Demystifying Cryptocurrency: Understanding Bitcoin and Beyond

1. Introduction: Hi, my name is Meltem Demirors and I'm a cryptocurrency investor, advisor, and advocate. Part of my role in the crypto ecosystem is traveling around the world, speaking at conferences, speaking on TV, conducting interviews, and meeting with companies, governments, regulators, and investors to help them untangle some of the strange, interesting, and complex ideas that are being worked on in my industry. That's one of the most important things we can be learning about because it has a tremendous opportunity to impact numerous aspects of our world today, including economics, politics, markets, and society as a whole. This class is not an investment seminar, and it's definitely not a comprehensive deep dive into every facet of cryptocurrency or blockchain technology. What it is intended to be is a comprehensive overview of the technology, the use cases, the participants in the ecosystem, some of the particulars of how cryptoassets are created, distributed, and managed and why cryptoassets and blockchain technology matter. Along with all of that information, we'll try to give you some practical resources along the way to further your learning and to help you explore particular aspects of the class that you find interesting. Note that this course is based on one person's perspective, mine, and that I'm an investor in multiple companies in this industry. I disclose all of my investments, holdings, and relationships with companies on my personal website, which is also linked in the resources section of this course. None of my comments in this course are intended to promote or prioritize one asset or one technology over another. My goal in creating this class is simply to demystify cryptocurrencies and blockchain technology for you. Hopefully, you'll go out into the world and feel much more confident that you are able to understand some of the basic concepts of how this technology works and why it matters, and to cut through a lot of the jargon and hype that make it difficult to get to the core of the issues people discuss. I'm glad you joined the class. Let's get started. 2. What Is Blockchain?: Let's start by answering the question, what is a block chain? What is digital currency? And how exactly does it all work? In order to understand digital currencies, I want to go back to another technology that we all use and that we all love, the Internet. What I'm sharing with you is a view of what I like to call the blockchain infrastructure stack. On the left side you'll see the Internet infrastructure stack and on the right side you'll see the blockchain infrastructure stack. The early stages of the Internet were really defined by groups of people who were building this technology trying to come together on the rules and languages of the system. These rules and languages of a system are often called protocols. One example is FTP or File Transfer Protocol which created a common language for how people would enable file-sharing. This meant that one person sharing a file through one application can be sure that their file-sharing would interact well with someone using another application or platform entirely. We see the same thing in the blockchain infrastructure stack where a lot of the work being done today is around protocols or developing common rules and languages for how these systems should work. The second layer of the stack is taking this code, these protocols and implementing them in physical space and time. This is called the networking layer. Now, in the Internet days, the Internet network itself was developed by companies who spent billions of $ putting cable into the ground in the form of ISPs or Internet Service Providers. These ISPs is provide the backbone for the Internet that we use then and continue to provide the backbone for the Internet that we use today. Now, the best-known network layer is the bitcoin network. The bitcoin network relies on a group of individuals and companies known as miners who provide computational services to bitcoin network. If these terms are confusing to you don't worry you don't need to really delve into the details of how these things work. Just know that it's very important to understand the relationship between how protocols designed and what the implications are for how the network runs and gets implemented in real time. Now, a lot of these network providers are paid in cryptocurrencies themselves. So, in bitcoin, if you provide computational resources to the network by validating transactions and enabling the bitcoin network to run, you're paid in new Bitcoin that are "mined". This is important because this provides an economic incentive for people to actually provide, compute resources in order to support these networks. So, we've talked about the protocol layer and we talked about the network layer. Now, what's really interesting is that in every technology, there's a tipping point where there's more awareness of how this technology might actually be transformative. Up until that tipping point things feel very immature. It feels like there's a lot of jargon and there's typically not a lot of attention on what's happening. Now, in the Internet world, that tipping point really was email or the ability to instantly communicate for little to no cost. In crypto world and then block chain world it's my belief that the first real killer application for a blockchains was bitcoin or the idea that you could have a system of money that was not tied to any central authority or entity that enabled people to transact peer to peer without intermediaries for the first time. Now, that doesn't mean that bitcoin is the only blockchain application that we have. Just like email wasn't the only application develops on top of the Internet, there are a lot of new and innovative applications coming to the world of blockchain. However, it's important to remember that from the time we had email in the early 1990's, really mass email that anyone could use to the time we're in now where we have super computers in our pocket and access the Internet to variety of things from talking via video, sharing files and doing a whole host of other things, a lot of time, energy and effort went into building these different applications. The blockchain ecosystem is still in its very early stages. So, many of the applications that are being built today are still very experimental and it's important to remember that a lot of the protocols and the networks that they rely on are also under development. So, while it may feel like the blockchain ecosystem is very mature and there are a lot of different applications. In reality, I think you have to accept that many of these applications are experimental. They're difficult to use. They may rely on other components that aren't fully complete yet, and there's still a lot of exploration beings on and how we can actually leverage this technology in meaningful ways. Interestingly, there were numerous efforts in the Internet days to build online payment systems and cash equivalents. In fact, there were a lot of efforts to build money that would be native to the Internet. Now, a lot of those efforts didn't really work out and many of the people who worked on those early efforts to create "digital currency" now are actually working on various components of the cryptocurrency ecosystem particularly bitcoin. For example, PayPal which to us may not necessarily be super innovative company, that was one of the first innovation companies that enabled transactions on the Internet by enabling people that were part of various payment networks, banks, and maybe separated by borders to transact in a unified way. Just like PayPal enabled people anywhere on the Internet working in any financial system to interact with one another and transact with one another, there's a lot of work happening in the blockchain ecosystem to ensure that people who are working on one blockchain or another will be able to transact and operate across these chains. This idea is called interoperability and it's one of the many exciting research areas that people in the blockchain ecosystem are spending time on. Now, that we've explored the blockchain stack a little bit, let's talk about how a blockchain actually works and why it's called the blockchain. 