Wednesday, December 6, 2017

Why Bitcoin Matters

Why Bitcoin Matters

Marc Andreessen, a co-founder of the venture capital firm Andreessen Horowitz.Credit Keith Bedford/Reuters
Editor’s note: Marc Andreessen’s venture capital firm, Andreessen Horowitz, has invested just under $50 million in Bitcoin-related start-ups. The firm is actively searching for more Bitcoin-based investment opportunities. He does not personally own more than a de minimis amount of Bitcoin.
A mysterious new technology emerges, seemingly out of nowhere, but actually the result of two decades of intense research and development by nearly anonymous researchers.
Political idealists project visions of liberation and revolution onto it; establishment elites heap contempt and scorn on it.
On the other hand, technologists – nerds – are transfixed by it. They see within it enormous potential and spend their nights and weekends tinkering with it.

Bitcoin Believers

While regulators debate the pros and cons of bitcoins, this volatile digital currency inspires the question: What makes money, money?
By Channon Hodge, David Gillen, Kimberly Moy and Aaron Byrd on Publish Date November 24, 2013.
Eventually mainstream products, companies and industries emerge to commercialize it; its effects become profound; and later, many people wonder why its powerful promise wasn’t more obvious from the start.
What technology am I talking about? Personal computers in 1975, the Internet in 1993, and – I believe – Bitcoin in 2014.

One can hardly accuse Bitcoin of being an uncovered topic, yet the gulf between what the press and many regular people believe Bitcoin is, and what a growing critical mass of technologists believe Bitcoin is, remains enormous. In this post, I will explain why Bitcoin has so many Silicon Valley programmers and entrepreneurs all lathered up, and what I think Bitcoin’s future potential is.

First, Bitcoin at its most fundamental level is a breakthrough in computer science – one that builds on 20 years of research into cryptographic currency, and 40 years of research in cryptography, by thousands of researchers around the world.

Bitcoin is the first practical solution to a longstanding problem in computer science called the Byzantine Generals Problem. To quote from the original paper defining the B.G.P.: “[Imagine] a group of generals of the Byzantine army camped with their troops around an enemy city. Communicating only by messenger, the generals must agree upon a common battle plan. However, one or more of them may be traitors who will try to confuse the others. The problem is to find an algorithm to ensure that the loyal generals will reach agreement.”

More generally, the B.G.P. poses the question of how to establish trust between otherwise unrelated parties over an untrusted network like the Internet.

The practical consequence of solving this problem is that Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.

What kinds of digital property might be transferred in this way? Think about digital signatures, digital contracts, digital keys (to physical locks, or to online lockers), digital ownership of physical assets such as cars and houses, digital stocks and bonds … and digital money.

All these are exchanged through a distributed network of trust that does not require or rely upon a central intermediary like a bank or broker. And all in a way where only the owner of an asset can send it, only the intended recipient can receive it, the asset can only exist in one place at a time, and everyone can validate transactions and ownership of all assets anytime they want.

How does this work?

Bitcoin is an Internet-wide distributed ledger. You buy into the ledger by purchasing one of a fixed number of slots, either with cash or by selling a product and service for Bitcoin. You sell out of the ledger by trading your Bitcoin to someone else who wants to buy into the ledger. Anyone in the world can buy into or sell out of the ledger any time they want – with no approval needed, and with no or very low fees. The Bitcoin “coins” themselves are simply slots in the ledger, analogous in some ways to seats on a stock exchange, except much more broadly applicable to real world transactions.

The Bitcoin ledger is a new kind of payment system. Anyone in the world can pay anyone else in the world any amount of value of Bitcoin by simply transferring ownership of the corresponding slot in the ledger. Put value in, transfer it, the recipient gets value out, no authorization required, and in many cases, no fees.

That last part is enormously important. Bitcoin is the first Internetwide payment system where transactions either happen with no fees or very low fees (down to fractions of pennies). Existing payment systems charge fees of about 2 to 3 percent – and that’s in the developed world. In lots of other places, there either are no modern payment systems or the rates are significantly higher. We’ll come back to that.

Bitcoin is a digital bearer instrument. It is a way to exchange money or assets between parties with no pre-existing trust: A string of numbers is sent over email or text message in the simplest case. The sender doesn’t need to know or trust the receiver or vice versa. Related, there are no chargebacks – this is the part that is literally like cash – if you have the money or the asset, you can pay with it; if you don’t, you can’t. This is brand new. This has never existed in digital form before.

Bitcoin is a digital currency, whose value is based directly on two things: use of the payment system today – volume and velocity of payments running through the ledger – and speculation on future use of the payment system. This is one part that is confusing people. It’s not as much that the Bitcoin currency has some arbitrary value and then people are trading with it; it’s more that people can trade with Bitcoin (anywhere, everywhere, with no fraud and no or very low fees) and as a result it has value.

It is perhaps true right at this moment that the value of Bitcoin currency is based more on speculation than actual payment volume, but it is equally true that that speculation is establishing a sufficiently high price for the currency that payments have become practically possible. The Bitcoin currency had to be worth something before it could bear any amount of real-world payment volume. This is the classic “chicken and egg” problem with new technology: new technology is not worth much until it’s worth a lot. And so the fact that Bitcoin has risen in value in part because of speculation is making the reality of its usefulness arrive much faster than it would have otherwise.

