Saturday, May 27, 2017

Blockchain 1.0

NOTE: Previously, I wrote an introductory article on cryptocurrencies and other applications of blockchain, The article can be found here: The article below builds on this by explaining the actual “nuts and bolts” of the bitcoin blockchain. Our goal is to have the reader walk away with a better, more technical understanding of the bitcoin blockchain. If the reader is not familiar with terms and concepts such as: blockchain, cryptocurrencies, distributed ledger, bitcoin mining, etc. It may be best to read the introductory article first or obtain the basic knowledge from other sources.)

Many people have a rough idea of how the bitcoin blockchain works, but few understand precisely how it works. This article intends to explain the blockchain in a clear, simple, and visual way.

Part 1 The Hash and the Blockchain [1]

Before we talk about blockchain, let’s talk about a hash [2]. The hash is the foundation of blockchain technology.

A hash is simply a product of a hash function [3]. So what’s a hash function? It is a computer program that takes in data of any size, length, format, type, and returns an output with a specific format, length, size, type, etc. This output is known as a hash.

For example, let’s say you have a hash function that returns a 3-digit value; input like “adfoadihfopahfeoapfjda” will return a 3-digit value (“391”); input such as “&(*!&$@” will return a 3-digit value (“126”), and an input such as “   ” will still return a 3-digit value (“792”). The point is, no matter the randomness of the input, the output is always one specific thing.

Note that hash functions are not unique, there are many different versions! The one bitcoin uses is called the SHA-256 Function and it returns hashes that are 256 digits-long hexadecimals [4]) The picture at right is a visual explanation of what this means:

FIG 1. Above

On the left side are random input (data) differing in size, shape, category, etc. On the right side is a specifically formatted output, or hash, in this case, it is a five-digit code.

Hashes are unique, one hash represents one specific input. A hash never represents two or more inputs. This makes a hash an effective identifier of a specific input. The SHA-256 hash function used by bitcoin generates hashes of 256 bits. Each bit represents either a 0 or a 1. You can form 2^256 different hashes, more than enough to identify every single thing in the universe!

Hashes are asymmetrical, there is no “inverse hash function”. In other words, you can apply the hash formula on some input to return some output. But there is no reverse formula that lets you reverse the output and get back to the original input. The only way to do it would be to use brute force - applying millions/billions of different inputs and see which one returns the correct output.

Hashes are random, if you change the input by a tiny, tiny, little bit, the output will be completely different. This means that you can not tell whether two inputs are correlated based on their similarity in hash. You’ll see why this is a favorable characteristic in a second.

So how is all this tied to the blockchain and transactions?

Say we have a transaction described as this: “Jane gave Allen 57.2 bitcoins on September 29, 2017 at 4:35 pm.” If we apply a hash function to it, we get a specifically formatted hash, such as something like this: “123910912” (random example, the actual bitcoin hash is a much longer).

This random number “123910912” is a hash: it uniquely identifies this specific transaction statement. It cannot be traced back to the transaction statement, and it cannot be inferred by knowing what a similar hashes stand for (there is absolutely no correlation between “123910912” and “123910913”. For example, “123910913”could stand for “Helen received 25 bitcoins through mining on January 6, 2002 at 1:12 am”).

Now things start getting cool:

Hash functions doesn’t have to be 1-input-to-1-output. It can be 2-input-to-1-output or 3-input-to-1-output. In other words, hash functions can take in multiple inputs and still generate 1 output.
Hashes and hashes can combine to form new hashes. Again, a picture will help clearly illustrate the point.

Fig 2. above

It’s the same idea as in Fig. 1, except this time, previous hashes are the inputs.

This is “blending the hashes.” What exactly does “blending the hashes” do? Take hash123: 83513 from the picture as an example.

First, it is a unique identifier of the three-input-combination. (the ball, the ball with a mark, and the square), it is the proof of existence of these three pieces of data.

Second, if all you see is the hash123: 83513, there’s no way for you to figure out what the inputs are.
And third, hash123: 83513 is not inferable. 83514, 83515, or 83516 does not tell you anything about 83513.

As shown, you can keep on combining and combining hashes until you get to one final hash. This final hash is cryptographically secure and it’s a proof that all the data went into it exists. The visual outline of this process is known as the Merkle Tree [5], the ultimate, single hash is known as the Merkle Root [6]. (the picture illustrates a 2 branch Merkle Tree, but it could have up to as many branches as needed).