3. How Blockchain Works: A blockchain, as the name implies, is a chain of blocks of information. These blocks can contain information about a number of different things. But in the Bitcoin network for example, blocks contain information about Bitcoin transactions. You can also embed other types of data into these blocks. But really, at the heart of the Bitcoin blockchain, the mechanism at work is a chronological and timestamped distributed ledger, meaning everyone in the network has a copy of that information that attests to the state of the network and the history of transactions that have happened in that network. The reason this matters is trust and truth. If you think about the way that we keep track of financial information today, it's typically very difficult to identify where money moved, when it moved and how it moved because you have to rely on an intermediaries, say a bank or a credit card company to tell you what the truth should be. In the Bitcoin blockchain, what happens instead is every single person or entity in the world that runs a copy of the Bitcoin blockchain, which really is just a data repository, has a complete history of every transaction that's occurred since the beginning of time. Now, it's very difficult to change that history, I will get to that in a moment, it's one of the key security features of a distributed ledger or a blockchain. But it's very important because it provides all participants in the network, trusted source of information. Now, as I mentioned earlier, the Bitcoin blockchain is likely the best known protocol but there are a lot of different protocols out there that people in the blockchain ecosystem are building and experimenting with. At the core of experimentation, what we're doing is we're exploring three fundamental variables that can change how a blockchain works. Number one is scalability. Number two is security. Number three is decentralization. Now, these are all words that at their surface are likely fairly meaningless. So, let's delve into why these three features really matter. Number one, let's talk about security. A blockchain is often defined by something called its consensus mechanism. Now, that's a lot of jargon. Consensus means agreement. So, the consensus mechanism for a blockchain is how participants in the network come to agreement about the truth or the record that should be recorded in that particular block of the blockchain. In Bitcoin, the consensus mechanism is something called Proof of Work. What that means is, computers have to do a lot of work called mining in order to prove that they have the right history or the right data in the blockchain. There are other forms of consensus that are being created like Proof of Stake where people put up risk capital that they lose if they're lying about the state of truth of the network, and there are many other forms of consensus that are being experimented with, proof of space and time and so on and so forth. As you go on in your studies after this course, you can look into some of these consensus algorithms and how they work and we'll provide some links in the resources section as well. But when we talk about consensus, what's interesting to know is really what we're talking about is security. The security model of a blockchain defines the ledger's ability to maintain its integrity against malicious attacks. Say for example, that I'm a bad actor and I want to steal money from someone, if it's easy to attack a blockchain because it's consensus mechanism doesn't require a lot of energy or a lot of money, then it would be easy to attack and I would likely not have high security on that blockchain. By making blockchains highly resilient, we ensure that we're comfortable storing large amounts of value or very trusted information on these networks. Now, some blockchains that aren't open and usable by anyone are called permissioned. This is typically used in enterprise settings where companies may already have a business relationship with one another or in places where known entities are transacting with one another and already have arrangements in place. A permissioned blockchain basically means that only known entities, people who have permission, are allowed to read and write data to the ledger. Now, this is one interesting way to approach a block chain model, but note that in this case, you are sacrificing security for the sake of other factors like scalability and speed. One of the interesting innovations of the Bitcoin blockchain is that Bitcoin's model is inherently adversarial, meaning no one trusts anyone. Proof of work is a highly secure and very expensive and computationally intensive process for reaching consensus. This is why I personally, I'm very excited about the Bitcoin network and the innovations of the Bitcoin blockchain. It's very difficult to attack this particular network and alter its history. The challenge that new blockchain networks and new protocols have to overcome is building a long enough transaction history and building a security mechanism that is resilient enough to stand up to attack, particularly if there's a lot of money at stake. The second aspect of a blockchain that's really critical is scalability. Now, there are two aspects to scalability. One is technical scalability, which means how many transactions you put through the network, how much data can you store on it, how big can the network get and how many people can it reach. This is very important because it dictates how much activity that particular blockchain network will be able to support. However, there's also a second element of scalability that doesn't get talked about very often, which is social scalability. Social scalability refers to the philosophy, the economic, political and social philosophy underlying many blockchain protocols. Because blockchain technology represents not just the technology innovation, but also a social innovation, it's important that there are a group of people who share the same beliefs and that share the same desires in terms of ensuring blockchain remains open, permissionless and so on and so forth. That's very important in ensuring the development of the protocol, particularly since it's open source technology, continues to move forward. Therefore, it's important to look into social scalability and we provided more information in the resources section that should help you on that journey. The third aspect of the blockchain that really matters is decentralization. Now, decentralization is an esoteric and poorly defined word, and we could teach several classes just on that topic alone. However, if we wanted to define decentralization, it's helpful to go back to the initial diagram that we shared at the start of this course. At the protocol layer, decentralization means that anyone can openly see the code that they're running; what's in the protocol, what it means and that people can suggest changes to the protocol. Most projects have a specific process for how changes and upgrades occur, and most of these processes are open and follow the principles of open source software development. At the next layer, the network layer, decentralization means that people who want to are able to easily and cheaply run nodes, put their transactions onto the network and validate transactions of others. There are a number of new innovations being worked on to make it easier for people to participate in consensus in the blockchain networks and it's an important area of research that will continue to impact how far and wide these networks are able to proliferate. Lastly, at the application layer, it should be easy for anyone who wants to enter and leave the network, there should be a degree of censorship resistance, meaning there's no ability for anyone to control what anyone else does on the network. Another way of saying this, is that the network should be permissionless, meaning anyone who wants to is able to build an application and commercialize it however they like. Lastly, transparency is key to all of this. One of the core ideas that we're exploring with digital currencies in blockchain technology is the idea that the relationship with money and power should be uncoupled. Transparency and how decisions are made, how changes propagate, what's happening on these networks, who's behind these networks is an important component of that. Therefore, arguably, the most important component of decentralization is really understanding what the word decentralization means and where it matters and being able to track how decentralized something actually is, which again, as we've just defined, can mean a lot of different things. We'll close this segment by talking briefly about an important distinction here. There's two things that are often talked about when we talk about blockchain technology: First is the actual technology itself. A lot of the technology underlying blockchains is not new, but it's helpful to understand. Ideas like public private key cryptography have existed for a long time and the cryptography that most blockchains are built on has existed for decades and has been formally documented in academic research. However, the unique aspect of blockchains today is the combination of technology with game theory and incentives, which is done through something called a cryptocurrency or crypto asset. The design of these governance systems; how the money in the system interacts with governance and the technology, is an important aspect of what makes this so unique. Likely, there should be a governance layer right above the network layer in the stack because it's really important to define how these systems are going to be governed, their aspects of ethics, political design, behavioral design and behavioral economics that are just starting to emerge in this community. However, I'd encourage you to think about incentives as we go through this course. I will try to highlight some of the interesting incentive structures at play between blockchain technology, the cryptocurrencies that live on these blockchain networks and the people building projects on top of them. Next, we'll be talking about why blockchains matter, understanding some of the important changes happening in our world, and how they might impact blockchain technology. 