Critics of Bitcoin point to limited usage by ordinary consumers and merchants, but that same criticism was leveled against PCs and the Internet at the same stage. Every day, more and more consumers and merchants are buying, using and selling Bitcoin, all around the world. The overall numbers are still small, but they are growing quickly. And ease of use for all participants is rapidly increasing as Bitcoin tools and technologies are improved. Remember, it used to be technically challenging to even get on the Internet. Now it’s not.

The criticism that merchants will not accept Bitcoin because of its volatility is also incorrect. Bitcoin can be used entirely as a payment system; merchants do not need to hold any Bitcoin currency or be exposed to Bitcoin volatility at any time. Any consumer or merchant can trade in and out of Bitcoin and other currencies any time they want.

Why would any merchant – online or in the real world – want to accept Bitcoin as payment, given the currently small number of consumers who want to pay with it? My partner Chris Dixon recently gave this example:

“Let’s say you sell electronics online. Profit margins in those businesses are usually under 5 percent, which means conventional 2.5 percent payment fees consume half the margin. That’s money that could be reinvested in the business, passed back to consumers or taxed by the government. Of all of those choices, handing 2.5 percent to banks to move bits around the Internet is the worst possible choice. Another challenge merchants have with payments is accepting international payments. If you are wondering why your favorite product or service isn’t available in your country, the answer is often payments.”

In addition, merchants are highly attracted to Bitcoin because it eliminates the risk of credit card fraud. This is the form of fraud that motivates so many criminals to put so much work into stealing personal customer information and credit card numbers.

Since Bitcoin is a digital bearer instrument, the receiver of a payment does not get any information from the sender that can be used to steal money from the sender in the future, either by that merchant or by a criminal who steals that information from the merchant.

Credit card fraud is such a big deal for merchants, credit card processors and banks that online fraud detection systems are hair-trigger wired to stop transactions that look even slightly suspicious, whether or not they are actually fraudulent. As a result, many online merchants are forced to turn away 5 to 10 percent of incoming orders that they could take without fear if the customers were paying with Bitcoin, where such fraud would not be possible. Since these are orders that were coming in already, they are inherently the highest margin orders a merchant can get, and so being able to take them will drastically increase many merchants’ profit margins.

Bitcoin’s antifraud properties even extend into the physical world of retail stores and shoppers.
For example, with Bitcoin, the huge hack that recently stole 70 million consumers’ credit card information from the Target department store chain would not have been possible. Here’s how that would work:

You fill your cart and go to the checkout station like you do now. But instead of handing over your credit card to pay, you pull out your smartphone and take a snapshot of a QR code displayed by the cash register. The QR code contains all the information required for you to send Bitcoin to Target, including the amount. You click “Confirm” on your phone and the transaction is done (including converting dollars from your account into Bitcoin, if you did not own any Bitcoin).

Target is happy because it has the money in the form of Bitcoin, which it can immediately turn into dollars if it wants, and it paid no or very low payment processing fees; you are happy because there is no way for hackers to steal any of your personal information; and organized crime is unhappy. (Well, maybe criminals are still happy: They can try to steal money directly from poorly-secured merchant computer systems. But even if they succeed, consumers bear no risk of loss, fraud or identity theft.)
Finally, I’d like to address the claim made by some critics that Bitcoin is a haven for bad behavior, for criminals and terrorists to transfer money anonymously with impunity. This is a myth, fostered mostly by sensationalistic press coverage and an incomplete understanding of the technology. Much like email, which is quite traceable, Bitcoin is pseudonymous, not anonymous. Further, every transaction in the Bitcoin network is tracked and logged forever in the Bitcoin blockchain, or permanent record, available for all to see. As a result, Bitcoin is considerably easier for law enforcement to trace than cash, gold or diamonds.

What’s the future of Bitcoin?

Bitcoin is a classic network effect, a positive feedback loop. The more people who use Bitcoin, the more valuable Bitcoin is for everyone who uses it, and the higher the incentive for the next user to start using the technology. Bitcoin shares this network effect property with the telephone system, the web, and popular Internet services like eBay and Facebook.

In fact, Bitcoin is a four-sided network effect. There are four constituencies that participate in expanding the value of Bitcoin as a consequence of their own self-interested participation. Those constituencies are (1) consumers who pay with Bitcoin, (2) merchants who accept Bitcoin, (3) “miners” who run the computers that process and validate all the transactions and enable the distributed trust network to exist, and (4) developers and entrepreneurs who are building new products and services with and on top of Bitcoin.

All four sides of the network effect are playing a valuable part in expanding the value of the overall system, but the fourth is particularly important.

All over Silicon Valley and around the world, many thousands of programmers are using Bitcoin as a building block for a kaleidoscope of new product and service ideas that were not possible before. And at our venture capital firm, Andreessen Horowitz, we are seeing a rapidly increasing number of outstanding entrepreneurs – not a few with highly respected track records in the financial industry – building companies on top of Bitcoin.

For this reason alone, new challengers to Bitcoin face a hard uphill battle. If something is to displace Bitcoin now, it will have to have sizable improvements and it will have to happen quickly. Otherwise, this network effect will carry Bitcoin to dominance.

