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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Break through your "crypto curiosity" and uncover why blockchain innovation will revolutionize our economy, culture, and the future of investing--as well as how to navigate it safely. Between the booms, crashes, jargon, and flashy memes, blockchain technology and digital assets have not been easy for ordinary investors to understand. Hopeful investors in blockchain, digital assets, and crypto everywhere have a lengthy list of questions--and the list keeps getting longer and more nuanced. But who do they turn to for answers? In Crypto Decrypted, Tradecraft Capital's Jake Ryan and James Diorio decrypt a new world that is hidden in plain view, accessible currently to folks "in the know." This book is for anyone who finds themselves lost in the blockchain babble, exploring and explaining not only how to participate, but the often overlooked reasons why this new technology is relevant to every human being. Ryan and Diorio dive in deeply, debunking common myths, clarifying major breakthroughs that are often disregarded, and providing easy-to-understand answers for both crypto newbies and blockchain enthusiasts, so they can move beyond the short-term to explore what great opportunities lie ahead for blockchain technologies while providing approaches to investing more safely and soundly so that you too can profit from this technological revolution. You will learn: * The basics of blockchain technology, which will allow you to better navigate this new world. * The truth that debunks the six most common myths about crypto and blockchain. * What the Byzantine Generals' Problem is, why it is important, and how it will impact your future. * Why blockchain technology is so important and how it is relevant to you--yes, you! * The ways in which blockchain innovation will transform our financial systems, our economy, and society itself. * How to participate in lower risk approaches in investing in digital assets to diversify your retirement portfolio. * Why the Information Age is over and that we've already begun a new long-wave economic cycle, the Age of Autonomy® , what the Autonomous Economy will look like in the coming years, and how it will impact us. Just as the internet revolutionized our world decades ago, blockchain technology will impact every person and businesses on the planet- for the better - in the decades to come.
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Table of Contents
Cover
Title Page
Copyright
Foreword
Acknowledgments
Note from the Authors
From our Legal Team
Introduction
PART I: THE PRIMER
1 What's the Big Deal About Blockchain?
A Blockchain Is a Specialized Database
Nonmoney Examples of Blockchain Technology
Blockchain Technical Components
Note
2 Bitcoin, the First Application of a Blockchain
What's Unique About Bitcoin
Getting Started with Bitcoin
On Risk
Notes
3 What Makes a Smart Contract Smart?
What Is a Smart Contract Platform?
The Foundation of the Age of Autonomy
Smart Contracts and the Supply Chain
The Evolution of the Contract
How Can We Benefit from Smart Contract Applications?
Notes
4 What Is DeFi?
The Wild West
Banking for the Bankless
DeFi and Governance Tokens
Notes
5 The Metaverse, NFTs, and Web 3.0
The ABCs of NFTs
Not Just Art
The Metaverse
MANGA and Mainstream Adoption
Web 3.0
Notes
PART II: DEBUNKING MYTHS
6 Myth – Regulation Will Kill Crypto
The Sticking Point
Crypto Classification: Security versus Commodity
The Punchline
Notes
7 Myth – Crypto Is a Bubble
Spring Follows Winter
Professor Krugman Is (Still) Wrong
Our Silver Lining Playbook
The Amazing Merge
Notes
8 Myth – Crypto Is Bad for the Environment
Bitcoin Energy Consumption
Blockchain Technologies and Climate Mitigation
Notes
9 Myth – Crypto Empowers Crime
The Internet Is a Criminal Battlefield
Tracing the Untraceable
Everyone Evolves
Notes
10 Guarding Against Fraud
The SEC: Watchdogs on the Hunt
Risk Management and Red Flags
Don't Do Stupid Stuff
Notes
PART III: THE BREAKTHROUGH
11 A Primer on Technological Innovation
The Convergence of AI, IoT and Robotics
Putting It All Together
12 The Byzantine Generals Problem
Some Other Top Computer Science Problems
What Is BGP and Why Is It So Important?
How Bitcoin Solved BGP
BBC Show Fake or Fortune Illustrates the Problem
13 Peer‐to‐Peer Models
Computer Networking
Easy File Sharing
Reduced Costs
Adaptability
Reliability
Notes
14 Trusting Trustless Transactions
The Trust‐Minimized Advantage
Open‐Source Software
15 No Permission Required
The Permission Monster
The Permissionless Solution
The Game, Changed
Notes
16 Digital Scarcity
Provable Scarcity
Digital Scarcity: The New Frontier
Scarcity in the Metaverse
NFTs – Provable Uniqueness
Notes
17 A New Decentralized, Autonomous Economy
Sound Money, Required but Not Sufficient
Financial Capital versus Production Capital
Production Capital Supporting the Autonomous Economy
The Autonomous Economy Realized
18 Liquid Venture
A Cautionary Tale
Crypto Assets Revolutionize Investing
Get Rich Slow
Notes
PART IV: THE APPLICATION
19 Signals versus Noise
All That Glitters Is Not Gold
Sound Assets
What Makes a Crypto Asset Valuable
Putting It All Together
Note
20 Interpreting Charts
On‐Chain Metrics
Technical Analysis
If Nothing Else, Dollar‐Cost Average
21 Crypto as Diversification in a Total Portfolio
Safe‐Haven Assets – Gold and Bitcoin
Generating Alpha – Market‐Beating Returns
Measuring Risk‐Adjusted Returns
Adding Bitcoin to a Total Portfolio
22 Savings, Borrowing, Income Strategies,and Taxes
Taxes
Saving
Borrowing
Income Strategies
Note
23 Investing and Retirement
Ways to Invest in Digital Assets in Retirement Accounts
No “40‐Act” Spot ETFs (Yet)
Investing in Digital Assets
24 Looking Ahead
The Future of the Metaverse
The Future of Sovereign Data
The Future of Money
The Future of the DAO
The Future of Companies
Practical Examples
The Technology Exists Today
A New Long Wave Economic Cycle Has Begun
What's Next?
