Blockchain technology: Is there a secret sauce?
“Are you scared? Don’t you worry honey. If they could get a washing machine to fly, my Jimmy could land it.”
— Jim Lovell’s Mother: Apollo 13
Houston we have a problem. In the movie Apollo 13, a routine operation causes an explosion. The astronauts have to find a way to make two incompatible systems work with each other. Their ship is made up of two parts; the lunar module and the command module. The modules, each made by different contractors, had incompatible air filters, one round and one square. By stripping non-essential parts from their stricken ship, the astronauts had to find a way to connect both systems.
If you’re confused about blockchain technology and frustrated by the amount of rehashed articles and information that’s out there, realise that when you break it down to its simplest parts, it’s all about this.
Just like the astronauts of Apollo 13, the race is on to fit a square peg in a round hole.
In 2018, the cryptocurrency markets have been hammered. That’s obvious. Experts everywhere are coming up with opinions about why a particular coin or token will recover. Most gurus deep dive into highly technical explanations. For now, because their readers and listeners are made up (still) of mainly technically minded innovators and the early adopter group of investors, they have an audience.
What’s not obvious is what is going to happen next and when.
This is where you get to ask what are you doing here. At one end of the spectrum, you might be a tech enthusiast who has absolutely no interest in investing and speculating, and instead, you’re only interested in cryptocurrency from a technical perspective.
You might be interested in the perceived social benefits of blockchains, and how technology can benefit society by making it more democratic.
Perhaps you’re interested in blockchains because they threaten to unbalance the status quo. A way for you to get even with the centralised system that brought in the 2008 financial crisis.
Perhaps you’re interested in blockchains not only because of the change they will bring to society but also because of the potential to invest in the upcoming changes.
Or at the opposite end of the spectrum from the types who get excited about the tech, you might be only interested in how you can benefit from the next big thing.
Most people don’t know or care how their television works. All they care about is the on/off and channel buttons. Most don’t understand how their car works, or how a synchromesh stick shift gearbox magically gets them five blocks away from home without even thinking about it.
Understanding how Cardano’s proof of stake algorithm, Ouroboros, works is one thing. But using this knowledge to benefit from investing in ADA is quite another.
How many people do you know with a degree or higher? Are they rich yet? How many people do you know who left school with zero qualifications and just got started? By the time an average Ph.D. student is venturing into the world and looking for employment, early school leavers have often paid down most of their first mortgage.
During the education process, we’re told that to be successful you need to get qualifications. A high school diploma at an absolute minimum, but preferably a degree.
If you take the time to look, you’ll find many highly successful entrepreneurs left school with nothing. In leaving early, they started out with no debt. A huge advantage. Acquiring an education is not the wrong thing to do, on the contrary, a degree or higher is advantageous and can open many doors, but most don’t think about the alternatives. Many entrepreneurs go back to school after they have established themselves and get educated without getting into debt.
Bill Gates, Steve Jobs, and Mark Zuckerberg all quit their education and made a start.
And it’s not limited to tech entrepreneurs.
Frank Lloyd Wright, America’s most celebrated architect, quit his college course, and so did filmmaker James Cameron. Actors Tom Hanks and Harrison Ford dropped out too. As did pop diva Lady Gaga.
Most people study, work hard and pay their taxes. After leaving college, they get a job, and after a few months of thinking about how great their life will be because they’ve not got to study anymore, they become aware of real world reality.
Almost every professional career requires constant updating. And this means more exams. And more study.
Even when the majority have some spare cash, they are faced with a bewildering array of options of what to do with it.
The complexity of financial planning has spawned a whole industry full of regulations and rules. New acronyms are everywhere. KYC - Know Your Customer, and AML, — Anti Money Laundering, being two.
Today, the problem is not getting your money out of the bank, it’s getting it into the bank. At almost every stage of your life, you are now being asked for more and more personal information. Think about that, while we talk about this…
Have you ever thought about why the financial wealth management industry focuses on selling you diversified investments? And have you ever wondered why almost all of the world’s most successful investors and speculators do exactly the opposite?
Acquisition of wealth may not be your thing, but it’s something to think about.
Societal trends of the 21st century are for more rules. More regulation. In 2018, governments have enacted many laws and regulations to ‘protect’ the well-being of its citizens.