One immediately obvious and enormous area for Bitcoin-based innovation is international remittance. Every day, hundreds of millions of low-income people go to work in hard jobs in foreign countries to make money to send back to their families in their home countries – over $400 billion in total annually, according to the World Bank. Every day, banks and payment companies extract mind-boggling fees, up to 10 percent and sometimes even higher, to send this money.

Switching to Bitcoin, which charges no or very low fees, for these remittance payments will therefore raise the quality of life of migrant workers and their families significantly. In fact, it is hard to think of any one thing that would have a faster and more positive effect on so many people in the world’s poorest countries.

Moreover, Bitcoin generally can be a powerful force to bring a much larger number of people around the world into the modern economic system. Only about 20 countries around the world have what we would consider to be fully modern banking and payment systems; the other roughly 175 have a long way to go. As a result, many people in many countries are excluded from products and services that we in the West take for granted. Even Netflix, a completely virtual service, is only available in about 40 countries. Bitcoin, as a global payment system anyone can use from anywhere at any time, can be a powerful catalyst to extend the benefits of the modern economic system to virtually everyone on the planet.

And even here in the United States, a long-recognized problem is the extremely high fees that the “unbanked” — people without conventional bank accounts – pay for even basic financial services. Bitcoin can be used to go straight at that problem, by making it easy to offer extremely low-fee services to people outside of the traditional financial system.

A third fascinating use case for Bitcoin is micropayments, or ultrasmall payments. Micropayments have never been feasible, despite 20 years of attempts, because it is not cost effective to run small payments (think $1 and below, down to pennies or fractions of a penny) through the existing credit/debit and banking systems. The fee structure of those systems makes that nonviable.
All of a sudden, with Bitcoin, that’s trivially easy. Bitcoins have the nifty property of infinite divisibility: currently down to eight decimal places after the dot, but more in the future. So you can specify an arbitrarily small amount of money, like a thousandth of a penny, and send it to anyone in the world for free or near-free.

Think about content monetization, for example. One reason media businesses such as newspapers struggle to charge for content is because they need to charge either all (pay the entire subscription fee for all the content) or nothing (which then results in all those terrible banner ads everywhere on the web). All of a sudden, with Bitcoin, there is an economically viable way to charge arbitrarily small amounts of money per article, or per section, or per hour, or per video play, or per archive access, or per news alert.

Another potential use of Bitcoin micropayments is to fight spam. Future email systems and social networks could refuse to accept incoming messages unless they were accompanied with tiny amounts of Bitcoin – tiny enough to not matter to the sender, but large enough to deter spammers, who today can send uncounted billions of spam messages for free with impunity.

Finally, a fourth interesting use case is public payments. This idea first came to my attention in a news article a few months ago. A random spectator at a televised sports event held up a placard with a QR code and the text “Send me Bitcoin!” He received $25,000 in Bitcoin in the first 24 hours, all from people he had never met. This was the first time in history that you could see someone holding up a sign, in person or on TV or in a photo, and then send them money with two clicks on your smartphone: take the photo of the QR code on the sign, and click to send the money.
Think about the implications for protest movements. Today protesters want to get on TV so people learn about their cause. Tomorrow they’ll want to get on TV because that’s how they’ll raise money, by literally holding up signs that let people anywhere in the world who sympathize with them send them money on the spot. Bitcoin is a financial technology dream come true for even the most hardened anticapitalist political organizer.

The coming years will be a period of great drama and excitement revolving around this new technology.

For example, some prominent economists are deeply skeptical of Bitcoin, even though Ben S. Bernanke, formerly Federal Reserve chairman, recently wrote that digital currencies like Bitcoin “may hold long-term promise, particularly if they promote a faster, more secure and more efficient payment system.” And in 1999, the legendary economist Milton Friedman said: “One thing that’s missing but will soon be developed is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B without A knowing B or B knowing A – the way I can take a $20 bill and hand it over to you, and you may get that without knowing who I am.”

Economists who attack Bitcoin today might be correct, but I’m with Ben and Milton.

Further, there is no shortage of regulatory topics and issues that will have to be addressed, since almost no country’s regulatory framework for banking and payments anticipated a technology like Bitcoin.

But I hope that I have given you a sense of the enormous promise of Bitcoin. Far from a mere libertarian fairy tale or a simple Silicon Valley exercise in hype, Bitcoin offers a sweeping vista of opportunity to reimagine how the financial system can and should work in the Internet era, and a catalyst to reshape that system in ways that are more powerful for individuals and businesses alike.

The Best Articles to Learn about Bitcoin, Ethereum, and Cryptocurrency

The Best Articles to Learn about Bitcoin, Ethereum, and Cryptocurrency

in Crypto

About a month ago I decided to dive in and learn more about cryptocurrency since my investing in it was doing well. The challenge with Bitcoin and cryptocurrencies, though, is that it’s such a new and rapidly changing field that it’s hard to find any good books or established resources on the topics. You mostly have to read blog articles, original whitepapers, and Wikipedia pages and figure it out as you go.
Since it took me a while to filter through what was helpful and what wasn’t, I thought others might appreciate a list of the articles that were most helpful for me learning about Bitcoin, Ethereum, and other cryptocurrencies.
I’d recommend definitely reading everything in the “Getting Excited” and “Learning More About Bitcoin” sections, then picking and choosing from what sounds interesting in the rest of the article.

