Ethereum 2.0 – The Path To Serenity

The Ethereum blockchain has undergone significant updates in preparation to a new version. The following software updates have been made since the project first started:

Frontier (July 2015)
Homestead (March 2016)
Metropolis (Byzantium in October 2017 and Constantinople in February 2019)
Istanbul (December 2019)

The next iteration is Eth2 or Ethereum 2.0 which will introduce the Serenity update. It is set to begin in late 2020 and deploy in phases. (Learn more at Ethereum.org)

It will change the Ethereum protocol, moving away from the Proof-of-Work (PoW) consensus mechanism to Proof-of-Stake (PoS). It will launch in multiple phases, as developers begin deploying the necessary changes to the Ethereum blockchain. The main purpose for this transition is to bring more efficiency and scalability to the network, to process more transactions and operate with more efficiency and stability. Scaling has long been a problem of blockchain-based networks, because they have to rely on decentralization which doesn’t process transactions as efficiently at the rate of commercial business applications. That is part of a tradeoff with scalability, since blockchains are more decentralized and secure.

Eth2 will still be decentralized, but improve their consensus mechanism from mining to staking. This will allow validators to contribute based on their proportion of ETH (ether) on the network rather than providing compute resources. There is no more need to solve random puzzles using hash power. Instead the staking method allows validators of blocks to commit a portion or all of their ETH to validate transactions. Their incentive will be based on the amount they staked. It is more energy efficient as well, not requiring expending large amounts of energy to produce one block. Eth2 randomly selects validators in a fair and decentralized manner.

At present, the Ethereum network can process between 15 to 30 tps (Transactions Per Second). With Eth2 it will increase the transaction velocity up to 100,000 tps. This would be possible (in theory) with the implementation of the Ethereum 2.0 upgrades. Even if in the real world it isn’t exactly 100,000 tps, a higher transaction velocity is still the best outcome. The underlying element to increase the number of transactions involves the use of shard chains (sharding will be explained later).

Among other changes to the network, the beacon chain and sharding will also be deployed as part of the EIP (Ethereum Improvement Proposals). Beacon chain is a feature that coordinates the PoS implementation on the Ethereum blockchain. Sharding aims to improve the storage of data on the network, to scale to higher capacity and faster access to data. Rather than to have all nodes on the network storing the blockchain state, shards are created to store system state in a distributed and decentralized manner for more efficient operations. If all nodes had to keep store of the world state of the blockchain, it certainly slows down the network since each node has to perform updates whenever there are changes. That can take plenty of time when you have many nodes.

The idea is to keep the network open to all who want to stake without barriers in order to maintain a decentralized network. Ethereum 2.0 will require 16,384 validators, which means a more decentralized and secure network. The more nodes there are, the more security to the network through coordinated participation of each node. This is because those who have staked their ETH face losing what they staked if they do not cooperate with other nodes or if they attempt to attack the network. It is a coordinated game theory example of contributing resources for the greater good. However, there are also consequences and not just incentives.

Despite all the efforts by developers, the project has been facing delays. This is not a major setback, but has been expected due to the complex nature of the system. It has been in development for years and it could still take longer to deploy and implement. It does keep the momentum for driving the value of ETH higher, along with the surge in the DeFi (Decentralized Finance) space which is based on Ethereum’s ERC20 token standard. As transaction volume increases and ETH gas costs decrease, the value of ETH would show a likely bullish trend. The market is so volatile though, nothing is certain. The transition to Ethereum 2.0 will be undergoing phases, so they won’t happen over night. It is best to keep an eye out on the developments, because any progress would surely be a good signal to the rest of the market.

The Summer When “Sushi” And “Hotdog” Burnt The Noobs

The DeFi space is notorious for copycat blockchain projects which don’t really deliver anything useful other than a quick pump and dump. Those who get in first benefit, dumping on those who come much later in the anticipation of ginormous returns. It just is not going to happen, unless you aren’t the “fool” (e.g. Greater Fool Theory). The problem is due to human nature. Many are looking at these DeFi projects as “get rich quick” schemes as they try to get in early and exit early with profits while leaving those who followed nothing.

It all started when developers followed the success of projects like Uniswap and Yearn.Finance. Since the code is open source, and there are plenty of resources available from GitHub among other places, developers can just copy and paste the code and create their own fork of the software. It has worked well in fact that we have Uniswap clones with catchy names like SushiSwap and HotDogSwap. They may sound like the next big thing in the crypto space, but that is not the case.

