Bitcoin as legal tender

Over the past few weeks, a significant number of countries have become crypto-friendly. More so, in Latin America and Africa than in the western world. The whole macro-economic environment of these countries has so far been dependent on oil or on loans provided by the International Monetary Fund, or international aid. Most of such international aid and/or loans come with riders that provide access to the nations natural or human resources or affect soverignity in some way.

El Salvador, a small country with a 6.5 million population, recently became the first country to make Bitcoin legal tender. This has been claimed and cited by certain Bitcoiners as a watershed movement where Bitcoin moved from a fringe asset used to hold assets – to the mainstream. The case of El Salvador is unique, because of two factors – the country has been ravaged by decades of civil war(s) and mutinies against the rulers. While the rest of the world embraced globalization So much of economic damage has happened in that country that they do not even possess mints to print sovereign currency. That country had the US Dollar as their only national currency till this point. This meant that the Federal Bank in the United States controlled all the money supply within El Salvador. Governments control societies, through the control of money supply…and being dependent on a foreign country for monetary policy (supply) meant the country was not entirely Free.

Now with Bitcoin, being the second only legal tender after the US Dollar, El Salvador has taken a path that is unique. One thing is for sure – El Salvador cannot print their problems away – like is done in so many countries with a flexible monetary policy, wherein governments can choose to print and circulate money to prevent short-term credit crunches, business loss, etc. Below I highlight a few challenges that can accompany adoption at the socio-economic level within El Salvadore. I also highlight the benefits that can accompany adoption of Bitcoin as a legal tender.

A few challenges that can accompany such adoption are as follows:
1. Political and Lending Challenges:The macro-economic resistance from international lenders.
2. Adoption Challenges:The resistance from within the country where users who are unbanked find it difficult to adopt the technology either via smartphone-based wallets or through desktop-based wallets.
3. Legacy Challenges: The difficulties to migrate legacy infrastructure to be able to access and use cryptocurrencies for common usage.
4. Printing away Problems: The inability to print away money during times where regular business (and commerce) is affected, will cause significant and rampant inflationary situations for prices of common commodities unless governments enact price control and anti-hoarding measures.
5. Managing Volatility : international commerce and banking systems will have to leverage against Bitcoin price fluctuation when Bitcoin demand falls and increases in global markets (or when coordinated mainstream media attacks) happen for bitcoin driving down prices.
6. Money Laundering protections, anti-scamming protections and emphasis on cybersecurity : It is important to note that El Salvadore should lead the world in what can become a successful model for other non-pariah states and nations to adopt, when their own financial systems and monetary systems have been decimated by global markets. For this to happen, user(s) from El Salvadore should be protected from or should be answerable to money laundering laws and stringent cybersecurity norms that prevent both the misuse of cryptocurrencies, and, of resources that are used to hold, store and transact with cryptocurrencies. The cryptoworld is full of scams¬† of all kinds from fake ICO’s to money skimming schemes, to every possible illegal activity under anonymity. strong regulation that can penalize both perpetrators and protect those who have been affected, is the need for the hour.

These macro-economic  and legal challenges should be handled by policymakers, with significant experience and expertise in a timely fashion -using rigorous economic and policy-based modeling. If there is a lack in rigor and/or policy awareness, and there is a delay in implementing/modifying legal clauses to suite the new conditions that persist, then cryptocurrency adoption would cause more troubles than otherwise. 

That being said there are significant advantages to adopt Bitcoin as a legal tender.
1. De-clutching from another country’s monetary system – in this case, US federal reserve’s monetary policy, sort of giving the country incentives to use their own bitcoin.

2. Increase in Networth for the country. If Bitcoin’s price grows as has done over the past 10 years, El Salvadorians could see a sudden increase in their networth, and as a nation could progress toward increasing GDP, GNP and average networth of each citizen.

3. Forcing infrastructure growth, network connectivity, and the digital economy. Now, all businesses however remote they are – will be forced to be connected to the internet. India accomplished a lot with its Railway system wherein the country grew its road network, electric connectivity, water supply, bridge construction, and such throughout the length and breadth of a vast country on the backbone of its Railways. In addition, the railways employ more than 3 million people and is one of the largest service providers for the logistics and supply chain in India. This is not to mention e-commerce, payment gateway advancements, prevention of fraud, etc. in the Railways. El Salvador’s bitcoin adoption will do the same – on the digital infrastructure side. internet companies, service providers, electricity providers, and allied service providers will be forced to connect the remotest corners of El-Salvadore, creating huge amounts of demand and supply for these services. Overall, in the next few years with this economic model we might see the whole of the country become internet-enabled, with every citizen understanding and creating unique applications for their own use.

