Why You Don’t Understand Bitcoin

“What is Bitcoin?” You may have been one of the hundreds of thousands of people who search for this answer on Google (as of October 2017).

You probably wished you didn’t, as you were left more confused about Bitcoin than before.

Why?

Because, after landing on thousands of different answers, you realized that very few pundits could explain how Bitcoin works in a way that is easy to comprehend. It’s not supposed to be easy to understand because Bitcoin a paradigm shift.

How Bitcoin is a Paradigm Shift

Bitcoin is a paradigm shift because it is at the nexus of four distinct fields: computer networking, economics, game theory, and cryptography. The computer network lays the foundation for the Bitcoin network to be built upon while cryptography adds a layer of security and legitimacy to the network. Economic models of Bitcoin analyzes how the markets behave not so much different than the New York Stock Exchange and game theory studies how people act within the network, whether with good faith or bad intentions. These four elements constantly interact with each other in a symbiotic manner to create Bitcoin.

An example that illustrates another recent paradigm shift was the advent of the internet. In that case, the paradigm that was shifted was also in computer networking, as well as information distribution, and surveillance technology. It took nearly two decades from when the internet first began to enter the mainstream consciousness in the 1990s for the internet to reach its full potential with the development of social media. People can now stay connected and keep in touch with each other by being “friends” with them on Facebook or following them on Twitter/Instagram. Information from news events can be decimated in real time with witnesses posting pictures and testimonies of the event on their social media accounts. In addition, public and private entities can easily figure out an individual’s profile and interest by analyzing their social media accounts.

The lifeblood of the internet is information, which is being circulated faster and freely more than ever before relative to the previous paradigm of media conglomerates having monopolies over print, television, and radio. Bitcoin and other cryptocurrencies are the lifeblood of a new emerging paradigm that will allow money to flow faster and more freely without the need for central control of banks and governments.

When you invest in cryptocurrency like Bitcoin, you take your money out of the centrally controlled world banking system and into a grassroots crypto-economic one. Bitcoin has no ‘leader,’ rather it has different parties (miners, developers, users, merchants, node operators) who constantly communicate compromise with each other to advance the development of the Bitcoin client software. In the end, it is you who is in control of your money, and if you lose it, that’s your problem.

The Paradigm Shift Is Coming Here/Proof That Bitcoin’s Paradigm Shift Is Already Here

Bitcoin, cryptocurrency, and other blockchain technology is a paradigm shift in that there is a need to create a new vocabulary to describe the universe of it. This is nothing new in the evolution of technology, as one can say similar events happened in the past.

Take the Industrial Revolution, for example. When it was in full-steam (pun absolutely intended), new terms came into existence to articulate what was happening around new technology with factories, trains, cars, etc. A simple phrase such as “I took my car to the mechanic for an oil change” could never have been conceptualized by people who did not live that experience.

In blockchain, we see that words and phrases that have either not commonly used (hard fork, replay protection, proof of work) or words that already have a commonly agreed upon definitions take on entirely new meanings (wallet, address, smart contract).

This lack of conceptualization is only temporary. As more people learn about Bitcoin and cryptocurrency, then the discrepancy in education will get smaller.

Where Is Bitcoin Now?

So, what have the results been for Bitcoin? Well, Bitcoin has risen from being worth a few dollars to know worth $6,600 in a matter of seven years. In the past year, it has risen in value by over 800%.

The rise of Bitcoin has not been smooth, though. It has come with its fair share of bubbles and downturns, most notably in 2013-2014 culminating with the collapse of Mt. Gox.

However, even with nearly 180 articles declaring Bitcoin’s demise, it has still found ways to bounce back and show perseverance through times of adversity.

 

 

 

The Unlikely Truth About Bitcoin Hard Forks

2017 has been quite the year for Bitcoin. Not only has it reached all-time highs, but by the end of it, Bitcoin will have hard forked several times. From an outsider perspective, people may view this uncertainty as negative. The truth is that hard forking is not only healthy for Bitcoin but a necessary step for its future development.

What is a Hard Fork?

A hard fork is a permanent divergence within a blockchain that happens when one group of nodes (computers connected to the blockchain network) signal for the original protocol while another group of nodes signal for a different protocol, isolating themselves from each other. The transaction history in each blockchain is identical up until the point of the fork.

Why Hard Forks?