4. Why Blockchain Matters: So, at this point, you might be asking yourself, why blockchain and why now? It seems like cryptoassets and blockchain technology have catalyzed a massive amount of interest from individuals, companies, and the press. So, why is everyone talking about this stuff? As I mentioned before, it's important to know that this isn't just about technology. While cryptocurrencies and blockchains are an important technological innovation, this technology also has profound impacts on social, political, and economic theories in organizations. Therefore, many of the early adopters particularly of bitcoin have shared very specific views about individual rights and freedoms, something referred to as self sovereignty or the ability for an individual to govern themselves. As we talked about in the last section, this concept of social scalability or shared vision is also really important component of how these systems are going to develop over time. In my view, there are three key drivers outside of just financial speculation that are driving an interest in blockchain technology, digital currencies, and decentralization more broadly. The first theme I want to dive into is the theme of trust. We're seeing an erosion of trust in financial institutions following the 2008 financial crisis in which not a single banker went to jail and our government used trillions of dollars to bail out very financial institutions that caused the crisis. Or also seeing a lack of trust in governments. We've seen this reflected in the political environment in America and beyond, with the breakdown of the European Union, with the UK leaving, with some of the rising populist tendencies in the developed world and also some of the challenges related to stability in the developing world. Lastly, we're seeing a massive erosion of trust in corporations and the way they use our information. As Facebook, Google, and other companies have revealed, there are many, many fundamental problems with their business models, where they utilize data from us, the users of their products, as the products they sell to advertisers and marketers. Our information is more vulnerable than ever and there's increasing frustration over centralized corporate control of the information that defines us. The second factor that's driving an interest in blockchain technology and digital currencies is demographic shift. We're in the midst of one of the largest wealth transfers in human history. An estimated $30 trillion of assets will flow from baby boomers and the sleeper regeneration to Gen X and millennial investors. Now, while at the surface, that may not appear to matter much. You have to remember that different types of investors and individuals have different preferences. Millennial, as we've seen repeatedly have an interest in things like social impact, environmental sustainability, and other factors that prior generations and prior groups of investors may not have cared about much. We've actually seen this change in investor preferences reflected in the way some of the world's largest asset managers conduct themselves. Earlier in 2018, Larry Fink, the CEO of BlackRock, which is one of the world's largest asset managers, announced that going forward BlackRock would look at the social impacts score of any company it invested in. Now, while that may not seem critical at its surface, this reflects a large shift in how institutions are viewing investment opportunities. The second important themes to highlight relating to [inaudible] demographic shift is the increasing role that women will play in the future of our economies. Women comprise 51 percent of the world population and they control over 80 percent of household spending. Increasingly, women are also making investing decisions in their households. Therefore, I believe one of the key ways to accelerate the adoption of cryptoassets and blockchain technology, will be to target these female consumers. The third key theme that's driving an interest in blockchain technology and digital currencies is the theme of disruption through digitization and change in business models. If we look at the top ten companies in the world about ten years ago, there are companies like General Electric, ExxonMobil. Companies with hard assets that made physical things. Now, if we look at the top ten companies in the world, they are all companies that operate on the internet. They make digital things that we consume and use. Without the internet, we wouldn't have Prime, Same-Day Delivery, something I personally love. A number of innovations were required to make that business model possible. As we discussed, it required the development of various protocols, the development of the internet as a physical compute network, as well as the development of multiple applications including payment applications, information transfer applications. The internet economy today is still largely unfinished and incomplete. There are many components that we wish we had, but haven't yet developed. What we see here is two potential paths for blockchain technology and digital currency. One way this could have developed is that blockchain technology and digital currencies enhance this [inaudible] Internet business model, by enabling further digitization and the extension of digitization into new forms and shapes. The second way blockchain technology can disrupt business models is to build an entirely new form of organization altogether. One that builds a new set of business models, completely independent or largely dependent of Internet business models that focus on organizations that are loosely organized and leverage open source software to get users to their products and platforms and create new types of value-driven ecosystems leveraging digital currency as the primary transaction mechanism. While it's unclear how exactly all of these factors will combine to form the future of blockchain technology and digital currencies. One thing is very clear, in evaluating this technology and its potential to change our world, it's very important to get outside of what I like to call the crypto bubble and to understand the broader lens through which we should evaluate what's happening in the cryptocurrency blockchain space in order to understand its potential impacts. Next up, we're going to delve into some of the confusing terminology of blockchains and where we are currently in the development of this technology. 