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Libra displayed on a phone.

Investing in Libra: How to Buy Into Facebook’s Digital Currency in 2020

Libra app displayed on a phone.

One year ago, Facebook announced its new cryptocurrency, called Libra. We gave them one year to decentralize it. One year later, we have an update – as well as some happy financial results, for those of you who invested.

That Escalated Slowly

The most surprising thing is how slowly the Libra project has moved forward. Facebook’s slogan, of course, is “move fast and break things,” but that doesn’t work when it comes to reshaping the global economy, where the project has been mired in scrutiny from regulators around the world.

The escalated slowly

First, I should be clear that it’s not a Facebook project: it’s technically owned by the Libra Association, a separate organization set up in Switzerland , which now includes 27 members: mostly tech companies like Uber and Spotify, plus VC firms like Andreessen Horowitz and Union Square Ventures.

But it started at Facebook.

That’s why regulators have raked Facebook over the coals. As I pointed out a year ago, Facebook has over 2.5 billion users — a third of the planet — and introducing a new digital currency would make Facebook a global economic superpower overnight. (Now, that’s thinking big.)

TL;DR: Regulators have put the brakes on the project, scaring off original Libra partners like PayPal, Mastercard, and Visa. In response to these concerns, Libra has posted a new version of its white paper to address some of these concerns — we’ll call this .

Libra 2.0: How it Works

Imagine that you have a Libra “wallet” – like a bank account – that you set up through Facebook. You can “load it up” with your own national currency, then use it to buy products and services on Facebook—as well as many other partners, like Lyft or Shopify.

But you might choose to keep your Libra in the wallet. It’s easier to transfer to friends and family (like Venmo). It’s easier to transfer internationally (like sending an email). It hides all the complexity of exchange rates and transfer fees – it’s just one currency, Libra.

But you might keep your money in Libra for other reasons. Maybe you get a better savings rate than your bank can give you. Maybe it’s easier to take out loans. Maybe it’s just a better experience than your bank. (In fact, maybe the bank itself starts to look old-fashioned and out of touch.)

As it stands today, then, Libra 2.0 looks more like a digital payment system built on a blockchain platform. This makes it more like a competitor to PayPal, but built on blockchain (and as we all know, blockchain is better).

Over the last year, the Libra Association made a few important changes to the original whitepaper:

1) Stablecoins. In the new roadmap, Libra uses stablecoins tied to specific currencies (like a US dollar coin), in addition to the “basket” of currencies they used in their original proposal. Importantly, these stablecoins are backed by “real” assets: they will only mint a Libra USD if they have a dollar backing it up. Instead of a dollar sign, these will be written with the Libra logo and then the currency:

USD, EUR, GBP
Libra will become the “meta money.”

2) Increased compliance. How do you keep Libra from being used for money laundering? In plain English, you’ll be able to use Libra only by going through a “custodial wallet or exchange” (like a bitcoin bank), or a do-it-yourself “Unhosted Wallet” which will have some kind of automated KYC/AML built in. It will be hard to use this anonymously (which is an improvement over cash).

3) More tightly centralized. The original plan was to move Libra to a permissionless (i.e., open or decentralized) system within five years. Regulators said that a public blockchain would be too hard to track bad actors, so Libra has now abandoned those plans, and made it a private blockchain – with plans to vote more members into the private Libra Association at regular intervals.

In summary: Libra is becoming a kind of payment network, based on a private blockchain. It is backed by “real” currencies — they have money in the bank to back it up — but it will be far easier and cheaper to transfer money than today.

This is all a net positive, though it’s not decentralized, which is a big negative. Because without decentralization, who primarily benefits?

Facebook.

How to Invest in Libra: Invest in Facebook

You can’t buy Libra today, but you can buy Facebook stock. For those who bought Facebook stock (full disclosure: I did), here’s the performance over the last year:

Facebook stock performance

From $193 to $235: that’s an 18% increase in one year. In my view, it’s not too late to hop on the Libra bandwagon. In fact, the CoronaCrisis has only increased the need for speed in our financial system.

The big challenge is that Libra is still theoretical. Although they have a working prototype, and developers are running testnet transactions, no one is “using” Libra in a practical way. We don’t know how long that will be, but my bet is that once the financial dominoes start to fall, things will move quickly.

We need to upgrade our monetary systems. As the Fed prepares banks for the perfect economic storm that may be coming, there has never been a better time to upgrade our financial infrastructure. Depending on how bad things get, we ordinary investors may need to transfer money quickly and easily, anywhere in the world. We will want options.

I’m disappointed that it’s not decentralized, but there are always ways for prophets to profit. If you peer hard into the future, think about where things are going with Libra – and who’s likely to win at the end of this movie.

At the beginning, many people called the Libra project “Zuck Bucks,” as if it was Mark Zuckerberg’s personal money. But who do you trust to roll out a global digital currency more successfully: Mark and his team of Libra insiders, or the central banks?

P.S.: Be sure to check out our original guide, Facebook Coin: How to Invest in Libra, Facebook’s New Cryptocurrency.

The great reset

The Great Reset

“There is a change in mindset that’s taking place, a greater recognition that we can do better.” – President Barack Obama

“A crisis is a terrible thing to waste.” – Economist Paul Romer

In the midst of a boatload of bad news these few weeks, there was a huge sign of hope.

The World Economic Forum (think of them like the United Nations of money) launched a new campaign called “The Great Reset.” I encourage you to watch the 90-second video here.

In the accompanying webcast, heavy hitters like Prince Charles, the Secretary-General of the United Nations, and the CEO of Microsoft spoke about using this time in history to fundamentally change the world.

The Great Reset has three primary initiatives, which IMF Managing Director Kristalina Georgieva called “Greener, Smarter, Fairer.”

