The Evolution of Custody: From Bearer Bonds to Blockchain

The Evolution of Custody: From Bearer Bonds to Blockchain

How we secure assets, whether they be securities, bonds or currencies, has been in a state of flux over the past century. As markets and the needs of individuals change, so do the mechanisms by which we secure and exchange assets. Central to all of this is the question of custody. How does an individual maintain control, or custody, of their assets without compromising security or the ability to access liquid markets for exchange?

How we secure assets, whether they be securities, bonds or currencies, has been in a state of flux over the past century. As markets and the needs of individuals change, so do the mechanisms by which we secure and exchange assets. Central to all of this is the question of custody. How does an individual maintain control, or custody, of their assets without compromising security or the ability to access liquid markets for exchange?

Today, the blockchain enables self-custody of assets in a way that when combined with innovative technologies like Ethos Bedrock, provides cutting edge security, rapid access to funds and liquidity in a way unrivaled by any other time in history. Understanding how this came to be is best done through examining the evolution of asset custody over the last century.

When trying to understand custody, a great place to begin are with bearer instruments, like bearer bonds, which are issued on paper (or goatskin) and can be stored by individuals in a safe, under lock and key. When one has physical possession of a bearer instrument, they gain all the beneficial ownership right associated with the asset. Thus, safeguarding these documents is vital since they are unregistered, with no records maintained of the changes of ownership or of the current owner.

Naturally, some people don’t want to keep these at home for risk of theft and have historically turned to banks for storage in a safety deposit box for safekeeping. This is referred to as custodial possession. The customer could then be given a key so they could get into their safety deposit boxes and have access to the assets. Sometimes the bank would also have a key. When two parties have a key to gain access to the underlying asset, this is referred to as joint custody.

Looking Back

As financial markets grew through the 20th century, the management and transferring of stock certificates, bearer bonds and cash became very unwieldy. In the 1960s, the New York Stock Exchange saw securities trading volume more than double over a span of just 3 years.

Adjusted for inflation, it’s estimated that billions of dollars worth of securities were stolen or lost during this era. A consequence of poor record keeping, insecure mechanisms of transfer, and theft from centralized repositories

The overwhelming trade volume marked the start of the Paper Crisis, which illuminated that the standard deployed by brokers for transferring and record keeping on securities exchanges, which at the time relied largely on paper and pen, was ill-equipped to handle the growing trade volume. This crisis led to dozens of brokerage firms going out of business and the implementation of computers, alongside professional management, to handle the high volume of trading.

Present Day

Today, custody has legally been defined as “. . .holding, directly or indirectly, client funds or securities, or having any authority to obtain possession of them” (17 C.F.R. 275.206(4)-2). This definition, while applicable to the status quo, fails to encompass custody as enabled by the blockchain, which breaks away from the inherent relinquishment of control necessitated by current standards.

The blockchain provides a revolutionary means of tracking, efficiently transacting/exchanging and securely storing assets in a decentralized fashion, in turn offering a solution that can mitigate risks associated with centralized fund storage through the self-custody of assets.

In the following section, we will provide a brief technical overview of how custody of digital assets can function in the emerging digital economy, specifically highlighting how the Ethos Universal Wallet, through Ethos Bedrock, is able to deliver safe and practical solutions to consumers and institutions through building on industry standards.


The Technology: Hierarchical Deterministic Wallet & Bedrock

As you now know, the blockchain enables self-custody of digital assets. Over the past decade, creating a wallet to store your digital assets was a complicated process, requiring individuals to manage independent public and private key pairs for every wallet they wanted to maintain. In order for someone to have 10 Bitcoin address, they would need to manage 10 private keys and 10 public keys… and if that list of lengthy alphanumeric private keys was damaged or lost, there was no simple way to regenerate those missing keys.

Now imagine if there was a way to securely generate 10 private keys and 10 public keys, all derived from and restorable with a single set of words instead of a lengthy alphanumeric string, wouldn’t that be convenient? Enter hierarchical deterministic wallets! Hierarchical deterministic wallets commonly referred to as HD wallets, allow an individual to create a multitude of private/public key pairs without the need for complex backup mechanisms or individual key management by the user.

The Ethos Universal Wallet is built 100% on Ethos Bedrock, with Bedrock being utilized as an institutional-grade custody engine. Bedrock Custody will solve the “custody trifecta” where you have your funds rapid, accessible and secure. Let’s take a dive into how all this works and examine how Ethos is building on industry standards to provide safe and secure custody solutions to consumers and institutions at scale through Ethos Bedrock.

BIP32

BIP stands for Bitcoin Improvement Proposal. A BIP is a standardized way of introducing proposals for alterations of Bitcoin, including the network protocol, block or transaction validation, and more. BIP-32 describes what HD wallets are and how they operate. An HD wallet is a system for deriving seemingly infinite private/public key pairs from a single point referred to as a seed. This creates a hierarchical tree-like structure of private/public keys.

From a mnemonic phrase, the seed is derived. That is hashed and a master key, also known as a parent key, is derived. From that parent key, you can then derive child keys underneath that. From each of the children, you can derive more child keys, and so on. Think of it as a tree branching out. This structure also allows the owner of the wallet to provide one of the branches, or sub-trees, to someone else and they can then generate more addresses further down that tree.

Deterministic wallets eliminate the need for a user to document every single private/public key because they can be regenerated at any time with the single mnemonic phrase that’s held by the wallet owner

BIP39

When creating a cryptocurrency wallet, a mnemonic phrase is sometimes generated in order to provide an easier way to remember your private key, instead of having to memorize or document a random alphanumeric string. BIP-39 provides a framework for generating that mnemonic phrase. Sometimes referred to as a “seed phrase,” it’s vital to keep this somewhere safe! The individual in possession of this set of words has full access to the assets associated with the given address, think of it as the combination to an otherwise uncrackable safe.

Under BIP-39, standardized lists of words in different languages are provided and can be used for creating a mnemonic phrase. The English language word list has 2048 words and can be found here.

For the Ethos Universal Wallet, your SmartKey is a 24-word mnemonic phrase (vs the 12-word standard used in many wallets). A single 256-bit seed, 24-word mnemonic provides master encryption for all of the private keys in each wallet you create.

Did you know the number of possible 24-word combinations of 2048 words exceeds the number of atoms on Earth!?

BIP44

BIP-44 defines a logical hierarchy for deterministic wallets and expands on the capabilities of the HD wallet as defined in BIP-32 to allow for support of different coin types (i.e., BTC, ETH, ADA) and accounts. This allows for a single mnemonic phrase SmartKey to be used to recover seemingly infinite wallet addresses that hold assets across different blockchains.

While Ethos adheres to BIP32 and BIP39, we found BIP44 as it stands would limit the ability for Ethos to provide unique solutions to our users; namely, the ability to dynamically generate addresses for users to receive payment on blockchains they haven’t used, which enables airdrops into wallets where the address has not yet been generated by the user. In considering these benefits along with additional security risks, we decided to pursue a non-standard approach to unlock use cases that will be beneficial to the overall user experience.

Ethos Bedrock utilizes “extended public keys” to securely generate addresses on our servers without having to transmit private keys. These extended public keys are used to generate all child public keys that exist below it in the derivation path – which are then transformed into addresses that follow the scheme defined by each blockchain. For a full description of the mathematics of these extended keys, see the BIP-32 / BIP-44 documentation.

Through unlocking and expanding on the capabilities of the powerful mathematical structure outlined above, consumers and institutions can now have access to industry leading custody solutions at scale.

Looking Forward

While the application of this wallet technology may be clear to our Universal Wallet users who already enjoy the benefits of self-custody and the convenience of a mobile storage solution, it’s important to note that Bedrock also enhances the custody offering for Voyager as well. Through Bedrock, we are opening up support of coins that Voyager’s existing custody partners do not support and increasing the speed to market for new coins. This enhances both the Voyager retail trading application, in addition to the Voyager institutional offering. For both businesses, Ethos helps solve one of crypto retail and institutional markets biggest problems – secure custody.

The combined Bedrock and Voyager B2B offering will enable businesses of all types to build crypto applications rooted in custody, payments, investing and more. Together, we look forward to granting Voyager’s institutional partners access to the powerful custody solutions enabled by Bedrock.

From bearer bonds to blockchain, we have arrived full circle to what the people need, true and secure asset ownership. Individuals and institutions can rest assured that Ethos is here to provide them with unprecedented security over their assets, without sacrificing ready access to rapidly transact and exchange them.



what is an api

What is an API?

what is an api

What is an API?

For a while now we have been talking about Ethos Bedrock, a high-performance Blockchain Financial Services (BFS) platform, which is composed of many APIs on which our flagship application, the Ethos Universal Wallet, is built. You may have found yourself wondering, what is an API? So we put together a brief introduction to what APIs are!

API stands for Application Programming Interface. For many of us the term API may not carry much meaning, but it’s important to understand that well designed APIs can provide strong building blocks on which a developer can create new programs, and serve as powerful software intermediaries for applications to communicate with other applications.

Most of us have experience using applications. In fact, you are likely viewing this article through a web browser. You can see links that you can click and you can scroll through the content. Unlike this type of application interface, an API is an interface designed for developers to more easily create new programs that can then interact with a base of code and microservices.

A common analogy used to describe APIs are Lego building blocks. Each Lego block has bumps and holes that fit together with another piece, and they can be stacked to build unique systems based on the builders end goal. Regardless of the builder, they are using the same pre-existing and functional base components. Similarly, an API allows developers access to those base blocks and the ability to seamless communicate with a number of underlying applications and microservices.

At the base of Bedrock lie an array of microservices. Microservices are services that are oriented around a specific task (i.e., listening for blockchain transactions, sending notifications, generating addresses, etc) that are used in combination to deliver robust features. For instance, the Universal Wallet relies on a multitude of APIs (i.e., xWallet, xTransact, xAlert) and underlying microservices that let a user know when crypto has been successfully transfered to their wallet.

Let’s take a closer look at an Ethos Bedrock service, xTransact, which consists of several APIs: TXN constructor API, TXN Signer API, and TXN Submission API.

  • TXN Constructor API: when a user or institution wishes to transact, they communicate to Bedrock how many of which coin they want sent to a given address – TXN constructor API  prepares the transaction and conducts a fee analysis.
  • TXN Signer API– after the transaction is constructed, TXN Signer API sends the transaction to the user, which is then signed on the device.
  • TXN Submission API – the signed transaction is now broadcast and verified!

Instead of an institution or developer being required to build a custom-developed application, they can now build one that is referencing APIs to incorporate the rich features they seek to deliver without spending precious resources on building from scratch. Additionally, they are able to mitigate risk of errors by referencing battle tested code.

Innovative, elegant and highly-scalable API platforms, like Ethos Bedrock, are crucial to the future development and adoption of blockchain based financial applications and tools by existing and emerging financial service providers. Whether they seek to create a fiat gateway, query price data or provide custody solutions to consumers, Bedrock is the foundation they need to build tomorrow’s consumer and institution facing products and services.



How Ethos Cryptocurrency Wallet Smart Keys Keep Money Secure

Ethos Smart Keys: How Cryptocurrency Enables Consumers to Protect and Own Their Money

Ethos Cryptocurrency Wallet Smart Keys

How the Universal Cryptocurrency Wallet Smart Keys Enables Consumers to Protect and Own Their Money

Introduction

Cryptocurrencies, such as Bitcoin and Ethereum, bring unique benefits to the world of personal finance by pairing the ability to own and store your digital assets in a cryptocurrency wallet, with the ability to cheaply, securely and almost instantly transfer them to others.

A blockchain, simply put, is an open record keeping system that’s maintained by a peer-to-peer network where everyone has access to read and potentially write data. Because of the open nature of blockchain, it’s absolutely necessary that all the data on the chain is verifiable as authentic and can’t be manipulated after the fact. To guarantee that all of our transactions are authentic, we turn to cryptography which gives us the ability to generate digital signatures and fingerprints.

The Ethos Cryptocurrency Wallet Smart Key is a unique digital signature that is used to verify the authenticity of transactions originating from your wallet. Any time a digital asset is transferred out of your Ethos Universal Multi Cryptocurrency Wallet, your Smart Keys will provide the authorization needed to execute the transaction. Ethos Keys are “Smart” because your one key represents all of your funds, regardless of what form of cryptocurrency you are using. This allows you to backup and restore all of your wallets with a single key phrase.

How safe is it?

Ethos leverages well-tested cryptographic standards and methods to ensure that your Universal Wallet uses an extremely high degree of security. The passphrase is 24 words (vs the 12 word standard used in many wallets) and the keys themselves are 256 bit, meaning uncrackable.

