Tag Archives: Cryptocurrency

Is Blockchain the Key to Web 3.0?

Web 3.0 has been around as a meme since early in the century. This writer was formerly with the Sun Microsystems Education business and recalls meetings we sponsored over a decade ago, that were attended by academic computer scientists promoting the concept.

And yet it has been slow to take off, and it remains a somewhat fuzzy catch-all concept. So much so that there is no Wikipedia entry! Some people claim Wikipedia has deliberately censored the term “Web 3.0”.

Wikipedia does have a section within the Semantic Web article. And this notes: “Web 3.0 has started to emerge as a movement away from the centralization of services like search, social media and chat applications that are dependent on a single organization to function.”

To my ear, this matches the desires of many in the cryptocurrency community for decentralized services built on blockchain that challenge the centralization of Facebook and others.

Web 3.0 was initially discussed in conjunction with Semantic Web and with agents. John Markoff of the New York Times supposedly coined the phrase.

Tim Berners-Lee has promoted the Semantic Web, where context and meaning are attached to data, and data structures have rich linkages in support of better data integration.

Cambridge Analytica has famously exploited these kinds of linkages in the Facebook environment to influence the U.S. presidential election and the Brexit referendum.

The general idea around Web 3.0 has been the semantic web, along with data mining, AI, and natural language providing a more productive web environment for users, with greater inferencing and intelligence.

Here’s a very simple view of how it relates to Web 1.0 and 2.0:

Web 1.0:  Read-oriented, static

Web 2.0:  Read and write, dynamic, interactive

Web 3.0: Read and write and execute, composite services, integration, meaning and agency, and greater decentralization

Now we see that blockchain and cryptocurrency are beginning to have an impact on the definition of Web 3.0.

Why? Well let us consider some major issues:

  • Net neutrality is dead in the U.S. thanks to the state-corporatist position of the FCC
  • The web is increasingly centralized on platforms such as Facebook, Google, Twitter who derive almost all of the financial benefit from data that users provide
  • Cryptocurrencies and blockchain are proving that decentralization can work in a secure fashion, at least for some significant applications

Cryptocurrencies and blockchains provide the opportunity to restore the Web toward its original vision of a decentralized resource. They provide the opportunity to return control and monetization of data to users, instead of it being concentrated in relatively few large corporations.

Semantic_web_stack.svg

Note that the Semantic Web stack shown at right includes trust and cryptography. Well blockchains and cryptocurrencies are built on cryptography and are all about distributed trust. (Sometimes they are called ‘trustless’ but in fact trust resides in the protocols and in the network of blockchain miners, and the developer and user communities more generally).

You can find a presentation here by Ben Gardner on Semantic Blockchains:

https://www.slideshare.net/bengardner135/semantic-blockchain

Blockchains add trust and proof of work to the Semantic Web’s unambiguous data with connections. Ricardian contracts or smart contracts can be implemented.

The Semantic Web template is linked data plus directed graphs built with RDF triples.

And, I ran across this interesting paper:

“A more pragmatic Web 3.0: Linked Blockchain Data”, Hector E. Ugarte R., 2017. https://semanticblocks.files.wordpress.com/2017/03/linked_blockchain_paper_final.pdf

The author writes “Linked Data is proclaimed as the Semantic Web done right…an incomplete dream so far, but a homogeneous revolutionary platform as a network of Blockchains could be the solution..designed to interconnect data and meaning, thus allow (sic) reasoning.”

The Semantic Web is all about linked data with defined attributes and relationships, e.g. graph structures such as with RDF triples as the data model. One can adapt blockchains, including linked blockchains, to this purpose and add smart contracts to provide reasoning.

A Semantic Blockchain is defined in his paper as “the use of Semantic web standards on Blockchain-based systems. The standards promote common data formats and exchange protocols on the Blockchain…Semantic Blockchain is the representation of data stored on the distributed ledger using Linked Data.”

More broadly, Blockchains allow the ability to build a new Web from the ground up, with name services more fully decentralized and file and compute services layered on top. Identity and services can also be fully decentralized. Security is inherently provided by the blockchain’s peer-to-peer decentralized mechanism.