4. Human Capital and Knowledge Work increase. The Bitcoin beach movement created to accomplish the true potential of Bitcoin – enables citizens of El-Salvadore to leapfrog into the networking, telecommunication, and fintech revolution. Already large mines powered by entirely green sources such as “Volcano” are being created in ElSalvadore. With China pulling the rug on all activities crypto -i.e., development, mining, exchanges, and transactions legally, a section of the miner(s), and their equipment will move to El Salvadore, creating not only an environment where Bitcoin is used for active commerce, but also for mining… The next generation of el Salvadorians (after the millennial generation i.e., the gen Z) will grow up knowing technology, using Fintech apps, fintech blockchains, writing code and programming money, to create an entirely sustainable ecosystem that is supported by open-source programming and knowledge.

It is the moment of reckoning for Bitcoin, the lightning network, and all other cryptocurrencies. If Bitcoin adoption becomes successful, the next natural steps for El Salvadore would be to let in stable-coins and technologies such as Ethereum, etc.That being said, if this decision to co-opt Bitcoin with the US dollar were to become successful, ElSalvadore -will leapfrog quickly into the first world, similar to what Singapore did during the period 1950-1980.






The Dow Jones Crypto Index

The year 2021 will possibly be noted as the year when the world recognizes mainstreaming of cryptocurrencies as the first possible type of blockchain based assets in markets. The signal from Dow jones a reputed industry standard for indices and a powerful market determinant – about launching a separate cryptocurrency index will possibly be a silver lining in the otherwise grey cloud. While the Dow Jones index is a critical factor, what remains to be seen is whether mainstream brokerages, traders and other financial actors like banks in the US will make crypto a part of their portfolio of products.

It is already known that major banks in Japan – an economy struggling from negative inflation- seems to have found solace in the growth of at least one financial asset I.e., cryptocurrency. The main Nomura holdings bank in Japan accepts cryptocurrency deposits directly and provides customers with dual accounts – one for cash or other assets and another for cryptocurrency based holdings.

One of the key factors that has been lacking till date in the cypto-space was an index from a reputed and established firms on Wall Street, that can be used for benchmarking existing asset portfolios. Of course, private indices did exist e.g., such as the index. The CCI30 was definitely one of the best indices that existed ever, but it was possibly inefficient as a baseline. The DJIA indexes 30 largest stocks by market capitalization.

Hopefully the mainstream banking and stock trading firms will pay heed to this sector. It is a known fact that most ultra HNIs, Family offices and others have invested in this sector. Many of those who used to condemn this sector as vapor ware as late as 2016 have now started accepting the value of this sector overall.

That being said, whenever regulations catch up globally to protect the assets of citizens by preventing fraudulent asset issuance, then blockchain based assets would be much sought after.

National Cryptocurrencies: Boon and Bane

cryptocurrency bitcoin ethereum ripple images together

Nation states such as China India US and Senegal have embarked on an agenda to either propose or start creating cryptocurrency infrastructure to replace existing “note” based infrastructure. Singapore, a trailblazing technical powerhouse is at the leading edge of implementing such technology through their well publicized Project Udin experiment. Such an initiative has several advantages:

  1. The robustness of a permissioned or permission less blockchain ecosystem is extremely well known and well understood. It is secure and extremely robust to all kinds of attacks on its cryptographic protocol.
  2. Dynamic monetary policies will enable governments and national financial institutions to accurately create, tweak and develop new forms of monetary policies that did not exist earlier.
  3. The cost of printing, regulating and preventing fake -or duplicate physical fiat currencies is reduced to 0 – since digital cryptocurrencies can never be duplicated and/or faked. The ledger validates with 100% surety.
  4. Problems such as double spending, money laundering, etc. are easily stoppable and recognizable.
  5. Governments, now need not necessarily introduce different fiat nominations and digital nominations and over a period of time, can wield significant control over the country’s money supply, flow and accounts which today – due to the percolation of physical fiat currency notes ¬†is very difficult to ascertain.
  6. Nevertheless, e-commerce and regular commerce will significantly become easy.

There are some disadvantages too for the national cryptocurrency system.

