DigitalSociety

Bitcoin markets and Tulip mania are very different

Tulip Mania

There has been many comparisons between Bitcoin’s recent price surge, and, the Tulip mania in Holland in the early 17th century. The argument made by some is that tulip bulb prices  between 1634 AD and 1637 AD grew in a short period of time, on, surging demand and scarcity of tulip bulbs to exceed the price of real estate. During the peak season one could purchase an entire real estate property for the equivalent of 1 tulip bulb. However, the moment price crashed, tulip prices became equivalent to that of a single onion. The crash in prices further led to significant bankruptcies, and, an economic downturn.

Tulip mania in Holland

Bitcoin vs. Tulips

Bitcoin – unlike Tulips – are a completely different kind of asset (though speculative on prices).

The tulip economy is based on the principle that tulips have a small shelf life, and, supply-demand sustains when individuals produce more quantity. Storage, transportation and exchange of tulips both nationally within a locality and outside takes significant physical effort. Bitcoin on the other hand is a global digital currency that can be instantaneously transferred from the buyer to the seller across both national and international borders seamlessly (using many mechanisms – including on paper).

Bitcoin can be exchanged to many different national currencies on exchanges. Unlike tulips that can theoretically be grown infinitely by individuals, mining or creating bitcoin is challenging and the supply is practically limited.

There is an entire ecosystem of software and application developers using Bitcoin and its blockchain for a wide variety of applications e.g. BITT is a company using Bitcoin for financial disintermediation, wirexapp and moneypolo for money transfers, Rsk-contracts on the Bitcoin blockchain, several hedge funds invest in Bitcoin for growing investor wealth, etc…

International nature of Bitcoin

Lastly the international nature of Bitcoin – specifically, when large economies and banking systems like those in Japan and Australia  accept this currency as a legal mode of payment, the network effects are huge. The price piggy backs on the large demand and limited supply of available bitcoin in the market.

Tulip bulbs would never have seen such growth, international adoption or functionality.

In perspective

The growth of BTC pales when compared to Amazon’s growth during the 1998-1999 epic boom in the market, and, the entire networth of all crytocurrencies today is still smaller than that of  the top 10 most valuable companies by market capitalization. Actually, the richest man on planet earth can buy allmost 90% of all cryptocurrencies in circulation and can own all traded bitcoin with about 50% of his wealth.

So much for the hype about price growth and predictions of the cycles of price rise for a global asset.

Also read: Do you think Bitcoin is future proof?

Bitcoin’s Quadratic Hashing Problem

There have been many debates around why Bitcoin needs to scale, and, why transaction lags happen. One of the most common reasons attributed to transaction lags is the size limit of 1MB  per block of data, that has been hard coded into the Bitcoin core source code.

Quadratic Hashing

Each block in the Blockchain contains a hash of all transactions since the previous block was created.  This artificial size of 1MB limits the number of transactions that can get into each new block. If a transaction cannot be mined in a particular block, then it will have to wait till the next block is created to be mined. Many exchanges, and, service providers such as ATMs or money exchangers wait for up to 6 blocks after the initial validation to make sure that the transaction was indeed validated.

For the crypto-enthusiasts – and those interested in the details, the following link gives you a technical description of what happens when users have multiple signatures and when 1 MB is insufficient in size for miners to incorporate all new transactions since the previous block. This problem otherwise known as quadratic hashing – indicates that the time complexity to validate new transactions increases quadratically (i.e. by the power off) with respect to the number of signatures needed to hash each transaction.

Solutions to Quadratic Hashing

Bitcoin Cash

Many solutions have been suggested including in the link above. Bitcoin cash also proposes a solution wherein they increase the block size significantly (8 times, from 1 MB to 8 MB), which they claim is sufficient to prevent transaction delays in mining new blocks.

Current Block Mining Time and Segwit2X

Source: http://data.bitcoinity.org

The following link provides a list of the average time taken to mine a new block. on the main blockchain. As of this writing, the average time to mine a new block is about 15 minutes (Meaning every hour 4 blocks are mined on the network.). Imagine the delay if you were to either sell or buy anything on the internet using Bitcoin. Segwit2X is the solution that most ecosystem participants have agreed to roll out soon. Once the rollout of Segwit2X  happens, we will see a significant reduction in transaction time across the bitcoin network. The countdown to Segwit2X is listed here.