Notes
Additional Resources
About the Authors
Index
End User License Agreement
List of Illustrations
Chapter 1
Figure 1.1 Bar Chart of Bitcoin Blockchain Size
Chapter 2
Figure 2.1 Crypto Chart of U.S. Investors
Figure 2.2 Exposure to Crypto
Chapter 5
Figure 5.1 NFT Sales Worldwide
Figure 5.2 Virtual Platform Usage
Figure 5.3 Market Capitalization
Figure 5.4 Benefits of Metaverse Worldwide, 2021
Chapter 7
Figure 7.1 Fed Funds Rate
Figure 7.2 Ethereum Price per Day
Chapter 8
Figure 8.1 Bitcoin Energy Consumption Worldwide, 2017–2021
Chapter 9
Figure 9.1 Crypto and Crime
Chapter 11
Figure 11.1 The Adoption Curve, the S‐Curve
Chapter 15
Figure 15.1 Unbanked World Population
Chapter 16
Figure 16.1 Fine Wine versus S&P 500
Figure 16.2 Bitcoin Circulation versus Supply
Chapter 17
Figure 17.1 Governance Page for Curve Financial – Voting on Proposals...
Chapter 19
Figure 19.1 Viable Crypto Assets (Estimated)
Figure 19.2 Inflation and Money Supply in Zimbabwe
Chapter 20
Figure 20.1 Metcalfe's Law
Figure 20.2 Glassnode On‐Chain Metrics Home Page
Figure 20.3 Example of Technical Analysis of Price Chart
Chapter 21
Figure 21.1 Correlation of $BTC to $SPY, the S&P 500 Index
Figure 21.2 Difference Between Sharpe and Sortino Ratios
Chapter 22
Figure 22.1 CD Rates, 2010–2019
Guide
Cover Page
Title Page
Copyright
Foreword
Acknowledgments
Note from the Authors
From our Legal Team
Introduction
Table of Contents
Begin Reading
Additional Resources
About the Authors
Index
Wiley End User License Agreement
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CRYPTO DECRYPTED
Debunking Myths, Understanding Breakthroughs, and Building Foundations for Digital Asset Investing
JAKE RYANJAMES DIORIO
Copyright © 2023 by Jake Ryan and James Diorio. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per‐copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750‐8400, fax (978) 750‐4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748‐6011, fax (201) 748‐6008, or online at http://www.wiley.com/go/permission.
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Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Further, readers should be aware that websites listed in this work may have changed or disappeared between when this work was written and when it is read. Neither the publisher nor authors shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
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Library of Congress Cataloging‐in‐Publication Data
Names: Ryan, Jake, author. | Diorio, James, author.
Title: Crypto decrypted : debunking myths, understanding breakthroughs, and building foundations for digital asset investing / by Jake Ryan and James Diorio.
Description: Hoboken, New Jersey : John Wiley & Sons, Inc., [2023] | Includes index.
Identifiers: LCCN 2022057666 (print) | LCCN 2022057667 (ebook) | ISBN 9781394178520 (hardback) | ISBN 9781394178544 (adobe pdf) | ISBN 9781394178537 (epub)
Subjects: LCSH: Cryptocurrencies.
Classification: LCC HG1710.3 .R935 2023 (print) | LCC HG1710.3 (ebook) | DDC 332.4–dc23/eng/20221201
LC record available at https://lccn.loc.gov/2022057666
LC ebook record available at https://lccn.loc.gov/2022057667
Cover image: Wiley
Cover design: © Vit‐Mar/Shutterstock
Author photos: Courtesy of the Authors
Foreword
You're about to delve into one of the most fascinating technological innovations ever devised – and I'm a little jealous. You see, when I first heard about bitcoin in 2012, it was still quite new, and I certainly wasn't looking for it. It kind of … found me. It was easy to dismiss the notion of “digital money” as a fad or a fraud – and that's precisely what most people did way back then.
Come to think of it, most people are still dismissing it. What a huge mistake – one that you're not making, judging by the fact that this book is in your hands. Unlike most people, you're ready for the knowledge you're about to obtain. Good for you!
You might not yet understand what bitcoin is, or the blockchain technology that underlies it – but that's okay. At least you won't get quizzical glances when you tell friends and family what you're reading about. Come to think of it, the fact that there's a book you can read on the subject is a huge advantage I didn't have back in 2012. So, yeah, I'm a little jealous.
Since you're still in the book's foreword, you're to be forgiven if the subject still makes little sense. A perplexed expression was certainly on my face the first time I heard of bitcoin, despite (or because of) my knowledge and experience in the financial field. Digital money? What is that? I wondered. And more to the point, why do we need it? It took me about a year to fully understand the answers. It wasn't easy to get the information; there weren't any books available. And as I'd talk about crypto, most people dismissed the idea as a fad or fraud.
They're wrong, of course. As you'll discover in this fine book by Jake Ryan and James Diorio, blockchain technology and the digital assets it makes possible are revolutionary – the most profound innovation in commerce since the invention of the Internet. Unfortunately, most people don't yet realize this – giving those who do a distinct set of advantages. By learning about this new tech, you'll be able to incorporate it into your life sooner than others – giving you both career and investment opportunities that evade others.
