Bitcoin

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Bitcoin is a cryptocurrency.  “Crypto” meaning encoded; “currency” meaning money.  It was invented by someone named Satoshi Nakamoto in 2009.  He was trying to solve the problems of digital currency such as using money online for shopping or banking.  His solution was so thoroughly thought out that one could say he gave birth to Bitcoin whole and fully formed.  In 2008 he published a white paper describing his invention, then formed a group of programmers who could create and follow his design. He then disappeared and no one knows who he is or where he is to this day.

Bitcoin is the result of something else Nakamoto created called a blockchain.  A blockchain is a distributed, decentralized network.  You all know what a centralized network is where every node in the network is directly attached to a central hub.  Our online banking systems work like that.  Every transaction goes through a central hub.  A decentralized network might have several hubs scattered throughout the network.  This would be what you would imagine our fire department looks like with stations scattered throughout the city.  A distributed, decentralized network is slightly different from these.  With a distributed, decentralized network there are no hubs.  Every intersection in the network between two or more users is considered a node.  Each node has several neighbors.  A blockchain is a distributed, decentralized network of nodes.  The Bitcoin blockchain has over 11,000 nodes at the moment.

In Nakamoto’s design for Bitcoin, each node would have a computer running the Bitcoin blockchain program.  The program would do several things.  It would each a ledger of every transaction made anywhere on the network at any time from the beginning of the network until the present.  It would communicate with its neighbors.  A typical node might have five or six neighbors.  Remember, this is all running on the Internet so a cyber-neighbor on the Internet does not mean it is a physical neighbor.  The nearest neighbor for a node in New York could be Chicago, London or South Australia.  The time for a signal to travel around the world is a small fraction of a second.

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When some at node A gives a Bitcoin to someone at node B that is called a transaction.  A transaction would be written as “A gives B one Bitcoin”.  The program at node A tells its neighbors this transaction.  Let’s say its nearest neighbor is node C.  The program at C receives the message “A gives B one Bitcoin” and records it as a new transaction and marks it as “Pending”. It then checks all previous transactions to see if A really has enough Bitcoin to give one Bitcoin to B.  If it finds the current amount of Bitcoin at A is sufficient to pay B one Bitcoin it sends a message back to A and B and says “Transaction confirmed” meaning that transaction can proceed.  Node A and B record the confirmation and write “Transaction pending.  1 confirmation”. C then goes on to tell all of its neighbors about this new transaction.  Node C tells D, E, F, G, and H.  They, in turn, check their ledgers to confirm that the transaction is authentic and allowable and send back confirmations if they do.  The process continues until Node A and B have 1000 confirmations.  At that point the transaction is considered authentic and allowed to proceed.  “Pending” status is changed to “Confirmed.” The 1000 confirmations make the network very, very difficult to cheat.  You would have to get 1000 strangers whom you do not know in advance to collude with you in order to cheat the system.

The transactions continue until there are a sufficient number of transactions to fill a block.  A block is about 1 kilobyte of data. When that happens the block is attached to the previous block to continue the chain. Now, Satoshi Nakamoto realized that he would have to get people to maintain all of these nodes, with a computer and a large disk drive at each one.  He created a very unique method for doing that.  These people would be called “miners.” A Bitcoin miner had 1) to be motivated to do the work, and 2) be chosen at random so that no one could take over the system for themselves.  His solution was this: he would pay them (in Bitcoin) for doing the work, and, he would create a very difficult mathematical problem for people to solve.  The problem was so difficult that even with a super-fast computer the miner would take about ten minutes to solve the problem.  And, the solution would be totally random so that even smart, fast computers did not have an advantage over anyone else doing the same thing.  The problem was to guess the password for the next blockchain.  This would be a random thirty-character password that took even the fastest computer about ten minutes to guess and looked something like this: 00RasOd2FsM5Gsdfd88up8pUs5QdWss:426SD38E1a.

The miner that guessed the password correctly was paid 12 bitcoin and had the privilege of creating the next block and communication that to the network.  Twelve (12) bitcoin today is worth over $100,000 so there are many people who want to do mining.   There are a total of 21,000,000 bitcoin in the system.  There will never be any more than that.  16,800,000 have already been distributed and there is enough bitcoin to pay miners for the next 100 years.  In the year 2108, the miners will have to charge fees to do the work.

Bitcoin is just one cryptocurrency.  Since it was created in 2008, there have been many more cryptocurrencies created.  To date, there are over 1500 cryptocurrencies recorded.  Not all will survive.  Each one was designed to do something different from the others.  There are currencies which are just for real estate.  There is one just for contracts.  There are several for online gaming, sports gambling, international finance and so one.  Their creators hope that they become popular and successful.  Some will.  Some won’t.  The most popular ones today are Bitcoin, Ethereum, Litecoin, and Ripple.  To see the Bitcoin network in action take a look at bitlisten.com. Since all transactions are public, at this URL the programmer created a bubble for each transaction and displays the size of the transaction in the bubble as they appear.

So what’s the big deal about Bitcoin?  Why all the fuss? How to get Bitcoin? How to keep Bitcoin safely? What are bitcoin wallets? These and many more questions are subjects for future discussion.  You can read more about Bitcoin at bitcoinARL.com.

 

Adoption Curves

 

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Adoption curves of new technology get ever steeper as communications, transportation, and knowledge improve though radio took just 15 years from the first commercial app to reach 85% of the population. The telephone took 90 years to do the same thing.

