Bitcoin, Blockchain & Co. - Joe Martin - E-Book

Bitcoin, Blockchain & Co. E-Book

Joe Martin

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Beschreibung

Information about Bitcoin, Ethereum, Blockchain and other cryptocurrencies for interested parties, for beginners and advanced. To be active in the emerging world of cryptocurrency, you must first to understand the systems that underpin it and that will help to shape the future. It is vital that you understand three fundamental pieces of information before you begin any activity related to cryptocurrencies. Without these three key considerations, you cannot fully understand and navigate the intricacies of the crypto world. Without these three foundational rules, you become extremely vulnerable to financial losses if you become active. For that reason, you should read thus book. Internalize the information and let them sink deep into your subconscious. The principles in this bool must be applied intuitively. Gauge everything—every single thought and decision—by these principles. With these three principles at the core of your every decision, you will be safe from fraud and you will understand how our world is going to work in the near future.

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The Author

Joe Martin is a child of the Computer Age and is fascinated by Bitcoin, blockchain, and all things cryptocurrency. As a journalist with over 25 years of professional experience in the world of technology, he is ideally qualified to provide an accessible, understandable and transparent insight into the world of cryptocurrencies.

Through the lens of Bitcoin, he explains exactly how blockchains work and why they will change the world. Bitcoin is the starting point of the fourth industrial revolution, and those who wish to protect their jobs, their property, their families and their futures must understand the basics of the crypto world. The significance of Bitcoin, blockchains, and cryptocurrency in general will be examined and explained in this book in an entertaining and accessible format.

This book will be particularly helpful to those working in professions that are sensitive to the impact that cryptocurrencies and the blockchain will inevitably have on our society and livelihoods.

Bitcoin, Blockchain & Co.

The Truth, and Nothing but the Truth

Information about Bitcoin, Ethereum, Blockchain and other cryptocurrencies for interested parties, for beginners and advanced.

EXTRA: Earning Money With Cryptocurrencies, Trading & ICOs

COPYRIGHT © JOE MARTIN and Co-Authors

Table of Content

The Most Important Things on One Page

Glossary

Chapter 1 — What you absolutely need to know

Chapter 2 — The Truth and Nothing but the Truth:

Chapter 3 — How the Bitcoin Blockchain Works

Chapter 4 — Wallets, Exchanges and the P2P-Net

Chapter 5 — The Truth

Chapter 6 — Money and Value

Chapter 7 — Criminals, Fraudsters and the Authorities

Chapter 8 — Other Cryptocurrencies and Blockchains

Chapter 9 — Nodes, Consensus and Mining

Chapter 10 — The Basis of the ICO Investment Decision

The Famous Last Words

Copyright

Copyright © 2017/2018 by Joe Martin and Co-Authors

All rights reserved.

No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording, or otherwise), without the prior permission of the publisher. Requests for permission should be directed to [email protected]

Special thanks to all who help to make this book possible. I am especially grateful to Luccia, Mariana, Susan and David.

I also would like to thank the organisers of this blockchain conferences where I learned a lot:

https://blockchain-expo.com/ — https://btcmiami.com/ — http://tokensummit.com/

https://digitalchamber.org/ — http://finovate.com/ — https://www.crypto-financing.com/

Title elements from:

Blank golden corner ribbon: Author: BSGStudio

Technology-background-in-blue-color: Designed by Freepik

The Bitcoin Exchange Rate

During the writing of this book, the price of Bitcoin skyrocketed against the dollar, euro and all other currencies, going from about $1,000 to over $15,000 per bitcoin. Who knows how Bitcoin will be valued when you read

While this jump in value was great, it has created a few problems in this book. For example, I did some calculations that took the exchange rate into account, such as whether it is worth mining cryptocurrencies, how much you would have been paid for a single pizza at the current price, and how high transaction costs are. Due to the steeply rising price, the results were already outdated by the time I finished the chapter and will continue to change over time. Bitcoin experienced constant increases in value throughout 2017—though it sometimes felt like every hour! To tackle this problem, I have decided to set a price of $10,000 per bitcoin at the time of printing in January 2018. Thus, it should be noted that all calculations refer to this exchange rate.

Please inform your friends and acquaintances!

Please share the information in this book with others, or simply recommend the book to those who can benefit from it. Your friends, your family and your acquaintances will be grateful if you point out how they can inform themselves about cryptocurrencies. Your friends and family should be able to use the information in these pages to make money. By the time they finish reading, they should be able to buy, trade and invest in Bitcoin, Ethereum, and other cryptocurrencies, while having enough knowledge to arm themselves against the many online scammers who try to take money out of their pockets.

Thank you very much.

The Most Important Things on One Page

To be active in the emerging world of cryptocurrency, you must first to understand the systems that underpin it and that will help to shape the future. It is vital that you understand three fundamental pieces of information before you begin any activity related to cryptocurrencies. Without these threekeyconsiderations, you cannot fully understand and navigate the intricacies of the crypto world. Without these three foundational rules, you become extremely vulnerable to financial losses if you become active.

