[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

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. [↩]

[Note: below is the Acknowledgements to Great Chain of Numbers]

I would like to thank the following entrepreneurs, businesspeople, experts, investors and thought-leaders for their time, views and feedback for this guide:  Derek Au, Steve Bennet, Nikos Bentenitis, Isaac Bergman, Vijay Boyapati, Vitalik Buterin, Preston Byrne, Zachary Caceres, Wences Casares, Raffael Danielli, Ben Davenport, Tuur Demeester, Mark DeWeaver, Joel Dietz, Charles Evans, Scott Freeman, Michael Goldstein, Ron Gross, Mike Hearn, Jon Holmquist, David Johnston, Petri Kajander, Zennon Kapron, Jeremy Kandah, Stephan Kinsella, Daniel Krawisz, Daniel Larimer, Adam Levine, Taariq Lewis, Jeremy Liew, Rui Ma, Hakim Mamoni, Robert McMillan, Amos Meiri, Jared Mimms, Alex Mizrahi, Kevin Moore, Tom Mornini, Chris Odom, Ryan Orr, Stephen Pair, Salvatore Delle Palme, Sean Percival, Jesse Powell, Chris Piaca, Celso Pitta, Mike Reid, Scott Robinson, Dan Roseman, Meni Rosenfeld, Robert Sams, Alan Safahi, Sebastian Serrano, Justin Simcock, Koen Swinkels, Nick Szabo, Alex Tabarrok, Stefan Thomas, Kyle Torpey, Eddy Travia, Stephan Tual, David Veksler, Jack Wang, Andrew White, Matthew Wilson, Yanli Xiao, Mike Youssefmir and Sean Zoltek.  The usage of handles: “cityglut,” “Graviton,” “PhantomPhreak” and “Uniqueorn,” is to protect the privacy of the individual.

Throughout the book I refer to their insights.  This is not an explicit endorsement of their opinions or services but rather serves as an on-the-ground reference point.  Nor by providing me with quotes do they endorse this book or my opinions.  Furthermore, in the interest of financial disclosure, I do not currently have any equity positions in the firms or companies discussed throughout, nor was I provided any financial compensation for the inclusion of companies or projects.

[Note: below is the Preface to Great Chain of Numbers]

With the help of many members of the community, I have written this short book for beginners, entrepreneurs and risk-takers who – having heard of a bitcoin or cryptocurrency, but knowing little about it – want to understand how algorithms can constrain governance and transfer value in a consensus-driven, voluntary manner.

Trustless asset management tools built on top of a cryptoledger such as Bitcoin or Ripple (which are tamper-proof) could not only reduce fees and redundancies in the developed world but also empower those in the developing world who are more easily marginalized as they lack political capital (guanxi).1 Cryptoledgers could also help governments and non-governmental institutions keep track of internal assets and reduce the barriers to financial services, leveling the playing field and allowing individuals from all walks of life to actually codify and manage scarce goods and value that they currently own in a more secure manner.

From securely automating parts of the financial industry (e.g., back-offices) to lowering transaction costs of international trade, this new type of mathematical tool – cryptoledgers – can be applied to many new segments and markets, some more obvious than others.  For instance, in January 2014 I was interviewed by Donald McIntyre who asked me why I was interested in cryptocurrencies and smart contracts.2 I explained that there are additional use-cases for using cryptoledgers to track property titles and contractual agreements that could be utilized not only in the developed world but also in developing countries like China.

While there are a number of analogies comparing the significance of these tools with historical equivalents – from railroad infrastructure, to operating system platforms – at their core decentralized applications like Bitcoin and its progeny have the potential to impact virtually any industry that is integrated with the internet.  And the insights from experts, entrepreneurs, investors and developers below illustrate many of the other uses that cryptoprotocols can provide and gives readers a foundation to build from and to explore.

There will likely be challenges and hurdles along the way, from embarking on educational outreach beyond early-adopters to carefully studying and complying with all the legal and jurisdictional issues of a particular instrument.