Getting Excited About Bitcoin & Crypto in General

Why Bitcoin Matters

By Marc Andreessen
This is the best intro to why you should be excited about Bitcoin. Andreessen Horowitz has been a major investor in Bitcoin related companies, and Marc Andreessen has been talking about its potential since the early days.
“One can hardly accuse Bitcoin of being an uncovered topic, yet the gulf between what the press and many regular people believe Bitcoin is, and what a growing critical mass of technologists believe Bitcoin is, remains enormous. In this post, I will explain why Bitcoin has so many Silicon Valley programmers and entrepreneurs all lathered up, and what I think Bitcoin’s future potential is.”

Bitcoin — The Internet of Money

By Naval Ravikant
Naval wrote this post back in 2014, explaining how Bitcoin was so much more than just an online currency. He walks through some of the potential applications of the technology, many of which have since started being worked on by startups.
“Most people are only familiar with (b)itcoin the electronic currency, but more important is (B)itcoin, with a capital B, the underlying protocol, which encapsulates and distributes the functions of contract law.”

How Digital Currency Will Change the World

By Brian Armstrong
Brian is the founder of Coinbase and wrote this article to explain how cryptocurrencies like Bitcoin could have a massive positive impact on global prosperity. The short version: as economic freedom increases, prosperity increases, and crypto has the potential to provide greater global economic freedom whether governments like it or not.
Economic freedom is one of the great meta-problems of our time (right up there with A.I., quantum computing, and cheap renewable energy). If we can create more economic freedom in the world, it will serve as a giant economic stimulus package for the world, accelerate innovation, reduce wars, make the poorest 10% better off, overthrow corrupt governments, and raise happiness.”

Learning More About Bitcoin

The Original Bitcoin Whitepaper

By Satoshi Nakamoto
Read it once, go read other crypto stuff, read it again… keep doing this until the whole document makes sense. It’ll take a while, but you’ll get there. This is the original whitepaper introducing and explaining Bitcoin, and there’s really nothing better out there to understand on the subject.
“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”

By reading this article, you’re mining bitcoins

By Ritchie S. King
This article helps to understand the blockchain and mining parts of Bitcoin, which in turn will help the white paper make more sense next time you go back to read it.
“What bitcoin miners actually do could be better described as competitive bookkeeping. Miners build and maintain a gigantic public ledger containing a record of every bitcoin transaction in history. Every time somebody wants to send bitcoins to somebody else, the transfer has to be validated by miners: They check the ledger to make sure the sender isn’t transferring money she doesn’t have.”

Coindesk Information

By Coindesk
For almost any other question you’d have about Bitcoin after reading the whitepaper, you can find a concise answer and explanation here. They explain everything in simple terms, and you may find yourself asking questions you didn’t know you should be asking.

Fat Protocols

By Joel Monegro
This was extremely helpful for helping me understand the app/protocol difference and why it’s so important in the case of bitcoin and blockchain tech. It also highlights why this is a fundamental shift in the architecture of the Internet and applications built on it, and why that matters. Must read.
“This relationship between protocols and applications is reversed in the blockchain application stack. Value concentrates at the shared protocol layer and only a fraction of that value is distributed along at the applications layer. It’s a stack with “fat” protocols and “thin” applications.”

The Fifth Protocol

By Naval Ravikant
Naval explains how coins can be used as a fifth protocol in machine to machine communication for the exchange of value, to weed out transactions and other demands on data that can be costly in huge quantities. It could be used to prevent Spam, DDOS attacks, etc. and even let machines operate autonomously among each other (such as a vending machine ordering its own restocks).
“Cryptocurrencies are electronic cash, and as such, will be used by electronic agents to exchange value, verify contracts, and track identity and reputation. All of a sudden, the computing resources spent by the Bitcoin miners doesn’t seem wasted – it seems efficient, given that it can be used for congestion control and routing of other network resources.”

Learning More About Ethereum

Ethereum is the second most discussed cryptocurrency right now, and the subject of many of the other articles in this series, especially as it relates to tokens.

A beginner’s guide to Ethereum

By Linda Xie
This intro from Linda at Coinbase gives you a quick overview of Ethereum and some of its exciting potential before you dig into the more meaty articles.
“With Ethereum, a piece of code could automatically transfer the home ownership to the buyer and the funds to the seller after a deal is agreed upon without needing a third party to execute on their behalf.”

The Original Ethereum Whitepaper

By The Ethereum Foundation
Like the Bitcoin whitepaper, you’ll have to keep re-reading it until you start to understand more of it, but the whitepaper is the best way to get to know Ethereum in addition to learning more about cryptocurrencies, blockchains, and smart contracts.
“What Ethereum intends to provide is a blockchain with a built-in fully fledged Turing-complete programming language that can be used to create “contracts” that can be used to encode arbitrary state transition functions, allowing users to create any of the systems described above, as well as many others that we have not yet imagined, simply by writing up the logic in a few lines of code.”