These copycat projects offer high yield products, that just seem out of this world. You must be in another dimension to expect 1,000,000x (1 million times) returns on a token. This reminds me of scamcoins like Bitconnect, but only more technical and neatly packaged for those who think they are on to quick gains in the crypto space. None of these tokens are sustainable if every holder ahead of you dumps and there is no further liquidity to maintain the liquidity pool. They were illiquid to begin with and have no other purpose other than speculation.

A developer who goes by the name of “Chef Nomi” has become well known for the SushiSwap token. It is another clone of Uniswap that issues its own token for Liquidity Providers to lock their digital assets. Despite its relatively short existence, it suddenly surged after August 30, 2020 with huge gains for those who hold the token. All they did was launch a new liquidity pool provider using “vampire mining” methods to siphon off tokens from Uniswap. At this point some holders were thinking things were going well, until SushiSwap dumped and Chef Nomi exited the project taking $14M (which he would later return). Later Chef Nomi apologized, stating the reason for exiting the project was more due to turning it over to the community. It was just that the way he left was not in a genuine way to assure the community that things will be all right. Actually, what does Chef Nomi care since no one should be in control of the platform. It is a decentralized protocol that no one, not even its developer should be able to control.

SushiSwap was eventually saved by Sam Bankman-Fried, head of startup Alameda Research and trading platform FTX. Perhaps SushiSwap was worth saving. If you look at the code, it was not just a clone of Uniswap. The project also added governance features for the community. At least things ended well with SushiSwap but not for the Yam project. Yam, a clone of YFI or Yearn.Finance token, became one of the hottest “Yield Farming” projects in DeFi in August 2020. Many people fell for the hype and soon many were putting their tokens to gain huge yields. However, the code was never subjected to an audit and it had a serious bug that would affect its operation. The bug has permanently affected the platform with $750,000 worth of Curve tokens locked. Perhaps this should be the DeFi example of who not to follow when launching a new project.

Following the heels of SushiSwap is another project called HotDogSwap. Once again the hype brought in a huge pump in its initial release in September 2. The token was valued at $5,000 at some point before crashing to less than $1.00. The value has since plummeted further below $1.00 as of this posting and it may not recover again, unless it has real liquidity and actual use cases. That cannot be stressed enough. Utility is what makes a token a GPT (General Purpose Technology). One of the failures of HotDogSwap is a lack of community governance that could have prevented large dumps through improvement proposal protocols (e.g. like EIP or Ethereum Improvement Proposal). Otherwise, there is no way to stop “Degenerate Farmers” who pump to push prices up and then cash in when the FOMO begins.

Perhaps the DeFi space needs to keep an eye out for regulators. With all the money being generated in this space, it will begin to catch the attention of regulators like the US SEC and tax authorities like the IRS. Compliance can be circumvented because these platforms are decentralized, but we shall see just how decentralized a platform is. If they use a form of on-ramp with fiat or digital exchanges, it could lead to requirements for users to submit personal KYC data. The use of CeFi (Centralized Finance) exchanges like Binance can provide the compliance requirements to some of these DeFi projects using a CeDeFi bridge.

Between Yam and HotDogSwap, users have lost plenty of money. These copycat projects are burning those who FOMO into the project with the expectation of high yield returns. The failed DeFi projects can serve as a cautionary tale to those who dare get into this space. These projects are digital ponzi schemes, and even much worse. With ponzi schemes you have a chance to recover your funds. With smart contracts and the blockchain, the problem is the immutability of data means there is no backdoor or master key that can unlock these funds. It is locked in the blockchain forever, thanks to reckless developers.

Your Funds Are #SAFU With Me, CZ

Binance is one of the largest cryptocurrency exchanges. There are threats from bad actors, who can affect the operation of digital exchanges that also affects users. When an exchange gets hacked, holders of coins who have left funds on the exchange usually have no way of getting their digital assets back. This is why a form of mitigation to be able to recover funds is becoming important. The Mt. Gox hack wiped out that digital exchange of 850,000 BTC (Bitcoin). To this date there has been no formal settlement with former coin holders.

Binance provides its own security measure to address this problem. It is called the SAFU (Security Asset Fund for Users). It is an emergency insurance fund announced back in July 3, 2018.

