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On Apple, Bitcoin, And The Internet

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FinGoth w/ Nick Mullen *TEASER* - Red Scare (podcast) | Listen Notes

ABOUT THIS EPISODE

President of the DSA Nick Mullen stops by to give the girls cryptocurrency tips

patreon.com/RedScare

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Disclaimer : The podcast and artwork embedded on this page are from Red Scare, which is the property of its owner and not affiliated with or endorsed by Listen Notes, Inc.

00:02:18 - President of the DSA Nick Mullen stops by to give the girls cryptocurrency tips patreon.com/RedScare

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Crypto is the future of our society - Inverted Passion

Balaji is a deep thinker on crypto and its implications. Formerly the CTO of Coinbase and General Partner at Andreessen Horowitz, he’s seen how technologies evolve over time, which ones change the world and which ones fizzle out as a fad.

He believes crypto technologies such as bitcoin represent the former. To him, crypto will emerge as something that’s as important as the Internet and influence our society for decades to come.

Listen to the podcast

What we talk about

0:04 ​ – Introduction 1:28 ​ – How did you get interested in crypto? 7:40 ​ – Your sense-making algorithm when you come across something strange and new like crypto? 20:44 ​ – Role of dissatisfied entrepreneurs in changing the status quo 26:40 ​ – Decentralized vs centralized networks 29:20 ​ – The demonstrated benefits of crypto 41:27 ​ – Is crypto a general-purpose technology like the internet? 55:24 ​ – Is the money being made or being transferred in the crypto ecosystem? 1:12:00 ​ – Valuations in crypto – actual value vs speculation? 1:17:47 ​ – Hindsight bias when analyzing crypto 1:25:24 ​ – What are crypto states? And why do you think nation-states will evolve towards them?

My notes and insights

1/ What got @balajis interested in crypto was the 2008 financial crisis in which banks were bailed out by the US fed. This made him question and go deeper into the nature of money.

2/ Bitcoin came in 2009 but it caught his attention in 2011 when it went up to $30 per bitcoin and then down to $2 and stayed there. When it started climbing back again from the low, @balajis got curious.

3/ Usually emerging tech sectors go through the Gartner hype cycle where their potential is over-hyped in the short term but under-hyped in the long term .

Eventually, sectors recover and flourish, but often individual companies and startups get killed in the cycle.

4/ However, with bitcoin it was different. Bitcoin survived a 90% crash and only a few companies in tech history have done that (Amazon was one of them). So in 2011, this made Balaji pay attention and he thought there was something interesting to it.

5/ Personally, what I find interesting about @balajis approach is that most people lose interest when the price of something crashes but he started paying extra attention to bitcoin after its 2011 crash.

6/ Crypto can be seen to have been driven by different sets of people during different time periods.

The earliest set of people were crypto-anarchists who, inspired by the Sovereign Individual , saw crypto technologies as a way to empower individual liberty.

7/ Then came engineers who built companies like Coinbase that got funded by VCs. Then came financiers such as banks and pension funds and now in 2021 we’re seeing artists who use technologies like NFTs.

8/ Crypto’s main utility is to bypass abusive states like Venezuela or Nigeria where the state wields its power on citizen .

Similar utility can be applied to bypass not just centralized nations but centralized companies like Facebook who can also wield their power on the users. For example, if you have a decentralized social network, nobody can ban you from using it.

9/ Crypto was (and is still) a strange thing that leads to strong debates about whether it’s a game-changing technology or a hyped-up toy. But crypto is not the only thing that demands sense-making.

10/ Many new trends like AI, robotics and genomics similarly are at a stage where they either can change the world or remain in history has overhyped technologies.

What is @balajis approach to making sense these strange new developments?

11/ He uses multiple lines of thought to do sense-making:

a) history – has something similar happened in the past; b) technology – what does the new technology enable that wasn’t possible before; c) extrapolation of trends – how fast is this technology improving; d) “nerd energy” – how passionate are the early adopters

12/ Another important aspect that @balajis says it took him a long time to understand was whether people hate the existing incumbent who’s only surviving due to its (historical) distribution.

He quotes Peter Theil who says: “ Product is merit, distribution is connections “. I love it!

13/ As any creator knows, you can create something amazing but if you don’t have the means to distribute, your work will remain undiscovered and unappreciated.

14/ Distribution is a function of quantity and quality of people . How many people are plugged into your distribution and how much influence they wield.

Low quality, high quantity distribution = reality TV’s fan base High quality, low quantity = high energy physics mailing list

15/ Back to sense making: when you have an incumbent who is surviving just on legacy distribution (which itself is declining in quality of people), there’s an opportunity. E.g. Oracle database is used by enterprises only for legacy purposes. All new startups use open source databases like Postgres, which is a superior product.

16/ @balajis says it pays to pay attention to whether an incumbent has lost the loyalty of influential people as whatever they’ll start paying attention to will start rising exponentially. Banks and traditional publications have lost the quality of distribution, even though they’re surviving based on the quantity of distribution.

17/ So a really good sense-making algorithm is to see whether there’s a growing frustration with the establishment that’s causing people with influence root for emerging alternatives .

18/ Is this inevitable though? Does the establishment always crumble? Amazon seems to be a counter-example as it has continued to grow without fail but @balajis attributes that to the founder Jeff Bezos.

19/ The founder’s role in navigating the changing world is hugely underestimated . Facebook’s bet on Instagram, Whatsapp and Oculus were totally counter-intuitive at the time when these companies were acquired (even though they look obvious in hindsight).

20/ In 2012, Mark Zuckerberg paid a billion dollars for Instagram which was making 0 revenue. A billion dollars was 20% of Facebook’s entire money at hand and it was done a few weeks before Facebook’s IPO and the board wasn’t consulted. This brave decision is something only a founder can take.

21/ A good founder has enough conviction in the strength of the new technology and the weakness of the incumbent (which in some cases might be their own company) that they can take bold decisions.

If Facebook was run by a professional CEO, chances are that Facebook would have been the crumbling establishment instead of a disruptor.

