Cache Flow Blog

3 Part Video Series

PART ONE: Laymen Intro to Bitcoin

What is money? Future of payments, store of value, unit of account? Bitcoin is a currency, protocol, and network. Decentralized ledger work for any asset?!

Bitcoin has poor branding, hard to understand as very complex and inherently paradoxical.

How do you know if something is real? What is money? In 9 words: medium of exchange, store of value, unit of account. Are loonies and greenbacks real? What about CLOs or leveraged loans?

Paul Graham evokes a primordial ooze-type analogy, suggests that we assume tech expands spreading itself out like a fractal stain.

Everything on the fringe presents an interesting problem. Get yourself to the leading edge of a technology. Live in the future.

When you get there, ideas that seem uncannily prescient to others, seem obvious to you. These might not be great businesses, but they are things that ought to exist.

Some personal examples of powerful things that should exist but do not:

• self driving cars
• github for dna
• frictionless digital banking (bitcoin and sidechains)

Common bond: extreme risk-reward asymmetry.

Bitcoin Simplified:

Bitcoin is a currency, and a network, and a protocol (set of standards and conventions). Bitcoin suffers from poor branding, as the money, technology and invention all share the same name! When combined with the inherent complexity of bitcoin (BTC) is easy to mischaracterize.

Why is it special? The blockchain. It solves a 40 year old computer science problem by creating a distributed public ledger of all transactions.

Transactions are authorized with by the network, once it has verified the valid public:private key pairs have been submitted. A key is nothing more than a random string of letters and numbers; one a public key or 'wallet', the other your private key or 'signature'.

The idea of keeping private keys in a wallet with a public address sounds like that money is vulnerable! Again, poor branding, the wallet hold the thing of most value, your private keys, and the wallet address, while public, is as harmless to share as your license plate number.

License plate number analogy helps to iron out the identity/privacy situation with bitcoin: it is anonymous, but public. HUH? I know. Anon meaning your wallet doesn't explicitly have your name on it (wallet is identified by whatever numbers/letters are assigned to it, like the plates).

Money is already digital, stored as 0 and 1 in various servers for mega-banks, money transmitters and investors. Central control -- intermediation -- by bankers, lawyers and others is very costly. Fees for VISA or Mastercard range from 150-300bps.

Bitcoin eliminates/reduces the need for costly payment infrastructure required for AML and fraud.

Common objections to legitimacy of bitcoin as an asset class.

Punks in basement, mysterious: white paper, open source software.

Paradox of decentralization: don't need 3rd parties, make money by being 3rd party... WTF

Good pipe vs. bad pipe -- SMTP (email) protocol vs SMS (text message)

EARLY ADOPTERS are financially and/or technically savvy. Educated and wealthy. Why?

How is it created? Doesn't matter. How is money created? What is money? For simplicity, just assume that it exists and will exist for some time. See this excellent video How Bitcoin Works in 5 Minutes (Technical) , read up on proof of work vs. proof of state.

Real World Examples:

ChangeTip, CoinKite, Brawker, many more! See links below

PART THREE: Blockchain - Side chain and alt coins

Nitty Gritty: Sidechains and Altcoins

Credit to Pantera Capital, these are my notes from reading, contains some quotes and paraphrasing here.

Subtle difference between sidechains and altcoins: sidechain units of account are do NOT depend on intrinsic valuation. Rather, they can be thought of as =“bitcoins-by-extension” (they extend as a side chain from some particular coin.

In this case, BTC side chains are very popular, but they are NOT considered altcoins, which are their own algo. This largely due to bitcoin making up over 90% of all cryptocurrency market cap.

Bitcoin merge mined sidechain, the units of account derived from that sidechain, instead of, can only be valued in terms of bitcoins.

-- side chain "unit of account" is BTC

-- casino analogy (chips are the altcoin)

-- miners can merge-mine, where reward is bitcoin-redeemable chips from casino

-- chips can be cashed out (hence, BTC-redeemable)

SIDECHAINS & ALTCOINS:

Innovations on top of BTC: benefits of open source protocol!

"Altcoins that fail to match the security of the Bitcoin network will ultimately perish or be reformed as BTC sidechains.

Pantera: (emphasis added)

We believe that, with the adoption of sidechains, altcoin market share of all digital currencies will decrease to NEAR ZERO!"

"Altcoins currently represent only 6% of all digital currencies’ market cap."

Pump and Dump: Sidechains less fraud prone

In a sidechain world, fraud that has been typically associated with weak altcoin networks and centralized altcoin exchanges will be largely reduced.

BTC sidechains will adopt the improvements that altcoin innovations bring to light. Moreover, sidechains better promote these features as a testing, development, and

deployment environment that has a negligible risk of fraud compared today’s altcoin ecosystem.

Bitcoin popular with derivatives traders

"The meeting on Bitcoin derivatives was the single largest audience for a U.S. Commodity Futures Trading Commission event historically. One of the largest audiences ever for a .gov webcast with high Chinese and European viewership"

CFTC head: "Bitcoin protocol or something like it is very, very likely here to stay."

Bank of England: Simple Matter of Supply and Command

FT Bottom as Contrarian Indicator:

Sept 19th 2014 "We’re going to stick our neck out and call this the end of Bitcoin." Ooops. BTC price up ~5% since (as of Nov 12th) ftalphaville.ft.com/tag/bitcoinmania/

Why they so negative?

Bitcoin currency, according to the FT and BoE "in its CURRENT fixed supply form would expose the economy to significant deflationary risk if it was ever to be widely adopted by the public" BoE:

the inability of the money supply to vary in response to demand would likely cause welfare-destroying volatility in prices and real activity.

What about pegged sidechains? It appears to me that bitcoin is in fact NOT at all supply constrained, as it is extensible through branches 'sidechains'. Thus, bitcoin can be viewed as infinitely divisible.

"On the level of assets, we no longer have a simple “one chain, one asset” maxim; individual chains may support arbitrarily many assets, even ones that did not exist when the chain was first created. www.blockstream.com/sidechains.pdf

Furthermore, BoE negative view shaped by fact that large scale bitcoin adoption "would seriously limit [BoE] power to manage systemic risk". Well, duh, that's the point!

BoE does acknowledge that a distributed ledger holds tremendous value:

Perhaps "the existing infrastructure of the financial system to be gradually replaced by a variety of distributed systems"

ie. Coloured coins: using digital currencies as tokens for other assets.

"This development could allow any type of financial asset, for example shares in a company, to be recorded on a distributed ledger. Distributed ledger technology could also be applied to physical assets where no centralised register exists, such as gold or silver."

It's a distributed asset management infrastructure that leverages the Bitcoin network, allowing individuals and companies to issue various asset classes”

Colour coins should be called corporate coins!

Business and organizations will have to issue their own bitcoin gift cards (or bitcoin currency as token, or sidechain). BOOM $1 Billion idea ;)