According to Binance:

“To protect the future interests of all users, Binance will create a Secure Asset Fund for Users (SAFU). Starting from 2018/07/14, we will allocate 10% of all trading fees received into SAFU to offer protection to our users and their funds in extreme cases. This fund will be stored in a separate cold wallet.”

The story of SAFU goes back to a time Binance CEO Changpeng “CZ” Zhao tweeted “funds are safe”. It became a regular message from CZ to assure exchange users on their status. Later a content creator named “Bizonacci” uploaded a video called “Funds Are Safu” on YouTube. It went viral and the term “Safu” instead of safe has stuck ever since.

This insurance fund collects a percentage of fees from transactions on the exchange. This would be used in the event of a serious breach that compromised the funds stored by the system. It is also stored in secure hard wallets away from online access to hackers. The fund is released in the event of an emergency only, so it continues to accumulate unless otherwise.

These are good measures to provide customers if you are a digital exchange. However, if you are the customer you might consider not storing your coins or tokens on an exchange because of the risk. Since exchanges do not guarantee the safety of your funds, if anything should happen like a software glitch or hack, your funds should they get stolen cannot be fully reimbursed by exchanges. Depending on jurisdiction, you can only pursue a lawsuit if there is any responsibility on the part of the digital exchange to reimburse you based on the policy agreement. Most of the time there is no obligation by the exchange, so storing funds in their custodial wallet is at your own risk.

The best solution is to have your own SAFU to store your funds. That means a hardware wallet that is offline in your own possession. This also gives you control of your own private key, something that digital exchanges don’t provide. Using online wallets (e.g. Exodus, Metamask, MEW, etc.) are also options, but since they are online they are still at risk from being attacked. Whichever wallet a user chooses, what is important is to keep the private key and seed phrase secure.

Ethereum Needs The LINK Marines

Ethereum is surging as DeFi is bringing in more liquidity into the decentralized platform. A vital part of this push includes Chainlink, a decentralized oracle network. Chainlink provides a solution for providing information to smart contracts, many of which run on the Ethereum platform. Blockchains are evolving to third and fourth generation networks that introduce new features that extend the capabilities of smart contracts. It is significant to the Ethereum blockchain when it comes to use case.

Decentralized Oracles

Chainlink provides an API for connecting smart contracts to real world data. This information can be processed form databases which feed the data to smart contracts in real time. What separates Chainlink from other oracles is its decentralized BFT (Byzantine Fault Tolerant) network architecture which is not under the control of any entity or organization. This prevents bias, data tampering, manipulation and single points of failure. Downtime can be costly when data is not received in time. This can affect business decisions like when to sell stocks or coins.

One of the main applications for Chainlink is connecting smart contracts to real time price feeds. By design, Chainlink was developed to bring off-chain data sources to on-chain smart contracts. The previous problem with smart contracts is they could not get data on their own. Chainlink provides a type of middleware to connect external data to the smart contract to execute on any blockchain.

LINK Token

To ensure that nodes on the Chainlink network are feeding accurate data to smart contracts, a token is used called LINK. It is an incentive to the oracles who provide data and help secure the network. Bad actors are removed from the system while those who are honest receive the incentives. There are consequences for dishonest nodes who try to tamper with the data. It is a type of reputation system so bad actors will be discouraged from malicious intents on the blockchain. This includes nodes that neglect providing data, falsifying data and attacking other nodes among other things. This provides an open market that is merit-based to provide reliable and trustworthy data.

Blockchain Agnostic

Although built using the Ethereum ERC20 token standard, Chainlink is actually blockchain agnostic. This means that Chainlink was meant to work with other blockchains like Icon and even Hyperledger. Although it is an ERC20 token on the Ethereum main network, it is not exclusive to it. Chainlink’s LINK token can survive on other blockchains through distribution. Blockchains that need real time data can use Chainlink through an API.

Benefits To Ethereum

Prior to Chainlink, oracles could not directly feed data to smart contracts in real time. The data from oracles can be coded by developers, but they could not do it automatically until the Chainlink API came along. A smart contract can get external data feeds from various data sources via Chainlink’s nodes that handle data requests. They also return the results back to the smart contract to fulfill the request.