22/ Navigating technological changes isn’t just about the intelligence to see the future or the past clearly, it’s more about the courage to take a non-consensus position at a short term great (monetary or reputational) cost .

As @balajis said this, I was thinking this is exactly what he’s doing with crypto. Putting his reputation at stake by claiming it’s the future.

22/ Driving a big change in an organization’s trajectory like Zukerberg’s decision to buy Instagram requires intelligence, courage, and authority . Most people don’t have the combination of these three.

23/ In 2008 banks were the establishment and the centralization of risk meant if home mortgages failed (which they did), everything else could fall with it (unless the Fed intervened). This meant that the centralized banking system could take the entire economy with it .

24/ However, in crypto, even though individuals can make a mistake and bear risk, the entire system is decentralized enough that it’s de-risked . Think of the decentralized nature of the Internet which never goes down, even though individuals can get disconnected from the network.

25/ Earlier I’ve raised concern about bitcoin’s energy usage (say when compared to Visa that processes a much higher magnitude of transactions), but @balajis said it’s a false comparison. Bitcoin’s energy usage has to be compared with the entire judiciary and enforcement capability of the US-backed dollar.

25/ Crypto enforces property rights with math , instead of guns.

26/ The potential of crypto is talked about a lot but has crypto realized any concrete benefits for society so far?

@balajis says yes. Crypto has benefited two classes of users: a) power users; b) marginalized users.

27/ The power users are financiers or developers . For example, if you have a use case where you need to send $10 to thousands of users across 100 different countries or $2million within the next 5 minutes to someone in another country, existing methods aren’t good enough for that.

28/ Marginalized people are either unbanked or unbankable . For example, these are the people who’ll not easily get a bank account. With crypto, they don’t need anyone’s permission to get one.

29/ When we think of payments, immediately the first thought that comes is the $5 payment at the coffee shop (which is a need adequately fulfilled by current methods). But crypto is good for payment use-cases that are extreme on some dimension (say very large, very small, very international, automated, or numerous in quantity, or contingent on some qualifications).

30/ @balajis compares bitcoin with Internet.

When the Internet came along, you could have compared it to making phone calls and the existing telephone served quite well for it . But you could not have predicted that Internet will give rise to these tremendous use cases of search engine, shopping on so on.

31/ Similarly, comparing bitcoin to the existing $5 payment at the coffee shop is not looking at what new use cases it’ll enable.

@balajis says bitcoin is 10x better at the following :

  • 10x improvement in wire transfers in speed and internationality
  • 10x improvement over gold in portability
  • 10x improvement in crowdfunding in terms of quantity
  • 10x improvement in the number of people in cap table (token holders)
  • 10x improvement in accounting (clean record on the chain)
  • 10x improvement in programmability

32/ Bitcoin may be at a place where Internet was in the year 2000 . The number of Internet users was in the order of 40-50 million and most people were just using it for surfing the web (which literally meant reading stuff on the Internet). Even though there was the hype of dot com boom, nobody knew the full potential because truly valuable use cases were yet to be born.

33/ The launch of iPhone in 2007 changed the Internet where all the Internet companies (such as Google or Facebook) started going vertical while media collapsed.

34/ This was a gold quote by @balajis -> the Internet economy is much younger than it appears because the nature of exponential growth makes everything big and prominent so quickly. But in reality, the pervasiveness of Internet economy has only happened in the last 10 years (2010-2020).

35/ @balajis says the skepticism on bitcoin is nothing unique . Lots of experts have been skeptics about the potential of things like Internet or computer technology. Case in point the following article that appeared in 2004 in HBR.

IT Doesn’t matter

36/ Continuing on the benefits of crypto, they go beyond 10x improvement in advanced payment use cases:

  • It’s accelerated advances in computer science – cryptography, formal verification, distributed systems and co-ordination problems
  • It’s giving us a framework to do ethical macroeconomic experiments – people opt into different types of economic systems and we can figure out macroeconomic principles
  • It’s enabled decentralization of wealth creation opportunity outside of U.S. – crypto has enabled people all over the world bet against the U.S. dollar system, which if they’re right is ethical and non-violent drainage of money away from US

37/ Right now crypto is getting built at the backend level (both technologically and in human minds) . But when it’s fully built and scalability challenges have been solved (which is happening right now), on the front end it’ll solve even more use cases that are unimaginable today (like send a cent every time you upvote a post in a social network).

38/ The massive valuations of crypto today are actually speculation on how big the digital economy will be . In the next 10 years where more people will work remotely internationally and via VR and other technologies, remain hooked onto the Internet, crypto as a native digital currency will see the corresponding growth as well.

39/ I find this interesting that the bet really is that as the digital economy grows 100x, crypto will grow 100x as well.

@balajis believes Virtual Reality may do to crypto what iPhone did to the Internet .

40/ How do we know that crypto is not a bubble?

The key thing to notice is that there have been lots of booms and crashes of crypto and it has still survived. So it seems crypto refuses to die.

Plus, this time market cap of cryptocurrencies is a trillion dollars and there are many crypto companies worth many billions of dollars. So it doesn’t seem like it’s going to go away.

41/ When it comes to technology, it seems all technologies that get hyped up ultimately end up changing the world .

It’s just that getting the timing right is hard as being too early and betting on something that’s not ready means you’ll lose.

42/ But you can get scar tissues as well, which means you’ve seen some technology fail and decide not to invest but this time it actually works .

43/ Like the economy, every technology seems to have its boom and bust cycles of overinvestment and underinvestment, but since most technologies ultimately do end up changing the world, you have to have conviction and balance sheet of riding through the down cycle .

44/ Final part of our conversation: what are crypto states?

Just like citizens of nation-states decide to issue themselves a currency (rupee, dollar, etc.) and enact laws/policies, different people can come together in a social network and issue themselves cryptocurrency. T his cryptocurrency-enabled social network can be thought of as a proto-nation.

45/ Just like nation-states, these users believe in common principles and the continuation of the entire group. They have a sense of patriotism.

@balajis says the difference between Paypal and bitcoin is that people were users of Paypal but they’re committed to bitcoin. (This is because people have an economic interest in bitcoin)

46/ If the story of the 2010 decade was cryptocurrency, the story of the 2020 decade is going to be crypto-states.

