The Opportunity of a Lifetime by Van K. Tharp, Ph.D.

On the third Wednesday each month, I’m going to write an article on the world of cryptocurrencies. I feel as if this is the best investment opportunity I have seen in my lifetime.

I also predict that most people who dabble in cryptocurrencies will lose their shirts. Why? Because it is like the wild, wild west out there. Seventy percent of the crypto tokens and coins could easily be scams. Plus it is so easy to make a simple mistake that will cause you to lose everything. Most people do not have their personal psychology together and as a result they will be victims of massive mistakes and scams.

This first article in the series will introduce you to blockchain technology and cryptocurrencies. Today, we’ll talk about the fifth evolution of computing – blockchain technology. Next month, we will talk about tokens — be they cryptocurrencies or work tokens or usage tokens, or hybrid tokens. Some of these tokens might be much better investments in the long run than the more familiar cryptocurrencies like bitcoin. In February, we will look into the expectancy of crypto-currencies as an investment. For example,
suppose you had you purchased $100 worth of each of the top ten cryptos for 2017 on January 1st. These were only cryptos that existed on January 1st so we ruled out bitcoin forks and those that started later and an obvious scam. That $1,000 investment would be worth over $50,000 today and Bitcoin (which gets all the attention) would have been the worst performer of the ten.

Today we’ll talk about blockchain technology. The blockchain concept is considered to be the “fifth evolution” of computing. It resolves the issue of lack of trust on the Internet. Right now, theft and even war seem to take place on the Internet. You can bankrupt a company or a country by hacking through the Internet and stealing. Blockchain technology, however, will change all of that because blockchains can and will create trust in digital data. Information written into a blockchain database will be impossible to change or remove and this is what makes it a revolution in the way the world works. Real property rights, intellectual property, identity, money and many other things can now be created and maintained safely online via blockchain technology.

Important Terms

First, a block is a list of transactions recorded into a digital ledger over time. Think of this ledger as a “block of information” and the ledger becomes a block once it reaches a certain size, time period, or hits a triggering event.

Second, a chain links one block to another mathematically. It creates mathematical trust among all the information.

Third, a blockchain is a series of blocks chained to each other.

Blockchains record the movement of a cryptocurrency or token. How does this happen?

A hash is an old computer invention (over 30 years old) that creates a mathematical function that cannot be decrypted. A hash in the blockchain is created from the data that was in the previous block. It is sort of a digital fingerprint of this data and it locks the blocks together in order and in time thus creating the chain which ties them together. As an example, the Secure Hash Algorithm 256 (SHA-256) generates an almost unique 32-byte hash that is a digital fingerprint of data used to lock it in the blockchain. Ethereum blockchain and tokens are created with SHA-256.

The next important component for creating blockchains is a network with many computing nodes. Each node has a secure algorithm that secures the entire network. Each node contains a complete record of all the transactions that were ever recorded in the blockchain. Bitcoin’s network contains over 5,000 such nodes.

The last important concept is consensus. Consensus is the driving force of the blockchain. Consensus is the means of creating agreement within the network about the entries being added to the ledger. Consensus secures the network through an economic means by making the network too expensive to attack and making it more profitable to protect.

Networks reach consensus through various means:

Proof of Work (POW) was pioneered by Satoshi Nakamoto (the inventor of bitcoin). POW is part of the “mining” process for cryptocurrencies.

Both Bitcoin and Ethereum use POW where multiple computers work individually to solve a complex problem and the first to find the solution is allowed to add a new block to the blockchain. Then, the other computers on the network have to generate the same solution in order to reach consensus. POW works on the principle that it’s expensive to add a block to the blockchain but once done, that it’s also very easy to verify. To disrupt this process, an attacker would need to control 51% of the computer network or nodes in order to gain control of the network (and the blockchain). This is basically impossible.

Masternodes The next approach uses masternodes in conjunction with POW mining. This helps processing transactions and the masternodes receive a share of the block rewards from the miner’s activity. DASH is an example of a coin using this method.

Proof of Importance (POI) The consensus system here is based upon the idea that productive network activity (not just amount of coins) should be rewarded. These include balance, reputation, and number of transactions to and from that address. NEM is an example of a token using this system.

Proof of Stake (POS) Here the participants’ coin stake determines their likelihood of adding the next block. Each network node is linked to an address and the more coins which that address holds the more likely it is to mine (stake) the next block. It’s like a lottery ticket but the more coins held, the higher the stake. An attacker would need over 50% of coins. This method was pioneered by Nxt. It is well suited to platforms where there is a static coin supply. Stake reward consists of transaction fees. The POS consensus mechanism is the approach taken by most crowd funding platforms.

There have been two spin-offs from the POS method of consensus:

Leased Proof of Stake (LPoS). This approach was developed to incentivize small stakeholders to take part by leasing their balances to staking nodes. The leased funds remain in full control of the holder and can be spent at any time which ends the lease. Leased coins increase the weight of the staking node. (WAVES is an example of this method)

Delegated Proof of Stake (DPoS). Coin holders use their balances to elect a list of nodes that will have the opportunity to stake blocks of new transactions. This method of consensus engages coin holders but may not reward them as much as the LPoS method. All token holders, no matter what the size, vote on changes of network parameters. This method of consensus is used by Bitshares.

There are probably more methods out there and certainly, more will be developed in the future but why is all of this important? Let’s look at what we have here.

  1. We have a unique fingerprint on a piece of information which is chained to every related event over time.
  2. We have a network of many nodes where each node stores all the information.
  3. The network has a consensus process verifying the information and keeping everything honest.

