Chapter 1: Introduction

[Note: below is chapter 1 to Great Chain of Numbers]

This guide is a brief primer and resource for those looking to understand:

what a cryptoledger is,

what smart contracts are,

how smart property works and

the disruptive impact of trustless asset management.

While I typically use examples from the United States and China, there are numerous business and personal applications for each in any country, irrespective of size.

This is not a guide on how to invest, and you, the reader, should make sure to conduct thorough due diligence of the specific area you are looking to create value in.  While there may be seemingly unlimited opportunities in this burgeoning field, there are also many risks – known and unknown.  You should begin your search by familiarizing yourself with the groundbreaking works, which are freely available online, of Nick Szabo, who pioneered the field of smart contracts and smart property.1 It is also highly recommended that in addition to consulting with someone familiar with business development related to cryptocurrency applications, you also speak with legal counsel and/or a risk assessment specialist who can help quantify and qualify the potential legal risks.

As this guide will illustrate in a general sense, even if you create an ostensibly ironclad smart contract that is used on a cryptoledger to track or transfer an asset, there may be brick-and-mortar legal institutions that do not recognize the manner in which the transaction takes place (e.g., exchanges must continue to use passive, paper-based interfaces).  To some in the cryptocurrency community the traditional mechanisms seem anachronistic. The stark reality is that the traditional mechanisms (postal mail, fax machines) are still required for business and show no signs of disappearing anytime soon.

Keeping an Open Mind

The economics of Bitcoin can and will continue to fill countless volumes.2 As to whether cryptocurrencies or tokens that act as virtual representations and abstractions of value actually are valuable, is in the eye of the beholder (or more appropriately, keyholder).  It is also a self-correcting quandary: if you do not see value in holding any type of cryptocoin, metacoin or “colored” coin, then you simply will not accept them.

One of the primary benefits of Bitcoin and cryptocurrencies like it, the argument goes, is that it will reduce costs and friction in international commerce.  Below is an image used with permission from Pierre Rochard that may help readers qualify many of the transaction costs between precious metals (gold, silver), fiat currencies (US dollars, euros) and cryptocurrencies:3 comparsion

Economists and legal experts have suggested that Bitcoin is not a real “thing” with some pointing out that, in some jurisdictions, cryptocurrency is currently beyond proprietary classification.4  I note below, they would be correct: it is nothing more than a virtual ledger entry.  Yet, despite this level of abstraction, there are those who find utility in subjectively valuing its scarcity relative to other assets, namely, fiat currencies.  Whether your neighbor or your favorite blogger values it the same way as you is not fundamentally important in the long run.5 Ultimately what matters is, what additional units of utility both the token and the protocol could provide for you or others.  Furthermore, if physical manifestations of value were all that mattered, then all of the abstractions humans use on a daily basis – from signing documents that represent contractual obligations and financial instruments, to swiping a credit card that sends electrons to a payment processor – would simply be a futile exercise in mental gymnastics.6

Altcoins

If you are new to the cryptocurrency world, you may have arrived through a variety of paths, including the altcoin world.  An altcoin means “alternate coin” – which commonly means any cryptocoin or cryptoledger that is not Bitcoin.  Sometimes an altcoin is an exact replica of the Bitcoin codebase: in other instances, it is drastically modified.

Namecoin is widely considered to have been the first altcoin.  Namecoin is designed to act as a decentralized DNS system that makes domain name censorship difficult, if not impossible.[vi] It was created in 2010 as a modified version of Bitcoin, and in 2011 the mining of namecoins (after block 19,200) was effectively merged with Bitcoin through a software update (e.g., pools had to use a new software release).78

While Namecoin provides DNS functionality, it can also be utilized as a messaging system, torrent tracker, and even a notary (which other cryptocurrencies can do as well).  While it is uncertain that any or all of the altcoins or the ongoing “2.0” (next-generation) projects described below will ever be successful in accomplishing their goals, these potentially new innovations, like Namecoin before them, show that cryptoledgers can be integrated to provide rich functionality beyond the current token system.