Ethereum in 25 Minutes

By Vitalik Buterin
This will be more approachable than the whitepaper when you’re first trying to understand Ethereum. Vitalik is a good speaker and explains Ethereum and its potential well, the only downside is that the camera crew failed to record the slides.

Visions, Part 1: The Value of Blockchain Technology

By Vitalik Buterin
This could also fit in the “getting excited” section, but Vitalik, the creator of Ethereum, outlines his vision for blockchain technology in general in a very easy to read, non-technical way.
“…we will likely discover that at some point we will hit an inflection point, where most instances of “blockchain for X” will be made not by blockchain enthusiasts looking for something useful to do, coming upon X, and trying to do it, but rather by X enthusiasts who look at blockchains and realize that they are a fairly useful tool for doing some part of X.”

Visions, Part 2: The Problem of Trust

By Vitalik Buterin
Part 2 of this series covers why trust is such a big issue, and how blockchains and Ethereum’s smart contracts can help move us to a world where trust isn’t such a big issue in business dealings.
Trust is a complicated thing. We all want, at least to some degree, to be able to live without it, and be confident that we will be able to achieve our goals without having to take the risk of someone else’s bad behavior – much like every farmer would love to have their crops blossom without having to worry about the weather and the sun. But economy requires cooperation, and cooperation requires dealing with people.”

Introducing Casper: The Friendly Ghost

By Vlad Zamfir
A big difference between Ethereum and Bitcoin, at least eventually, is Ethereum’s plan to use “proof of stake” instead of “proof of work.” This article explains what that might look like and why it matters.
“It is called Casper “the friendly ghost” because it is an adaptation of some of the principles of the GHOST (Greedy Heaviest-Observed Sub-Tree) protocol for proof-of-work consensus to proof-of-stake.”

Proof of Stake: How I Learned to Love Weak Subjectivity

By Vitalik Buterin
This article digs in more on the proof of stake model, why it matters, and why Ethereum is planning on implementing it.
“Proof of stake continues to be one of the most controversial discussions in the cryptocurrency space. Although the idea has many undeniable benefits, including efficiency, a larger security margin and future-proof immunity to hardware centralization concerns, proof of stake algorithms tend to be substantially more complex than proof of work-based alternatives, and there is a large amount of skepticism that proof of stake can work at all…”

Learning More About Appcoins, Tokens, etc.

You’ve probably seen some businesses using appcoins and tokens to raise money and create their own cryptocurrencies. These are about how that process works and the theory behind it.

The Bitcoin Model for Crowdfunding

By Naval Ravikant
Naval proposes a Bitcoin style crowdfunding model back in 2014 before the recent ICO craze. It wasn’t really being done back then, but the market has evolved fairly true to his predictions.
This is true crowdfunding – get funded by your users in proportion to their usage. Reward early adopters, network operators, and developers with upside.”

Blockchain Tokens and the dawn of the Decentralized Business Model

By Fred Ehrsam
Written two years after Naval’s post, Fred’s article on the decentralized business model will help you understand the potential for tokens more at the conceptual level, with examples from ones we’re seeing in the marketplace today.
“[Company equity] has been used by startups for years to attract employees to a young company, and now decentralized apps are using it to incentivize all potential users around the world to join the app early on.”

How to Raise Money on a Blockchain with a Token

By Fred Ehrsam
This is the followup to the previous article where Fred dives more into the how of raising money through token sales. It covers what kinds of businesses it makes sense to have a token for, and then how to create and sell those tokens.
Should we consider the token model? In short: if your project has a network effect, yes.”

Thoughts on Tokens

By Balaji Srinivasan
Balaji co-wrote the last article with Naval, and these are his thoughts three years later on the growing Token and ICO market. He covers some of the opportunities, challenges, and thoughts on where tokens might go from here.
“The most important takehome is that tokens are not equity, but are more similar to paid API keys. Nevertheless, they may represent a >1000X improvement in the time-to-liquidity and a >100X improvement in the size of the buyer base… This in turn opens up the space for funding new kinds of projects previously off-limits to venture capital, including open source protocols and projects with fast 2X return potential.”

The difference between App Coins and Protocol Tokens

By Will Warren
These terms get thrown around a lot, so this article was really helpful for understanding the difference between coins, app coins, protocol tokens, dApps, and all of the other token related lingo.
Each additional building block that is added to our communal tool set will accelerate innovation, leading to new applications for Ethereum smart contracts.”

Other Interesting Articles

This is a collection of papers and articles related to Bitcoin and crypto and the various other projects that I’ve found interesting and helpful, in no particular order.

Bit Gold

By Nick Szabo
Szabo proposed the idea of “Bit Gold” back in 2005, and it’s extremely similar to what eventually became Bitcoin, leading some people to speculate that he is the pseudonymous Satoshi Nakamoto who created Bitcoin. This paper outlines Nick’s idea of Bit Gold.
“Thus, it would be very nice if there were a protocol whereby unforgeably costly bits could be created online with minimal dependence on trusted third parties, and then securely stored, transferred, and assayed with similar minimal trust. Bit gold.”

The God Protocols

By Nick Szabo
This article provides some context on why the blockchain system for decentralized trust is so important, and how it compares to old third party mediated protocols. It was written long before Bitcoin was created (1996), and touches on some of the issues that Bitcoin and Ethereum have been created to solve.
If mutually confidential auditing ever becomes practical, we will be able to gain high confidence in the factuality of counterparties’ claims and reports without revealing identifying and other detailed information from the transactions underlying those reports.”