5. Crypto Assets: Let's dive right into terminology. Blockchain is very confusing and to be honest after five years of working in it, I sometimes still don't know what we're talking about. But let me do my best to try to provide an overview of some of the words we're using in this space and what they actually mean. So, you've probably heard the word blockchain and ask yourself, "What is blockchain?" We talked a bit about the technology and how blockchain actually works, but at a high level, blockchain can be used to refer broadly to the category of technologies that are defined by distributed ledgers. As we discussed, there are many different models for how distributed ledgers or blockchains work, but often the word blockchain or distributed ledger are used interchangeably. When we talk about cryptocurrency, we could also say crypto asset, digital asset, digital currency, virtual currency. Really what we're talking about is an asset that's native to a blockchain and what that means is that the asset is part of how that blockchain works. The best example is to explain the difference between Bitcoin and the Bitcoin blockchain. So, Bitcoin is two things. Number one as we discussed, it's a protocol and that protocol is run by a bunch of devices as part of the Bitcoin network or the Bitcoin blockchain. This is a technology and it's a network. However, Bitcoin is also an asset. Bitcoin is a unit of account, it's a form of money that's used to store value and transfer value and that's a digital asset. Now, there are many different ways that people are using these terms but at their core and way to think about it is blockchain is the big category of technology and digital currency or crypto assets are a subset of that technology that relate to payments, value and value transfer. Now, we've already talked about the word consensus and what it means, but broadly, consensus is how people come to agreement. As we've discussed, the way that people come to agreement about the state of a blockchain network can have profound implications for the security model of that network as well as the role that a crypto asset, cryptocurrency or a token as it's sometimes called, the role that asset actually plays in how consensus works. Now, we've also talked about the word mining and what that means. Mining is simply the process that the Bitcoin network goes through in order to add new data to the blockchain. Now, in other blockchains, we use different words. For example, Ethereum which is another popular blockchain, is working on something called proof of stake. Proof of stake is where people stake or put up token collateral to attest to their version of the truth of the state of that network. If they're wrong, that stake gets taken away. In this process, you wouldn't use the word mining, but you use the word staking to define the activity of participating in consensus in the network. Well, I know this is confusing, don't worry. Whenever there's new technology, people often grapple to define new words and give them new meanings to capture some of what these things actually mean. While there isn't yet standard terminology in the blockchain space, hopefully understanding some of these words and how they're used will help you become more adept at understanding what people actually mean when they use some of these terms. One of the things that's characteristic of any new technology space that's still being defined is something I like to call complexity theater. As you start learning and reading more about digital currencies and blockchain technology, you'll often encounter words that are difficult to understand. Words you may not have seen before, words that are used in ways that they're typically not used in. I would encourage you to delve into the actual meaning of these words and the intent of these words rather than get hung up on the terminology. Since this is early stage tech, a lot of the terminology is still being defined and there are a lot of incentives to define this terminology in certain ways. I wouldn't worry about it. A lot of what we're talking about is actually quite easy to understand and hopefully this course has given you some of the building blocks to start to understand some of the jargon you may encounter. Now, we talked a little bit about the actual technology, how and why it matters, but let's talk about where we're actually at. As we mentioned in the first lesson much like the way the Internet was developed, the development of the blockchain ecosystem is going to take time and there's an interesting relationship between the protocols or these systems and the code underlying them, the networks of computational capacity that support these protocols and the applications that are going to build the products and services that people like us or corporations may interact with. So, let's talk about where we actually are in the stage of that development. One idea I want to go back to is understanding the adoption life cycle. There's a great book called "Crossing the Chasm" that's all about the adoption of new technologies and you can find it linked in the resources section. What's often talked about is that technology adoption doesn't happen in a straight line. It often happens through series of stops and starts and it's often not as straightforward as we think. Civically, there's a group of early innovators and early adopters who do a lot of experimentation, build a lot of random stuff or experiments to try to come up with how they might use this technology in ways that create value for users. This is called the first part of the lifecycle. Typically, after all of this experimentation, there's a lot of excitement or hype as people start to see how potentially some of this technology could be impactful and typically there's a rush to invest in some of this technology. At the peak of the Internet bubble, over $1.5 trillion of value was wiped off a balance sheet as a result of the correction in how people perceived the value of this technology. This process is something that's in fact been well documented. There's another book by a researcher named Carlota Perez that focuses on exactly this relationship between new technology innovation and investment capital. As you'll see in this diagram on innovation and financial bubbles which is taken from her book, there's typically a phase where new technology emerges where we see intense funding. We then enter into a frenzy as more and more investors learn about this technology and as early investors make money where there's rampant speculation on the future of this technology. Now, what's interesting is as we've mentioned before, blockchains aren't just technology. There's actually a cryptocurrency or an investable asset that's native to many of these blockchains which has led to a lot of rampant speculation in these digital currencies themselves and we've seen this in a lot of cases and the decoupling between the actual production value of what some of these technologies are able to do and the paper value of some of these assets and the prices at which they trade. Now, this isn't necessarily new thing. As I said, this is a documented phenomenon that occurred in the Internet frenzy as well, but it's important to understand that we're now going through phase as products are becoming more refined as these technologies are becoming more mature, there will be a phase of correction, but there will be a recoupling of value where we start to see more of a focus on production or building actual products and services at the application layer that people can use as well as the maturity of this technology where we'll start to see growth shifts to more experimental technologies. This is also reflected in the adoption life cycle of new technology. As technology becomes more and more prominent and widely adopted, we start to see larger groups of people accept and adopt this technology. This is typically reflected in the early majority and the late majority. The iPhone came out in 2007. Now, that didn't mean that every single person in 2007 owned an iPhone or rushed out to buy an iPhone. The iPhone ecosystem was still really immature and there weren't necessarily a lot of apps you could download that could do things you can do with other phones we hadn't. I myself was a BlackBerry user and didn't even switch to an iPhone until 2011. So, I was probably one of the early majority who adopted an iPhone and today, there are a lot more people who own iPhones meaning the technology is far more developed and far more much mature and the application ecosystem around the iPhone is also much more developed and much more mature. Similarly, it's important to understand that a lot of the innovation happening with blockchain technology is still very early and very experimental. That doesn't mean that there isn't a value in it. What that simply mean is it will take some time for it to proliferate throughout popular society and it will take some time for it to develop meaningful use cases and applications that people will feel comfortable using. Next, let's delve into some of the use cases of blockchain technology and cryptocurrencies. 