If there's a downside to this tech, it's the fact that most people still don't get it. And over the past decade, I've found that those with the greatest disdain tend to be the people with the least amount of knowledge about it. Unfortunately, that still includes most financial professionals. As a group, financial advisors are as uneducated about crypto as everyone else – and that's a problem, considering that they collectively manage two‐thirds of all American investors' money.
What's an investor to do when their advisor knows nothing about this new asset class? Take control: learn about it yourself – and find an advisor who did the same.
And this book is great place to start. By the time you finish, you'll have a better understanding of blockchain and digital assets than most people. Along the way, you'll discover that Jake and James are great guides. Their passion pops off these pages, thanks to their knowledge and training as computer scientists, along with their expertise in AI and hedge fund management. They link AI, IoT, and robotics to blockchain technology; the result will be autonomous systems used in every industry and by every government to boost productivity and generate, transfer, and store value.
This technological revolution is just getting started, and the convergence of AI and blockchain will change how we live, work, and play. That makes Crypto Decrypted essential, and, by choosing to read it, you're taking an important step toward the future.
Ric EdelmanFounder, Digital Assets Council of Financial ProfessionalsHost, The Truth About Your Future podcast
Acknowledgments
Crypto Asset Investing in the Age of Autonomy was a Herculean effort. When the opportunity presented itself for a follow‐up, Jake and I agreed that the only way to do it would be together. To say it's an effort is an understatement and, in accordance with the concept that it takes a village to raise a child, it seems to also take a village to write a book. With that in mind, there are far too many people who deserve to be acknowledged but we'll do our best below.
Together we would both like to acknowledge the following:
We would like to thank the entire Tradecraft Capital team. You tirelessly shucked and jived, picked up slack, and filled any gaps required in operating our fund while we were furiously putting pen to paper. Carissa Posch and Albert Perez, thank you for all you do in getting our message out to the masses via our newsletters, TikToks, and podcasts. And, to Sofia Koo, for keeping the firm running when we had to focus on the book, thank you so much!
We also want to acknowledge Ron Levy and METal International and the Crypto Roundtable, the group of brothers really helped in our distribution strategy and more.
We would also like to thank Herb Schaffner. Herb, you brought not only wisdom and guidance but also tremendous contribution and encouragement to this work. Herb, brother, you are the best! Thank you!
And we would also love to thank and acknowledge Bill Falloon for his tireless stand for the authors and we really appreciate you!
We would also like to thank Susie Frank for your amazing work in helping us write our vision.
We would like to thank Ric Edelman for your ongoing partnership and for the fantastic Foreword in this book, as well as Don Friedman of DACFP.
We also would like to thank Michael Terpin, for your wisdom and collaboration; John Durrett, for your confidence in what we are creating; and Anurag Shah, for your insight.
We would also like to thank Josh Hong. Josh, you were among the first with whom we collaborated in this space. We've learned much from you, and you've been a true friend as well as a colleague. Thank you!
In addition to the above, Jake has the following acknowledgments:
I would like to thank, again, my mom, for her support and tireless effort in helping us edit and review the material that goes out. I'd like to thank and acknowledge my ex‐wife Onkar, for her support in raising our beautiful son Rome; and my son, who gives me the inspiration to build a better world for him. And to Ellie Ruple, who is an amazing connector and someone who's helped me get my books in the hands of many influential people.
Finally, James has the following acknowledgments:
I'll start with Jake Ryan. I acknowledge you, Jake. You are truly a thought leader and a visionary, and it has been my absolute honor not only to build Tradecraft with you, but to collaborate on this new tome. You started me on this journey into the world of digital assets – little did I know that we'd be partners and co‐authors. I appreciate and cherish our partnership. Thank you!
I would like to thank my mom, Patricia Diorio. Mom, you not only have given me the gift of life but have always believed in me no matter what. Thank you!
I also thank OJ Zeleny. OJ, you've been a backstop and a grounding rod for many years and have always provided an environment for me to be creative and produce my best. Thank you!
I want to thank my family – my huge extended Italian family (you are too many to name, and you know who you are). You have been with me through the most difficult of times, and I thank you for your steadfast encouragement and staunch support of a lifetime of entrepreneurial musings. Thank you!
I'd like to acknowledge Maureen Charles. Maureen, as an author, coach, and friend, your mentorship has guided me in so many areas of my life, not the least of which is this one. Thank you!
I'd like to extend a special acknowledgment to Sofia Koo – far more than just my life partner, you're an incredible business colleague and a tireless advocate. I'd not be here without you. Thank you.
Finally, I'd be remiss not to acknowledge my late daughter, Bella Diorio. Bella, it was an honor and a privilege to be your dad. You inspired me to be my best in the world and bring that back home to our family. I know you looked at me funny when I started this crazy blockchain journey, but you were an enthusiastic supporter nonetheless. I wish I could have shared more of it with you. I miss you. Thank you for the years we had.
Note from the Authors
We're excited to present this work to you. A little about us – we both come from the technology sector. Both of us have degrees in computer science and worked in the software development industry for the first 20 years of our respective careers, moving from developers to managers to, ultimately, business owners together. We worked together as partners from 2001 to 2004 and then went our separate ways, although we always kept in touch. The partnership worked and it's a little bit of kismet that we're here together again bringing you this book.