We believe that blockchain and cryptocurrencies will accelerate the development of Web 3.0 while also helping to refine its definition.

Bitcoin Forks are So 2017

“Let a Hundred Flowers Bloom” Mao Tse Tung 百花齐放

Well there are 20 flowers in the Bitcoin ecosystem. And over 1400 in the cryptocurrency ecosystem at present.

Salad forks, dinner forks, shrimp forks, dessert forks, tuning forks, pitchforks… so many kinds of forks..

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Image credit: Ellen Levy Finch, CC BY-SA 4.0

Why fork a new cryptocoin? One can fork for technological improvements, one can fork to make money, and one can fork for ego, for the pride of “ownership”.

There were several software forks that occurred mainly in the 2015-2016 timeframe and known as XT, Classic, and Unlimited. Including Unlimited, they have had limited impact to say the least.

But let us look at hard forks, or coin splits, that have been so prevalent since August of last year.

Technology enhancements promoted in these forks are across several main categories:

  • Bigger blocks for scaling, shorter block times
  • Off chain or side chain transactions (Segwit for signature, more generally Lightning, etc.) for scaling
  • Different hashing algorithms for easier mining
  • More anonymity, security
  • Enhanced programmability, smart contracts
  • Increased money supply

How many hard forks and coin splits has Bitcoin had so far? In total there have been 20 such forks to date.

  • August 2017 – 2
  • October – 1
  • November – 1 and Segwit2x proposed, withdrawn
  • December – 14
  • January 2018 – 2 so far

This Cambrian Explosion of bitcoin forks is in large part a result of the increased transaction costs and delayed confirmation times with original BTC, Bitcoin Core. But it is also a sign of a healthy and growing blockchain universe. If cryptocurrencies were not seeing increased success, the rate of innovation, and the number of forks, would be smaller.

Here is a list of the most significant ones, all in the second half of 2017, and with current pricing, key features, and URL:

August – Bitcoin Cash, BCH, $2413, 8 MB blocks, bitcoincash.org

October – Bitcoin Gold, BTG, $323, equihash, bitcoingold.org

November – Bitcoin Diamond, BTCD, $22, 10 times number coins , X13 hash, btcd.io

December – Super Bitcoin, SBTP, $108, lightning and zero knowledge proofs and smart contracts, supersmartbitcoin.com

If you owned bitcoin prior to block 478558, you in principle own all 20 of the forked coins, including the most valuable one Bitcoin Cash, and mostly in a one-one ratio. Putting your hands on them is trickier.

That is a question as to what support particular private wallets or public exchanges provide. There are guides on the internet and YouTube as to how to retrieve although it seems more trouble and risk than justified in most cases. (This writer has managed to get some BCH and BTG separated out, but it is a somewhat nerve-wracking experience.)

For now it seems we have reached a point of exhaustion for the principal good ideas and the newest forks are more likely to be dodgy, or frauds, or duplicating others, or of limited potential.

Here is an important consideration: while increasing the transaction rate and lowering fees will bring greater utility to users, this does not contribute to the store of value or digital gold aspect. Bitcoin, the original Bitcoin core, is most valuable today for its store of value attribute, much more so than for its medium of exchange attribute.

Now it will be a race between development teams and marketing teams to see which of these forks/coins other than BCH and maybe BTG will have relevance and value going forward, and what value any of them can sustain.

Bitcoin: Like Gold or Like a Currency?

Valuing the various bitcoin forks

Breaking News: Segwit2x fork has been postponed indefinitely

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Some say bitcoin acts more as digital gold then as a currency, more as a store of value than as a medium of exchange. It is very interesting to look at the various bitcoin forks with this question in mind.

Everything in life and in finance is a tradeoff. Gold works well as a long term store of value, but not so well as a medium of exchange. The US dollar works very well as a medium of exchange, but not well as a store of value in the long term. Even the Federal Reserve and other central banks hold gold as a reserve asset. It represents the bottom of the inverted money pyramid.

Now bitcoin is from its beginning more like gold in the sense that it is an asset with limited, predetermined supply. Dollars and other fiat currencies are debt-based since they come into existence when new loans are made, and their continual supply growth is rather assured; usually inflation occurs to varying degrees. See the Money 3.0 article for a longer discussion of this point.

