What Problems Does Bitcoin Solve? - Crowdsourcing Week

Are Bitcoin miners processing Bitcoin transactions or solving complex math problems?

So I am a bit confused on what Bitcoin mining actually is. I've heard that mining Bitcoin is essentially solving complex math problems which reward the "miner" with Bitcoins. I've also heard Bitcoin mining is the act of processing Bitcoin transactions which make up the blocks in the blockchain.
So if you're mining Bitcoin are you actually processing the transactions? How does mining work on crypto coins that have little to no transactions? How can the miners still receive regular block rewards for mining if there's not enough transactions to fill a block?
submitted by mroth7684 to Bitcoin [link] [comments]

Are Bitcoin miners processing Bitcoin transactions or solving complex math problems? /r/Bitcoin

Are Bitcoin miners processing Bitcoin transactions or solving complex math problems? /Bitcoin submitted by HiIAMCaptainObvious to BitcoinAll [link] [comments]

Technical: Taproot: Why Activate?

This is a follow-up on https://old.reddit.com/Bitcoin/comments/hqzp14/technical_the_path_to_taproot_activation/
Taproot! Everybody wants it!! But... you might ask yourself: sure, everybody else wants it, but why would I, sovereign Bitcoin HODLer, want it? Surely I can be better than everybody else because I swapped XXX fiat for Bitcoin unlike all those nocoiners?
And it is important for you to know the reasons why you, o sovereign Bitcoiner, would want Taproot activated. After all, your nodes (or the nodes your wallets use, which if you are SPV, you hopefully can pester to your wallet vendoimplementor about) need to be upgraded in order for Taproot activation to actually succeed instead of becoming a hot sticky mess.
First, let's consider some principles of Bitcoin.
I'm sure most of us here would agree that the above are very important principles of Bitcoin and that these are principles we would not be willing to remove. If anything, we would want those principles strengthened (especially the last one, financial privacy, which current Bitcoin is only sporadically strong with: you can get privacy, it just requires effort to do so).
So, how does Taproot affect those principles?

Taproot and Your /Coins

Most HODLers probably HODL their coins in singlesig addresses. Sadly, switching to Taproot would do very little for you (it gives a mild discount at spend time, at the cost of a mild increase in fee at receive time (paid by whoever sends to you, so if it's a self-send from a P2PKH or bech32 address, you pay for this); mostly a wash).
(technical details: a Taproot output is 1 version byte + 32 byte public key, while a P2WPKH (bech32 singlesig) output is 1 version byte + 20 byte public key hash, so the Taproot output spends 12 bytes more; spending from a P2WPKH requires revealing a 32-byte public key later, which is not needed with Taproot, and Taproot signatures are about 9 bytes smaller than P2WPKH signatures, but the 32 bytes plus 9 bytes is divided by 4 because of the witness discount, so it saves about 11 bytes; mostly a wash, it increases blockweight by about 1 virtual byte, 4 weight for each Taproot-output-input, compared to P2WPKH-output-input).
However, as your HODLings grow in value, you might start wondering if multisignature k-of-n setups might be better for the security of your savings. And it is in multisignature that Taproot starts to give benefits!
Taproot switches to using Schnorr signing scheme. Schnorr makes key aggregation -- constructing a single public key from multiple public keys -- almost as trivial as adding numbers together. "Almost" because it involves some fairly advanced math instead of simple boring number adding, but hey when was the last time you added up your grocery list prices by hand huh?
With current P2SH and P2WSH multisignature schemes, if you have a 2-of-3 setup, then to spend, you need to provide two different signatures from two different public keys. With Taproot, you can create, using special moon math, a single public key that represents your 2-of-3 setup. Then you just put two of your devices together, have them communicate to each other (this can be done airgapped, in theory, by sending QR codes: the software to do this is not even being built yet, but that's because Taproot hasn't activated yet!), and they will make a single signature to authorize any spend from your 2-of-3 address. That's 73 witness bytes -- 18.25 virtual bytes -- of signatures you save!
And if you decide that your current setup with 1-of-1 P2PKH / P2WPKH addresses is just fine as-is: well, that's the whole point of a softfork: backwards-compatibility; you can receive from Taproot users just fine, and once your wallet is updated for Taproot-sending support, you can send to Taproot users just fine as well!
(P2WPKH and P2WSH -- SegWit v0 -- addresses start with bc1q; Taproot -- SegWit v1 --- addresses start with bc1p, in case you wanted to know the difference; in bech32 q is 0, p is 1)
Now how about HODLers who keep all, or some, of their coins on custodial services? Well, any custodial service worth its salt would be doing at least 2-of-3, or probably something even bigger, like 11-of-15. So your custodial service, if it switched to using Taproot internally, could save a lot more (imagine an 11-of-15 getting reduced from 11 signatures to just 1!), which --- we can only hope! --- should translate to lower fees and better customer service from your custodial service!
So I think we can say, very accurately, that the Bitcoin principle --- that YOU are in control of your money --- can only be helped by Taproot (if you are doing multisignature), and, because P2PKH and P2WPKH remain validly-usable addresses in a Taproot future, will not be harmed by Taproot. Its benefit to this principle might be small (it mostly only benefits multisignature users) but since it has no drawbacks with this (i.e. singlesig users can continue to use P2WPKH and P2PKH still) this is still a nice, tidy win!
(even singlesig users get a minor benefit, in that multisig users will now reduce their blockchain space footprint, so that fees can be kept low for everybody; so for example even if you have your single set of private keys engraved on titanium plates sealed in an airtight box stored in a safe buried in a desert protected by angry nomads riding giant sandworms because you're the frickin' Kwisatz Haderach, you still gain some benefit from Taproot)
And here's the important part: if P2PKH/P2WPKH is working perfectly fine with you and you decide to never use Taproot yourself, Taproot will not affect you detrimentally. First do no harm!

Taproot and Your Contracts

No one is an island, no one lives alone. Give and you shall receive. You know: by trading with other people, you can gain expertise in some obscure little necessity of the world (and greatly increase your productivity in that little field), and then trade the products of your expertise for necessities other people have created, all of you thereby gaining gains from trade.
So, contracts, which are basically enforceable agreements that facilitate trading with people who you do not personally know and therefore might not trust.
Let's start with a simple example. You want to buy some gewgaws from somebody. But you don't know them personally. The seller wants the money, you want their gewgaws, but because of the lack of trust (you don't know them!! what if they're scammers??) neither of you can benefit from gains from trade.
However, suppose both of you know of some entity that both of you trust. That entity can act as a trusted escrow. The entity provides you security: this enables the trade, allowing both of you to get gains from trade.
In Bitcoin-land, this can be implemented as a 2-of-3 multisignature. The three signatories in the multisgnature would be you, the gewgaw seller, and the escrow. You put the payment for the gewgaws into this 2-of-3 multisignature address.
Now, suppose it turns out neither of you are scammers (whaaaat!). You receive the gewgaws just fine and you're willing to pay up for them. Then you and the gewgaw seller just sign a transaction --- you and the gewgaw seller are 2, sufficient to trigger the 2-of-3 --- that spends from the 2-of-3 address to a singlesig the gewgaw seller wants (or whatever address the gewgaw seller wants).
But suppose some problem arises. The seller gave you gawgews instead of gewgaws. Or you decided to keep the gewgaws but not sign the transaction to release the funds to the seller. In either case, the escrow is notified, and if it can sign with you to refund the funds back to you (if the seller was a scammer) or it can sign with the seller to forward the funds to the seller (if you were a scammer).
Taproot helps with this: like mentioned above, it allows multisignature setups to produce only one signature, reducing blockchain space usage, and thus making contracts --- which require multiple people, by definition, you don't make contracts with yourself --- is made cheaper (which we hope enables more of these setups to happen for more gains from trade for everyone, also, moon and lambos).
(technology-wise, it's easier to make an n-of-n than a k-of-n, making a k-of-n would require a complex setup involving a long ritual with many communication rounds between the n participants, but an n-of-n can be done trivially with some moon math. You can, however, make what is effectively a 2-of-3 by using a three-branch SCRIPT: either 2-of-2 of you and seller, OR 2-of-2 of you and escrow, OR 2-of-2 of escrow and seller. Fortunately, Taproot adds a facility to embed a SCRIPT inside a public key, so you can have a 2-of-2 Taprooted address (between you and seller) with a SCRIPT branch that can instead be spent with 2-of-2 (you + escrow) OR 2-of-2 (seller + escrow), which implements the three-branched SCRIPT above. If neither of you are scammers (hopefully the common case) then you both sign using your keys and never have to contact the escrow, since you are just using the escrow public key without coordinating with them (because n-of-n is trivial but k-of-n requires setup with communication rounds), so in the "best case" where both of you are honest traders, you also get a privacy boost, in that the escrow never learns you have been trading on gewgaws, I mean ewww, gawgews are much better than gewgaws and therefore I now judge you for being a gewgaw enthusiast, you filthy gewgawer).

Taproot and Your Contracts, Part 2: Cryptographic Boogaloo

Now suppose you want to buy some data instead of things. For example, maybe you have some closed-source software in trial mode installed, and want to pay the developer for the full version. You want to pay for an activation code.
This can be done, today, by using an HTLC. The developer tells you the hash of the activation code. You pay to an HTLC, paying out to the developer if it reveals the preimage (the activation code), or refunding the money back to you after a pre-agreed timeout. If the developer claims the funds, it has to reveal the preimage, which is the activation code, and you can now activate your software. If the developer does not claim the funds by the timeout, you get refunded.
And you can do that, with HTLCs, today.
Of course, HTLCs do have problems:
Fortunately, with Schnorr (which is enabled by Taproot), we can now use the Scriptless Script constuction by Andrew Poelstra. This Scriptless Script allows a new construction, the PTLC or Pointlocked Timelocked Contract. Instead of hashes and preimages, just replace "hash" with "point" and "preimage" with "scalar".
Or as you might know them: "point" is really "public key" and "scalar" is really a "private key". What a PTLC does is that, given a particular public key, the pointlocked branch can be spent only if the spender reveals the private key of the given public key to you.
Another nice thing with PTLCs is that they are deniable. What appears onchain is just a single 2-of-2 signature between you and the developemanufacturer. It's like a magic trick. This signature has no special watermarks, it's a perfectly normal signature (the pledge). However, from this signature, plus some datta given to you by the developemanufacturer (known as the adaptor signature) you can derive the private key of a particular public key you both agree on (the turn). Anyone scraping the blockchain will just see signatures that look just like every other signature, and as long as nobody manages to hack you and get a copy of the adaptor signature or the private key, they cannot get the private key behind the public key (point) that the pointlocked branch needs (the prestige).
(Just to be clear, the public key you are getting the private key from, is distinct from the public key that the developemanufacturer will use for its funds. The activation key is different from the developer's onchain Bitcoin key, and it is the activation key whose private key you will be learning, not the developer's/manufacturer's onchain Bitcoin key).
So:
Taproot lets PTLCs exist onchain because they enable Schnorr, which is a requirement of PTLCs / Scriptless Script.
(technology-wise, take note that Scriptless Script works only for the "pointlocked" branch of the contract; you need normal Script, or a pre-signed nLockTimed transaction, for the "timelocked" branch. Since Taproot can embed a script, you can have the Taproot pubkey be a 2-of-2 to implement the Scriptless Script "pointlocked" branch, then have a hidden script that lets you recover the funds with an OP_CHECKLOCKTIMEVERIFY after the timeout if the seller does not claim the funds.)

Quantum Quibbles!