The importance of Chainlink is the way it provides real world data. For practical application use cases, oracles like Chainlink can provide data as they occur and not from a previous time. Smart contracts that are able to get data in real time to process transactions are more accurate and reliable. This can improve systems that rely on constantly changing data like on monetary exchanges. This means a trader will get the actual value of their trade as it is happening in the market.

The potential is huge for Ethereum. It provides an actual service that has a use case to benefit users. It is also decentralized so there should be no point of failure or downtime. These oracles perform non-stop even if one node is down since there will be others to take its place. This can help extend smart contract capabilities on Ethereum to become truly reliable for business and finance.

The Lightning Network – A Micropayments Layer For Bitcoin Transactions

Scalability is one of the main criticisms against Bitcoin (BTC), since the network is not capable of more than 7 TPS (Transactions Per Second). This is due to the “Scalability Trilemma” of blockchains, in which there is a tradeoff of scalability with security and decentralization. You cannot have all three things at once so it requires a balance of resources. If you value more decentralization, you will get more security as well but that will be at the expense of scalability. The blockchain cannot scale if there are too many nodes on the network. When compared to the VISA and Mastercard network, Bitcoin is not on the same level when processing transactions. The VISA network can process over 1,700 TPS or close to 150 million transations per day. In reality though, it doesn’t always reach these values but it gives some idea of the scale VISA is capable of.

While the developer community looks to the fundamentals of Bitcoin as its strength, others view ways to preserve the core architecture while introducing new features to enhance it. One way to improve scaling is through a Layer 2 solution called the Lightning Network (LN). This protocol moves the computational process from the blockchain main network to an off-chain layer. This puts less work on the nodes while using an off-chain layer as the solution to process direct peer-to-peer transactions using payment channels. The blockchain will then be used for settling the transaction and recording it. These can also be implemented as sidechains, which still have a Merkle Root for provability that they are a part of the blockchain. In theory the LN can process up to 1 million TPS and support other cryptocurrency (e.g. Litecoin).

One of the main talking points of the Lighting Network is reducing transaction fees. This means instant payments that only require a fraction as fees. The idea is to enable micropayments using BTC and make it much easier to pay for items like a cup of coffee. Prior to that, paying for coffee with BTC was impossible. Merchants do not accept BTC and the transaction fees were quite expensive. It made more sense to use BTC to move millions of dollars of currency than to transact $5.00 for a cup of coffee. Developers also promote the idea of using the Lightning Network for Atomic Swaps, which allow large amounts of BTC to be exchanged for other currency or cryptocurrency.

The LN has been in development since 2016. One of the requirements needed to support it was the activation of SegWit BIP 141 UASF. SegWit was activated on August 24, 2017 after the Bitcoin community agreed on BIP 91 (signals the support to activate BIP 141). While it has been steadily improving for production use, it is not without critics. The Bitcoin Cash community hard forked from Bitcoin because one of the reasons was that they did not support SegWit and the LN. The Bitcoin Cash supporters believe in larger block sizes and on-chain solutions as opposed to maintaining existing block size and off-chain solutions. Other critics have expressed concerns that the LN could become centralized with payment channels. Several channels could form one large channel and monopolize the network, in theory. Other views state that the channels could become like intermediaries, with the power to deny transactions and thus defeats the purpose of a decentralized system.

There are 3 possible problems with the LN (from Investopedia):

Transaction Fees
Nodes are susceptible to hacking
Does not solve network effect in Bitcoin

Users will choose whichever has smaller transaction fees. If the main network has lower fees, then there is no need for a Layer 2 solution. However, if the main network is slower then it makes an off-chain solution ideal. A faster LN can process transactions faster and more efficiently than the main network. Fees should eventually lower when there are more users.

Since LN nodes have to be online at all times, if a hacker knows the LN node’s IP address and network, they can attempt to attack it. They can attack the node to disrupt its service or even to try to steal BTC. When a node goes off-line, by accident or intentionally, it can also affect transactions. A Fraudulent Channel Close can occur if a channel closes before the transaction completes and pocket the BTC. Network outages can also bring the LN system down if the payment channels are too centralized.

While the LN is aimed to increase adoption of BTC as a form of payment (i.e. medium of exchange), it may not be able to keep up with the network effect. Bitcoin Cash claims to have solved the problem with micropayments since it has a faster network than Bitcoin. In order for LN to be more successful it must be used for making BTC payments. It appears though that more people are willing to hold on to BTC as a store of value rather than for making payments.