This is how transactions are recorded in a block. Take, say 100 transaction statements, hash them into 100 unique, uninterpretable, un-patterned code, combine them down to 50, then 25, then 13…7…4…2…and finally down to 1; that 1 hash is a proof that ALL 100 transactions took place, and is infinitely close to being 100% secure!

To understand the important role that hashes play in blockchain, imagine…
  • Q. What happens if one hash represents two transactions or two bundles of transactions?
  • A. For example: What if transaction statement: “Jane gave Allen 57.2 bitcoins on September 29, 2017 at 4:35 pm.”, and transaction statement: “Helen received 25 bitcoins through mining on January 6, 2002 at 1:12 am” both are identified by hash: “123910912”? The system breaks down.
  • Q. What happens if you can trace back to the transaction from the hash?
  • A. For example: by applying some formula to “123910912”and conclude “Jane gave Allen 57.2 bitcoins on September 29, 2017 at 4:35 pm.” You have no privacy, and the information might be used to cause harm.
  • Q. What happens if there was a pattern to the hashes?
  • A. For example, knowing what “123910912” is gives you some idea of what “123910911” and “123910913” are? You can pretty much infer a whole bunch of things with one piece of knowledge, which is undesirable.
This is how privacy and integrity of the blockchain can be maintained at once.

Part 2 The miners and the blockchain

A miner creates hashes that represent whole blocks and attaches them to the blockchain (we’ll refer to these hashes as “complete-hashes”). The first miner that successfully attaches the next complete-hash wins a prize of some number of bitcoins. The process repeats until all bitcoins have been mined (21 million).

There are three components that make up the complete-hash. The Merkle root we just described, representing all pending transactions generated by the network after the consolidation of the previous block, the hash of the previous block, and the nonce. We define this term below.

[ In the bitcoin network, a transaction is considered valid if that transaction has been authorized by the transferrer through his or her digital signature.

Because of the way blocks are setup (All transactions come down to one hash), there is no way for you to validate the past transactions by flipping through the old blocks-because you can’t reverse the hashes of those blocks! So, instead, you “wax” them together, creating self-evident proof. Here’s what I mean in a picture

Fig 3. (Click on picture to enlarge).

The mere existence of the most current block is the proof that all the transactions before it are valid, since you cannot get here without this being the case. Notice that we made a very important assumption: WE ASSUME THAT ALL “CURRENT” TRANSACTIONS WERE VALID IN THE FIRST PLACE.  How do you know that? This leads to the discussion of the last component: the nonce. ] 

NOTE: (what I said in the brackets [] could be wrong, due to my misunderstanding. I would love some feedback on this.)

We need to discuss two things before we get to the nonce: 
  1. The consensus issue and 
  2. How to commit fraud.
The consensus issue 

Blockchains exist as files on a network of computers connected via the internet or another network protocol. For blockchain to work, every computer on the network needs to have an exact copy of the newest blockchain. When one computer announces an updated version of the blockchain, this “work” is publicized and all the other computers on the network verify this “work”. 

The newest, most recent blockchain needs to be consistent- all transactions must make sense. This insure that it is impossible to have some extra bitcoins on someone’s account that can’t be traced back to being mined. The newest blockchain also needs to be accepted by the majority of the computers online (51% of the network participants). After consensus is reached, the newest version of blockchain is accepted by all computers. 

When offline computers come online, they’ll compare the copy of the blockchain they hold with the newest copy on the network. If the newest copy is longer and consistent, they’ll automatically update their copy up to that version. 


Blockchain network computers only verify that updated transactions are consistent. Most types of fraud are denied because they cause inconsistencies. Note that computers fall short of detecting fraud that is consistent with the transactions (you’ll see what I mean in a bit). If a hacker commits this type of fraud, and becomes the first one to announce a fraudulent and consistent update, other computers will accept his work as valid. Once the consensus reach 51% of all participants, the fraud is permanently in the record and unsolvable. 
Let’s talk about how fraud is committed. Imagine you are a malicious, greedy hacker (just for a while). You want to cheat the system. There are three ways you can cheat:  
  1. Create some bitcoins out of nowhere; 
  2. Steal some bitcoins from…say your friend Bob, and 
  3. Purchase something from Bob with bitcoins, and after receiving that something, create a fake transaction that reverses the initial transfer of bitcoins. 
Option 1 will be immediately denied with option 1. It is impossible to add unauthorized bitcoins to the system, because the record proves that those bitcoins never existed in anyone’s account, and aren’t officially mined. Same with option 2. You can’t just go in pull out some bitcoins from Bob’s account without his authorization (through his digital signature, and hacking a digital signature incredibly hard and impractical). 