Image: Silver ice cream fork, De Young Museum

There are 4 versions of bitcoin, 3 currently, and one possible fork. That was scheduled later this month as Bitcoin 2x (or B2X) a possible fork due to partial adoption of Segwit 2x, but it has now been indefinitely postponed due to lack of support.

As of today, approximate values for the 3 existing forks are:

Bitcoin BTC $7200

Bitcoin Cash BCH $630

Bitcoin Gold BTG $140

And Bitcoin 2x B2X had future values around $1600 before plunging on the announcement that it is now postponed.

All these cryptocurrencies have a supply of around 16.6 million accounting units, and all are limited to 21 million as the ultimate supply. And yet their prices are very different. Bitcoin has a first mover advantage but is that the whole story? How does one value BCH and BTG relative to BTC? In principle the various versions have both asset and currency characteristics.

Each of the alternatives to the original bitcoin is designed to facilitate faster, less expensive transactions. And this makes it more like a currency than a reserve asset.

BTC can be looked at like a large denomination bill, not as easily spent, although it is much easier to break into change than large bills are. Bitcoin Cash differs from BTC because it has a much larger blocksize, 8 MB. Bitcoin Gold differs in adopting a GPU-friendly mining algorithm, Equihash, rather than SHA-256 used by the others, which requires custom ASICs.

Bitcoin 2x adopts Segwit2x with a larger 2 MB block size.

Each of these three alternative coins is designed so that the system can process transactions more quickly and at lower cost, and so, along the spectrum of digital gold to currency, each is closer to a currency than the original BTC.

And that, somewhat counter-intuitively, is why original BTC retains a higher value.

In particular, the Bitcoin Gold is actually least like gold of all of these, since it will have the most accessible and thus fastest mining algorithm, and presumably could end up with the lowest transaction fees.

bitcoincomparison

Image credit: bitcoingold.org

The respective values of the 3 or 4 types of bitcoin reflect this view. Bitcoin is the “slowest” and has the lowest velocity (slowest turnover) and highest value. Bitcoin Gold appears to be the most rapid and with lowest transaction fees, and thus has the lowest value.

Bitcoin Cash and a possible future Bitcoin 2x are between the two extremes. Since Bitcoin Cash has much larger blocks it has substantial miner support. Bitcoin 2x is favored by the user community that wants to facilitate more efficient transactions.

If you have a gold coin and some fiat currency, which do you spend first? You bought the gold coin in expectation that it would preserve its value and increase in terms of the number of currency units per coin.

So HODL (hold on for dear life) BTC, and spend or convert BTG and BCH seems the way to go for now. As always one should monitor how the different cryptocurrencies are developing in comparison to each other, in this very dynamic and volatile marketplace.

Evolutionary Forks and Dividends

What is a fork?

It is early days in evolutionary terms for cryptocurrency. Bitcoin has not been around even a decade. Ethereum has only been here for a few years. The respective economies of these and other cryptocurrencies have been growing at triple digit percentage rates.

A given blockchain can be thought of as a continuing line of a particular species. A new blockchain, e.g. Ethereum with new attributes is a new species of cryptocurrency. A fork in a blockchain, such as the recent Bitcoin Cash, is also a new species, but perhaps one can say that it belongs to the same genus.

Mayr’s concept of species is that of representatives of the same breeding population. They are in some sense on the same continual chain.

A fork is an evolutionary branch in response to environmental pressure. The pressure arises due to the developing needs of the ecosystem for cryptocurrencies overall and for individual cryptocurrencies.

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Pressure

The pressure that gives rise to evolution in the cryptocurrency ecosystem arises from the need to scale cryptocurrency to higher transaction rates and to more diverse use cases. For example, there is the very general use case of smart contracts, that led to the creation of Ethereum.

How new currencies are created or are forked results from the technological requirements and how those are interpreted and implemented by particular members of the development community. This is a political arena since miners, developers, exchanges, merchants, and other groups have different interests.