Whether LN will become an integral part of Bitcoin, is still up for debate. It presents an excellent idea but it may already be outdated. More Bitcoin maximalists are really just looking at BTC as a digital asset counterpart to gold, so it is a new store of value. As BTC becomes more valuable, people will not likely spend it for micropayment transactions. This is where the altcoins fit the bill for that purpose. Instead BTC will be like digital gold, stored safely by HODlers in their hardware wallets. This creates a dilemma for the LN, but it can still work out for the best. BTC can be divided into smaller denominations or units called Satoshis. The LN can prove its value by providing a safe and easy way to make micropayments using Satoshis. Proving its value will make it a better proposition for developers to incorporate the LN in their applications, and that could onboard users for greater adoption.

Lost Bitcoins Were Not Meant To Be Easily Recovered

There have been stories of people losing their digital asset, Bitcoin (BTC), for careless reasons. There is the story of a Welsh man who “accidentally” (we don’t know for sure) threw a hard drive away that contains approximately $80-$100M+ worth of BTC. The price actually will be worth plenty more or even less based on market value. The most common incident involves holders of BTC losing their private key to their digital wallet. Now think of it like losing your apartment key. It is different though because if you don’t have a duplicate you can always go to the apartment manager for a master key to open the door. In Bitcoin, unfortunately, there is no master key that unlocks all digital wallets. Other instances of unrecoverable BTC happens when the holder of a digital wallet dies and no one else has access to it. Unless there is a next of kin to claim the inheritance, it is as good as gone unless the private key can be provided to recover the coins.

You can still recover your BTC even if the private key is lost, provided you took the required measures. You must have the seed phrase generated during wallet creation. The problem is if you don’t have both then your BTC will not be recoverable based on the blockchain’s inherent design. That is because all private keys and wallets are unique, and since the blockchain is decentralized there is no master key or main administrator to support users. Incidents that involve hacking would not be considered lost BTC because the hackers will most likely send the stolen coins to another wallet and then try to lose anyone tracking the BTC by using various digital exchanges. In other words, that BTC would be considered stolen rather than lost, and it could end up back in circulation if it were sold to an exchange. This is why it is important to make backups of both the private key and seed phrase, but store it in a secure location and not just some random cloud drive. Consider using hardware wallets, removable hard drives, thumb drives and other storage devices that can be locked up in a vault (you get the idea).

Is it easy to lose your private key? The answer is yes, when considering the circumstances. If you store your private key on your local hard drive without a backup copy, if that hard drive should fail then it could mean game over. Your savior would be the seed phrase of the digital wallet or what is called the recovery phrase. This is provided to the user during the creation of the digital wallet, when the private key was generated. This contains 12 words in Bitcoin (also called the mnemonic) that must be provided when recovering the private key. Another way a user loses a private key is if it was stored online and never exported to an offline location. If the online service were to fail with no backup system, the private key will be gone as well.

Whatever the story is, lost BTC lead to less of the supply of the cryptocurrency. According to Chainalysis, an estimated $35,000,000,000 (price is volatile so this is not a fixed value) in Bitcoin (BTC) is likely to never be recovered. This was based on their report that 20% of Bitcoin’s total supply of 21M BTC has not moved for five years or longer. According to the report, that would be 3.72M BTC based on a market valuation of $9,408.60 (as of the market value when report was published). It is also assumed that 4M BTC in total, including the BTC in the report, may never ever be recovered unless there is protocol which will allow the lost coins to be released back into circulation. That is not likely unless the Bitcoin community in general come to a majority consensus. The Bitcoin blockchain does not support releasing lost BTC as of Bitcoin Core 0.20.0 (Released in 6/3/2020). When we deduct the 4M BTC, that means there will be only 17M BTC.

Holding a digital asset like BTC requires plenty of responsibility in return for financial independence. The question then is why would anyone even want to own Bitcoin if it cannot be easily recovered, has no customer support like a bank and no master key to unlock it if the private key is lost? That should make it all the more obvious why it is important to own Bitcoin. Only you can have control of your BTC. The government cannot freeze it and prevent you from storing value on the blockchain. You have freedom from bank policies which regulate finances (e.g. withdrawals, remittances, loans, etc.). The only thing a person must do to have this benefit is to secure their private key and seed phrase. Humans are not perfect and very prone to mistakes, so is it even possible to have a system like this?

