Why invest in crypto? (Crypto reading for newcomers)

in #crypto6 years ago (edited)

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With the recent upturn in the crypto-currency markets, it is probably a good idea to explain again some fundamental strengths of the blockchain technology and why it is possibly a good solution for some sectors of our society and industry. Too many people jumped on board at the end of last year (2017) with the idea that crypto was magic money, a way to double (or better) your money in a week or two without any effort. This was done generally without any understanding of the basic technology or the applications, and as any seasoned investor will tell you, this is a recipe for your personal financial disaster.

The money part of crypto is the most public part of the ecosystem, but in a way, it is a side effect from the more exciting technological applications of a decentralised computing and data structure. On the other hand, getting a nice return for your investment is also nice...

This post is aimed at the ordinary person with little experience with crypto, not blockchain developers!

Decentralisation

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This is the real "magic" of crypto-currencies, the idea that data (and computing) can be decentralised. This is the first new concept to grapple with and understand, and it is the key central part of the technology.

An example

Let's consider your relationship with your bank. There are two records of your standing (plus/minus) with your bank, the bank holds one and you (haha!) should keep your own record. If you keep your own ledger of debits and credits, then you must be some sort of a crazy nut, because in practice we all rely on the bank to keep an honest record (and let's just say the banks are not all angelic in all their dealings). If you want to see some of the bank abuses, this Royal Commission into Australian banks is turning up some horrific details.

So, let's take the ideal case, and we reconcile our double ledger between you and the bank. Hopefully there is no discrepancy, because if there is, then you have to try to appeal to the bank or banking regulator to fix the problem. So, in practice the banking situation boils down to two closed ledgers (you and the bank), that are trying to track the same transactions with no checks and confirmations from outside sources. This is a pretty brittle system, when it works it works, but why are you running with your shoelaces untied? It really is asking for trouble, or an incredible amount of trust in a central authority (in this example, the bank).

Imagine a solution where this ledger could be transparent (if required) but more importantly held by multiple participants in the system and verfied by multiple independent sources. Could this be possible?

The solution

Now, the problem that needs to be solved is "Is there a way for multiple ledgers, all held independently, to agree on a single canonical true version?". Well, it turns out there was a solution to this problem that was put forth by the mysterious "Satoshi Nakamoto" in his Whitepaper on Bitcoin. This is recommended reading if you are intested in how crypto-currencies work (also Public-private key cryptography if you are more mathematically minded).

In this paper, Nakamoto laid the foundations for a workable system for a single ledger that could be agreed upon by all participants (users) and verifed by multiple independent sources (miners). This became what is now known as Bitcoin, the first implementation of the crypto-currencies. In this case, the "currency" part was the way to incentivise "miners" to verify the transactions and changes to the ledger.

Strengths of decentralisation

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Resilience

Currently, all or most of our data (financial or otherwise) is centralised to a single gatekeeper. We entrust our emails, social profiling, identification, bank records to a trusted single entity. Which is fine if it works and if you trust that point of failiure. However, in any engineering system it would be foolish to have a construction that relied on a single point to guaruntee the sucess or failiure of that system. Hence, the idea that the banks in the global financial crisis that were deemed to big to fail.

By spreading the data and verification of that data accross many holders of that ledger, there is now not a single point of failiure. Indeed, the security of this distrubuted ledger is increased by applying more stakeholders or computation depending on the model of the crypto.

Instead of a single point of failure that is a juicy target for attack, you now have to conquer at least the majority (51 percent) of the network to even begin to have a chance for changing the records in a nefarious way.

Transperancy

This is perhaps the greatest strength of the blockchain idea. The fact that all transactions, by which we mean changes to the record (not necessarily financial), are visible to everyone is an important strength. How many times have we seen dodgy stuff happen behind closed doors, lack of transperancy is the seed for corruption.

Indeed, it is possible that certain applications will require some privacy, and that can be built in. However, the privacy appears to be via obfuscation of addresses and identity, not a complete cover up of ledger changes.

However, transparency in itself is only a beginning point. As we can see on Steemit, the sheer transparency of certain dodgy transactions and corrupt power structures doesn't neccesarily mean enough people will care or know enough to change the system that empowers the bad behaviour.

Possible applications?

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"I remember seeing an elaborate and complicated automatic washing machine for automobiles that did a beautiful job of washing them. But it could do only that, and everything else that got into its clutches was treated as if it were an automobile to be washed. I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail."

Abraham Maslow in The Psychology of Science (1966)

Removing middlemen

The internet was supposed to remove middle-men, instead we got a new set of middle-men. Think of Uber and AirBNB, they replaced older models but kept the man in the middle taking a cut model. One of the potential use cases of crypto and smart contracts is the ability to have trust in the transaction without needing trust in the other party.

For example, at the moment, if you buy a house you will need to have the money held in escrow until the lawyers are certain that all the conditions from buyer and seller are met. For this service of trust, they take a nice cut. Now, imagine if you could make a contract that only executed (and transferred ownership of property/money) when the conditions were met? Where would the lawyer be now?

Automated transport

When cars and transport are automated, they will need to communicate with each other. Thus, they will need to be able to idenitify themselves to other vehicles on the road. The car in front of you will need to prove that the data that it is sending you really is from that car and not some other car/truck.

Now, if all that information was held in a single database at a central (or several central) locations, then if that database failed then it would be carnage on the streets. Decentralisation solves that problem, the resilience of the identification would be found in the fact that there are many many stakeholders that secure the integrity of the database.

Identification

Are you who you say you are? Prove it, by unlocking this box that only you have the keys to. We do this every day on Steemit, by using the private keys to unlock various services, thus proving that we are the genuine owner.

As a quick reminder, NEVER NEVER NEVER use your Master key for anything, keep it safe and preferably offline. Always use the lowest level key acceptable for the service that you are accessing.

Governance

At the moment, in most Western countries we have a representative democracy. This means, we send one person per chunk of population for a set time (4 years) to represent our collective views and preferances. In the time of horseback and snail mail, this was a great idea. However, it is at best, a very chunky representation of the population's wishes and it is open to corruption and gaming of the system.

Consider if we could have a democracy that represented the wishes of the population in real time, on a one to one representation. We have a proto-version of this on Steemit, we all (should) vote for witnesses that represent our wishes for the platform. At any point in time we can retract our support. By having 30 votes, we can respect the idea that there is no ONE candidate that will ever represent our ideal vision for the platform.

Will this empower the weak?

When the People contend for their Liberty, they seldom get any thing by their Victory but new Masters.
Marquis Halifax from Of Prerogative, Power and Liberty

In a word, NO. This is my opinion only, but I think that the introduction of crypto to the greater public, by itself, is not going to change things. I am a firm believer that it will empower new people and disempower others, leaving us with a new elite. The same as when the internet revolution happened, we just exchange new masters.

Also, consider that the old money is slow moving but is many orders of magnitude larger and stronger than the crypto system that is coming online. They don't have to be early adopters, they only need to hop on at some point and they will benefit from sheer size.

However, in combination with other technologies such as production on demand (like 3D printing) and increasing artificial intelligence and automation, the playing field might change enough that it becomes a different game completely!

Foreseeable Hurdles

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Complexity

At the moment, the cryptosphere is mess of competing platforms that are at best pretty hostile (user friendliness-wise) to the general public. Remember that in general, we are pitching the idea to people that use the same password ("letmein") across all sites and have trouble understanding the concept of the "the cloud".

For mass adoption, which is a required long-term goal, we need to be able have people use crypto by stealth. Steemit is a great example of this, people are blogging and writing about stuff they like, they are interacting and socialising with people they enjoy talking with. Under this, there is a crypto, but it isn't (shouldn't) be the reason that people are here, it shoudl be the side-effect of doing something they were already doing!

Consolidation

Thousands of non-compatible ledgers that have nothing to do with each other and that are only of worth to their own ecosystem is not a sustainable idea. Sure, there are things like exchanges where you can cash out from one system to a more general one, but again I refer to the notion that these places are at best, user-unfriendly. On Steemit, we a have a nice solution in the form of @blocktrades, that allows easy changing into and out of the STEEM chain.

In the end, I think we would need a way to seamlessly and invisibly move between systems. If I want to buy coffee, I don't want to have to wait and sell some of social crypto to load up my money crypto.

Thanks for taking the time to read my thoughts about the current state of crypto, invest wisely!

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Hey @bengy

A great insight into blockchain. I will be sending this to a friend who is interested in finding out more because its the perfect explanation of the basic principles.

Nice one.

Gaz

Thanks! Not too much gory detail for the newcomer but enough to begin with. The specific details can come later!

I agree. It's a good balance. If my friend likes it I might throw some Andreas Antonopolis his way!

I have heard it said that what really makes a currency is when it becomes a valid method of paying taxes... The first one to achieve that in the crypto world will be the initial winner. However, until then, it's all just a guessing game. I'm going to have to take sides at some point this year when I want to make my first cashout from Steemit. Thankfully, I haven't had to make that choice yet.

I will post more about different types of crypto, stay tuned. My advice (for your first investment) is to stay away from the risky ones that are only aiming to solve a specific problem. Look instead at the more broad based chains that can be platforms for many uses. Ethereum, EOS and and NEO are examples of this.

Also, learn your digital security and how to safely store your tokens. You will want to make sure you own the private keys and not delegating someone else via a glorified IOU!

Very good! I'm passing this on to friends/family who've been asking these questions.

Thanks! Yes, it is tricky to try and answer the questions about what is crypto. Too many people focus on the hype of money making, when the potential application of the technology is quite amazing.

My son is a code-writer, and I'm proud of him. Oh how I wish I had this tool when I was in the prime of my career...I can see so many advantages. Maybe I can contribute a little even though I'm an old fart Baby Boomer hippie type guy.

This is timely, was trying to explain and give my students a better reason to be on Steemit. This helps a lot. At least I can make this into a reading comprehension like task.haha

Ha ha, check to see if any of them did the extra reading on the bitcoin whitepaper or the asymmetric cryptography!

Wow, very well written and informative article. You explained so many thing so well its hard to start where. I would suggest all newbs to crypto read this article. You even touched on a few things I have never even considered..

Thanks, just out of curiosity, what were the unexpected bits?

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