171106 Trusted Distributed Networks

trusted bridgeYou’re walking along the street, minding your own business, when a stranger comes up to you and says, “I’ll give you $10,000 for your hat.”  You know the hat is worth at best $25.  In fact, there is no love lost were you to part with this hat which you’ve been meaning to replace for months.  But this man’s proposal is crazy.  Who would pay $10,000 for a cheap hat? And, were you to agree how would he pay you?

If he gave you $10,000 in cash, chances are much more likely the bills would be counterfeit than real. Besides, who wants to walk around with $10,000 in cash on them? A check wouldn’t be worth the paper it was written on.  By the time you cashed it this guy would be long gone.  You can accept Mastercard or Visa with your smartphone.  The fee, though, is 6% or $600.00 in this case.  His phone allows him to make a Paypal payment.   But you don’t have a Paypal account.  What do you do?

You use Bitcoin, of course. You flash your Bitcoin wallet address barcode which his Bitcoin wallet reads and sends you the $10,000 in Bitcoin.  You give him the hat.  An instantaneous, no-fee, anonymous transaction.  You don’t have to pay a processing fee, the transaction happens in the wink of an eye, he doesn’t have to know your name, you don’t have to know his, and it is completely trustworthy.  That’s the value of Bitcoin’s trusted, distributed network.

170930 Bitcoin’s Built-in Obsolescence​

Bitcoin uses miners to maintain and build its blockchain database.  ‘Miner’ is a bit of a misnomer.  They aren’t digging for buried bitcoin.  They are not even creating bitcoin or finding bitcoin.  They are getting paid in bitcoin from a pool set aside just for this task by the system’s designer. Only in the sense that the bitcoins they receive weren’t in the public marketplace before miners did their work, should miners be thought of as the prospecting type of miners.

Miners are artificially put to a task that takes a random but sufficiently long period of time that the task makes mining sort of a specialty.  One has to have the right training, sufficient capital investment and access to the right technology in order to do mining.  But the system allows anyone to do it and you will get paid — eventually.  It’s a random assignment sort of thing.  By artificial, I mean that the work is not accomplishing anything other than having a sufficiently large enough pool of miners for a random selection to be made, a lottery per se, to keep the system fair and honest.  Miners have to guess a randomly generated ‘key’ which can be thirty characters long.

I read somewhere that $147,000 would be the energy cost to run all bitcoin mining equipment for just an hour. That’s a huge amount of computing.  That seems like an awful waste of talent and energy just to keep things fair and honest.  Don’t get me wrong, fair and honest is worth all the money in the world.  Without fairness and honesty bitcoin would have no value and no future.  Fairness and honesty are what give people TRUST in bitcoin.  However, if what the miner is doing is creating a new database record with the first one hundred characters he processes and then must generate another billion-billion more characters just to win (it’s a lottery) a fee for the work, that is a terrible waste and inefficiency.  Sounds like the perfect opportunity for a Bitcoin 2.0. What do you think?

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.