Yet there are also likely financial rewards for reducing the fees involved in remittances or providing more secure and robust mobile payments.  For instance, according to Gartner, “mobile payments will top $720 billion a year by 2017, up from $235 billion last year [2013].”3 Finding a way to build an application that provides value in this niche is just one area of disruptive potential that a decentralized or distributed cryptoledger can attempt to do without exposure to counterparty risks.

Finally, this manuscript is not an exegesis on the economic foundation or utility of cryptocurrencies.  While economists were consulted, this guide is an attempt to show the potential of changing how interactions and value can be transferred and managed in a manner that could not be technologically or mathematically done until this past decade.

This is an exciting journey and one that I believe will outlive and outlast the hype and hyperbole of both its largest ideological proponents and opponents.  In time some of the visions and claims may ultimately be vaporware, yet several have the potential to impact commerce the same way that the internet did 20 years ago and the PC did 35 years ago.  Let me help provide you with the knowledge that was distilled and shared with me over the course of my own educational process.

Tim Swanson

San Francisco, March 2013

1. Guanxi (关系) is a confluence of connections and relationships.  While “knowing” the right person is always helpful in any country, the cultural and economic influence of guanxi is magnified in China.  Even with the proper funding and proper forms, if you do not have guanxi with the right officials or bosses (laoban), your project may never get off the ground. [↩]
2. Tim Swanson Talks About China, Bitcoin, And Smart Contracts from Newfination [↩]
3. Can PayPal Beat Apple, Google, Amazon And Icahn In The Wallet Wars? from Forbes [↩]

[Note: below is the Foreword to Great Chain of Numbers]

“It is a rare mind indeed that can render the hitherto non-existent blindingly obvious. The cry ‘I could have thought of that’ is a very popular and misleading one, for the fact is that they didn’t, and a very significant and revealing fact it is too.”  

– Douglas Adams, Dirk Gently’s Holistic Detective Agency

The physical world has an intractable problem; things exist.

Whether a bar of gold or a bus pass, left to their own devices these valuable objects will not move or act of their own accord.  Furthermore, if you want to sell such an item, you have the unenviable task of finding someone who  would like that item from you, is willing to pay you in the thing you desire and is local enough to make such a deal logical.

Money used to have this problem; we used antiquated systems that move promises for dollars around the world at 1960 speed.  Bitcoin changed the equation, introducing the distributed ledger technology that allows value to change owner with no regard for where the transacting users are geographically located.

Bitcoin is to money what Smart Property is to ownership.   A fundamental reinvention of how things should work, and a better way.   The problems are not new, and the solutions enacted to this point were designed with that liability of physical existence in mind.

We are no longer constrained by this liability.

This all occurs against a backdrop of open source innovation and cooperative competition among the projects vying to “win” the battle for Bitcoin 2.0.  Where six months ago there were two projects, now there are eight, with new protocols announced at least monthly.

When Satoshi Nakamoto mined the Genesis Block, he had months before there was much competition for the tokens he was mining and years before the first competitor for his protocol emerged.   In this next generation there is no luxury of obscurity.  The race is on and the only sure winner is technological progress.

In the information age, technological optimization is often confused with technological progress.  Both are measures of growth, improvement in the lives of users of these technologies, but they are very much not the same thing.

Optimization is a purely additive process.  Moore’s law and the competitive nature of the free market demand that these items be made smaller and denser.  Faster and cheaper.  This is steady and predictable, and it can be mapped and planned for.

Sometimes optimization constitutes progress; but most real progress, paradigm shifting in implication, comes from doing something unexpected.  Intentionally or not.

You cannot plan for this.

You are not prepared for this.

But then, neither is anybody else.

So rejoice, because you got here first.  Consider the manuscript that follows your guide to the exciting world of smart property, and let me be the first to welcome you to the Future of Money.

Adam B. Levine
Editor-in-Chief, Let’s Talk Bitcoin! March 3rd, 2014