Introduction

Blockchain and Trust

You let out an impatient sigh as you hit the “Parking Ramp” elevator button. You had a long day of meetings at work, and your spouse just texted you that they need you to pick up a gallon of milk. You unlock your car, turn the ignition, and are off to the races. Weaving through traffic and what feels like an innumerable amount of traffic lights, you drive over a bridge that takes you to your local grocery store. You park the car, lock it, and walk through an automatic sliding door. Quickly selecting a gallon of milk, you hand your credit card over to the cashier and are soon on your way. You are ten minutes late for dinner, but you trust your spouse does in fact still love you despite your many apparent flaws.

In a simple mundane journey of a perfectly normal day, you take many leaps of faith. You trust that the elevator won’t crash, that you will arrive on the corresponding floor of the button you hit, that the car door will unlock, and that the vehicle will start. You trust others not to run a red light and smash into you when the light turns green (a rather unnerving contract with society). You trust the bridge you crossed to be properly maintained so it doesn’t collapse. You locked your car in the grocery store parking lot because you don’t quite trust that every single person has your property’s best interest in mind. You trust those automatic sliding doors to activate upon your arrival. You trusted the milk on the shelf to not be spoiled, and the cashier to not steal your credit card information. Finally, you trusted that your spouse would still love you despite arriving late to dinner!

Trust is all pervasive: inescapable in our daily transactions and movements. Trust is the most valuable resource of the twenty-first century. It is the digital oil that all infrastructure, interactions, and communication are built on top of. Every Amazon purchase, credit card swipe, and meal consumed hinges upon trusting either a source or an action will result in a desired outcome. We surround ourselves with routines, ideas, and people we trust. It is an integral part of the human experience for better or for worse.

As you read this book, you will develop an understanding of what I call the “Trust Problem.” It is intertwined with many businesses and third parties that exist to facilitate and ease the worries of our daily transactions. News alert—the current way of dealing with the Trust Problem is less than ideal! Trust is an issue that is pervasive in every transaction between humans. Blockchain is the answer to the Trust Problem, turning the tables on society’s antiquated method of transacting. Instead of trusting people, what if we can trust the guarantee of mathematics and the neutrality of automation through programming for our transactions and contracts?

Before we begin this journey together, I want you to understand what brought me to the table. Three years ago, my cousin Garrett Woetzel (a finance savant) linked me to a variety of articles on this thing called “blockchain.” As an undergrad getting a degree in finance and computer science, the appeal of this packaged deal of digital currency, decentralized ledger technology, cryptography, economics, and all the investment hype drew me in. I was like an eager bee ready to taste the mysterious nectar known as “blockchain.”

As I joined a variety of projects in the space and began to invest, a lot of commotion occurred. Prices skyrocketed nearly 700 percent for a variety of cryptocurrencies—and subsequently plummeted. Communities I had engaged with had people who turned into millionaires, and shortly thereafter were utterly broke. Parents who enthusiastically jumped in because their kids recommended it walked away defeated. As I consumed all the literature I could get my hands on in the cryptocurrency and blockchain space, I found that none of the books struck a balance between the pessimism of investing fundamentals with the enthusiasm for what could be unlocked in the near future with blockchain and cryptocurrency.

That is what set me on this journey. This is what drove me to read hundreds of research papers written by some of the most brilliant researchers in the world. Over the course of three years, I built for myself a rock-solid understanding of blockchain and cryptocurrency with the goal of making this emerging technology understandable for everyone. That is what this work is: a comprehensive dive into this emerging technology in a simple fashion by equipping you to understand, explain, and invest in blockchain technology.

The Coming Exploration

Arthur C. Clarke once wrote, “Any sufficiently advanced technology is indistinguishable from magic.” Blockchain technology is no different relative to the mystery surrounding it. Leveraged as a marketing term or headline buzzword, blockchain and cryptocurrency have soured for a huge percentage of the population.

Maybe you have heard of cryptocurrency (such as Bitcoin), or maybe you haven’t. Perhaps you invested and got burned during the 2018 bubble. Or maybe you are a traditional investor that wants to learn what all the fuss is about. Regardless, you will walk away from this book understanding that in the near future, blockchain will be whirring away in the background of our lives—just like the internet. And, what’s more, you have a chance to invest in the infancy of this emerging technology that solves the Trust Problem that is so prevalent in our world today.

This book will give you clarity in a space that repeatedly misses the mark on educating readers to a point of confidence. By the time you are done reading this book, you will be able to confidently answer the following:

•Why is blockchain valuable?

•How does blockchain work?

•How should I invest in cryptocurrency and a decentralized future?

•What is the past and future of blockchain technology?

But what exactly is blockchain? And why should you care?

“Blockchain is shorthand for a suite of distributed ledger technologies that can be programmed to record and track anything of value, from financial transaction to medical records or even land titles.”