Bitcoin’s price chart looks more like the adoption curve of a new technology than a Wall Street bubble.  The chart above shows the speed at which new ideas take hold as more and more people begin to use a new technology.  When Marconi invented the radio in 1895 it took 25 years before the first commercial application appeared.  But it took just 15 years until the radio could be found in nearly 85% of American households, one of the fastest technology adoptions ever to be seen, before or since.  The telephone took 90 years to do the same thing.  However, in general, the chart above demonstrates that adoption of new technology happens at a faster and faster rate.

What we are witnessing since Bitcoin’s inception in 2009 is the steadily increasing adoption of cryptocurrency.  The cell phone started in 1983 but didn’t take off until seven or eight years later. By 2009, after Apple’s iPhone appeared on June 29, 2007, and several copycats in the two or three years that followed, nearly everyone purchased a smartphone of one kind or another in the following decade.  The Internet, another new technology, shot up just as quickly but without the eight-year incubation period.

While there are limits to the speed of adoption, for example manufacturing limits in the case of cell phones, Bitcoin promises to move even faster than these earlier technologies.   It will NOT take 15 years for the vast majority of people to start using cryptocurrency.  If what has happened to Bitcoin in 2017 with 700% growth is any indication, Bitcoin growth will exceed anything we have ever experienced.

 

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A typical adoption curve consists of innovators and early adopters, followed by mainstream folk and finally laggards as new technology is disseminated throughout the population.

Certainly, the money flowing into purchasing cryptocurrency at this time is speculative investors eager to make a quick buck.  However, this only accelerates the adoption curve, but does not change what is happening to a bubble.

 

 

 

 

171106 Frontier Days

Screen Shot 2017-10-18 at 8.45.27 PMWhat’s happening in the world of cryptocurrencies reminds me of the time when the Internet was just becoming known and getting popular.  People were scrambling to understand the Internet, to learn what a browser was, why you would call a web address a URL and other such new phenomena.  You could register a domain name for $9.95 and they were ALL available. “They would be worth good money some day,” someone told me.  Anyone could have registered macdonalds.com, coupon.com, or ford.com if they’d had a mind to but no one could think of what one would do with them, and it wasn’t clear that they would be worth money then.

When the use of blockchain technology and cryptocurrencies spread through our society, there will be tokens or cryptocurrencies for everything.  There’s a good chance that half of all the cryptocurrencies out there already will be valuable at some time in the near future.  We’re at the beginning of virtual money, and as currencies come into being, with a little imagination, all you have to do is put out your hand and grab some.

I founded and managed a small software company for many years that specialized in barcode.  I learned a great deal about barcode during those years.  Barcodes are like languages in that if you print a certain barcode type and your scanner is capable of reading that barcode type you will be understood.  The reasons for different types of barcodes are many.  One barcode type might be capable of being printed smaller than another.  There is a barcode for really bad printers.  There is a barcode just for pharmaceuticals.  There is a barcode that can hold two thousand characters.  There is a barcode just for military purposes.  So, too, are there now cryptocurrencies with special features and applications.  The list is already enormous and keeps growing.  We already need a dictionary of cryptocurrencies to understand the universe of virtual money.

There is no doubt some will be enormously popular and some will disappear.  The world is evolving quickly.  No doubt fortunes will be made and lost during this process.

170913 Hernando de Soto

HandshakeIn May 2015, ($3948) Hernando de Soto attended the first annual Blockchain Summit, hosted by British billionaire Richard Branson.  de Soto is the author of a 2000 non-fiction work entitled: The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. ISBN 0-465-01614-6 It’s a fascinating read.

He has been advocating the need to have secure documents that memorialize property.  He gives the example of a young couple, here in the U.S., buying property, putting as little as 20% down in cash and going to the bank to borrow the rest, 80%. The couple now has a mortgage, which allows them time and capital to spend on improving the property, among other pursuits they may have, such as starting a family or business.  In a sense, they created capital by taking that mortgage loan.

The bank feels safe and secure knowing the couple is the rightful deed-holders of that property.  Moreover, the bank knows they have the support of an excellent legal system, police department, judges, and lawyers should they have some entanglement with the loan.  Furthermore, they know there is a host of other systems in place that will help secure the property such as a fire department, utilities, and local government.  Trash will be collected and should the need arise, the couple has the support of a local hospital and doctor.  There is a Building Department to ensure good practices are followed, a health inspector, and government planning for roads and bridges.  All of this helps the bank to feel safe in making the loan.

Now, de Soto continues, imagine the same couple wanting to purchase a similar property of similar value in Guatemala.  They go to a bank and ask for a loan.  The bank says, “How can we be sure that you are the owners? Just yesterday a man who claims to own the same property came to see us.”  No loan.  Without all of the various systems in place that helps ensure the value of the property by insuring ownership and more importantly TRUST, that couple cannot leverage their cash to buy property or invest in a business or all of the other things capital makes possible.

Blockchain technology, what Bitcoin and other cryptocurrencies are based on, does just that.  It ensures trust between trading partners.  Even strangers are able to trust each other in a Bitcoin transaction.  It’s no wonder Branson invited de Soto to speak at the Blockchain conference.  de Soto understands how important TRUST is to capitalism.  Blockchain technology holds great promise for any system that requires trust.