The rise of Bitcoin & Co. has created a gold rush of sorts. There are a lot of frivolous offers from opportunists out to make a quick buck from the hype. In a more sinister twist, there are also seasoned fraudsters who actively look for ways to part you from your money and your crypto-credit. These criminals range from the shady opportunist to the seasoned professional. To navigate this world, you must always be on your toes. The best way to beat the fraudsters is to stay one step ahead with some knowledge of your own.

For that reason, you should read these instructions repeatedly. Internalize them and let them sink deep into your subconscious. The following principles must be applied intuitively. Gauge everything—every single thought and decision—by these principles. With these three principles at the core of your every decision, you will be safe from fraud and you will understand how our world is going to work in the near future.

1. Ensure that you—and only you—have the “Private Keys” to your cryptocurrencies (that is, Bitcoin and Co.). Always. No one else!

2. You can only unconditionally trust a genuine public blockchain with many completely independent nodes.

3. The Computer Source Code of a trustable blockchain system is always openly accessible and can be examined and used by everyone.

Even if you don’t yet understand what “Private Keys” are or know what a genuine Public Blockchain is, never forget these principles. Analyze every offer from this perspective, no matter how attractive it seems. Do not allow yourself to be tempted into breaking these rules. Read this book carefully, understand the importance of these rules, and question every offer with this knowledge. That is the only way to protect your property. Only then is your future on a firm foundation and only then are you capable of taking informed action. With the knowledge contained in this book, you can successfully deal with cryptocurrencies and other Blockchain systems and shape the future so that you and your family are comfortable.

Glossary

Terms Used

Fortunately, there are only a few specialist terms that you need to know to be able to discuss and understand cryptocurrencies and the blockchain. These are initially explained in the following short glossary. Other terms will be introduced successively in the text and explained fully. This book is aimed at the layman and is presented in an accessible and understandable way.

Public Blockchain: The word “public” doesn’t accurately reflect the generally accepted meaning of this term. A public blockchain in the sense of a true, genuine blockchain is not a private blockchain nor the blockchain of a consortium or association. The characteristic of a public blockchain is that anyone who has a computer can download the appropriate software and become part of the blockchain system. In general, the data in this blockchain is publicly accessible, although this is not necessarily always the case. The computers creating the blockchain can be located anywhere in the world and work completely independently in creation and management of this blockchain. It is also worth noting that, in this context, “public” does not mean that all data is transparent, just that anyone can participate.

A public blockchain is the only blockchain that is truly tamper-proof. Not all blockchains are created equal, and the differences are crucial.

Ledger: A ledger should be interpreted as a general account record. It is a list or book in which all transactions are stored chronologically from the first to the current transaction. In the case of a blockchain, it is a file. As transactions occur, this ledger continually grows in size. In the summer of 2017, the ledger of the Bitcoin blockchain was already greater than 130 GB.

Crypto: Crypto refers to all systems that use encryption techniques to prevent data from being accessed, or at least read, by an unknown third party or to sign the authenticity of. These systems are summarized under the umbrella term crypto. Mathematical encryption techniques are currently used in these systems, but before the computer age, less secure methods of encryption were used.

Cryptocurrency: If a coin is created by computers with the help of an algorithm, then it is labeled a crypto coin. The algorithms and computing power required for the creation of the coins are very complex and elaborate. This is because mathematical encryption techniques do not just create the coins, they must also calculate or compute other functions. For example, the computers that carry out these calculations also protect the network against misuse and manipulation. This is achieved by applied cryptography. The best-known cryptocurrency in the world is Bitcoin, closely followed by Ethereum.

FIAT Currency/ Money: Fiat money has no intrinsic value—it simply serves as a means of exchange.The opposite of fiat money is commodity money, such as tobacco, rice, gold or silver, all of which have an intrinsic value alongside its exchange value. It’s value is not dependent on governmental decree. It holds its value as long as payment can be made with it.

In principle, Euro, dollars, Swiss francs, yen and all other paper currencies are fiat currencies. They have no real intrinsic value. Critics even claim that they are worthless. At any time, fiat currencies can be inflated through additional printing from central banks and governments, thus become actually worthless. For example, this happened to the Reichsmark in 1920s Germany and has been happening to the Venezuelan bolivar since 2014.

Bitcoin is not a comparable currency because, although it also possesses no intrinsic value, it is unique in that it cannot be manipulated or printed by any government. Thus, the Bitcoin is not subject to this kind of inflation. For this reason, it is defined as neither fiat nor commodity money, but as a cryptocurrency.

Bitcoin’s intrinsic value can best be quantified in the electrical energy that computers need to secure the network and keep it running. It is reassuring to note that if an organization requires more electrical energy per year for purchasing and provision than Iceland uses to keep this network running, then Bitcoins must represent some value.

1944

George Orwell, in relation to a possible victory by Hitler, wrote that winners have always been able to rewrite the history of humanity at their discretion and to their taste, to shape their own future and remain in power. Truth then becomes a relative concept, which is a great danger.

2014

Julian Assange stated that Bitcoin’s most important function is that of an unalterable time stamp which guarantees that news represents the truth and is firmly fixed for all time. Thus, any falsification of history by rulers, a danger correctly identified by Orwell, is excluded once and for all.