What is the Lightning Network and how can it help Bitcoin scale?

By Elizabeth Stark
Stark is one of the co-founders of Lightning, and she explains here in pretty simple language (impressive in any blockchain article) how it works and why it’s important.
“Imagine if every computer had to store every e-mail, to receive any. That’s how blockchains work. Lightning Network allows computers to make blockchain transactions, only storing the data they care about—their own money.”

The Company of the Future: DAO

By Dmitry Korzhik
This article goes over some of the potential and benefits of a DAO. It’s a good quick read if you’re not familiar with the concept already.
“The future of the organization is distributed, the DAO happened. Imagine an organization where bosses don’t exist as a definition and voices of all members are heard despite their position in the company. Furthermore, employees don’t exist as well but the company gains its market share and earns the profit.”

The bear case for crypto

By Preston Byrne
Preston is a legal tech entrepreneur who analyses the current ICO market from a legal / tech perspective, pointing out why it’s ripe for popping and some mechanisms for how that might happen.
The ICO bubble and its promise of cheap, quick gains is rightly the focus of attention for most folks at the moment. It is the promise of the greatest gains in the shortest time with the least effort. That bubble needs to pop before we can get down to business with the utility-driven applications of this technology. And pop it will, as surely as the sun rises in the morning.

Fiat Currency: What It Is and Why It’s Better Than a Gold Standard

By TMFVelvetHammer
A quick overview of Fiat currency (like the dollar) and, as you can guess, why it’s better than the Gold standard. Also some data on how gold hasn’t been a great investment historically which I found surprising.
“Currency is a tool of trade. People tend to hoard gold and silver when things are uncertain, and that’s harmful when it limits currency flows on a large scale. Removing the relationship between a currency and commodity doesn’t create “worthless money.”
Thank you to Taylor Pearson for writing “The Top 10 Cryptocurrency Resources for Non-Technical People,” Chris Dixon for his “Crypto token roundup,” and Nick Tomaino’s for his list of “Some Blockchain Reading.”

Monday, November 13, 2017

Bitcoin Crashes and Then Surges in Wild Weekend Action

Bitcoin Crashes and Then Surges in Wild Weekend Action

Updated on
  • Buyers return to market after cryptocurrency slid 15% Monday
  • Offshoot called bitcoin cash is luring users amid tech debate
Uber Approves SoftBank's Investment Offer
IMF's Lagarde Has Concerns Over China Debt
CBA Europe’s Peter Kinsella and Bloomberg’s Ed Robinson examine the issues behind the sudden decline in bitcoin.
Bitcoin is proving that investing in digital currencies isn’t for the faint of heart.
After plunging as much as 29 percent from a record high following the cancellation of a technology upgrade on Nov. 8, the largest cryptocurrency came roaring back in early trading Monday before fluctuating between gains and losses.
“Crypto trading is not for the novice investor,” said John Spallanzani, chief macro strategist at GFI Securities LLC in New York.
While multiple reasons are being cited for the price volatility, one of the more viable is that some investors are switching to alternative coins. Bitcoin cash, an offshoot of bitcoin that includes many of the technical upgrades being debated by developers, has more than doubled in the same period.
“We have seen similar steep falls in bitcoin throughout the year -- specifically in June and September -- but every time a considerable decline occurs, new investors jump in to experience the new asset class,” Hussein Sayed, chief market strategist at ForexTime Ltd., a currency broker that uses the brand FXTM, wrote in a note Monday.
While markets had been focusing on bitcoin’s more than 500 percent surge this year, bitcoin cash was gaining popularity because of its larger block size. That’s a characteristic that makes transactions cheaper and faster than the original.
When a faction of the cryptocurrency community canceled plans to increase bitcoin’s block size on Wednesday -- a move that would have created another offshoot -- some supporters of bigger blocks rallied around bitcoin cash.
The resulting volatility has been extreme even by bitcoin’s wild standards and comes amid growing interest in cryptocurrencies among regulators, banks and fund managers. While skeptics have called its rapid advance a bubble, the asset has become too big for many on Wall Street to ignore. Even after shrinking as much as $38 billion since Nov. 8, bitcoin boasts a market value of about $110 billion.
Supporters of bitcoin’s technology upgrade “are now switching support to bitcoin cash,” said Mike Kayamori, head of Tokyo-based Quoine, the world’s second most-active bitcoin exchange over the past day. “There’s a panic about what’s happening. People shouldn’t panic. Just hold on to both coins until we see how it plays out.”
The cancellation of last week’s bitcoin upgrade has left users to choose between the two versions of the cryptocurrency. On one side is the original bitcoin, powered by so-called SegWit technology, which aims to improve its performance by moving unessential data off of its underlying blockchain. On the other side is bitcoin cash, which allows its blockchain to handle eight times as much data as the original.
Proponents of bitcoin cash believe their approach is simpler and closer to the original goal of bitcoin, which was described primarily as a payment system in its white paper. Supporters of the original bitcoin say that vision is too limited, and that by improving the blockchain with SegWit technology, bitcoin can become a new digital-asset class that not only supports payments but countless other functions.