As discussed in the next few sections, the bulk of the security offered by the Ethos Universal Cryptocurrency Wallet and Smart Keys comes from modern cryptographic techniques, such as public-key and elliptic-curve cryptography, and their ability to generate secure and verifiable digital signatures and fingerprints. Let’s first consider some background to fully understand the mathematical magnitude of the protection.

Ciphers, Hashes, and Digital Fingerprints

The concept of a cipher is fundamental to cryptography. The roots of cryptographic hashing go back to 50 BC, during the reign of Julius Caesar and the Roman Empire. At that time, the official means of communication was a courier service that was highly vulnerable to espionage and interception. To throw off their enemies, the emperor and his consul would communicate by scrambling the letters of their messages before sending them. Upon receipt of a message, the letters would have to be unscrambled to reveal the original message.

One method of doing this was to shift every letter over by one, so that every instance of the letter ‘a’ would be replaced by ‘b’, ‘b’ would be replaced by ‘c’, and so on. This now commonly referred to as a Caesar Cipher, or a Shift Cipher, because the method to conceal the message is simply shifting each letter over one.

In this case the message ‘hello’ would become ‘ifmmp’ and the courier tasked with delivering it would ideally not be aware of the method used to scramble the message. Anyone who intercepted this message would also not know what to make of the seemingly nonsensical message. The “key” in this example is the method of encoding the message.

Over the next two thousand years, this idea of a cipher was further developed into that of a cryptographic hash, which in simple terms is a more sophisticated way of scrambling a message so that it’s very difficult to reverse. Hashes also have the property of, given some data, being able to reliably create a unique digital fingerprint of that data.

Everytime you submit a transaction to the blockchain, a fingerprint of your transaction is created and used to link the blocks in the blockchain, ensuring that the data in each block hasn’t been manipulated. For example, if you spend one bitcoin and someone tries to go back and manipulate the record to say you spent 10 bitcoin, it would invalidate all of the fingerprints in the blockchain leading back to that transaction.

Digital Signatures

Public Key Cryptography

Equally fundamental to the field of modern cryptography is the concept of Public Key Cryptography. In Public Key Cryptography there is the notion of a shared public-key that can be used by anyone to encrypt a message; then only you, with the corresponding private-key can decrypt to read the original message.

One of the most important properties of Public Key Cryptography is that, given a key-pair, its possible to generate a signature, digital proof of ownership of addresses that derive from your key. So whenever you send a transaction to the blockchain, it includes a signature proving that you are the owner of that address and therefore authorized to make that transaction. If the signature doesn’t match the public wallet address, the transaction is deemed to be unauthorized and is rejected by the network.

Elliptic Curve Cryptography

Elliptic Curve Cryptography is a type of Public Key Cryptography that makes private and public key generation even more secure due to the mathematical properties of elliptic curves that make it extremely difficult to reverse engineer the private key from the public keys.

Ethos Smart Keys are created from a cryptographically random number known as a seed. Sometimes seeds are created by a random number generator. However, this isn’t 100 percent secure because sometimes a hacker can re-generate a random number by knowing when it was generated and using a timestamp.

To ensure a higher degree of randomness, you generate your seed with a combination of a random number and another random number created by shaking your phone the first time you open the app. The unique signal from this process ensures that no one will be able to guess a non-random seed like your birthday, phone number, or a timestamp.

This seed is then used to generate private and public key-pairs on a secp256k1 Elliptic Curve, the results of which are hashed several times and encoded to reveal your public wallet addresses. By creating your Smart Keys this way, you can safely share your public keys and rest assured that only you have access to spend the funds in those wallets with your private key.

A Brave New World

Now that you know a little bit about the technology we use to secure your Universal Cryptocurrency Wallet app, you might want to know exactly what we’re protecting you against. The follow are the most common exploits that are used by “bad actors” to gain control of your funds.

Jailbreaking and Mobile Security

Jailbreaking is a popular method of unlocking non-standard features on your mobile device. While this can be an easy and fun way to personalize your phone, doing so goes around some very important security features of your phone, and can give unauthorized apps the ability to snoop around your phone and potentially sniff out your keys.

While the Ethos Universal Cryptocurrency Wallet does everything it can to secure your keys on your phone, it’s very important that you never jailbreak your phone or install apps that aren’t approved by the app store. We can’t emphasize enough how important it is that you never use the Ethos Universal Wallet on a jailbroken phone.

Dictionary Attacks: Cracking Passwords

Someone who wants to gain unauthorized access to your cryptocurrency funds is going to be most interested in finding out your private key. To crack a password, or in this case a key, a hacker would typically use a “brute force” method and employ what is commonly known as a “Dictionary Attack.” This method involves a linear search through a dictionary of common words, comparing passwords systematically against each word until a match is found. While this may sound like a lot of work, remember that an average computer alone can execute billions of operations per second.

Hypothetically, say someone were to chose the very insecure password “castle”. A dictionary attack on this password would take about 3 seconds, which is the time it would take a computer to try all of the words in the dictionary before “castle” is found as a possible password.

Let’s add a little bit more complexity to this password by adding a random number to the end of it, for example, “castle123”. This seemingly more complex password still takes only 27 seconds to hack.

Stringing together dictionary words, ie, “castleone” would take considerably more time to hack (11 days, 8 hours) but still within the realm of possibility for a properly motivated hacker with the right equipment.

 

 

Good News: There’s Safety in Numbers

As demonstrated, adding just one additional word to a password provides an exponential increase in its security. If we take this idea to the next level, we can quickly generate a password that would take an unimaginable amount of time and energy to guess, with even the most sophisticated computers available.

 

 

Even considering that every 18-months, new computers with twice the computational power are released at half the price, a 12-word password will still be secure for generations to come. And to be extra secure, Ethos uses 24-word passwords.

Introducing the Ethos Cryptocurrency Wallet Smart Keys

An Ethos SmartKey is a unique 256-bit key signature that is yours and yours only. It is generated and secured on your mobile device, and should also be written down on a piece of paper, aka “paper wallet”, and stored in a safe place or memorized.

 

 

When you open the Ethos Universal Multi Cryptocurrency Wallet App for the first time, you are asked to shake your phone to create your first wallet. The shaking motion generates a random number that is impossible to recreate, and your key is generated on your phone based on that random number.

Your key is then automatically mapped to a 24 word phrase that gives you the convenience of backing up and restoring your wallets with an easy to read mnemonic. It’s very important that you physically write this phrase down and keep it in a safe place in case you lose your phone. When you get a new phone you can restore all of your wallets easily by entering the backup-phrase.

 

Important SmartKey Safety Tips

  • Write your backup phrase down in a private place away from any cameras or windows.
  • Never copy / paste your private key, always type it in.
  • Do not store private keys on services like Google Drive or Dropbox
  • Never share your private keys.
  • Reputable firms will never ask for your private keys via email, phone or chat.

How many SmartKeys are there?

SmartKeys are generated with a unique 256-bit signature. There are over 340 trillion trillion trillion different possible SmartKey combinations. To put this number in perspective, that’s more than the number grains of sand on Earth. That’s even more than the number of known stars in our universe. That’s over forty-five octillion possible SmartKeys for every man, woman and child on planet earth; So there are plenty to go around.

SmartKeys and Hierarchical Deterministic Wallets

Under the hood, the Ethos Universal Wallet is built on the BIP-32: Hierarchical Deterministic Wallet specification developed by the Bitcoin developer community. While many Bitcoin exchanges have been hacked, generally with phishing or database hacks, no one has yet to mathematically break or reverse engineer a BIP-32 wallet despite hundreds of billions of dollar equivalent as bait. The underlying algorithms have been battle-tested with trillions of dollars of transactions. In other words, its among the most secure cryptographic standards on earth.

Features

Ethos Universal Cryptocurrency Wallet and Smart Keys:

  • Generates an astronomically complex, and cryptographically secure key that prevents anyone from spending from your wallet.
  • Maps this key to a set of 24 words enabling you to restore your wallet easily.
  • Stores multiple types of digital assets including Bitcoin, Ethereum and ERC20 Tokens.

Conclusion

The Ethos Universal Cryptocurrency Wallet is designed for you to store and secure a wide variety of coins/tokens with a single Smart Key and backup-phrase. We leverage decades of cryptographic research in addition to widely used industry standards that enable the self-custody of your assets, as well as their safe transmission and backwards compatibility with popular devices such as the Ledger Nano S and Trezor hardware wallets.


How Secure Is Blockchain Technology

Just How Secure is Blockchain Technology?

Just How Secure is Blockchain Technology? by Gregory Rocco

What is Blockchain Technology? How does Blockchain work?

Blockchain technology is best known for both its security and immutability. In a blockchain ledger, blocks act as a living record of transactional flow and are secured through heavily incentivized consensus mechanisms. These consensus mechanisms of the blockchain are incentivized due to the distributed nature of the system and anonymous participants. Its underpinnings have been around for several years but it wasn’t until the creation of bitcoin blockchain that the first example of a successful implementation of a decentralized ledger was deployed in a secure fashion.

 

Bitcoin Blockchain Technology and Asymmetrical Cryptography

The Bitcoin blockchain network relies on what’s called “public key cryptography,” where both a “public key” and a “private key” are used to transact. A public key is the equivalent of your address, or rather, where you will receive cryptocurrency. In the case of bitcoin, when transacting, ownership rights of the bitcoin in question are signed off on by using a private key to do so.

 

 

For example, let’s say Alice wants to send Bob one bitcoin. Alice will create a transaction to be sent to Bob’s address, and in doing so, she is giving Bob the right to transfer that bitcoin. Both her transaction and Bob’s future transactions involve proving ownership using their keys. The public key acts as ownership proof on the blockchain network while the private key exists to sign off on transactions.

It is important to remember that private keys should never be given out, as it is what keeps your funds secure. Giving away your private key is the equivalent of giving away access to your bank account – you wouldn’t want it falling into anyone’s hands. However, a public key must be given to any party wishing to send funds to your cryptocurrency wallet. A recommended security practice to protect one’s privacy is to never reuse public keys and to instead generate a new one for each transaction.

 

The public key is derived from the private key, and both are required in the movement of value on the blockchain network. After the transaction is sent, it is then relayed to the network and included in the next block on the blockchain to eventually be mined and secured on the ledger.

 

How Bitcoin is Secured Through Proof of Work

Consensus algorithms are a key component in distributed computing systems, and “proof of work” is the consensus algorithm the bitcoin blockchain network utilizes to both confirm transactions and add blocks to the blockchain. By that point, proof of work was also the first consensus mechanism to be deployed in a blockchain network.

In a proof of work system, individuals are pointing computing power to the network to solve a cryptographic equation and find what’s called a “hash.” Once solved, they have the chance to mine the next block, which contains a bundle of recent transactions that have yet to be secured on the ledger. As the network grows, so does the difficulty of solving that equation which leads to more computational power being added to secure the network.  

Related to security, each new block hash contains the hash of the previous block which allows the longest chain to continue to grow. Once mined, transactions in the block are now considered to be confirmed.

The mining incentive to secure bitcoin’s blockchain is what’s called a “block reward.” The first miner to solve the required computation correctly and mine the next block is rewarded with a fixed amount of bitcoin which “halves” after a certain period. This is to ensure that miners are paid for adding their power to secure the network, and to keep bitcoin with a controlled supply. The current block reward is 12.5 bitcoin.

Imagine the case of a horse race occurring on average every ten minutes. The gun fires, and the first horse to cross the finish line earns the bitcoin and transaction fees associated with each block. The race then resets in perpetuity. The process itself is like finding a needle in a haystack – with enough computational power and generation, the answer is bound to be found eventually. The block reward is what keeps miners incentivized to continually try to find a solution to the puzzle and lend their computational power to the network.

Over time, the bitcoin network has experienced an exponential amount of hashrate being added at the cost of the centralization of mining. Over 75 percent of the mining is currently controlled by five large pools, each containing both large organizations and individual miners contributing their hashing power. All of this has effectively led to a form of delegated proof of work in which hashing power is delegated to larger pools due to efficiency rather than individual miners each competing for the block reward at the expense of their computing power.

Although this has added plenty of hashing power to the network and allowed individuals to be granted fractions of a block reward otherwise unobtainable, this does leave the network open to threats due to its concentration. However, incentive mechanisms inherent to the blockchain makes the risk of attacking the network not worth the reward.

 

Attacking the Blockchain Network

Distributed ledgers aren’t necessarily free from malicious actors, but incentive systems exist within the networks to keep participants in line. There are a few ways in which disruptors could potentially wreak havoc on the blockchain network, with one of the major attack vector being a 51 percent attack.

A 51 percent attack is where an entity controlling a majority of the network hashrate can take control by preventing new transactions from confirming and modifying the history of the ledger. However, the cost of acquiring the computational power necessary to assume that level of control is immense, considering the current hashing power of the network.