Starting up a city is not illegal. You can take unincorporated land and start a city. You can make laws at the local level such as making meat-eating illegal and you’ll attract the people who believe in it and have an economic interest in making sure it succeeds.

Follow @paraschopra

Have an opinion on this essay? You can send your feedback on email to me.

Balaji is a deep thinker on crypto and its implications. Formerly the CTO of Coinbase and General Partner at Andreessen Horowitz, he's seen how technologies evolve over time, which ones change the world and which ones fizzle out as a fad. He believes crypto technologies such as bitcoin represent the former. To him, crypto will emerge as something that's as important as the Internet and influence our society for decades to come.

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Bitcoin is mother of all network effects - Inverted Passion

Bitcoin is such a strange beast that it’s hard to really understand what it really is. Some people call it the biggest Ponzi scheme ever invented, while others see it as the currency that’ll power a decentralized, libertarian utopia. Whatever it is in reality (and whatever “reality” really means), there is no question that network effects are playing a central role in making it the most hotly debated idea of recent times.

I’m a big fan of the power of network effects and have previously written about different types of network effects . In this post, I want to talk about what network effects are at play in bitcoin. This post assumes you know what bitcoin is and how it works at a high level. In case you don’t, go through my introductory post on basics of bitcoin first .

Bitcoins without network effects

Bitcoin started as a vision and a plan for a currency system that is decentralized and permissionless. This means that the early bitcoin enthusiasts were committed to developing a system where anyone could send anyone else money without a central authority (like a bank) or without requiring anyone’s permission (like a government, when you do cross-border transaction). Running such a payments network costs money (ask Visa about it). You have to purchase computers, pay for network bandwidth, storage and electricity.

Come for ideals, leave with profits

Early bitcoin enthusiasts invested their hard earned money and time in setting up this network. Let’s assume that the cost of doing this was $X and the network had a total of BTC A amongst all of them.

This gives us a bottom limit for the price of bitcoin in early days. They couldn’t spend BTC for pizzas yet but if someone had come to purchase BTC from them, you’d expect them to at least want to recover their investment by offering X/A exchange rate (for USD/BTC) for offsetting their investment in electricity, storage, bandwidth. (You can incorporate opportunity cost of their time in it as well).

Bitcoin solves real world problems for someone

Bitcoin’s properties make it an excellent choice for certain types of transactions that are difficult or impossible for traditional alternatives like banks or credit card networks. One such problem is cross-border transactions for illegal items. Bitcoin serves this real-world need.

Imagine a girl named Rose wants to purchase a book that’s banned in India but is available at UK shop. Although the book is not costly ($100), getting the money across from India to UK shop is difficult. Out of fear of government action, she obviously would not do the transaction via credit card and she also doesn’t have a trustworthy friend in the UK who she can ask to purchase the book and ship. Note that this is a real need that bitcoin network is uniquely positioned to serve because it’s decentralized and permissionless.

For doing this transaction, Rose has following options:

  • Take services of a money laundering network . Dealing with such people is risky and they charge a significant commission for their services.
  • Setup her own computer in bitcoin network and mine bitcoins . She needs to run it long enough to “waste” $100 worth of electricity, storage, and bandwidth to mine and send $100 * A/X worth of bitcoins to the UK shop. She convinces the UK shop to accepts the bitcoin because proof of work part of bitcoin protocol gives them confidence that Rose would have necessarily spent $100 worth of money to generate this amount of bitcoins. They can use the same argument to persuade their suppliers to accept the payment in bitcoins
  • She can purchase bitcoins from a bitcoin enthusiast (or miner) in India giving her USD (or INR). She will pay $100 + a premium to get $100* A/X worth of bitcoins. She needs to pay a premium because she is getting bitcoins instantly, without setting up the full miner node and waiting for bitcoins to be mined. The bitcoin miner will charge a premium for his services. Note that, unlike money laundering people, bitcoin miner doesn’t need to know that Rose will use bitcoins on something illegal.

The premium paid by Rose to bitcoin enthusiast drives up the price of bitcoin. It’s due to the demand-supply rule taught in the Econ 101 class. As demand for bitcoin rises, given that supply is limited, the price per bitcoin rises.

Network effects of network effects

If you’ve invested or purchased something for money, you’d hate to see its value go to zero. Because of our loss aversion tendencies, we usually hold on to objects and not sell them at a loss until we really need to (say for survival or in a panic or when a massively better opportunity comes along). This is why real estate prices in India aren’t coming down even when the demand is reducing, this is also why people will rather spend money on storing their unused possessions than sell them.

For bitcoin network to work, miners or bitcoin enthusiasts are required to spend real economic value (in terms of computation power for proof of work ). If running their server costs them $1 and gives them 1 BTC, it’s likely they won’t sell below 1 BTC/USD price. Similarly, if someone accepted 10 BTC for a $100 book, they won’t sell their BTC for less (unless they really have to). This avoidance of loss gives us a lower limit for bitcoin’s price. It’s not zero.

The requirement of investing time, energy or money to earn bitcoin gives it real value. And with more people having bitcoin, the utility of being able to accept and receive bitcoin increases exponentially. See Metcalfe’s law that states that the value of a telecommunications network is proportional to the square of the number of connected users of the system.

Bitcoin network effects

These three properties of bitcoin (having real-world use with no good alternatives, requiring an investment of money to generate currency, limited supply guaranteed by the protocol) gives it multiple network effects. Acceleration in any one loop impacts other loops and the value goes up.

Because of its limited supply, people are hoarding bitcoin and that reduces its utility as a currency. But the same property also gives it a lasting store of value: you know that people will always be ready to accept it whenever you want to spend it. Bitcoin is better than gold in these respects because it’s divisible and portable. If gold could be divided into infinite small values without damage, we could have been using gold as a currency. This property of bitcoin to store world’s entire economic value for a long time gives its price an upper limit. Imagine all the gold, silver and idle money in the world was stored in bitcoin’s 21 million tokens. It will definitely be larger than the current price of $8k per bitcoin or so.