  1. the volume of cryptocurrencies needed will significantly be large – and as a result will need decades of developing a robust infrastructure to support both high cost and high speed of transactions.
  2. If national monetary systems become completely digitized over time then existing business models including those of currency notes, banking infrastructure i.e., money transfer systems, ATM networks, connection infrastructure among banks, ¬†that has existed over the past 100-150 years will have to be replaced in its entirety. Imagine if one just needs an internet connection and a digital wallet to access one’s account – what would be the need for a bank?
  3. Such national cryptocurrency systems will need to interoperate among different nation states since each nation state will want to build its own infrastructure.
  4. Lastly, monetary freedom of a nations citizens and people can completely disappear when central control of digital currencies happen.

Libra – and the monetization of network effects

Facebook Libra coin

Over the past few days, there has been a lot of buzz about Libra – Facebook’s version of a (stable)cryptocurrency and potentially a smart programming platform. While Libra is a brand new innovation and yet another blockchain with an extremely well-defined governance model, adoption and governance are not as straightforward as it seems. Below I highlight some of the features, use cases, and challenges that will be faced by an ecosystem like that of libra’s – including regulatory ones.

What is Libra?

Libra is a cryptocurrency proposed by Facebook going to launch in 2020. It is a stable coin with governance from corporate partners like Visa,eBay, Uber, Paypal, and Mastercard. The libra association is a governing body that open sources the libra blockchain and developer platform along with developing its own programming language called MOVE.

What will be the Use of Libra?

Libra is supposedly going to be the form of value transfer on Facebook’s network which includes the Facebook platform, facebook messenger, Instagram, and WhatsApp’s crypto-wallet Calibra. Libra’s use cases vary – firstly, from providing a user friendly way to transfer money between people using WhatsApp, to trade with other affiliate companies (or use as a currency on eBay, uber, PayPal, etc).. In addition, Facebook expects that its 2.38 billion people will somehow get to use Libra, while its value is stable – This onboarding of 2.38 billion people onto the ecosystem will suddenly bring the whole connected world- in direct touch with cryptocurrency through one of Facebook’s many services. This reach is truly the largest a cryptocurrency can expect in the world and will significantly increase volumes significantly on exchange markets because once people realize how easy it is to adopt or use libra then they will trade/participate on exchanges that support other cryptocurrencies too, cross chain innovation (e.g., multiple blockchains being able to interact among themselves), applications in other constrained environments too.

Bitcoin, Ethereum VS Libra.

Libra is a centralized permissioned blockchain network backed by real currency value in the form of currency and/or debt bonds from the stakeholders or partners. Bitcoin and Ethreum have their own value but Libra will depend on the currency value. Bitcoin is highly volatile but Libra will be a Low volatility stable coin – according to Facebook.
. Every large firm in the world will now be motivated to launch its own crypto e.g., United Lever, AT&T, Verizon, Sprint, etc… or join the Facebook Libra or one other crypto platform. In foreign countries like India – ridesharing firms such as Ola and e-commerce platforms such as Flipkart have their own rewards mechanism.


1) Government regulation on monetary equivalents or money will significantly challenge libra’s global adoption – since governments control all aspects of money within their boundaries. While Facebook has the monetary power to push through or lobby for regulation in all geographies, it will take time to really make it a globally adopted monetary equivalent. Secondly, Facebook’s push into cryptocurrency markets will overall be good for the entire crypto-ecosystem since regulation will now ease adoption of other cryptocurrencies as well. We have seen this with organized efforts from the

2) While Facebook has promised to back up libra with monetary equivalents – it has yet to be seen how this will be audited in each geography.

3) The low volatility coin hopefully does not lead to secondary markets where libra is traded and demand far outstrips supply.

4) The reach of libra is far greater than that of any other cryptocurrency – but, will libra now managed (and governed) by the libra organization, be able to replace all banking infrastructure globally.

Government regulation Vs Libra.

1. US, Maxine Waters, the chair of the House committee on financial services, said that Facebook should hold the Libra launch temporarily.
2. The current state of India cryptocurrency policy won’t allow Libra to launch in India.
3. China already banned crypto activities, Companies like Ali express and Tencent are not going to follow Facebook

Let’s wait and watch this private digital currency future.

Coinbase-Earn Strategy

Earn Strategy – a Coinbase company, has created an innovative way to accomplish a)crypto- education, b)getting users on its network and c) seeding cryptocurrency networks through their strategy.

Imagine, listening to a video tutorial and getting paid for it, in cryptocurrencies, that can possibly be immediately traded for USD or equivalent.

Such a strategy accomplishes multiple goals: Firstly, it promotes the cryptocurrency usage amongst new users, since many will login with the goal of earning the cryptotokens. Secondly, it familiarizes users with a new cryptocurrency platform. Finally, these tokens start seeing increasing volumes when users who hold them, start trading them. Potentially when the doles are large enough, the market value of the token would increase since this creates a demand for these tokens (even though artificially).