Now if you were really paying attention, you might have noticed this parenthetical:
(technical details: a Taproot output is 1 version byte + 32 byte public key, while a P2WPKH (bech32 singlesig) output is 1 version byte + 20 byte public key hash...)
So wait, Taproot uses raw 32-byte public keys, and not public key hashes? Isn't that more quantum-vulnerable??
Well, in theory yes. In practice, they probably are not.
It's not that hashes can be broken by quantum computes --- they're still not. Instead, you have to look at how you spend from a P2WPKH/P2PKH pay-to-public-key-hash.
When you spend from a P2PKH / P2WPKH, you have to reveal the public key. Then Bitcoin hashes it and checks if this matches with the public-key-hash, and only then actually validates the signature for that public key.
So an unconfirmed transaction, floating in the mempools of nodes globally, will show, in plain sight for everyone to see, your public key.
(public keys should be public, that's why they're called public keys, LOL)
And if quantum computers are fast enough to be of concern, then they are probably fast enough that, in the several minutes to several hours from broadcast to confirmation, they have already cracked the public key that is openly broadcast with your transaction. The owner of the quantum computer can now replace your unconfirmed transaction with one that pays the funds to itself. Even if you did not opt-in RBF, miners are still incentivized to support RBF on RBF-disabled transactions.
So the extra hash is not as significant a protection against quantum computers as you might think. Instead, the extra hash-and-compare needed is just extra validation effort.
Further, if you have ever, in the past, spent from the address, then there exists already a transaction indelibly stored on the blockchain, openly displaying the public key from which quantum computers can derive the private key. So those are still vulnerable to quantum computers.
For the most part, the cryptographers behind Taproot (and Bitcoin Core) are of the opinion that quantum computers capable of cracking Bitcoin pubkeys are unlikely to appear within a decade or two.
So:
For now, the homomorphic and linear properties of elliptic curve cryptography provide a lot of benefits --- particularly the linearity property is what enables Scriptless Script and simple multisignature (i.e. multisignatures that are just 1 signature onchain). So it might be a good idea to take advantage of them now while we are still fairly safe against quantum computers. It seems likely that quantum-safe signature schemes are nonlinear (thus losing these advantages).

Summary

I Wanna Be The Taprooter!

So, do you want to help activate Taproot? Here's what you, mister sovereign Bitcoin HODLer, can do!

But I Hate Taproot!!

That's fine!

Discussions About Taproot Activation

submitted by almkglor to Bitcoin [link] [comments]

How to work out cost basis

So I am struggling to get my head around calculating my cost basis for my crypto after a lot of confusing trades. My situation is complicated, but I can simplify my problem with the following example :
Jerry buys 1 Btc for 100, a few weeks later buys another for 200.
Jerry has 2 bitcoins, wants to store in a wallet.
2 weeks later price goes up and Jerry wants to sell 0.75 for 300 and keep the rest in his wallet incase it goes up.
The problem arises is which bitcoin did he sell? From the 100 bitcoin or the 200 bitcoin?
How would you determine which bitcoin was the one that entered the exchange to be sold?
This problem applies to me in a more complex way, I have bought in small increments over the years and I have traded different amounts for different crypto currency and traded back into bitcoin.
Am I missing something super simple here? My maths is not too great but I can understand complex problems with simple problems to guide me.
submitted by Carabouua to CryptoTax [link] [comments]

Reverse Chance Me: Indian-American Male

Demographics: male, upper middle class, Asian Indian, heterosexual and cisgender, Long Island, New York, high school class of 2021
Intended Major(s): Mathematics
ACT/SAT/SAT II/PSAT: 35 (35E, 36M, 34R, 36S), 1570 (800 math, 770 english, 23/24 essay), 800 math2, 800 chem, 800 physics, 1500 (760 math, 740 english; hopefully i get national merit since I made the cut off)
UW/W GPA and Rank: 4.0UW, 103.96% weighted so far (out of 100%, APs weighted 1.08 and Honors 1.06; I'm not sure what it is out of 5 but everything's been an A or higher so far)
Coursework:
10th: AP World History (4, 99%), AP Computer Science Principles (4, 99%), AP Calculus BC (5, 97%); all other grades except Chemistry (96%) at least 97%
11th: AP Lang (5, 97%), Multivariable Calculus and Linear Algebra (through school, weighted as an AP, 98%; I get college credit from a state university for taking this), AP Physics 1 (5, 98%), AP United States History (5, 99%), AP Computer Science A (5, 100%), AP Statistics (self-studied, 5); all other grades 97% or higher
the above courses were taken through school, but I enrolled as a non-matriculated undergraduate student through the same state university that's giving me college credit for high school multi to take the following courses in Fall 2019 and Spring 2020 respectively:
"Logic, Language, and Proofs" (basically introduced me to the language of mathematics and abstract proof construction, etc.) (A+), Introduction to Real Analysis (third-year undergraduate course, probably) (A+)
12th: (incoming senior) AP Lit, Differential Equations (through school, weighted as an AP; I get college credit from a state university for taking this), AP Physics C (I don't know which yet but probably E/M), AP US Gov, AP Micro, AP Spanish Lang
the above courses are going to be taken through school, but I enrolled as a non-matriculated undergraduate student through the same state university that's giving me college credit for high school diffeq to take the following courses in Summer 2020, Fall 2020, and Spring 2021 respectively:
Applied Complex Analysis (well, I actually just finished this course, so I got an A), Advanced Linear Algebra, Analysis in Several Dimensions
like 12 APs in total by the end of senior year; I have taken the most rigorous courses available + courses at college
Awards:
AIME Qualifier (missed the USAMO cutoff by one AIME question's worth of index points, oops), HMMT/PUMaC awards
President's Volunteer Service Award, Gold (by the end of senior year, I should have lifetime ~650-675 volunteer hours): 3-time winner, 10th, 11th, and (expected) 12th
AP Scholar (I don't remember which though I have it on my application, but based on the scores I have, you can figure it out if you need to), Commended PSAT Scholar
UNSCO Qualifier, USAPhO Qualifier, USACO Silver
Regeneron Semifinalist, Scholastic Silver Writing Award (this was like 2-3 years ago, I don't remember much about it)
Essays:
they're actually coming on really good so far, not done writing though
Letters of Recommendations: my multi/diffeq teacher (really epic), my physics 1/c teacher (pretty good), my counselor (really good); additionally, I'm considering getting one from my principal (he first set me up to take the college math courses because he's an adjunct professor at the university I took courses at, so it should be cool), and a Princeton dude (see below for more explanation; he also used to mentor me before I started doing research)
Extracurriculars/Leadership Roles:
Science Olympiad (have won state medals before), Math Team (treasuresecretary 12th, top scorer in county-wide mathematics tournaments), Coding/CS Club (treasurer 11th, vice president 12th), National Honor Society, DECA (have qualified for the national-level competition, ICDC), did Model UN (but stopped after 10th, so probably won't put this on)
treasurer of our school's science research program from 2018 (personally offered this position by the director of the program) to when I graduate from high school in 2021
information technologist for a science education nonprofit
formerly unpaid teacher assistant (now paid 'intern'; my position got renamed because I've started doing more than just TAing) at a weekend mathematics enrichment program I used to attend when I was younger; I just set up and now own/manage the program's Discord as well as helped implement a grading system for the students on Google Classroom during the transition from real-life classes to online, Zoom classes due to COVID-19
CTO of a startup digital advertising business I co-founded with my friend (I personally made just under $15,000 so far, but the business's net worth is about $40,000)
in July 2018, I attended a summer program that related to computer science, electrical engineering, and informatics; we learned several skills such as programming Python (including NumPy, Matplotlib, and Pandas) in the context of physical engineering concepts and the Raspberry Pi; I engineering a program comparable to the widespread arcade game “Wheel of Fortune”
hospital volunteer (transporter, a large source of my volunteer hours)
Bitcoin/general cryptocurrency trademiner, I've set up several ASIC miners and studied their stock trends to optimize the amount of money I make from them, although I put a hold on this activity when crypto started dying again
10-year piano player (stopped in 9th grade though, but I went to state-level festivals and got perfect scores on my performances), 5-year viola player (planning to qualify for the state festival this year), JV Tennis (memes), 7-year soccer player (stopped after 9th grade, though)
also I'm probably not gonna put this on my application, but out of enjoyment, my friend and I conducted a satire analysis on our in-class chemistry performance through research, usage of spreadsheet/database applications, and Python’s machine learning modules; essentially, we collaborated on our mutual objective for his project in that we sought to “predict” when our grades would drastically fall, and a psychological explanation as to why we, somewhat academically-oriented students, tend to make the most drastic shortcomings when it comes to in-class performance ( used long short-term memory in the structures of recurrent neural networks which served as a model for Keras, a Python deep learning API, to make a grade prediction based on learning the ups and downs of our previous grades)
not sure if this counts for anything, but in May of 2012, in a Nassau County-based competition that I took against high schoolers double my age at the time, I won first place for the highest amount of problems correct so that's pretty cool I guess
finally, I've done over-the-summer online research under the guidance of a postdoctoral researcher in mathematics I got the contact of during a visit to Princeton University (did his doctoral thesis under the mentoring of Terence Tao, a world-renowned Fields Medal recipient)
Other life circumstances:
recovering narcotics addict (I had an injury while playing soccer in the spring of 9th grade and got hooked for a year after I didn't need them anymore), violent/alcohol-ridden home situation; I've had some issues with mental health in 9th and early 10th grade but I think I'm doing better now yay

I really wanna make it into some kind of Ivy/T20 kinda school, but I'm open to any suggestions as to where I stand in college admissions. Also, because I took all those college math courses, I got permission from the undergraduate director of mathematics to transfer those into credits for a bachelor's degree at that state school, so I can graduate two years early (2023 instead of 2025) if I get accepted and enroll there as a full-time student.
I'd really appreciate any help! Thanks!
submitted by mesmore to chanceme [link] [comments]

[ Bitcoin ] Technical: Taproot: Why Activate?

Topic originally posted in Bitcoin by almkglor [link]
This is a follow-up on https://old.reddit.com/Bitcoin/comments/hqzp14/technical_the_path_to_taproot_activation/
Taproot! Everybody wants it!! But... you might ask yourself: sure, everybody else wants it, but why would I, sovereign Bitcoin HODLer, want it? Surely I can be better than everybody else because I swapped XXX fiat for Bitcoin unlike all those nocoiners?
And it is important for you to know the reasons why you, o sovereign Bitcoiner, would want Taproot activated. After all, your nodes (or the nodes your wallets use, which if you are SPV, you hopefully can pester to your wallet vendoimplementor about) need to be upgraded in order for Taproot activation to actually succeed instead of becoming a hot sticky mess.
First, let's consider some principles of Bitcoin.
I'm sure most of us here would agree that the above are very important principles of Bitcoin and that these are principles we would not be willing to remove. If anything, we would want those principles strengthened (especially the last one, financial privacy, which current Bitcoin is only sporadically strong with: you can get privacy, it just requires effort to do so).
So, how does Taproot affect those principles?

