Since its groundbreaking introduction by Satoshi Nakamoto in a paper entitled: ‘Bitcoin: A Peer-to-Peer Electronic Cash System,’ on October 31, 2008, the term Bitcoin has nearly become a household name. Over the last nine years, this crypto currency has maintained nearly an upward trajectory – culminating in its price reaching $19,783.21 – a week before Christmas.
During this period, it has been praised by many and vilified by a few. It has been grudgingly accepted by Wall Street – who introduced Bitcoin futures late last year, and rejected by many national governments like North Korea, India, and China. There is also an anecdotal evidence that, it has even made 18-year olds into millionaires while some have lost their retirement funds to its volatility. The Crypto lexicon has found some new terms, such as, Ethereum, Ripple, and Cryptonnaire that define various Alternate Coins and a Crypto Millionaire, respectively.
Evidently, an ‘idea,’ resulting in such spectacular monetized returns merits a closer look from the crypto currency traders, to use knowledge to make better investment/trading decisions. For example,
A prime objective of this five-part white paper is to dissect the Bitcoin myth, though more importantly it is to simplify the understanding of the underlying BCT.
In addition, an attendant objective is to draw the traders’ attention to several other investment opportunities in BCT technology, and ALTCOINS that yield equally spectacular returns.
Thus, this five part series is organized in a way such that a newcomer to Cryptocurrency Trading (CCT) can gain an enhanced understanding of the Bitcoin myth – what drives it, and appreciation for the underlying disruptive BCT technology. Unquestionably, this technology is bound to change practically every aspect of the human life: business, finance, health, and medicine to name a few.
This discussion will be outlined in five parts:
- Bitcoin Myth and BCT,
- Inner Workings of Blockchain Technology (BCT),
- Cryptocurrency Transaction Logistics,
- Current Applications of BCT, and What Lies Ahead,
- How Can a Cryptocurrency Trader Leverage Knowledge of BCT?
Bitcoin Myth and BCT :
Imagine a situation where a bank’s client uses its electronic payment system to effect an electronic transaction payable to a vendor. Generally, in this case the bank outsources this activity to a ‘Third Party,’ to honor the check and pay the vendor. Thus, the bank and its outsourced component ‘Trust,’ the client to keep sufficient balance in the account to cover the check. However, this ‘Trust Based Model,’ suffers from the weakness that the bank’s client may not have sufficient funds in the account.
The check could be dishonored resulting in extra costs incurred by the bank and billing party to recover the attendant loss. Though, a simple illustration – when multiplied by billions of transactions that financial institutions process even day – the cost of doing business under the ‘Trust Model’ can be staggering. The electronic payment system also suffers from the classical double-spending problem, where the same currency could be fraudulently used to make payments for two different transactions.
Primarily to circumvent these two challenges, Satoshi in 2008 conceived the idea of a cryptocurrency, and then ‘minted,’ about 50 Bitcoins in January 2009. The first Bitcoin transaction was negotiated between Satoshi and his friend, Hal Frey that month. Since that first transaction, Bitcoin and its sister currencies (ALT COINS) had reached a whopping market cap of nearly $835 billion by the end of 2017. Even though, its market cap has been slashed by almost 50%, it still garners a significant fraction (about 5% at the writing of this article) of the overall global currency and coin market cap. And, on further analysis, one estimate shows Bitcoin having overwhelmingly largest market share at close to 60% of that 5% fraction.
This evidently shows the extraordinary power of Satoshi’s rather original ingenious thesis – that when monetized – Bitcoin has created staggering opportunities for Crypto coin traders.
What is Blockchain Technology (BCT) then? The underlying infrastructure supporting Bitcoin and other ALTCOINS is rooted in Blockchain Technology. Recall the example in the previous section: A bank client initiates a transaction that is entered into both the bank’s and the vendor’s General Ledger Systems. By making entries into General Ledger Systems, the bank, the bill payer and the vendor create a ‘Trust Bond,’ that establishes the veracity of the transaction. This Trust Bond is as good as the bill paying capabilities of the bank, and the bill payer. Now, what if one player in the ‘Bond Chain’ is unable to honor the commitment, the chain breaks, and if the service or the payment mechanism is NOT reversible then someone in the chain incurs losses? Recall the great financial crisis of 2008-2009, when major brokerage houses and US banks could not meet their debt obligations; they went bankrupt, and Millions of ordinary citizens lost their life savings.