Malicious actors are also incentivized to stay in-line due to market effects. If users of the bitcoin network knew that the network was compromised, a mass exodus would occur, dramatically dropping the price of bitcoin which would effectively leave the miners with less than what they spent to control the majority of the hashing power. Information leading to this conclusion is public, as network hashrate distribution can be found with a simple search.

 

Other Consensus Models For Blockchain Technology

Bitcoin’s proof of work isn’t the only consensus algorithm that secures distributed networks. Another popular type of consensus mechanism is proof of stake, which involves individuals “staking” their cryptocurrency to potentially be selected to create the next block. In this system, blocks aren’t “mined” through hashing power, but “forged” or “created” by participants. This eliminates the arms-race involved in proof of work systems to secure the most computational power, and is a greener consensus mechanism due to reduced emissions.

An argument in favor of a proof of stake consensus mechanism relates to a deeper conversation, specifically on ethics. As we’re tapping into a financial goldmine and securing a network, how can we best protect that which is inherent and has been slowly drained in the background due to increased energy consumption? Methods of liberating those in financial need should also best-serve their surroundings as well.

The likelihood of an individual being selected to create the next block is directly dependent on how much of that cryptocurrency they own. Although the consensus could be affected by a smaller group of large holders due to the increased likelihood of them being selected, they are incentivized to act efficiently, as the value of their holdings are proportional to the success of the network. In the future, the Ethereum blockchain will be switching to a proof of stake system to replace their existing proof of work consensus.

Some platforms even use a combination of both proof of work and staking to both have a form of block reward to secure the network and using the latter for network maintenance. One example of hybrid system is DASH where typical proof of work mining is deployed but nodes staking DASH participate in its governance.

New blockchain consensus mechanisms are being explored every day to bring higher levels of efficiency and security to distributed systems. Considering how far we’ve come from an original proof of work deployment in a short span of time, the innovation soon to come will be incredible.


Mom This Is Cryptocurrency

Dear Mom, This is Cryptocurrency

Dear Mom, This is Cryptocurrency by Zachary Dash

We all have that one family member or friend, that no matter how many times we try to explain cryptocurrency, we are met with blank stares of bewilderment or curious questions of concern.

“Is this real money, or just monopoly money?”

“Okay cool, but what can I do with it?”

“You mean that Bitcoin thing?”

For me, this person is my mother. A red-haired, middle-child and grandmother to three; she always has a way of standing out from the norm and thinking differently. Despite this rebellious nature and open-mind, the conversations of cryptocurrency have been a struggle to say the least.

As with many families across the world, the polarizing topic of Bitcoin has become a common dinner table discussion. Although the average age of cryptocurrency supporters seem to skew towards younger generations, it is not uncommon to have demographics in all directions passionately promoting their side of the debate.

As early adopters, it is not our responsibility to change the minds of others; but rather, foster the growth of understanding. Understanding that of which we do not accept is the first step to accepting that of which we do not understand. So mom, this is for you. This is cryptocurrency.

 

History of Change

In recent months, I have started to feel like a crypto missionary of sorts. Riding my altcoins into the abyss; knocking on every door who will answer. Telling people you are into cryptocurrency has become the new standard of announcing your vegan-ness or personal crossfit records.  It is many times frustrating to not be met with the same enthusiasm and excitement when discussing something you are so incredibly passionate about. But, can you really blame them?

In 1995, the prominent magazine “Newsweek” published an article criticizing the internet with some pretty confident remarks:

“The truth in no online database will replace your daily newspaper, no CD-ROM can take the place of a competent teacher and no computer network will change the way government works.”

Although this sentiment did not represent everyone’s opinion from the 90’s, the value of the internet was not as obvious as it is today. Google hadn’t been invented yet; your computer still made robot noises when connecting online; and this new technology making its way into our homes was still referred to as the ‘information superhighway’.

As the internet continues to revolutionize how we connect, there is another evolution taking place in the financial industry.

 

Why Does Cryptocurrency Matter?

It is human nature to explain concepts by answering what something is. In my early conversations, I attempted to explain the concept of cryptocurrency with the same wikipedia-laced line of information:

“A digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.”

But as humans, we don’t care what something does; we care why it is important. What impact does this have on the world? How does it pertain to me? Although cryptocurrency is still in its early stages, it is already impacting the world as we know it. Here is one my favorite examples of many.

Azraq Refugee Camp

In the heart of a Jordanian desert sits the Azraq Refugee Camp, built for Syrian refugees. While lucky enough to escape the violence and civil war in their homeland, all possessions and goods previously owned have been lost or taken away. Living in conditions and situations many of us cannot fathom, the main sense of normalcy these refugees have involves socializing at a local supermarket. However, instead of paying traditional money, all transactions are utilizing cryptocurrency.

Due to the nature of cryptocurrency, each transaction a refugee makes is locked on an unchangeable digital ledger that can be moved across borders. If there is ever an opportunity to transition back to their home countries, this technology would allow for a smoother transition back into society.

Houman Haddad, the brainchild behind Building Blocks Project added to the importance of how this digital asset will be with them for many years to come. “In the case of refugees, it’s not a document that can be actively taken away from them or something they can be persecuted for stuff on, at the same time they’ll have access wherever they go,”

African Inflation

Although Americans do see inflation of the USD over the years, the problem of over-printing money is a greater and more critical problem in other parts of the world.

“In 2016, a study of 10 African nations with unusual inflationary ratios, indicated that South Sudan had a huge inflation rate of 295%. Egypt had the lowest rate with 12.30%. High inflation and weak African currencies allow Bitcoin and cryptocurrencies to offer African consumers a stable store of value and an inflation hedge.” Source

In traditional financial systems, citizens are dependent on centralized governments and banks to ensure their money holds value over time. In the decentralized systems that cryptocurrency enables, power is put back into the hands of the people.

 

So, What is Cryptocurrency?

Before we get too far down this rabbit hole, there are three misconceptions that we must clear up.

1) Bitcoin is only a portion of the cryptocurrency industry.

While Bitcoin is inherently a cryptocurrency, not all cryptocurrencies are Bitcoin. Just like in the physical world, there are multiple forms of currency; from the USD and Peso, to the Yen and Euro. Bitcoin just so happens to be the most well-known and media hyped cryptocurrency at this time.

2) Currency takes many different forms.

All the time I hear, “Is this real money?” There are only two things that must be true for something to be used as money. First, two people have to mutually agree it has a value. Second, there has to be something to transfer; like food, paper, or utilities. In the case of cryptocurrency, millions of people mutually agreed it has value, and we transfer ownership to one another as payment. Without this foundation, the idea of digital, cryptographic, “monopoly money” universe is extremely difficult to comprehend.

3) Not all cryptocurrencies are used as currency.

Confusing, I know. If there was one thing I could go back in time and change about the industry, it might be the naming of “crypto-currency”. Although it is possible to use a few coins to buy a cup of coffee, much of the industry is comprised of ‘tokens’ that were made with a sole purpose of performing tasks. Just like hammers, wheels, and the all-important backscratchers; many tokens are used for purpose, not as payment.

 

How Does Cryptocurrency Work?

Currently, when you want to send money to your uncle in North Dakota, you are probably going to use a third party to accomplish the task. One way you could do this is by transferring some money on PayPal. If you are lucky enough to have the same bank, you might wire him the money. If you are feeling super paranoid, you could even attach some cash to a carrier pigeon and hope he makes it there in time for winter. In all these examples, whether you use Paypal, Chase Bank, or a carrier pigeon, you are putting your trust in another person/entity to successfully transfer your money.

This, is what cryptocurrency changes. There is no middle man but it accomplishes the same task. Although there are many complexities in how this is technically possible, there are only two things you must understand to get your crypto on. Blockchain and Wallets.

1) Blockchain (Bank)

The most common way in which we interact with money in today’s society is through banks. We give our cash and assets over to the bank, and in turn, they promise to keep it safe and easily accessible. While this is an extremely valuable service to provide, the recent innovation of blockchain technology allows for us to get the same safety and accessibility, without using a third-party.

In short, a blockchain is simply a public ledger of transactions. However, instead of one company or entity controlling your funds, the funds are processed and secured by group consensus. Here is a quick analogy to help explain how these transactions are transmitted.

Imagine a room of 10 people; all with an imaginary $10. Everyone knows the rules of this room and how much money everyone else has. When Person A wants to send their imaginary money to Person B, they simply say it out loud. “I, Person A, am sending $5 to Person B”. The entire room hears what just happened and writes it down. When Person C wants to send money to Person D, they follow this same process. Announce their transaction, and everyone writes it down. At any time, we can ask the room how much money any person has, and the room, as a whole should be able to tell you the correct amount. There is no teacher in the middle. There is no principal in the lobby. Everyone has an equal voice and relies on the trust of the group to come to a consensus of what is right.

This is how cryptocurrency works. But instead of trusting in people to write everything down on paper to keep up with these transactions, we put our trust in math.  While it seems like a crazy idea to put our trust in mathematical numbers and formulas, this is something we already do on a daily basis without knowing it. When we set our alarm clock at night, we are trusting in math to wake us up at the right time. When we navigate our way to the top of a skyscraper, we are trusting in the math of architects and engineers to ensure our safety. When we are driving our cars, we are trusting in math to tell us how fast we are going and how much gas we have left in the tank.

I believe a lot of people get scared away from the industry when they first hear the word ‘crypto’. Seems like some made up word from the Da Vinci Code or Legends of the Lost Temple. However, if we simply think of ‘crypto’ as mathematical formulas, it is sometimes easier to comprehend.  While humans have done many amazing things throughout history, we have also proven to be emotional creatures that make mistakes. Cryptocurrency builds itself on the trust, consistency, and the incorruptible nature of numbers.

2) Wallet (Bank Account)

Now that we understand the blockchain can be used as a decentralized bank, we can move on to understanding ‘wallets’. The best analogy when describing a cryptocurrency wallet is similar thinking of your current bank account. This is where you send, receive, and keep your cryptocurrencies. While many people like to imagine their money sitting safely three stories underground in a vault protected by armed guards, most banks now hold a majority of their assets on central computers and servers. If these servers or vaults were to be robbed, your money would be in jeopardy as well.

Cryptocurrency assets, however, sit inside multiple digital ‘vaults’ all over the world. If a hacker or thief were to try and steal your money, it would take much more time, energy and effort to do so. With no central target of attack and a security system that gets stronger as the network grows, cryptocurrency wallets are a decentralized solution to the current banking system.

Here are the five ways in which you can currently store and send your cryptocurrencies in a decentralized manner:

  • Web Based Wallet: A virtual web based wallet is similar to how you currently interact with your bank online. You go to a web page, login, and can access your account.
  • Desktop Wallet: To use this, you must first download a software (similar to downloading iTunes or Photoshop). This is a great alternative to taking the coins into your own hands.
  • Mobile Wallet: Same concept as a desktop wallet, but on your phone. Simply download the mobile app from the app store and you are good to go.
  • Hardware Wallet: These wallets usually come looking like a USB stick, with some extra added tech inside. It seems counterintuitive to move a digital asset onto a physical wallet, but this is one of the safest way to secure your coins.
  • Paper Wallet: Your wallet always has a public and private key. Think of this as your account name and password. A paper wallet allows you to print this information off and take your coins “offline”.

Even as a cryptocurrency advocate, many people believe wallets are currently the largest obstacle holding back the mass adoption of cryptocurrency. While you don’t need technical understanding of the blockchain to gain its benefits, there is still a very high learning curve for sending, receiving and storing cryptocurrencies. It’s like we have baked the best cake in the world, and nobody knows how to use a fork, yet.

Currently, many different coins and tokens require their own wallet or storage system. To counter this, the team at Ethos is building out an easy-to-use mobile application to interact with cryptocurrency without all the confusing stuff. With the Universal Wallet, Ethos puts you in complete control at all times with no need to keep track of multiple wallets and private keys. You can rest easy knowing your assets are safe, secure and right there when you need them. Here is a sneak peek at the mobile app coming soon:

 

How Does this Affect Me?

Alright, so you have a basic understanding of cryptocurrency, but how does this pertain to you? What are the actual use cases and how can this make your life better?

More Secure

Decentralized platforms over time will be a much more secure network, but why is this? In the past year, there have been many stories of large and credible companies getting hacked.

  • Equifax, a top consumer reporting agency, had over 145M customers’ data and information compromised. [Source]
  • Target, one of the largest retailers, had credit card and debit card data from over 40M accounts stolen. [Source]
  • Uber, the largest ride sharing application, had data from over 57M customers stolen. Oh, and they paid $100,000 to cover it up. [Source]

More than individual entities showing an inability to remain secure, there have been countless examples of entire countries taking advantage of their power. Most recently, the United States experienced the 2008 financial crisis which is considered by many to be the worst financial downturn since the Great Depression. Here is a quick summary of how and why it happened.