Taproot and Your /Coins

Most HODLers probably HODL their coins in singlesig addresses. Sadly, switching to Taproot would do very little for you (it gives a mild discount at spend time, at the cost of a mild increase in fee at receive time (paid by whoever sends to you, so if it's a self-send from a P2PKH or bech32 address, you pay for this); mostly a wash).
(technical details: a Taproot output is 1 version byte + 32 byte public key, while a P2WPKH (bech32 singlesig) output is 1 version byte + 20 byte public key hash, so the Taproot output spends 12 bytes more; spending from a P2WPKH requires revealing a 32-byte public key later, which is not needed with Taproot, and Taproot signatures are about 9 bytes smaller than P2WPKH signatures, but the 32 bytes plus 9 bytes is divided by 4 because of the witness discount, so it saves about 11 bytes; mostly a wash, it increases blockweight by about 1 virtual byte, 4 weight for each Taproot-output-input, compared to P2WPKH-output-input).
However, as your HODLings grow in value, you might start wondering if multisignature k-of-n setups might be better for the security of your savings. And it is in multisignature that Taproot starts to give benefits!
Taproot switches to using Schnorr signing scheme. Schnorr makes key aggregation -- constructing a single public key from multiple public keys -- almost as trivial as adding numbers together. "Almost" because it involves some fairly advanced math instead of simple boring number adding, but hey when was the last time you added up your grocery list prices by hand huh?
With current P2SH and P2WSH multisignature schemes, if you have a 2-of-3 setup, then to spend, you need to provide two different signatures from two different public keys. With Taproot, you can create, using special moon math, a single public key that represents your 2-of-3 setup. Then you just put two of your devices together, have them communicate to each other (this can be done airgapped, in theory, by sending QR codes: the software to do this is not even being built yet, but that's because Taproot hasn't activated yet!), and they will make a single signature to authorize any spend from your 2-of-3 address. That's 73 witness bytes -- 18.25 virtual bytes -- of signatures you save!
And if you decide that your current setup with 1-of-1 P2PKH / P2WPKH addresses is just fine as-is: well, that's the whole point of a softfork: backwards-compatibility; you can receive from Taproot users just fine, and once your wallet is updated for Taproot-sending support, you can send to Taproot users just fine as well!
(P2WPKH and P2WSH -- SegWit v0 -- addresses start with bc1q; Taproot -- SegWit v1 --- addresses start with bc1p, in case you wanted to know the difference; in bech32 q is 0, p is 1)
Now how about HODLers who keep all, or some, of their coins on custodial services? Well, any custodial service worth its salt would be doing at least 2-of-3, or probably something even bigger, like 11-of-15. So your custodial service, if it switched to using Taproot internally, could save a lot more (imagine an 11-of-15 getting reduced from 11 signatures to just 1!), which --- we can only hope! --- should translate to lower fees and better customer service from your custodial service!
So I think we can say, very accurately, that the Bitcoin principle --- that YOU are in control of your money --- can only be helped by Taproot (if you are doing multisignature), and, because P2PKH and P2WPKH remain validly-usable addresses in a Taproot future, will not be harmed by Taproot. Its benefit to this principle might be small (it mostly only benefits multisignature users) but since it has no drawbacks with this (i.e. singlesig users can continue to use P2WPKH and P2PKH still) this is still a nice, tidy win!
(even singlesig users get a minor benefit, in that multisig users will now reduce their blockchain space footprint, so that fees can be kept low for everybody; so for example even if you have your single set of private keys engraved on titanium plates sealed in an airtight box stored in a safe buried in a desert protected by angry nomads riding giant sandworms because you're the frickin' Kwisatz Haderach, you still gain some benefit from Taproot)
And here's the important part: if P2PKH/P2WPKH is working perfectly fine with you and you decide to never use Taproot yourself, Taproot will not affect you detrimentally. First do no harm!

Taproot and Your Contracts

No one is an island, no one lives alone. Give and you shall receive. You know: by trading with other people, you can gain expertise in some obscure little necessity of the world (and greatly increase your productivity in that little field), and then trade the products of your expertise for necessities other people have created, all of you thereby gaining gains from trade.
So, contracts, which are basically enforceable agreements that facilitate trading with people who you do not personally know and therefore might not trust.
Let's start with a simple example. You want to buy some gewgaws from somebody. But you don't know them personally. The seller wants the money, you want their gewgaws, but because of the lack of trust (you don't know them!! what if they're scammers??) neither of you can benefit from gains from trade.
However, suppose both of you know of some entity that both of you trust. That entity can act as a trusted escrow. The entity provides you security: this enables the trade, allowing both of you to get gains from trade.
In Bitcoin-land, this can be implemented as a 2-of-3 multisignature. The three signatories in the multisgnature would be you, the gewgaw seller, and the escrow. You put the payment for the gewgaws into this 2-of-3 multisignature address.
Now, suppose it turns out neither of you are scammers (whaaaat!). You receive the gewgaws just fine and you're willing to pay up for them. Then you and the gewgaw seller just sign a transaction --- you and the gewgaw seller are 2, sufficient to trigger the 2-of-3 --- that spends from the 2-of-3 address to a singlesig the gewgaw seller wants (or whatever address the gewgaw seller wants).
But suppose some problem arises. The seller gave you gawgews instead of gewgaws. Or you decided to keep the gewgaws but not sign the transaction to release the funds to the seller. In either case, the escrow is notified, and if it can sign with you to refund the funds back to you (if the seller was a scammer) or it can sign with the seller to forward the funds to the seller (if you were a scammer).
Taproot helps with this: like mentioned above, it allows multisignature setups to produce only one signature, reducing blockchain space usage, and thus making contracts --- which require multiple people, by definition, you don't make contracts with yourself --- is made cheaper (which we hope enables more of these setups to happen for more gains from trade for everyone, also, moon and lambos).
(technology-wise, it's easier to make an n-of-n than a k-of-n, making a k-of-n would require a complex setup involving a long ritual with many communication rounds between the n participants, but an n-of-n can be done trivially with some moon math. You can, however, make what is effectively a 2-of-3 by using a three-branch SCRIPT: either 2-of-2 of you and seller, OR 2-of-2 of you and escrow, OR 2-of-2 of escrow and seller. Fortunately, Taproot adds a facility to embed a SCRIPT inside a public key, so you can have a 2-of-2 Taprooted address (between you and seller) with a SCRIPT branch that can instead be spent with 2-of-2 (you + escrow) OR 2-of-2 (seller + escrow), which implements the three-branched SCRIPT above. If neither of you are scammers (hopefully the common case) then you both sign using your keys and never have to contact the escrow, since you are just using the escrow public key without coordinating with them (because n-of-n is trivial but k-of-n requires setup with communication rounds), so in the "best case" where both of you are honest traders, you also get a privacy boost, in that the escrow never learns you have been trading on gewgaws, I mean ewww, gawgews are much better than gewgaws and therefore I now judge you for being a gewgaw enthusiast, you filthy gewgawer).

Taproot and Your Contracts, Part 2: Cryptographic Boogaloo

Now suppose you want to buy some data instead of things. For example, maybe you have some closed-source software in trial mode installed, and want to pay the developer for the full version. You want to pay for an activation code.
This can be done, today, by using an HTLC. The developer tells you the hash of the activation code. You pay to an HTLC, paying out to the developer if it reveals the preimage (the activation code), or refunding the money back to you after a pre-agreed timeout. If the developer claims the funds, it has to reveal the preimage, which is the activation code, and you can now activate your software. If the developer does not claim the funds by the timeout, you get refunded.
And you can do that, with HTLCs, today.
Of course, HTLCs do have problems:
Fortunately, with Schnorr (which is enabled by Taproot), we can now use the Scriptless Script constuction by Andrew Poelstra. This Scriptless Script allows a new construction, the PTLC or Pointlocked Timelocked Contract. Instead of hashes and preimages, just replace "hash" with "point" and "preimage" with "scalar".
Or as you might know them: "point" is really "public key" and "scalar" is really a "private key". What a PTLC does is that, given a particular public key, the pointlocked branch can be spent only if the spender reveals the private key of the given private key to you.
Another nice thing with PTLCs is that they are deniable. What appears onchain is just a single 2-of-2 signature between you and the developemanufacturer. It's like a magic trick. This signature has no special watermarks, it's a perfectly normal signature (the pledge). However, from this signature, plus some datta given to you by the developemanufacturer (known as the adaptor signature) you can derive the private key of a particular public key you both agree on (the turn). Anyone scraping the blockchain will just see signatures that look just like every other signature, and as long as nobody manages to hack you and get a copy of the adaptor signature or the private key, they cannot get the private key behind the public key (point) that the pointlocked branch needs (the prestige).
(Just to be clear, the public key you are getting the private key from, is distinct from the public key that the developemanufacturer will use for its funds. The activation key is different from the developer's onchain Bitcoin key, and it is the activation key whose private key you will be learning, not the developer's/manufacturer's onchain Bitcoin key).
So:
Taproot lets PTLCs exist onchain because they enable Schnorr, which is a requirement of PTLCs / Scriptless Script.
(technology-wise, take note that Scriptless Script works only for the "pointlocked" branch of the contract; you need normal Script, or a pre-signed nLockTimed transaction, for the "timelocked" branch. Since Taproot can embed a script, you can have the Taproot pubkey be a 2-of-2 to implement the Scriptless Script "pointlocked" branch, then have a hidden script that lets you recover the funds with an OP_CHECKLOCKTIMEVERIFY after the timeout if the seller does not claim the funds.)

Quantum Quibbles!

Now if you were really paying attention, you might have noticed this parenthetical:
(technical details: a Taproot output is 1 version byte + 32 byte public key, while a P2WPKH (bech32 singlesig) output is 1 version byte + 20 byte public key hash...)
So wait, Taproot uses raw 32-byte public keys, and not public key hashes? Isn't that more quantum-vulnerable??
Well, in theory yes. In practice, they probably are not.
It's not that hashes can be broken by quantum computes --- they're still not. Instead, you have to look at how you spend from a P2WPKH/P2PKH pay-to-public-key-hash.
When you spend from a P2PKH / P2WPKH, you have to reveal the public key. Then Bitcoin hashes it and checks if this matches with the public-key-hash, and only then actually validates the signature for that public key.
So an unconfirmed transaction, floating in the mempools of nodes globally, will show, in plain sight for everyone to see, your public key.
(public keys should be public, that's why they're called public keys, LOL)
And if quantum computers are fast enough to be of concern, then they are probably fast enough that, in the several minutes to several hours from broadcast to confirmation, they have already cracked the public key that is openly broadcast with your transaction. The owner of the quantum computer can now replace your unconfirmed transaction with one that pays the funds to itself. Even if you did not opt-in RBF, miners are still incentivized to support RBF on RBF-disabled transactions.
So the extra hash is not as significant a protection against quantum computers as you might think. Instead, the extra hash-and-compare needed is just extra validation effort.
Further, if you have ever, in the past, spent from the address, then there exists already a transaction indelibly stored on the blockchain, openly displaying the public key from which quantum computers can derive the private key. So those are still vulnerable to quantum computers.
For the most part, the cryptographers behind Taproot (and Bitcoin Core) are of the opinion that quantum computers capable of cracking Bitcoin pubkeys are unlikely to appear within a decade or two.
So:
For now, the homomorphic and linear properties of elliptic curve cryptography provide a lot of benefits --- particularly the linearity property is what enables Scriptless Script and simple multisignature (i.e. multisignatures that are just 1 signature onchain). So it might be a good idea to take advantage of them now while we are still fairly safe against quantum computers. It seems likely that quantum-safe signature schemes are nonlinear (thus losing these advantages).

Summary

I Wanna Be The Taprooter!

So, do you want to help activate Taproot? Here's what you, mister sovereign Bitcoin HODLer, can do!

But I Hate Taproot!!

That's fine!

Discussions About Taproot Activation

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All you need to know about Yield Farming - The rocket fuel for Defi

All you need to know about Yield Farming - The rocket fuel for Defi
Source
It’s effectively July 2017 in the world of decentralized finance (DeFi), and as in the heady days of the initial coin offering (ICO) boom, the numbers are only trending up.
According to DeFi Pulse, there is $1.9 billion in crypto assets locked in DeFi right now. According to the CoinDesk ICO Tracker, the ICO market started chugging past $1 billion in July 2017, just a few months before token sales started getting talked about on TV.
Debate juxtaposing these numbers if you like, but what no one can question is this: Crypto users are putting more and more value to work in DeFi applications, driven largely by the introduction of a whole new yield-generating pasture, Compound’s COMP governance token.
Governance tokens enable users to vote on the future of decentralized protocols, sure, but they also present fresh ways for DeFi founders to entice assets onto their platforms.
That said, it’s the crypto liquidity providers who are the stars of the present moment. They even have a meme-worthy name: yield farmers.

https://preview.redd.it/lxsvazp1g9l51.png?width=775&format=png&auto=webp&s=a36173ab679c701a5d5e0aac806c00fcc84d78c1

Where it started

Ethereum-based credit market Compound started distributing its governance token, COMP, to the protocol’s users this past June 15. Demand for the token (heightened by the way its automatic distribution was structured) kicked off the present craze and moved Compound into the leading position in DeFi.
The hot new term in crypto is “yield farming,” a shorthand for clever strategies where putting crypto temporarily at the disposal of some startup’s application earns its owner more cryptocurrency.
Another term floating about is “liquidity mining.”
The buzz around these concepts has evolved into a low rumble as more and more people get interested.
The casual crypto observer who only pops into the market when activity heats up might be starting to get faint vibes that something is happening right now. Take our word for it: Yield farming is the source of those vibes.
But if all these terms (“DeFi,” “liquidity mining,” “yield farming”) are so much Greek to you, fear not. We’re here to catch you up. We’ll get into all of them.
We’re going to go from very basic to more advanced, so feel free to skip ahead.