(From Jake) I started angel investing in 2014 and made my blockchain startup investment in 2015. From those 15 angel investments made, I've had four exits and hold one investment that turned into a decacorn. I've worked with two VC accelerator firms, as well as being a strategic advisor for a private equity firm and an advisor to several venture‐backed startups. Although I'm a technologist, my passion has always been investing. I bought my first mutual fund at the age of 15, my first stock at the age of 17, and started trading options at 22. It was in 2016 that I bought my first bitcoin for roughly $475, and that led me to thinking a lot about this new industry. I love crypto, because it's the intersection of tech and finance and I knew it was time. I had the notion to start a crypto hedge fund in 2017, ultimately leading to Tradecraft Capital, which I soft piloted in 2018 and then opened to private investors in 2019. It has been quite a ride. I'm proud of what we've accomplished and prouder to share this work with you. I hope you enjoy it.
(From James) My story starts the same as Jake's but takes a few different turns. It's true that I'm a computer scientist. As a programmer I enjoyed the challenge of developing complex applications and, although my early career was during the rise of the Internet, I really was so focused on my work that I missed the bigger picture as it was unfolding. I missed the forest for the trees, if you will. It was in 2012 while I was growing a Software‐as‐a‐Service company that my lead architect came to me and said, “Jim, I'm going to start bitcoin mining.” I thought he was nuts and was embarking on a fool's errand, and I thought no more of it. Then, in 2016, Jake told me about bitcoin. I didn't really understand it and when I saw the outlandish price of $674 a coin, I was clear that I missed the window, told Jake he too was nuts, and ignored the whole crypto thing. Boy, was I wrong.
After an exit in 2017 I thought to myself, maybe I'm nuts. From there, my journey began. After a few years of traveling from Dubai to Toronto, New York to San Francisco, and everywhere in between, digesting every piece of information I could find, I became convinced. I became an early investor in Tradecraft and was thrilled when Jake asked me to be an advisor and help him shape the Age of Autonomy® thesis. I knew he was on to something. I also knew that many people were participating in this ecosystem without a real understanding of it or, worse, were ignoring it just as I had. It was then that I made it my goal to educate as many people as I could so that they didn't let this opportunity pass them by. I began with the concept of Crypto Decrypted as a way to educate, which ultimately turned into a monthly blog, and never looked back. I suppose that is what led us here, and why I'm so excited to share this with you. It's been an amazing ride – but from our view, we're still at the very beginning of one of the most exciting technological breakthroughs the world has ever seen.
Our goal is to take a different point of view about crypto and digital assets. Most books talk about the technology of blockchain, but lean heavily into the investment potential of bitcoin and digital assets. Similarly, it seems the majority of articles written focus on tokens or coins and their price. They contain headlines like “bitcoin is up $10,000 this year” or “bitcoin fell to $20,000 from its peak of $68,000.” While we certainly want to highlight the investment potential that digital assets can be, we also want to be sure you understand the technology and innovation that's occurred over the past few decades and the profound impact this will have on society. We're now able to do something we couldn't do before, and that's why blockchain technology is important. That's ultimately why any blockchain‐based digital asset has any value at all.
The purpose of this book is to explain the technological innovation that's occurred and to try and unpack the what, how, and whyfrom a technology viewpoint. Just as the Internet was the backbone of the Age of Telecommunications, blockchain technology is the backbone of a new wave. We hope that after reading this book you'll have a much better understanding of what digital assets are, what crypto and blockchain tech is, and why this breakthrough is so important.
Crypto is a wild ride. The volatility – the change and impact of that change – occurs at breakneck speed. Many events over the past few years have destroyed value and investment by bad actors. Some events have destroyed value because we are still in an experimental phase and the technology is not yet mature. This happens during any technological revolution, as we're in the early stages of this technology adoption cycle. The vision of what we see as possible doesn't yet match what we can actually achieve. But it will.
After reading this book, we hope you have a better understanding of what's going on and why it's so revolutionary.
We hope you enjoy this book; moreover, we hope that by the time you're done with it, you have the same wonder and excitement about this new age that we do. Enjoy!
From our Legal Team
The discussions and content in this book is for informational purposes only. You should not construe any such information as legal, tax, investment, financial, or other advice. Nothing contained in this book constitutes a solicitation, recommendation, endorsement, or offer by its authors or publishers to buy or sell any particular investments, securities, or assets.
All discussion and content in this book is information of a general nature based on the author's current views, and does not address the circumstances of any particular individual or entity or their investment portfolio. Nothing in this book constitutes professional or financial advice, nor does any information in this book constitute a comprehensive or complete statement of the matters discussed. The author is not your fiduciary and you are not an investment advisory client of the author. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of any information in this book before making any decisions based on such information. You should consult with your personal investment advisers before making any investment decisions.
Introduction
The world of decentralized finance, cryptocurrencies, and blockchains has changed dramatically since I wrote my first book, Crypto Asset Investing in the Age of Autonomy, in 2019. When I was researching and writing that book, you could still buy a bitcoin for less than $11,000, and most people had never heard of an NFT, much less the metaverse. The years since then have seen exponential growth in crypto projects, fans, and naysayers. My fund has expanded as well and this time I'm collaborating with my business partner, James Diorio, to bring you something a little bit different.
For those of you who are familiar with Crypto Asset Investing in the Age of Autonomy, we will touch on these concepts and also some of the fundamentals for the first‐time reader. That book, however, was primarily about establishing the foundational thesis and providing a general broad perspective about how to build a crypto portfolio. We've written this book with a slightly different goal, particularly that of understanding – we noticed that there are plenty of books that discuss how, but often without real context of the why. To that end, this work will provide investors as well as the curious amateur with an in‐depth understanding of blockchain, crypto, and emerging digital assets like NFTs and, importantly, why they are so important (the breakthrough). We will also clear up common misconceptions about blockchain and crypto (the myths) and, ultimately, walk the reader through the essentials of making crypto a profitable and reliable instrument in savings, retirement planning, and active and passive investing activities (the foundations for investing).