Since 2009

Public blockchains have been locking the truth in data blocks and ensuring that no-one, no government, no-one with money or weapons, or lobby groups equipped with whatever, can ever alter this data. For the first time in human history, it is guaranteed that this data—and thus the history of humanity—corresponds to the truth, and nothing but the truth, for all time.

Chapter 1 — What you absolutely need to know

What you will learn in this book and how you should read it

I stumbled across Bitcoin late—not until 2016. Maybe you discovered it even later than me, or years before me. Regardless of when Bitcoin came to your attention, I am sure you have a few questions that no-one has been able to give you a satisfactory answer to. I am also sure—since you’ve picked up this book—that you are interested in the topic of Bitcoin and cryptocurrency. As an author and journalist, I am fascinated by the subject of crypto. However, no matter how hard I tried to grasp it, to understand it, to get a handle on how it all works, I kept finding myself in a deep dark wood. The more I learned, the more questions I had.

Even after reading dozens of reports, listening to even more podcasts, attending conferences and speaking to lots of crypto experts, I was still in those woods looking for clear answers. But my problem had changed. It wasn’t dark in the woods anymore. On the contrary; now the sun seemed to be illuminating my path, but I could no longer see the wood for the trees. Total information overload.

More conversations, more reports, more articles, more podcasts, and none of it really helped. The only reassuring thing was that I was finding more and more people who were experiencing the exact same uncertainty. There was more confusion than expertise in this new, specialist area. Again and again, I participated in conversations until both sides exhausted our logic and still were no closer to clarity. Why was that so, and how could it be solved?

I believe that anyone who has had any dealings with Bitcoin, blockchains and other cryptocurrencies will know instinctually that this new technology will change the world for the better. Many are intuitively of the opinion that we are approaching a new industrial revolution, or perhaps are already within it. But the world of cryptocurrency and blockchain is anything but intuitive. It runs counter to every framework and system that form the foundation of our modern lives. In large part, it is counterintuitive, strange, unknown, alien. I have often stood with almost literal question marks on my face, my lips forming one astounded “Pardon?” after another. I kept hearing the same stock answer from my friends: “I just don’t believe that.”

Understanding Bitcoin and blockchain runs counter to everything we know

A change in thinking was not the only thing missing in my understanding of what is happening with cryptocurrencies. I lacked the central theme, the overarching framework, or maybe—as I now think—the deeper meaning of Bitcoin and blockchain.

When I realized something was missing from my conceptual framework, I started to seek it out. I looked for a new paradigm.

Many people who get involved with crypto see it as an opportunity to gamble. They want to take a chance at the possible windfall that comes with investing early in new technologies. With Bitcoin, the rate rocketed from a few hundred to over $10,000 within one year, and investors experienced wild fluctuations, up and down, again and again.

The cryptocurrency Ethereum, whose rate shot from under $10 to nearly $1,000, experienced even wilder fluctuations. Ethereum investors gambled with so-called “Alt-Coins” and via ICOs—but more about that later in the book.

Oh yes, and all that happened within nine to twelve months. Bitcoin shot up 1.333 % in twelve months (December 2016 to December 2017- from $750 to $ 10,000), while Ethereum skyrocketed 5,300% in twelve months (Ethereum from December 2016 until December 2017 - from $8 to $420).

Nearly every crypto-portfolio made the profits of Warren Buffet—the best investor in the world for the last 40 years—look like pocket change. These profits in the thousands of percent were new for everyone, even the high-powered professionals who gamble every day with their financial instruments and move billions back and forth.

But others who come into contact with Blockchain see even more in it. They see better workflows in their company, more peace for mankind, the solution to all problems, the universal world computer.

The truth is probably—as it so often is—somewhere in between. However, this recognition does help us to further understand what it all means. What are the long-term implications of Blockchain? Are there any? Is it all just hype, a new software? Like Windows 10, 11 or 12?

The aim is to understand without being able to program

I am a child of the computer age, and the rise of crypto reminded me of my lectures from the past. My first home computer was a Commodore VIC-20—the predecessor model to the revolutionary C 64. I grew up with it and was in the vanguard of the whole development. When Apple released the first iPhone, I stood in line at the Apple store in San Diego, California for hours, but by the time I reached the front of the queue, they were already sold out.

As an entrepreneur, author and journalist, I have done and experienced a lot in the technology sector. However, I have never been a programmer or mathematician. This is good news for you because this book is written for technical laymen. No computer code and everything explained in a way that can be understood by mere mortals, interested non-specialists.

This book is also for those who are already involved in the wild west that is the current crypto world. It is even written for the software experts who, perhaps, after reading it, will have a better understanding of the problems they are solving in the real world, and why that is so valuable and important.

But at that time, when I was first getting involved in crypto, I didn’t have the overarching framework to guide me. I knew that there was something there, but for many long months, I simply couldn’t grasp it. The further I ventured down the rabbit hole, the more I discovered that many others didn’t know much either. Even those who stood on the stage, and certainly those in the audience, didn’t fully understand what it was and where it was going. In the coffee breaks, subjects were skillfully avoided, and a kind of pseudo-knowledge was coolly presented without any real idea of the material. Maybe because this knowledge framework was lacking.