Upgrade Called Off

While bitcoin cash has been around for months, it saw limited support as the community awaited last week’s technology upgrade for the original bitcoin, which promised similar features. Now that the upgrade has been called off, businesses that use the cryptocurrency primarily as a payment method are expected to increase adoption of bitcoin cash.
While bitcoin cash surged over the weekend, it hasn’t been a straight line up. The cryptocurrency was trading at $1,300 at 9:47 a.m. in New York, down from a high of about $2,478 on Sunday, prices show.
Bitcoin has been similarly volatile; it initially rose after news that it would avoid another split, but the gains were short-lived. Its plunge earlier Monday to as low as $5,605 compares with an intraday record $7,882 on Nov. 8.
Volume across bitcoin exchanges jumped to 436,021 bitcoins on Sunday, the highest since September, data show. BitMEX, an exchange for cryptocurrency derivatives that allows shorting, saw record activity on Sunday, Chief Executive Officer Arthur Hayes said.
— With assistance by Natasha Doff

Thursday, April 20, 2017

Massachusetts Investment Advisor Registration Requirements

Massachusetts Investment Advisor Registration Requirements

State of Massachusetts Investment Advisor Registration Facts & Figures

While there are some exceptions, in general, investment advisors with less than $100 million in assets under management (AUM) that are located in Massachusetts, have more than 5 clients in Massachusetts, or actively solicit in Massachusetts must register with the State of Massachusetts as a Registered Investment Advisor (RIA).
  2015 Total 2015 State Rank
Number of RIAs 1,353 4
Population 6,398,743 13
RIA Population Density (residents per RIA) 4,729 2
RIA Geographic Density (sq. land miles per RIA) 6 2

Note: RIA firm data courtesy of Meridian-IQ and includes both SEC and state-registered investment advisory firms that are based in Massachusetts as of May 2015. Population and geographic data is courtesy of the United States Census Bureau as of the 2010 Census.

Massachusetts Investment Advisor Registration Process

Investment Advisor Registration Financial Statement Requirements:
  • RIAs with discretion must submit a security bond.
Investment Advisor Representative (IAR) Registration Requirements:
  • Licensing Requirements: Series 65, Series 66 and Series 7 combined, or CFP, CFA, CIC, ChFC, PFS.
  • Each investment advisor representative must submit the form U-4 and ADV Part 2B.
General Firm Registration Requirements
  • Payment of all State of Massachusetts registration filing fees
  • FINRA Entitlement paperwork
    • In order to file a registered investment adviser application with the state of Massachusetts, one must first apply to the Financial Industry Regulatory Authority (FINRA) for an account (Entitlement) to their WebCRD/IARD on-line system (the web application for the registration of RIA’s and their representatives). While RIA’s are in no way regulated or supervised by FINRA, the state of Massachusetts uses FINRA’s WebCRD/IARD system to process applications.
  • Form ADV 1 (online)
    • The Form ADV Part 1 is the on-line component to your Firm’s registration documentation. Note: The Form ADV Part 1 primarily discloses information about the FIRM. Individual information is primarily disclosed in the Form U4 as detailed below. The Form ADV Part 1 is also the vehicle to upload your Firm’s Form ADV Part 2A (Firm Brochure) and Form ADV Part 2B’s (Brochure Supplements).
  • Form ADV 2A (paper and online)
    • The Form ADV Part 2A acts as your Firm’s Brochure. It is a narrative description of your services, fees, disciplinary disclosures, as well as several other Firm details. The Form ADV Part 2A must be provided to all Clients and Prospective Clients. The state of Massachusetts requires that the ADV Form 2A be written in “plain English” and easily understood by your clients.
  • Form ADV 2B (paper and online)
    • The Form ADV 2B is the paper brochure that Investment Adviser Representatives must (in most cases) provide to clients. This form contains employment, educational, conflict of interest, and disciplinary information. Generally, Executive Officers, any person generating investment advice provided to clients, and any representative advising clients must have a Form ADV Part 2B.
  • Client Advisory Contract
    • Client Advisory Contract including an investment policy statement that meets the appropriate regulatory authority standards for client advisory contracts in Massachusetts state.
  • Policies and Procedures Manual
    • The firm’s Policies and Procedures manual is the guiding document that your firm will use to maintain and enforce your firm’s internal policies on all aspects of your business from the handling of client complaints to the training of new Investment Adviser Representatives. It also houses your firm’s Business Continuity Plan, Information Security Policy, Anti-money Laundering Policy, and Anti-insider Trading Policy.
  • Privacy Policy Statement
    • The Firm’s Privacy Policy Statement must be provided to all clients at the beginning of the client relationship and annually thereafter. It must disclose how the firm stores, and handles and disseminates client information. Privacy Policy Statements are built to your firm’s specifications and designed to meet State of Massachusetts compliance requirements.
  • Code of Ethics
    • Code of Ethics filing ensuring that you meet the standards of the State of Massachusetts.