It's easy to mistake bitcoin and other digital assets as just another new investment opportunity. Yes, it is that – but it's so much more. It's really the beginning of an entirely new economic infrastructure and technological foundation. We are eager to share not only our knowledge of this emerging technology and economy, but a vision of how it can be used to improve people's lives.
These benefits are not just about making crypto millionaires. What if a Venezuelan struggling with a 2,719% inflation rate could put money into a cryptocurrency account to protect themselves from hyperinflation? Or a musician could sell a fraction of a digital music file and receive royalties every time their song was resold?
Wishful thinking? Not at all. It already exists. The technology is there, and the marketplace is already forming around it. And those are just two examples of a fascinating new world that blockchain makes possible. After reading this book you will understand the innovation, properties, and promise of crypto in all of its many manifestations.
Is investing in crypto scary? Yes. But what's scarier is continuing to use financial infrastructure that requires trust to complete a transaction. If you have to trust a bank or a counterparty to complete a transaction, you're taking on invisible risk that you no longer need to. When people get a taste of being able to use public financial infrastructure that is trustless, that doesn't require trust to complete a transaction, they're never going to want to go back to trust‐required financial infrastructure. Just ask anyone from Lehman Brothers to Bear Stearns to MF Global to the Cyprus Bank to BlockFi to FTX to Celsius. Investors and customers alike all either had to go through a bankruptcy process or are currently in line with a bankruptcy process to try and get their pennies on a dollar.
Once crypto and blockchain technology is really understood by the public, everyone is going to want to use trust‐minimized, peer‐to‐peer public financial infrastructure to complete their economic transactions – that's what this whole crypto revolution is about. Removing counterparty risk. Removing the middleman. Removing the guy you have to trust with your money. Let's end this and build an economy that's transparent and can grow on sound money principles. That's what this is all about.
We've written this book to provide both serious investors and the curious amateur with an in‐depth understanding of crypto foundations and emerging assets like NFTs and to clear up common misconceptions about crypto. Most of all, the book walks the reader through the essentials of making crypto a profitable and reliable instrument in savings, retirement planning, and active and passive investing activities.
We will provide factual, informed, razor‐sharp analysis of blockchain and cryptocurrency and other crypto assets and explore their value to the investor and the economy at large. We will acknowledge where risks lie, how to get started safely, and will debunk the unfounded myths around crypto. We'll look at crypto history, its place in the economy, unpack the fundamentals of this technology and, drawing on facts, lay out the details you can use. No pom‐poms. No gibberish. No jargon.
A word about style. As two of us are writing this, you, as the reader, will get well‐rounded insights. We each have had our own experiences and you'll find storytelling throughout. So, when you see a reference to a personal experience it might be Jake, it might be James. For readability we don't distinguish who the writer is, because that's not what is important. What is important is that the concepts have been delivered in a way that makes sense to you, and that both of us are of a common thought process on the content you'll find inside.
We'll tell you why these financial innovations matter to the world and to you. We'll share a huge basket of developing opportunities as this new world of money evolves. Now, let's go!
PART ITHE PRIMER
In Part One of this book, we cover the basics of the technology and innovation of blockchain, tokens, smart contracts, smart contract platforms, and digital assets. We aim to give you a basic understanding, a primer into the world of digital assets. Once you have a better understanding of the technology and innovation of digital assets you will be better equiped to understand the breakthrough, follow the debunking of the myths, and you'll see why investing in them is something every investor should consider.
1 What's the Big Deal About Blockchain?
Everyone is talking about crypto, the colloquial term for digital assets. Love it or hate it, it seems to be on everyone's lips. The fact is that crypto is now mainstream. From Main Street to Wall Street, your street to our street, everyone has an opinion. We would often go present to different groups, ranging from trade shows to investor summits, and even as little as three years ago people looked at us like we were aliens. Truly – aliens bringing some unfathomable concept and, clearly, not of this Earth. Things have changed quite a bit over the past few years.
Bitcoin is the most popular and well‐known of the crypto assets built on a blockchain. Yet Bitcoin is only one of thousands of crypto networks, applications, and protocols empowered through blockchain technology. Stories of teens driving Lamborghinis, or businesspeople who invested, then lost, all of their bitcoin by throwing away their wallet accidentally or forgetting a password permeated throughout. Riches were made and riches were lost, and everyone seemed to know about this volatile new asset. During this process, crypto has become somewhat of a dirty word. There is so much baggage around it that it's hard to actually cut through the noise and, with all the hype about making money, we see that the fundamentals and foundations of this amazing technology are generally overlooked and misunderstood. So let's start by understanding that blockchain technology is a breakthrough.
Blockchain, recently made possible through decades of computer science and mathematical innovations, enables computers in different locations to access, verify, and share their data. By doing so, blockchain technology overcomes one of the biggest computer software challenges of all time: how to share information quickly and reliably among separate, unaffiliated entities without the involvement of a centralized gatekeeper. This is known as the Byzantine Generals Problem and is discussed thoroughly in Chapter 12.
The breakthrough in solving this problem cannot be overstated, as it allows peers to transact business without an overlord. That may seem rather ho‐hum to you, but consider the simple act of handing your friend a 20‐dollar bill. You don't need to go to a bank or get permission; you can just do it. Well, before blockchain the only way to digitally exchange something was to go through that central third party. Now, you can just do it directly – like handing your friend a 20‐dollar bill. Four unique characteristics make blockchain revolutionary. Blockchain is:
Decentralized: No central authority controls transactions occurring over the network.