1) FAIRER: Making a market with more equitable outcomes. The richest 1% holds half the world’s wealth — and during the pandemic, the rich have only gotten richer. For our American readers, here’s an easy way to visualize it:

If USA land mass were divided like US wealth

This image is courtesy the Occupy Movement, which we should expect to have a great reawakening in the months to come (or something like it). The CoronaCrisis has widened the gulf between the haves and the have-nots, and the have-nots are feeling the pain.

The Great Reset will be an opportunity to better distribute the world’s wealth. Our goal is a “stakeholder economy,” where everyone feels they have a stake in the economy: that it fairly benefits everyone, not just a privileged few.

2) GREENER: Investing in sustainable infrastructure. With governments creating massive stimulus packages, we have a once-in-a-lifetime opportunity to direct these packages toward green initiatives.

For example, why should we bail out fossil fuel companies, when we could put that money into green energy instead? Why not pay unemployed workers to plant trees? Why not subsidize re-insulation of old buildings? Why not pay for solar production and invest heavily in new battery technology?

Instead of just throwing good money after bad (fossil fuels and legacy industries), we can throw good money at the good: investing in initiatives that will build the next generation of jobs and wealth — while making a meaningful impact on climate change.

3) SMARTER: We already see that technology companies are doing pretty well during the CoronaCrisis. The high-tech hubs (Silicon Valley, New York, Seattle — the “haves”) are going to emerge the big winners, while the older legacy cities (the “have-nots”) are going to increasingly feel the pain.

We must recognize that the old economy is not coming back. The new economy is about well-educated, tech-savvy workers — what we call “knowledge workers” or “creative workers” — who rapidly produce new ideas and use them to create new goods and services.

Therefore, we will need to completely rethink our education system. We will have to focus on bringing our kids up to speed with creative tools and digital software, to invest heavily in next-generation technology education. This is a generational change, planting trees for our children’s children.

We’ll also need to invest in “tech hubs” in every city that wants to survive, no matter where they’re located. This means developing a rich ecosystem of the “Three Es” — education, entrepreneurship, and environment — to help new and innovative ideas grow and flourish. (For a great example, see Charlotte, North Carolina.)

Estimated Active Hubs.
Africa also has the right idea: create a rich network of tech hubs.

It’s easy to be skeptical about these initiatives, to say “That’ll never happen.” But until recently, it was easy to dismiss the warnings of a global pandemic from people like Bill Gates. “Oh, that’ll never happen.” It was easy to dismiss the warnings of an economic breakdown from people like Ray Dalio and Richard Florida (who wrote the book on The Great Reset). “Oh, that’ll never happen.”

Guess what? It did.

Today, everyone is talking about the “Recovery,” but we’re talking about a “Reset.” The popular story is that we’re in the closing innings of this ballgame, but our story is that it’s still early innings.

For the economy, this matters a lot. Here’s why.

The Great Reset of the Economy

I spoke with a jeweler this week who has maintained a storefront shop for over 30 years. He told me he’s planning on closing down his storefront when his lease expires in a few months.

“Rent is my single biggest expense,” he told me. “I keep a storefront because it brings me foot traffic, which gets new customers into my store.

But I’m living in this shop most of the day. It’s my second home. Would you want 20 strangers a day walking into your home, without knowing who was sick?”

After he told me this, I drove through downtown Boston, where the National Guard was posted throughout the city, with Humvees reading MILITARY POLICE. Shop windows were boarded up, to protect against the possibility of looters.

National Guard
National Guard posted outside the Tesla store.
Crate and barrel store front with boarded up windows.
Why would a jeweler want to keep a storefront in an environment like this?

My jeweler friend is looking at his own “Great Reset” of going fully online, INVESTING part of his rent money into online marketing.

Now multiply this story times hundreds and thousands of small businesses across America, and even across the world. Picture boarded-up shop windows all over our major cities.

If this is our future — and a “hard reset” of the economy is coming — then what might this look like for blockchain investors?

The ultra-wealthy will move their money elsewhere. Like rats jumping from a sinking ship, they will try to quickly dump their unprofitable real estate ventures and get out of Main Street businesses, moving money into places (and countries) where they think they can get a better return.

Increasingly, they will move into assets that they perceive as safer (such as gold) or higher-growth alternatives (such as bitcoin). In both cases, you can see by the rising prices that this is already happening.

Six-month gold price

Six-month gold price (above) vs. Bitcoin price (below).
Charts courtesy APMEX and CoinMarketCap.

Bitcoin price

The bottom line for investors:

  • Don’t panic.
  • Consider our Blockchain Investors Portfolio. Consider investing a small amount into digital assets, without betting the farm.
  • Consider our Health and Wealth Portfolio. Long-term, the stock market is probably not going anywhere: especially if we focus on companies that provide real value during this time.

Stay focused. Stay calm. Stay healthy. That’s how we’ll build prosperity – and a better world.

That’s how we’ll make the #GreatReset.

John Hargrave is the bestselling author of BLOCKCHAIN FOR EVERYONE and a founding member of the Boston Blockchain Association.

David Vorick of Sia

Blockchain Project Profile: Sia

Can a Boston-based company give the big tech companies a run for their money (and future cryptocurrencies) in the file storage space? David Vorick, Co-founder of Boston-based Sia is confident public blockchains will disrupt the space. David recently appeared at the Nasdaq MarketSite for this episode of The Business of Blockchain with Jane King.

Cat in a brown paper bag.

SEC Regulation on Crypto Tokens, Explained With Cat Photos

Cat in a brown paper bag.

The great irony of the blockchain space is that we’re the decentralized community, yet the industry has been paralyzed by a centralized authority.

I’m talking, of course, about the U.S. Securities and Exchange Commission, which has been quiet on how it will regulate blockchain assets. This uncertainty has frozen innovation and created what we’ve called “crypto winter.”

The SEC’s long-awaited guidance on blockchain projects, the Framework for Digital Assets, is relatively short (just eleven pages), and written in plain English to make it user-friendly and accessible. In this post, I’ll make it even simpler.