What’s causing volatility in bitcoin’s price?

Starting from a price of 10,000 bitcoins for a pizza , in the last couple of weeks, the price hit a high of $20k per bitcoin and then recently it crashed to $8k per bitcoin. If there are multiple network effects going into bitcoin, why is the price so volatile?

Bitcoin’s price is volatile

The unsexy answer is that the demand for bitcoins is going up or down and that’s what’s causing price volatility . Why might that be happening? One possible reason is the arrival of speculators and traders in the market who do not care about the intrinsic value of bitcoin but completely base their decisions on market trends and emotions. And when it comes to trends, the network effects that drive up the price quickly can also bring down the price quickly. . Imagine in the network effects image above, instead of “Price goes up” there’s a temporary “Price goes down”, the loop will start reversing. Speculators cause short-term volatility in markets (but they also serve a useful purpose of providing liquidity). On the other hand, value-driven investors hold for long-term and do not react to short-term fluctuations.

I think bitcoin right now could be compared to pre-2000 Internet bubble where anyone and everyone had invested in an Internet stock. With the 1999 crash, many speculators lost money. However, Internet kept on booming even after 2000 crash and all Internet giants of today gained prominence despite the crash.

There’s a difference between pricing or valuing something . If you believe bitcoin solves a real-world need, it’s going to be valuable in the long run. In the short run, however, the price can go anywhere.

Thanks to Nilesh , Pranay , Roby and Aakanksha for reviewing the article.

Follow @paraschopra

Have an opinion on this essay? You can send your feedback on email to me.

Bitcoin is such a strange beast that it’s hard to really understand what it really is. Some people call it the biggest Ponzi scheme ever invented, while others see it as the currency that’ll power a decentralized, libertarian utopia. Whatever it is in reality (and whatever “reality” really means), there is no question that network… Read More

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over 1 year ago

After my first weekly reading recap on basics of bitcoin and blockchain , I couldn’t post a recap last week as I was away attending my weekly class of Stanford’s Seed program in India for growth stage entrepreneurs.

My favorite part of the week was the design thinking class where various teams (of 4-5 people) had to interview people, discover a problem, brainstorm, prototype and test potential solutions — all within one day. The team I was part of went to autorickshaw stands and had detailed conversations with drivers about their lives, hopes, regrets, likes and dislikes. My biggest learning (and shock) was about their idle time: auto drivers don’t do anything for 90%-95% of their workday and so are unable to meet their ends meet (earning only Rs 200-600/USD 4-10 per day). We discovered lots of economic inefficiencies that are waiting to be fixed by an entrepreneur. I recommend you see my entire Twitter thread with detailed data and observations.

What is Ethereum?

As far as my reading is concerned, I have been spending a lot of time reading about various blockchain related projects. In case you’re just starting out, start by going over my earlier reading list first .

I’m particularly drawn to Ethereum because it enables storage and execution of computer programs on the blockchain. This seemingly small change from storing numbers (as it happens for bitcoin ) to storing computer programs is a huge step in making blockchains accessible to a wider range of programmers. To appreciate what Ethereum project is trying to do, you’ll have to imagine how difficult was it to program the very first computers. Early programmers had to get deep into the weeds to make even the simplest of programs but once programming languages like BASIC or FORTRAN were introduced, the software industry exploded. Had it not for programming languages, software wouldn’t be eating the world .

Source of images: Wikipedia

This is what makes Ethereum so powerful and compelling. Think of Ethereum as a platform that enables anyone who has programmed JavaScript or other such high-level languages to explore the potential of blockchains. .

With that background, I hope you’ll be interested enough to explore Ethereum and blockchains.

Resources on Ethereum

1/ Start by reading Programmable blockchains by Vinay Gupta . He explains Ethereum and its potential in context of how software has evolved from pre-Internet days. Even if you are non-technical, I highly recommend the article .

2/ If you are technical do not miss reading the original introduction (whitepaper) on Ethereum . It was originally written by the project’s founder Vitalik Buterin and subsequently expanded by other contributors. Reading the whitepaper will take about an hour and will give you a solid foundation to in Ethereum.

3/ When you are ready to get your hands dirty, head over to Cryptozombies (by Loom Network ) where they teach you basics of programming on Ethereum by making a game. It’s super fun. I have tried it.

4/ Current implementations of blockchains (including Ethereum) don’t scale well with the number of transactions. Because of its decentralized nature, Ethereum is as slow as the slowest computer in its network. This is a blocker for widespread adoption of Ethereum. For a better understanding on current technical issues and possible solutions to scaling issues, read Blockchains don’t scale. Not today, at least. But there’s hope by Preethi Kasireddy .

5/ If you are ready to have your mind blown away with futuristic ideas based on Ethereum, I recommend reading Organisations That Create Themselves (through Ethereum) and An Intro to TrueBit: A Scalable, Decentralized Computational Court by Simon .

6/ For a strange blend of Artificial Intelligence and Blockchains, read AI DAOs, and Three Paths to Get There by Trent .

Building mental models on blockchains

7/ Explaining blockchain — how proof of work enables trustless consensus by Aleksandr Bulkin explains what proof of work is and why it’s important to prevent abuse in decentralized apps.

8/ Why Everyone Missed the Most Mind-Blowing Feature of Cryptocurrency by Daniel Jeffries emphasizes on why decentralization is an important ideal to pursue for humanity’s sake.

7/ Blockchain Tokens and the dawn of the Decentralized Business Model by Fred Ehrsam explains how blockchains challenge traditional business models by creating economic incentives for users using a protocol vs accumulating all economic value in an organization like Uber, Facebook or Amazon.

Via Fat Protocols

8/ Also read Blockchains Never Forget by Venkatesh . Since you cannot erase data from blockchains (not even governments), his concept of artificial forgiveness will become increasingly important. Institutions rewrite history by forgetting inconvenient “facts”. When blockchains make that rewriting impossible, we will have to deal with ugly misses by acknowledging them but deciding to forgive people involved. Blockchain-based history won’t be able to forget anything so we’d have to resort to forgiving.