Immutable: Posted transactions are there forever and can never be deleted or changed by anyone.
Transparent: Every transaction on the blockchain is public record and can be viewed by anyone on the network.
Authenticated with cryptography: Blockchains use complex mathematical codes to store and transmit data to ensure the legitimacy of each transaction and participant, just like an old‐school signature. Every participant in the cryptoverse, via their crypto wallet, has a unique digital signature that's impossible to forge.
These features of blockchain position this technology as the biggest technological disruptor since the Internet. Blockchain, however, unlike many technology breakthroughs, is actualized by and empowers those who use it. As Vitalik Buterin, co‐founder of Ethereum, said, “Whereas most technologies tend to automate workers on the periphery doing menial tasks, blockchains automate away the center. Instead of putting the taxi driver out of a job, blockchain puts Uber out of a job and lets the taxi drivers work with the customer directly.” This is what we mean by peer‐to‐peer. To start giving this context let's look at Bitcoin, which is a blockchain that is a worldwide peer‐to‐peer financial network. It's the network and interaction directly between two people that is really important, and, as noted in Figure 1.1, the Bitcoin blockchain has grown significantly since its inception in 2009.
Figure 1.1Bar Chart of Bitcoin Blockchain Size
Source: Blockchain © Statista 2022.
A Blockchain Is a Specialized Database
Google began when two graduate students in computer science and mathematics at Stanford, Larry Page and Sergey Brin, prototyped their search engine called BackRub (seriously). Page and Brin weren't planning on launching one of history's most successful companies. Rather, as computer scientists and academics the two friends saw the World Wide Web as a system of citation. In the world of academia, credible research is valued by how the author's work responds to citation (or reference), and by how future projects and publications cite the author's article or book. Well, the web to Page and Brin was simply a vast catalog of articles and information, but, without a way to cite (reference) other works, it would not realize its true potential. To Page, “the entire Web was loosely based on the premise of citation – after all, what is a link but a citation?,” John Battelle wrote in his landmark book The Search. If Page could “divine a method to count and qualify each backlink on the Web, as Page puts it, ‘the Web would become a more valuable place.’”
This may be strange now, but Page, Brin, and other computer scientists at the time saw the Internet as a graph. Each computer was a node, a data point, and each link on a web page connected the nodes. The result: “a classic graph structure.” Brin and Page envisioned a search engine as perfecting the academic citation model.
“Not only was the engine good, but Page and Brin realized it would scale as the Web scaled,” Batelle wrote. “Because PageRank worked by analyzing links, the bigger the Web, the better the engine. That fact inspired the founders to name their new engine Google, after googol, the term for the numeral 1 followed by 100 zeroes. They released the first version of Google on the Stanford Web site in August 1996 – one year after they met.”1
We tell this story to make a point about innovation breakthroughs. In our daily lives, as we go about doing our jobs and getting stuff done, Google can seem like a utility service that mysteriously materialized on our computers. Of course, if we take a moment and think about it, we can dredge up a few relevant facts about how search engines came into our lives. Maybe inventing the wheel was an exception, but most technological breakthroughs happen as discoveries rooted in well‐established systems begin to take hold. Jared Diamond observed that technology has to be invented or adopted. We say it is almost always both. Blockchain technology, then, was first invented, then adopted.
Decentralized
It can be easier to start understanding blockchain as a new kind of database where data is stored on individual, independent computers that exist in locations all over the globe. This makes a blockchain network distributed, because it consists of many computers that are not all in one location. That's pretty easy to grasp.
Decentralization is a little different, however, because blockchains are also decentralized. The best way to think about decentralization is to think about your photos on your laptop. If you drop your laptop in the ocean, you've probably lost your snapshots of vacation on the Big Island sipping a frothy, fruity rum drink. You may retort “not so!” because you have a backup somewhere.
That's great; however, if that backup goes kaput, then, once again, your pictures of that mai tai in Hawaii are gone. A next step, of course, would be to have all your photos uploaded to “the cloud” – a central location – which then allows us to download to multiple devices. In this, we're getting closer, but we still have that pesky central location. If that location falls into a sinkhole, the means to synchronize across all devices fails. What if there were another structure that didn't rely on single points of failure? In this example, what if there were 100,000 computers that all had copies of your photos (for some of you, that's a scary thought, so let's just pretend it's only the photos you want people to see), and every time you take a new photo, every computer gets a copy. That is decentralized. No single point of failure, no point more important than any other. That is decentralization. Blockchains are decentralized because every computer can access all of the information on a blockchain, which makes them very robust. There is no central entity controlling any given blockchain interaction; it's all kept on track with ingenious cryptography and computer software.
Immutable
Almost every database technology in use today allows transactions to be altered or overwritten. This includes everything from bank balances to health records. In a blockchain, by contrast, once a transaction is written into a block it is there forever and can never be deleted or changed by anyone. Period. So, if Bob sends Sally one bitcoin (BTC), once that transaction is confirmed, Sally has one BTC. That transaction is irrefutable, written in stone, and can never be changed. It's written on the blockchain. The computers in the network validate it (agree), and everyone has access to that transaction record. If Bob says it didn't happen – and even if Bob takes Sally to court (that BTC may be worth $1 million someday!) – we could look for the transaction on the chain and know the facts. There are few places in the world where this kind of certainty exists, and it's essential not only for currency transactions but also for transactions of any type.
Immutability becomes very interesting when you're keeping records over long periods of time or conducting business that depends on a shared idea of value, title, ownership, or scarcity. Our current traditional economy requires trust at every turn. You trust the credit card machine company to debit the correct amount from your bank account when you are at the grocery store checkout counter. It would be best if you trusted that the store's bank and payment systems will operate as expected. You need to trust that the banks will honor their agreements. And so on and on and on. It's the whole reason brands are so valuable. They are marks of trust.