Hard forks are a natural process in an evolution of a network when participants in it become isolated from each other. They don’t happen just in Bitcoin, they happen everywhere else, too.

Image result for hard fork bitcoinThe best example of a hard fork of a complex network similar to Bitcoin is The Reformation. When Martin Luther posted his 95 Theses on a Church in Eisbein, Germany, it signaled the beginning of the schism between the Catholic Church and soon to be created Protestant sects. One group of people (to think of the last phrase in Bitcoin Terms, conceptualize a ‘cluster of nodes’) began to believe (or, in Bitcoin Terms, ‘signal’) the words of new Protestant leaders, they no longer participated in the universe of the Catholic Church (or in Bitcoin Terms, the blockchain of the Catholic Church).

If you think of Christianity as a Blockchain, all denominations have agreed upon interpretations up to a certain point. Small disagreements in interpretations and practices add up and evidently lead to more serious conflicts. When the conflict causes a split, the separated chains begin to record a different history on their ledger. It is not a surprise that certain different denominations have different leaders and literature to which they ascribe to.

In other words, any network of nodes that interacts with each other has the potential to split when different factions of the network have differences in objectives and values.

Now, let’s go over three of Bitcoin’s most well-known hard forks.

Bitcoin Cash

The Bitcoin Cash hard fork was over a community disagreement for how to scale Bitcoin’s Blockchain. Bitcoin can only process 3-4 transactions per second which is abysmal compared to Ethereum (20 per second), Paypal (193 per second), and Visa (1,667 per second).

Image result for bitcoin cashIf Bitcoin wants to become the medium of exchange it intends to be, then actions must be taken in order to make transaction speeds faster.

To increase the network capacity, the community proposed two scaling solutions:

  1. Seg-Wit (mentioned later in this article), which would allow transactions to take place on a ‘side chain’ run by another entity, alleviating the load on the original chain.
  2. A block size increase, which would record all the transactions on the chain.

The politics of Bitcoin are for another post, but a common critique of Bitcoin Cash is that it centralizes hashing power for those who can afford to mine large blocks. This centralization is antithetical to Bitcoin’s ethos of being decentralized.

Because of this, the vast majority of the Bitcoin community opted for Seg-Wit with 97% of nodes in the network signaling for it. Bitcoin Cash still exists, but is considered by the community to be currently an altcoin. 

Bitcoin Gold

Image result for bitcoin goldIn the case of Bitcoin Gold, the fork will change the Proof-of-Work algorithm from SHA-256 to an Equihash. This fork isn’t as contentious as Bitcoin Cash and is driven by the ideological belief that mining should become more decentralized.

A main critique of SHA-256 is that it requires expensive ASIC miners which are dominated by centralized mining pools mostly located in China. Equihash is mostly mined by GPU cards which is much more accessible to the average miner and is employed by Ethereum and zCash (Classic).

It is important to note, however, that the man behind Bitcoin Gold, Jack Liao, is also the CEO of multi-GPU mining unit manufacturer LightningASIC, giving him a financial incentive to back the hard fork. The fork is intended to take place on October 25th.

Segwit2x

Segwit2x finds its origins in the New York Agreement signed earlier this year. Basically, the different entities in Bitcoin agreed to implement segregated witness by August 1st, 2017 and later increase the block size by November. When the Bitcoin Cash hard forked in August, many Bitcoin core developers felt like the NYA was void, and have refused to increase the block size. Others in the industry, such as Jeff Garzik, support increasing the on-chain Bitcoin block size from 1MB to 2MB, and along with Segwit will increase total block size to 4-8MB.

Image result for segwit2xThe main contention with Segwit2x is that it does not offer replay protection. This means that, if you send your B2X coins to one address, you may find your BTC coin may disappear as well. Since no side will offer replay protection, then what we will witness is a giant game of chicken and when November, whichever protocol has more hashing power will absorb the other one.

The price of Bitcoin will probably be volatile until the Segwit hard fork is completed. Leading up to the Bitcoin Cash hard fork, the price of Bitcoin fluctuated between $1,900 and $2,900, but once the event horizon (the August 1st hard fork) was realized, it only took 13 days until the price of Bitcoin reached $3,000 for the first time.