I remember a time in the mid-90s when stood on the stage and spoke about the internet. Wide eyes, furrowed brows, disbelief, and then: “Oh, the internet, it’s just a fad. It will pass.”

Not that it bothered me. I didn’t mind whether people believed me or not, but their response did surprise me. As we all know today, the internet wasn’t a fad. It didn’t disappear. It might be new territory, as German Chancellor Mrs. Merkel postulated even in 2015, but the internet has changed our lives hugely.

Around the millennium, I found myself standing on stages again. My new subject was the great frontier of e-commerce. Again, I heard nay-sayers and disbelievers with all kinds of excuses and dismissive remarks. A common one was: “No-one will put their payment details on a website, it’s far too dangerous.” Well, in 2016, Amazon alone achieved 136 billion USD of sales from people who don’t put their payment details on the internet. So much for that.

Five years later, I spoke on the topic of “social media.” I heard the same voices piping up: “No-one will put personal data about themselves on the internet.” Today, Facebook alone has over two billion people doing exactly that. So much for that.

And here we are today with cryptocurrencies and blockchain. But this time it is different. People are more aware of the change. They have seen the patterns of the past and are more curious than anything. That’s good. Of course, there are still the skeptics. That is the biggest group—interested yet skeptical, and not really motivated to do anything about it.

Why a blockchain?

The blockchain is exactly why I looked for the framework. For the skeptics and the curious, I looked for the real purpose of a blockchain, the real reason for the existence of a decentralized system. I looked for the reason why cryptocurrencies generate such hype. Why large industrial organizations, banks, insurance companies, and even governments are strategically involved in cryptocurrencies. I looked for the reason why many of these individuals and organizations were working together, when in the real economy, they were often bitter competitors. Why this sudden co-opetition? Why are those in competition co-operating at the same time?

At some point in my investigation, it all became clear to me. I had stepped out of the dark of the wood and was now bathed in sunshine. I could clearly see the trees, the trunks, the leaves, the ferns and all the flora. I had found it: the truth!

Ok, that sounds a bit theatrical and possibly even esoteric, but it isn’t. The truth is an integral part of a certain kind of blockchain. To formulate it in a different way:

We can rely 100 percent on the information of a public blockchain

Like the Bitcoin blockchain, which is the first and strongest blockchain to date. It contains an unalterable record of all transactions made since the first Bitcoin was created. No intelligence on this Earth can ever change this. No individual person, group of people, computer group or even an artificial intelligence can alter the transactions of the Bitcoin blockchain.

That was the “Wow” moment for me. You’re probably thinking that you already knew that. You already knew that a blockchain is a record of all processes and is immune to changes. You already knew that it is a solid database. That is how blockchains are often characterized, right?

Yes, that is how they are described. But exactly what that all means is rarely correctly understood or communicated.

We know how a blockchain works. We know all the things that you can do with a blockchain. But what we don’t really know is why you should do all of that with a blockchain. The truth, which is stored unalterably by the data in a public blockchain, will change our world. Certainly, and inevitably.

That is why I decided to write this book. It is a complete handbook for the new age of truth. One which will lead the reader into the fascinating world of cryptos.

What knowing the truth means

What does it mean for us that we can rely 100 percent on the details anchored in a blockchain? That is a question that is difficult to answer, and a new question for us because trusting completely in data is counterintuitive to us. We are often happy to give away the data of our orders, our bank accounts, and our movements to Amazon, Facebook, Google, Apple and other digital entities, and for the most part, we don’t even think about what happens with our data. But sometimes we are alarmed—and rightly so. Maybe we are alarmed because a hacker has stolen 140 million records from the Equifax company or because someone has stolen our personal identity. While we might be more trusting in giving data, we are becoming more and more skeptical of the data we receive and rely on.

Fundamentally, we trust these large companies, these centralized administrators and marketers with our data. We rely on them. We have the expectation that a company of their size must know how to protect their customers’ private data. (Ha, ha, ha).

Nevertheless, that trust only goes so far, and it has to stop somewhere. With the number of security failures and leaks that have occurred in recent years, we are beginning to become distrustful of institutions. Blockchain will change all that.

If you can rely 100 percent on entries in a database, could you then purchase something from a third party without knowing who he or she is?

How do you know that this person can pay? How do you know that this person is the legal owner of the goods for sale? Up until now, you didn’t. Up until now, you could only cross your fingers or maintain a level of ignorance and indifference.

If you buy a car from a complete stranger whom you have only spoken to briefly on the telephone, you would want the papers for the vehicle, right? You would like a purchase contract and invoice, and you would want a reliable record of the payment you have made by putting it into the bank. If you were the seller, you would want evidence that the payment had been received and assurance from the bank that it is not counterfeit or fraudulent. This is particularly true when we are dealing with someone from out of state or even from abroad. You would ideally like a copy of their ID so you can find them if something goes wrong. At the end of the day, you’ve got to be a little bit wary of when completing transactions with total strangers. How can you trust them? Is everything that they are telling you true? Do you know the truth?