As for option 3, you can’t wait too long. Once those transactions are consolidated into the blockchain, you’re back in the ‘option 2’ situation. So, your only option is to reverse the transactions before they get incorporated into the blockchain. What you want to do then, is create a fake reversal transaction, include it in the Merkle root, and be the first one to complete the hash. Other computers will check your hash, make sure it is consistent, and accept all those transactions as valid. 

Now you might not be the first one to complete the hash, since many other computers are competing with you. But, based on today’s computer processing power, there is a significant chance that you’ll be successful. And nothing stops you from keep trying.

Enter the nonce….

Remember the randomness property of a hash? It states that by changing the input a tiny tiny bit, the output hash becomes completely different.  A nonce is just a number generated by the computer. Since the final hash is the product of a hash function that takes in: 1. the Merkle root, 2. the previous hash, and 3. the nonce. By changing the nonce a little bit, say from 1 to 2, you end up with a totally different result. 

Now, here’s the thing: you can force the result to be a certain way, or satisfy certain criteria, before it can be attached onto the blockchain. 

For example, you can require the size of the output hash to be below a certain threshold value. By doing this, you are essentially forcing the computer to do a lot of computational work, as it must try many nonces until it is able to find one that satisfies the criteria. 

Now what’s the point of this? The answer is that it make it exceptionally, exceptionally hard for hackers to commit the type of fraud described in 3. above (known as transaction-consistent fraud). It becomes  impractical. 

One important build-in mechanism of the blockchain algorithm is that the more people participating in the activity of extending the blockchain/fighting over the rewarded bitcoins, or so-called mining, the harder the hash function mathematical problem becomes. 

The average time to add a new block onto the existing blockchain doesn’t change (for bitcoin, it’s 10 minutes), but the probability that any particular participant solving out the puzzle diminishes. So, the more people involved, the more unlikely that a hacker will be able fraud the system. As of right now, it is practically impossible to the system.

Besides that, hackers today face another huge challenge: the group known as the “mining experts”.” These people that have the most powerful mining equipment on the network-huge processors that take up a room, and specifically designed to mine bitcoins. The probability that experts mine bitcoin is much higher now than the probability that a regular person will be a miner. Of course, a hacker can become a mining expert, but he’ll soon find that mining equipment costs much more than he can recover from reversing  transactions.

Fig. 4 (Click on picture to enlarge).


Here’s a side issue I want to bring up: it is possible for two or more computers to simultaneously solve out the mathematical hash function puzzle, broadcasting two or more versions of the newest blockchain. In this circumstance, all the computers are going to receive all the versions of the blockchain but in a different chronological order. Under this circumstance, blockchain network computers work on whichever one it receives first, and put the other one aside. The tie is broken when one of the versions gets updated before all other versions (either it’s the one currently working on or not); All the computers then unify on this version and abandon all the rest. 


Blockchain: a digital ledger in which transactions are recorded chronologically and made available publicly or to a network.

Hash/Hash Function: A hash function is any mathematical rule that can be used to map data of arbitrary size to data of fixed size. The values returned by a hash function are called hash values, hash codes, digests, or simply hashes.

Hexadecimal: In mathematics and computing, hexadecimal (also base 16, or hex) is a positional numeral system with a radix, or base, of 16. It uses sixteen distinct symbols, most often the symbols 0–9 to represent values zero to nine, and A, B, C, D, E, F (or alternatively a, b, c, d, e, f) to represent values ten to fifteen.

Merkle Tree: a tree in which every non-leaf node is labelled with the hash of the labels or values.

Merkle Root: the hash of all the hashes of all the transactions in the block.

Nonce: an arbitrary number that may only be used once.