  • People wanted to keep their money safe, so they put it in banks.
  • Banks wanted to make money, so they took people’s money and gave it out as loans.
  • These loans were not good loans, and people did not pay them back.
  • The banks declared for bankruptcy and the government stepped in to bail them out.
  • The Government used the people’s tax money to pay off the money that the banks lost.

When there is one point of failure it is easy for negligent, malicious or simply corrupt behavior. Cryptocurrencies on the other hand are not stored in one central location, but on a distributed, decentralized system.

Lower Fees

While Bitcoin has had some growing pains of the last few years with transfer fees, there are many other cryptocurrencies that allow you to send with minimal or zero fees.

Universal

You can take cryptocurrency with you anywhere in the world and it retains it’s value. No need to convert it to the local currency. Although there a limited number of vendors who currently accept cryptocurrency, this number is expected to grow exponentially in the very near future.

Private

Some coins offer more anonymity than others. Not sure what you want to be buying with this anonymous money mom, but I will leave that up to you.

Conclusion

This is where we currently are with cryptocurrency; a mystical state of science fiction and awkward teen years. Not quite old enough to drive, but just tall enough to ride every roller coaster at the amusement park. As we try to figure out where this all will end up in our society, cryptocurrency is trying to understand itself and the long term impact it will have on the world.

https://upscri.be/27f3c1/


Cryptocurrency Guide

Ethos’ Alphabetical Guide to Cryptocurrency Definitions and Metrics

Easily Understand Bitcoin, Blockchain & Cryptocurrency Definitions and Metrics

Welcome to Ethos’ Alphabetical Guide to Cryptocurrency Definitions and Metrics. We know, there are dozens of these guides out there, but this is the one to rule them all. OK, crypto’s complicated. There’s bound to be a load of stuff we’ve missed. Just know, this is only the start. This guide will be updated on a monthly basis with all of the cool happenings in the world of crypto. We’re writing it in plain English, because we want to make everything as clear as possible. Besides, for all the crypto-wizards out there, you probably know it all anyway, right?

It’s for anyone that wants to learn more, and maybe have a go at explaining it to their friends, colleagues, relatives and fellow investors: for those that have been in crypto for a while and want a simple definition of the latest stuff, or the ones just getting into it, and who want to get up to speed. So, find your favourite easy chair, sit back, and relax. It’s about to get technical, yo!


Airdrops

A way of distributing free cryptocurrency or tokens to users. This can occur by simply holding an account with a partnered cryptocurrency exchange or holding a compatible cryptocurrency, such as ETH or Bitcoin, in a specified 3rd party wallet or can even take place in completely public events. Sometimes both apply i.e. an exchange may require you to hold a certain amount of one coin, before you can receive another. It is seen by some as a PR exercise, and by others as a viable option / alternative to ICOs for fairly distributing an asset. Once received, these assets then become transferable and tradeable on the open market. Airdrops can also occur in the form of a hard fork, where the original version of the cryptocurrency is required, and a blockchain ‘snapshot’ of ownership is taken before the owner of the original cryptocurrency receives the new, forked version of cryptocurrency. Learn more about the Ethos Community Airdrop Program by reading our Community Airdrop Guide!

 


 

Atomic Swaps

A technology allowing two different users to directly exchange cryptocurrencies belonging to separate blockchains, without any third-party or intermediary e.g. XRP to Ethos. The technology is still in its nascent stages, and while progress is being made, there are associated risks involved. Currently, the only viable alternative is to use an exchange, which requires trading the original cryptocurrency i.e. XRP into a compatible intermediary i.e. Bitcoin, and then trading this cryptocurrency into what you want to purchase i.e. Ethos. This trade incurs fees, which would be negligible using an Atomic Swap. Were you to currently attempt sending a cryptocurrency to an incompatible address, there is a high likelihood that you would lose your funds, and they would be irrecoverable. See the section below on an ‘Address’ for more information.

 


 

Addresses

Composed of a unique, alphanumeric string of characters, an address is a secure identifier enabling an individual or entity to perform a blockchain transaction. A private key is required to access these funds, which is an equally unique string that operates as a password or PIN number. In conventional terms, your address can be seen as your account number and sort code. Bitcoin addresses start with a ‘1’ or a ‘3’. Ethereum addresses start with an ‘0x’. It is important to note, as per the definition above on Atomic Swap technology, that sending a cryptocurrency to an incompatible address is not advised, as it is likely you will lose the funds. Unlike a centralized system, there is often no resource to protect your funds should you make a payment to an incorrect address, so it is important to get it right. If in doubt, always send a small amount of value first, to practice, and then proceed with the main transaction.

 


 

Altcoins

Any category of cryptocurrency that isn’t Bitcoin. These alternative coins are made up of currencies and tokens. Many present alternatives to Bitcoin, aiming to be faster and cheaper, while many operate as access tokens for digital goods and services applications (DApps) that operate on a blockchain. Many popular altcoins operate using Bitcoin’s core technology, while others are completely unique. Others, such as Ethos, are built on the Ethereum blockchain and are known to be ERC-20 compliant – a common standard for Ethereum based coins. The original altcoin is considered by many to be Litecoin, as it was based on the Bitcoin source code. As of 19th February 2018, there are 1,544 altcoins available on CoinMarketCap, comprising 62.6% of the entire cryptocurrency market. Altcoins can be stored in compatible wallets and traded with other altcoins via an exchange. The Ethos Universal Wallet can store more than 150+ altcoins, be sure to check out the coin wallet support list for more details!

 


 

ASICs – Application Specific Integrated Circuits

Microchips or processors designed and manufactured to perform the highly specific task of mining cryptocurrency. Bitcoin ASICs came into existence in 2013, vastly outperforming existing technology at the time. Many consider the use of ASICs mining to be incompatible with the decentralized vision of cryptocurrency, as it is generally a technology accessible by those with a high degree of technical expertise and funding. Nonetheless, the majority of Bitcoin ‘Proof of Work’ mining is now carried out by these types of processors, which perform well, yet also consume considerable amounts of electricity. Therefore, more sustainable alternatives to generating cryptocurrencies are being developed, including PoS and DPoS protocols. For more information, please refer to the ‘What are ASIC miners?‘ article on the Ethos website.

 


 

Bitcoin

The original cryptocurrency created by Satoshi Nakamoto in 2009. Allowing for near instant transactions of value in a P2P way, it operates as an decentralized, and thus un-hackable and immutable ledger of value stored on what is known as a blockchain. Bitcoin is not backed by any central government or institution. It exists purely as a distributed network of computers that attest to the uniqueness of any given transaction. Colloquially known as ‘The King of Crypto’ and ‘Digital Gold’ it is the most liquid of all cryptocurrencies, worth $189.76bn in terms of its total market cap, according to CoinMarketCap on 19th February 2018. Bitcoin requires a large amount of computing power to operate, relying on what’s known as a Proof of Work protocol. For more information, please refer to the ‘What is Bitcoin?’ article on the Ethos website.

 


Blocks / Blockchain

Refers to a public ledger, or database, that in theory cannot be changed without consensus. This immutability allows for data within that database to perform different transactional functions, and the elements of this database are known as blocks. These blocks can represent movements of value, like a currency, or work as an access mechanism or functional utility, for a platform providing goods and services. As more transactions take place on a ledger, new blocks are added to the chain containing the recorded transaction data. There are different ways of generating and managing blockchains. Some are mined, others are pre-minied. Each has a different amount of data it can store, and there are large variations of speed in which the data can be transferred. Some blockchains are managed centrally by specialized parties that run nodes in the network, and might more accurately be termed distributed ledger technology, and others like the Bitcoin blockchain are completely decentralized. There also exists hybrid systems, which aim to combine the benefits of centralisation and decentralisation. For more information, please refer to the “What is Blockchain?” article or learn more about how does blockchain work on the Ethos website.

 


 

Block Height

Refers to the number of blocks that have been produced in a specific blockchain, in the case of blockchains which are mined i.e not pre-mined. Starting with what is referred to as a ‘genesis block’ (the first block in a blockchain), these blocks can store and manage multiple types of information like documentation data, yet popularly relay transactional values or functions of utility. The block height on a transactional blockchain like Bitcoin can be accessed publicly via a ‘block explorer’. The speed at which a particular block height is reached depends on the difficulty and inflationary / deflationary model of the respective blockchain.

 


 

Block Reward

A payment, in the form of cryptocurrency or fees, offered to the miner of a successfully hashed block on a blockchain. What this reward is will depend on the algorithmic policy of the cryptocurrency: such variables include the age of the blockchain, hashing difficulty, and therefore the inflationary model of said cryptocurrency. For instance, Bitcoin mining currently awards 12.5 Bitcoins for each block that is successfully hashed. After a certain period of time, rewards will decrease as the hashing difficulty is increased. Often, the block reward halves when a certain number of blocks have been mined, every 210,000 in the case of Bitcoin.

 


Centralized

A term referring to an organization or system that is controlled by a single group or entity. Governments and corporations are centralized organizations, as are their currencies and shares respectively. Current centralized systems have various advantages that decentralized systems lack, such as regulation, yet conversely decentralized systems have advantages over centralized systems, such as resistance to abuse, attack and failure.

 


Cold Storage

Describes a method of storing digital data, such as cryptocurrencies, in a way that is not connected to the internet. Popular methods of cold storage include specialized USB enabled ‘hardware wallets’. Due to the lack of user-friendly software, it makes the use of such data more complicated and less likely to be regularly accessed. Additionally, one aspect of such devices is the opportunity for physical damage, loss or theft. However, the advantages of such tools is that they are far less likely to be prone to software theft, commonly known as hacking.

 


 

Consensus

Defined as any agreement by a given majority, often placed at 51%. If 51% of people, or entities on a network, agree to a certain condition, be that a value transaction or change to the system, the result is known as consensus. An important part of the cryptocurrency space, consensus is required to verify the validity of digital transactions on a blockchain. It is also a way of politically managing decentralized systems, for instance whether or not a hard fork should occur.

 


 

Cryptocurrency

Any type of currency that is transferred via a blockchain, using decentralized and cryptographic protocols. By using these protocols, the value of the data being transferred is resistant to fraud, and is protected from negative features of traditional fiat currency, such as counterfeiting. This transparency, coupled with its P2P and portable nature is considered one of its many benefits, in addition to the fact that it is theoretically unable to be interfered with by centralized governments and organizations. As of 19th February, the most valuable cryptocurrency in the world is Bitcoin. Other cryptocurrencies include Litecoin, Dash, ZCash, Monero, and Nano. Read more about “What is a cryptocurrency exchange?” on Ethos.

 


Cryptojacking

The covert use of a computer to maliciously mine cryptocurrency. Traditionally reliant on a piece of software installed on the computer itself, modern cryptojacking techniques can be managed remotely by simply accessing the computer’s browser. Website owners are essentially hacked, have the rogue software installed on their servers, and then the software activates whenever a user accesses a particular page on that website. It is also possible to cryptojack via display ads on websites, using a similar technique by installing within the advert’s HTML code.

 


 

DAO – Decentralized Autonomous Organizations

An organization that operates through rules encoded as smart contracts. Think of it as a financial or crowdfunding program, built on a decentralized blockchain, existing entirely online. They’re designed to be autonomous, yet often require maintenance by specialized individuals who are hired by the DAO’s members to encode elements that cannot be performed autonomously. DAOs are not owned or governed by individuals. Instead, they operate via network of distributed computers, with actions decided by consensus. In many ways, a DAO is effective democratic, financial system with safeguards in place to protect its members. However they cannot be considered infallible or incorruptible, as proven by the Genesis DAO hack of May 2016.

 


Decentralized

Drawing from the definition given by Vitalik Buterin, founder of Ethereum, the term can be broken into three parts when referring to decentralized blockchains: architectural, political and logical decentralisation. ‘Architectural decentralisation’ is the number of computers on the network. ‘Political decentralisation’ is the number of users of that network. ‘Logical decentralisation’ asks whether two halves of the network could operate independently of one another, were you to split users and providers of the network equally. Blockchains are politically decentralized, as no single entity controls them. They are also architecturally decentralized, meaning they don’t exist on a central server, resulting in a lack of central point of failure. However, they are logically centralized, as there is agreement related to the operational behaviour of the system, for example that users agree Bitcoin will only ever have a total supply of 21M coins. Therefore, anything that definitively breaks that rule (a hard fork) isn’t Bitcoin.

 


 

DApp – Decentralized Application

Software applications that run on top of dedicated, decentralized P2P networks. They differ from smart contracts, and therefore are also different from DAOs. Any number of participants from the provider and user sides may interact with these applications, and the function need not be financial, as is the case with a DAO. Like conventional, centralized applications, DApps can be written in a variety of programming languages from Javascript and C# to PHP and Java, and more besides. Ethereum is the most popular DApp platform at the time of writing, primarily using a custom coding language called Solidity. The Ethos Universal Wallet is an Ethereum DApp.

