundamental as why we need banks while the transaction is between two parties. And answer boils down to one single word — trust. Banks, Uber, Amazon all provide a layer of trust which you need to make any transaction. In other words, taking example of banks or VISA etc, even though we transfer the money using internet, still we need intermediaries to vet that transaction. Computers are not empowered to do that alone by their own.

But we have seen in past banks go bankrupt, users private data stolen from various servers plus other privacy issues, and more then above disproportionate power to these big players. If you ever tried digital marking of your product you will understand how cheated you feel. Still we trust this system as there is no alternative. Crypto try to solve this problem by two ways — a) It’s not centralized b) trust is burned inside the code— no one can change it. So what is the meaning of not centralized or decentralized. It means anyone can run a Bitcoin or Ethereum node and you will be rewarded with handsome money if you are resourceful enough to mine it.

And how does crypto solve trust issue ? Let’s take example of life Insurance. In today’s digital world, if someone who has life insurance passed away, his family has to file the insurance claim. Then there is verification process and after that beneficiary gets the payment. The Claim ratio is not 100% as we all know. There might be manual errors which could happen, resulting beneficiary either faces delayed payment, mental trauma, or no payment at all. Moreover, there are harassments at every level. What if we can create smart contract, which is linked to death certificate issued by govt authority. As soon as govt website shows that a given person is no more, the smart contract automatically transfer the insurance money to beneficiary account. No manual intervention, as trust is embedded in the code.

More on Financials:

Govts of the world have two ways to steal money from you — taxes and inflation. While the direct and indirect taxes are well defined, real inflation is something a normal or even the experts can’t figure out. The inflation numbers published by authorities are far from reality, which you can easily figure out if you look at grocery bills, gas bills, dine out etc. So, while you are happy that your stocks are making profit, your real-estate price increased, you really don't know that the denominator (fiat currency / or money for simplicity) has depreciated. Meaning, you didn’t get rich as you thought, or in some case you even get poorer. Talking about money in bank, i.e. cash, cash is trash in today’s situation.

Copied as it is from In-Gold-we-trust-report-2021 May edition.

To put the things in perspective look at the Gold return (2020) in various fiat. if we compare Gold price appreciation, INR vs EUR, it’s almost half. The denominator changes everything.

Although, a large part of world was already facing financial crises, COVID-19 has acted as catalyst here. Wherein productions have went down and the govts had to print more to save various banks, industries. Consequently, people’s trust on fiat, which was already on shaky ground, has fallen sharply.

What is the way out, how to save money? People start parking their cash in stock market, hence the stock market has quickly become overvalued. Those who knows insides of stock market, knows how retail investors get slayed and how it’s controlled by few big institutions of Mutual Funds, Hedge funds etc. The gamestop stock was real eye-opener for us, you can read about it more here https://qz.com/1966818/with-gamestop-reddit-and-robinhood-gamified-the-stock-market/. The problem was again centralized places have more control.

Other safe heaven is Gold, somehow gold is loosing it’s shine in 2021. Party because Institutions have start investing in BitCoin and also because Gold is sluggish (as they say Gold is Old) and can’t meet pace of real inflation, but truly speaking no one has a good answer for it.

Crypto :

It was necessary to understand some financial information to fully grasp on the problem Crpto is trying to solve. As those who have not seen the darkness can’t really appreciate the light.

Ok, so it will be easier to understand Crptyo if we divide this big space into two — Crypto Store of value/Currency and Crypto as Platform for Web 3.0 (Or Future of Web)

Crypto as Store of Value/Currency

The Grandfather of Crypto, Bitcoin, is a store of value (SoV), something like Gold but in totally digital format. Before thinking about why a Bitcoin is valued 40K USD (as I am writing this) while it provides no intrinsic value, I think the right question to think is why Gold has a value whatever it has. It also doesn’t have much of a use. it’s more of perceived value, because of it's scarcity. So is Bitcoin, there will not be more then 21 million bitcoins.

It’s an open ledger meaning you can literally see all the transactions, unlike banks where you only know about what you sent and received. You can't see beyond that. The funny part is ideally banks should charge to provide custody of you money, but rather they pay interest. Now for them to get that interest, they have invest your money to get bigger return compared to interest they are paying. If that investment goes wrong, which is quite a possibility, then bank goes bankrupt. On the other hand, the ledger of Bitcoin is maintained by Miners, who runs costly computers to calculate the hash for each transition and get monitory rewards for same. This monitory reward comes from transaction fee, which one has to pay for doing any transaction in Bitcoin. This makes Bitcoin as totally decentralized asset class (Goldman Sachs has also accepted It as asset https://in.news.yahoo.com/bitcoin-is-officially-a-new-asset-class-goldman-sachs-103540636.html).

The creator(s) of Bitcoin, Satoshi Nakamotto, had choice to envision it as currency or Store of Value, he/they prefer of keep it as SoV (initially) rather a currency. However, some developer of BitCoin wanted it to be Currency, so they hard forked it and created BitCoin Cash (BCH), a different crypto. So what difference does it creates on underlying technology. The answer is, as you might have guessed, Cash require faster transactions while SoV doesn’t. Bitcoin can not handle high transactions because it’s created as SoV, while BCH can do that. But then some people created layer 2 solution on top of Bitcoin called Lightening Network, which solves the problem of low transaction speed by consuming most of transactions in layer 2 and sending only little one to Layer-1 (Bitcoin). This gives speed and saves high transaction fee on Bitcoin layer. Thus, while BitCoin is designed as SoV, using layer-2 solutions it can be used as currency too.