Tuesday, May 23, 2017

2017 Fiscal Summit by Henry Zhang, Impact Investing Intern, University of Toronto

The US is in major trouble, this being the gigantic amount of debt it has issued. The debt burden is getting bigger by the second and shows no sign of stopping.

For those that aren’t sure what this means, it means less public spending in the future, more inflation, and a large scale economic crisis ahead.

Major trouble attracts major attention, so on May 23rd, 2017, the well known Peter G. Peterson Foundation hosted the 2017 Fiscal Summit, with prominent speakers like Senator John McCain, Senator Mark Warner, House Democratic Leader Nancy Pelosi (and many others) all convening to discuss the national debt, the current political landscape, and implications of the debt for the nation's future.

The key message from the conference is this: nothing can be done and nothing will be done unless the Republicans and the Democrats work together. Right now, there’s little hope for that.

Bipartisanship is an unknown land at this point, and very, very far away, since each party sees the other as the major threat to the nation's well being. In Congress, there is a lot of quarreling going in and nothing coming out. Whatever the Democrats propose, Republicans oppose. The problem is further complicated by tension between the new White House and the Congress. When the White House tries to propose legislation to the Congress, it is met by fierce opposition and disapproval. Healthcare reform is a good example. Tax reform is another.

Even with Republicans controlling the White House, the Senate, and the House of Representatives, problems aren’t solved and in fact the situation is made worse. And remember, this is not the right time to do nothing. The national debt is at a dangerously high level and it keeps on rising. Interest charges are growing at an alarming rate and eating away a major chunk of tax revenue. The result: public spending’s are getting squeezed by interest payments.

Things need to be done right now, even at the cost of some pain-there are no painless solutions at this point: either you cut spending, increase taxes, or print more money. Each has its adverse effects on parts or all of society. However, it would be less painful to fix the problem right now than to fix the problem later by "kicking the can down the road."

The longer the wait, the harder the fix.

Another complication is the Trump/Russia investigation, made ever more difficult by the firing of FBI director James Comey. During one of the sessions, Senator Mark Warner gave a firm stance on the issue, he will relentlessly pursue the investigation until things are made clear. (Just moments ago, news of the Senator issuing a new request for documents from Michael Flynn came out.)

A tough, tough issue.

Edited by William Michael Cunningham

Sunday, May 21, 2017

Too Late for Bitcoin?

On April 17, 2017, we made the following suggestion:
"Get some Bitcoins. Now! Why? Our economic forecasting models (the same ones that predicted Trump's win, btw) show an extended period of instability coming, and soon. Should things really go south, bitcoin will be one of the few transaction tools you can depend on. (You can thank me later..just don't say we didn't warn you and give you a way out that we both could benefit from...but I digress...) If you don't know what Bitcoin is, this may help: 'Bitcoin is a new kind of money that can be sent from one person to another without the need for a trusted third party such as a bank or other financial institution; it is the first global, decentralized currency. One of the most important elements of Bitcoin is the blockchain, which tracks who owns what, similar to how a bank tracks assets. What sets the Bitcoin blockchain apart from a bank's ledger is that it is distributed, meaning anyone can view it. Since Bitcoin is open, no company, country, or third party is in control of it, and anyone can participate.' "

Here is another summary of bitcoin written by one of our former interns.
Our advice at the time? "Open an account. Buy $100 in Bitcoin. Hold for now." See: Had you done so, your holding (not investment....we don't think bitcoin is suitable as an investment. It is for transaction purposes. It doesn't hurt, of course, that it has gone up....) would have gone from $1,203 to $2,032, as the chart below shows.
Many have asked if there is still time to participate. My answer is....stop being greedy. The rally was a byproduct of the political instability we predicted. (We note that CNBC recently followed our lead with a story one month after our forecast that "Bitcoin jumps to fresh record near $1,900 amid increased political risk.")
As long as there is the kind of extreme political instability we have experienced recently, the price of bitcoin will probably increase.

Thursday, May 18, 2017

The K(NO)W Identity Conference by Bo Wang, Impact Investing Intern and student at American University

From the past to the present, people always ask "Who are we?" Today, in a technological era, we have to ask ourselves: "What is my identity?" How does identification relate to our lives?