We have to go back to the fundamentals of Bitcoin and why it was designed that way. Remember, its founder Satoshi Nakamoto developed a system of direct peer-to-peer payments without relying on a trusted third party. It is also decentralized so that it cannot be manipulated and controlled by a single entity. The way to do this is give full control of money to the users and establish a platform that is permissionless and trustless for exchanging value. The blockchain provides a cryptographically secure platform of trust among strangers who want to transact because it doesn’t require them to know each other or trust an arbiter to exchange value. Instead they use a private key to authorize transactions under their digital signature and verify that they are indeed the holder of the BTC. The reason lost BTC cannot be recovered is because it will require the unique private key that belongs to its owner. If that was lost, the BTC can still be recovered using the seed phrase. Until there is a chance at recovering BTC, users must be responsible for their digital assets. All it requires is keeping a digital wallet with a private key, in a safe and secure manner.

Keep Your Private Key To Yourself

Never ever, and that means EVER, reveal your private key to anyone. That means it is better you take it with you to the grave or lock it up with a will rather than entrust it with a third party or anyone you know. There are plenty of stories of how careless people can get with their private keys. This has led to unrecoverable funds, digital identity theft and hacked digital wallets. If you were to give your private key to someone and they lose it, your only chance of recovery would be the seed phrase generated during the key creation for your digital wallet. If you lost those seed phrases, good luck because chances are there is no other way to recover your private key.

Why is it so hard? This is probably the reason mainstream finance is turned off by cryptocurrency. Digital wallets are mostly not user friendly and there is no technical support to help users recover their funds or private keys. The apps provided for cryptocurrency are open source, and available to the public but there is no one supporting it directly. It is decentralized, so the best resources to contact are members of the community who are knowledgable about the subject. Unfortunately, not even the top tier engineers and developers of the cryptocurrency can help you recover or generate a new private key unless it is for a new digital wallet.

What many people don’t understand is that private keys were not meant to be recovered. Only one unique private key is created for a digital wallet, and that means there is no master key that can open a backdoor to help anyone recover their funds. That was by design due to the open source and decentralized nature of the blockchain. This sounds like a bank is still the best place to store your wealth because they provide full customer support. Now I am going to explain the difference between a bank and the blockchain, in the context of cryptocurrency and private keys.

Banks are highly centralized and they are pretty much in control of your wealth. No matter how much money you have deposited in a bank, policies still dictate how much you can withdraw, where you can send your money and what you can do with it. If a bank were to go bankrupt, your funds go along with it. Banks won’t voluntarily give you all their money if they are closing. You lose all your wealth in the worst case scenario. In times of financial crisis, banks can also stop withdrawals to prevent bank runs. You are mostly at the mercy of your bank when it comes to money, and they will gladly take what you deposit while giving you permission to withdraw your own money. It doesn’t really make sense, but that has been the mainstream banking system for decades now.

Compare that to cryptocurrency and the blockchain, you have financial independence. You control your own wealth through your private key, which is why it is so important not to lose it or let others access it. A private key is not even a tangible object, it is a digital code consisting of numbers that have been cryptographically generated and stored as a file. From your private key you get a public address which is created from your public key. The public key is derived from the private key to generate the public address. This is like your account number that is allowed to be exposed on the network. Funds deposited or withdrawn are recorded on the blockchain. The private key also authorizes you to send and receive funds using a digital signature. The digital wallet is basically where you store the private key. To keep the private key safe, store the file away from your computer or online drive. The best recommendation from experts is to use a hardware wallet, which is an offline device that secures private keys. That would prevent hackers from accessing it online since the only way to access it is from the device.

The lesson here is that if you want financial independence and control of your own wealth, it requires plenty of responsibility. That includes managing your private key by keeping it in a safe storage location like a hardware wallet. Make a backup, but store it wisely and not somewhere it can be accessed publicly (e.g. file sharing site). You can copy it to a thumb drive to be stored in a vault or a secure enclave in a smartphone if supported. There will be more robust solutions for key recovery systems for digital wallets, but until that time comes, users should always be alert regarding their private key. If anyone asks for your private key so they can send you funds, ignore that request. There is never any reason to reveal your private key to anyone. It is not like a driver’s license number or SS number which you do need to provide sometimes. A private key should only be known by its holder and never shared or revealed to anyone. You have the right to protect your privacy and it is secured through cryptography on a blockchain.