Some news reports claim that Coinbase is spending about 100 million USD in association with the token foundations.

Smart contract platforms – Part 1

Smart Contract

This past year i.e. 2017 saw the nobel prize in economics go to Hart and Holmstrom for their work on contract theory. An old pre-print version of their thesis on the Theory of contracts is found here.

Their theory argues that contracts improve efficiency in transactions by setting rules for transactions, and, mechanisms by which rules are enforced. This basic understanding spawned several debates including ones about the boundaries of firms, and, saw entire industries such as software outsourcing, etc. being created.

Smart contracts build upon this theory by  automating exchanges of value, by validating rules, between two intervening parties for any transaction. Ethereum & Solidity programming have been predominant mechanisms by which contracts are written on software applications.

A unique token mechanism that provides for a global validation of the contract on the Blockchain has created a very unique set of applications. For example Augur is a smart contract based token that rewards participation in prediction markets.

Similarly, GNT is a smart contract based token that rewards individuals who lend their spare computing cycles. There are many more such contracts for automated payment based businesses, media platforms such as TRON, Block-chain software based EOS, Exchange token BNB used for transferring standalone value, etc…

A recent study found that off the top 100 most valuable coins by marketcapitalization, about 90% of them are smart contract based tokens built atop Ethereum.

Ethereum itself supports many forms of contractized tokens:
1.ERC-20 the most popular value holding token.

2.ERC223- a standardized token that validates and corrects problems with ERC 20.

3. ERC721- Digital asset standards on ethereum.

4. ERC827- A modification of ERC20 that allows transfer of value in-conjunction with Data.

A comparison of these different contracting mechanisms can be found here.

In the next few parts of this post we will look at the Waves platform, the Tron Platform and the NEO paltform all of which advance the smart contracts business.

Consensus algorithms on the blockchain

blockchain image

Distributed consensus based algorithms on crypto-networks have been created to ensure byzantine fault-tolerance. Many such algorithms have their sources in the Proof-of-work. Proof of work itself has evolved to different mechanisms e.g. ethhash, SHA-256, scrypt, equihash, cryptonode, and others.

A few other important ones are listed below:

1. Proof of stake (PoS) – going to be adopted by most leading blockchains
2. Delegated Proof of Stake (DPoS)- Adopted by STEEM wherein witness nodes randomly selected validate transactions and create blocks. The witnesses are voted by other members of the community.
3. Proof of activity (PoA)- a mixture of Proof of Work and Proof of stake
4. Federated Byzantine Agreement – Proof by consensus amongst nodes – Ripple and Stellar cryptocurrencies use this mode.
5. Proof of Space – Here, nodes concur about the amount of space or storage that has been used.
6. Proof of Authority – wherein a particular set of nodes randomly become validators, with the rule that no two subsequent blocks are not mined by the same node
7. Directed Acyclic Graphs ( DAGs ) – Examples include Pay-it-forward consensus where each node on the network is responsible for validating networks before forwarding it. Typically a centralized node also validates each transaction. e.g. IOTA uses this.
8. SPECTRE – Serailized Proof of work through Recursive elections: This proposal uses a combination of PoW and DAGs to accomplish scalability on the Bitcoin blockchain.


Each of these consensus algorithms have suffered from one or more drawbacks e.g. PoW is computationally expensive, PoS leads to No Stakes problem, FBA proponents disagree about the decentralized nature of the protocol, PoS claims resource usage in terms of space, etc… Overall, what we see is practical manifestations of years of research in computer science in fields as diverse as graph theory and theory of computation taking shape and supporting a large economic and financial shift in the way business problems are solved.

The Tragedy of the Commons in the blockchain


What is Tragedy of the Commons?

The tragedy of the commons is a well known economic problem governing any resource constrained system. In any socio-economic system, how would one prevent users of the system who behave in their own self- interests, so as to be detrimental to the common good of all users of the system? For example, consider a common grazing ground in a village where any cattle owner can graze. How would one prevent a few cattle owners from over-grazing, so that the grass can be proportionally shared amongst all cattle owners?

The Tragedy of the Commons in Blockchain

Economists such as Garret Hardin has suggested a) State ownership of the common good and b) dividing the common good into parcels that can be individually owned as solutions. However, with the blockchain when we have millions of nodes coordinating to attain a function e.g in the case of Bitcoin that of transaction validation, and, in case of Ethereum, validating the Turing completeness of the smart contract logic., both these approaches fall short. Of course, state ownership will completely defeat the purpose of the blockchain since the nodes and resources on which the system runs is global. Similarly, proportional assignment of things such as memory, processing power, etc. to all kinds of contracts running on the system would be very hard to ascertain and control, especially when we have smart contract application growing in double or triple digits.