Surprisingly, though maybe not be coincidentally, Satoshi presented his thesis about Blockchain just about that time. In its most vernacular explanation, BCT is the collection of a publicly monitored ledger system, say a giant data base that records and maintains in perpetuity ALL actions and the attendant digital signatures that have been executed for a given transaction. This ledger is shared simultaneously among all participants of that transaction. Each transaction, event, or action is attested by a consensus of a majority of the participants.
Five Pillars of a Block Chain:
A generic Blockchain system includes at least the following salient features – that I would call five pillars of a Blockchain:
- Distributed Consensus,
- Verification – Proof of Work,
- Immutability – Unique relationship between output and input,
- Trustworthiness, and
- Transaction Velocity.
Distributed Consensus: This is probably the MOST critical feature of the BCT. Recall, in the above example it required only a banker to attest to the fact that a particular transaction had occurred and it was in the bank’s ledger system. This breeds lack of trust among the participants, and the fear that the one entity ledger system might be subject to abuse and even maleficence. In the most egregious example, an authoritarian regime can take down the monetary system or even demonetize ALL or part of a national currency system. Recall the demonetization of Indian Rupees – large currency denomination in late 2017.
Due to the unilateral actions of one of the parties in the ‘Trust Bond Chain,’ or the government, hundreds of millions could lose their life savings overnight. A decentralized feature of the Blockchain technology eliminates the fear associated with unilateral action of a single party in the CBT. The decentralized public ledger is validated and maintained by thousands of peer-to-peer nodes that make it impossible for a single person or entity to abuse the system.
Verification – Proof of Work: In any transaction, commercial or otherwise, veracity of the parties involved, terms agreed to, and the transaction consummated must be immutable – something that can NOT be altered. Often, those in power, affluent or not, alter the agreement because they can. The BCT protocol DOES NOT allow alteration of any kind in a given transaction chain. This is guaranteed by the following:
The transaction ledgers are public, AND distributed. As the transaction ledgers are in the public domain, it is IMPOSSIBLE for some scrupulous person or entity to alter the public document without raising the ire of the watchers. Additionally, the given ledger is distributed among hundreds, if not, thousands of nodes, making it formidable for anyone to mutate the record.
Immutability: The BCT algorithm is incredibly complex and ensures only one output function for a given input. This is really the brilliance of Satoshi’s original thought experiment in crypto currencies. To solve the problem of dual-spending, he proposed a unique relationship between the input (the inception of a transaction), and the output (the completion of a transaction). Any intermediate perturbation to the transaction invalidates the transaction.
We will elaborate on these in the later chapters.
Trustworthiness: The existential beauty of BCT is the inherent fail-safe mechanism embedded in the BCT protocol. The trustworthiness of a given transaction is assured since each transaction is verified by a collection of ‘crypto miners,’ given the difficult task of solving in order to approve the transaction. Again, the control for the transaction is removed from one person and shared across a multitude of people or entities.
Transaction Velocity and Cost: As the BCT technology becomes more Main Stream, the transaction velocity will be incredibly high. In fact, the transaction speed could be limited only by Moore’s Law: that the speed of computer chips doubles almost every 18 months. In any event, the digital transactions are incredibly fast, and costs almost negligible, compared to transactions through traditional banking channels.
In this segment of the white paper we have unveiled some mysteries surrounding Bitcoin, and other Alternate coins, and provided an overall introduction to Blockchain technology. We also have tried to demystify some of the underlying reasons – why Bitcoin and other Alternate coins are the wave of the future, and not just another Tulip Mania.
We, at Platinum Trading Institute (PTI), hope that if you understand the incredible power of Blockchain Technology (BCT), you will better appreciate the rationale behind Crypto Currency investments, and trading.
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