What are tokens?

Most CoinDesk readers probably know this, but just in case: Tokens are like the money video-game players earn while fighting monsters, money they can use to buy gear or weapons in the universe of their favorite game.
But with blockchains, tokens aren’t limited to only one massively multiplayer online money game. They can be earned in one and used in lots of others. They usually represent either ownership in something (like a piece of a Uniswap liquidity pool, which we will get into later) or access to some service. For example, in the Brave browser, ads can only be bought using basic attention token (BAT).
If tokens are worth money, then you can bank with them or at least do things that look very much like banking. Thus: decentralized finance.
Tokens proved to be the big use case for Ethereum, the second-biggest blockchain in the world. The term of art here is “ERC-20 tokens,” which refers to a software standard that allows token creators to write rules for them. Tokens can be used a few ways. Often, they are used as a form of money within a set of applications. So the idea for Kin was to create a token that web users could spend with each other at such tiny amounts that it would almost feel like they weren’t spending anything; that is, money for the internet.
Governance tokens are different. They are not like a token at a video-game arcade, as so many tokens were described in the past. They work more like certificates to serve in an ever-changing legislature in that they give holders the right to vote on changes to a protocol.
So on the platform that proved DeFi could fly, MakerDAO, holders of its governance token, MKR, vote almost every week on small changes to parameters that govern how much it costs to borrow and how much savers earn, and so on.
Read more: Why DeFi’s Billion-Dollar Milestone Matters
One thing all crypto tokens have in common, though, is they are tradable and they have a price. So, if tokens are worth money, then you can bank with them or at least do things that look very much like banking. Thus: decentralized finance.

What is DeFi?

Fair question. For folks who tuned out for a bit in 2018, we used to call this “open finance.” That construction seems to have faded, though, and “DeFi” is the new lingo.
In case that doesn’t jog your memory, DeFi is all the things that let you play with money, and the only identification you need is a crypto wallet.
On the normal web, you can’t buy a blender without giving the site owner enough data to learn your whole life history. In DeFi, you can borrow money without anyone even asking for your name.
I can explain this but nothing really brings it home like trying one of these applications. If you have an Ethereum wallet that has even $20 worth of crypto in it, go do something on one of these products. Pop over to Uniswap and buy yourself some FUN (a token for gambling apps) or WBTC (wrapped bitcoin). Go to MakerDAO and create $5 worth of DAI (a stablecoin that tends to be worth $1) out of the digital ether. Go to Compound and borrow $10 in USDC.
(Notice the very small amounts I’m suggesting. The old crypto saying “don’t put in more than you can afford to lose” goes double for DeFi. This stuff is uber-complex and a lot can go wrong. These may be “savings” products but they’re not for your retirement savings.)
Immature and experimental though it may be, the technology’s implications are staggering. On the normal web, you can’t buy a blender without giving the site owner enough data to learn your whole life history. In DeFi, you can borrow money without anyone even asking for your name.
DeFi applications don’t worry about trusting you because they have the collateral you put up to back your debt (on Compound, for instance, a $10 debt will require around $20 in collateral).
Read more: There Are More DAI on Compound Now Than There Are DAI in the World
If you do take this advice and try something, note that you can swap all these things back as soon as you’ve taken them out. Open the loan and close it 10 minutes later. It’s fine. Fair warning: It might cost you a tiny bit in fees, and the cost of using Ethereum itself right now is much higher than usual, in part due to this fresh new activity. But it’s nothing that should ruin a crypto user.
So what’s the point of borrowing for people who already have the money? Most people do it for some kind of trade. The most obvious example, to short a token (the act of profiting if its price falls). It’s also good for someone who wants to hold onto a token but still play the market.

Doesn’t running a bank take a lot of money up front?

It does, and in DeFi that money is largely provided by strangers on the internet. That’s why the startups behind these decentralized banking applications come up with clever ways to attract HODLers with idle assets.
Liquidity is the chief concern of all these different products. That is: How much money do they have locked in their smart contracts?
“In some types of products, the product experience gets much better if you have liquidity. Instead of borrowing from VCs or debt investors, you borrow from your users,” said Electric Capital managing partner Avichal Garg.
Let’s take Uniswap as an example. Uniswap is an “automated market maker,” or AMM (another DeFi term of art). This means Uniswap is a robot on the internet that is always willing to buy and it’s also always willing to sell any cryptocurrency for which it has a market.
On Uniswap, there is at least one market pair for almost any token on Ethereum. Behind the scenes, this means Uniswap can make it look like it is making a direct trade for any two tokens, which makes it easy for users, but it’s all built around pools of two tokens. And all these market pairs work better with bigger pools.

Why do I keep hearing about ‘pools’?

To illustrate why more money helps, let’s break down how Uniswap works.
Let’s say there was a market for USDC and DAI. These are two tokens (both stablecoins but with different mechanisms for retaining their value) that are meant to be worth $1 each all the time, and that generally tends to be true for both.
The price Uniswap shows for each token in any pooled market pair is based on the balance of each in the pool. So, simplifying this a lot for illustration’s sake, if someone were to set up a USDC/DAI pool, they should deposit equal amounts of both. In a pool with only 2 USDC and 2 DAI it would offer a price of 1 USDC for 1 DAI. But then imagine that someone put in 1 DAI and took out 1 USDC. Then the pool would have 1 USDC and 3 DAI. The pool would be very out of whack. A savvy investor could make an easy $0.50 profit by putting in 1 USDC and receiving 1.5 DAI. That’s a 50% arbitrage profit, and that’s the problem with limited liquidity.
(Incidentally, this is why Uniswap’s prices tend to be accurate, because traders watch it for small discrepancies from the wider market and trade them away for arbitrage profits very quickly.)
Read more: Uniswap V2 Launches With More Token-Swap Pairs, Oracle Service, Flash Loans
However, if there were 500,000 USDC and 500,000 DAI in the pool, a trade of 1 DAI for 1 USDC would have a negligible impact on the relative price. That’s why liquidity is helpful.
You can stick your assets on Compound and earn a little yield. But that’s not very creative. Users who look for angles to maximize that yield: those are the yield farmers.
Similar effects hold across DeFi, so markets want more liquidity. Uniswap solves this by charging a tiny fee on every trade. It does this by shaving off a little bit from each trade and leaving that in the pool (so one DAI would actually trade for 0.997 USDC, after the fee, growing the overall pool by 0.003 USDC). This benefits liquidity providers because when someone puts liquidity in the pool they own a share of the pool. If there has been lots of trading in that pool, it has earned a lot of fees, and the value of each share will grow.
And this brings us back to tokens.
Liquidity added to Uniswap is represented by a token, not an account. So there’s no ledger saying, “Bob owns 0.000000678% of the DAI/USDC pool.” Bob just has a token in his wallet. And Bob doesn’t have to keep that token. He could sell it. Or use it in another product. We’ll circle back to this, but it helps to explain why people like to talk about DeFi products as “money Legos.”

So how much money do people make by putting money into these products?

It can be a lot more lucrative than putting money in a traditional bank, and that’s before startups started handing out governance tokens.
Compound is the current darling of this space, so let’s use it as an illustration. As of this writing, a person can put USDC into Compound and earn 2.72% on it. They can put tether (USDT) into it and earn 2.11%. Most U.S. bank accounts earn less than 0.1% these days, which is close enough to nothing.
However, there are some caveats. First, there’s a reason the interest rates are so much juicier: DeFi is a far riskier place to park your money. There’s no Federal Deposit Insurance Corporation (FDIC) protecting these funds. If there were a run on Compound, users could find themselves unable to withdraw their funds when they wanted.
Plus, the interest is quite variable. You don’t know what you’ll earn over the course of a year. USDC’s rate is high right now. It was low last week. Usually, it hovers somewhere in the 1% range.
Similarly, a user might get tempted by assets with more lucrative yields like USDT, which typically has a much higher interest rate than USDC. (Monday morning, the reverse was true, for unclear reasons; this is crypto, remember.) The trade-off here is USDT’s transparency about the real-world dollars it’s supposed to hold in a real-world bank is not nearly up to par with USDC’s. A difference in interest rates is often the market’s way of telling you the one instrument is viewed as dicier than another.
Users making big bets on these products turn to companies Opyn and Nexus Mutual to insure their positions because there’s no government protections in this nascent space – more on the ample risks later on.
So users can stick their assets in Compound or Uniswap and earn a little yield. But that’s not very creative. Users who look for angles to maximize that yield: those are the yield farmers.

OK, I already knew all of that. What is yield farming?

Broadly, yield farming is any effort to put crypto assets to work and generate the most returns possible on those assets.
At the simplest level, a yield farmer might move assets around within Compound, constantly chasing whichever pool is offering the best APY from week to week. This might mean moving into riskier pools from time to time, but a yield farmer can handle risk.
“Farming opens up new price arbs [arbitrage] that can spill over to other protocols whose tokens are in the pool,” said Maya Zehavi, a blockchain consultant.
Because these positions are tokenized, though, they can go further.
This was a brand-new kind of yield on a deposit. In fact, it was a way to earn a yield on a loan. Who has ever heard of a borrower earning a return on a debt from their lender?
In a simple example, a yield farmer might put 100,000 USDT into Compound. They will get a token back for that stake, called cUSDT. Let’s say they get 100,000 cUSDT back (the formula on Compound is crazy so it’s not 1:1 like that but it doesn’t matter for our purposes here).
They can then take that cUSDT and put it into a liquidity pool that takes cUSDT on Balancer, an AMM that allows users to set up self-rebalancing crypto index funds. In normal times, this could earn a small amount more in transaction fees. This is the basic idea of yield farming. The user looks for edge cases in the system to eke out as much yield as they can across as many products as it will work on.
Right now, however, things are not normal, and they probably won’t be for a while.

Why is yield farming so hot right now?

Because of liquidity mining. Liquidity mining supercharges yield farming.
Liquidity mining is when a yield farmer gets a new token as well as the usual return (that’s the “mining” part) in exchange for the farmer’s liquidity.
“The idea is that stimulating usage of the platform increases the value of the token, thereby creating a positive usage loop to attract users,” said Richard Ma of smart-contract auditor Quantstamp.
The yield farming examples above are only farming yield off the normal operations of different platforms. Supply liquidity to Compound or Uniswap and get a little cut of the business that runs over the protocols – very vanilla.
But Compound announced earlier this year it wanted to truly decentralize the product and it wanted to give a good amount of ownership to the people who made it popular by using it. That ownership would take the form of the COMP token.
Lest this sound too altruistic, keep in mind that the people who created it (the team and the investors) owned more than half of the equity. By giving away a healthy proportion to users, that was very likely to make it a much more popular place for lending. In turn, that would make everyone’s stake worth much more.
So, Compound announced this four-year period where the protocol would give out COMP tokens to users, a fixed amount every day until it was gone. These COMP tokens control the protocol, just as shareholders ultimately control publicly traded companies.
Every day, the Compound protocol looks at everyone who had lent money to the application and who had borrowed from it and gives them COMP proportional to their share of the day’s total business.
The results were very surprising, even to Compound’s biggest promoters.
COMP’s value will likely go down, and that’s why some investors are rushing to earn as much of it as they can right now.
This was a brand-new kind of yield on a deposit into Compound. In fact, it was a way to earn a yield on a loan, as well, which is very weird: Who has ever heard of a borrower earning a return on a debt from their lender?
COMP’s value has consistently been well over $200 since it started distributing on June 15. We did the math elsewhere but long story short: investors with fairly deep pockets can make a strong gain maximizing their daily returns in COMP. It is, in a way, free money.
It’s possible to lend to Compound, borrow from it, deposit what you borrowed and so on. This can be done multiple times and DeFi startup Instadapp even built a tool to make it as capital-efficient as possible.
“Yield farmers are extremely creative. They find ways to ‘stack’ yields and even earn multiple governance tokens at once,” said Spencer Noon of DTC Capital.
COMP’s value spike is a temporary situation. The COMP distribution will only last four years and then there won’t be any more. Further, most people agree that the high price now is driven by the low float (that is, how much COMP is actually free to trade on the market – it will never be this low again). So the value will probably gradually go down, and that’s why savvy investors are trying to earn as much as they can now.
Appealing to the speculative instincts of diehard crypto traders has proven to be a great way to increase liquidity on Compound. This fattens some pockets but also improves the user experience for all kinds of Compound users, including those who would use it whether they were going to earn COMP or not.
As usual in crypto, when entrepreneurs see something successful, they imitate it. Balancer was the next protocol to start distributing a governance token, BAL, to liquidity providers. Flash loan provider bZx has announced a plan. Ren, Curve and Synthetix also teamed up to promote a liquidity pool on Curve.
It is a fair bet many of the more well-known DeFi projects will announce some kind of coin that can be mined by providing liquidity.
The case to watch here is Uniswap versus Balancer. Balancer can do the same thing Uniswap does, but most users who want to do a quick token trade through their wallet use Uniswap. It will be interesting to see if Balancer’s BAL token convinces Uniswap’s liquidity providers to defect.
So far, though, more liquidity has gone into Uniswap since the BAL announcement, according to its data site. That said, even more has gone into Balancer.