6. Use Cases: Let's dive right into some of the use cases of how this technology and how these assets are being applied. Because I love frameworks and because I love numbering things, we're going to talk about three primary use cases today. Number one is the store of value use case. Number two is the medium of exchange or payments use case. Number three is the distributed ledger or technology use case. Sound good? Let's dive in. The first use case is store of value. Now, throughout human history, people have used all sorts of things to denote value. Some of them are interesting cases. On the island of Yap, people used really large stones called Rai stones to denote value. People use shells, salt, furs, silk, spices and things like gold to store value. Now, the idea underlying bitcoin and digital currencies is the idea that something like bitcoin is an equivalent of digital gold or maybe even the equivalent of having a Swiss bank account in your pocket. The idea that you can own money that isn't controlled by any government or state, that has limited supply, is highly fungible, it's divisible and easy to transport, all you need is a cell phone or hardware wallets makes it really compelling as a digital store of value. We see this expressed not only with bitcoin but with other digital currencies like Zcash, Monero and Dash that focus on user privacy. There are also new implementations of store value that take real physical assets and make them digital representations using blockchain technology. One interesting example that I find entertaining is the idea of taking physical gold and digitizing its ownership through a blockchain-based smart contract. There's been a lot of discussion how to implement this, and there are a lot of interesting ways the digitization of other stores of value, physical stores of value can start to create interesting opportunities for how people store, manage, transact and trade and otherwise deal with these assets. The next use case is medium of exchange or basically a fancy way of saying payments. One of the things we talked about earlier is that one of the shortcomings of the Internet is that it never had a native payment currency. What this means is there have been a number of companies that have sprung up starting with PayPal and extending to many other companies such as Zoom and TransferWise that have all the time to resolve some of the fundamental challenges of the different payment networks that exist in our world today. Now, banks use something called the correspondent banking system or SWIFT, where they have an actual network where they communicate with one another and send of value to one another. However, one of the fundamental challenges that I have if I use PayPal and my friend uses Venmo is that one of us has to join the other person's network. It's very difficult for people to transact on a day-to-day basis if they're not part of the same payment network. Payments in our world are still very complicated, not just for individuals but also for companies. Companies spend billions, if not trillions, of dollars every year, moving money around the world between not only themselves and the different affiliate entities they have in different countries but between their suppliers and their end customers. There are a lot of opportunities that people are exploring to use both blockchain technology and digital currencies to make it easier to move money around the world and to remit money from one country to another. The last use case I'll talk about is the distributed ledger, really focusing on the core technology innovation and less so the digital asset or digital currency itself. If we think about changing business models, one of the things we talked about in one of the prior lessons, there are a lot of opportunities to use blockchain technology to change the way that companies operate. At its core, there are two things that companies try to do when they innovate. Number one is to drive new business lines or create new sources of revenue, which is increasing the top line. The second is to cut costs and find ways to be more efficient, which is optimizing the bottom line or what's leftover after you take revenues, subtract out expenses you're left with the bottom line. So, what are the ways that companies are leveraging blockchain technology to try to do those two things? First of all, there are a lot of opportunities to use blockchain technology or the idea of distributed ledgers or one source of the truth to optimize the way that companies manage their back-office and their reporting. If we think about all of the different functions in a business, a lot of what people in a business do is ticking and tying accounting, making sure that everything adds up and records the way it should. This is why we have triple entry accounting and a lot of really complex bookkeeping systems, enterprise data management systems and so on and so forth. A number of entrepreneurs are building new technology tools typically deployed as enterprise software to try to leverage some of the features of a blockchain to bring efficiency to all of the processes that a corporation has in its back and middle office. There also is that companies are using blockchain technology to create new business lines. For example, by offering new types of software to users, by creating new types of products and services and by thinking about ways that they could leverage blockchain technology to create new opportunities. So, what types of companies are actually using blockchain technology? Well, I'm going to focus on just the crypto asset component because that's what I'm passionate about. Let's look at some of the brand names here that are using crypto assets as a store of value, as a medium of exchange and as a core innovation in business processes. Let's look at the company Square for example. Square is a company that's focused on payment space. What Square did is they launched the ability for users of their platform to trade bitcoin in their cash app in November of 2017. The company's stated that it supports bitcoin as part of a long-term push towards providing more financial access. The impact of this is the stock price of Square has gone through the roof. It's up 90 percent year to date and Square generated $70 million in revenue from its crypto business alone in the second quarter of 2018. As a result, Square is growing three times faster than one of its largest competitors Venmo, which is owned by PayPal. Let's talk about new investment opportunities and the ability to take physical assets and digitize them using digital currencies and blockchain technology. The St. Regis Hotel chain recently did a security token offering, where they offered shares of common stock in their Aspen property using a digital currency or a token. Each token represents one share of common stock in the property and these tokens can be purchased with either US dollars or with bitcoin. Now, while this is still an early experiment, what will be interesting to observe is how many investors will actually be able to participate in this offering. The idea being that a wider group of investors will now be able to participate in opportunities like these. There's also the idea that shares will be more liquid if they're tradeable as tokens. The idea is that ownership in this property, hopefully over time, will become more widely distributed because the asset is easier to access and there's an active secondary market for it. The idea is that security offerings like these that are regulated and issued through regulated exchanges in platforms will create new investment opportunities and take some currently liquid asset classes and make them more liquid or more investable. Let's look at payments and remittance or the medium of exchange use case. There's a company called Coins.ph based in the Philippines that's actually using digital currency as the back-end for their digital payments service in Southeast Asia. They actually received the first digital money license in the Philippines and have been working closely with regulators to bring this technology to users in the region and the impact is pretty compelling. The company has over five million users in Southeast Asia and in 2018 saw tripling of its user base, which is quite impressive for any company. They have over 10,000 partner locations in Southeast Asia, where users can go and deposit cash-in or get cash-out in exchange for digital tokens. What's really interesting as well is that when users see when they use the platform it's not cryptocurrency. They see their local currency. This is an important example of how user experience will impact adoption. By making these products and platforms easy to use, we may actually see digital currencies being used by consumers who don't even know that it's powering some of the applications they're using. The last concepts we talked about are the digitization of business models is another interesting one. I want to talk briefly about Rakuten which is a Japanese e-commerce company that owns a wide range of businesses all focused on online marketplaces. Rakuten has announced their plans to create something called Rakuten coin that's going to be used as part of the company's points-based reward system. These coins will be usable within and across each of Rakutens' many businesses. What's interesting to note here from an impact perspective is that Rakuten has over 1.1 billion members across a 190 countries. That's a