Tuesday, January 24, 2017

Money-Fund Overhaul Gives Federal Home Loan Banks New Prominence

Money-Fund Overhaul Gives Federal Home Loan Banks New Prominence

A rise in debt issuance by the FHLBs lends fresh support to a U.S. mortgage market in flux

By Katy Burne
The Wall Street Journal
Jan. 23, 2017 7:30 a.m. ET
The Federal Home Loan Banks are emerging as one of the unexpected beneficiaries of last year’s money-market fund overhaul, lending fresh support to a U.S. mortgage market in flux as interest rates creep higher.
Money funds that invest in government debt are fueling a rise in debt issuance by the FHLBs, independently chartered financial institutions created by Congress 80 years ago to bolster U.S. housing finance. The increase is a boon to FHLB member banks like J.P. Morgan Chase & Co. and Wells Fargo & Co., which borrow from the FHLBs for a range of needs including to fund mortgage lending, and is the latest ripple from a series of regulatory changes at the heart of financial markets.
The home loan banks’ outstanding debt rose nearly 10% from a year earlier in 2016, finishing the year at $989.3 billion, its highest level since 2009. About 30% of their debt is now floating-rate debt, the most since at least 2002, and a nod to growing money-market fund appetite for short-term government debt.
Each of the 11 regional home loan banks lends to local members such as banks and other financial institutions, secured by the mortgage loans or bonds posted by the borrowers. Because the FHLBs were created by Congress, money funds often consider their debt to be the next best thing to government debt.
The lending surge isn’t the first turn in the spotlight for the FHLBs, which are headquartered in cities as diverse as Dallas, New York, Pittsburgh and Topeka, Kan. In the 2008 crisis, the Federal Reserve called FHLBs the “lender of next-to-last resort” after the Fed’s discount window, citing the home loan banks’ role in helping lenders survive the financial meltdown.

Home Grown

Federal Home Loan Banks have increased their outstanding borrowings, and the component that is floating-rate debt, to help fund new loans to banks.
Total debt outstanding
Top Borrowers from FHLBs*

Loans outstanding to member banks†
FHLB debt eligible to be bought by U.S. money funds‡
*through Sept. 30, 2016 †as of year end

‡Bonds with 397 or fewer days to maturity
Sources: FHLB Office of Finance; Inside Mortgage Finance (top banks) THE WALL STREET JOURNAL.
Wall Street Journal
It is the latest sign of how far-reaching the 2016 money-market overhaul has been. That effort, overseen by the Securities and Exchange Commission, aimed to prevent a repeat of the 2008 run on a large money-market fund that lost money on debt holdings issued by Lehman Brothers Holdings Inc.
The new regulations required so-called prime money-market funds holding mostly corporate securities to report daily share prices that fluctuate with changes in their portfolios, rather than fixed share values.
Over the past year, this prompted many investors to shift about $1 trillion from prime funds into government-debt funds that aren’t subject to the same restrictions. Funds flowed out of prime funds that once were the leading purchasers of bank commercial paper and certificates of deposit and into government-only funds.
Now the FHLBs, helped by the appetite from government funds, are lending money to banks that have seen their access to prime-fund cash curtailed.
“FHLBs have always been a source of attractive financing,” said Mark Cabana, interest-rate strategist at Bank of America Merrill Lynch. With the money fund overhaul having limited a source of short-term funding, “having the FHLBs step up is increasingly convenient.”
The FHLBs are the second-largest issuer of debt held by U.S.-taxable money-market funds, after the Treasury, according to iMoneyNet.
Government money funds like to buy the FHLB’s floating-rate securities because while they have maturities ranging from six to 18 months, their interest rates reset monthly or quarterly with the London interbank offered rate benchmark, and are attractive to investors anticipating a rising-rate environment.
Last year, the FHLBs’ regulator—the Federal Housing Finance Agency that also regulates government-backed mortgage giants Fannie Mae and Freddie Mac—warned the FHLBs were exposing themselves to the risk that they could be unable to refund maturing short-term debt called “discount notes” if the market dried up.
“We want them to always take advantage of opportunistic times,” said Andre Galeano, associate director of examinations in the division of FHLB regulation at the FHFA. “We don’t want them to have to issue when market conditions are not apt.”
David Messerly, investor relations director at the FHLB Office of Finance, said the FHLBs were in dialogue with their regulator about those concerns but declined to specify further. Since the warning, discount notes have fallen to 41.5% of outstanding FHLB debt, down from a peak of 54% in December 2015.
The increased lending by FHLBs also is timely because demand for their secured loans is growing, on account of new federal rules requiring banks to have predetermined levels of cash on hand.
With banks now subject to new liquidity rules and constrained from too much short-term borrowing, the FHLBs have stepped in and are able to provide low-cost loans to big U.S. banks.
The largest borrower from FHLBs is J.P. Morgan, which had $79.5 billion in loans outstanding in the third quarter, up 8% from the year before, according to Guy Cecala, chief executive of lending-trade publication Inside Mortgage Finance. A spokesman for J.P. Morgan declined to comment.
Wells Fargo is the second-largest borrower. Its borrowings hit $68.7 billion as of the third quarter, up 158% from the year earlier period. A Wells Fargo spokesman said the terms of FHLB loans make them attractive.
“Demand for our debt is strong, and that’s a good thing. It keeps liquidity flowing to member banks so they can keep lending,” Mr. Messerly said.
Write to Katy Burne at