 


Difficulty

When creating blockchains through the process of hashing, the difficulty determines the amount of computer power required to solve the cryptographic puzzle that adds a block to the chain. Therefore, two factors determine the difficulty or hashpower required: the parameters set by the cryptocurrency, and the number / power of computers on the network trying to solve the puzzle. Typically, the difficulty parameter and reward mechanism of the cryptocurrency is predetermined, so the variable affecting the difficulty is dependent on the number / power of computers on the network. The computer network’s hash power is improved by using ASICs.

 


 

ERC-20

A certifiable standard for tokens launched on the Ethereum Blockchain network, that guarantees they work in a predictable and secure way. This allows for the easy transfer of compatible tokens, in the instance of an ICO for example, that would require the exchange of Ether. The benefit of having this benchmark of compliance also means that wallets and cryptocurrency exchanges only need to apply a single smart contract address for Ethereum in order to manage multiple types of token.

 


 

ETH – Ether

According to the definition on the Ethereum website, “Ether is a necessary element – a fuel – for operating the distributed application platform Ethereum. It is a form of payment made by the clients of the platform to the machines executing the requested operations. To put it another way, Ether is the incentive ensuring that developers write quality applications (wasteful code costs more), and that the network remains healthy (people are compensated for their contributed resources)”. Developers who intend to build DApps that will use the Ethereum blockchain require Ether, as do users interacting with its smart contracts. Using the platform, transaction fees are measured based on the gas limit and gas price, ultimately paid for in Ether.

 


 

Ethereum

The foremost DApp platform at the time of writing, proposed and founded by Vitalik Buterin in 2013. Development was funded by an online crowdsale that took place between July and August 2014. The system went live on 30th July 2015. Ethereum provides a Turing-complete virtual machine, known as the Ethereum Virtual Machine (EVM), that allows for open-source, public and blockchain based distributed computing, using smart contract functionality. The DApps that can be built on the Ethereum platform range widely in use cases, from prediction markets and identity systems, to games and social media platforms. Ethereum is the second largest blockchain by market cap, worth an estimated $91bn on CoinMarketCap as of 19th February, 2018, representing approximately 19% of the entire cryptocurrency market. For more information, please refer to the ‘What is Ethereum?‘ article on the Ethos website.

 


 

Emission

The speed at which certain cryptocurrencies are created and released, often through the use of airdrops or staggered ICOs. Whether this speed slows or remains constant determines whether the cryptocurrency is based on a deflationary or inflationary model, respectively. Often, a cap will be placed on the emission, so that by default it becomes deflationary after that point, due to physical loss or token burns. This cap is known as the maximum supply. However, there are examples of cryptocurrencies that employ an infinite emission model, so that they will continue to be created and released, though at a lower rate of emission. Such a currency is inherently inflationary, in that the unit value of the currency decreases over time. Emission rates to not necessarily speak to the quality of a cryptocurrency, however from an investment perspective it is worth understanding the concept, as it is a parameter that may dilute your portfolio over time.

 


 

Forks – Soft & Hard

A change or upgrade to the software protocol of a blockchain. What determines if it is soft or hard fork depends on a) whether the change can still operate alongside the existing protocol and b) whether there is consensus related to the change. To clarify, soft forks are generally seen as routine maintenance to improve issues related to the blockchain, such as security and scalability. Much like when you download a patch for the operating system on your computer, you are not fundamentally changing the main operating system. With a hard fork, the operating system of a blockchain is being changed i.e. a new record of data begins. This means the new version of the blockchain will disregard the old blockchain completely, and becomes something fundamentally different. This new blockchain will then be maintained independently from the previous one, and will be given a different name. Sometimes, however, the older blockchain is given a different name, as was the case with Ethereum Classic in 2016. After Ethereum was hard forked after the Genesis DAO hack of 2016, the new version maintained the name Ethereum, while it was the old version that changed its name. On various occasions, accidental hard forks have occurred that did not undergo a process of network consensus. Hard forks regularly result in the resulting cryptocurrency being delivered via airdrop to users that hold the ‘pre-fork’ version, as has been the case with Bitcoin Cash, Bitcoin Gold and Bitcoin Diamond.

 


Gas

On the Ethereum platform, each transaction i.e. API call that is performed, costs gas. This small cost pays for the computational resources of the network to process the transaction. The more gas a user pays, the faster the transaction occurs. Think of it as an incentive for the miners on the network to prioritise your transaction, over a user that set a lower gas limit i.e. the maximum amount of gas one is willing to spend on a transaction. Any gas that is unused after a transaction occurs is returned to the user. If a transaction fails for any reason, the user still pays the gas. Gas is calculated by multiplying the gas price or ‘gwei’. gwei is a mathematical term referring to a fraction, also known as a ’shannon’, defined as 1 billionth of a whole. That’s 1:100,000,0000. A typical gas price is 20 gwei, but can be as high as 50 gwei if the Ethereum network is busy. 2 gwei is the minimum required to perform a transaction. A simple USD calculation of your maximum gas price is $ cost of Ethereum / 1 billion x gas limit. If you are performing regular transactions on the Ethereum Blockchain network, it’s worth understanding this formula. For more information, please refer to the ‘What is Ethereum Gas?‘ article on the Ethos website.

 


 

Hashing / Hash Function

A computer program, which takes data and converts it into an alphanumeric sequence or code. Hashing allows for faster retrieval of information related to the original data, because hashes are typically shorter and therefore easier to compute. Hashes have the added benefit of scrambling data, so that it becomes unreadable, secret and secure. The difficulty to crack a hash function is therefore what defines the security of a blockchain, as well as contributing to its production.

 


 

SHA 256 – Secure Hash Algorithm 256

Originally designed by the US Government’s National Security Agency in 2001, and released under a royalty-free licence, SHA is considered one of the most digitally secure ways to encrypt and protect information. It is used by Bitcoin as the basis of its Proof of Work algorithm, a variation of the Hashcash function invented by British cryptographer Adam Back in 1997. It’s also used in creating Bitcoin addresses, thereby improving security and privacy. It is estimated there are as many solutions to SHA 256 as there are grains of sand on earth, making the economics of trying to crack it using brute force techniques unviable. See the section on ‘Proof of Work’ to learn more about the fundamentals of its application to blockchain technology.

 


 

Hashes per Second

Simply the number of hashes a computer can produce in a second. A megahash is measured as 1 million (1,000,000) hashes, therefore a hashrate can be measured as 1 million hashes / second or 1 MH/s. Of course, there are higher hashrate definitions: A gigahash is one factor above a megahash, so 1,000,000,000 hashes. A terrahash is one factor above that, at 1,000,000,000,000 hashes. And a petahash, well that’s 1,000,000,000,000,000 hashes! The Bitcoin mining network is currently performing at approx. 22 PH/S, and growing.

 


Keys – Private and Public

When performing a cryptocurrency transaction, it is first necessary to have a public and private key. It is the combination of these two keys that allows users to send and receive in a secure way. Each key is represented by an alphanumeric string, a hashed reference to that user’s ownership of a cryptocurrency from a particular blockchain. Think as your private key as your digital ID, or PIN number. Like a conventional bank account, it’s required to spend, withdraw or transfer funds, or carry out functions on the account. A hash algorithm processes your private key, in order to generate your public key. When you make a transfer, your public key is broadcast to the nodes on the blockchain network. Via consensus, the network confirms the validity of that transfer, that is to say that the private and public keys are compatible, and the entity that performed the transfer actually owns the funds. Once confirmed, the transaction is sent to the recipient’s public address. The addresses themselves are generated via the public key, and you can think of your address as an account number and sort code. Although public keys and addresses are generated from a private key, and both the public key and address are visible on the network, trying to reverse the process to find a private key is practically impossible. This is due to the hashing algorithm on the network, which makes trying find the key economically non-viable, due to the cost of the hash power required, which would need to exceed the power of 51% of the entire network. It is important to safeguard your private key. You can always regenerate your public key and address from your private key, but if you lose your private key, you will lose access to your account. See the ‘Mnemonic – Seed Phrase’ reference in this guide for more information on how to remember and protect your private keys. For more information, please refer to the ‘What are private keys and addresses?‘ & “What is a Smart Key?” article on the Ethos website.

 


Lightning Network

Described in its whitepaper as “Scalable Off-Chain Instant Payments”, the Lightning Network is a theoretical technology that allows for high-speed, high-throughput, low-cost micropayments to occur on the Bitcoin network. Indeed, should it succeed in its vision, the technology could be applied to a range of cryptocurrencies. A much discussed issue with Bitcoin as a payment protocol, aside from the volatility of its price, is the number of transactions that can be made on the network, known as its ‘scalability’. Depending on how busy the network is, the transaction range can be anywhere from 5-20 per second, with the average being around 7. Compare this to the Visa network, which can peak around the 45,000 t/s range, and it’s clear there’s a scaling issue for Bitcoin as a global payment method. Bitcoin Cash (BCH), a Bitcoin hard fork, aims to solve the problem by increasing the amount of data a block can hold from 1MB to 8MB. By contrast, rather that updating Bitcoin’s technology, the Lightning Network will achieve scalability by creating an extra layer of technology that sits alongside the Bitcoin blockchain, in the form of hashed timelock contracts, while still harnessing the same level of security in its transactions. One potential issue is that BTC must be locked in these time locked contracts in order to participate in the Lightning Network.

 


 

Miners & Mining

Miners are users, or nodes on a network, that perform the important task of creating cryptocurrency, validating blockchain transactions, and adding them to the public ledger in the form of new blocks. Miners are rewarded transaction fees for the work they carry out, as well as a payment in the form of the blockchain’s cryptocurrency when hashing new blocks. Miners are the entities that decide which version of a blockchain should be mined. The services they provide allow for issuance of new cryptocurrency, and through decentralisation also ensure the security of the blockchain. Anyone with the correct equipment and technological understanding to engage with the process is able to, however due to the cost of both the modern hardware (CPUs, GPUs and ASICs) and electricity required to run a mining rig, in addition to the industrial competition for hash power, many are limited from doing so. Due to these challenges, many miners collaborate in ‘mining pools’ in order to share resources, and the rewards from the cryptocurrency they create. For more information, please refer to the ‘What are miners?‘ article on the Ethos website.

 


 

Mnemonic – Seed Phrase

‘Mnemonic’ refers to any system that helps you remember something. It could be a series of rhyming words, abbreviations, a song, or even a journey through an imaginary place. When creating a cryptocurrency wallet, a mnemonic phrase is sometimes generated in order to provide an easier way to remember your private key, instead of having to memorize an alphanumeric string. Also referred to as a ‘seed phrase’, it’s important to keep it somewhere safe. As with any private key you hold, if you lose it means you’ll also lose access to your cryptocurrency. Try not to keep your passwords anywhere that could be destroyed or stolen, and if possible try to keep them separate from other details about your crypto wallet. To be highly secure, keeping your passwords away from internet connected devices is also advised.

 


Multi-signature

This means that more than one private key is required before a transaction can occur. It increases security by decentralizing control, and therefore has a number of benefits from a business perspective. The most common commercial application is escrow. Though the current escrow application does not provide an absolutely trustless environment, it does not require the degree of centralization that traditional escrow services do. For example in a digital marketplace, a buyer will often wish to withhold funds until their delivery arrives. In centralized marketplaces like eBay, the escrow service is at the discretion of eBay. There is a voting system to protect buyers, but ultimately eBay has the final say. Even in cryptocurrency environments, a form of escrow can be deployed with a user acting as a middleman for both parties, however this system is still open to corruption. With a multi-signature wallet, a buyer, seller and middleman can all have private keys, with funds not released from the buyer until all parties agree that the delivery took place. This gives all parties more control, with the only trust being placed on the wallet provider. If the wallet itself is decentralized, the system becomes trustless.

 


 

Peer to Peer

Describes any system in which there is no third party or middleman. In cryptocurrency, it is the direct exchange of currency or data from user to user, without any central or external involvement. The decentralized nature of P2P networks can make them more resilient to a single point of failure. The larger a P2P network, the more resilient it becomes. However that does not make it immune to failure, as the network will require nodes to connect users, which could potentially be throttled or shut down using a denial of service (DDOS) attack.

 


 

PoB – Proof of Burn

A concept describing the economics of adding value to one cryptocurrency, by destroying the availability of another. Put another way, provably removing liquidity from System A in exchange for System B adds immediate value to System B. This can be done in a variety of ways, typically by sending a cryptocurrency to a wallet, and then destroying the private keys to that wallet. How this act is performed would be decided by consensus. Users that sent value to the ‘burn wallet’ then receive an agreed amount of new cryptocurrency in exchange for burning their old one. Such a process could be managed via a DAO. This model tends to rely on burning Proof of Work currencies, such as Bitcoin, where there is demonstrable economic resources i.e technical expertise, hardware costs and electricity, that went into producing it. In short, PoB works as a practical application of the concept of ‘scarcity’, and is an example of the economics of supply and demand, allowing for the efficient transfer of value between different systems.