What if we’re talking about buying something much bigger? If you want to purchase some real estate, surely there are lawyers for that, right? True. But that’s another professional group that will be made redundant by blockchain technology. What? Pardon? Lawyers are becoming redundant?

Lots of jobs are being lost, and blockchain is making sure of that

Blockchain technology will change the world and how we interact and transact in it. We will no longer need to trust anyone because the truth is anchored for all time, unalterably, in the blockchain.

Whatever is contained in a public blockchain is true and reliable. You can buy a house without a lawyer and even without a copy of the seller’s ID. You can trust that it is the real owner from the data in the public blockchain. If the transaction is then closed, you become the new owner and that new information can be found in the public blockchain. The record of your ownership exists forever, or until you enter the sale to someone else into the public blockchain. It is safe and without risk, and it allows for seamless transactions between strangers anywhere on Earth. It all happens without need for a lawyer and with low or no fees involved.

The public blockchain will automatically enter you as the owner if all the preconditions stored as an smart contract in the public blockchain are met. The public blockchain holds the door open to you because your unique cryptographic key fits and that of the previous owner no longer does. (Please note that I quite deliberately keep writing “public blockchain” and not “blockchain.” There will be more about that later in the book.)

That is, of course, a futuristic example, and I know that it appears a little contrived. But what if I told you that we already have the technology for that? What if I told you that the first projects in which real estate is being managed via a blockchain are already up and running? They are in Costa Rica and Sweden.

I have chosen this example deliberately because it is very provocative. There are many examples which are less challenging, such as digital money, marriages via the blockchain, automatic electricity delivery from neighbor to neighbor, or automatic betting on anything at all. What about a €100 million bond from Mercedes-Benz via blockchain? This has been in place since June 2017.

Blockchain technology is here and it is not going away. It will not disappear overnight or over the weekend. It is far too late for that.

Having a basic understanding is helpful and necessary

To understand what this means for us all, it is first necessary to understand the basics of the technology and the concepts it is built on. That is what I will explain in this book.

Compare it to the time you were learning to drive. You learned the highway code, the rules of traffic, and the basics of how the car works. The driving instructor explained how some cars need diesel fuel and others need petrol. Some cars have a manual transmission and others have an automatic. You also learned how to calculate braking distances so you don’t drive too fast and can stop safely. A little theory was needed before you could get moving in practice.

You really didn’t need to know how engine management software is written or what material the drive shaft is made of to drive a car from A to B. Similarly, you do not need to know exactly how the software works to understand the crypto world. However, you do have to know the signs so that you don’t end up in a cul-de-sac or drive the wrong way up a one-way street. In the first instance, you get stuck. In the second, you could end in an accident. Both scenarios are unpleasant, potentially dangerous, and completely avoidable.

It is the same in the crypto world. You can easily get yourself stuck in a dead end or run yourself right into a fraud, which amounts to an accident. In this book, you will learn the signs and how you must act in “crypto-traffic” to ensure you get where you want to go safely.

If you master the basic rules, you will be able to trade faster and more independently with cryptocurrencies. You can use the skills you have learned for your own needs, or you can join a blockchain company or movement. In any case, you will be the one in the driver’s seat at all times. You will also learn how to earn money with Bitcoin, how you can save, and how you can perhaps make yourself independent of the pension system, which can no longer be financed anyway.

The first part of this book explains how Bitcoin works, what different types of blockchain there are, how you can trade or set up a savings plan with Bitcoin, what other cryptocurrencies exist, and how you can invest in new business models and make good profits in these currencies. The goal of the first section is to give you a thorough framework of understanding for the fundamentals of cryptocurrency.

In the second part, we dive into the dangers and potential pitfalls of the crypto world. We’ll discover how you can lose a lot of money, be taken in by fraudsters, and the incorrect ways to set yourself up that will inevitably lead to losing your Bitcoin or other cryptocurrencies. The goal of the second section is to make sure you’re aware of the dangers so you don’t fall victim to them.

The two halves of this book are essential and inextricably linked. You should study the first section diligently so that the misfortunes described in the second section do not befall you.

After you have mastered the basic procedures and techniques, you will understand and value what it means to know the truth in relevant areas of our life, because it is anchored always and forever in the public blockchain. You will recognize the potential danger of the massive changes that will occur for you, your company, or your industry as crypto shakes things up. And with your knowledge and understanding of blockchain, you will be able to act accordingly. You will understand and be able to see what is coming. You can prepare, position yourself to capitalize on these shifts and set yourself up for success.

That is why I have written this book—so that you are not caught by surprise when the new wave of automation inevitably hits. Because one thing is sure: the world is about to change in a huge way. The data which we will soon be relying on will make millions of jobs redundant. At the same time, it will enable and encourage completely new business models. Be prepared. Be on board.

How you should read this book

I worked hard on the structure of this book to make it as logical and accessible as possible. As with any book, it is recommended that you read it from start to finish. Each individual section is carefully placed to build on the previous, which will allow you to really understand the whole system in a clear way.

By the time you finish, you will know not only how to drive the car—to persist with the driving metaphor—and what signs mean what, but you will also know how cars will change our society. You will understand the significance of cars being able to move goods and people from A to B faster than horses, and how you can be one of the first to position themselves accordingly and trade profitably.