massive target audience and could speed the adoption of digital currencies with such a wide user base. They also had global gross transaction volume of 96 billion across their businesses in 2016. So, digitizing some or all of that flow molecularly results to material savings and new opportunities for this business. In concept, what they're trying to do is focus on extending the edges of the Rakuten network and keeping more value within parts of that network. We're seeing this across a number of businesses that have traditionally had ecosystems that are connected say, for example, the Apple ecosystem but have payment systems that are decoupled or specific to each application. By creating a unified payment experience or an embedded payment experience that's native to all of these applications and ecosystems, companies can think of new ways to extend their business model, reach new users or keep more users on their platform. It's important to recognize that technology itself isn't moral or ethical in any way. Technology isn't inherently good or bad, but it is important to note that there are ways that this technology can be used to do things that maybe take rights away from people. Therefore, the ethics of how we create and implement this technology is very important to ensuring it's used in ways that benefit people. One of the things that we can do in order to ensure we actually understand how we're participating in and contributing to some of these projects is to examine some of the incentives at play when we support specific digital currencies, protocols, networks or blockchain products. It's important to understand how the project or product makes money, who benefits from that flow of money and how that money is being used. Now, again these things are difficult to untangle but understanding some of the relationships between the flows of money and who has control to make what changes are important to ensuring that the assets we hold and the technologies we use don't support projects that may not actually align with our ideologies. This also goes back to the concept of social scalability that we mentioned at the beginning of this class. Next, we'll be talking about the life-cycle of a crypto asset and how new cryptocurrencies are born or created. 7. Lifecycle of Crypto: So far, we've talked a lot about blockchain technology and digital currencies as though they're one broad group of ideas. In this part of the class, we're going to hone in on one very specific component of blockchain technology which is digital currencies or Crypto Assets themselves. The reason I want to talk about this one of the more interesting aspects for me of this new technology ecosystem. I think there's still a lot of confusion about how digital currencies actually work. So, let's start right into the lifecycle of these assets. How they're created, how they're distributed, how they're managed, and what might happen to one of these assets at the end of its lifecycle. Let's start with Bitcoin. Bitcoin is an asset that we've been hearing about for the last five years, and it's a project that's pretty easy to explain and understand. In 2008, there was an anonymous individual or group who called themselves Satoshi Nakamoto who released something called a whitepaper, nine page PDF, outlining idea for digital money system they called Bitcoin. Now, this paper was released and sent around on an email chat and no one really paid much attention to it. The Bitcoin network was first deployed in 2009, meaning the protocol or code was taken and actually run on computers. In the early days of the Bitcoin network is really easy to run the Bitcoin code on your computer, and overtime it became much harder and required more specialized hardware. Now, most users didn't really interact with Bitcoin for a very long time, even though Bitcoin came into existence technologically in 2009. I didn't interact with Bitcoin until 2012, and many people are just now beginning to interact with Bitcoin 10 years later. As I mentioned earlier the innovation and adoption lifecycle often takes a long time, because most people may not have heard about Bitcoin, and may not have had any practical way to access it, and may not even have understood what it was. So the first phase of the Crypto lifecycle is creating a new protocol and creating a new network. Now the Bitcoin network has been around for ten years as I mentioned, and not only was the network created, but bitcoins were actually distributed to individuals through process known as mining. What this means is every time that a new block is added to the blockchain more Bitcoin is created. Now, in Bitcoin the model is the distribution of Bitcoin goes down over time and there's a limited number of Bitcoin that will ever exist. One of the reasons that Bitcoin is often compared to the idea of digital gold, because it's limited and scarce in supply just like physical gold. Now, once Bitcoin been distributed through this process known as mining, there's an entire phase that begins where people speculate on the value of Bitcoin through trading, where people actually use Bitcoin for applications like sending payments or cross-border remittances or variety of other applications. We're starting to see people use other features of the Bitcoin network to deploy a number of other applications such as storing or anchoring data to the Bitcoin blockchain or leveraging Bitcoin security model to do other things that could create value. So, if we look at Bitcoin, it's gone through the creation phase, scan through the distribution phase, and as a result this network has accrued over a $100 billion of value, and also has a number of different applications deployed on top of it that are easy for people to use. One such application that you may be familiar with is an application called Coinbase. Coinbase is a phone and computer-based application that allows people to easily buy Bitcoin using their bank account or credit card and then store that Bitcoin. There are also applications from traditional companies like Square that allow people to do the same thing. These are all pointing to the fact that Bitcoin as an asset, isn't a later stage of maturity of many of the new Crypto assets that are just beginning to emerge. Let's go to a second example, Ethereum. Now, the Ethereum network came into existence two years later in 2015. The way that the Ethereum network came into existence, well a little bit different than how the Bitcoin network came into existence. The Ethereum network raised money through something called an ICO or Initial Coin Offering. Where the developers that created the protocol sold a block of Ether or the token that's native to the Ethereum network in something called Initial Coin Offering. People could contribute Bitcoin, the other digital currency that existed at the time. In exchange for Ether they would be given when the network first launched. So, a bunch of people participated, and the Ethereum Foundation which oversaw the process raised $18 million Bitcoin. When the Ethereum network finally launched in 2015, all the people who'd contributed Bitcoins to the Initial Coin Offering received Ether in exchange for their contribution to the project. This model of raising capital for new cryptocurrency protocols called Initial Coin Offering was popularized by Ethereum and has since been used by a number of different projects. Now, we've also seen other models used to create and deploy new cryptocurrency projects. What's interesting to note here is there a lot of different ways that a protocol can come into existence, but it's important to evaluate some of the incentives that play for why developer, group of developers might create a protocol and how they choose to monetize or fund the development of that protocol overtime. It's important to evaluate how these models impacts the ecosystem around these cryptocurrencies, particularly when it comes to moving beyond the speculative phase. If we look at this graphic of all of the different businesses that have been built to support the Crypto Asset lifecycle. We can see that it's still very early. There are a lot of companies focused on helping teams create Crypto Assets. There are also a lot of different models being experimented with on how these assets are distributed whether it's through an Initial Coin Offering, a new regulated model called a Security Token Offering, and hybrid thereof. There are a lot of different platforms like exchanges that can be used to speculate on the value of these different Crypto Assets. However, overtime for these things to actually have value, they have to be utilized by people to perform different activities. We've talked about some of these used cases like store of