Tuesday, December 5, 2017

Intro to Crypto

Not for you, for me.

If you ended up here looking for any form of introduction to cryptocurrency, this is probably not the right place - this is a more a share of my experience of being introduced to the basics. Nothing very useful here. Move on.

Phase 1: Get Bitcoin!

At present, crypto is crazy. Social media is buzzing with it, everyone is getting in or considering getting out. My first comment on the topic was a few months earlier this year - I was a late adopter. It was something along the lines of "It's not gonna last" or "it's a short up and down". I was met with a fair amount of evidence to the contrary and decided to take a little (emphasis on little) bit of extra cash that I had available and was willing to part with and hop on for a little ride. I asked about what platform to use on social media and Luno (shameless link to my referral code right there) came back as quite a popular local option. I downloaded the app, signed up and sent off the required documents. A couple of days later my account was active so I parted ways with traditional currency and into my BTC wallet.

Right on cue.... this happened...
As if the digital gods were watching me... waiting for me.... to drop it. But 1 thing I've heard enough of in the small amount of exposure I've had to the investing world is that any investment should not be emotional; and knee-jerk reactions to market changes can cost lots. So I sat tight. And cried a little inside as my little venture lost 35% in 4 days. And then I did something bravely foolish - I threw a bit more ZA Ronds at it. I think the gods favoured my foolishness because it turned. From R60k per coin to over R100k in about 3 weeks, BTC was in the news with another upwards rampage. Subconscious calls for bicycle upgrades started surfacing into my consciousness. I spoke to my kids about it and they wanted to put their pocket money in. I explained that if they put anything in, they must be willing to loose it. "Oh, so Bitcoin is like gambling" they surmised perfectly. And they hopped on the wagon a bit too.

And that is the start of my crypto journey - forex trading on a very hot currency (currently R170k/BTC)

Phase 2: The questioning

Ok - so now this crypto thing is actually holding something of value to me. I've past the "Let's play" part and am having fun skating on a frozen lake with no idea of how thick the ice is or cold/deep the water underneath. And my mind starts turning to questions - "How does it work". "Why is there such a demand for it / such value being given to it" and "Where does it come from".

The concept of the underlying Blockchain technology is built on solid principles - it's an unmodifiable (from a practical sense), open ledger of transactions validated cryptographically. The Wikipedia link explains it pretty well. Bitcoin was the first cryptocurrency based on this technology. There are many others now. The properties of the currency is a decentralized, peer-to-peer, trust-based value system - no central institution controlling it. The nature of "What it is" or "How does it work" answers the second question of rapid adoption of the technology.

But where does it come from? If there's no central institution, how is it made? I began reading. And so I started learning about mining. Miners are the peers of the network - members of the general public using computers to validate and timestamp transactions, adding them to the ledger. The idea is that it takes a lot of work to calculate the transaction but not a lot of work to validate it. So 1 computer will calculate something and submit it to the network; and a few other computers will validate it and confirm that work was done to get to the result. The calculating computer / node is then rewarded for its work.  But what work? "Miners solve complex problems" - aaah great - the value proposition. Coins are being awarded for doing something useful, right? I wanted to get a better understanding of these "complex problems" and where they came from. The problems are relatively arbitrary! Pretty self-contained to the crypto network. 1. Pick a hash. 2. Work out how to get there. That's it. So we're running computers that use lots of energy to calculate something and then proof that they did the calculation. But the calculation serves no purpose other than proof that it did the calculation! To prove that power must have been consumed. What?? This didn't sit right - a fundamental flaw in the proposal of the value system. Global mining is using more power than 100's of countries at time of writing. Generating a coin using this model takes a few days at least with some pretty specialized hardware. What a waste. I wanted to get out.

I started chatting to friends - ranting on the phone. "It's not sustainable, it will never last!" (sorry bwot). But the shock settled and after some sleep and more thought I got a different perspective on it. It's not an underlying flaw in the technology, it's just an inefficiency. I work and earn traditional currency through what I do. This is a representation of value in a centrally controlled system (government, tax man, banking system). Energy is a transfer mechanism of this value representation from 1 system to another: I pay my power utility. They give me electricity. I use electricity. I get Bitcoin. The value is now out of the traditional system and into the decentralized, peer-validated system. Quite clever. But still something wrong. Why do so much work for nothing?

Reward models

The mining model described above that led to somewhat fevered phone calls is referred to as Proof of Work (PoW). The peer network can validate that work was done easily, and the node that did the work is rewarded. I wanted a more efficient system. Some way of doing the same thing as mining, but instead of solving arbitrary problems, the compute power could be used to solve real world problems; problems like identifying cancer markers; analysing LHC collisions; or mapping the galaxy. And I'd find a way to do it. Revolutionary thoughts. I'm not a revolutionary though, and some smart people had already thought of that.

There's another way of generating tokens of value in a cryptocurrency network. It's a model called Proof of Stake. The idea of this model is that members of the network are given more opportunities to create the next block the more coins they own and/or the longer they wait (owning more coins increases opportunities to earn more coins instead of owning more mines to earn more coins). Combing this with a system of distributed consensus on the calculations, you can now use the compute energy to do REAL work and solve problems facing humanity. And this is where I'm exploring now.

Phase 3: The present and the future

So a PoS system seems much more efficient but has some flaws. So do PoW systems. The best value seems to be in networks that somehow leverage both. One system that uses a combination of both is Gridoin's Proof of Research which I quite like fundamentally. It gives an opportunity to generate coins while doing something useful

And it seems a little less volatile than BTC or Ethereum:

So that's where I am at the moment. Gently throwing a little bit of energy at modeling the Milky Way, solving cosmological problems and analysing LHC collisions, while increasing stake in a slightly more efficient and hopefully sustainable currency system.