To help address these issues, on May 15th, One World Identity held The K(NO)W Identity Conference, a platform for participants to connect with identity industry leaders. There were 200 speakers, and more than 300 companies in attendance at this conference. This is a moment for people in the identity industry to learn from other experts. In addition, each session delivered ideas about how the identity industry relate to business, finance, security, government regulation, and so on. However, speakers pursued a neutral position and to sought to simply communicate ideas related to identity across different industries.

From eighteen (18) first day sessions, I attended three related to government, privacy, technology/implementation.

The first session I attended focused on using and managing big data. With all of the technical innovations in effect nowadays, how can we use (big) data that has been commercialized? The speakers focused on three issues: 1.) why do we collect the data? 2.) After we collect the data, how can we get to what is the essential knowledge, and 3.) what is the benefit of collecting the data.

The second session I attended was called The Business of Identity. We used to think of identity as a factor in access to resources; however, this session asked, why is identity starting to be a business in and of itself. Session members discussed digital identity and value it creates. In addition, they discussed control of personal data, and reducing the cost of sharing or securing sensitive information. Finally, they discussed simplifying and strengthening authentication.

The third session mainly talked about the international regulation of identification in the financial services field, and focused on key differences and global trends. One of many topic they discussed concerned global weather identification as a factor in global integration or disintegration. The final discussion concerned recent actions by the Monetary Authority of Singapore related to blockchain, cybersecurity, and government regulation.

Of course, this is a good way to discuss the future of identify, to grow your person network, and to meet and connect with identity industry business leaders.


Wednesday, May 17, 2017

Identity and Blockchain by Henry Zhang, Impact Investing Intern, University of Toronto

With the breakout in the price of bitcoin (from $1177 on March 16 to $1832 on May 16) and the rise of blockchain technology, people now have a “blockchain” view on the future of society. Just about every industry has to deal with internet data and the inherit the risks - data integrity, data transparency, and/or third party inefficiency. This means they can all use blockchain technology and the distributed ledger technology to mitigate or eliminate some or all of the these risks.

One industry which has recently gotten a lot of attention is the identity management industry. Fortunately, since I am in Washington DC for the summer, I had an opportunity to attend the 2017 K(NO)W Identity “intellectual fest” and hear what experts in the identity management field have to say about the issue.

Admittedly, this was a hard conversation to follow. Half of the time they were throwing out jargon I did not understand and the other half of the time they did not provide clear, concise answers to questions. They were all over the place. Out of this messiness, I was able to extract one piece of information that all of the experts agree on: blockchain is not the right solution for current problems of the identity management industry. Blockchain, after all, was designed to solve the problem of double spending, not to solve identity management issues.

But the broader concept of the distributed ledger does suggest many new and better ways of doing things related to identity. One good example (mentioned by one of the experts) is pure peer to peer interaction without the facilitation of a third party (such as Facebook or Twitter). This can be accomplished using a straight forward identification and authentication process via an automated system, similar to that of smart contracts.

My personal thoughts

While I am still learning about the identity management field, based on my current understanding of blockchain, I think blockchain can be applied to the identity management industry.

Blockchain provides a solution to the privacy issue (encryption, hash function), and removes a central authority from personal identification data. The technology can also improve the efficiency and accuracy of a given registration process.

Of course, the exact process for reaching any of these goals is still up for debate. This is the real question, and that’s probably why the "experts" weren’t so excited about it. 

Monday, May 15, 2017

Edward Snowden on Identity

In what must be considered a successful and interesting approach, the KNOW Identity Conference focused on identity related issues and identity related investment opportunities.

The first speaker was Edward Snowden, appearing via Skype from an undisclosed location. Mr. Snowden made a number of interesting comments.

He noted the government’s primary role in the provision of authenticated documents relating to identity. Indeed, supplying “identity” is one of the core functions of a modern government. Mr. Snowden suggested that governments focus on enabling people to interact with one another, secure in the knowledge of true identity. This needs to be facilitated both locally and globally, that is, you need to communicate securely (secure with respect to knowing the identity of the other person) over both great distances and/or over a shop counter.

As a way of facilitating this thinking, Mr. Snowden noted that one of the core ways to enhance identity is to have governments ask the question when focusing on identity data, “what do we really need?” Mr., Snowden suggests that citizens demand governments acknowledge that identity data will definitely be misused. The question then becomes what governments do under that eventuality. In other words, citizens need to ask governments what they (governments) will do when (not if) that data misuse happens?