Did liquidity mining start with COMP?

No, but it was the most-used protocol with the most carefully designed liquidity mining scheme.
This point is debated but the origins of liquidity mining probably date back to Fcoin, a Chinese exchange that created a token in 2018 that rewarded people for making trades. You won’t believe what happened next! Just kidding, you will: People just started running bots to do pointless trades with themselves to earn the token.
Similarly, EOS is a blockchain where transactions are basically free, but since nothing is really free the absence of friction was an invitation for spam. Some malicious hacker who didn’t like EOS created a token called EIDOS on the network in late 2019. It rewarded people for tons of pointless transactions and somehow got an exchange listing.
These initiatives illustrated how quickly crypto users respond to incentives.
Read more: Compound Changes COMP Distribution Rules Following ‘Yield Farming’ Frenzy
Fcoin aside, liquidity mining as we now know it first showed up on Ethereum when the marketplace for synthetic tokens, Synthetix, announced in July 2019 an award in its SNX token for users who helped add liquidity to the sETH/ETH pool on Uniswap. By October, that was one of Uniswap’s biggest pools.
When Compound Labs, the company that launched the Compound protocol, decided to create COMP, the governance token, the firm took months designing just what kind of behavior it wanted and how to incentivize it. Even still, Compound Labs was surprised by the response. It led to unintended consequences such as crowding into a previously unpopular market (lending and borrowing BAT) in order to mine as much COMP as possible.
Just last week, 115 different COMP wallet addresses – senators in Compound’s ever-changing legislature – voted to change the distribution mechanism in hopes of spreading liquidity out across the markets again.

Is there DeFi for bitcoin?

Yes, on Ethereum.
Nothing has beaten bitcoin over time for returns, but there’s one thing bitcoin can’t do on its own: create more bitcoin.
A smart trader can get in and out of bitcoin and dollars in a way that will earn them more bitcoin, but this is tedious and risky. It takes a certain kind of person.
DeFi, however, offers ways to grow one’s bitcoin holdings – though somewhat indirectly.
A long HODLer is happy to gain fresh BTC off their counterparty’s short-term win. That’s the game.
For example, a user can create a simulated bitcoin on Ethereum using BitGo’s WBTC system. They put BTC in and get the same amount back out in freshly minted WBTC. WBTC can be traded back for BTC at any time, so it tends to be worth the same as BTC.
Then the user can take that WBTC, stake it on Compound and earn a few percent each year in yield on their BTC. Odds are, the people who borrow that WBTC are probably doing it to short BTC (that is, they will sell it immediately, buy it back when the price goes down, close the loan and keep the difference).
A long HODLer is happy to gain fresh BTC off their counterparty’s short-term win. That’s the game.

How risky is it?

Enough.
“DeFi, with the combination of an assortment of digital funds, automation of key processes, and more complex incentive structures that work across protocols – each with their own rapidly changing tech and governance practices – make for new types of security risks,” said Liz Steininger of Least Authority, a crypto security auditor. “Yet, despite these risks, the high yields are undeniably attractive to draw more users.”
We’ve seen big failures in DeFi products. MakerDAO had one so bad this year it’s called “Black Thursday.” There was also the exploit against flash loan provider bZx. These things do break and when they do money gets taken.
As this sector gets more robust, we could see token holders greenlighting more ways for investors to profit from DeFi niches.
Right now, the deal is too good for certain funds to resist, so they are moving a lot of money into these protocols to liquidity mine all the new governance tokens they can. But the funds – entities that pool the resources of typically well-to-do crypto investors – are also hedging. Nexus Mutual, a DeFi insurance provider of sorts, told CoinDesk it has maxed out its available coverage on these liquidity applications. Opyn, the trustless derivatives maker, created a way to short COMP, just in case this game comes to naught.
And weird things have arisen. For example, there’s currently more DAI on Compound than have been minted in the world. This makes sense once unpacked but it still feels dicey to everyone.
That said, distributing governance tokens might make things a lot less risky for startups, at least with regard to the money cops.
“Protocols distributing their tokens to the public, meaning that there’s a new secondary listing for SAFT tokens, [gives] plausible deniability from any security accusation,” Zehavi wrote. (The Simple Agreement for Future Tokens was a legal structure favored by many token issuers during the ICO craze.)
Whether a cryptocurrency is adequately decentralized has been a key feature of ICO settlements with the U.S. Securities and Exchange Commission (SEC).

What’s next for yield farming? (A prediction)

COMP turned out to be a bit of a surprise to the DeFi world, in technical ways and others. It has inspired a wave of new thinking.
“Other projects are working on similar things,” said Nexus Mutual founder Hugh Karp. In fact, informed sources tell CoinDesk brand-new projects will launch with these models.
We might soon see more prosaic yield farming applications. For example, forms of profit-sharing that reward certain kinds of behavior.
Imagine if COMP holders decided, for example, that the protocol needed more people to put money in and leave it there longer. The community could create a proposal that shaved off a little of each token’s yield and paid that portion out only to the tokens that were older than six months. It probably wouldn’t be much, but an investor with the right time horizon and risk profile might take it into consideration before making a withdrawal.
(There are precedents for this in traditional finance: A 10-year Treasury bond normally yields more than a one-month T-bill even though they’re both backed by the full faith and credit of Uncle Sam, a 12-month certificate of deposit pays higher interest than a checking account at the same bank, and so on.)
As this sector gets more robust, its architects will come up with ever more robust ways to optimize liquidity incentives in increasingly refined ways. We could see token holders greenlighting more ways for investors to profit from DeFi niches.
Questions abound for this nascent industry: What will MakerDAO do to restore its spot as the king of DeFi? Will Uniswap join the liquidity mining trend? Will anyone stick all these governance tokens into a decentralized autonomous organization (DAO)? Or would that be a yield farmers co-op?
Whatever happens, crypto’s yield farmers will keep moving fast. Some fresh fields may open and some may soon bear much less luscious fruit.
But that’s the nice thing about farming in DeFi: It is very easy to switch fields.
submitted by pascalbernoulli to Yield_Farming [link] [comments]

How to Explain Bitcoin: 3 Tips to Have Better Bitcoin Conversations

BTC Friends,
Let’s be honest, Bitcoin is confusing. Not to you (you are on this / after all), but to the people who have no idea what it is. Trying to explain Bitcoin is even harder. I’m sure we’ve all had those long, complicated, drawn-out conversations which leave people more confused than when it started.
To aid its adoption WE HAVE TO GET BETTER AT EXPLAINING WHAT BITCOIN IS.
Here are a few tips that should, hopefully, help you manage a simple and easy to understand discussion about Bitcoin.
Before we get to that, a few things to remember:
Bitcoin is a fundamental change from what most people believe. An explanation about Bitcoin shouldn’t be about “being right” or “winning the argument.” Instead, it should be about helping someone explore a new idea and begin to understand that there are actually different alternatives to the only “money” they’ve ever known.
Bitcoin is complicated. It’s important to remember that this is as much of an emotion transformation for someone as it is a logical one. A CONFUSED MIND ALWAYS SAYS NO. If you leave a person confused or frustrated about what Bitcoin is, they are more likely to build up a resistance to it and become close-minded because “it’s just too complicated.”
Adoption is a marathon, not a sprint. Don’t feel the need to word vomit all of your intense 1337 cypto-knowledge in a single conversation. Slow and steady. Like a good story-teller, keep them wanting more.
Now, some tips to consider:
1. Start with ‘WHAT is Bitcoin?,’ not ‘WHY is Bitcoin?’
A fundamental mistake that people make is to try to justify WHY something exists before even explaining WHAT something is. Your explanations need to act as a building blocks of knowledge which means you have to have a very clear, very easily understood, fundamental premise:
Bitcoin is…:
Digital coins that exist on the internet that you can spend and save just like the paper money in your wallet.
An alternative form of money than what you are given by your local government.
That's it. That's Bitcoin. While I’m sure we can, and probably will, argue about what that base, fundamental definition is, it’s important to start with WHAT, not WHY.
While hyperinflation, store of value, scarcity, the Federal Reserve, and how the printing of fiat devalues currency are all important, it does not answer the question of WHAT is Bitcoin. If you start with WHY, you are skipping a major building block in the mind of the listener and are on your way to creating confusion. And remember, a confused mind always says no!
Here is an example. (Now, don’t go full-internet on me. I’m not degrading this person or this video THANK YOU PERSON FOR MAKING THIS VIDEO. This video is awesome! I only bring it up because it is a recent video that got some attention. It also demonstrates this point.)
When asked to explain Bitcoin, here is the opening line:
“The FED…is out of control with printing money…”
This is a ‘WHY is Bitcoin’ response. Already, the listener is probably thinking, ‘what the heck does the FED have to do with anything? I just wanted to know what Bitcoin was…’ and you may just lose your listener right there.
Furthermore, this video never actually says “Bitcoin IS…” While there is an implied comparison to gold, there is never a fundamental definition of WHAT Bitcoin is.
Start with a clear, concise definition of WHAT Bitcoin is before moving on to WHY Bitcoin is.
2. Let Them Lead / Gauge Their Interest / Know When To Stop
When explaining any topic to someone who doesn’t understand it, there is a very strong temptation to TELL everything you know. This is human nature. We are proud of what we know. We want to display knowledge and proficiency. We must, however, understand that it is counter-productive to the learning process. Imagine that certain math teacher going over that certain math problem. They explain it. They are enthusiastic about it. They write it on the chalkboard. Yet your eyes glaze over. It’s too much too fast. You are just waiting until the end when they finally tell you the answer. All logic and reasoning and understanding is gone. This is similar.
Instead of telling them everything you know, LET THEM ASK! Allowing your listener to ASK demonstrates two things: an understanding of the last thing you said and, more importantly, interest! Ultimately, that’s what we want and need; their interest.
Believe me, just like that little kid asking, ‘why, why, why…?’ They will give you every opportunity to share a little bit more, and a little bit more.
For example:
Bitcoiner – “Bitcoin are digital coins that exist on the internet that you can spend and save just like the paper money in your wallet.”
(STOP TALKING AND LEAVE SPACE FOR THEM TO ASK!!!)
Noob – “Oh…ok…well…why do we need that? What's wrong with the money I have now?”
Bitcoiner – “Well, there is a risk that, over time, the money that you keep in your wallet or bank account will actually be worth less and be able to buy less stuff.”
(STOP TALKING AND LEAVE SPACE FOR THEM TO ASK!!!)
Noob – “Wait, what do you mean?”
And we are now on our way to a discussion about these messy and intense concepts of inflation vs deflation, printing of fiat currency, fractional reserve lending, etc. And through it all, LET THEM LEAD.
Now this is the tough part. If their eyes glaze over, YOU HAVE TO STOP! When the questions stop, YOU HAVE TO STOP! The last thing you want to do is ramble on once they’ve stopped listening. Instead, ASK them a question:
I’m sorry, did you not understand something I said?”
“Did I answer your question?”
“Is this interesting to you?”
By doing this, you will give them an opportunity to ASK you another question: “…back up…what did you mean when you said ‘store of value’?”
Or maybe even make a comment: “…wow…this stuff is pretty complicated…”
In either case, this actually helps keep the conversation going. Just back up, explain it again, keeping in mind your base concepts and definitions, and see if you can talk them past where they got stuck.
Maybe they shut you down entirely: “you know what, this is crazy, it can’t be true, let’s change the subject…” To which the ONLY correct response is, “Ok!” (we’ll get to this later).
Keep in mind that letting your listener lead will allow you to carry the conversation much further than you trying to push it along on your own.
3. Know Your Role / A Little at a Time / Don’t Overcorrect
So, what’s the end goal? Is it to have them whip out their phone, download an exchange, and make their first Bitcoin purchase right then and there?! No, of course not.
The role of these conversations is to LEAVE THEM WANTING MORE. Your goal should be to spark interest and curiosity. If after talking with you they end up on The Google or The YouTube looking for more information, then you’ve done your part!
Movies and TV condition us to want the big payoff at the end: the parade, the teary embrace, the triumphant symphony. That is not real life. Really, the best ending to a Bitcoin conversation might just be your listener making an audible, but clearly deeply contemplative, “…huh…”. You’ve done your job. You’ve got them noodling something they have never noodled before.
Even once you understand Bitcoin, there is still an entirely different conversation about what the technology is, how it works, and how people interact with it. And let’s be honest, it’s complex and confusing. Exchanges, blockchain, forks, difficulty adjustments, miners, cold storage… More complicated ideas. More jargon. Make sure you throttle yourself back and explain just A LITTLE AT A TIME. It’s ok to have one conversation about the fundamentals of Bitcoin and then an entirely different conversation about blockchain technology or how people acquire BTC or the difference between storing Bitcoin on an exchange versus a cold wallet. Don’t fall into the trap of thinking you have to tackle all of this at once.
While all this is happening, BE CAREFUL NOT TO OVERCORRECT. People know what they know, right? And what people know is always correct, right?? Be sensitive. If your listener makes a comment that isn’t true or is off track, don’t scold them or forcefully correct them. If your listener feels attacked or threatened, conflict will arise, and once that happens, their minds will be completely shut off. No one listens during an argument. Don’t attack. Explain.
For example:
Noob – “Well, the USD is backed by gold, so that will prevent it from ever devaluing!”
Bitcoiner – “You know, it’s pretty interesting, a lot of people think the same thing. The truth is that while the USD was backed by gold for a long period of time, it isn’t anymore. You see, back in 1971…”
Keep it simple, factual, and non-confrontational.
Going back to our example from before, even if your listener shuts you down entirely, THAT’S OK! They have now experienced a Bitcoin conversation that will percolate around in their brain. And perhaps next time they hear the word Bitcoin, whether on the news or on the internet, they’ll think back to your conversation and what you shared with them. Hopefully you didn’t over-press and their memory of your conversation isn't a negative one which leaves them feeling negative about Bitcoin: “Bitcoin is stupid and people who believe in Bitcoin are arrogant and rude.”
Finally, ENCOURAGE THEM TO DO THEIR OWN RESEARCH. The journey doesn’t start and end with you. You are simply a stepping stone along their path. Know that you are playing a part in their story; you are not the main character.
Adoption of Bitcoin will occur over a long period of time. The conversations we have with our friends and family will create the buzz, attention, and understanding that is needed, but please be mindful that you are doing it in a helpful and productive way that leaves people wanting to know more.
Oh, and step 4: Stack Sats and HODL!
submitted by Reinmaker to Bitcoin [link] [comments]