9/ Finally, to understand “network effects of network effects” do not miss this twitter thread by Naval.

What are your favorite links from last week?

Please share your favorite links from last week (blockchain or non-blockchain, it doesn’t matter!) by replying to the tweet above (+ check out other readers’ favorite links).

Follow @paraschopra

Have an opinion on this essay? You can send your feedback on email to me.

After my first weekly reading recap on basics of bitcoin and blockchain, I couldn’t post a recap last week as I was away attending my weekly class of Stanford’s Seed program in India for growth stage entrepreneurs. My favorite part of the week was the design thinking class where various teams (of 4-5 people) had… Read More

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over 1 year ago
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Cryptocurrencies are belief systems - Inverted Passion

Making fun of hundreds of new cryptocurrencies launching every month is understandable. People are confused by all diversity of cryptocurrencies ( bitcoin , litecoin, ethereum, ripple, etc.) because historically there was never a competition among currencies. All we’ve ever known or used in our lives is just one currency: the one the government issues. Imagine telling someone who had grown up reading the New York Times in the early 1990s that in less than two decades there will be hundreds and thousands of publications covering the city. He would have laughed at you. Today, the same person would be consuming news on Twitter or discovering new restaurants on Yelp, and catching up on celeb-gossip on Instagram.

I am late to the party of blockchains and if you’re in the same boat as me, I’ve compiled these resources for you to get started . As I read and think more, I’m increasingly getting convinced that blockchains represent a major innovation in human society. Perhaps as big as language, printing press, radio, TV or the Internet. The reason for my enthusiasm is because for the first time in human history, blockchains allow different belief systems of all types to compete with each other without permission from any central authority.

Capitalism allows many types of belief systems to compete with each other. When you buy an iPhone, by paying money , you’re expressing your desire and belief in the value of that object. When you go to church every Sunday, you pay with your time to express belief in its value to you. Each new startup is a belief system about a certain way of making the world a better place. Customers express their agreement or disagreement by paying or not paying money.

As long as you have free markets, competition makes customers happier because they can discover and adopt belief systems that align with their values and preferences .

But, in the pre-blockchain world, not everything is on the free market. You cannot choose the nation-state that you’re born in, you cannot choose to not believe in certain laws and you cannot choose to the currency. All these belief systems are mandated to you by institutions.

The problem with this lack of choice is that you are at the mercy of decision making by large institutions. Incentives in systems drive behavior . So, if politicians want to get the second term, they vote for printing more money to let everyone afford a home, this drives interest rate to zero, causing the mortgage bubble of 2008. If the recession caused by that impacted you personally or professionally, you were pretty much helpless. Social problems are wicked problems , so the choices made by institutions are compromises, and they always do collateral damage.

Moreover, just like institutions tend to control information , institutions also tend to control money because purchasing power is the ultimate expression of beliefs.

In contrast to whims of human institutions, cryptocurrencies encode the rules of engagement upfront into a protocol. Transparent and accessible to all. If the bitcoin protocol says that there will be not more than 21 million bitcoins ever in existence that statement is mathematically proven to always hold. You do not have to trust anyone in keeping their word or doing as they promised. It just happens.

I’m also starting to think of cryptocurrencies as words we use in a language . If you to me ‘roses are red’, you don’t have to trust me that my understanding of ‘roses’ and ‘red’ is same as yours. You just know that the I’ll understand this statement as you wanted to convey. As a society, we’ve agreed what objects represent roses and what wavelenghts represent red. Similarly, if you use namecoin , you don’t have to trust someone else in executing your desire to register a domain name. The protocol guarantees that if you give the appropriate amount of namecoin (set by market), your domain registry will go through. Nobody can stop that. Not even government .

In the pre-blockchain world, when you register domain on GoDaddy, your trust is mediated by the human blockchain of contracts, lawyers, judges, politicians, constitution and just like any human system, it’s error-prone. In the post-blockchain world, your wish is guaranteed to execute due to shared, de-centralized and consensus-building protocols. Just use the appropriate cryptocurrencies, and what you want to get done is guranteed to get done.

In reality, cryptocurrencies are better than languages because you misunderstand words or their meanings. Language is ambiguous. But cryptocurrencies are built on the laws of mathematics that do not allow any ambiguity.

Don’t make fun of cryptocurrencies, let them compete

Matt Levine from Bloomberg is fundamentally mistaken in his column: The Blockchain Is Not the World . He makes fun of BananaCoin which is a cryptocurrency by the export price of 1kg real-world banana. He says:

The rest of the white paper is similarly silly, though I particularly enjoyed this bit: “Bananacoin is being developed as an easy to use token with an understandable fiat equivalent (in the form of 1 kg of bananas). It does not require specialized knowledge in cryptography or blockchain technology”

Matt, that is the point. Bananacoin is exactly right. Just like we don’t need to know about linguistics in order to communicate, we also don’t have to know innards of cryptography to use our knowledge or love for bananas to associate with a belief system about bananas. And unlike investing in a Banana plantation company that may go into making fertilizers, BananCoin will forever be linked to prices of Banana. Blockchains guarantee that and it’s a good thing.

Making fun of hundreds of new cryptocurrencies launching every month is understandable. People are confused by all diversity of cryptocurrencies (bitcoin, litecoin, ethereum, ripple, etc.) because historically there was never a competition among currencies. All we’ve ever known or used in our lives is just one currency: the one the government issues. Imagine telling someone… Read More

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over 1 year ago

From this post onwards, I’m starting a weekly recap of insightful articles and videos that I come across. This recap serves two purposes: a) curate and filter only the most insightful articles for readers of this blog; b) improve my mental models by reflecting on what I read recently. I intend to do this recap every week, so if you’re interested in reading along with me, subscribe to the mailing list .

The inaugural weekly recap (this one!) is mostly going to be about blockchains and bitcoins. What I find fascinating about the cryptocurrency mania is that perhaps the biggest current phenomenon that’s begging to be analyzed. Previously I covered how fidget spinners became all rage , how Facebook beat Friendster and how Singapore rose into dominance . All those were historical phenomena but bitcoins is what’s happening right now .