More recently Elinor Olstrom, another economist proposed an approach of community controlled natural resources wherein the local communities assigned to protect and use certain natural resources also controlled the dissemination of the resource. This approach is again not suitable.

Mechanism to Prevent Tragedy of Commons

The solution being discussed in the Ethereum community is one where usage would be charged “proportional rents” as a mechanism to prevent the “tragedy of the commons”. In this approach¬†smart contracts or ethereum-progams that issue tokens¬†are charged a¬†rent¬†(fee) based on their usage of the network’s resources¬†e.g. memory¬†(data footprint) and/or processing power.¬† ¬†There are many pros and cons of this approach.¬† While renting can reduce fraudulent contracts (ICOs), they also introduce an entry barrier for large applications. Similarly, renting can lend itself to monopolization. Imagine a big application such as Facebook¬†or twitter that dominates the marketplace, then they could rent out all the memory and space available, thereby making it impossible or proportionally harder for other smaller businesses to host their applications or smart contracts on the blockchain.

We have to wait and watch, what approach is adopted by the developers of the crypto-ecosystem. However, this problem needs to be solved. There is no disincentive for people to stop writing data onto the Bitcoin or ethereum blockchain. Today Bitcoin’s blockchain bloat is caused by individual users writing and storing all kinds of data into the transaction record; some just for fun….. This leads to a huge size bloat for the Blockchain, and, definitely a wastage in processing power for validating transactions.

The role of crypto-tokens



Crypto-tokens are very important for the crypto-ecosystem. In addition to embodying an equity-like function, crypto-tokens also embody the following for the underlying business:
1) governance model – the model which dictates how many tokens are issued, and who decides the rules for business other than the founding team.
2) security model – the issuance of securities (or shares) of the underlying business based on rules for holding/selling/divesting/etc.
3) the revenue model  Рthe underlying mechanism by which the firm issuing the token earns revenues.
4) reward model – wherein participants on the network rewarded commensurate to their participation on the network

However, crypto-tokens are treated by many technologists and regulators as pure securities or financial instruments, that are akin to shares or bonds. Recently Facebook and Google decided to ban advertising for any new crypto-tokens that were issued, on account of too many tokens promising only “security” related functionality, without any functional revenue or governance model.

The fundamental difference between crypto-tokens and securities is that, though shares/bonds and other financial instruments can be encoded (or embodied) in a crypto-token, through smart contracts written atop ethereum (or other platforms), crypto-tokens can also embody a lot more. For example, they can indicate the true worth of the network as measured by storage available from all users ( e.g. as in FileCoin).

Initial Coin Offers

Whenever a new token is created, firms that create these tokens have to start seeding the network so as to generate a critical mass for the adoption of the token. Once the critical mass of adopters is reached, any token will automatically see increased subscriptions from regular retail users or other stake holders. All of this adoption process has been modeled according to the Bass model of diffusion of technology. What is new here is the process of creating the early adopters on token-based networks.

Airdropping is the new smart contract mechanism wherein networks of users are acquired by any new business. Fundamentally, users who subscribe to airdropping disclose their wallet addresses (bitcoin or ethereum) on a cloud-based exchange to the firm. In exchange for this wallet address, firms gift (airdrop) the new token into the user’s corresponding cloud exchange¬†wallet address. Air-dropping has many functionalities:
1) Firstly, ensuring that the subscriber is aware of the coin technology and risks associated with it, and are genuine users and not bots.

2) Ensuring that subscribers are on particular cloud exchanges – This brings increased adoption to that particular cloud exchange.

3) Seeding the network for usage so as to kickstart the initial governance model for the underlying platform.

Blockchain and Artificial Intelligence


OpenMined Platform

OpenMined is a platform that integrates the Blockchain and Artificial Intelligence

Their mission is to enable users to earn rewards by improving learning models. These users contribute to improving deep-learning (or other learning) models without access to the actual data (that is hidden through homo-morphic encryption).

Their mission statement is  obvious:

“With OpenMined, AI can be trained on data that it never has access to.”


This interesting shift in problem-solving would never have been possible without the blockchain.  A more detailed podcast from Andrew Trask on the Epicenter channel is given below:

Anyone who is interested in the intersection of these two domains should listen to this podcast.