We have just had the Bitcoin Cash fork and are now facing possible forks for Bitcoin Gold and Segwit2x (Segwit was adopted without a fork in August).

It is difficult to determine which fork or species will be the most successful in the long run; but the original or main branch can have an advantage. Overall forks can be seen as strengthening the ecosystem as a whole since total value seems to rise after forks. After the Bitcoin Cash (BCH) fork the original Bitcoin (BTC) increased in value, and one could also collect the BCH on a one per one BTC held basis as a dividend. 

More generally, this has been borne out by the continually increasing market capitalization of the set of cryptocurrencies, currently having reached around $160 billion (roughly a Buffet plus a Gates).

For investors in cryptocurrency one can view forks as special dividends. Those who held Bitcoin through the Bitcoin Cash fork received a dividend of several hundred dollars per BTC. Sometimes numbered prints or copies are valuable as well.

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Above is not our view, but that of @BitcoinWrld

What you do (hold, sell all, sell half) with your dividends is up to you and your views on individual forks; we make no recommendations here. But the dividends are there to receive, along with possible capital appreciation as the cryptocurrency economy continues to grow rapidly.

A Golden Fork

What do Bitcoin and Gold have in common? They are both assets. Both have limited supply that grows only slowly. Both can be seen as a form of money since they are stores of value and can be used as a medium of exchange. Both are liquid and divisible, although Bitcoin is much more easily divided. And both are unlike fiat money, in that they are debt-free. Both are ‘mined’, gold is physically mined, and Bitcoin is ‘mined’ via cryptographic hash algorithms (proof of work).

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But what is Bitcoin Gold? It is neither gold, nor the current Bitcoin. Rather it is a proposed fork of Bitcoin, designed to make mining easier, and accessible to more people. And it could happen very soon, just three weeks from now.

The chief backer is CEO of a Hong Kong-based company, Jack Liao, and he indicates the motivation behind Bitcoin Gold is for it to be complementary to Bitcoin and to grow the community of miners, to allow the Bitcoin ecosystem to move away from its present centralization in a few mining pools.

It is not clear how well the proposal has been developed, and how many miners, current or new, will back it. But the intent is to allow mining by GPUs, rather than the specialized ASICs highly optimized for the SHA-256 hashing used by both Bitcoin and Bitcoin Cash.

Instead it will use the Equihash algorithm, that is GPU-friendly rather than ASIC-friendly, since it demands substantial utilization of memory and memory bandwidth. This could allow for a much broader community of miners since GPUs from Nvidia and AMD are so widely deployed.

The primary cryptocurrency usage of GPUs today is for mining Ethereum. But since Ethereum is scheduled to move away from proof of work and to adopt proof of stake next year, Bitcoin Gold could be the most important new target for GPU-based mining.

The developers of Bitcoin Gold intend to remain aligned with Core and Segwit roadmaps.

Everyone holding Bitcoin, with a suitable private wallet at the beginning of August, received a ‘free’ dividend of Bitcoin Cash. The major exchanges ended up supporting access to users’ Bitcoin Cash, some sooner, others later. Now everyone holding Bitcoin with a suitable private wallet on October 25th stands to receive a free dividend of Bitcoin Gold (BTG) as well.

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Cryptocurrency a Bridge to the Future

Bitcoin, and cryptocurrencies more generally, can be a bridge to a better monetary future for the globe. In almost every nation today, fiat currency managed by a central bank is the norm. This is money that is inherently inflationary by design. Since central banks are controlled by national governments, and governments routinely run substantial deficits, the banks promote inflation in order to benefit their governments.

In our current low growth environment, the Federal Reserve has grown the money supply (M2 money stock) 4.9% during the past year when inflation is running at 2% or less. They are operating on an equation of around 2% inflation plus 2% to 3% GDP real growth for about 5% monetary growth.

Bitcoin has a very controlled and low absolute inflation, much less than 1%. There are currently 16.6 million bitcoins available, and there will never be more than 21 million, and that does not occur until over 100 years from now. In practice, Bitcoin is currently deflationary since the economy around Bitcoin is currently increasing very rapidly, at triple digit rates. It has been gaining value against fiat currencies rapidly, albeit with very high volatility.