If you are, like me, late to the party of bitcoins and blockchains, don’t worry. This week’s recap will bring you up to speed on the basics of bitcoin and blockchains.

1/ Start with The Bitcoin Boom: Asset, Currency, Commodity or Collectible? Aswath Damodaran, professor of finance at NYU, differentiates between assets (something that generates cash over time in future, e.g. stocks or debt), commodities (something that goes into supply chain as raw material, e.g. copper or energy or wheat), currency (something that is used as a medium of exchange and has no inherent value, say USD) and collectible (something that has aesthetic value for the holder, e.g. baseball cards). He argues that bitcoin is not an asset (it doesn’t generate cash), nor a commodity (it isn’t useful as a raw material), so the big question is whether it’s a currency or a collectible . Nobody knows that yet, so it can be profitable to make your own opinions there.

2/ If you do think bitcoin is more likely to be a currency than a collectible, I recommend reading this analysis on Cryptoasset Valuations . The key idea is that price of one bitcoin is equivalent to the worth of all goods and services traded via it divided by the number of times bitcoins exchanged hands. P = Total-worth-of-transactions-via-bitcoins / Number-of-bitcoin- exchanging-hands. The insight I got was that if people hold on to a currency, it ceases to be a currency. For a currency to be useful, it needs to exchange hands . The concept is called the velocity of money and you can watch a short Youtube video on it .

3/ New York Times magazine had a very long but super interesting article on bitcoins that explains what it is simply, compares its evolution with the early days of the Internet and then explores the potential of the technology behind bitcoin: blockchain. I recommend reading it: Beyond the bitcoin bubble.

4/ Before we move to blockchains, I also recommend thinking about where does the BTC/USD rate come from and what variables impact that rate. Since most of the bitcoin hype is about its price, read about the difference between pricing and valuing and then watch a few videos on how exchange rates are determined .

What’s happening in bitcoins? Are people pricing it or valuing it? (via here )

5/ My understanding of blockchain is that they are a distributed database where data can be appended (but not deleted). No central authority controls that database and yet it has mechanisms to ensure everyone can “trust” that the data in there hasn’t been tampered with . So this means if a blockchain says Alice has 10 bitcoins and Bob has 1, everyone can safely assume that Alice hasn’t “cheated” by falsely updating the database. Traditionally banks do this job by deploying secure databases on their servers, but banks can fail. Blockchain is a technology that guarantees that even if Alice and Bob both delete their databases, this record of who has how many bitcoins will always remain. To start with blockchains, read this excellent introductory guide to blockchains . And then dive deeper via this five-part series titled The Product Manager’s guide to the Blockchain .

If you are in the mood to watch a video, here’s the best introduction on bitcoins and blockchain that I’ve seen so far. (Hat tip to Nilesh Trivedi )

6/ This blog explains many terms of the trade (such as smart contracts, ICOs, etc.) in very gentle terms. A good place to start on that blog is their gentle introduction to blockchain technology .

7/ To build better mental models about blockchains, read all of these posts by Joel: The Blockchain Application Stack , The Shared Data Layer of The Blockchain Application Stack , and Bitcoin is like SMTP . If you don’t have time to read these many, make sure you read Fat Protocols .

The Blockchain stack (via here )

8/ I also enjoyed Albert’s intuitions about the value of protocols on Crypto Tokens and the Coming Age of Protocol Innovation and foundational innovation of the blockchain .

9/ If you feel ready to dive into building on blockchains, developing on Ethereum is a great start. I found an interactive tutorial where you make a game on blockchain. It’s called Cryptozombies . If you have previous background in JavaScript, you will be able to finish their lessons in a couple of hours. (And, by the way, you’re confused by what does a game-on-blockchain mean, the tutorial will make that very clear). What I found most interesting about cryptozombies is that it is able to interact with a separate game (cryptokitties) without their permission or official API. This interaction is possible because both these apps/games access the same database – the ethereum blockchain.

Some of the cryptokitties have sold for $100k+

10/ If you are not in the mood to spend hours learning how to code on Ethereum, you can get an overview via Ethereum for web developers .

11/ For a more detailed and technical dive in blockchains, go through these articles: Life Cycle of an Ethereum Transaction , How to Code Your Own CryptoKitties-Style Game on Ethereum and Lessons learned from making a Chess game for Ethereum .

12/ There’s a fundamental difference between coins like bitcoin and thousands of other new coins you keep hearing about. In fact, anyone can roll out their coins without much technical help. Understand the difference between protocol tokens and app tokens.

One way to understand tokens is that they’re incentive systems for participants. Bitcoins and ethereum coins hold value because they incentivize people to spend money and effort deploying their computers, networks and hard drives to maintain the blockchain . Other coins are incentive systems for other activities such as storage of data, doing calculations or even adopting early.

12/ Before you get excited about blockchain and get deeper into a cycle of confirmation bias, I recommend reading two criticisms. They will expand your perspective and enrich understanding of blockchain’s potential. Read Ten years in, nobody has come up with a use for blockchain and ICOs and Economics of Lemon Markets .

What are your favorite links from last week?

Now that you’ve read the article, I have a question for you.

Please share your favorite links from last week (blockchain or non-blockchain, it doesn’t matter!) by replying to the tweet above (+ check out other readers’ favorite links).

Follow @paraschopra

Have an opinion on this essay? You can send your feedback on email to me.

From this post onwards, I’m starting a weekly recap of insightful articles and videos that I come across. This recap serves two purposes: a) curate and filter only the most insightful articles for readers of this blog; b) improve my mental models by reflecting on what I read recently. I intend to do this recap… Read More

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over 1 year ago
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Notes from Berlin on crypto and blockchain - Inverted Passion

I attended Blockstack Berlin event yesterday and here are my notes. In case you’re not very familiar with the cryptocurrencies or blockchain space, I recommend going through my reading list on bitcoin and ethereum first.

The Agenda

What attracted me to travel from Pune, India to Berlin, Germany was the impressive list of speakers. I was specifically interested in listening to Edward Snowden (the famous whistleblower), Nick Sbazo (creator of bitgold, precursor to bitcoin ), and Albert Wenger (author of world after capital ).