Traditional Mining vs Green Staking: How UMI Cares for the Planet

Traditional Mining vs Green Staking: How UMI Cares for the Planet

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Cryptocurrencies are about a major contribution to the transformation of the existing financial system. They can dramatically change the world and be of great benefit to humankind. But looking for benefits mustn't do harm to the environment.
We've taken up this theme for a reason. It is indeed possible to do harm. In fact, harm is already being done. Do you want to know in what way? By traditional mining, which is necessary to maintain the Bitcoin network, and thousands of other Proof-of-Work-based cryptocurrencies.
Negative impact of traditional mining
In order to maintain the Bitcoin network or other PoW-based cryptocurrencies, miners have to solve complex computational math problems — by doing so they verify the authenticity of transactions and add valid ones to the blockchain. This process is dubbed mining and requires extensive computing resources.
The need to compete to solve a mathematical puzzle and receive a reward makes people use more and more powerful equipment. This is how new bitcoins are generated. With the cryptocurrency boom, harmless mining on computers turned into an endless race among miners. Today miners not only buy high-performance computers. Some miners create farms consisting of energy-consuming ASIC devices while others use huge plants to mine bitcoins.

A mining farm consisting of thousands of ASIC devices. Source.
As you know, intensive computing power requires elevated power expenses and leads to air pollution and a waste of natural resources. This poses a serious problem. Nowadays electric power stations, which are thermal power plants (TPP), burn fossil fuel, such as coal or natural gas, to produce electricity.
This process causes CO2 (carbon dioxide) emissions which adversely affect the biosphere — mining contributes to the greenhouse effect which heats the planet up. This consequently causes a global warming effect with its associated impacts on the environment and may pose threats to life on the planet. What is more, every minute we are breathing the same polluted air, thereby being at risk of a bunch of diseases and complications. All these factors shorten life expectancy for us and our children. Air pollution cause a great deal of premature deaths
The more carbon dioxide gets into the environment, the more harm it does. Carbon dioxide is a harmful by-product of industrial activity. The biting irony is that we use natural resources to generate these emissions, and these resources have limits too. Traditional mining significantly exacerbates the global problem and the situation has been deteriorating in recent years.
The effects of carbon footprint are already being felt
There are, undoubtedly, a lot of other factors that cause global environmental degradation, but the impact of mining should never be ignored. Bitcoin mining is estimated to produce as much carbon dioxide as that produced by industries of Estonia, Switzerland, the Czech Republic, Jordan, or Sri Lanka.
The entire bitcoin network is responsible for 22-22.9 million tons of CO2 per year — just think and try to imagine how much it is. Chinese miners represent about half (47%) of emissions. In China energy is cheap as it's produced by coal-fired thermal power plants. Once we add emissions produced by mining other cryptos, the numbers will double!

Powerful mining equipment. Source.
Two years ago, Nature Research journal published an article regarding Bitcoin emissions. It said: "We cannot predict the future of Bitcoin, but projected Bitcoin usage, should it follow the rate of adoption of other broadly adopted technologies, could alone produce enough CO2 emissions to push warming above 2 °C within less than three decades." Two years later, we can see the researchers' concerns had the ground — digital gold keeps to be mined with the same enthusiasm as well as the planet keeps to be polluted. "It [Bitcoin] alone could produce enough emissions to raise global temperatures as soon as 2033, " warn a group of researchers.
As an alternate solution, miners are encouraged to use renewable energy (wind, solar, etc.) — which can make bitcoin mining more environmentally friendly. Unfortunately, renewable energy sources account for just a small share of global energy which makes them impossible to be used widely. Moreover, in the pursuit of profit, miners don't seem particularly eager to get rid of profitable equipment which cost them a fortune.
Nonetheless, the fact that modern cryptocurrencies disapprove environment-damaging mining lets us hope for the early improvement of the situation. UMI is one of these cryptocurrencies.
UMI is a green cryptocurrency based on smart contract
Not all cryptocurrencies use computing power to generate new coins. For example, there are cryptocurrencies based on Proof-of-Stake (PoS) and Proof-of-Authority (PoA) technology. UMI is just like that.
As a substitute for mining and to incite users, UMI uses Staking Smart Contract which allows generating new coins with no energy expenses and powerful equipment. No waste of natural resources. Staking technology is perfectly safe for the planet. This is the latest technological development loop of crypto industry.

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UMI can be definitely called an environmentally friendly cryptocurrency as it has no negative impact on the environment. Today this is of greatest importance for all of us. UMI staking neither endangers human health nor harms the environment. In other words, we are protecting the planet and all the people that inhabit it. This is something we can be really proud of. Because the environment influences our health, and good health is the most important thing in life.
As a final note, we would like to say that adhering closely to their ideology, the UMI team collaborates only with environmentally conscious partners who are concerned with the protection of the natural world. This was the main reason for choosing the ROY Club as our partner. We are certain this will be productive cooperation which will make this world a better place.
Join in and invite all your friends — together we can create new UMI coins using eco-friendly staking and care for our planet!
Best regards, UMI Team!
submitted by UMITop to u/UMITop [link] [comments]

Is it right about bitcoin mining?

The result of “bitcoin mining” is twofold. First, when computers solve these complex math problems on the Bitcoin network, they produce new bitcoin (when referring to the individual coins themselves, "bitcoin" typically appears without capitalization), not unlike when a mining operation extracts gold from the ground. And second, by solving computational math problems, bitcoin miners make the Bitcoin payment network trustworthy and secure, by verifying its transaction information.
submitted by OddPark9 to btc [link] [comments]

After reading in an r/bestof on what and how bitcoins are mined.

After reading in an bestof on what and how bitcoins are mined. submitted by t25torx to Bitcoin [link] [comments]

PoW or PoS: The Difference Between Mined and Non-Mined Crypto

PoW or PoS: The Difference Between Mined and Non-Mined Crypto
The whole crypto world discusses how Ethereum will switch from Proof of Work to Proof of Stake now. This change can significantly affect the cryptocurrency market. What are the positive and negative sides of PoW and PoS?
Cryptocurrencies can be divided into two types: those that can be mined (Bitcoin, Litecoin, Monero) and pre-mined ones (Ripple, Stellar, Cardano, EOS, NEO).

What is the big difference?

Although they differ in the method of generation, the basis of both types of crypto is the same: verification. Every transaction processed by the network must be verified by someone to ensure that virtual money has not been spent twice. Here we are talking about the difference in the verification process. Transaction groups are combined into a block; after verification, the block joins other previously confirmed blocks, and create a chain of transactions, or blockchain.

PoW: Mined Crypto

Mining is a process in which individuals, groups, or companies solve complex mathematical equations to verify transaction blocks using powerful computers. These math problems are part of the encryption process that protects transactions from cybercriminals and third party access.
The first who solves the problem and signs a block of transactions receives a reward. The miner, who confirmed the block of transactions e.g. in the Bitcoin network, receives a reward in BTC.

Disadvantages of Mined Crypto

  • Mining can be very expensive due to the large amounts of electricity consumed. In mined crypto with less capitalization, competition is usually lower than in BTC.
  • BTC mining requires special ASIC chips, that are combined into huge farms. Electricity is one of the main expenses for these projects. That is why China, where electricity is relatively cheap, has become a home to four of the five largest Bitcoin mining companies in the world.
  • Mining farms have to spend significant money funds on new equipment, which becomes out of date very fast.
  • Large projects need additional cooling, as servers and graphics cards heat up to high temperatures during operations.
  • The Proof-of-Work model is potentially vulnerable to a 51% attack (when a group of people with 51% of the computing power gains control of the network and its participants). For popular cryptocurrencies such as Bitcoin (BTC), Litecoin (LTC), and Monero (XMR) this is not a problem due to their large capitalization. However, minor cryptocurrencies with long block processing times and low daily volumes are risking a lot.

PoS: Non-Mined Crypto

At the other end of the spectrum are pre-mined cryptocurrencies such as Ripple (XRP), Stellar, Cardano, EOS, and NEO.
In the PoS model, super-powered computers are not needed, and participants do not compete for the right to sign the next block. Thus, the costs of this approach are significantly lower. Transaction verification is carried out by cryptocurrency owners. The more cryptocurrencies you have, the longer you own it, the higher the probability that you will be selected to check the transaction block.
Certain mechanisms are built into the system that prevents the dominance of large cryptocurrency holders over the verification process. There are many random ways to select owners who get the right to sign a transaction block. This ensures that small holders have a chance to participate in the process.