There is some bad news and some good news. We’ll take them in that order.

The Bad News: We Already Knew All This

You can skip the first nine pages.

Over the past year, everyone in blockchain has become a securities expert, so everyone knows about the so-called Howey test, named after William Howey, who was sued by the SEC in 1946 and lost.

Row of orange trees.

Howey was a citrus magnate: he owned huge orange groves in Florida, as well as a resort hotel in the area where I’m guessing the guests drank a lot of orange juice. When guests checked into the hotel, they got a glass of OJ. They also got a pitch for the opportunity to invest in a chunk of Howey’s orange groves.

If you bought a “share” in his orange groves, Howey’s laborers would tend to the orange trees, pick the oranges, and sell the produce. Because of the skyrocketing price of oranges, they claimed, the land would become increasingly valuable—a great long-term investment.

On one hand, this seemed reasonable. People invest in real estate all the time, with the expectation that it will appreciate in value. On the other hand, something seemed fishy—the aggressive sales pitch, the promise of future profits, and the fact that they are serving us nothing but orange juice.

The SEC argued that this wasn’t a real estate investment, but something more like a stock investment. It developed what we now call the Howey test, which is not a test to see if your friend Howard is comfortable with a laid-back nickname.

The Howey test says that an “investment contract” exists if these conditions are met:

  • Investment of money: They bought the orange groves with real cash (U.S. dollars).
  • Common enterprise: The orange groves were managed under Howey’s company (i.e., a common enterprise).
  • You expect profits because of someone else’s work: Critically, the investors did not have to tend to the oranges themselves; Howey’s people did all the work.

It’s helpful to think of buying, say, Tesla stock. You pay real cash in Elon Musk’s company, and you hope the stock goes up in value because Musk’s army of robots is building his electric cars.

So the even simpler test of a blockchain token is just to ask, Are people thinking of this like a stock? Let’s say that someone launches a new project called OrangeChain, which will put all the world’s oranges on the blockchain. They raise money through a new blockchain-based token called OrangeCoin, and you buy $1000 of OrangeCoin, with the hopes that you’ll be able to sell it at a profit in a few months.

That falls under securities law—which simply means that if the founders and promoters of OrangeChain have not complied with those laws, they can be held legally liable. Probably not a great investment.

Now for the good news.

The Good News: The SEC Gave Us an Example

The SEC’s framework has eight pages of what you can’t do, but two pages of what you could (maybe, possibly, with many caveats) do.

Forbes magazine Bezos on the cover.

Let’s say that Amazon launches PrimeChain, which is a new blockchain available to Prime members. It creates a new blockchain-based token called PrimeCoin.

Think of PrimeCoin like reward points: for every dollar you spend on Amazon, you earn 10% in PrimeCoin. You can redeem PrimeCoin for real-world purchases—just like redeeming frequent flyer miles for a flight. Save up enough PrimeCoin, you can buy a new pair of Apple EarPods.

You can also use PrimeCoin at any Amazon-owned business, which means you can buy your groceries at Whole Foods using PrimeCoin (that’s a lot of PrimeCoin). You can also sell the PrimeCoin back to Amazon for cash—which is something airlines won’t let you do with frequent flyer miles.

“Big deal,” you say. “This is just rewards points. My local coffee shop does this.”

But these PrimeCoin are recorded on the blockchain. They are recorded on a decentralized ledger, shared by thousands or millions of computers around the world—not on Amazon’s central servers.

What Amazon has done, in this case, is minted its own money. It has created a virtual currency that is supported by a shared global network of computers. Amazon, the master of cloud computing, has moved its value to the cloud.

This is what I mean when I say the cat is out of the bag.

The Cat is Out of the Bag

What does that saying even mean? What kind of monster keeps a cat in a bag? They make cat crates, you know.

Cat in a black bag.

In my hypothetical example, Amazon now has PrimeCoin, its own money supply. True, it’s tied into the physical money supply (because Amazon still has to redeem it for dollars upon request). But Amazon will create a bunch of PrimeCoin benefits—just like Prime member benefits—and most people will just store and spend PrimeCoin instead of U.S. dollars.

In my example, any seller on Amazon can also accept payments in PrimeCoin. The SEC doesn’t want you transferring PrimeCoin—so no trading PrimeCoin on Poloniex—but Amazon will start selling PrimeCoin gift cards, and those will also function like cash. The Amazon credit card will also give you PrimeCoin benefits, so now you can earn PrimeCoin with any purchase, anywhere in the world.

Now Amazon has its own virtual currency, with a physical counterpart (gift cards), a payment system (Amazon credit cards)—all completely decentralized. This means it’s beyond the reach of any government to shut down. Amazon has just created its own economy to compete on a global scale with the dollar and the Euro.

It has also created a cottage industry of “miners” who keep the PrimeCoin network running. This means tremendous benefits for its Amazon Web Services cloud business (as many of them will run on AWS). Why will anyone want to donate their computer to the PrimeCoin network? Because they’re paid in PrimeCoin.

What Does the SEC Want From Us?

The SEC wants to protect investors.

US Securities and Exchange Comisson home page.

The problem with selling blockchain tokens as investment opportunities is what we call “information asymmetry,” which just means the sellers know things the buyers don’t. For example, if investors are buying Enron stock, thinking it’s a great deal, when inside the organization the executives are cooking the books to hide their enormous losses, that’s a problem.

The SEC did not mention that blockchain technology has the potential to remove information asymmetry, by ensuring that everyone has complete access to all the information. The nature of blockchain is an open and public ledger—far better than the private ledger, which can lead to Enron.

Information asymmetry

Let’s imagine a new company—I’ll call it TransparentCorp—that stores all its financial information on a public blockchain. All the revenues and expenses are stored on TransparentChain. You can buy a share in the company—just like stock—and receive a blockchain-based token, which I’ll call TransparentCoin.