Although it is next to impossible to predict anything short term in the price of Bitcoin, it can be expected something similar to happen preceding and during the Segwit2x hard fork. Only when the hard fork is resolved and there is a clear winner, then certainty will enter the market again.

Conclusion

Put simply, hard forks are a natural cleansing of the system as well as nice dividends for hodlers. With three notable hard forks happening in 2017, it should be expected that they will not go away in the future. Because of this new reality, cryptocurrency exchanges should be more prepared to deal with hard forks.

 

How To Perceive Bitcoin Through Understanding Money and Content

Bitcoin has been around for nearly a decade, and yet, it is still a mystery to many people how it works. After listening to several experts speak about the nature of Bitcoin, I noticed that in order to understand it, you need to deprogram how you think about money.

The Different Functions of Currency

Depending on who you ask, money has several definitions and functions.

  1. Money is an efficient medium of exchange that avoids the need for bartering
  2. store of value that holds wealth for long periods of time
  3. unit of measurement

One can argue that money has become a system of control, but that is not the point of this article, rather, it is to show how money is a form of content that instrumental for societies to function.

How We Live in an Ocean of Content

Content is an outside force in which you can interact and absorb information from. This definition extends to anything that can make you reflect on yourself including but not limited to media, people, and substances. The way I view the world is that we are surrounded by content the same way fish are surrounded by water, and when people share commonalities among content, that is how culture forms. From reading your Facebook feed to posting a Snapchat story, there are plenty of simple ways of posting and absorbing content. Another form of content that is a level more complex is having a debate with someone about ideas; you are simultaneously creating and absorbing information at once. One of the most powerful forms of absorbing content is through drugs and alcohol. The reason why I call drugs a form of content because of the way the chemical composition of them drugs interact your brain. There are uppers, downers, psychedelics, and everything in between that temporarily but drastically changes your perception, and consistent use can have an effect on who you are. It is not a coincidence that drugs are the most regulated forms of content by governments. Who knows what the world would look like with unfiltered access to them? Similar to how fish do not question what water is, people do not question what content is either because we are engulfed by it.

Money is a form of undefined content; it can become anything. By being accepted is the foundational medium of exchange by society, money is reserved potential that can become anything you choose it to be. Spending money to attend a concert is using that potential reserve into a memorable experience or buying drinks at a bar with the intent of getting drunk is transferring your funds in order to change your state of mind. There is something about money, and its ability to become anything makes people’s imaginations launch into the stratosphere. Especially true in American culture, money has been elevated to a holy status. Money is a major theme in the vast majority music we listen to and entertainment we consume. Americans are chasing dollars due to it being the ultimate sign of success in the United States’s capitalist system, but rarely ask where money gets its value in the first place.

Why the Dollar has Value

In the international monetary system, the US Dollar holds a special place among the world’s currencies because it acts as the world reserve currency, meaning that governments are required to hold some of it in order to participate in global finance. The dollar used to be backed by gold, but since Nixon decided to leave the gold standard in 1971 in favor of a fiat system, the only thing that has been backing the dollar is the sheer size of the US Economy and the faith that the US Government can pay back its debts.

Dollars come into existence through the policies of the Federal Reserve System. The Federal Reserve is the Central Bank of the United States and is sanctioned to issue currency and set monetary policy. The Federal Reserve lends money to banks like Goldman Sachs and JP Morgan who then lend it to business. Quite simply, the Federal Reserve is the bank’s bank; they are the gatekeepers of what I like to call the faucet that floods our world with undefined content.

Bitcoin differs from the Federal Reserve and other central banks because the faucet of creation is not controlled by a centralized group of bankers but a decentralized network of computers solving complex problems. What gives Bitcoin its value is that it possesses all three essential traits to be classified as currency. The blockchain technology seamlessly keeps track of every transaction to ensure accuracy, wallets serve as one’s own bank account that is free from government scrutiny, and Bitcoin is becoming widely accepted among merchants, most notably Expedia and Overstock. Every ten minutes, you can be sure that a new Bitcoin block will be mined and added to the chain.

Conclusion

Just as the internet decentralized publishing allowing anyone to share their work to the world, Bitcoin and cryptocurrency will do the same with banking. There is something powerful about decentralizing the faucet of the uncertain potential of money because it will shift the world monetary system from being fiat-based to crypto-based. That is not to say that fiat money will just disappear, but rather that Bitcoin will play a much more substantial role in the global economy.