Disadvantages of Non-Mined Crypto

Despite the fact that the costs of the Proof-of-Stake method are lower, PoS has its drawbacks.
  • Such cryptocurrencies are not threatened by an attack of 51%, however, another trouble replaces it — a person who posses 51% of all tokens in circulation can gain control of the network and its participants. Of course, in the case of cryptocurrencies with high capitalization, the possibility of this scenario is low, but small partners may suffer from this vulnerability.
  • The Proof-of-Stake model also gives major owners additional votes in determining the future development of the network. Most NEO tokens) belong to several founders, for instance. This helps increase transaction speed and reduces consensus-building time, but also makes cryptocurrency too centralized. In other words, in the PoS model, large players gain significant power, which is theoretically impossible with the PoW model.

Which method is better?

Both methods have their pros and cons. Nevertheless, sooner or later, some of the largest mined currencies (e.g. BTC) will reach their token limit. At this point, they will have to switch to Proof-of-Stake. Since it significantly reduces power consumption and doesn't require powerful computers, gradually all crypto including BTC will switch to a non-mined model just like Ether did.

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submitted by CoinjoyAssistant to ethtrader [link] [comments]

Your heresy shall stay your feet – why you shouldn’t just invest in equities

The most popular approach to reaching FIRE here in Australia seems to be investing solely in equities, either Australian only or with some international shares as well.
It’s a strategy expounded by some of the more prominent bloggers and any questions on Reddit or the like about how to invest to reach FIRE usually get a bunch of responses talking about various equities only portfolios.
Given the great returns that shares have had historically and especially over the last 10 years or so, it’s easy to see why this is a popular strategy. Which is why I wanted to write about how it’s probably not actually going to be the best idea for most people.
Quick disclaimer: As is always the case you should not plan your finances around what some random person on the internet says. Everything which is written here is of a general nature at most and is certainly not specific professional advice for you and you should not be relying on it when making decisions. Whilst every endeavour is made to provide accurate information at the time of writing you should be talking to a licensed professional about any specific areas of your finances, taxes etc. Also, it’s going to be really embarrassing if it all goes pear shaped and you have to explain that it did so because you read about something from a random blogger. Moving on!
I live in Australia, why do I need to invest in equities in other countries?
There are certainly some very good reasons to invest in Australian shares. You don’t have to worry about currency movements as much, there aren’t any annoying forms to have to fill out so that other countries don’t tax you more than they should, you’re supporting Australian companies and workers etc.
There are also a lot of problems with this though. One of the problems that is frequently brought up is that in Australia the 10 biggest companies make up about 40% of the index. The below is from Vanguard’s factsheet for VAS and it shows that the top ten companies make up 42.0% of the ASX 300 as of 31st August.
Which is obviously a pretty big percentage, but isn’t actually that unusual globally as per the below chart. Australia is really around the middle of the pack, although a lot of the countries where the top 10 make up smaller percentages of the index have much bigger markets.
What is more of a problem to my mind at least is that so much of the Australian market is focussed on just two sectors, Financials and Materials.
The Financials sector makes up 31% of the index, and in fact the big 4 banks are about 21% of the entire index. Given that they’re almost entirely domestically focussed with few growth opportunities here and with a very large amount of their earnings coming from residential mortgages in what seems to me to be a very highly valued property market, I’m not super keen on having my money invested only in Australia.
Similarly with Materials making up about 17.5% and most of this being companies that dig stuff out of the ground and export it and are largely reliant on continued good relations with China, it doesn’t strike me as being a great growth sector either.
I could be wrong on all of this of course (and have been wrong about all sorts of investment ideas in the past) but personally I would prefer a bit more in the way of diversification and growth prospects because otherwise you’re essentially taking a bet on housing staying strong and China continuing to buy our resources.
If I look at MSCI World ex-Australia (VGS), Financials and Materials are a much smaller part of the index so by buying international equities I have a lot more diversification and I get exposure to industries which have lower representations in Australia like IT, Health Care and the like and which are probably likely to see more growth in my opinion. Again, I could be wrong about all of this but that’s part of my thinking here.
There is also some diversification benefit from investing in global equities, in that although the Australian sharemarket is likely to closely follow what global markets are doing ie if they go up or down so will the Australian market but the reverse doesn’t necessarily hold true.
So if the Australian share market has a fall due to overinflated property prices for example, stockmarkets areoudn the globe are unlikely to get hit on the back of this. So to me it makes a lot of sense to invest not just in Australian equities but International ones as well.
Why should people invest in anything other than equities?
I mentioned in my post explaining bonds that I actually have about 21% in investments other than equities. That’s a mix of cash, fixed income, REITs, and infrastructure investments.
I also talked about one of my favourite FIRE bloggers the FI Explorer having about 30% of his investments in assets like bonds, gold, and bitcoin as of his last update.
The idea of investing in those other asset classes is that hopefully when equities fall or aren’t doing much, these other assets will go up in value. Historically speaking bonds tend to go up in value when equities are falling significantly. Likewise gold tends to rise when stocks go down. I’m less convinced about Bitcoin as an investment but it’s worked as a hedge so far is my understanding, and it’s not as though it’s me who is invested in it.
As someone who has spent a lot of time studying finance for both formal qualifications and my own enjoyment (yes really) I’m very aware of the fact that equities are a pretty volatile asset class.
I’m not talking about the stupid stuff on the news about billions being wiped off or added on to the value of the sharemarket that the media loves to talk about, that’s irrelevant because what it actually means is the Australian share market went down or up 0.1% or something similar that I don’t care about.
What I do care about are the big falls in the value of the market, and thus my investments. It doesn’t actually make much of a difference to me mathematically at this point in time because I’m still a long way from hitting my FIRE number, in fact it’s actually a net benefit because I can invest at a lower price.
Psychologically though it can make a difference. I talk a lot about the math behind FIRE, but in a lot of ways the behavioural aspects are more important.
I can tell you from experience that it’s not a lot of fun seeing your net worth drop by $100k or more when the market decides to go down by double digit percentages as it did for the last quarter of 2018. As much as you might assume it’s only temporary it doesn’t feel like that at the time and you start wondering if this time is going to be different.
I would say that I’m actually far more relaxed about this stuff than most people because after 20 plus years in finance (mostly in equities/equity linked products) which includes the dot com crash, the GFC, the Greek debt crisis, the taper tantrum and all the other moves up and down over that time period I’ve got a fair idea what it feels like to see my net worth drop and be nervous about the state of the markets and my investments.
Certainly from the number of conversations I’ve had with people who freak out about a 2% drop it seems like I’m a lot calmer about the volatility of shares. Despite that I still want to reduce the chance of big falls in the overall value of my portfolio as much as possible, to have some investments which zig when equities zag so to speak.
Investments like treasury bonds are great for this, because they tend to appreciate in value when the market falls as shown in the graph below taken from this excellent post showing what bonds have done when stocks crashed over the last 30 years or so. The numbers are for the US but would likely be very similar for Oz.
The chart below from this post by one of my favourite finance bloggers (Ben Carlson at a Wealth of Common Sense) shows the performance of stocks and bonds during bear markets over the last 70 years or so, again this is for the US rather than Australia.
The same author wrote this amusing post after Bank of America declared the 60/40 (stocks/bonds) portfolio dead. 60/40 is the rule of thumb asset allocation for US investors, here in Australia your super fund will tell you they’re more like 70/30 even though they’re probably more like 90/10. Again, that’s a post for another time. In any case, as he says in the post a 60/40 portfolio gave you an 8.1% return vs 9.5% for stocks, but had 40% less volatility. I’m happy to trade some return for a lot less volatility.
My point is that although having some money in bonds is not going to be enough to stop the value of my portfolio falling a bit especially given that most of my portfolio is still made up of equities, it will hopefully be enough to stop it from being cut in half as would have been the case for equity only portfolios in the GFC.
So bonds to me are a safety net, both emotionally and financially. Having that safety net in place means that I’m more likely to be able to stay the course. However depending on the timing of any stock (or bond) market crashes they may actually help me reach my goal faster. If there is a big stock market crash right before I would have hit FIRE and bonds haven’t been too much of a drag in performance along the way, then bonds will reduce my losses and help me get to my FIRE number faster than an equity only portfolio will.
What else can you invest in to diversify?
As I mentioned above another asset which can serve well as a diversifier is gold, although personally I don’t like it because even though it has worked historically there is no real reason why it should do so. Warren Buffett has this great quote about gold. “[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” So I don’t invest in gold personally, but if others want to I can see how it makes sense based off what has happened historically.
Similary with Bitcoin which I think of as being even sillier, yes it has worked as a diversifier in the short time it has been around but it has even less utility than gold and basically is worth something only because there are a bunch of people who are willing to keep believing it is worth something. Maybe it’ll keep on working, maybe it won’t, I’m not planning on buying any either way.
As I said above I do have some other investments like property (REITs) and infrastructure as well, I don’t think these are necessarily great for helping me out if the stock market crashes but they may help a little, and in the meantime in years when the stock market goes up but not by much these may well do better for me. In fact over the last 20 years for the US, both bonds and REITs have outperformed stocks.
So maybe I should actually have more money in bonds and REITs than what I currently do!
Does diversification help when you retire?
Dan at Ordinary Dollar has done some great work on optimal asset allocation and longer retirement lengths looking at a mix of Australian and US stocks and bonds.
Combining the findings of the two posts, if you have an 80/20 portfolio you get pretty close to the same probability of a succesful retirement as 100% equities but with a lot less volatility. Sounds like a pretty good deal to me!
It also shows that a 100% allocation to Australian equities (or to US equities for that matter) is not as effective as a more diversfied portfolio, particularly over longer time frames.
The benefits of diversification
What I’m aiming for in my portfolio is a mix of assets that will go well in most circumstances without too much volatilty, and when stock markets crash won’t fall by as much. This will help me out psychologically by having smaller falls in net worth along the way so I don’t panic when markets are falling, and as I’ve said above might well get me to FIRE faster than an all equities portfolio anyway.
It will also help me when I have retired because as it turns out having some diversification actually gives me a higher likelihood of a successful retirement!
Are you all in on equities, or do you have other assets to diversify your portfolio? Has this post changed your mind?
Original post with pretty pictures and graphs here.
submitted by AussieHIFIRE to fiaustralia [link] [comments]