 


PoO – Proof of Ownership

Describes the provable storage of document data on a blockchain. Think of it as a way of immutably proving that a record exists, in a way that other systems cannot. For example, if you wanted to prove that you owned a piece of property, the deed to that property could be stored on the blockchain. Traditionally, that proof would need to be stored in some way on a centralized system, be that digital or analogue, and that centralized method of storage could be open to a range of issues including tampering, loss or destruction, in addition to the fact that the party in charge of that record must be trusted in some way. Proof of Ownership removes elements of fraud associated with the production of ownership certification. Therefore, the model can be used in a range of applications, from wills, real-estate and digital rights’ management, to ID verification, logistics and medical records. It’s a way of maintaining the integrity of important information, and proving without doubt that the owner associated with that record is verifiable.

 


 

PoR – Proof of Research

A concept related in many ways to Proof of Work. However, unlike Proof of Work where the value associated with the production of a cryptocurrency is reliant on an arbitrary process of hashing, which despite its provable input cost has no other value output other than the creation of a cryptocurrency, Proof of Research aims to put the hash power of the decentralized network to work on problems that have demonstrable, real world value. There exists a number of companies that are attempting to build globally networked supercomputers, that harness the spare computing power of ordinary, non-technical users, and reward them in cryptocurrency for solving problems on their machines. These problems can range from analysis of weather systems and astronomy, to research into new drugs and artificial intelligence. By offsetting the spare hash power of their computers, participants in the network can benefit from the receipt of a publicly tradable asset, and scientific research teams can access an ad hoc network of computers. For the latter party, this is usually cheaper and easier to access than a traditional, centralized supercomputer, and arguably more dynamic in the ways in which hash power can be managed, making it possible for multiple research teams to use the network simultaneously.

 


 

PoS – Proof of Stake

Proof of Stake is an algorithm that aims to solve the intensive energy requirements required by Proof of Work, while allowing non-technical participants to be rewarded for their continued engagement with a network. There are varying models, but the underlying principle is that by owning the cryptocurrency associated with a particular blockchain, you can stake it on the network and be rewarded, rather than having to perform the labour intensive task of mining. Staking coins on the network can offer a range of benefits to the network, including increased
security and liquidity. Think of staking like a lottery, where the chances of winning the lottery increase based on the overall stake you have in the network. A user with 100 coins on the network would, in principle, have a 100 x chance of winning the lottery compared to a user with 1 coin. Naturally, there are issues inherent to this model, such as centralisation of coin value in order to game the system. However, certain parameters can be put in place to prevent abuse of the system, such as placing a limit on the rewards that can be received by an individual. There also exists the concept of Delegated Proof of Stake (DPoS), where users on a network vote for ‘delegates’ who maintain the network, ‘forge’ new blocks on the blockchain, and process transactions. Users can vote for these delegates, based on their value to the network, and receive a proportion of the rewards that those delegates generate in the form of new cryptocurrency, or transaction fees. Again, this system is not perfect, due to the semi-centralisation of political power on the network, which may be open to abuse. However, many developers are working on solving this model to make it as fair and secure as possible.

 


 

PoW – Proof of Work

An algorithm that rewards participants, known as miners, for solving a cryptographic puzzle. At its heart, the benefits of PoW are security and economy, in that any attack on the system i.e. blockchain, would be expensive vs. the rewards one would receive from doing so. Bitcoin is an example of a PoW blockchain and cryptocurrency in which dedicated software, powered by energy intensive CPUs, GPUs and ASICs, use the SHA 256 hashing protocol to produce new blocks. The value of Bitcoin and other PoW based cryptocurrencies is therefore derived from the hardware and infrastructure costs associated with its production. Bitcoin’s PoW protocol works by allowing miners to broadcast the computational work they have done to the network, with the network then verifying that work. The work is verified because it is represented as a unique block, which in itself is attached to a chain of unique blocks. These blocks are unalterable by anyone, ensuring the validity and fungibility of the system. Bitcoin’s PoW protocol is based on a system invented in 1997 by British cryptographer Adam Back, who created an algorithm called Hashcash designed to limit email spam. By proving that an email was created by a human, rather than a machine, the algorithm was able to limit the economic returns of spammers who would use computers and bulk delivery, by increasing their cost per email. For more information, please refer to the ‘What is Proof of Work?‘ article on the Ethos website.

 


 

Raiden Network

The Raiden Network is to Ethereum what the Lightning Network is to Bitcoin. As per the Raiden Network website, it is an in-development “off-chain scaling solution for performing ERC20-compliant token transfers on the Ethereum blockchain, allowing for the secure transfers of tokens between participants without the need for global consensus”. This is achieved using ‘state channels’ combined with digitally signed and hash locked transfers called ‘balance proofs’. As with Bitcoin’s Lightning Network, the benefits are its ability to perform scalable micro-payments, quickly, and with minimal fees. Gas costs on Ethereum are not related to the size or value of the transaction being made. For mid-large transactions, gas costs are less of a relative issue for the convenience the platform provides, however for smaller transactions the gas cost can end up being a significant proportion of the overall value of the transaction. Payments in the range of fractions of a $ cent can be transferred on the Raiden Network, quickly, and with reduced cost to the sender, making it an effective solution for day-to-day use. Yet users should also understand that networks like these require value to be locked up effectively as ‘collateral’, in exchange for the benefit of instantly transacting on the network.

 


 

Satoshi

Named after Satoshi Nakamoto, the anonymous individual or group that invented Bitcoin, the satoshi represents one hundred millionth of a bitcoin. That’s 0.000000001 bitcoin. The unit structure of bitcoins means 1 bitcoin (BTC) is equivalent to 1,000 millibitcoins (mBTC), 1,000,000 microbitcoins (μBTC), or 100,000,000 satoshis. Compare this structure to that of a dollar, for example, which is only divisible by 100 (a cent) and it’s clear that it allows for far greater flexibility as a unit of value. However, due to current costs associated with processing Bitcoin, sending or exchanging less that a certain value becomes uneconomical for the BTC network or its service providers, so that the practicality of sending single satoshis is currently non-viable. Many service providers, such as wallets and exchanges, set a minimum amount of BTC that must be sent to clear a balance. These small values that cannot be processed by current systems are commonly referred to as ‘dust’. It is thought that novel technologies such as the Lightning Network may solve the issue of sending these fractional amounts.

 


 

Scalability

Scalability with regards to a blockchain generally references its speed. When discussing Bitcoin, for example, it is usually the 1MB block size that is brought into question; a parameter designed to limit the occurrence of spam attacks on the early network, yet which has provided usability issues due to network overload as the cryptocurrency becomes more popular. It’s also the case that all transactions on the network must be confirmed by consensus, via globally distributed computers, which in themselves have limits in terms of processing power. Similarly, Ethereum has faced scaling issues for similar reasons, in that all smart contracts and transactions must run through the Ethereum Virtual Machine (EVM). Solutions are being developed, such as Bitcoin’s Lightning Network and Ethereum’s Raiden Network, in addition to a range of solutions like SegWit, sidechains and sharding. However, it remains one of the largest challenges facing the development of blockchain technology, and therefore adoption by the mass-market.

 


 

Segregated Witness

First proposed by Dr. Peter Wiulle, Segregated Witness (SegWit) is a scaling solution for Bitcoin. It aims to solve the issues inherent to a 1MB block size, and therefore the speed of transactions on the network. When a transaction happens on Bitcoin’s blockchain, the process of confirming that a sender has enough funds in their balance happens on the blockchain itself. This reference is known as a signature. This signature takes up space on the blockchain, accounting for 65% of the information stored, and it is this additional information that is enough to slow the network. New records are made on the Bitcoin blockchain every 10 minutes, so by segregating the transaction signatures via SegWit and managing them separately, space is freed up, allowing for a higher throughput of recordings and transactions on the network. In order for this to take place, 95% of miners running nodes on the Bitcoin network must agree to the change, by switching to a new Bitcore Core client for a period of at least two weeks. Segwit has been a very controversial proposal within the Bitcoin community due to differing political views on how Bitcoin should scale, which led to the Bitcoin/Bitcoin Cash hard fork.

 


SPV – Simplified Payment Verification

Similar to what SegWit would do for Bitcoin transaction speed were it implemented, Simplified Payment Verification (SVP) does for the handling of transaction data in a Bitcoin wallet. If you want to receive BTC, you need a wallet to receive the funds. When your wallet receives a transaction, it needs to confirm it’s valid i.e. the BTC is real, and has not been spent elsewhere. How does it do this? Typically, wallets need to check the entire blockchain to confirm that the BTC is available to be spent. This requires downloading and updating the entire blockchain, which is computationally intensive. Assuming you wanted to control your own private keys (which you should), instead of receiving your BTC to a centralized exchange wallet, for example, this would require using a ‘heavyweight wallet’ which would be managed by yourself. This would improve security, but is more resource intensive given the amount of data it needs to handle. A ‘lightweight wallet’ uses SVP to cross reference that the Bitcoin you have received is a viable transaction, confirming against a specific block number, rather than the whole chain. In this way, SVP allows for management of a BTC wallet on lower-powered devices, like mobile phones, which would otherwise struggle computationally to check the entire blockchain.

 


Smart Contracts

Smart contracts are in many ways like traditional contracts. With a traditional contract, an agreement is made between two parties, and the financial terms of the contract are executed once an event, specified within the contract, occurs. A smart contract operates in the same way, yet instead of requiring a centralized executor to confirm the event took place, and validate a transfer of value, a smart contract is programmed to execute the terms automatically. Because a smart contract exists on a decentralized blockchain, which in itself cannot be tampered with, it operates as an immutable reference to the terms of the agreement. Therefore, in addition to their programmable and automated nature they maintain advantages over traditional contracts. In the event of a disagreement between the parties of a traditional contract, it may require a judge or some other centralized party to confirm a certain event took place, and then order that the terms be executed. This party may be open to corruption, based on a bias towards a party within the contract. With a smart contract, both the terms and the execution are built into the same, impartial program designed around the original agreement. To quote Vitalik Buterin, Co-Founder of Ethereum, which as of 19th February 2018 is the foremost smart contracts platform in existence, “…any contract has its own internal memory containing a code. When an item participates in a transaction, the code gets executed. It may work with data from the memory and create new transactions. Thus one may encode any kind of rules or any sequence of events that have to happen should the rules [be] observed. Programmable contracts managed and protected by blockchain may apply to diverse interactions between parties”. Such interactions can range broadly in terms of real applications. These include decentralized exchanges and prediction markets, to wallets and Decentralized Autonomous Organizations (DAOs), the latter being a method by which funds in the form of cryptocurrency from multiple, globally distributed parties may simultaneously be allocated within in the same smart contract. For more information, please refer to the ‘What are smart contracts?‘ article on the Ethos website.

 


 

Trustless

Decentralized cryptocurrencies, based on blockchain, can in general be defined as trustless due to the method of consensus required to verify transactions on an immutable ledger. Yet to really define what trustless means, it requires a comparison to a traditional, centralized value system like fiat currency. Fiat currency is backed by a national government, which determines issuance of the currency itself, and also a range of financial elements that affect the value of that currency: interest, inflation, debt and trade agreements with other nations, in addition to political control of the economy and interactions with the private sector, by which the value of the currency is backed. These aspects are generally outside of the direct control of the users of the currency, despite being able to decide (within democratic systems) which government is in charge. Therefore trust must be placed in this third party, which includes co-participants in the process of choosing a government and the private sector, to not debase or dilute the value of that currency. With a trustless currency, such as one based on blockchain, it is the P2P nature that determines a currency’s value. A currency is as valuable as the market says it is, without intervention by government. Of course, the value of that currency can be affected by exterior actors, such as private interest and the economy at large, but the system itself cannot be altered from within, without consensus of its users. Additionally, there is greatly reduced potential for fraud and counterfeiting with cryptocurrencies, because transactions are (outside of privacy coins) visible on the blockchain itself, which requires independent verification at scale in order for a transaction to complete. This overall lack of centralized dependence means that, in theory, these currencies become trustless. A user can transfer value to another user, without a government or bank being able to take control of the funds, and the only basis by which the value of that currency can be determined is based on bartering with other users.


A Crypto Wild West – The Good, the Bad and the Fudly

A Crypto Wild West - The Good, the Bad and the Fudly

Crypto Wild West – The Good, the Bad and the Fudly by Krishan Nursimooloo


As I sit listening to Ennio Morricone’s epic theme tune, The Good, The Bad and The Ugly, written for Sergio Leone’s eponymous classic Western, it’s hard not to think about how far we’ve come. Only nine years ago, explorers left the Old World in the middle of a financial and economic meltdown. Modern civilization was brought to its knees by all too powerful banks. The abrupt end to a prolonged period of a “debt supercycle”, which began in the 1960s with a cycle of fiat credit and was followed by a move away from the Bretton Woods System to free-floating fiat currencies, had finally happened.

Although banks suffered quite a bit at the time, they were eventually bailed out by the public purse, while the wreckage of recession and austerity weighed heavily on global consumers. Nonetheless, amongst all of this uncertainty and angst, something shiny and wonderful emerged: Bitcoin. Following the work of Satoshi Nakamoto, its secretive inventor, these intrepid prospectors of the time grabbed their spare processors, went panning with source code, and expected the rest would fall nicely into place. Akin to the gold miners of the 19th and early 20th centuries, progress was slow, but it would be worth it.

Crypto Wild West – A New Frontier

Like any fledgling gold rush, their original equipment was relatively low-powered. Blocks were easy to mine. The cryptographic puzzle at Bitcoin’s heart was really a cinch to crack, compared to today’s mind-boggling hash difficulty. Yet it also spoke of novel processes, founded on similarly romanticized values to the American Frontier; those of equality and self-reliance. A dream, not just for the privileged few, but for everyone. No banks. Trustless safeguards. Complete freedom of access to a system of value, for all. Everyone could now live in a peer-to-peer way; a blockchain-powered future, where the same market mistakes could be avoided. Indeed, they could never happen. A utopian, distributed world was open for business, and we could all get involved. But of course, it wasn’t like that. Far from it…

 


Things were very quiet for some time. A few coyotes. A lot of tumbleweed. These crypto-crazies living in the prairies and deserts were searching for gold, but no-one wanted it. Then in 2017, something strange and remarkable happened. As if from nowhere, the global market cap of cryptocurrencies rose 1600%. Investors were in an Ecstacy of Gold, scrabbling around For a Few Dollars More to throw at “blockchain”. OK, I’ll stop with the Morricone references. But seriously, check out those songs. They’re all great.

And all of this was unprecedented, unless you include the Dot-com bubble of the early millennium. Everyone was optimistic. Solutions were being found for problems people didn’t even know existed. Yet, like that famous bubble things have, well, burst. At least a little. And as we all know when this happens on a personal level, it can be hard to pull yourself out of a slump. Collectively, it’s even harder.

In 2018, especially if you entered the crypto space just before January 7th, you’ll probably feel the promise of prosperity has been replaced by the Wild West’s darker tenets; fear, banditry, lawlessness, and a prevailing sense that you might be eating beans around a dying campfire for the foreseeable future. BitConnect certainly will, as they prepare for one of many class-action lawsuits filed against them in the US last month. Or maybe it’s the SEC’s crackdown on ICOs, specifically Munchee Inc. and AriseBank, that’s caused the kerfuffle and has everyone running for the hills.

To this point, much of the drama right now is around the notion of Ponzi schemes,  where different layers of reward from a scheme are granted to individuals who get in early, at the expense of those who get in later. It’s not like a normal market, where there’s push and pull based on interest in an equal asset, oh no! These companies are set up like pyramids, whereby those at the top profit, and those at the bottom can lose everything. But worry not, the sheriffs are coming to town partners, and as you can imagine there are no carrots for those cowboys, just very large sticks.

So, what happened to all the trust in these supposedly trustless systems? Why is the bullish sentiment momentarily  being replaced by a  downturn? Well, the answer is not entirely simple, but keep reading and maybe there’ll be some food for thought to go with those beans of yours. Plus, it will give you a few minutes away from your Mammon app. Or Blockfolio. Or CoinStats. Whatever it is you don’t find yourself checking every five minutes of every day.

The Good

Let’s start with The Good, a statement questionable to some of this audience, but to many something we’re trying to get our heads around, and that’s tax. And it’s tax season. Yay! Predominantly in the US and the UK, taxes are declared around the beginning of Q2, so investors are drawing down for the year and getting their houses in order. You can be sure that the regulators are coming, and that with them the respective tax offices are figuring out how to manage income and capital gains taxes from crypto. Cue lawyers lining up for the first cases.

It’s likely those wishing to buy larger ticket items like Lambos, or divest into more traditional assets like property, will have to pay their taxes if they want to keep said Lambo or property further down the line. Therefore, the market has stalled as a result. Remember that tax, particularly at this early stage, isn’t a bad thing. What tax means is legitimacy. And legitimacy means investment. So, if you’re in this for the long run, based on where the market could well be headed in the next five years, you should probably welcome it. 20% creamed off a lot is way better than 0% taken from not much. That’s Economics 101, yo!

Incidentally, I hear that Ethos will be integrating Taxfyle functionality into their Universal Wallet, in addition to being on point with regulators, which should make the whole damn thing a lot easier. Plus, it’s worth accounting for the fact that, combined with the massive bull run at the end of Q4 / beginning of Q1 just asking for a major correction, people are generally broke at the start of the year. Christmas was expensive. It’s usually when we start new jobs, or take stock of where we’re headed. We’re making all sorts of plans, and plans cost money.

So ultimately, if you’re a HODLR now, you’re likely to remain so until the next tax cycle, which in the UK starts in April. In the US, April is slap bang in the middle of the fiscal year. No biggie, unless you’re in debt and need to draw down on your crypto investment to cover it. Undoubtedly, many late investors to the recent spike will be in debt to some extent, so that’s more than likely exacerbating the volatility and downturn too. But fear not, as soon as everyone’s settled what needs to be settled in the real world, interest will gradually return to the market. We’ve seen what it can do now, and it’s all just too exciting.

Plus, the whales of the world won’t leave things where they are. With much of the tech promised in 2017 coming to fruition in 2018, there’s just too much amazing stuff on offer, and when you compare the current market cap to the Dot-com bubble of 2002, we’re not even a tenth of the way there. The big institutional players know that, so they’re just waiting until the dust clears, busy moving fat stacks out of the traditional stock market in preparation, as illustrated by the simultaneous crash of the Dow Jones Industrial Index last month; its worst week in 6 years. It’s not just us guys, everyone’s pulling out right now. It’s the order of things.

The Bad

And so on to The Bad, and what a bad bunch they are. Rhymes with tax, it’s hacks. And the criminals making bank are coming up with more ingenious high and low-profile ways of rustling your cattle. From last month’s 500m ($370m) NEM theft from Japan’s CoinCheck, December 2017’s 4,700 BTC ($80m) hack at NiceHash in Slovenia, to the ETH Parity Wallet situation in November 2017 ($150m), it seems like every other week there’s another story to keep you on your toes. Do you know where your crypto is right now? Yeah, better go check, huh?

And that’s not to mention the smaller stuff like hacked display ads, colloquially known as Cryptojacking, keylogging software and even using Starbucks WiFi in Argentina last month, where covert mining occurred on coffee drinkers’ laptops. In that instance, it was the privacy coin Monero that was being sought.

Oh, and then there’s the big hacks on the mainstream, centralized world, that end up demanding payment in guess what? That’s right, Bitcoin. Remember WannaCry in May of 2017? It was a Ransomware attack that impacted private firms like Hitachi, Honda, FedEx, and Telefonica to civil, security and public services like Russia’s Ministry of Internal Affairs, China’s Public Security Bureau and the UK’s National Health Service.

OK, relatively the hackers didn’t get away with much, maybe 70 BTC maximum, but it gives crypto a bad reputation. That added to the fact that the majority still think it’s only used on the Dark Web, for all sorts of nefarious purposes, and it makes people nervous. Crypto’s core community may be strong, but its brand is brittle, so it doesn’t take a snowstorm to whitewash public opinion. Like a game of cards in a dusty saloon, one cheat can spoil it so that no-one wants to play, and occasionally someone gets hurt…

The Fudly

All of which segues nicely into the media. Let’s refer to them as The Fudly. Over the (ahem, magnificent) seven or so years since I’ve been interested in cryptocurrency, I’ve worked in various digital and creative sectors of the media industry, and in that time, I’ve built a clear insight into how the system works. Essentially, it’s all about money and data. Specifically, the money from centralized systems such a politics, banking and of course, advertising. And the data, well that’s from you, the consumer of all that juicy media wanting to spend, erm, money on stuff from advertisers.

If you want to learn more about it, just Google “programmatic advertising”. Don’t worry, you won’t break the internet if you do, despite Google being some of the best at it. Their DoubleClick tech is weapons-grade advanced, and the industry at large is truly vast. According to the Internet Advertising Bureau, in 2017 an estimated $40bn dollars was generated in half a year in the US, from the display ads you see on websites, search advertising, paid content and social media magic. Then bring in the rest of the world, and you get an idea of how big a deal it really is. If it can sway elections, it’s worth something. It doesn’t matter how good blockchain is, the current system makes serious bank, and companies aren’t just going to give it up. Would you?

Without this revenue, companies like Facebook wouldn’t exist. Therefore, if the modern mainstream press and gigantic content channels base their entire existences on other centralized systems, such as themselves, why would they promote anything that could jeopardize the established order? At least until they have their own versions of blockchain, and you can bet your bottom satoshi that every global tech CEO has at least a few researchers tinkering away…

It therefore stands to reason that headlines such as “Digital cash hack hits government websites”, “Criminals hide ‘billions’ in crypto-cash” and “Facebook bans all crypto-currency ads” should feature on the UK’s BBC website (which incidentally, I love). The people should be informed. But what about a balance of opinion? In that, there seems to be a palpable lack, and it’s enough, because of the scale of it, to fuel the FUD which in turn prevents new investors entering the market. They’re even bringing ET into it, with “Crypto-craze ‘hinders search for alien life’”. In fairness, that’s a great read. But the point is, it’s powerful stuff and it’s here to stay, at least for a while. Nowadays, a single tweet can move markets. This probably belongs with The Bad, and of course there’s crossover between the two, but it’s worth noting one incident:


At 13:07 on Tuesday, April 23
rd, 2013, the Associated Press sent a tweet to nearly 2 million followers. It read “Breaking: Two Explosions in the White House and Barack Obama is injured”. By 13:08, 150 points had dropped off the Dow, which according to Bloomberg News represented $136bn in equity market value at the time, a third of crypto’s current market cap. By 13:13, it was back to normal. Jokes.

Turns out the Syrian Electronic Army claimed responsibility for the hack. Old news, sure, but it just goes to show how even conventional markets can be easily spooked. Crypto is the same. It is not a beautiful or unique snowflake, at least from an emotional perspective. The Fudly are professionals, but sometimes even they lose control, and we put so much stock in what they say, every day, that there’s a direct correlation when it comes to the rises and the falls. So, fear not, it’s all relative. Excellent tech will eventually prevail. At least, that’s what we all hope, right?

The Future

So here we are, moseying gently into The Sundown (sorry, not sorry) of this market crash. As with so many beautiful things, it’s tinged with danger, yet inevitably a sunrise follows. 2018 is set to be a landmark year. The railroads are being built. Constitutions are being written. That dusty saloon is being refurbished, and when it is, normal people are going to want to hang out there. The Crypto Wild West is becoming less wild by the day, and for some that removes the appeal. But if you’re prepared to wait for the many, who only want the Starbucks (Starbuckses?) of this world, it has real value.

Wallets are being made easier to use, while gaining sophisticated functionality and security; no prizes for guessing who’ll win that race. Development of the Internet of Things is picking up pace, and blockchain will undoubtedly be a core component of that industry. Medical blockchains are allowing us to protect our personal data. Counterfeit goods blockchains are protecting brands and consumers. E-Commerce itself is becoming peer-to-peer, as too is sustainable electricity trading. Prediction markets are creating the search engines of the future. Social media users are monetising their own content, without the need for advertisers. Charity, logistics and transport safety systems are all being revolutionized. We’re entering a future where it’s about more than CryptoKitties. It’s becoming useful. Even the porn industry is getting involved, and if we know anything, it’s that sex sells…

So, relax partner. Polish your pistol. Give your horse a well-earned rest. The Wild West still exists, but it is getting less dangerous. And if you were smart enough to survive this standoff, then one day you’ll tell stories around a not so smouldering campfire, with a lot more than a mess can of old beans. Sure, there are no perfect investments. Nothing’s guaranteed, and you need to think very carefully before you get into any of this stuff. But if you get it right, you might just end up with more than a Fistful of Dollars.   


What is Bitcoin?

So what is Bitcoin anyway?

What is Bitcoin anyway?

So, let’s start at the beginning. Maybe you’re already familiar with what Bitcoin, blockchain and cryptocurrencies are. Or maybe you’ve just heard about it on the news, from a family member or overhead it on the subway. In this piece, Bitcoin’s origin, technology, and impact will be explored. Bitcoin can be described as a currency that is not controlled nor given legitimacy by any central authority. However, there is a wide misconception that Bitcoin functions like a virtual currency or gaming token. These misconceptions dismiss the crux of Bitcoin – blockchain technology – that may revolutionize archaic monetary systems, the internet, and give unprecedented anonymity to both good and bad actors.