Here’s the full agenda:

My notes

These notes are not comprehensive; they are the ideas and perspectives that caught my attention. I’m pretty sure like last year, Blockstack this year too will release videos from all talks on their youtube channel . So keep an eye on it.

1/ Founder of CoinCenter – a non-profit educating governments on bitcoin, @valkenburgh said the reason blockchain and crypto are important is because Internet is an adversarial environment . You can believe that people are generally good, but you have to design open, decentralized systems with the assumption that malicious entities exist and will try their best to take personal advantage.

2/ @valkenburgh recommended reading: A Declaration of the Independence of Cyberspace . I didn’t know John Perry Barlow – founder of Electronic Freedom Foundation was also a lead singer for The Grateful Dead.

3/ Technology is not inherently good or bad – it is an expression of human will and values . The same technology (say Internet) can be used for good (freedom) or for slavery (mass propaganda). Technology is neutral, said @valkenburgh .

4/ Cofounder of Blockstack, @ryanshea said that the mission of Blockstack is to enable these four properties of decentralized apps (Dapps): a) runs on device of your choice; b) lets you bring your ID; c) lets you bring your data; d) lets you bring your assets.

5/ @Muneeb , cofounder of Blockstack, talked about the recurring trend in computing: centralization/decentralization (mainframes -> PC -> cloud computing -> decentralized computing) . Note to myself: why does this bundling or unbundling happens in waves? This trend is also central thesis of The Master Switch by @superwuster

6/ @Muneeb suggested that a developer selecting a platform for developing decentralized apps should ask these questions: a) can it scale to millions of users? b) is it secure? (what’s the attack surface); c) does it have developer tools? I’ll add another one to the list: d) does it solve a real user problem?

7/ @jutta_steiner defined web 3.0 (that’s what everyone is calling decentralized web now) as reliable means of making applications available under adverse conditions – both intentional and unintentional.

8/ @santisiri , founder of democracy.earth gave a very interesting talk on nation-states and crypto. He defined nation-states as monopolies of money and force that are limited by geography.

9/ @santisiri said that democracy is in decay due to conflict between cloud (corporations) and land (nation-states) .

10/ @deseventral , cofounder of orchidprotocol – marketplace for VPNs, says that a surveillance state is successful if its citizens behave as if surveillance is everywhere (even if it’s not) . He says people in regions of China are stopped where police check their phones if they are using any unauthorized apps. Scary!

11/ @valkenburgh introduced the audience to the Goodharth’s law which says: ‘ When a measure becomes a target, it ceases to be a good measure ‘. For example, GDP includes military spending so measuring GDP growth alone isn’t good. Similarly focus on marketcap for crypto is bad.

12/ Then there was investor panel with @AriDavidPaul , @andy_bromberg , @richardmuirhead and @br_ttany . Major insights: what’s changed is that with tokenizing open source, value capture in open source has become directly possible now . That’s the interest of VCs in crypto space.

13/ A lot of variables in cryptospace are unknown: “there’s no single utility app in crypto right now”. There’s no clarity on the total addressable market. Also, there’s tragedy of commons in decentralization: “the more decentralized an app is, less incentivized is each individual to improve it”.

14/ Network effects in protocols mean that value may not accrue to initial founding team / project . As projects fork, the value can accrue to even 20-30 projects. This is what VCs have to be cognizant of.

15/ “When you’re investing in open source network effects, you are asking whether network effects can sustain until switching costs become high that users don’t switch to a forked version “.

16/ @nickszabo4 defined markets as a network of contracts. As markets expand –> greater division of labour -> greater productivity. This is why markets drive economic growth.

17/ Markets have caused all economic and material growth of the modern century. @NickSbazo4 made me think that although communism sounds great in theory and resonates with intuition, it had horrific consequences . Our intuition about what’s right and wrong may not turn out to be right on deeper thinking. This idea is the basis of moral reasoning .

18/ @NickSbazo4 key message: trust scales poorly and trusted 3rd parties are security and lawyer magnets . The design objectives of networks online should be to minimize need to trust any single party.

19/ @NickSbazo4 also said that governments and institutions have argument surface which allow many different entities to slow down decisions. This is the fundamental tradeoff of speed v/s reversibility of decisions that Jeff Bezos also talks about as Type 1 and Type 2 decisions.

20/ @starkness , founder of the lightning network (that enables scalability and speed on bitcoin) said that bitcoin is like savings account while lightning is like checking account on top of it . Bitcoin blockchain is increasingly becoming the settlement layer while other protocols like lightning enable more interesting stuff to happen on the protocol.

21/ @nadertheory , founder of basecoin – a cryptocurrency whose price doesn’t fluctuate (these cryptocoins are called stablecoins) – said that volatility is bad for long term contracts . Uncertainty of price causes many types of contracts to simply not happen.

22/ @nadertheory also said that even though gold has been in existence for centuries, it’s price can still have a volatility of upto 15% per year. He suggested that basecoin has the right incentives built into the system so that participants can profit from reducing volatility .

23/ I loved @nadertheory ‘s perspective that basecoin isn’t a threat to US dollar rather stablecoins compete with weak and rapidly depreciating currencies which citizens have lost trust on (like in Venezuela) . Although reaching such places and getting adoption is going to be difficult.

24/ Note to myself: market inefficiencies should be solved via market mechanisms (and not central institutions)

25/ Now for the main reason I went from India to Germany: listening to @Snowden . Here are some gems: a) people who make laws never imagine how others may end up interpreting and applying it ; b) we must know what we as humans want (only then can we make tech work towards it)

26/ @Snowden : even good politicians do horrible things in the political system because it’s the system that has a life of its own. E.g. under Obama’s presidency, drone strikes increased .

27/ @Snowden : the benefit of smart contracts is that you can define laws precisely. In reality, people exploit loopholes and underspecification in laws for their goals. If such laws are encoded in code, doing that would be impossible.

28/ @Snowden : Blockchains unlocks and enables new human abilities (such as trusting anyone, even geographically distant). However, every human capability (not just tech) will be abused.