value, medium of exchange, and distributed ledger applications. But ultimately, it's up to these developers and the communities of people using these Crypto Assets to ensure that we evolve beyond the speculative phase into actually utilize in Crypto Assets for meaningful purposes, and then beginning to specify how these assets are uniquely enable to perform specific functions. The market needs robust new infrastructure to enable these assets to exist and to enable these assets to create utility that will be functional in a market economy. The last thing I mentioned before we end this section on Crypto Assets is that what we're seeing at its core is an evolution in how capital is formed and how people raise money for new ideas. We've seen their eyes at the internet stocks also called the Fangs are Facebook, Amazon, Netflix, Google, were companies who reached public markets through traditional IPO or Initial Public Offerings. These are traded on the stock market today. With Bitcoin, Ethereum, and other Crypto Assets, we saw an entirely new model be experimented with which has its shortcomings but also opportunities. We're now seeing a new form of capital creation through Initial Coin Offerings be experimented with, and through that process we're uncovering some of the challenges with these incentive models, and some of the challenges associated with raising money in this way. None of these structures are perfect by any means, but it's important to note the fact that these are important experiments and they're exciting to keep track of. A new model we're seeing as one we talked about briefly with the same regions offering which is a security token or a registered security that complies with financial regulations that raises money through more traditional means there might be reserved for hedge funds or other private investment opportunities, but this is by no means the end of the story. There are a lot of new ways that we'll start to see Crypto Assets being issued by individuals, projects, firms, and other entities, maybe even governments themselves. While it's still very early and difficult to determine what methods are best for long-term success. It's exciting to note that this new technologies creating new ways for people to form capital that haven't existed before. There are a lot of unanswered questions about the Crypto Asset lifecycle, but hopefully thinking through this framework of how assets are created, distributed, and then manage over their lifecycle provides you with some new contexts through which to evaluate opportunities to not only use these assets but to invest in them and to hold them as long term investment opportunities. Also note that it's very high risk to invest in Crypto Assets. I've always advised that you should never invest more money than you're willing to lose because there's a high probability that these assets will be worth nothing. This is not investment advice nor should you take investment advice from anyone on the internet on Twitter or anywhere else. Now you may be asking yourself why we're even talking about the retirement or the end of life for some of these assets so early in their development. But it's still far away and maybe decades or multiple decades in some cases that some of these assets actually start to reach the end of their life. It's important to think about what happens to some of these assets. Can a digital asset trade and perpetuity even if there's no underlying network to support it or even if there are no real users or holders of the asset. These are all interesting and unique questions that this new innovation and technology represents. This is not as simple as a Myspace situation where accompanies ceasing to exist means the platform itself ceases to exist, because these networks are distributed, and because their development can be very decentralized in some cases, there are a lot of interesting wrinkles to explore when we talk about what it actually means for the lifecycle of Crypto Asset to end. 8. Ecosystem Overview: So, how does the cryptoasset ecosystem actually work? Who are the people that are actually building these things, buying these things, investing in them, regulating them, and using them? What impact is all this going to have on your life today? Let's talk about it. As we talked about in the last segment on the cryptoasset life cycle, there are a lot of people who are focused on creating blockchain technology and cryptoassets. Typically, the people who are creating these things are developers. In some cases, protocol developers might also be asset issuers if their protocol happens to have a native cryptoasset. These are often organized as nonprofit foundations companies or loosely organized communities. For example, in bitcoin, a lot of protocol development work is done by a core group of five or so individuals create a lot of the code base. There is also a public online process called the BIP process or the Bitcoin Improvement Process, whereby anyone can submit changes to the protocol, have them peer reviewed, and if approved, actually have that code integrated into the core bitcoin code repository. Next, as we move from the protocol layer up to the network layer, there are network service providers. So, for example, in bitcoin, these are called miners, because they engaged in a process called mining, whereby they provide computational services to the network to process bitcoin transactions. In other protocols, there are different services like staking pools, validation services, and so on and so forth. But really what this means, there are different service providers that enable the network tag to be created in physical compute space. Next, the application layer or the last layer of the blockchain stack, we have entrepreneurs and companies for building applications. Now, a lot of these applications that are consumer-facing happened to be phone-based, meaning that I can go on my phone and interact with blockchain technologies or cryptoassets directly. But there are also applications that are enterprise-facing, where people are selling their services to businesses. There are also businesses that are being built that are focused on providing services to other cryptoassets-focused businesses, say PR companies, consulting firms, tax advisers, and so on and so forth. As you can imagine, there are a number of aspects of this ecosystem that are really unique and really experimental, and therefore require highly specialized expertise and knowledge from a group of industry professionals. There are a lot of service models that are focused on providing these types of advisory services and professional services to the crypto ecosystem, as well as more traditional businesses that are trying to understand how they might apply and leverage this business within their own organization. We have protocol developers, network maintainers, and we have application builders. But how is this stuff actually getting built and who's paying for it all? Well, first and foremost, they're venture investors or VCs who have typically funded a lot of entrepreneurial activity, especially here in the United States. A lot of the early work in the crypto community was funded by VC firms and VCs themselves as individual investors who supported the development of these early protocols and projects. There is also a large part of the cryptoasset community that actually participates in funding new protocol work by taking the existing cryptoassets they have, say bitcoin and ethereum, and reinvesting it into research and development on new protocols themselves. These are typically not traditional investors, but they're individual investors who are supporting these networks and services, Or they can also be called stakeholders in some of these protocols. There are a lot of new types of investors that are emerging as well. There are a number of venture funds that are specifically focused on just investing in cryptoasset and blockchain technology. There are also new types of investors that resemble more traditional hedge funds and make more speculative investments on just the cryptoassets and not the underlying technology itself. These new models are called crypto funds, and there's a lot of experimentation being done with how this asset management model might evolve. The next important part of this ecosystem is the press. The press has played a critical role in helping the general public understand and learn more about cryptoassets and blockchain technology, and also to share news of what enterprises and individuals are doing with this technology. Now, there has been a lot of bad reporting on digital currencies and blockchain technology, mostly because as you can hopefully gather from this course, there are