Bitcoin meets the attributes of currency, see Money 3.0 article. It is not debt-based, as are all currently circulating fiat moneys, paper and digital money backed by nothing but debt (Money 2.0).


Akashi Kaikyo bridge is the world’s longest suspension bridge. GFDL license.

The entire financial system was at risk of collapse in 2008 due to accumulated debts and risky and fraudulent derivatives built on top of those debts. Trillions of dollars of wealth were destroyed, with Americans losing 40% of their net worth during a 3 year period.

In addition, the system is well-designed for the money center banking elites to pull more and more wealth into their own hands, through financial techniques that create no real wealth. Those who get to create the money lend it out and accrue the highest benefits.

A more stable system is required, and Bitcoin could play an important role, as an asset-based, not debt-based, currency. Dollars and Euros come into creation as new loans are issued by commercial banks. Central banks manage the reserve and equity requirements of those banks, but a large amount of leverage is inherent in the fractional reserve system.

Bitcoin comes into creation as a result of the mining process, that occurs as new transactions are forged into the blockchain. Bitcoin creation is a direct result of the operation of the economy around the cryptocurrency. Bitcoins are ‘minted’, not ‘printed’. Like fiat currency they have value due to scarcity and utility, and dependent on the growth of their economy.

Bitcoin and other cryptocurrencies can be the basis for more honest money, as well as for decreased transaction costs, and higher efficiency. Banking will change forever. Like fiat currency, bitcoin can be borrowed and it can be lent.

Those who are involved in Bitcoin today, a “peer-to-peer cash” are pioneering a future that could be a more stable, more honest monetary system. Today Bitcoin is young, has plenty of growing pains, and volatility, but it is now 8 years old and maturing rapidly.

J-Coin Prediction: it will be a Bonsai among alt-coins

One of the largest banks in Japan, Mizuho, along with other Japanese banks is looking to get into the blockchain game. CNBC reports “Japanese banks are thinking of making their own cryptocurrency”.

Except they are not, based on the information released so far. This will be mobile Yen, a use of blockchain to allow mobile users to spend Yen and send Yen. Mobile money. Not that there is anything wrong with mobile money, an electronic wallet, it can be quite useful.

This is not Nakamoto consenus, this is not mining of currency. It is a tethered currency. This is not an open source, globally distributed ledger with trust resident in the algorithm, the ledger, and the community.

I was married to a Japanese lady for over a quarter century, and have lived and worked in Japan. I know the Japanese mindset. This will be a highly constrained ‘currency’.

No doubt with all the constraints, and as a complete tether to the Yen, and with large banks behind it, they will be able to gain Japanese government approval.


Bonsai, courtesy of http://www.japanexperterna.se/

But I do not expect this to be a true cryptocurrency. It will require a permissioned ledger, controlled by central authorities, the large banks.

Cryptocurrency wants to be free, wild, and out of the box. Satoshi’s vision is more along these lines:


Courtesy of JoJan, CC-BY-SA-3.0

Jamie Dimon must be kicking himself. “J-Coin”, why did I not think of that?

Money 3.0: Cryptocurrencies

Recently, Jamie Dimon called Bitcoin a ‘fraud’. This coming from the CEO of JP Morgan, the bank that has been fined more than any other, save one, for financial crimes since the Great Recession of 2008. His statement reeks of hypocrisy since JPM is a member of the Enterprise Ethereum Alliance, his traders have been trading Bitcoin related ETN securities, and his firm has applied for patents using blockchain technology.

By the way the Enterprise Ethereum Alliance has well over 100 members including Microsoft and Mastercard. Serious players understand that cryptocurrencies are a big deal. The market cap of all cryptocurrencies is currently in the neighborhood of $150 billion, around 2/3 the market cap of Visa. And this has all happened in only eight years’ time.

So why do I say cryptocurrencies like Bitcoin and Ethereum are Money 3.0? And what are Money 1.0 and Money 2.0?