29/ @Snowden : tools and capabilities multiply human potential (both good and bad). The case for unfettered progress in new tech depends on whether we believe humans are generally good or generally bad. Do you? (I do).

30/ @valkenburgh asked @Snowden whether people who architect really complicated cryptographic systems get a sort of godlike power (where they can even leave backdoors in their open source projects because nobody else understands the tech as well as they do).

31/ @Snowden said: we’re already in a world where you can’t compete with technocractic elites but that’s okay because we’d rather have a battle for brains than a battle for dollars.

32/ @albertwenger talked about how privacy is increasingly at odds with technology progress. He said as technology progresses there are more ways to destroy than to create , so if anyone can 3D print an AK-47 in their basement, do we want privacy for them or we want to detect and stop those acts?

33/ @albertwenger ‘s alternatives to privacy: a) economic freedom (universal basic income to everyone); b) informational freedom ( all data is default public, but signed by respective individuals ). He urged to campaign to the government to make all its data public.

Some of the cryptokittens have sold for $100k+

34/ Lastly, @dete73 and @mik_naayem creators of Cryptokitties said they ‘ cryptokitties were created to satisfied cryptocuriosity ‘. Many people became faimilar and got their first cryptocurrency because of cryptokitties so they’ve been pretty successful with their project! (BTW – all art is hand drawn).

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Have an opinion on this essay? You can send your feedback on email to me.

I attended Blockstack Berlin event yesterday and here are my notes. In case you’re not very familiar with the cryptocurrencies or blockchain space, I recommend going through my reading list on bitcoin and ethereum first. The Agenda What attracted me to travel from Pune, India to Berlin, Germany was the impressive list of speakers. I… Read More

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over 1 year ago
over 1 year ago
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Bitcoin's value beyond hype - Inverted Passion

A product or a service creates value when it solves a human need. When Amazon was founded, it was a lifesaver for book lovers in remote places where they didn’t have good bookstores. People of the world allowed Jeff Bezos to become rich because he made their life simpler. We happily exchange money for services when it enables us to make our lives better. Librarians help others but scientists help themselves. Guess who makes more money? .

Just like Amazon solves a real-world need, so does Bitcoin . (Of course, like Amazon stock, people speculate on Bitcoin’s price as well.) What needs does bitcoin solve for? The answer to that is long-winded. The network effects and feedback loops in bitcoin ecosystem make teasing out the value question really difficult, but I’ll try doing that here.

My current interpretation of bitcoin’s real-world value takes three different views. In practice, it provides a mix of all three but the degree to which it performs this function is hard to say (and that’s what makes this space so exciting).

Bitcoin as gold

Many people work hard today so they or their children can enjoy a better life tomorrow . To enjoy benefits of their labor in future, people seek storage mechanisms that durably store value for a long time. Storing your savings in cash is a bad idea because inflation makes them decrease in value over a period of time (For example, if INR 10 gets me one cup of coffee today, it may require INR 500 in 10 years). Storing value in stock comes with risk – what if the company didn’t exist in future? You could store it in government bonds (which is a popular choice) but that’s also risky – what if the government defaults?

Gold makes an excellent choice for a store of value because it’s scarce and expensive to mine. One key property that’s desired out of a store of value is resistance to inflation and minimal risk of losing value. Gold has performed these two jobs really well throughout history and it has an advantage over bitcoin that humans cannot simply create more gold, while with bitcoins humans can simply fork and start a new cryptocurrency. However, Bitcoin has an advantage over gold because you are not required to physically store and protect it, unlike gold . Plus, you can buy really small units of bitcoin which may not be possible with gold.

If you believe Bitcoin is a store of value, you should NOT expect to make money from it because you’re using it to store money earned into it. People do not usually buy gold to make money, they buy it to store money. The only people who make money buying or selling is jewelers but they make money by selling their trust that it’s pure or their designer work. Gold, in itself, is a commodity.

Bitcoin as payments network

Another way to look at bitcoin is to focus on its network which allows permissionless, cross-border transfers of money. Through this lens, bitcoin’s direct competitors will be illegal money laundering services and indirect competitors will be Visa / international banks.

Bitcoin as a payments network should give you returns because it’s used to give a service to a human whose other options were either costly, worse or unavailable. As more people get attracted to bitcoin over money laundering services or Visa, they will be willing to offer a similar commission to what competitors charge (2-3% for credit cards or up to 10% for money laundering). And that’s how bitcoin network will make profits. If you hold a bitcoin, you are essentially a shareholder in payments network as the usage of bitcoin network increases the value of the bitcoin token and you benefit from that appreciation.

If you believe Bitcoin is a payments network, you are very much like a Visa shareholder, expecting bitcoin’s price appreciation in tune with how competitive bitcoin’s offering is as compared to its competitors.

Bitcoin as currency

I find it funny when people say they’ve invested in a currency. You get paid in a currency or you trade in a currency, but rarely do you invest in a currency. Currency is a unit of value. Sitting idle, it does no economically useful work and you shouldn’t expect to hold a currency to give you massive returns. Returns on a currency aren’t generated until someone purchases it from you at a premium.

Currencies do change rates against each other and one can make a case that by holding a currency, you’re betting on demand of that nation’s products (so people would want to purchase forex from you to pay for those products). If you were to go with this train of thought, by holding bitcoin as a currency, you’re essentially in a commodity business . When customers come to you to purchase bitcoins, a competitor can come along and offer them bitcoin at a cheaper rate. Making profits in a commodity business is hard – competition eats away all your margins .

So if you believe Bitcoin is a currency, do not expect returns from it. As a currency, it is a commodity and you will get commodity-like returns from it.

So, which lens is the right lens?

tweet to me. I’d love to learn from your experience.

Thanks Roby for reviewing an early draft of this post.

Follow @paraschopra

Have an opinion on this essay? You can send your feedback on email to me.

A product or a service creates value when it solves a human need. When Amazon was founded, it was a lifesaver for book lovers in remote places where they didn’t have good bookstores. People of the world allowed Jeff Bezos to become rich because he made their life simpler. We happily exchange money for services… Read More

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over 1 year ago