As part of this focus, a recognition that people rarely need precise data to validate identity is helpful. In other words, to cash a check, you don’t need to know my blood pressure, height (to the centimeter), or exact weight (to the ounce). You may need approximations of this data, but you do not need exact numbers. The implication is that we should only use role or transaction specific and appropriate data. This data requirement changes with the nature (age, size, geographic location of the parties, time) of the transaction the identity data is (or will be) used for.

Mr. Snowden ended with more comments of the nature of the identity challenges faced in the modern age. He pointed out that dumb terrorists tend to be weeded out/captured quickly.

All in all, an engaging and thought provoking discussion. 

Friday, May 12, 2017

Summary of bitcoin and its underlying technology-blockchain, by Henry Zhang, Impact Investing Intern. University of Toronto.


Everyone’s probably heard of “bitcoin,” but many only have the vaguest idea about it and little understand the underlying technology. Even fewer realize the true impact this technology may have on the future.
Bitcoin is a cryptocurrency. A cryptocurrency is a digital program or asset designed to work like currency. It seeks to have the following properties: a store of value, a unit of account, and a medium of exchange  Bitcoin is the most popular cryptocurrency of the seven hundred out there. Other major cryptocurrencies are Ethereum, Ripple, and Litecoin.

Cryptocurrencies work via a system of paired-public, private keys - randomly generated numbers. Each user in the cryptocurrency network has a unique pair of public and private keys. The public key is a string of numbers available to everybody on the network. They are used for encryption. The private key is only available to an individual. It is used for decryption of the paired public key. The bitcoin transfer mechanism works as in the following example: user A wants to give user B 100 bitcoins. Those 100 bitcoins initially have user A’s public key “tagged on” to it, indicating that they belong to user A. Through the transfer command, User B’s public key replaces user A’s public key. (note: every coin in the system is tagged with a user’s public key, since every coin is owned by someone. The actual transfer is validated by user A’s private key and signature. All user B has to do is decrypt the code, using his/her own private key, to receive the bitcoins.


Bitcoin, along with all other cryptocurrencies, rely on an innovative technology known as blockchain. While blockchain is an application of TCP/IP internet technology, it has the potential to be as big as the internet itself.

To understand blockchain and truly appreciate its potential, let’s first talk about the double spending problem with digital currency. With physical money, if you want to spend a hundred dollars but only have fifty, unless you want to go to jail (rob a bank or a person, etc.), you cannot create fifty dollars out of thin air. Only a central bank has the right to create money. This is how you are held accountable-when you only have fifty dollars in physical money, the max you can spend is fifty dollars and not a penny more.

But digital money you can literally create out of thin air, because no one holds you accountable. The double spending problem is precisely what blockchain prevents, and does so without the need for a central authority or central bank.

A blockchain is a constantly updated, complete and full record of transactions, it is, by essence, a full ledger. Think of it as a big Excel spreadsheet. Each row has a column that contains a security code (hash) validating that the row is legitimate. When one page gets filled up, it is considered a "block," and another "block" is started in a new tab. What’s beautiful about this is that the validity of the transactions is certified not by a central authority such as a bank, but instead, by the “consensus” of blockchain computer network nodes. A node is a device connected to the blockchain network, usually a computer or a terminal. Every node on the blockchain network has a copy of the entire blockchain, or record of transactions. This is the same copy of the blockchain that everybody has.

When a user on the blockchain network tries to modify the blockchain in a way that is fraudulent, his/her request will be denied because his/her copy of the blockchain will not match everybody else’s. In fact, what’s recorded in the blockchain is analogous to words carved onto the stone: it is nearly impossible to change the historical records (further discussion on this topic in the next section). It is this mechanism that means everybody is in charge of the ledger but nobody is in charge of it all at once. This preserves accountability and, in the end, qualifies bitcoin and other cryptocurrencies as acceptable money.

Bitcoin Mining

But that is not the whole story to the bitcoin network. The accountability is further enhanced by what are known as bitcoin miners. Think of bitcoin as a gold mine. The way bitcoins are created is no different from the way gold is extracted from the ground - workers mine it.