If you don’t read this book in order, you will still gain some important knowledge that will help you. However, you will remain as just one of thousands of people in the traffic who take it for granted that goods are on the supermarket shelves. If you know the whole system and the concepts and models behind it, then you will know why the goods are in the supermarket and how they get there. You will understand the overarching principles and you can achieve considerably more in the crypto world. You can calmly and skillfully shape the future for you and your family.

With this in mind, I hope you enjoy reading the book.

Joe Martin

Miami, January 2018

Chapter 2 — The Truth and Nothing but the Truth:

Bitcoin, Ethereum, Cryptocurrencies and Blockchain - Why blockchain will change our world and our society, and how we ought to manage it

We all know that once toothpaste has been squeezed out of its tube, it will never go back in. Turning back time breaches so many laws of physics that it is just not possible to do. Who among us would willingly choose to go back to the old practice of recording music from the radio onto cassette tapes, when we know the current quality of digital music from CDs, iTunes or Spotify?

These advancements and inventions that characterize our modern lives will not just disappear from use. Unlike advancements of the past, they will not be lost.

Knowledge, on the other hand, can be lost. It has only been in recent years that we have we discovered—with astonishment—why the ancient Romans were able to produce vastly superior and more durable cement than the builders of today. The materials and techniques we use for our motorway bridges crumble after just 50 years of use, while the Colosseum is—more or less—still standing almost 2000 years later. This superior building knowledge was lost to us through time.

Knowledge can be manipulated. In the era of “fake news,” manipulation of information is an easy feat to accomplish. Apparently. Because actually, the word was never really any different. Manipulation of every kind—from faked news to counterfeit banknotes, falsified records to forged signatures—has defined our past and created our society.

Why can’t we just blindly trust this data and information?

An analysis shows why knowledge is lost through time, and the result is unequivocal: knowledge and information could only be managed centrally up to now. Central management, central storage, central control. Anything that is centralized can be changed, manipulated and lost through destruction.

Who knows what valuable knowledge was contained in the thousands of scrolls and books at The Great Library of Alexandria—one of the largest and most significant libraries of the ancient world—before it was destroyed by a series of fires over a number of years. The information lost could have been the foundation of many great advancements for humanity, and the loss has probably held back the development of the western world considerably. Just as the knowledge of the Inca was lost, no one knows for sure what contributions from other cultures we have missed out on. What everyone today knows, though, is hard disk drive errors and computer crashes. In some ways, that is also a loss of knowledge. When the excel table or the document you’ve been working on are gone, you have no choice but to start from scratch. Your carefully formulated thoughts are lost. The skilfully created table is lost. Annoying.

Until now, this system of central management was the best solution to maintaining, organizing and protecting our valuable knowledge. States were and are centralized structures; sometimes that took the form of a monarch ruling a kingdom or a democratic government that leads and manages the state. Ultimately, everything is ordered and managed from a central point of control, even if there is devolved local administration.

Even if you live in a democracy or a federalized state, you should be under no illusions. The most important information—for example, tax numbers, our social security number, and our vehicle registrations—are all centralized at the highest data levels and are stored in some linked database. These databases, which can be manipulated at any time, can also fail, be hacked, and are permanently under threat of viruses.

If centrality is the problem, or if centrality is identified as the predetermined breaking point, is there another solution?

Yes, there is. A solution to the problem of centrality came to the fore in 2008 with the birth of a concept called “Bitcoin.”

The Bitcoin white paper, the folding paper of the crypto industry, was published by Satoshi Nakamoto. To this day, no-one knows who is behind this pseudonym. It might be a lone wolf or it could be a group of computer software experts. Nakamoto describes how a group of computers can technologically be made to deliver the truth, and nothing but the truth.

A truth that is firmly written for all time and on which you can rely 100 percent. A truth, on the basis of which one can blindly base one’s future, and that works completely without any trusted persons or trust in itself.

And so an exciting idea was born. Today that idea is building an ever-growing following of enthusiasts. It is reaching the masses increasingly quickly and efficiently, and it is massively changing our society and its administration. That is why it is all the more important to know the basics of this technology; otherwise we are each facing a fait accompli, wondering how we can jump onto a train to the future that is already departing.

Data that we can trust blindly?

If we could blindly trust data, it would have enormous consequences and that would completely change our future. Without overstating it, you could argue that it’s a fourth industrial revolution—that of the trusting society.

By this, I mean a society in which you can blindly trust any offer or transaction, even if it comes from a completely unknown third party. In this version of society, you can purchase real estate by mobile phone without a lawyer. You can have your medical files with you and any doctor, wherever you are, can rely 100% on the information contained in those files, meaning they treat you more quickly, effectively, and safely than ever before. That is the kind of life-changing impact trustable data can have.

In the following section, I will show you exactly how that works and what technical developments would need to be in place to ensure that data is always reliable and reflects the truth—without exception. I will illustrate how this system is constructed and why it is uniquely positioned to deliver the truth. Along the way, you will also discover the circumstances under which it is vulnerable to attack or could be manipulated. All of this is presented in a straightforward way, so that anyone can understand it without needing to be a software programmer.