In the future crypto economy, trust will be less critical because you won't need a third party to facilitate and settle transactions. When you can deposit money into your cryptocurrency wallet, you're assured that the blockchain keeps track of everything. If you are interested in a work of art, you can see its provenance (the whole history of ownership and origin) on the blockchain. No third parties needed. No need for trust. Instead, everything is authenticated cryptographically. With applications built on blockchains and cryptocurrency, transactions occur peer‐to‐peer.
Before Google, the citational credibility of a web page was a black box; the Google search brings scientific transparency to the question of trust – it allows you to find and reference data all over the world. The blockchain provides its own brand of transparency into the custody of currency, supply chains, and sensitive data such as medical records.
Transparent
Another seminal quality of a blockchain is transparency. Everything that is ever written on the chain is visible to anyone at any time. This, in and of itself, is a marvel. You see, almost every other database in the world is exactly the opposite. Data is stored and you only get to see whatever the owner of the database wants you to see. In the blockchain world it is the opposite, and that is one of the great strengths of this technology.
Let's say that Fred sends one bitcoin to Mary. This will be written on the blockchain, and no one can ever deny that this occurred. When you combine this with the concept of immutability, this becomes a powerful recordkeeping system and an unalterable chain of title. Whether used for tracking products from farm to table, validating the ownership of any physical good, from art to autos, or affirming accounting entries and money transfers, there is no question of the activity that has taken place and, importantly, it is visible to anyone.
We want to be clear at this point that it is the transaction that is visible; your identity is not. I was recently sending a friend a transaction using Venmo, which has this feature that your transactions can be publicly visible. That's weird. I don't know about you, but generally I don't want the whole world to know when I send money to someone. So, in the Fred/Mary example, we don't have to worry about this because blockchains are pseudonymous, meaning that while your transactions are visible, your identity is not (unless, of course, you disclose it publicly, but that is your choice). Everyone can see that a transaction happened, but they do not necessarily know who the parties on either end of the transaction are.
No, this does not make blockchain a hotbed for criminals. As we will learn in Chapter 9, money has to come on to the chain somewhere and off the chain somewhere. It's possible to trace the flow of money to these endpoints, which tend to be tied to humans. In almost all cases your activities can be traced back to you. Frankly, we want this to be the case because this allows us to confirm ownership, chain of title, transaction activity, and so on. All of this and more will be discussed further as you dive into this work, but the important part is that this is the best of both worlds. You can transact while generally maintaining anonymity and yet there is still a permanent record that can be traced if needed.
Cryptographically Secure
Our current economy still relies on the power of our unique signatures. We put our “John Hancock” on something and that is our bond, our agreement. Signatures have been so important up until now that some states, like Texas, still require a “wet” actual physical signature on important documents like mortgages. The challenge with digital signatures has always been the concern that they can be copied. Enter cryptography.
Cryptography is the art of using technology to secure data so that it can only be accessed by the desired party, and such parties have what is known as a “key.” Think of cryptography as a lock on your data that can only be accessed with the right key. Blockchains like Bitcoin also require signatures in order for transactions to occur. The reason we can trust them is because blockchains use cryptography techniques and the only ones who can authorize a transaction are the ones who hold the specific keys. Bitcoin uses complex mathematical codes to store and transmit data to ensure the legitimacy of each transaction and participant. They are unique, just like an old‐school signature is unique. This brings us to your wallet. A wallet is a place where crypto assets can be stored. They are cryptographically secure addresses (just like your house has an address) that anyone can send assets to. But the only way to transmit assets from a wallet is with your key. When you enter your key, you are “signing” a transaction. Every key/wallet combination creates a unique digital signature that's impossible to forge. We discuss wallets in more depth later in Chapter 2.
The unique digital signature in a blockchain is authenticated and can't be repudiated; the hash is unique to origin, so one can't later deny sending a message. The mathematical nature of the hash can't be reversed, and no two or more messages have the same coding. Each is locked, like a chain, bearing an invisible tag like a barcode that cannot be removed.
We all know that natural scarcity and rarity create value. Cryptography not only makes it easier to establish the authenticity of someone conducting a transaction, it can also create verifiably rare digital assets that mimic scarcity rarity in the natural world, like gold and diamonds.
Crypto apps built on a blockchain, like Bitcoin and Ethereum, require a “consensus mechanism” to settle transactions and secure the network. Bitcoin uses a proof‐of‐work (PoW) consensus mechanism that involves using powerful computers (aka bitcoin miners) running nonstop. Right now, it takes an enormous amount of energy and a certain amount of expertise and dedication to mint a bitcoin, for example. Just like a one‐of‐a‐kind, handmade couture gown takes more time (and costs more) than a mass‐produced gown, bitcoins are not easy to make. Bitcoin's creator engineered scarcity by designing the software to stop making bitcoin at 21 million coins.
But PoW is only one consensus mechanism. Another is proof‐of‐stake (PoS) – and it is not energy‐intensive. Instead, it's based on users staking their crypto assets (and risking losing them) to secure transactions on the blockchain. For example, the popular blockchain Ethereum is transitioning to PoS. Once Eth 2.0 is fully in production, Ethereum will be the second‐biggest blockchain, and it will be running on PoS. In Chapter 11, we'll explore the ongoing evolution of these two technologies for forging coins.