First what is Money? It is amazing how few people can give a definition, other than pulling out a bill from their wallet, or referring to the numbers in their checking account statement. And how does money get created in our modern economy? Very few actually understand the process. Most people say government creates it. Governments can, and do, but most money is not created directly by the government. What the government does is validate money, they define a single type of money for their nation. They print currency, but most money today is digital, residing in bank balance sheets, and most money creation occurs as banks issue new loans.

Throughout history there have been many forms of money, but two forms have dominated. The first form, Money 1.0, was the dominant form for millennia. It was coins made of precious metals, in particular gold and silver, and ‘base’ metals such as copper and bronze. According to the St. Louis Federal Reserve, money must have six properties: durability, portability, divisibility, uniformity, limited supply,  and acceptability.

They sound a bit like goldbugs when they write it that way. These are all useful attributes of the thing that is used for money, be it gold or paper. But it doesn’t quite get to the most essential three properties of money. It must serve as:

1. A unit of account

2. A store of value, and

3. A medium of exchange

Money is whatever can be used as a socially agreed upon unit of account and medium of exchange. It also should retain its value, not depreciate quickly, so that it can be used next month and next year as well. Notice I say socially. Societies agree upon what is used as money, and nation states in recent centuries have taken the lead in that definition. In order to be conveniently exchanged, then the six properties above come into play. Durability and limited supply allow the retention of value. Portability and divisibility make it easier to exchange. Uniformity makes it a useful unit of account, as does acceptability.

We all have to more or less agree on what the accounting unit is. That is actually the starting point for money, agreeing on the standard measure. The government can decree the accounting unit, and can demand taxes be paid in that unit. That is government fiat, and can apply for either coined money of precious or base metals (Money 1.0) or paper money (Money 2.0).


Roman gold Solidus coin. York Museums Trust. CC-BY-SA 4.0

The US dollar was originally defined to contain a certain weight of silver, and aligned to the Spanish dollar (originally Austrian  thaler) or ‘pieces of eight’ that was widely used in New World trade. The US dollar has also been defined against gold, with an official act in 1900 following nearly 3 decades of defacto gold standard following the Civil War. Of course the gold standard is now entirely gone after being discarded in two phases, under Roosevelt in 1933 and Nixon in 1971. The remnants of the bimetallic standard of the late 19th century remain in present-day dimes and quarters that used to contain silver even until 1965, retain the color, but have been entirely debased.

No nation remains on a Money 1.0 standard of precious metals, all have moved to Money 2.0, fiat paper money. If they did they would lose their gold, and they prefer to melt it into bars and store it in central bank vaults as a reserve. So as Warren Buffet says, we dig it up in mines, melt it down into bars, and bury it again in vaults.

With paper money, there must be fiat, as nobody wants pieces of paper that have no value. The days of gold certificates and silver certificates as circulating currency are long gone, although I remember silver certificate dollar bills from my youth. The value comes from the legal tender requirements that the paper be accepted by businesses, be used for taxes, and from the government’s printing process to make counterfeiting difficult plus the government’s overall management of the money supply (usually through interest rate policies) to limit loss of value due to inflation.

The technology of high quality paper engraving, augmented with serial numbers, threads and holograms, and the technology of central banks, allow fiat money to work. The vast majority of nations have central banks to lend to the commercial banks in times of crisis and to manage the banking system and money supply indirectly.

So those are Money 1.0 and Money 2.0. In summary:

Money 1.0 – Public or private, asset-based, intrinsic value, coins or bars of precious metal

Bureau of Engraving and Printing, U.S. Dept. of Treasury

Money 2.0 – Public and sovereign, debt-based, no intrinsic value, paper and digital.

Most Money 2.0 is digital, with the circulating currency representing a small percentage. Money mostly comes into circulation not through the printing press, but when banks make new loans. If a bank creates an auto loan, it credits the checking account of its customer digitally. Banks are allowed to make new loans within the limits of their central bank authority determined reserves and equity capital requirements.

Note as an aside that Money 1.0 and Money 2.0 can coexist. We mostly have Money 2.0 in the United States, but there was a small amount of silver coinage money circulating alongside up until the 1960s. This is an important principle, since we are beginning to see the coexistence of Money 2.0 and Money 3.0.

What about Money 3.0? Cryptocurrencies are purely digital, whereas Money 2.0, fiat and debt-based money, is mostly digital.