Right away, this is a better model than our current stock market. Now if promoters are hyping up TransparentCoin, everyone has access to the books in real-time. Bad actors—like Enron’s auditors—can’t help the company hide poor financial results. It’s all out in the open.

Such a TransparentCoin would certainly be considered a security, since it passes the Howey test with flying colors. But it’s a much better model for investors. This is where I hope the SEC will focus its efforts next—in creating a new class of smart stocks that are recorded on the blockchain.

TL;DR

In brief, here are my personal takeaways from the SEC guidance:

  • If you’re buying a blockchain token and thinking of it like a stock, it probably will be treated like a stock—so be sure it’s being sold like a stock.
  • If you’re selling or promoting a blockchain token like a stock, be sure you’re following securities law.
  • A blockchain token that’s used as virtual currency or reward points is (maybe, kinda, sorta) OK—and this opens up many interesting opportunities.

The new framework is a baby step in the right direction. Let’s hope the SEC now takes the opportunity to embrace what blockchain can really do for investors.

(For more big, bold, blockchainy ideas, apply to become a member of the BBA).

Cryptocurrency regulation

How Should the SEC Regulate Crypto? Here’s An Idea

Cryptocurrency regulation

Blockchain was going to end world poverty! It was going to revolutionize investing! Blockchain would cure the common cold! It would get us to Mars! 

A year ago, do you remember how jazzed everyone was about blockchain?

I still hold that kind of optimism. Problem is, the conversation this year has been dominated by one question: how will blockchain assets be regulated?

Bear with me, even if you find this question boring (this won’t be). 

What we’re talking about is securities law, and how the U.S. Securities and Exchange Commission should regulate bitcoin, cryptocurrencies, and other blockchain assets. 

The SEC, meanwhile, has a difficult job. If they regulate too quickly, it could stifle innovation. The government took a light touch toward regulating the Internet in the early days, and that allowed a thousand flowers to bloom. Sometimes it’s better to “wait and see.”

The argument goes like this: when the SEC tells us how to think about blockchain assets, then the big institutional investors will come on board—and that will open up the floodgates of investment.

And so the industry waits, holding its breath. 

But isn’t it ironic that blockchain is the decentralized technology—the technology of the people—and we’re waiting on permission from a centralized government agency? Shouldn’t we be leading the SEC, not the other way around?

I recently hosted the Investor’s Stage at Blockchain Expo in Silicon Valley, and I had a terrific panel of blockchain investors and VCs. I asked them a question that flipped the script on this whole impasse.

The Question That Will Let Blockchain Move Forward

Here’s the question I asked: What is one meaningful change the SEC can make for blockchain investing?

Instead of being reactive to every scrap of gossip or hearsay from the SEC, this lets us be proactive in helping out this important government agency.

  • We are the experts. We understand blockchain far better than the SEC, so we are in a better position to provide advice.

  • It gives us a starting point for discussion. The point is not to get every idea approved, but to have good ideas on the table. 

  • It makes us think creatively. The industry has been paralyzed by a lack of good creative thinking. I know it’s out there!

Remember: the job of the SEC is to protect investors. How can they best do this with a decentralized technology that allows anyone to invest?

What are your ideas?

One Solution: Investor Certification

When I asked this question of my panel, Rob Nance of CityBlock Capital  had a terrific idea: why doesn’t the SEC create a kind of “certification” that requires investors to go through training?

It was Rob’s idea, but I’m running with it. Hear me out.

Today, most blockchain investments are limited to “accredited investors,” which means you make over $200,000, or you have a net worth of at least $1 million (your house doesn’t count). The argument goes that the rich can afford to make riskier investments—and besides, they know what they’re doing. 

There’s widespread agreement that this rule is arbitrary. If you make $190,000, you are incapable of managing money, but as soon as you hit $200,000, you are now imbued with magical investing powers?

It seems silly that investors have to pass the “accreditation” test to spend their own money, when anyone can walk into a casino and gamble away their life savings. You can literally “invest” all your money on scratch tickets at a gas station—no accreditation needed!

Imagine if the SEC created an investor training program that would allow investors to become “certified” or “licensed” to these more complicated investments. Think about a driver’s license, which is a rigorous way of ensuring the safety of everyone on the road.

Put another way, imagine that certification replaces accreditation. “Certified investors” instead of “accredited investors,” with certification open to all.

The model already exists: investment advisors, broker-dealers, and other financial industry professionals must first obtain financial securities licenses. Why can’t we have a license for the general public?

Call it investor certification (open to all).

This idea would greatly serve the public good:

  • Investor certification (open to all) would make the public more financially literate. 
  • Investor certification (open to all) would protect the public from investing scams, and help the public invest more wisely.
  • Investor certification (open to all) would help capital be deployed more efficiently into more sectors of the economy.

There’s even an SEC division, the Office of Investor Education and Advocacy, that could spearhead this initiative. And for our part, we’d be happy to help.

Wanted: More Ideas for the SEC

To summarize: Get rid of investor accreditation (available only to the rich), and create investor certification (available to all).

Why are we sitting on the sidelines? Let’s show some hustle. Let’s get ideas that the SEC can use to help the blockchain industry grow and thrive.

At the Boston Blockchain Association, we’re making things happen. To discuss more ideas with the smartest minds in blockchain, apply to become a member.

Why You Should Join the Boston Blockchain Association

Our Mission

Our goal at the Boston Blockchain Association (BBA) is to help bring the Boston blockchain ecosystem together. We believe the more connected Boston’s blockchain ecosystem becomes, the more opportunities will arise for cross pollination, synergy, and growth.

This, in our minds, is the path toward realizing our ultimate vision of establishing greater Boston as an international hub for blockchain innovation.

Whether you are part of a company, institution, university or protocol, whether you’re a seasoned entrepreneur looking to start something new, or a wantrepreneur looking to learn something new – we hope to provide you the support, connections, and resources you need to grow your business and reach your goals.