Fiat currency is government established money that is valid by law. Bitcoin, unlike fiat currency, is not issued by a central authority. No single entity is in charge of creating bitcoins. Instead, individuals have an incentive to “mine” it out of a “pool” of unpredictability. Just like a gold miner’s shovel does not know if it will strike gold with each and every use, a bitcoin miner does not know with certainty that they will receive bitcoins for each and every effort. It is only by the constant application of effort that one can receive coins.

Blockchain mining

Miners are block creators that constantly update the blockchain with new records of transactions.  In order to ensure the validity of the blockchain, miners compete to create what is known as a hash. A hash is the outcome of a block that is being modified using a specific mathematical formula - the hashcash “Proof of Work” function.

Technically speaking, the blockchain isn’t a full layout of all the blocks but a chain of hashes. A hash has some interesting properties. It is easy to go from a block to hash through the formula, but practically impossible the other way around. It is a one way street. This has the benefit of also preserving the historical record of the blockchain, since it is hard to even figure out the records of transactions. Another interesting property of the hash is that it is unique. The slightest change in a block will change the hash completely.

Now in order to create a hash, merely having the block itself is inefficient (the average block takes approximately 10 minutes to create), two additional ingredients are needed: 1.) information regarding the previous hash, and 2.) a computationally complex math problem (Proof of Work function). The former is what keeps everything in sync, and the latter is what keeps supply in control. When a hash is successfully produced and attached to the blockchain, it is “mined”.

Bitcoin Mining (again)

The miner gets a reward of a certain number of bitcoins. The problem is that computers nowadays can easily complete the first two steps: it is estimated that all bitcoins could be mined in ten minutes if it was that simple (the maximum amount of bitcoins that can be mined is 21 million). The complex math problem that needs to be solved prohibits this from happening.

To solve this problem, massive computational power and time is required. This way, the miner’s earns a reward only if he or she is lucky enough to be the first one to complete the next hash. This requires time, special equipment, and electricity. The whole reason for all of this is to make sure the blockchain stays intact, since miners are constantly, unintentionally making sure that no one is committing fraud.

As mentioned before, there is a limit to the number of bitcoins that can be mined (21 million). As more and more people join the mining business, the complexity of the proof of work mathematical problem grows and it becomes harder and harder to solve. Not only is the reward reduced, but there are fewer bitcoins in total to be mined. This is all controlled by an algorithm that was set at the very beginning of the bitcoin blockchain process.

Industry structure and the current situation

Though still in its early stages, blockchain technology is already being applied in different fields- identity and content management, social and browsers etc., beyond cryptocurrency. Currently, block chain has flourished in the following markets directly or indirectly related to cryptocurrencies:
  • Wallet & Money services-these companies primarily develop software to store and secure cryptocurrencies
  • Exchanges & Cryptocurrency Trading-these companies that build exchanges and trading platforms for cryptocurrencies
  • Merchant Services-companies that primarily develop cryptocurrency and blockchain solutions for merchants and sellers
  • Cryptocurrency Mining-companies that build hardware and software that help mining cryptocurrencies
Here are other areas where blockchain has been applied:
  • P2P Market places and P2P lending-Peer-to-Peer market platforms where users can exchange goods directly without an intermediary
  • Enterprise services and Currencies-Companies that primarily develop blockchain operating systems for various enterprise usages
  • Social and Browsers-Companies that primarily build secured web browsers
  • Storage, Security & Regulatory-Storage companies that primarily store data with blockchain-secured technology
My thoughts

I went through the basics of blockchain and it's most widely used and known application: bitcoin and cryptocurrencies. Though I feel I’ve dissected the underlying mechanism and principles of the bitcoin blockchain down to a pretty fine level (not completely, more work needs to be done in order to fully understand how the bitcoin blockchain operates), analysis is needed on the risk side of things-such as current and potential problems with the technology, government regulation, and other internal or external weaknesses and threats. Also, the industry and the current market situation need further and finer analysis to answer questions like:
  • who are the dominant players in each market, 
  • what are the potential applications of blockchain besides the ones that have been listed, 
  • what are the market caps of the different cryptocurrencies and blockchain itself. 
Even better would be to include an analysis of the commodity side of bitcoin:
  • what are the factors that are propelling the rapid rise in the price of bitcoin, 
  • what actually effects the price of bitcoin, and 
  • what is the future of bitcoin.
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Sunday, May 7, 2017