This is not to say that the cryptocurrency community has uniformly embraced disruptive change: far from it.  Like all inclusive groups, there are varying amounts of elitism, rigidity, and openness throughout.  People learn about cryptocurrencies through various ways.  Many late-adopters, have learned about mining or even coding through other altcoins such as Litecoin and Dogecoin – which serve as gateways for new entrants to the larger crypto ecosystem.9 These coins have done so, at least in part, because of the psychological value of being rewarded with a significantly larger amount of tokens for either fiat or mining (e.g., ten dollars for one billion dogecoins) – avoiding what is referred to as ‘mental transaction costs’ of doing decimal calculations in bitcoin.10 Yet depending on the venue, these projects are often frowned upon by many early Bitcoin adopters.11 Thus if you, the reader, choose to enter the community, you should know there are various political turf wars that I recommend you stay away from as they are a distraction to the value-added potential and business opportunities that trustless asset management promises.

This book focuses on the opportunities of the ecosystem, not a particular protocol: it is impossible to know what market conditions will be like in three or five years, what regulatory issues will arise, what developmental tools will or will not be made or what market participants will find utility in.  Alice may, for some reason, find utility in a project or cryptocurrency that Bob find’s distracting and pointless.  For this reason it is important to distinguish your own subjective valuation from others’.   While the analogy is imperfect, consider this sardonic perspective to dismissing Bitcoin alternatives a priori:

‘It is too bad about English.  All of that wasted effort on other languages.  English is perfectly good but there are so many competing efforts that distract from a simple, powerful chain-of-letters – an alphabet.  If only we had an L’Académie française to manage, prune and develop the language in a directed rational manner.  Just look at all of these ridiculous languages used by just a fraction of the world’s population.  They are wasting scarce resources in maintaining all of those goofy spinoffs that do not really further the linguistic ecosystem as it is pointless redundancy.  They merely just reinvent the wheel time and again with projects on syntax, grammar and style.  It is too bad that English is not the only protocol used.  And since it does not have 100% market share it is likely that the entire linguistic endeavor will fail.  And fail hard.’

Skepticism is warranted for claims that in order for cryptoprotocols to be successful there needs to only be one cryptoledger in the world.  This is akin to saying that for the internet to be successful there needs to only be one website (e.g., Reddit), and all of us need to support it and only it.  People like choices; and consequently they have created alts.  And there is probably room for more.

As Carl Sagan purportedly said, “It pays to keep an open mind, but not so open your brains fall out.”  Therefore, keep a lookout for new opportunities but be wary of lemons and scams – these exist in every economic sector including this brave new world of cryptocurrency.  Conduct your due diligence and caveat emptor.

  1. Nick Szabo’s Essays, Papers, and Concise Tutorials []
  2. Economics of Bitcoin: Is Bitcoin an Alternative to Fiat Currencies and Gold? by Peter Šurda and The Economics Of Bitcoin – Challenging Mises’ Regression Theorem by Michael Suede []
  3. The Bitcoin Central Bank’s Perfect Monetary Policy by Pierre Rochard []
  4. Cryptocurrency gets real by Preston Byrne []
  5. One reviewer of this manuscript sees symbolic parallels with the works of Jean Baudrillard, a French philosopher, with respect to those who value and view cryptocurrencies as a sign rather than a repository. []
  6. For hundreds of years humans have used paper as an abstraction layer to describe, secure and exchange assets.  Many securities like shares of stocks and bonds are electronically traded globally.  But they use a trusted party framework requiring many middle men to provide auditing, approval and authentication. []
  7. See Namecoin and What are Namecoins and .bit domains? from CoinDesk []
  8. Merged mining []
  9. After attempts to modify Namecoin it became clear that a more elegant, native solution for asset tracking was needed in order for one blockchain to manage different “colors” or contracts. []
  10. I pronounce dogecoin, dogecoin.  See How Do You Pronounce “Doge”? from Slate []
  11. While nearly anyone with internet access and a bank account can currently purchase bitcoins for almost any amount of fiat, the psychological factor of receiving numerically large amounts of tokens as you mine (or hash) a block is evidently a self-rewarding mechanism.  And for new, inexperienced users, this entry point often serves as a jump off node into the Bitcoin ecosystem afterwards.  Thus if the goal for Bitcoin adopters and cryptoledger developers is to attract (e.g., marketing) and get more people interested in crypto-based services and solutions, then the community as a whole should be enthused that more people are joining the community through these new conduits.  Perhaps some users will get disenchanted if and when a memecoin like doge fails to live up to expectations (e.g., “to the moon”) but it is their subjective preferences and valuation of utility that determine market adoption, not by “rational” planners in any community. []
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