Still not convinced? Here are a few more reasons you/your organization should join the BBA:

  • Resources – We are working hard to compile a long list of Boston Blockchain resources (meetups, events, people, companies, projects, learning material and much more…), all of which will be fully available to BBA members.
  • Knowledge / Education – With some of the world’s top blockchain experts in our backyard, you’ll have an opportunity to learn from the very best. Stay tuned for some awesome events we have planned.
  • Partnerships – The distributed nature of blockchain as well as its endless variations and applications make developing and building strong relationships and partnerships ever more important. No one can do it alone. When you become a member, you will gain access to an exclusive membership database, as well as find plenty of networking opportunities to connect directly with professionals and companies who might be able to help you.
  • Marketing – Between our events, newsletter, blog, and additional channels, we will provide you with many opportunities to share your story and get your solution in front of the right people in our network – whether as a member or a sponsor.
  • Hiring – Tap into Greater Boston’s talent pool (rumor has it, some smart people live here…) – whether to find a co-founder or make your next hire. Looking for a job in blockchain? Join our network to talk directly to the source and potentially learn about openings before they are made public.

All that said, the value we bring to the table depends directly on the size of our network, so there are two ways you can get involved:

1. Apply for a membership.

We’ve recently released our Membership Benefits page. As a non-profit lead by volunteers, there are some costs we have to cover.

Membership annual rates are currently as follow:

  • Student – $25
  • Individual – $100
  • Company – $1,000

Rates may go up in early 2019, so hurry while the lower rates last.

2. Explore sponsorship opportunities.

Sponsor an event, our newsletter, or our blog for a chance to get your brand (and value prop) out there. For more info, fill out our Contact Form or send an email to: bostonblockchainassociation@gmail.com.

In Summary

It’s an ambitious goal, but we believe Boston has all the right pieces to become a global hub for blockchain innovation. So if you are local, interested in blockchain and read this far, you should join. Last but not least, if you’re interested in building blockchain-based solutions to problems, you should join.

2017 was the year of HODL. 2018 was… okay, let’s never speak of 2018 in blockchain again;)

Here’s to 2019 being the year of BUIDL – because that’s the blockchain really needs – more people building useful applications that solve real problems. Not hype, not speculation, not another $2B ICO…Real utility. Real value. Buidlt in Boston.

If you’re passionate about that, you’re already a part of the BBA.

You just need to become a member

Blockchain investors

Are We Worth a Billion Dollars Yet?

Blockchain investing

How much is a superpower worth?

How much would you pay to be able to fly, or to become invisible? Let’s say $200 million. You could easily make that $200 million back with a superpower. Shrink to the size of an ant, cure cancer, boom. $200 million, easy.

Now, how much would you pay for fivesuperpowers? A billion? (You could probably negotiate a lower rate for the five-pack.)

Blockchain assets—bitcoin, altcoins, and tokens—are a new investment class. It’s like the early days of the stock market, with tons of golden opportunities. But understanding how to navigate the world of blockchain investments is like possessing a superpower.

Over the last year, we’ve worked tirelessly to build a framework for blockchain investors—a way to think about these new altcoins and tokens, within the context of their IRA and 401(k). And in the process, we have acquired knowledge that is incredibly rare and valuable.

In building a framework for blockchain investors, here are five superpowers that we’ve acquired—and passed on to others. Call it a billion dollars’ worth of superpowers.

Superpower 1: Understanding How It Works

One year ago, we started a meetup for Boston blockchain investors. The first meeting, maybe a dozen people showed up. The next month it was a few dozen. The next month, we had to move to a bigger space. By March we had over a hundred investors.

The demand for investor education was insatiable. People wanted to know how this stuff works.

Blockchain investing

And in return for providing all this free education, we got something in return: information. We got to hear how investors made decisions, and what they were investing in. We learned their average blockchain investment ($11,000), and how much they had in non-blockchain holdings ($150,000).

By helping investors understand blockchain, we greatly accelerated our own knowledge. So much of my blockchain education has come from talking with other smart investors, thinking about their questions, and figuring it out together. And there’s still so much to learn!

Blockchain investing

Superpower 2: Qualitative Analysis

It became obvious that investors needed a framework to evaluate the thousands of tokens and altcoins that were flooding the market. How do you decide if a new blockchain project is worth your money?

We developed the Blockchain Investor Scorecard, an academically-published, peer-reviewed framework for evaluating new blockchain projects. Answer a few simple questions in five important categories, and it gives you a 1-5 star rating on whether to consider investing.

This provides a way for investors to compare wildly different blockchain projects. Whether it’s a supply chain project, a prediction market, or an energy token, you can use the Blockchain Investor Scorecard to compare “apples to apples.”

We built out a team of outstanding analysts and journalists, who use the Blockchain Investor Scorecard to rate and review new opportunities each week, serving up the best to our Pro Newsletter subscribers.

Our hope is the Blockchain Investor Scorecard becomes the industry standard. Feel free to use it and improve it: it’s open source.

Superpower 3: Quantitative Analysis

We needed better numbers.

When you’re considering investing in a stock, you have all kinds of metrics: Earnings Per Share, P/E Ratio, and so on.

Blockchain investors had one metric: price.

If bitcoin is trading at $4,000, is that overpriced or underpriced? Should it really be worth $1, or $1,000,000? Who knows?

When you’re only looking at price, it becomes a “hall of mirrors” where the only thing you can refer back to is price. It’s an infinite loop.

We developed new quantitative metrics for valuing blockchain investments, including Value Per User (which I wrote about last week), and others (that we’ve made available to our Pro Newsletter subscribers).

Blockchain investing

Our hope is these metrics become industry standards, just like stock valuation metrics. Use them and improve them: they’re also open source, for the good of the community.