—Lucas Mostazo

The first chapter, Blockchain & Ventre à Terre, is devoted to answering the question, “What is blockchain and how does it work?” For now, you just need enough to know that blockchain is a digital decentralized ledger that is maintained by thousands of different computers. Picture a decentralized version of PayPal, but with a lot more capabilities and many valuable properties that centralized services cannot offer.

This ledger leverages cryptography and mathematics to guarantee the validity of transactions and to remove power from any single third party (such as a bank or Facebook). Users who use the blockchain ledger can transact in a peer-to-peer fashion with 100 percent confidence the digital transaction or contract will complete successfully, without any human interference.

The Trust Problem and Skepticism Factors

The foundations of blockchain were first splattered in digital ink onto a screen in 1979 by David L. Chaum in his PhD dissertation paper, “Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups.” This humble title says a couple of critical things. First, the original value of blockchain is centered around trust between groups of individuals who have no way of trusting each other. In other words, blockchain exists to solve the problem of trust between mutually distrustful parties. The apps and businesses that are using blockchain are using the technology to solve the problem of trust. The conquering of the Trust Problem makes blockchain valuable.

Every use case (the way the technology is used) is built upon the following simple set of questions. What is not trusted? How does blockchain create trust in the situation that would not be possible without a blockchain?

The original ideators built blockchain off of the understanding that humanity lacked a technology that could facilitate transactions while simultaneously being trustless, decentralized, and censorship resistant. These ideas are revolutionary, and the ideators that created the possibility of such a technology did it on the back of mathematics, game theory, and software, fully knowing their work would change society. As David Chaum noted in his introduction for the original piece of research literature that would lead to blockchain, “Manuel Blum was around a lot that summer, and he and I talked. He maintained that one should never try to predict the effects of one’s actions on society. It was the rejection of this principle which led to the present work.” Little did Chaum know just how much that paper would change the world.

Talking to various investors, professors, and technology enthusiasts (many of whom are hesitant about cryptocurrency and blockchain) has led me to many intriguing conversations. Spectator investors who have long been entrenched in traditional investments are consistently reluctant about cryptocurrency. I have been able to narrow these down to what I like to call the “Skepticism Factors,” of which there are three: Volatility, Trust, and Tangibility.

Investments that are built on products in flux—without a firm place in society—are volatile. Cars are a stable part of society; we will always need to get from point A to point B in some capacity. A car’s valuation typically doesn’t change from $100,000 to $5,000 in a couple of days. The value of any given car is, for the most part, relatively mapped out. Housing and shelter will always play a part in human existence, and probably McDonald’s too. Let’s be honest, cheap and quick food isn’t disappearing anytime soon. These examples are all mapped out, “stable” investments. The revenue streams are fairly easy for investors to track.

Blockchain technology, which enables cryptocurrency, is not so. We are in the stage of unknown unknowns when it comes to adoption and integration. The cryptocurrency market also lacks liquidity. This makes cryptocurrency as an investment speculative, risky, and volatile. But just because an emerging technology and asset class justifiably contains volatility within price discovery does not detract from the legitimacy of the innovation in progress. It merely adjusts the expected return of the investment.

The irony of the second problem—trust—is blockchain exists to solve this exact problem. For as long as humanity has been around, third parties have existed to facilitate transactions and the execution of contracts. Real estate escrows, debt collection agencies, attorneys, landscaping companies, and marketing agencies—all of these require trust. Often, this trust is quietly misplaced and exploited.

What if there were an alternative to trusting people? A perfectly neutral party that could always be trusted? This is what blockchain enables—mathematics running monetary policies, programs executing transactions, and contracts being enforced digitally. All operate without needing to trust a human party—trustless trust.

Thus, I was left to grapple with “tangibility” as the indescribable problem many high-caliber investors—potentially including you, the reader—have with cryptocurrency. When I asked a retired finance professor why he was so pessimistic about the future of cryptocurrency as an asset class and product, he immediately looked uneasy. Perhaps his voice even contained a trace of disgust: “You can’t touch it. There seems to be a lot of hand-waving. This whole cryptocurrency thing . . and blockchain is just not tangible.”

Lack of tangibility came up interview after interview until it could be ignored no longer. Some of these people were modern individuals, children of the digital era. How could they be so obtuse about wanting the product to be tangible?

In the middle of the summer of 2018, I set out for a ten-mile run with my mind set to this question. Running often produces a meditative state in which everything seems to quiet down. It’s my favorite pastime and problem-solving tool, and a painful one at that. As I passed by a small pond, I spotted a swan standing perfectly still. I kept running. I’m not one to slow down for anything. An oncoming car drove by me and grabbed my attention for a couple of seconds. I glanced back at the pond.

The swan was gone.

The moment felt magical. I knew that swan was real. It had to have been. I trusted my eyes. I trusted what I saw. Trust. Trust is what made that mysterious swan feel tangible.

In many ways, I would argue trust itself is an attribute of tangibility. If we see something in front of our eyes, we move through space trusting that the information we receive is true. Anyone who has used virtual reality before can relate to the confusion of this fact suddenly not being true. The verification of reality no longer matching the information from your own eyes is chaotic and disorienting. Thus, trust seems to be the step between tangibility and verification.