Nonmoney Examples of Blockchain Technology
Bitcoin is the king of blockchain and everyone knows it. Bitcoin is a money use case; that is, it is designed to be currency and do the things currency would do. We'll dive deep into this in Chapter 2; however, the fact that bitcoin is money is a big part of the reason many people think that all crypto is money. The fact is, there are endless applications for blockchain technology. We'll discuss this throughout the book but just to get you started, the following are three examples, which we find compelling, that are in use today.
Decentralized Finance
One of the first successful uses of blockchain technology is decentralized finance, known as DeFi. We discuss this more fully in Chapter 4, but as an overview, DeFi platforms allow people to lend or borrow funds from others, speculate on price movements on assets using derivatives, trade cryptocurrencies, insure against risks, and earn interest in savings‐like accounts. DeFi makes it possible for anyone with a smartphone to put money into a savings account, get a collateralized loan, and make or receive a digital payment. DeFi platforms are basically software programs that run 24/7 and allow anyone to use them – a far cry from the protocols at most banks. This makes DeFi a free‐market playground of crypto apps that many are enjoying and, in the process, making money. As a caution, however, if you choose to explore this world of protocols, we just want to send a word of wisdom to always be prudent with your money, never invest more than you are prepared to lose, and always be aware that scammers are out in force, just as they are in most other marketplaces.
Supply Chain Management
Blockchain technology is already being adapted into our supply chains, markets, information technology systems, and points of purchase. There are growing cases where this technology reduces fraud in the counterfeiting of luxury brands and high‐value goods, helps companies recognize how ingredients and finished goods are passed through each subcontractor, and lessens losses from counterfeit and gray‐market trading.
“Major brands have already begun partnering with tech firms and other entities in response to rising demands for improved brand protection. LVMH (Louis Vuitton SE), for instance, working closely with Microsoft and ConsenSys, has created Aura Ledger to provide proof of authenticity of luxury items and trace their origins from raw materials to point of sale and beyond to the used‐goods markets,” reports GlobalTrade, the trusted logistics and global trade outlet. Pretty soon, when you see that Louis Vuitton bag that should be $10,000 for sale for the bargain price of $1,500, you won't just need to rely on your gut and logic to determine that it's not real – you'll be able to use blockchain technology to verify this very thing.
It's not just luxury brands that are stepping in, but the biggest business drivers on the planet. The buttoned‐down blue‐chip giant, IBM, for example, has an entire practice devoted to blockchain supply chain solutions. Consulting giant McKinsey & Company is urging clients to consider integrating blockchain. According to the none‐too‐radical business analysts at Deloitte, “Blockchain‐driven innovations in the supply chain will have the potential to deliver tremendous business value by increasing supply chain transparency, reducing risk and improving efficiency, and overall supply chain management.” Among many examples, companies have integrated blockchain to track the responsible sourcing of tuna in Indonesia, secure digital media usage and sharing rights, and manage business‐to‐business (B2B) trade and supply chain finance products.
The Society for Human Resource Management documents how blockchain can verify identity, credentials, education details, and payroll management. And we have insider reports that media companies are adopting blockchain technology to eliminate fraud, stop piracy, and protect intellectual property rights of content.
Ultimately, this is where the power of a peer‐to‐peer, immutable, decentralized network comes into play. Transactions are permanent, traceable, and aren't subject to manipulation. This makes them perfect for this job.
Additional Examples
This is just the beginning. Blockchain technology is the foundation for Dapps (decentralized applications), platforms, and protocols, which in turn make it easy to send and receive money across borders, clear and settle financial transactions, manage supply chains, enable device‐to‐device transactions in the Internet of Things, create more reliable property and asset registries, and improve record‐sharing in health care, among others. The benefits – greater speed, transparency, lower cost, and ease of access and control of one's own data – offer tremendous opportunities for expanding global commerce and improving the lives of everyone on the planet. All of this can be a little dry, but we believe it's important to understand the fundamentals – this will make it much more valuable in later chapters as we explore the breakthroughs. Rather than stay theoretical, in the next few chapters, we will introduce the most important applications for blockchain technology that are already proving useful and effective without controversy.
Blockchain Technical Components
In order to really understand Bitcoin or any blockchain, we need to have a fundamental understanding of how a blockchain works. Unfortunately, most people skip this step and simply want to jump on the bitcoin train, but understanding how a blockchain works will shape your entire investment strategy. These are the fundamentals that most skip, so this is where we are going to start.
A blockchain is software that runs on a computer server just like any other server‐based application, just like a web server hosts a website, for example. The software components of a blockchain are programmed in code. These include blocks, which store transactions (data), the hashing function, which organizes the transactions and allows for searching/sorting, and the consensus mechanism, which keeps all the nodes in the network synced and accurate and allows transactions to be approved. The software also includes any functionality to create a wallet or sign (approve) a transaction.
The server is the computer hardware that may run one or more instances of the blockchain software. An instance of the software is a node. The network is merely the connected servers, each of which may have one or more nodes running on it. Since anyone can run the blockchain server software, the network is a globally decentralized network that runs on the Internet, just like other server‐based software.
Transactions
A transaction is a single entry on the public ledger. It's broadcast to all the nodes in the network. Any time a user sends a token from one wallet to another, that's a transaction. A transaction is data that is recorded inside a block, and a block will have one or more transactions stored in it.
The most important function, and where the big innovation lies with blockchains, is consensus. Consensus is the process of all of the nodes agreeing on whether a transaction is valid or not. In order for a transaction to be considered valid, 51% of all the nodes must agree. If they do, the transaction is grouped together with other transactions and permanently stored in a new block, which all nodes then have a copy of. This process is called gaining consensus