Superpower 4: Portfolio Construction

We saw that many blockchain investors were in it to get rich quick. Our goal was to convert these “crypto bros.” into “blockchain pros” by helping them think long-term, like more sophisticated investors.

At the same time, we needed a way for ordinary investors—the 99% who’ve never heard of blockchain—to get on board. This is essential for this asset class to grow.

So we created our Blockchain Investor’s Manifesto, which outlined a philosophy of investing. It was based on “value investing”—the same philosophy that built Warren Buffett’s fortune—updated with blockchain.

Blockchain investing

We haven’t been able to print enough of these manifestos. We go through them by the suitcase. Investors are hungry for a sensible strategy.

We also began explaining how blockchain can be viewed within an overall investment portfolio. Just as you’d diversify your 401(k) with stocks and bonds, you can diversify your investments further by adding just a little bit of bitcoin (between 2-10%).

Blockchain investing

These are three sample portfolios that would have returned a whopping 81%, 326%, and 823% in just three years. What’s more, since bitcoin does not behave like stocks and bonds, these portfolios actually diversify risk.

Blockchain investing

We’ve outlined these portfolios in detail to Pro Newsletter subscribers, who have also acquired these superpowers.

Superpower 5: Changing the World

What will we do with all the wealth that’s being created? We have a once-in-a-lifetime opportunity to fundamentally reprogram some of our biggest human institutions with blockchain. This work is happening now:

Government: Boston startup Voatz is putting elections on the blockchain, so we all have transparency into our electoral process.

Investing: Blockchain is making investment opportunities open to everyone—not just the 1%—through  projects like our open-source Equity Token Project.

Law: Consensys-backed OpenLaw is mashing up smart contracts with legal contracts, greatly simplifying legal help, and making it more accessible.

Energy: Boston startup Swytch is making blockchain-based energy markets for solar power—helping us switch the entire world onto solar.

Poverty: By making it instant and free for people to send money overseas, projects like Boston’s Tunnel are opening the flow of capital to developing nations, and helping lift the world out of poverty

The Superpower Stack

We’ve developed these superpowers so that smart investors like you will also be able to acquire them—today,before the rest of the world has caught on. Not just one superpower, but all five: the superpower stack.

A future is coming when blockchain will be part of everyone’s portfolio. It’ll be offered through Fidelity, and you’ll add it to your 401(k). It’ll just be the way things are done. Together, we’ve developed the framework for how we’ll get there.

And we’ve done this in a year!

Imagine what we’ll do together in the next two to three years. It’s incredible to think about the wealth that will be created, and how we’ll use it to change the world.

When you look at it that way, a billion dollars seems like a bargain.

At the Boston Blockchain Association, we’re building the next generation of blockchain superheroes. Apply to become a member.

Coordinated attack

Proof of Selection: A Better Alternative to Proof of Work

Sun TzuAll battles are won BEFORE they are ever fought. – Sun Tzu

The biggest problem facing blockchain today is scalability.

Take CryptoKitties. When the blockchain-based collectable cats were introduced in October 2017, they were all the rage. Thousands of cats were created and sold, with some kitties fetching prices of over $100,000. CryptoKitties was built on the Ethereum network, which couldn’t handle the load. CryptoKitties crashed Ethereum.

Rule of thumb: whenever a blockchain application gets popular, the blockchain breaks.

This is due to the primitive state of consensus algorithms—the method that lets all the nodes on a blockchain network agree with each other. Each consensus algorithm has its own set of limitations and flaws:

Consensus AlgorithmUsed byLimitation/Flaw
Proof of WorkBitcoin, EthereumEnergy Consumption
Proof of StakeEOSUnbalanced/Inherent Inequality
TangleIOTACentralized Coordinator
SwirldsIn developmentProprietary, limits innovation
Delegated Proof of StakeLiskTrades decentralization for speed and scalability

We’ve been working with our client Cyberspec to develop Proof of Selection, a new consensus algorithm that is:

  • less resource-intensive than Proof of Work
  • more balanced than Proof of Stake
  • without a centralized coordinating process (e.g., Tangle Coordinator)
  • not proprietary (e.g., Swirlds)
  • fast and scalable without sacrificing centralization (e.g., DPOS)

In this post, we’ll:

  1. Show how Proof of Selection does not require mining, has equal block publishing rights that are not based on stake, and has no centralized coordinating processes.
  2. Outline a new digital ledger infrastructure based on Proof of Selection to achieve a more efficient method of decentralized currency, storage, data transactions, and research.
  3. Explain how to integrate Proof of Selection into existing digital ledger technologies that need better scaling or more decentralization.

This is how Proof of Selection will solve the blockchain scalability problem.

The Proof of Selection Story

Sun TzuWater adapts its course according to the terrain; in the same way, you should shape your victory around the enemy’s dispositions. – Sun Tzu

Officer Kennie Jenkins of the United States Navy had a problem. It was such a famous problem that it had a name: the Byzantine General’s Dilemma.

Imagine an army of generals are encircled around an ancient city. They need a way to coordinate the attack on the city, since a half-hearted attack will result in defeat. It’s ancient times, so communication is poor. There may also be traitors in their midst who are sending false messages.

Coordinated attack

The Byzantine General’s Dilemma is this: How can multiple generals agree on a plan of attack without the ability to reliably communicate with each other?

During a ten-year career with the United States Navy, Jenkins had earned a Master’s Degree in the field of cybersecurity, briefing personnel at the highest levels of the United States Military and Department of Defense. Ultimately this led to the founding of his own cybersecurity company, Cyberspec.

He saw the Byzantine General’s Dilemma was the same problem faced by blockchain: consensus mechanisms need a way to agree. Like the generals, communication between blockchain nodes is often poor, and traitors (in the form of hackers) may try to send false messages.