In this book, I have drawn examples from private and professional areas in which confidential applications, dominated by the truth, deliver benefits, and how these new applications will influence the future. By the end of the book, you will fully understand why this will happen and why the development is inevitable and unstoppable. The toothpaste is just not going back in the tube!

What is the secret of such a trustworthy application, in which the truth and nothing but the truth is recorded?

If the problem is that of truth, the integrity of data, or centrality, it logically follows that the solution can only lie in a decentralized application. I’m sure this was also the exact logical progression that Nakamoto’s thoughts took when he began creating a solution.

Nakamoto built a truly decentralized application with Bitcoin—one in which data are kept simultaneously on several decentralized computers. This network of individual computers, also called nodes, always optimizes itself so that failures of individual nodes are automatically balanced. As a result, most nodes always have access to the truth. In this way, such a network is designed to safeguard against failure.

In addition, the data must always have a certain structure and be stored in a certain way so that subsequent alterations and manipulations are impossible. Through skillful linking of the individual data sets into a series of data blocks that are linked to each other, an unalterable record is produced, one which always corresponds to the unaltered truth.

The data must be stored unalterably forever, impervious to manipulation or censoring, and must be stored on many computers (nodes), completely independent of each other simultaneously. They must also, though, be linked with each other so that subsequent alteration by an unauthorized individual is denied and ignored by the majority of the computers.

House owners can relate: if the land registry has been tampered with, someone else will then suddenly own their property. That is an entirely plausible scenario that could occur through the malicious collaboration of a lawyer with an employee of the land registry or the escrow company, for example. However, this kind of manipulation would no longer be possible if the transfer of title had been registered and certified simultaneously in the first instance by many hundreds of independent places. That would mean that hundreds of lawyers and land registry officers would have to have collaborated on the deception. That is practically impossible.

Transactions without Witnesses

The real estate metaphor serves only as an example that it is—theoretically, at least—possible to manipulate information when only a small number of participants and witnesses are involved.

A simpler version of this same manipulation, is if you give someone 100 dollars in cash and he later claims to have never received the money. You have entered into a transaction within a centralized system without a third party to witnesses and corroborate the truth of the transaction. Even if you asked a friend to be present when you paid the other party, you still can’t be 100% sure that said friend is reliable enough to confirm that you gave the other party the 100 dollars. He could forget, or pretend that he had forgotten because he had been bribed by the other party. Humans error and susceptibility to manipulation is a large part of what makes the centralized system vulnerable and ineffective.

There is a huge amount of literature on this subject and many academics worldwide have tackled these connections. Game theory is a science that attempts to understand systems as a way to predict the behavior of people who interact when exposed to a variety incentives. What the game theoreticians want to understand is how much a recipient who owes 100 dollars must pay a friend for him to “forget” and thus no longer be a witness. In theory, there is always a sum that makes it lucrative to manipulate. Maybe not for 100 dollars; but with sums in the millions, it would not be exceptional or rare to discover that someone’s loyalty can be bought for a price.

If the handover of the 100 dollars is observed by 1,000 friends and all 1,000 are potential witnesses, then any judge will believe that the 100 dollars was paid—even if one, 10 or even 200 of the witnesses lose their memory. Thus, the greater the number of witnesses, the lower the risk of interference.

Transactions with witnesses and a dictator

Real estate owners can relax, then. Even if real estate transfers are not recorded simultaneously by all registry office officials, it is unlikely that ownership issues are manipulated by the lawyer and the office concerned.

What about the state, though? The state is ultimately the highest central point. A registry office is only a state instrument—an office. If a lawyer is bound by the laws, are owners threatened by adversity?

As in all centralized systems, there is a danger of manipulation within a state in a functioning democracy through politicians who decide the laws. That is, more or less, simple or manipulative, depending on the state. In Germany, people have been arguing for years about paying fees to the license fee agency for public radio broadcasters. The state, as a centralized point, introduced a system that forces everyone to pay for something that not everyone uses. There are enough examples of centralization and, thus, manipulation by the state—according to budget situation and interests. And there are plenty, especially if you think that you are living in a free, democratic state: residence costs for new roads, refuse collection fees, church tax, etc.

In a dictatorship, homeowners cannot feel comfortable. If the son-in-law or nephew of the dictator desires a nice property that already belongs to someone else, then the ownership issues will soon change. That has happened more than once in history. The central element—the dictator—simply changes the rules.

Dictatorships don’t often last long. They either die out or are overthrown. Then the big clean-up starts, and the questions arise as to which buildings belonged to whom and when. Mr. Smith claims it was his; Mr. Jones says the same because he paid Mr. Smith for it. There are few witnesses, if any, and each one remembers something different. The simple problem of the 100 dollars described previously has suddenly become the problem of a house owner dispossessed by the state. Since there are no reliable records and no reliable witnesses, what can be done?

The good news is this: All of the problems described so far can be elegantly and reliably solved by decentralized systems.

In a genuinely decentralized system, there are always enough witnesses. Additionally, all records from the past in a public blockchain are unalterable for all time. That is why you can blindly trust these data.