Thus, we can create a unique fingerprint for every contract, document, coin, piece of equipment, etc., chain those together, replicate it all and store it all across the globe — which creates an immutable record of anything that happens to it.
Again, why is this important?

There are now something like 6 billion devices that can be connected to the Internet. Soon this will be something like 20 billion devices, however, right now any of these devices can be hacked. Someone with enough skills can take over a device and control it — even supposedly secure pieces of expensive equipment. For example, the Department of Homeland Security has $250,000 drones that fly over the US-Mexican border looking for drug smuggling. Those devices don’t help prevent much smuggling, however, because the drug smugglers simply hack into the drones, take over their guidance system and send the drone away from the border. When the drone gets far enough away from the hackers, the GPS starts working again and returns the drone to the border, only to get hacked and sent away again. This cycle continues until the drone gets low on fuel and has to return to base. The net result is that a $250,000 piece of equipment becomes totally useless.

Not long ago, a hacking group gained access to —

  • the email former CIA director John Brennan and released his personal details;
  • the email and phone accounts of former US spy chief James Clapper,
  • the AOL email of ex FBI director Mark Giuliano,
  • and most impressively — the personal information of 20,000 FBI agents, 9,000 Dept. of Homeland Security personnel and some DOJ staff members.

A British teenager led the group which included two other UK teenagers and two teenagers from North Carolina who are currently being prosecuted. (How were the members of the group connected and tracked down? In part, through a Bitcoin transaction.)

The most impressive hack to date revealed on WikiLeaks the entire hacking process available to the CIA. They could turn iPhones, Androids, Windows 10, and even Samsung TVs into covert microphones to listen to your conversations. A group called Shadow Brokers had also hacked into the NSA and revealed their hacking secrets. In fact, the hacking tools of our government’s top secret agencies were actually offered for sale to the highest bidder. Shadow brokers released the actual code. As a result, this equipment and material, created at a huge expense to American taxpayers, has been released to hackers in North Korea and Russia and used on the United States and its allies.

Basically the wars of the 2000s are not so much military wars but computer wars. Governments now get hacked, financial systems can be disrupted, millions of dollars have been stolen, millions of people’s private data and identities have been given to those who assume those identities for theft. Millions of people have seen their computers shut down by ransomware with demands for payment in cryptocurrencies to have their data restored. It goes on and on.

Private industry has also been impacted. Fed-ex reported that an attack on a European subsidiary halted Fed-ex deliveries and cost the company about $300 million. Attacks have disrupted production at car plants in Europe, at a chocolate factory in Tasmania (I toured that factory 3-4 years ago), at an oil company in Brazil, and at thousands of businesses worldwide.

Blockchain technology has the ability to stop all of this cold. How? First, the blockchain has the ability to decentralize information. Right now, people buy mass storage online at a central agency such as Dropbox. Dropbox’s technology will soon be obsolete because blockchain technology enables you to store your data securely on hundreds of computers all over the world. Information stored using blockchain makes it impossible to hack without an attacker gaining control over the majority of the nodes on the network. That’s too expensive for anyone to want to attempt.

Blockschain applications will be able to create impeccable record keeping. They can create a clear timeline so that anyone can see who did exactly what and at exactly what time — without being concerned about the validity of the information. Blockchain can create completely trustworthy currency exchange records, legal documents, proofs of sale on a house, etc. Imagine a home closing process being reduced from weeks to minutes — with complete trust among the parties — using blockchain technology. The list of possible improvements goes on and on across every interaction and every industry.

One company, for example, is working to create a unique identity code for each piece of equipment that is known on the Internet (aka the Internet of Things or IoT). Once that fingerprint is connected and checked every ten minutes or so, owners will know instantly if something has changed. Hacking will become a thing of the past. That means that the Department of Homeland Security drones will no longer be hackable. Eventually, your smartphone nor anything else in your house will be hackable either.

Bitcoin was actually the first major demonstration of blockchain in action. A group of individuals who didn’t know each other, who had never met in person, and who lived in different countries was able to operate an online system where cooperation was rewarded and cheating was made very costly. As mentioned earlier, the bitcoin network has over 5,000 nodes each of which contains a complete set of all records that were ever recorded in that blockchain. To cheat, you would have to control over 50% of those nodes and that would cost billions of dollars to accomplish. Thus, it’s much more profitable to mine bitcoin and cooperate with the network rather than to hack it.

Cryptocurrencies = Money?

So how can something like bitcoin be considered to be money? A unit of physical money is invented by the government and deemed legal currency. The government can manipulate it (i.e., inflate its value so it buys less and less), but it’s utility pretty much stops with its financial value.

A unit of cryptocurrency, however, has an inherent value as data and potentially as a powerful computing tool. This utility is the source of its financial utility. An asset token (like bitcoin) is treated like an asset because it has value – 1) it is costly to create and 2) people believe it has value. That second point makes it similar to any traditional currency — it has value because people believe it has value.

On the other hand, there are many types of and uses for crypto-tokens. Some of these tokens in the long run might be more useful and more valuable than the asset tokens. But that’s a whole other story that we’ll save for next month when we discuss all the different types of tokens.

In the meantime, I’ll start putting my update on cryptocurrency prices here.

869 feature van chart
Do the changes in these cryptocurrencies begin to interest you? This snapshot of prices might seem exciting but be careful — the whole cryptocurrency market is a dangerous place for people who don’t know what they are doing. Just one example, daily price swings of 20% or more are common. We will show you some ways to think about cryptocurrencies in the coming months before you should consider entering the area.

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