Applying his knowledge of military history, Jenkins understood that an imperfect plan that’s executed in a timely manner will be more effective than a perfect plan that is implemented too late; therefore, he immediately began implementing his vision for a fully-decentralized consensus algorithm that is resource efficient, fully transparent, and egalitarian.

He called this algorithm Proof of Selection.

How Proof of Selection Works

Sun TzuThe General must be possessed of wisdom, honesty, benevolence, courage, and discipline. – Sun Tzu

Cyberspec’s Proof of Selection algorithm works by developing consensus around “selecting” the next nodes to create a block in the blockchain. It’s like the Byzantine Generals coordinating a time to attack or retreat, as well as a method of detecting traitors in their midst.

It involves an agreement of:

  • who is eligible to be selected (the eligible node);
  • who is selected to build the next block (using the PseudoRF function).

Eligible nodeAn eligible node is a node that has registered their public key into the chain by a digital signature and is still considered active. Nodes that have registered (Rgx) can then be selected by the pseudo-random function, PseudoRF—like selecting a random general’s name out of a hat.

The PseudoRF will automatically select these node(s) to create the next block(s). This selection is determined by the previous block hash and block creation timestamp. Transactions are timestamped and monitored by the rest of the network; a block is valid only if the rest of the network agrees.

Along with eligible nodes, dead nodes (Dn) must be similarly identified. To register an eligible node, a simple function logging a node’s public key into the blockchain is used. To register a dead node, an invalid block or no response upon selection must occur. After an adjustable number of dead registrations occur, the node is considered dead and is removed from the selection process.

Block

Why Proof of Selection is Better

Sun TzuAttack at points that the enemy must scramble to defend. – Sun Tzu

Existing consensus algorithms have plenty of problems. Proof of Selection provides the solution.

Consensus AlgorithmLimitation/FlawProof of Selection Solution
Proof of WorkEnergy ConsumptionNo mining, no computer power imbalance
Proof of StakeUnbalanced/Inherent InequalityEqual Block Publishing Rights
TangleCentralized CoordinatorFully Decentralized
SwirldsProprietary, limits innovationOpen Source, no transaction fees
Delegated Proof of StakeTrades decentralization for speed and scalabilityFully decentralized/no stake

Proof of Work (POW) is flawed, because nodes with the most power or pooled power can control the blocks created, transactions logged, monetary rewards, and ultimately the core of the program. Controlling any of these areas can skew the currency in a way that serves the purpose of the computers with the most power.

Proof of Work also consumes vast amounts of power. Mining proponents reason that as a store of value, performing work is a good way to ensure that the resulting coins will always have value; however, that fact does not justify the power usage. Further, the digital age is all about efficiency. While there will always be a place for cryptocurrency mining, the future will likely witness an inevitable move from mining digital currencies to more efficient methods.

Proof of Stake is the most common alternative: staking resources to have the right to create a block or write to the ledger. While this can be effective, ensuring that the stakes are not applied unequally requires various methods to offset the threat of centralization. In general, they require using a value system or tokens to bet or invest on the valid blocks. Some implementations entirely remove mining, but in some cases, the weighted dynamic creates a volatile environment that is not ideal for an equally distributed system.

Tangle Coordinator​ (IOTA) is a consensus method that removes mining and integrates with a digital ledger technology called the Directed Acyclic Graph (DAG). However, there is a central coordinator who provides rudimentary functions to validate the new blocks at regular intervals. Tangle also requires some POW prior to accepting a new block.

The Swirlds​ (Hashgraph) methodology also removes mining and is used in conjunction with DAG, but the primary negative issue is that it is proprietary software and not open source, limiting its full technological review and potential for innovation. Further, participants not running nodes can influence consensus with their stake; essentially Swirlds uses a modified proof of stake methodology.

Delegated Proof of Stake (DPOS) is a technology that offers advantages in terms of speed and scalability, but at the expense of decentralization. DPOS requires a subset of nodes to be granted publishing powers. First, that subset of nodes results in less decentralization. For example, some technologies, such as EOS, only use around 20 delegate nodes for their entire network. Second, the nodes that are voting for these delegates are essentially paying assets to stake the delegates. This means that any organization could ensure delegate nodes remain in power with funding, which again, results in less decentralization.

Proponents of DPOS state that the small sacrifice in centralization is acceptable for the gains in scalability; however, that cost could prove to be extremely detrimental, and is therefore, difficult to quantify. For example, a typical DPOS technology could create the illusion of decentralization in that delegate nodes could be located all over the world; however, a single organization or country could be staking all of those nodes.

The New Digital Ledger

Sun TzuThe ultimate achievement is to defeat the enemy without coming to battle. Change the flag and standard of the captured chariots, and add them to your own squadron. – Sun Tzu

Proof of Selection makes possible a new type of Digital Ledger that:

  1. Uses the Proof of Selection algorithm.
  2. Eliminates the requirement for an internal currency for applications (e.g., ether/gas).
  3. Improves registration and tagging of transactions so that nodes can ignore blocks or data not slated for their needs.

For example, a ledger such as Ethereum creates a dynamic that allows miners to ignore the lowest paying applications, thus creating a natural bias for high-paying apps. With no natural bias, all transaction rewards using Proof of Selection are equal. As a result, the resulting incentives include:

  • Currency is issued at block creation (similar to bitcoin);
  • Currency can rise in value on crypto exchanges;
  • The application can attract more users at a lower cost;
  • Application owners can pay nodes to host their application;
  • Application owners retain the ability to have anyone else host the same decentralized application and data.

In order to take over a market with established players, blockchain projects using Proof of Selection do not need to directly confront the competition. In the same manner as a skilled general who can turn enemies into allies and utilize an enemy’s existing resources, developers are not limited to building new ledgers and attempting to establish them in the industry. They can build Proof of Selection into existing ledgers, or add its functionality on top of them.