a lot of complexities of this technology that are not that easy to understand or easy to communicate in a short article. However, there are a number of specialized news outlets that focus just on covering this particular industry and that's been a really interesting development to watch. There's also advocators, promoters, and educators. You may say that I'm an advocate for cryptocurrencies because I'm sitting here recording this class to help you learn about cryptoassets and blockchain technology. But there are a number of individuals in the ecosystem who spend their time on education, advocacy, and promoting the use and adoption of this technology. Some of them are compensated for their role and some of them are not. As I've mentioned, you can go to the resources section to see what projects I'm involved with and if I'm compensated for any promotional activity. Typically, I've shied away from this, but there are many people who play an important role in helping speed the adoption and awareness of these technologies through these types of rules. The next important category of the ecosystem is academia and the research community. As we've mentioned, there are a lot of the aspects of this technology that are still highly experimental, and this isn't just about technology itself. There are also profound implications on social, political, and economic structures in our world that are happening as a result of cryptoassets and blockchain technology. Therefore, it's important to take a multidisciplinary approach to really study, evaluating, and generating more data about the actual impacts this technology can have on systems in our world. That's where the academic community plays an important role in ensuring that rigorous peer-reviewed research is done on some of this technology and it's published in peer-reviewed academic journals. While historically the coverage of cryptoassets and blockchain technology in the research community has traditionally focused on computer science and cryptography, we're starting to see the emergence of new disciplines such as economics, behavioral ethics, and others being reflected in how this topic is covered by academia. Lastly, arguably the most important part of this ecosystem at this specific point in time is regulators and governments. Regulators and governments also play an important role in the developing cryptoasset and blockchain ecosystem. The financial system is one of the most regulated parts of our economy and for good reason. Finance and our relationships with financial firms play a very important role in our lives. As we witnessed from the 2008 financial crisis, having prudent regulation that protects consumers and markets is very important to maintaining a healthy market economy. Therefore, regulators are really paying attention to what's happening particularly around cryptoassets, which represents a new type of capital formation, and as I've already mentioned, a very high-risk speculative investment that could harm consumers if not carefully managed. In addition, governments are actively looking at ways to leverage blockchain technology and cryptoassets to improve their own processes and perhaps make their own governance more transparent. Or, in the case of Venezuela, as we've explored, and potentially other governments, blockchain technology can be leveraged to help the government exert more power over its citizens. It's very important to keep track of how regulators and governments in particular, are viewing this technology because they could have profound impacts on its development. Lastly, the most critical part of the blockchain ecosystem is you, the actual user, and the ultimate stakeholder in many of these systems. The fundamental idea underlying the idea of many of these cryptoassets we've spoken about and much of this blockchain technology concepts we've discussed is bringing self-sovereignty or bringing rights back to the individual user. Therefore, for this to actually work and for us to understand whether or not these experiments are actually productive, we need real people, you, to start using these things. Today, a lot of these products and services are still highly experimental and they're not that easy to use. This is a problem that's been discussed at length in the crypto ecosystem, and there is an increasing recognition that design and user behavior are really important fields to start focusing on. However, for us to understand how these things might work in the future, it's very important that they're actively used. Therefore, I would highly encourage you to try actually using some of these products, to try actually using some of these tools, and to provide real feedback as to whether or not they're useful. In a lot of cases, they may not yet be today, but in the future, it's impossible to develop these things to a point of maturity if there's no real feedback loop. Next, we'll discuss how you can get involved and stay up-to-date on all the interesting things that are happening in the crypto ecosystem. 9. How To Get Involved: We've made it. We are finally at the end of this class and hopefully you've learned something new and if not, hopefully you are at least a little bit entertained by some of the topics we discussed. Now that we're at the end of the course, let's talk about some of the ways you can get involved and how you can step today on all the exciting developments in the crypto ecosystem. First, I want to start by saying you don't need to be technology expert to make meaningful contributions to the crypto space. What's really interesting is that there are a number of different disciplines that you need to master to really be an expert on all things crypto. Some of these ideas of outlined here in this graphic that shows what the bitcoin analysts brain might contain are things like cryptography which is a branch of math, Information theory which is a branch of Computer Science and math, Computer Science itself but also economics, monetary history, network dynamics and ideas like game theory. There are a lot of disciplines that are starting to factor into how crypto ecosystems will develop and everyone has something to bring to the table. The best way to provide your talents to crypto ecosystem is participate in both in-person physical conversations through meetups, conferences and other local events but also on online forums where much of the chatter in the crypto ecosystem takes place. A number of different online forums exist including Twitter, which is leveraged extensively by the crypto community to disseminate news and share interesting findings. Medium where people tend to share a longer form articles particularly those focusing on research or new developments they've been working on and forums like Telegram, Reddit and other places where messaging and information can be exchanged in real time that's more time-based and more sensitive to recent events. If you're still in the learning phase and you wanna get more information, some of the concepts that were explained a fairly high level in this course. YouTube is actually a great resource to help you on your learning journey. We provided some links to YouTube videos we think are interesting in the resources section so check it out. Another great way to stamp to date in a simple easy way is to subscribe to some newsletters. There are a lot of great newsletters that cover a variety of different aspects of what's happening in the crypto ecosystem. These include things like technical developments, community developments, protocol developments, and other aspects that you may find interesting. We've listed some of these out and hopefully you'll subscribe to some of these newsletters and find them a useful way to stay up to date without having to do a lot of work. Lastly, if you're into Twitter which is a place where I spend a lot of time, I've created a Twitter list that's also linked in the resources section to some of the people that I find interesting to follow. But as always, I highly encourage you to do your own research and to look carefully the incentives the people who may be sharing information with you. After all, this is the combination of two very potent things, technology and money and that often means that people have a very specific stake in how things turn out. With that, I hope this course has provided you with some clarity on all the complexities, the jargons, some of the weird ideas that you hear about in the crypto and blockchain space. If anything is unclear or if you have any questions, I look forward to reading about it in the comments section of this class. Thanks so much for joining and I hope to see you on the next part of your crypto journey. 10. Explore More Classes on Skillshare: