Building Confidence in Blockchain

Carter Lee Woetzel

• Publisher: New Degree Press
• Year: 2020
• ISBN:
  9781641376938
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Handel

Did you know that the US dollar has lost more than 97% of its value since 1917?

The reality is that inflation is just one of the many issues that plagues the dollar as a primary form of currency. Other issues like centralization, increasingly expensive transaction and contract infrastructure, and entrenched trust deficits all make this traditional asset both inefficient and impractical as the currency of the future.

Blockchain enables cryptocurrency - the solution to many of these legacy transactional problems.

In Building Confidence in Blockchain: Investing in Cryptocurrency and a Decentralized Future you will learn about:

• The past, the present, and the future of blockchain technology
• Why blockchain is valuable
• How blockchain works
• How you can strategically invest in cryptocurrency and a decentralized future

Building Confidence in Blockchain speaks to the investors and innovators that are looking at blockchain's value proposition for the first time. It's a guide that will help you strategically invest in cryptocurrency as an asset class with the same sound investment principles and strategies that you use with traditional investments.

The era of centralization is coming to its end.

Are you ready for the future of decentralization, cryptocurrency, and blockchain?

Chapter 1

Blockchain & Ventre à Terre

“Sorry to be a wet blanket. Writing a description for this thing for general audiences is bloody hard.”17

—Satoshi Nakamoto, anonymous creator of Bitcoin

When I first set out to describe blockchain in a simple fashion, I spent months poring over the original research papers: David Chaum’s 1977 dissertation, Satoshi Nakamoto’s 2008 white paper, Vitalik Buterin’s Ethereum whitepaper, and a list that could go on for quite a while.18, 19, 20 I wasn’t satisfied. I extended my search to simplified explanations: an example of this was the University of California Berkeley’s 2015 “Blockchain Technology—Beyond Bitcoin” paper.21 Even YouTube videos such as “Blockchain Explained Simply” contained a surprising amount of chaos in comment sections. 22 People didn’t seem to understand. Even if they did, they didn’t have the confidence to echo it back at others.

The realization during my research was this: we are not taught the concept nor logistics of ledgers, and because blockchain is just a radically futuristic ledger, the dilemma the majority of people encountered on their first attempt to learn about blockchain became rapidly apparent.

We know how to go to the gas station and purchase a soda, but we don’t really stop and think how this transaction is recorded by the gas station, the bank, and all of the intermediaries that take a slice of any given transaction. At best, the average person tracks how the balance in their account/ledger increases or decreases. We are stuck viewing the world using a single-ledger paradigm.

Understanding ledgers is the first step in comprehending blockchain. A ledger is a living record of financial transactions. You use ledgers every single day and other ledgers are at play other than your own account that are an integral part in confirming your own account balance in what I like to call the “ledger ecosystem.” Because truthfully, your current balance of $34,220 in your bank account is merely the sum of all the transactions that have been coming to and from your account.

The paycheck from your company adds +$832 to your account (of which the company’s ledger reflects -$832), the transfer to your PayPal account nets -$150 on your bank account (with PayPal’s ledger gaining +$4.99 for the transaction fee), and the outbound transaction to buy that Big Mac is -$2.32 (+$2.32 on McDonald’s ledger). Your own account balance you use every day is a simple ledger interacting with hundreds of other ledgers that are constantly reconciling and balancing with each other.

This is the starting point of understanding blockchain. We need to start viewing the world as hundreds of different ledgers constantly reconciling and balancing with each other, with many centralized ledgers of dollars being the centralized point of authorization and ownership. Additionally, not all ledgers are created equal. Some have more power than others. And this is true of not just banks, but any sort of mass data system. Databases (Facebook servers, Twitter, eBay, or Amazon) are merely ledgers of data instead of ledgers of dollars. All of these are centralized intermediaries that attempt to facilitate transactions between two parties.

With the current system, many ledgers are centralized in their control over many people’s dollars and data, introducing the risk of manipulation and distrust. This is why we have accountants and audits all the time (which are quite expensive). We come to find out that reconciling disputes between huge centralized ledgers is expensive. Centralized players do not like trusting each other. The whole system is built on a shaky system of trust.

“ . . . the duplicate and time-consuming post-trade processes that banks, brokerages, custodians and clearing houses undertake to reconcile multiple ledgers represent a very large cost of trust embedded in the existing system”23

—Center of Economic Policy Research

A Decentralized Solution

But what if there were a way for truly peer-to-peer interactions between you and me or between businesses without any sort of human third party intermediary slowing down and sucking up value along the way? What if you and I truly controlled our own accounts? What if there were a system, backed by mathematics and cryptography, that everyone could trust as the facilitator of transactions in an entirely automated fashion that we know to be secured, auditable, and permanent?

That is precisely what blockchain does. Blockchain flips the centralized ledger paradigm on its head.

We now know what blockchain exists to solve, but what precisely is blockchain?

Blockchain is a decentralized ledger of transactions, accounts, and data secured by a decentralized ownership of the ledger, in which mathematics and cryptography are the digital law of the ledger. The maintenance and use of the shared ledger is made possible within the ecosystem using digital cryptocurrency as the medium of exchange, which is simultaneously the incentive for those who maintain and secure the ledger to continue to do so.

Instead of trusting a chain of centralized parties to backup, update, and verify your own transactions and your own wealth, we instead trust publicly visible coded protocols to manage and maintain our transactions. The digital laws of the ledger are built with mathematics—a perfectly neutral party we can all trust as the facilitator of truly peer-to-peer transactions.

What’s more is that the control of the digital ledger and its rules are made up of a decentralized community—stopping any single party from manipulating the rules of the ledger or the ledger entries. Because everyone has the same copy of the ledger, it becomes easy for protocols to spot anyone who attempts to manipulate the ledger.

In the end, leveraging public-key cryptography (the same stuff that makes the internet work) allows everyone who uses this decentralized ledger to now make peer-to-peer transactions without the need to be reliant on multiple intermediaries to make a simple transaction possible.

How Does Blockchain Work?

You’re with a group of friends and you decide to loan ten dollars to your friend Austin. Your two friends Dakota and Tony see this transaction take place and take note of it mentally. A week later, Austin pays you eight dollars and says, “That’s how much I owe you.” Naturally, you are upset! What is the proof that Austin has returned the wrong amount? Dakota and Tony back you up: “It was ten dollars—we were there when you made that transaction.” As a friend group, the accepted consensus is that Austin owed you ten dollars, not eight. Your group has created a pseudodecentralized ledger in which each party is cross-checking to make sure the record of transactions is kept fair and balanced.

Also known as a Decentralized Ledger Technology (DLT), blockchain is a system of record keeping in the form of a digital ledger.24A blockchain has the following set of properties: the ledger is distributed, shared, immutable, and composed of cryptographically linked entries in the ledger that take the form of “blocks.” The protocol—the coded law that controls how the transactions and balances are maintained and executed on the ledger—is designed to continuously build consensus on what the shared ledger contains at any given moment.25

You...