 

BTC and BCC

This week, Bitcoin forks. About 99% of the network including the miners, exchanges, user nodes will continue to support the original BTC, which has agreed to roll in the Segwit2X patch for scaling. However, many of these exchanges have taken a stand that they will not support the BCC chain.

Bitcoin Cash

However, the rest will move onto BCC (Bitcoin Cash), an alternative currency supported by a few miners, and, developers. ( Read more about BCC at its website https://www.bitcoincash.org/. ) There are quite a few main exchanges like Kraken that are neutral to BCC.

This has happened earlier with Ethereum – wherein two coins were born i.e. ETH and ETC, after the DAO hack. ETC continues to trade on several exchanges such as on shapeshift.io, but major exchanges do not support ETC.

In equity markets, when a stock splits or additional shares are issued as a bonus, the value of the equity does go down to reflect this – so as to retain the market cap of the firm issuing shares. Usually, in the short term, this increases the market cap because of each new share, becomes more amenable to the buyer’s “willingness to pay”.

In Contrast, with respect to Bitcoin – this is very unlike a stock split (or a bonus declaration). This is the creation, of a brand new coin and blockchain off the original chain. Ideally, every BTC owner can- after August 1st access both his BTC and BCC balance. The futures market of BCC, already shows the price of BCC to be between 0.08 and 0.01 BTC.

Bitcoin’s Social Scalability

Social Scalability
This concept of “social scalability” and Bitcoin’s (the Blockchain’s) role in enabling social scalability is fascinating. Nick Szabo – the original creator of the smart contract – defines it as follows: Social scalability is the ability of an institution –- a relationship or shared endeavor, in which multiple people repeatedly participate, and featuring customs, rules, or other features which constrain or motivate participants’ behaviors — to overcome shortcomings in human minds and in the motivating or constraining aspects of said institution that limit who or how many can successfully participate.

Why Social Scalability matters?
What’s amazing about this idea is that social scalability (as evidenced and plausible with a blockchain based system) can eliminate dunbar’s limitation of 150.Repeated conversations featuring customs, rules and/or other features that eliminate constraints (both internal and external) are now possible. In the essay here Nick makes the case for social scalability and how blockchains play the empowering role in ensuring that human and social/behavioral limitations can be transcended. This transcending happens because of various limitations that are completely eliminated in such an institution powered by the blockchain. There is more about this here – where Naval Ravikanth, Tim Ferriss and Nick Szabo engage in an all enlightening podcast here.

Nick Szabo a polymath genius, designed Bitgold – using Hashcash – the earliest proof of work system, now common-place in the blockchain world for transaction validation. His thoughts on various things are phenomenal to read here .

Transaction Validation – Blockchain

Today and tomorrow at New York, the Consensus 2017 is happening. It is the world’s largest conference around any and every happening about the Blockchain.

Amongst the many panels, and talks happening I found this one from the CTO of Ripple. The talk from about 7:00 till 18:00 compares and contrasts 3 of the most innovative approaches to Transaction validation i.e. Proof of work, Proof of stake and Proof by consensus.

The interesting thing about the Proof by Consensus, is that it uses the wisdom of the crowd to concur on the validity of the transaction.

While I do think Proof by consensus is unique and “at the current moment” the fastest because of many reasons – over a period of time- once Ethereum moves onto the Proof of Stake method for validation, this is going to be the fastest mode of validation of the transaction – and – additionally going to reinforce the network value; since nodes will be incentivized to own more ether in order to obtain transaction validation power; and rewards thereoff.

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Cloud Mining

Cloud mining is a unique business.

HashFlare demo

Firms such as Genesis mining and Hashflare, have arrived at very unique business models never seen earlier in the internet infrastructure industry.

These firms raise capital from the public based on mining capacity measured in Tera Hashes (for Bitcoin) and Mega Hashes (for Ether, SCrypt, Dash, etc.). Then these companies return – pretty much on a daily basis – a share of the revenues( coins earned) by the pool back to the investor. The return on investment is issued in coins (E.g. ether, dash, BTC).

Investors can either withdraw daily returns on investment or reinvest back into their mining pool – at a transaction cost. The amount returned to the investor is in the range of 40% – 60% of the mined capacity.

This slows down as the network becomes larger, and, at some point where the cost of mining overtakes the transaction cost of the deposit to be made – mining stops and the returns on investment stops.

These models can scale significantly because there is neither a lower limit nor an upper limit on how many pools or Tera Hashes an investor can invest in.