If you’ve ever made an online order before, when you put your card number in and commit a transaction, you trust the product will eventually end up on your doorstep. I would imagine that the first time individuals made online orders, they did not trust the product would arrive. Thus, the original people who made online orders took a risk and were eventually rewarded by a product conveniently arriving on their doorstep (verification). The more a user purchases online, the more we take the transaction itself as something tangible. If you make an Amazon order and you click on the “Add to Cart” and “Purchase,” a twenty-first century user would say the entire exchange feels “tangible.” Perhaps this is because there is a series of mouse clicks. Regardless, the outcome builds trust, which eventually converts into a feeling of tangibility.

Digital banking is not tangible. You cannot touch a transaction because “transacting” is a verb. Yet we take leaps of faith every day when we swipe our cards here and there. The result of the swipe is tangible, and the transaction is therefore tangible. The twenty-first century economy of transactions will be invisible and pervasive. If you do not deny digital banking as being tangible, then don’t be contradictory and claim decentralized ledger technology (blockchain) and cryptocurrency are “not tangible.” You simply trust one and not the other.

Thus, to anyone who felt cryptocurrency is not tangible, such as our retired finance professor mentioned earlier, I posed the following question: “Have you transacted on any blockchain before using cryptocurrency?”

The inevitable answer was “no.” As someone who has transacted over six hundred times on a variety of blockchains, one of my goals for this book is to get you to experiment and use cryptocurrency. It is one of the quickest ways to understand the breadth, magic, and possibility this emerging technology is capable of achieving.

Centralization versus Decentralization

What are the systems you trust today in the world? At this very moment, how much does the world know about you? Do you trust the companies and apps you use? How much say do you get in your control over your own assets and data? If today the bank decided your account had zero dollars in it, what would you do? If Facebook decided to sell all your profile information and location data to the government, or if your phone company traded your everyday conversations to a third party, what could you possibly do to stop this? What control do you truly have?

You are not at the top of those hierarchies. You are merely a participant.

As I began to investigate the original research papers on Bitcoin, blockchain, and privacy, it became clear to me that centralization of power is a lurking beast we as a society have decided to trust. And rightfully so—centralization was created out of a time when no effective alternative problem-solving solution existed. Since then, centralization has shape-shifted to meet the many demands of society.

“Centralization itself is not evil—it cannot be. It does not exist in opposition to anything. It’s just a concept, a point on a line, always in relation to something else. Over-centralization is the enemy—cycles of reconcentrating power amongst fewer individuals until systems collapse under their own weight.”

—Tor Bair of Enigma MPC (Blockchain)

Centralized systems on the surface are not inefficient, from an economic standpoint. The problem with centralization is not efficiency, but the characteristics that are born out of an overcentralized system. Because of the relationship between centralized systems and the user, oftentimes the user has no effective alternative that does not contain the negative externalizations. For the longest of time, the negative externalizations of overcentralization posed a trinary choice: participate, choose a lesser evil, or sit out completely. Centralized systems are often imposed on individuals as a result of historical events they are wholly unaware of. Terms and conditions apply.

The US monetary system is centralized. Internet service providers are centralized. Your entertainment is centralized (Disney and Fox combined own 35 percent of the movie market). The servers holding your information for Snapchat, Facebook, and Instagram are centralized. Even farming in the twenty-first century is centralized!

Centralized systems are a natural human reaction to any sort of chaos that involves a large number of parties needing to come to consensus on how to do an action efficiently, and, in many cases, to “serve the customer.” No wonder the majority of businesses are authoritarian in structure.

Yet just because something is natural does not mean it is fair. And just because something is efficient for some does not mean it is efficient for all. Decentralized systems such as blockchain are an alternative solution to centralization, a solution created by human tendencies designed to solve the problems of the first millennium., Enter the twenty-first century, when we face problems inconceivable to past generations. The stakes are higher and a trusted alternative to centralization is desperately needed.

“A lot of people automatically dismiss e-currency as a lost cause because of all the companies that failed since the 1990s. I hope it’s obvious it was only the centrally controlled nature of those systems that doomed them. I think this is the first time we’re trying a decentralized, non-trust-based system.”

—Satoshi Nakamoto, anonymous creator of Bitcoin

This book grapples with this topic. At our fingertips is a technology that solves the problem of distrust, centralization, and the possibility of executing transactions and contracts digitally without a centralized intermediary. Blockchain opens the door to truly peer-to-peer transactions, without human intermediaries sucking up value along the value chain of simply transacting from one person to another. Blockchain is not without its flaws; one of the economic levers that gives blockchain the ability to solve these problems (cryptocurrency) is in a constant state of fluctuation. But on a horizon not far from here is a world where those levers are stable, and the technology underneath emerges as a beautiful solution.

The time for top-down abstraction of what blockchain solves is over. Let us now begin the journey of answering the burning question on your mind. “Enough of the suspense. What the heck is blockchain? And how does it work?”