Amazon’s Blockchain-based Product Authenticator Patent And How It Can Impact Global Supply Chain Management

If you thought Amazon would never get into the blockchain, they already have. They patented a new system for supply chain management that uses a blockchain-based product authenticator. Even before that, Amazon’s AWS already provided a blockchain platform for developers, so this is not merely a PR stunt to show they are in the know. They actually “know” what they are talking about. While the actual details of the patent do not seem to be available (as of this writing), many news sources have reported that it had been approved.

What Amazon is developing has significance in modern business. They are building a system that compiles data from distributors, manufacturers and shippers using an “open framework”. This gathers real time information from what would otherwise be silos of data. It interconnects those involved in the supply chain with a trusted platform using a distributed ledger for accountability and transparency. That is a way for tracking the authenticity of products as they are packaged and shipped to retail.

One of the things this system can do is prevent counterfeiting and product theft. There is a huge black market from stolen luxury goods and another problem is that there are fake products being sold around the world that is cutting into the brand’s profit margins. This also affects consumers who are not purchasing genuine products, but fake rip-offs that have no value. Many just buy the fake items because of status. The harm it causes though is not apparent, but does affect the brands whose name is being counterfeited in these fake products. A real genuine luxury handbag like that from Gucci come with authenticity certificates or labels, while counterfeit products do not. Products can be tracked using its GTIN (Global Trade Item Number) which is a code that verifies a genuine product from its source.

A blockchain provides a way to track the products in the supply chain and earn trust among suppliers and distributors with more transparency. That is a way to make sure that no hidden party is involved in the process, since it is being recorded on a distributed ledger which others involved in the process can view. If there are any anomalies, it can be detected and corrected. For example, if the products suddenly change distributors, it can be red flag to the supplier. The blockchain records that and can notify the supplier if and when it happens. With legal agreements enforced, this can then be disputed by the supplier.

Now that Amazon’s plans are clear, will it affect the current ecosystem of projects that are doing the same thing? Amazon is known to kill off startup businesses who cannot compete with the retail and tech giant. Amazon has its own platform and infrastructure to remain dominant. This could open the market to more competition with Amazon, as other companies propose their own solutions. IBM and Deloitte are just some of the companies that have already been involved in exploring blockchain-based solutions for supply chains. Even Amazon retail rival Alibaba has championed the use of blockchain systems. Numerous other tech companies, like Facebook (Libra digital payments) and Microsoft (New patent for cryptocurrency) have started their blockchain projects for other types of applications.

According to Deloitte:

“Using blockchain in the supply chain can help participants record price, date, location, quality, certification, and other relevant information to more effectively manage the supply chain.”

IBM has stated:

“Supply chain data is not always visible, available or trusted. IBM Blockchain helps supply chain partners share trusted data through permissioned blockchain solutions.”

Alibaba has numerous blockchain patents. According to an article from Smartereum:

“The Chinese giant will rather pioneer efforts in the blockchain space than lose out on early gains of blockchain adoption. So far, it has adopted blockchain to fight food fraud, secure medical data and track cross-border shipments.”

Amazon’s entry into the market shows that big business is taking blockchain seriously as a solution to real world problems rather than merely a novel technology. Patents are still just on paper, and not actual products. Once they get their product to market and it proves effective, Amazon’s patent could gain industry adoption as a standard for supply chain management.

The Halving Has Arrived

The third Bitcoin Halving has finally occurred on May 11, 2020 at block height 630,000 at 19:23 UTC without any glitches.

This was reported by Coindesk:

“In an homage to Satoshi Nakamoto’s iconic “brink of a second bailout” message in the 2009 genesis block, f2pool, which mined the 629,999th block (the last before the halving), embedded a reference to the current financial crisis: “NYTimes 09/Apr/2020 With $2.3T Injection, Fed’s Plan Far Exceeds 2008 Rescue.”

The reward for miners is now at 6.25 BTC per validated block. This means that although the block subsidy incentive has been reduced, the price remains volatile. Either a miner can earn more due to the appreciation in price value or profit less due to operating inefficiencies (e.g. old ASIC miners, higher costs of electricity, etc.). Miners who stand more to lose than gain should reconsider their configuration to adjust to the difficulty target and network’s hash rate.