Satoshi Nakamoto invented such a system in the form of Bitcoin, which was the first decentralized system in which one can transfer money from A to B with 100% security against counterfeiting. That is only possible within a decentralized system.

Unfortunately, decentralization only sometimes seems to prevail.

This is the point at which the first misconceptions often occur. The difference between a centralized and a decentralized system is absolutely crucial. A centralized system is easy to define. It is the one point in a network where everything is stored and where all decisions are made. In a computer network, this is the central computer, also called a server.

Of course, a central server can become unserviceable for a variety of reasons, just like any device. In such an instance, you no longer have any access to the information and decisions cannot be made. For that reason, these servers are usually designed so that the important parts are duplicated. The backup system takes over if the original fails.

This is called a redundant system. Redundant systems are standard, for example, in aviation. It is imperative that, should a signal system to the engine fail, the aircraft stays safely in the air; the instruction to climb or descend has to be received via a parallel system.

Loss of data can have catastrophic results.

While it is inconvenient when decisions temporarily cannot be made, it is often catastrophic if the hard drive of a server is damaged and the data lost. For this reason, backups are imperative. However, these are only a partial solution. They have to be played back and the entire server rebuilt. It’s certainly better than nothing, but not a satisfactory solution on the whole.

So, engineers quickly came up with the idea of a mirror drive. In this, data are written not to a single hard drive, but to many, simultaneously. The combination of these hard drives ensures seamless and efficient access to data. However, even this does not guarantee the existence of the central unit, as the whole site could go down. The cause of this could be something as disastrous an earthquake or a flood, or something as trivial as a power outage lasting longer than any supply of emergency batteries. Similarly, burglary with material damage and theft of computers is another potential hazard that must be accounted for. For this reason, data is stored on distributed systems; that is, so-to-speak, local separation of the mirrors. This could be entire computer centers acting as mirrors, potentially thousands of miles from each other and, today, might even be located in different countries to be able to withstand “political earthquakes” unscathed.

If one computer center becomes unserviceable, another takes over. This usually happens smoothly, although in some cases, the synchronization may take some time, but, as we know from experience, the internet never actually fails. These distributed data systems can thus be classed as completely secure.

But! These are not decentralized systems; they are just distributed systems, and this is the small but crucial difference that must be kept in mind.

Distributed, safe systems may be safe from failure, but they are not immune to human error and manipulation. Decentralized systems are both safe from failure and immune to manipulation. Those two things are often confused.

Manipulation by the operator

Centralized or even distributed systems are operated by somebody. Somebody—typically a company—programs these systems and thus controls how data is stored in the system. More importantly, it controls what data is being stored. If a malicious perpetrator changes data while saving it, then these data can be accessed securely but are no longer reliable. The truth can never be guaranteed in a centralized or distributed system. It will always be necessary to check the veracity of the data in a multitude of ways.

Herein lies the greatest amount of work generated in our modern world. Millions of people do nothing else but check the veracity of data. If you think that sounds a bit abstract, try cashing in a savings book that is worn and hard to read, or try to register a vehicle without documents.

Historically, we have always had the problem of relying on other peoples’ statements or records. Those with malicious intent have thrived on figuring out new ways to circumvent or manipulate this reliance for their own gain. How many wars, skirmishes or local disagreements have happened because news that formed the casus belli was based on falsehoods?

False information has repeatedly been used to foment wars, win wars, and gain some kind of advantage over others. It was like that then, and it still is like that today. Forged references, forged doctor titles, forged decrees—all of these have happened and still happen on a daily basis.

The question that constantly arises is that of the verifiability of information. If a seal was broken, the information within could not be trusted. If the seal was unharmed, then it could. Or could it? What if the seal been forged? Therein lies the problem.

Methods have been developed over hundreds of years to uncover and combat forgeries. For example, there are around 50 security features included in the latest euro banknotes to ensure that the note is genuine. Safety features, such as a seal and holograms, are only effective until they can either be forged or—the more common reason for which they are eventually dispensed with again—they become too expensive.

Computers couldn’t solve the problem before

This problem was not solved by the rise of electronic data processing. In fact, the same problem was simply transferred to a different medium. Malware, viruses, and hacker attacks threaten our information in new ways on a daily basis. Computerized seals can be broken very easily by insiders with advanced technical knowledge. An example of this is rounding errors. Someone with knowledge and access could transfer the number in the third decimal place to themselves in the bank’s software. Tiny, incremental adjustments often go unnoticed and fraudsters can siphon off millions of dollars undetected.

To make matters worse, it does not have to be fraudsters in the conventional sense. It could be the management itself or the state. Information can be systematically altered to gain advantages. Election fraud, for example, is just the prominent tip of the iceberg in this regard.

In contrast, there is the data that is changed by simple, human error with no harmful intent. Transposed numbers are probably the most common cause: illegible figures from a fax, typing into a table, or missing receipts for sums were paid out so that everything balances in the end. Many millions of workers are busy, day in, day out, doing nothing other than shifting data from one medium to another: typing from paper into electronic data processing or from one software program into another. There are millions of writing errors, typos and wrongly understood data in our databases. One classic is, “Dear Mrs. John Smith”.