International money transfer is still very slow process given that we need currency conversation etc, Bitcoin solves this as it completely decentralized — not owned by anyone. The problem is it’s very volatile as of now, hence some people have created Stable Coins which are pegged by USD. The volatility is there because it’s still far away from mass adoption. But my view is over the period of time, when the adoption of crypto will come to mainstream, International money transfer will be taking place in crypto (if not Bitcoin)

Looking Bitcoin somewhat philosophically, I really love the work of Epsilon Theory https://www.epsilontheory.com/in-praise-of-bitcoin/#:~:text=Starting%20today%2C%20Epsilon%20Theory%20will,subscriptions%20through%20our%20BTCPay%20server.&text=We're%20signaling%20an%20identity,in%20the%20context%20of%20Bitcoin.

They compared it work of Art. They call it an Art. I can’t really agree with them more. An Art work has a story, a cryptic message, without it art work has no value. BitCoin as whole has same legacy.

Alright, sorry for jumping here and there too much but you also need to understand couple of concepts here, like I said Bitcoin is open ledger, so anyone can see the transactions, the lesson is never try to hide any transactions from Govt authority to save tax, they can easily trace all of your transactions. Well, as you can see, some people don’t like this, I mean why I want my transaction to be seen by anyone - enter Projects Monero and Zcash. You can consider them open ledger but in encrypted form. Monero was created by one of Bitcoin developer. Zcash works of Zero Knowledge proof, meaning it only gives as much information to both parties as required to complete the transaction and keep the things Anonymous .

I presume now you are gathering why there are so many crypto projects. Well, let’s see few more. We talked about the role of Miners, they validate the transactions and earn the rewards. Higher the processing power a miner has, better his/her chances to win, hence people really put many special HW for mining setup. This is what makes Bitcoin truly decentralized, and this concept is called Proof-of-Work (PoW). Now, some people have raised the concert about Energy consumption because of this PoW, plus its relatively slow. Moreover, think about the fact, that you have to make some changes in SoftWare, you will need the consensuses of Miner community. Latest update of BitCoin Taproot is an example of same. To handle this, some projects are adopting Proof of Stake, wherein some people stake their tokens (minimum staking amount is pre-decided), and their nodes become validators. For this they earn the staking rewards. This makes governance little easier, reduces the energy consumption and make transactions faster. But comes with the cost - it’s not as decentralized as PoW. In my opinion, if I have put my money, then in words of Michael Saylor, I would rather want it to be protected by walls of energy required by PoW. As I understand, the energy more and miners are moving towards green energy these days, so in future that should be sorted out.

Then there are projects which uses part of both PoS and PoW and have separate Governance as well like DECRED (again created by off springs of Bitcoins). This project get more attention when Catherine Wood from Ark Investor mentioned it’s name in her recent interviews. So all in all — many concepts many projects which all will survive only time will tell (like I said at beginning compare it with Dot Com boom era).

Crypto as Platform for Web 3.0

As I explained earlier, we have problems with current Internet. As BitCoin is considered to be De Facto standard of SoV, Ethereum is De Facto Standard for development of decentralized applications. In words of Ethereum Creator, Vitalik Buterin “Ethereum expands on the Bitcoin approach, basically saying, well, instead of having rules that are designed around supporting one application, we’re going to make something more general purpose where people can just build their own applications” then he gave a very good example “So one explanation that I heard one person give is that Bitcoin is like a spreadsheet where everyone only controls their own five squares of the spreadsheet, but Ethereum is a spreadsheet with macros. So everyone controls their own accounts, which is their own little piece of this universe, but then these pieces of the universe can have code and they can interact with each other, according to pre-programmed rules” attributed to The Tim Ferriss Show, URL — https://tim.blog/2021/03/09/vitalik-buterin-naval-ravikant-transcript/.

Many Dapps and Projects are getting built on Ethereum blockchain. it’s considered to be the OS of Crypto.

Ethereum blockchain which is PoW, also has problem of slow TPS and high Gas Fee. There are many Layer 2, Layer3 and side chain solution are built on top of it which addresses these issues. Ethereum is also planning to upgrade to Ethereum 2.0 wherein they will move to PoS and introduce concept of sharding to improve throughput. Also, there are many competitor of Ethereum emerging in market like Cardano, Polkadot.

Then we also the Hadera Hashgraph. They are not blockchain. They use the technology which is called DLT (Distributed Ledger Technology). so rather using Blockchain they use Hashgraph. They provide both consensus service and token service with high speed transaction and deterministic low Fee. Hadera works with trusted nodes, wherein the member of governing council runs these nodes. These member of governing council, max number 39 from highly diversified Organizations, are elected for 3-year terms, with up to two consecutive terms. Hadera governing council includes some big names like — Google, IBM, Boeing, DT, LG, etc. Given that it works on governing council concept rather complete decentralized like Ethereum, its more suited for Enterprises who want to use crypto, or people who are not allergic to these governance. The governance model also solved the issue of hard fork.

That’s it for this write-up. Time for Disclaimer:

Disclaimer: I am not a financial advisor, doesn’t even posses any formal education in that field. All views I wrote above are based on my personal research, the organization I work for has no influence on it. Also, I may be in possession of some of the cryptos mentioned above.