Why Money 3.0? Technologists and advocates of non-fiat money were concerned about the risks of centralized monetary systems dominated by central banks and by money center banks engaged in fraudulent activities around mortgages and other lending with derivatives including CDOs, CDSs and more. The corrupt system lead to the Great Recession of 2008. Everyone in the society suffered, but the banks were bailed out by enormous government loans.

There were more than 50 attempts at creating a digital crypotcurrency prior to the year 2000. None succeeded. One was gold-based and known as e-gold. It was shut down in 2009 by the US government, because it ran afoul of stricter money laundering regulations. It was also subject to repeated thefts of accounts from Russian and other criminal hackers.

A successful non-fiat cryptocurrency must provide a single secure ledger of entries to protect against counterfeiting and double spending. It must have a method of commiting a single instance of a transaction to this secure ledger that is publicly shared, and is known as the blockchain. It must have a built-in automated “central banking” function that determines the money supply.

Satoshi Nakamoto’s brilliance was to combine a number of existing ideas around public/private key cryptography, distributed ledgers, and a mining algorithm with “proof of work” that rewarded miners for solving a difficult cryptographic hash problem. Transactions are signed with private keys. All bitcoins reside in the distributed ledger. The owner has a wallet with the key that allows them to transfer bitcoin in arbitrary amounts to someone else and thus confers ownership.

The supply is limited with a maximum at 21 million bitcoins that will not be reached until well into the 22nd century. New bitcoin comes into existence in conjunction with the mining of blocks of transactions. The successful miner is rewarded with an allocation of new coins, presently 12.5 coins per block of approximately 2000 transactions. So here we have the central banking function and a digital minting or mining process for the ‘coins’ which are really just ledger entries.

We describe this Nakamoto consensus algorithm and the mining process in more detail at orionx.net/podcast.

Now we have not just Bitcoin, but Ethereum, Bitcoin Cash (which is a recent fork of Bitcoin with large block size), Ripple, Litecoin and hundreds more cryptocurrencies. We have new coins being created rapidly in conjunction with new applications and ICOs – initial coin offerings.

The largest of these, those with market caps in the billions of dollars, meet the three requirements for money. Unit of account. Medium of Exchange. Store of value. Their limitations at present relate to the latter two attributes. They are accepted as medium of exchange in some environments, but relatively few compared to existing fiat currencies. And as a result of that their value is less stable and determined more by investment and speculative demand. Their ultimate value will be determined by the cryptocurrency economy as uses cases, applications, and acceptance grow.

They are child currencies, developing and growing, but far from the maturity of an existing national fiat currency. The value should continue to grow for the long term, however since transaction volumes are increasing very rapidly.

So now we have in the world:

Money 3.0 – Private and globally distributed, asset-based, digital only.

Money 3.0 holds much promise. It can remove a lot of cost and friction from the financial system. Trying sending a check or ACH transfer to your sister and having the transaction complete on the weekend. Send her some bitcoin? She will get it even on Sunday at 3 am around an hour or so after you send it. Bitcoin is 24 by 7 by 365. And with very limited fees within the Bitcoin economy. Most of the cost is in moving Bitcoin to fiat or vice versa.

It is not based on debt, so does not have the instability of debt or counterparty risk. The only real risk is security, which holds as well for your banking balances. The other risk is to the value as governments and politicians feel threatened. But at the end of the day, they can only regulate it, but not eliminate it. The technology is too widely available to anyone.

Money 3.0 is not poised to replace Money 2.0 anytime soon, although in a number of ways it is superior. They will coexist. At some point a small country will convert their currency to Money 3.0, by building a blockchain-based peso or some such. A number of central banks, large and small, are already studying this issue.

Many have talked about global currencies in the past. The US dollar has global impact for trade and the price of key commodities, but you have to exchange it when you cross borders. The Euro has been a boon for commerce, trade, and travel in many countries within Europe. Gold historically had a global role but was difficult to move and verify as to weight and purity.

Bitcoin has no weight and purity issues. It transcends borders. It, Ether, and the other cryptocurrencies are indeed the first global currencies.