The Intellectual Foundation of Bitcoin比特幣的智識基礎. By Chapman Chen, HKBNews

The Intellectual Foundation of Bitcoin比特幣的智識基礎. By Chapman Chen, HKBNews

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Summary: Bitcoin was invented by the anonymous Satoshi Nakamoto as recently as 2008, but it is backed up by a rich intellectual foundation. For instance, The 1776 First Amendment separates church and state, and contemporary American liberation psychologist Nozomi Hayase (2020) argues that money and state should similarly be separated. Just as Isaac Newton’s study of alchemy gave rise to the international gold standard, so has the anonymous creator Satoshi Nakamoto's desire for a “modernized gold standard” given rise to Bitcoin. Indeed, Bloomberg's 2020 report confirms Bitcoin to be gold 2.0. Montesquieu (1774) asserted that laws that secure inalienable rights can only be found in Nature, and the natural laws employed in Bitcoin include its consensus algorithm and the three natural laws of economics (self-interest, competition, and supply and demand). J.S. Mill (1859) preferred free markets to those controlled by governments. Ludwig von Mises (1951) argued against the hazards of fiat currency, urging for a return to the gold standard. Friedrich Hayek (1984) suggested people to invent a sly way to take money back from the hands of the government. Milton Friedman (1994) called for FED to be replaced by an automatic system and predicted the coming of a reliable e-cash. James Buchanan (1988) advocated a monetary constitution to constrain the governmental power of money creation. Tim May (1997) the cypherpunk proclaimed that restricting digital cash impinges on free speech, and envisioned a stateless digital form of money that is uncensorable. The Tofflers (2006) pictured a non-monetary economy. In 2016, UCLA Professor of Finance Bhagwan Chowdhry even nominated Satoshi for a Nobel Prize.
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Separation between money and state
The 1791 First Amendment to the U.S. Constitution enshrines free speech and separates church and state, but not money and state. "Under the First Amendment, individuals’ right to create, choose their own money and transact freely was not recognized as a part of freedom of expression that needs to be protected," Japanese-American liberation psychologist Nozomi Hayase (2020) points out (1).
The government, banks and corporations collude together to encroach upon people's liberties by metamorphosing their inalienable rights into a permissioned from of legal rights. Fiat currencies function as a medium of manipulation, indulging big business to generate market monopolies. "Freedom of expression has become further stifled through economic censorship and financial blockage enacted by payment processing companies like Visa and MasterCard," to borrow Hayase's (2020) words.
Satoshi is a Modern Newton
Although most famous for discovering the law of gravity, Isaac Newton was also a practising alchemist. He never managed to turn lead into gold, but he did find a way to transmute silver into gold. In 1717, Newton announced in a report that, based on his studies, one gold guinea coin weighed 21 shillings. Just as Isaac Newton’s study of alchemy gave rise to the international gold standard, so has the desire for a “modernized gold standard” given rise to Bitcoin. "In a way, Satoshi is a modern Newton. They both believed trust is best placed in the unchangeable facets of our economy. Beneath this belief is the assumption that each individual is their own best master," as put by Jon Creasy (2019) (2).
J.S. Mill: free markets preferable to those controlled by governments
John Stuart Mill (1806-1873) the great English philosopher would be a Bitcoiner were he still around today. In On Liberty (1859), Mill concludes that free markets are preferable to those controlled by governments. He argues that economies function best when left to their own devices. Therefore, government intervention, though theoretically permissible, would be counterproductive. Bitcoin is precisely decentralized or uncontrolled by the government, unconfiscatable, permissonless, and disinflationary. Bitcoin regulates itself spontaneously via the ordinary operations of the system. "Rules are enforced without applying any external pressure," in Hayase's (2020) words.
Ludwig von Mises (1958): Liberty is always Freedom from the Government
In The Free Market and its Enemies, theoretical Austrian School economist Ludwig von Mises (1951) argues against the hazards of fiat currency, urging for a return to the gold standard. “A fiat money system cannot go on forever and must one day come to an end,” Von Mises states. The solution is a return to the gold standard, "the only standard which makes the determination of the purchasing power of money independent of the changing ideas of political parties, governments, and pressure groups" under present conditions. Interestingly, this is also one of the key structural attributes of Bitcoin, the world’s first, global, peer-to-peer, decentralized value transfer network.
Actually, Bloomberg's 2020 report on Bitcoin confirms that it is gold 2.0. (3)
Von Mises prefers the price of gold to be determined according to the contemporaneous market conditions. The bitcoin price is, of course, determined across the various global online exchanges, in real-time. There is no central authority setting a spot price for gold after the which the market value is settled on among the traders during the day.
Hayek: Monopoly on Currency should End
Austrian-British Nobel laureate Friedrich Hayek’s theory in his 1976 work, Denationalization of Money, was that not only would the currency monopoly be taken away from the government, but that the monopoly on currency itself should end with multiple alternative currencies competing for acceptance by consumers, in order "to prevent the bouts of acute inflation and deflation which have played the world for the past 60 years." He forcefully argues that if there is no free competition between different currencies within any nation, then there will be no free market. Bitcoin is, again, decentralized, and many other cryptocurrencies have tried to compete with it, though in vain.
In a recently rediscovered video clip from 1984, Hayek actually suggested people to invent a cunning way to take money out of the hands of the government:- “I don’t believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can’t take them violently out of the hands of government, all we can do is by some sly roundabout way introduce something they can’t stop” (4). Reviewing those words 36 years hence and it is difficult not to interpret them in the light of Bitcoin.
Milton Friedman Called for FED to be Replaced by an Automatic System
Nobel laureate economist Milton Friedman (1994) was critical of the Federal Reserve due to its poor performance and felt it should be abolished (5). Friedman (1999) believed that the Federal Reserve System should ultimately be replaced with a computer program, which makes us think of the computer code governing Bitcoin (6).[\](https://en.wikipedia.org/wiki/Criticism_of_the_Federal_Reserve#cite_note-:2-12) He (1970) favored a system that would automatically buy and sell securities in response to changes in the money supply. This, he argued, would put a lid on inflation, setting spending and investment decisions on a surer footing (7). Bitcoin is exactly disflationary as its maximum possible supply is 21 million and its block reward or production rate is halved every four years.
Friedman passed away before the coming of bitcoin, but he lived long enough to see the Internet’s spectacular rise throughout the 1990s. “I think that the Internet is going to be one of the major forces for reducing the role of government," said Friedman in a 1999 interview with NTU/F. On the same occasion, he sort of predicted the emergence of Bitcoin, "The one thing that’s missing, but that will soon be developed, is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B, without A knowing B or B knowing A." (8)
Of course, Friedman didnt predict the block chain, summed up American libertarian economist Jeffery Tucker (2014). “But he was hoping for a trustless system. He saw the need. (9).
Bitcoin Computer Code as Constitution in the Buchananian Sense
American economist cum Nobel laureate James Buchanan (1988) advocates constitutional constraints on the governmental power to create money (10). Buchanan distinguishes a managed monetary system—a system “that embodies the instrumental use of price-level predictability as a norm of policy”—from an automatic monetary system, “which does not, at any stage, involve the absolute price level” (Buchanan 1962, 164–65). Leaning toward the latter, Buchanan argues that automatic systems are characterized by an organization “of the institutions of private decision-making in such a way that the desired monetary predictability will emerge spontaneously from the ordinary operations of the system” (Buchanan 1962, 164). Again, "Bitcoin regulates itself through the spontaneous force of nature, flourishing healthy price discovery and competition in the best interest of everyone" (Hayase 2020).
Shruti Rajagopalan (2018) argues that the computer code governing how the sundry nodes/computers within the Bitcoin network interact with one another is a kind of monetary constitution in the Buchananian sense. One of Buchanan's greatest inputs is to differentiate the choice of rules from the choice within rule (Buchanan 1990). One may regard the Bitcoin code as a sort of constitution and "the Bitcoin network engaging in both the choice of rules and choice within rules" (Rajagopalan 2018) (11).
Tim May: Restricting Digital Cash may Impinge on Free Speech
Cypherpunks are activists who since the 1980s have advocated global use of strong cryptography and privacy-enhancing technologies as a route to social and political liberation. Tim May (Timothy C. May [1951-2018]), one of the influential cypherpunks published The Crypto Anarchist Manifesto in September 1992, which foretold the coming of Bitcoin (12). Cypherpunks began envisioning a stateless digital form of money that cannot be censored and their collaborative pursuit created a movement akin to the 18th Enlightenment.
At The 7th Conference on Computers, Freedom, and Privacy, Burlingame, CA. in 1997, Tim May equated money with speech, and argued that restricting digital cash may impinge on free speech, for spending money is often a matter of communicating orders to others, to transfer funds, to release funds, etc. In fact, most financial instruments are contracts or orders, instead of physical specie or banknotes (13).
Montesquieu: Laws that secure inalienable rights can only be found in Nature
In his influential work The Spirit of Laws (1748), Montesquieu wrote, “Laws ... are derived from the nature of things … Law, like mathematics, has its objective structure, which no arbitrary whim can alter". Similarly, once a block is added to the end of the Bitcoin blockchain, it is almost impossible to go back and alter the contents of the block, unless every single block after it on the blockchain is altered, too.
Cypherpunks knew that whereas alienable rights that are bestowed by law can be deprived by legislation, inalienable rights are not to be created but can be discovered by reason. Thus, laws that secure inalienable rights cannot be created by humankind but can be found in nature.
The natural laws employed in Bitcoin to enshrine the inalienable monetary right of every human being include its consensus algorithm, and the three natural laws of economics (self-interest, competition, and supply and demand) as identified by Adam Smith, father of modern economics.
Regarding mathematics, bitcoin mining is performed by high-powered computers that solve complex computational math problems. When computers solve these complex math problems on the Bitcoin network, they produce new bitcoin. And by solving computational math problems, bitcoin miners make the Bitcoin payment network trustworthy and secure, by verifying its transaction information.
Regarding economic laws, in accordance with the principle of game theory to generate fairness, miners take part in an open competition. Lining up self-interests of all in a network, with a vigilant balance of risk and rewards, rules are put in force sans the application of any exterior pressure. "Bitcoin regulates itself through the spontaneous force of nature, flourishing healthy price discovery and competition in the best interest of everyone," to borrow the words of Hayase (2020).
A Non-monetary Economy as Visualized by the Tofflers
In their book, Revolutionary Wealth (2006), futurists Alvin Toffler and his wife Heidi Toffler toy with the concept of a world sans money, raising a third kind of economic transaction that is neither one-on-one barter nor monetary exchange. In the end, they settle on the idea that the newer non-monetary economy will exist shoulder-to-shoulder with the monetary sector in the short term, although the latter may eventually be eclipsed by the former in the long run. What both the Tofflers' The Third Wave (1980) and Revolutionary Wealth bring into question is the very premise of monetary exchange. The vacuum left over by cash in such a non-monetary economy may be filled up by Bitcoin as a cryptocurrency.
Satoshi Nakamoto Nominated for Nobel Prize by UCLA Finance Prof.
UCLA Anderson School Professor of Finance Bhagwan Chowdhry nominated Satoshi Nakamoto for the 2016 Nobel Prize in Economics on the following grounds:-
It is secure, relying on almost unbreakable cryptographic code, can be divided into millions of smaller sub-units, and can be transferred securely and nearly instantaneously from one person to any other person in the world with access to internet bypassing governments, central banks and financial intermediaries such as Visa, Mastercard, Paypal or commercial banks eliminating time delays and transactions costs.... Satoshi Nakamoto’s Bitcoin Protocol has spawned exciting innovations in the FinTech space by showing how many financial contracts — not just currencies — can be digitized, securely verified and stored, and transferred instantaneously from one party to another (14).
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End-notes
  1. https://bitcoinmagazine.com/articles/bitcoin-is-the-technology-of-dissent-that-secures-individual-liberties
  2. https://medium.com/hackernoon/why-sir-isaac-newton-was-the-first-bitcoin-maximalist-195a17cb6c34
  3. https://data.bloomberglp.com/professional/sites/10/Bloomberg-Crypto-Outlook-April-2020.pdf
  4. https://www.youtube.com/watch?v=EYhEDxFwFRU&t=1161s
  5. https://www.youtube.com/watch?v=m6fkdagNrjI
  6. http://youtu.be/mlwxdyLnMXM
  7. https://miltonfriedman.hoover.org/friedman_images/Collections/2016c21/IEA_1970.pdf
  8. https://www.youtube.com/watch?v=6MnQJFEVY7s
  9. https://www.coindesk.com/economist-milton-friedman-predicted-bitcoin
  10. https://www.aier.org/research/prospects-for-a-monetary-constitution/
  11. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3238472
  12. https://www.activism.net/cypherpunk/crypto-anarchy.html
  13. http://osaka.law.miami.edu/~froomkin/articles/tcmay.htm
  14. https://www.huffpost.com/entry/i-shall-happily-accept-th_b_8462028
Pic credit: Framingbitcoin
#bitcoin #bitcoinhalving #jamesBuchanan #MiltonFriedman #AlvinToffler #FirstAmendment #LudwigVonMises #TimMay #freeMarket # SatoshiNakamoto #FriedrichHayek #Cypherpunk #Cryptocurrency #GoldStandard #IsaacNewton
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Bitcoin Mining & Altcoin

I'm curious when bitcoin miners solve those complex algoritms does that mean a new block is added to the block chain that confirms the transactions then that leads to a reward of bitcoin for the miner OR do miners both confirm the transactions on a blockchain or ready there AND solve the math algorithms to be rewarded with bitcoin?
So JP Morgan Bank has a digital coin. How does it work out when a business wants to create its own digital coin and is this considered an altcoin? Does this mean they buy a data center and also try to mine coins or what? I understand something like ethereum as it is for smart contracts but having problems understanding altcoin.
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But how does bitcoin actually work? - YouTube

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