Ripple – Cryptocurrency for Global payment settlements

Over the past week, Ripple has become the second largest cryptocurrency in terms of net market capitalization (even overtaking Ethereum). Ripple has only one purpose – i.e., to enable cross-border, cross-banking system payments in real-time with the least possible transaction cost. The video above from the Ripple team gives a bird’s eye view of the cryptocurrency. This is probably going to be the next big thing – in the international remittances market, as also in the B2B payments market. The B2B payments market is plagued by many problems, such as banking system interconnectivity issues, forex rate fluctuations,  risky banking payment networks amenable to exclusions,  frequent rule and regulation changes by governmental/banking systems, etc.. Ripple solves a lot of these system level problems – that was supposedly one of the original goals of Satoshi…

Ripple solves a lot of these system level problems – that was supposedly one of the original goals of Satoshi…The original purpose of bitcoin was to do just this – move money across geographies very fast, with certainty and with low transaction costs. However, due to blockchain size limitations, transaction validation time uncertainty, experiments such as “Bitcoin Unlimited”, etc. that tried and failed at solving these problems – banking systems such as Japan’s national bank are using Ripple instead.

As in the case of any new technology – whenever an existing technology – more so in information technology –  doesn’t meet a large market need, society will start seeing substitutes that will within a short time replicate and almost entirely solve this problem. However, in crypto-markets, there are many complementary functionalities that Bitcoin would serve other than international remittances or payments. Thus Bitcoin will survive for a long time – though over a period of the percentage share of its market control will erode. Already Ethereum + Ripple is approximately 60% of Bitcoin’s market capitalization. Both the mindshare of developers and businesses needing

Thus Bitcoin will survive for a long time – though over a period of the percentage share of its market control will erode. Already Ethereum + Ripple is approximately 60% of Bitcoin’s market capitalization. Both the mindshare of developers and businesses needing Blockchain based solutions are slowly moving away from Bitcoin.

What computers can’t do?

A few days back – Professor Dreyfus passed.

His work – in philosophy – at Berkeley and MIT dealt with the limits of artificial intelligence. Today it is accepted that Artificial Intelligence is the next revolution after analytics and computers such as this can substitute humankind in knowledge work and for physical labor.
Dreyfus wrote this seminal work titled “What computers cannot do?” based on his research about the limits of AI. Most of what we see in applications of neural networks and deep-learning are influenced by this work.

He followed it up – about 14 years later with another book titled “what computer still can’t do?”.

Fermat and Internet of People

Amongst, all innovations in the Blockchain space – be it ICO’, DAO’s or Steemit – I feel that Fermat’s protocol – aptly nicknamed the Internet of People (or IoP) is the most powerful. The Fermat project’s goals will enable silo-less firm’s to operate with contracts directly off the blockchain where employees will be compensated based on their contributions. Similarly, open social graphs – another goal of the project will make transactions and communications more efficient, realistic and significantly free of spam.

The following whitepaper by the Fermat team is fantastic to read.

Quoting straight from the whitepaper that has been influenced by Fermat’s last theorem I observe the following main contributions arising straight from theory.

“We foresee an entire ecosystem of powerful apps that:

● allow business to be done free of middlemen – ie. organizations without bosses and contracts that pay people according to their contributions.

● operate with both digital fiat and cryptocurrencies – i.e. compensations determined by the network of contracts

● are censorship resistant – i.e. not controlled by a single entity.

● treat content as digital assets for which authorship is fully compensated “ – i.e. shares rents earned from network effects with the creators of content….

The last one specifically is very important and powerful. What we know of today’s internet business models – such as Facebook , Snapchat , whatsapp have been created wherein users contribute significant content without any compensation on these platforms. The utility to the users of the platform is fungible on public markets, but the rents are earned by the firm and its shareholders.

The end user who actually creates the content is never compensated – and partakes only a small part of the utility by being satisfied with the ability to interact on the platform. This “free renting” will change with a blockchain based system – as proposed in Fermat. Already Steemit and Ethereum based systems are attempting this, but Blockchain ecosystems will start sharing the rents earned from content with actual content creators.

Imagine a company such as Snapchat going public and distributing the entire $19 Billion market capitalization amongst its users and shareholders based on a revenue / profit/ value sharing process, that has been agreed upon by all participants of the ecoSystem. – This is utopia, but there are many many loopholes in the implementation details that need to be implemented prior to Fermat taking wings.

Control of wealth

Reading an interesting blog post from Brian Armstrong about how digital currencies that are decentralized can offer more control to an individual over his own wealth – serving a better purpose than any nationally controlled currency.