Sale of the US Election

As we noted on June 11, 2016, "our initial 2016 Election Fully Adjusted Return Forecast indicates that Donald J. Trump will win the election for the Presidency of the United States" (see: "Why Trump Will Win" )
Having given on November 9, 2016 one explanation for Trump's win (, we continue to get interesting comments from persons claiming to have additional insight. I found one comment particularly interesting and thought I would share it.
“I enjoyed your analysis, but I think it leaves out a few factors.
Goldman Sachs acted as a broker for the sale of the US election. It’s why their people fill so many key positions. By applying the same type of computer programs used in high frequency trading, Goldman was able to manipulate actual vote totals. Given their knowledge of this type of trading, they identified a number of highly skilled Russian computer programmers. They presented them with an impossibility and a challenge: stealing the US presidential election by manipulating vote totals is widely considered impossible. So, how can I do exactly that?
These programmer like nothing better than a challenge presented as an impossibility (and I should know). Money is not an issue (they were, after all, bankrolled by Goldman, who put together an offering for the sale of the US election, basically, and got financing for this specific project from the wealthiest people on the planet – Theil, Mercer, Ellison, Trump, etc.).
Goldman simply brokered the deal. They brought the players together and gave them a way to get this done.
Others provided the labor and resources needed. Firms like Palantir and Cambridge Analytica, (owned by the very right wing Robert Mercer and whose motto is ‘we use data to change audience behavior’) provided data and analytics used to implement the manipulation and vote change effort. Theil and others have shown a willingness to use their platforms in service to these types of efforts. Ellison bought the firm at the center of the DDOS attack, (see: where planted server side software allowed you to manipulate vote totals.
You described many of the key steps correctly. The DDOS attack and the use of Russian top level domains was critical to that phase of the project. One you have entry to the computer servers used to compile US votes, you need to be very smart about which votes you change. This is where firms like Cambridge Analytica come in. In addition to actually changing votes, you need to have a plausible public rationale for the outcome. This, as you noted, is where Fox News played a role.
One of the things that is interesting is that this vote manipulation software and process is still in place, ready for 2017 and 2018. Results in recent elections (Georgia (US), France) may prove this.”
Again, I don’t know if I believe all of this, but it is an interesting theory.

Monday, May 1, 2017

Sir Richard Branson at the Post by Brendan Cody, Impact Investing Intern and GWU student

Richard Branson owns one of the British Virgin Islands, but, on Friday April 28th, concern about climate change brought him out of his tropical paradise to Washington.

In advance of attending the climate march on Saturday April 29, the Virgin CEO sat down with Jonathan Capehart of the Washington Post for a wide ranging discussion.

Before answering Capehart’s first question, he untied the reporter’s neck tie and tossed it away, displaying his patented eccentricity and disdain for formality. Branson had an unconventional upbringing and while he never received a university education, he “learned through meeting fascinating people and through amazing experiences.”

Branson has innovative ideas to improve the world and prevent the potentially debilitating effects of  climate change. Along with other billionaires, he created a monetary prize for anyone who can create a way to remove carbon from the atmosphere.

He also suggested that coal is not coming back in the United States, but that coal mining regions can be converted to clean energy centers. "People who used to mine coal could now lay solar panels and of roofs and and help to build wind energy plants." Clean jobs in West Virginia, Pennsylvania and Kentucky would help these devastated climates while also improving the climate. (This is similar to the Energy Efficient MBS investment CIR developed in 2006.)

While Jonathan Capehart asked some very good questions and is a respected journalist, he arguably could have facilitated a more compelling and captivating discussion with a character like Branson.  I would have asked about the business strategy of Virgin and the future of disruptors in continuing to push innovation. Additionally, I would have liked to hear Branson address the question of whether the next generation of disrupters will come from established companies (Amazon, Apple, Virgin) expanding into new sectors or from new startups that will challenge the established order. Capehart spent several minutes on Branson’s personal relationship with the Obamas, which, although interesting, used time poorly: a brief discussion of their shared policy initiatives would have sufficed.

Branson is cautiously optimistic about the future and contends that, with some exceptions, the world is improving. Conflicts are at historic lows and human rights advances are seen across the world. Branson is optimistic regarding his own future as well and stated that at 65, he hopes to live for at least another 30 years.

When asked about his legacy, he suggested it is much too early for such a question since he is still creating a lasting impact on the world.