Blockchain can be described as a shared record of every transaction ever made on a digital accounting book. When person A sends Bitcoin to person B, this transaction is added to an immutable public ledger – the blockchain. This ledger is stored in multiplicity throughout the network, and to update one is to update them all. That’s a big part of what makes blockchain so powerful as a tool and idea – once a record is created on the blockchain, it can’t be reversed or altered, it is forever, and it is verifiable. This is part what is meant when we say trustless. No third party is required to prove your transactions are real and correct, their very existence on the blockchain does that for you. And if you wanted to steal from the blockchain, think of it as not only having to rob one house, but having to rob all the houses in a city at the same time, in the same way. An impossible task. Also, don’t rob houses.

Processing and validating these transactions and then recording them is called mining. Mining can be done by anyone possessing enough computing power to solve mathematical problems required by the system to validate transactions. For their efforts, these miners are given a fee in the form of newly minted bitcoins. Mining is intentionally resource intensive to set up and to maintain, and the mathematical problems required in order to keep the system going are also intentionally difficult and resource intensive. In this way, a type of self-governance is built into the system that automates some of the governing aspects or traditional monetary systems. Miners are only rewarded for properly validating transactions and playing a role that fuels the whole system, which incentivizes the ongoing maintenance, accuracy and growth of the blockchain. Satoshi really nailed it here as you can see. Smart stuff.

The next unique property of Bitcoin and many digital currencies is scarcity. Scarcity means that there is a limited number of Bitcoins that are or ever will be available. Scarcity is part of what gives gold its value, for example. It’s a rare and precious metal, and that combined with its beauty is what has made gold a useful and relatively universal store of value for centuries. Bitcoin is coded to have a fixed supply of 21 million coins. There will never be more than 21 million Bitcoins created, or “mined”. So until that amount has been fully mined, there will still be an incentive for miners to continue validating transactions even if at a decreasing fee. Bitcoins, however, are divisible up to eight decimal points or 0.00000001. This unit is called a Satoshi or a SAT. As the market capitalization grows, which is the total amount of money invested in a particular market or asset, the total quantity of bitcoins remains static, so it’s value rises accordingly. This is how the value of most cryptocurrencies is determined. Total market capitalization, divided by supply. So it’s important to look at those two numbers in relation to each other, looking at it’s dollar amount is only part of the picture and may not be an accurate picture of its actual value. The more scarce a cryptocurrency is, the greater opportunity for its value to increase as its market cap grows. Bitcoin is known for having a relatively low supply at 21 million, so this combined with its popularity and high market cap are what make it the leader of the cryptocurrency pack – both by price, and by total volume or market cap. Again, clever design by Satoshi.

 

History

So who invented blockchain technology? It is widely accepted that the concept was first introduced in a whitepaper by Satoshi Nakamoto – a pseudonym that may represent a person or a group of people. One could say that Nakamoto’s legacy is as immortalized and immutable as blockchain itself.

However, there were many prophets who heralded the idea of decentralization using cryptologic methods. Tim May, former Senior Scientist at Intel and contributor to the Cypherpunk mailing list, wrote the famous 1988 essay titled The Crypto-Anarchist Manifesto [2]. In it was a clear vision of things to come. Tim writes: “Just as the technology of printing altered and reduced the power of medieval guilds and the social power structure, so too will cryptologic methods fundamentally alter the nature of corporations and of government interference in economic transactions.”

Later in 1991, Stuart Haber and W. Scott Stornetta proposed a secure blockchain for storing documents using Merkle Trees. It was not quite known as blockchain then, but rather a ‘chain of blocks’. Only in 2008-2009 did Satoshi Nakamoto emerge from the woodwork, audaciously claiming to have solved the Byzantine General’s problem in his whitepaper titled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ [1].

 

The Byzantine General’s Problem

What is the Byzantine General’s problem? It is a fictitious medieval scenario where a general stations each of his armies around a castle he plans to ransack. Now, it would require the full force of his armies to storm the castle – anything less would end in defeat. How then can the general ensure that all armies act together, and act at the same time? He would need to ensure that the same message is sent to the lieutenants of each army and that the integrity of the message remains intact.

Blockchain solves this problem by rendering information immutable. Therefore, if said general uses blockchain technology to store his message, corrupted lieutenants would not be able to tamper with it even if they wanted. This translates into transactions within a cryptologically secure blockchain which are immutable once they are stored and validated.

Critics would argue that this is a flimsy premise and does not truly solve the problem. Theoretically, a 51% attack is all it takes to corrupt the integrity of the blockchain. What this means is that the validity of transactions must be agreed upon by 51% of miners in order for them to be valid, so it would take a bad actor an exponential amount of resources to control 51% of nodes that validate transactions. Despite this deterrent, it is still a very likely possibility with the existence of large mining pools where a great percentage of hash power controlled by very few parties. But it is ironically one of the few solutions that have worked out in practice despite a delicate theoretical underpinning – no 51% attacks have been known to happen to Bitcoin’s network thus far. Satoshi’s solution was ‘good enough’.

 

Potential Applications

Bitcoin, and blockchain-based cryptocurrencies more generally, could revolutionize payments in that they have no intermediaries and are inherently ‘trustless’. This eliminates a lot of middlemen in various industries. There doesn’t need to be a central bank to ensure the integrity of transactions. Make no mistake – reputation and trust still play a huge role in validating transactions, but through the gamification by bitcoin engineers of economic rationality to incentivize playing by the rules.

It also revolutionizes micropayments. Small sums of money can be moved around without hefty fees. However, the erratic rise of Bitcoin’s value has been followed by the ballooning of fees. Unless this is overcome, it is likely that the world would have to look at an alternative cryptocurrency for a solution.

Blockchain transactions in their current state also grant anonymity while preserving transparency. Although every transaction is recorded on the blockchain, there is no name or identity associated with it, only a wallet address represented by a public hash key. While this preserves privacy, it unfortunately resulted in Bitcoin being adopted rather early by bad actors like Silk Road and money laundering syndicates. The perception that Bitcoin is the exclusive domain of bad actors however, is something that continues to shift rapidly as Bitcoin and other cryptocurrencies enter the mainstream conversation. 

 

Barriers to Adoption

Governments have yet to decide what to make of Bitcoin and how to regulate it, and are wary of legalizing something they cannot control. As such, one of cryptocurrency’s biggest hurdles would be government regulation. Powerful banks, which might look at cryptocurrencies as a rival, might not stand idle. However, the more important concern would probably be technological. Blockchain might not be ready for real world adoption due to scalability issues. It takes very little to cause the whole Bitcoin network to lag. Presently, there can only be 4 bitcoin transactions per second. VISA can handle 24,000 per second. Until gaps like these (the rite of passage to real world application) are closed, some of the brightest minds will be working around the clock to one day bring blockchain technology to the mass market.


[1] Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System”, https://bitcoin.com/bitcoin.pdf
[2] Tim May, “The Crypto Anarchist Manifesto”, https://www.activism.net/cypherpunk/crypto-anarchy.html


Ethereum & Ethos: A Tale of Two Cryptocurrencies

Check out this new piece from Founder and CEO Shingo Lavine over on our Medium page about the strengths, similarities and differences between Ethereum and ETHOS.

https://upscri.be/27f3c1/


What is the Token Economy: A Metaphor for Functional Tokens

The New Economy, A Token Economy Based On Functional Tokens

The Token Economy: Imagine there is a bridge that connects two cities, Atlantis and Bedford, which we will refer to as A and B. These two cities are separated by a small body of water making the bridge immensely useful in travel between A and B. Without this bridge, commuters would have to travel hundreds of miles to go between these cities, but with this bridge, travel is fast and easy. This bridge currently charges a toll of $1 and commuters happily pay this fee every day.

Suppose one day, the owner of this bridge wants to change the way that they operate this bridge. The owner says that the bridge will no longer accept dollars as payment to cross the bridge, but instead will only accept Travel Tokens which are issued by the Atlantis Bedford Bridge Authority or ABBA. Travel Tokens can be used to cross the bridge and are consumed on use. The ABBA decides to issue 20% of the tokens to anyone who wants to buy them at $1 each and will keep the remaining 80% of the tokens. The ABBA also says that the supply is immutable which means no new Travel Tokens will ever be created. Some tokens may be lost or destroyed which takes them out of circulation meaning that the Travel Token is an inherently deflationary currency.

Many people will buy the Travel Token because they need to use the bridge. These people don’t mind since they are paying the same price they were before to use the bridge. Some speculators may also buy the coin because they think that the bridge was so useful that people should be paying more than $1 to use it. They may buy large quantities of the token in order to control the supply and sell them later at a higher price. The Travel Token, however, has not changed. It still can only be used to cross the bridge connecting cities A and B.

Since the Travel Token is needed to cross the bridge, there will always be people who need to use this token and there will be an active market for people who need to buy this token to cross the bridge. These people may be buying the token from the ABBA who sell the token to pay for bridge maintenance or from other people who don’t need to use the token. The token price will fluctuate based on what people are willing to pay to cross the bridge. The token may begin to trade at $2 since that is how much people are willing to pay to cross the bridge.

Now suppose that cities A and B do not have a bridge between them at all. People in cities A and B wish there were a bridge since they need to travel frequently between the two cities, but due to political and funding issues, the bridge never gets built. Despite public demand, the two cities cannot decide on how to fund this bridge.

A savvy entrepreneur comes around and sees that there is massive demand for a bridge between these two cities, yet no one is building one. This entrepreneur realizes that there might be enough people who are willing to pay up front in order to use the bridge later on when it is built. The entrepreneur decides to sell Travel Tokens at $.25 each which will be able to be used to travel between A and B. The entrepreneur sells 50% of the total supply of Travel Tokens to the public in a sale and raises money to build the bridge.

The Travel Token doesn’t yet have any use, but there are many people who want to use the bridge and are excited for the prospect of being able to travel between the two cities. They decide to buy the token early since they think it will be more expensive to buy the token later if they want to use the bridge in the future. They understand there are numerous risks involved in this project that are all out of their control as they have no ownership rights in the bridge. They also understand the bridge may not ever be built or the bridge may have heavy traffic, but they buy Travel Tokens anyways because they think the bridge will change commuter travel between A and B.

Eventually, the bridge is finished and people are very happy with it! The Travel Token now trades on the market at $2 each because the bridge saves so much time for commuters between the two cities. The entrepreneur is happy because they now own a very successful bridge authority collecting lots of Travel Tokens which can be sold back onto the market to pay for bridge maintenance and employee salaries.

Now suppose the bridge has become highly popular and the token price is extremely expensive and now trades at $4. To better justify such a high price of the token, the bridge authority decides to allow round trips on the bridge with a single token. That means that the Travel Token can now be used for 2 trips instead of 1. The token jumps in value because that means each token has more utility, but only to $6. That means that the effective cost of crossing the bridge has been reduced from $4 to $3.

Early bridge backers now hold Travel Tokens that have increased in value. They may use their newfound wealth on traveling across the bridge at a cheaper original cost of $.25, which allows them to use their savings to increase wealth or consumption, or they may find that there are other people they can sell their Travel Token to who want to cross the bridge. The Travel Token has a large market cap, but that market cap is justified by the number of commuters that use the bridge every day. Over 1 million drivers cross the bridge daily each spending 1 Travel Token meaning that there are $4 million worth of tokens being collected by the ABBA every day. The ABBA may choose to sell these tokens back onto the market instantly meaning the market cap of the token stays constant. If the ABBA sells fewer than $4 million worth of tokens a day, the demand side of the token will be larger than the supply and the price will begin to increase. The price will continue to increase until other commuters decide to simply sell their token at a profit and drive the long way around since it isn’t worth that much to them.

Suppose the Travel Token can also now be used for a bridge connecting cities B and C. The supply of the Travel Token remains constant, but the demand has increased causing a positive price increase for the Travel Token. There may be fewer bridge commuters on the bridge between A and B, but the increased number of commuters that come from bridge B and C push the price of the Travel Token higher. The ABBA can reduce the number of Travel Tokens that are consumed to cross the bridge to keep costs down for customers if the market does not appear to be in equilibrium. As the token gains more utility, the price increases which is justified because now a single token can do a lot more than it could before the bridge was even built.

While just a metaphor, this is a good example of the "token economy."  People are willing to fund projects for functional access tokens if they believe in the project.  Many early token purchasers consider themselves to be "contributors" to a project.  Additionally however, they believe the value of the token can rise if the service - a bridge connecting two markets or ideas - is successful.  This is an idea that is both old and new at the same time, and shows the potential of human collaboration and cooperation.