Challenges and Solutions

Sun TzuA wise leader always considers both advantages and disadvantages equally – Sun Tzu

Although the potential of Proof of Selection is enormous, there are several challenges and issues that are still being researched. These include rewards, attacks, privacy, and Delegated Proof of Stake.

Sun TzuWho best understands the use of rewards and punishments? – Sun Tzu

The principle purpose of rewards is to promote nodes to stay online, send transactions, and process blocks. There is no competition mechanism built into Proof of Selection; if a node is selected, a reward is issued—one Sel will represent the reward for the creation of a block.

SelThe actual value of a Sel will be sorted by the market; however, the ratio between created blocks to active nodes could create an environment where nodes have limited natural incentive to be a part of the network.

In an attempt to ensure a built-in incentive for all network users, a configuration will be available to reward active nodes at certain intervals for nodes that have not been selected within a certain timeframe. The opposite configuration will also be available—to not issue rewards if the number of blocks created vastly outnumbers the active nodes.

Sun TzuIf you know yourself, and you know your opponent, you will be undefeated in 100 battles. – Sun Tzu

With any new consensus algorithms, the following potential attacks must be addressed: Double spending, forks, 51% attacks, Sybil attacks (fake nodes), selection fixing (specific to Proof of Selection). Proof of selection will:

  • handle double-spending by discarding invalid blocks
  • de-incentivize fake node creation
  • prevent a Sybil attack from lasting long enough to acquire a significant number of Sels

Sun TzuWhen you find the enemy’s agents spying on you, offer them bribes. – Sun Tzu

Concerning privacy, the Proof of Selection infrastructure will be open—though privacy does not necessarily have to occur at the infrastructure level. Proof of Selection addresses the problems associated with Mixers and Zero-Knowledge proofs by eliminating transaction fees, eliminating mining, and adding the ability to selectively process applications.

Sun TzuIn the conduct of war, the general receives his orders from the ruler; it is then the general’s job to marshal the forces available to him, put them into effective order, and build their encampment. After receiving his appointment as Commander, when the Commander is at the head of the army, he need not accept all of the ruler’s orders. – Sun Tzu

Proof of Selection aims to remove that centralization problem by eliminating the idea of stake, which is at the core of the DPOS centralization problem. Further, ensuring that every device can participate directly, and not via proxy, allows for a larger network that is critical to all trustless technologies.

Too Long; Didn’t Read

Sun TzuThe essence of military operations is speed. – Sun Tzu

Proof of Selection is a revolutionary consensus algorithm that improves upon the limitations of existing consensus algorithms. It removes mining requirements and promotes equal block publishing and transaction rights without any centralized coordinating processes or authority.

Proof of Selection is fast, with no time restrictions on block creation, and it is also scalable due to its ability to increase the number of selected nodes. The Proof of Selection consensus algorithm can potentially revolutionize digital ledgers and become the world standard for blockchain.

Download the Cyberspec Battle Plan here. For more great blockchain ideas, apply to become a member of the Boston Blockchain Association.

How to Value Bitcoin Using VPU (Value Per User)

Bitcoin Market Journal

Blockchains have network effects.

The classic example of network effects is Facebook: every person who gets on Facebook makes the network a little more valuable for every other person on Facebook.

As the number of users in a network grows, the more ridiculously valuable the network becomes. That’s why the most powerful companies in the world today are network companies: Facebook, Apple, Google.

The old-school “blue chip” companies don’t have the benefits of network effects. (When a new customer buys your toothpaste, it doesn’t make toothpaste more valuable for everyone else.)

Blockchain assets (like bitcoin) are essentially networks. The more people who use a blockchain asset (like bitcoin), the more valuable that blockchain becomes.

One way that analysts value network companies (like Facebook and Twitter) is by looking at Value Per User. We take their market cap, then divide by their number of Monthly Active Users.

Value per user
Data as of 11/20/18. Sources: Omnicore Group, Yahoo Finance

In plain English, Facebook has a price on your head. Although I believe you are a precious and irreplaceable human being, Facebook values you at about $175. Twitter values you at about $75.

Of the top social media networks, the Value Per User generally ranges from $25 to $250. These values have fluctuated over time, but they give us some guard rails. (We haven’t seen Facebook valued at $10,000 per user, or at $1 per user.)

With blockchain assets like bitcoin, we can also calculate Value Per User by taking Market Cap and dividing by number of Monthly Active Users. It looks like this:

Value per user
Data as of 11/20/18. Sources: Bitinfocharts, CoinMarketCap

Of the blockchains we can track, the Value Per User is typically $1,000 and $5,000 per user. This makes sense, as we would expect blockchain VPU to be higher than social media VPU, since blockchain users are much more valuable—they’re not just mindless ad-consuming machines, like on Facebook.

Here’s the best part: Blockchain Value Per User has stayed relatively consistent over the past year. Take a look at the “crypto mania” in November 2017 vs. the “crypto depression” in November 2018:

Value per user

In plain English: more people were actively using bitcoin a year ago, so the overall market value was much higher. Although prices have dropped, so have the number of monthly users, so the overall Value Per User has stayed in the $4500-5000 range.

This is good news. It means there is a rhyme and a reason, a method to the madness.

It also means the way to increase the value of blockchains is to get more people using them. That means making them faster, cheaper, and better. The blockchain is about people. People have to use them!

In summary, Value Per User can be used to value networks like Facebook (typically between $25-250 per user):

Value per user

It can also be used to value blockchain networks (typically between $1,000 and $5,000 per user):

Value per user

The caveat is that Value Per User depends on knowing Monthly Active Users, which is not available for all blockchain assets. Blockchains that have this level of transparency will have better valuation metrics, which means they will become more trusted, and thus more highly valued.

Value Per User will become an industry standard metric, because the blockchain is about users. To increase the value of your blockchain, increase the number of users.

That’s common sense. And now common sense has a formula to back it up.

At the Boston Blockchain Association, we’re helping companies build their blockchains, one user at a time. Apply to become a member.

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