Within the next two weeks after the halving occurred, difficulty should adjust (every 2,016 blocks). Miners should keep an eye out for the hash rate as well to see whether it has fallen (takes more time to produce blocks) or increased (more competition). Factor in the market price, and it gives an indication of whether the rewards are better or much worse.

While the Feds have quantitative easing, Bitcoin has quantitative hardening, a principle that has yet to be fully explained. The understanding is that Bitcoin is sound money because it uses an anti-inflationary model that limits the total supply (21 Million Coins). The code does not mint new coins at all and no one can mint more coins on the Bitcoin network. It is fixed at the supply set in code, and it is never created out of thin air.

While that sounds good in theory, in reality it has not been a perfectly deflationary model. While the supply is not reduced over time (it is fixed), there are new BTC still put into the circulating supply. It is when the amount of new BTC in circulation hits zero that it becomes deflationary. At that point, there will be no more rewards to miners but they can still collect transaction fees for their participation.

Right now the current economic landscape will have more influence on the price of BTC post-halving. What investors would like to see are the Fed’s injections into the economy trickling into BTC through stimulus. There are different ways that can happen and have been made available through the largest digital exchanges like Binance and Coinbase. For now, Bitcoin has proven itself once again as a stable and mature blockchain built on sound principles.

Note: While no bugs have been reported at the moment, it seems the halving occurred successfully.

DeFi Open Lending Protocols, Bringing Financial Inclusion To Everyone

When it comes to the significance of the blockchain, most would think about its decentralized organization which is not controlled by anyone and it is open to all. When applied to finance you could come up with a “killer app” for DeFi (Decentralized Finance). The implementations of DeFi are providing ways to offer traditional financial services like lending using the techniques from blockchain architectures. It cuts out the intermediary and lets anyone become their own financial service provider.

This is made possible using smart contracts that run on top of the Ethereum public network. This is yet the best implementation of Blockchain 2.0 with the innovations that introduce Blockchain 3.0 features (e.g. staking, digital governance). The blockchain provides a layer of trust between two parties, so that transactions are transparent. There is also no arbiter or middle man who can obscure details from a transaction. Everything is executed by the smart contract, containing the business logic and conditions.

This has led to the Open Lending protocols, providing ways for anyone to make money from interest lent out. It is based on cryptocurrency and other digital assets, which can be collateralized debt to gain credit. There are no background checks or personal information needed, just a form of collateral to secure a loan. This would be considered risky in the traditional finance sense, but an over collateralized debt position can mitigate risk along with conditions that will allow lenders to leverage digital assets to their advantage. Thus, if a lendee defaults on their loan, the lender will become the owner of the collateralized digital asset.

While most lenders need to be registered as a financial service provider due to compliance with regulators, that is not the case with DeFi products. Open Lending provides an API for DApp developers to create an interface that allows them to interact with a smart contract. The smart contract is created by the lender, who enters into the transaction based on a condition that is specified in the business logic’s code. There is no need for credit checks, employer endorsement or references to secure a loan. It is all based on trust in the blockchain, through the smart contract.

Open Lending can help a large sector of the underserved members of the community, particularly the unbanked. It provides everyone a path to capital resources they would otherwise never have a chance to obtain. People who don’t have access to micro-loans because of lack of documentation will have the opportunity for financial inclusion perhaps for the first time in their lives. People with poor credit scores will get a chance to access financial services they otherwise would not be able to enroll in with traditional banks. Since these protocols run over the Internet, anyone from around the world can be a lender for anybody that needs financing through digital assets. The money can be converted into a stablecoin to avoid the volatility of the cryptocurrency market, but most will just convert to fiat through digital exchanges. At times, the smart contract may also be a DeX (Decentralized Exchange) and allow the person to get their loan in their currency of choice.

The ecosystems for DeFi applications using Open Lending protocols can be a problem for first time users. They are not easily available, and requires some understanding of how cryptocurrency works. Developers are working to make the UI/UX easier and more convenient for users by integrating the DApp with smartphones or mobile devices. It will be hard to regulate this since it is not a particular company offering the services and the smart contracts are merely running on top of an open source platform. It would be hard for regulators to shutdown the Ethereum network since it is not a single entity, but rather a set of nodes that encompass the world. As DeFi becomes more mature, so will the applications. Then more users can enter the ecosystem and realize there is an alternative to banks and creditors when it comes to financial services.