Gone are the days where your son or daughter could just walk into a summer job with a smile and some confidence. Today, there’s a myriad of paperwork, (more exams), including health and safety.
Want to work in a coffee shop? Sure, just apply online with your barista, health and safety, and tourism certificates.
Today, even if you sell used cars, not career path traditionally associated with regulations, you need to pass exams. The reason being health and safety, KYC, (Know Your Customer), and AML. (Anti Money Laundering)
In modern life, you can’t do much without continually attending courses and passing exams.
New rules and regulations are sold to the public as a way to improve the quality of life and as a way to keep them safe. But risk can’t be eliminated, it can only be moved around giving the illusion of security.
The implementation of new rules doesn’t only generate taxes, it generates data. Lots and lots of data.
The cryptocurrency markets are down but not quite being handed their hat. In Smart Dust, we discussed where blockchain technology is most likely situated on the Gartner hype curve in October 2018.
We showed how the 5%, the consistently profitable investors and speculators, use the hype cycle with the price cycle, (discussed in Heatseeker, Deus-Ex, Machine Gun Preacher, and Ignitus), to figure out the current position within the cycle.
The 5% use the location to temper their expectation on future price movements. They assign probabilities to their assumptions, and to achieve this, they observe market conditions.
The 5% are looking for a catalyst to drive blockchain technology along the next stage of the hype cycle on its way to mainstream use.
One of the variables the 5% take into account is the enormous amount of new data created by new societal rules.
Most people who are interested in blockchain technology are the die-hard innovators and early adopter groups. Generally, these two groups are interested in the tech, for the techs sake. They are the engineers who like to know how things work, right down to the deepest most granular levels.
The 5% club study the evidence. They see the creation of massive amounts of new data and wonder how it’s all going to be managed.
Take Cardano’s proof of stake algorithm Ouroboros. The 5% club concentrate on understanding the competitive advantage of Ouroboros and not necessarily how it works.
The 5% understand technology only at the granular level with enough clarity that’s needed to extract and spell out the advantages and disadvantages over its competitors.
The 5% club aren’t fans for being a fans sake. They take their lead from the investing greats like Warren Buffett and concentrate their efforts on finding the competitive advantages that set their investment targets apart.
In 21st century life, very few speak clearly.
Especially so, when it comes to technology. But it’s when the subject turns to cryptocurrencies and blockchains that the clarity levels drop. And for good reason. Understanding blockchains at a technical level requires some specialist knowledge, and for anyone without that knowledge getting your head around how a particular blockchain feature works is hard work.
You start off with one article but soon find you’ve branched into several other websites and pages in an attempt to understand a term within a sentence. This recursive searching gets overwhelming fast.
With the cryptocurrency markets under the sword, the majority of people who are still interested in Bitcoin, Ethereum, Stellar, and Cardano are the original innovators and the early minority groups. The majority of these groups consist of technically minded individuals, and it’s a problem.
What if you’re not technical? What if your tech knowledge ends at the on/off switch?
A quick internet search brought up some interesting questions on Cardano.
Why is the price so low? When will Cardano go up? Why is Cardano’s coin rank so high, despite the 90% price drop from the high?
These are the kinds of questions the 95% ask. The 95%, the consistently unsuccessful group of investors, is the group of people who don’t form their own opinions and rely instead on the post or tweet from a guru. Any guru will do, as long the 95% are told what they want to hear.
Because of where blockchain technology is situated on the Gartner hype curve, a high proportion of people who are interested in blockchain technology have technical backgrounds. When blockchains move out of the trough of disillusionment and move into the next phase on their journey on the hype cycle, the slope of enlightenment, more and more non-technical people will become interested.
Think of it like this. Imagine you’re inside your favourite sports stadium. Walk into the centre, and place a basketball in the middle of the pitch. The basketball represents the people within the innovators and early adopter groups with IT technical or engineering knowledge. The stadium represents all eventual investors or people with interest as blockchain technology ends stage four of the hype cycle and is accepted and used by everyone. Like a smartphone.
Meanwhile, if you have limited technical computer science knowledge, it’s next to impossible to figure out what the technically minded writers are saying.
It’s because they suffer from the curse of knowledge. Usually, you’ll be able to spot a writer suffering from the curse, because they’ll helpfully drop an acronym in brackets in the opening paragraph, but then it’s dive dive dive, straight into critical looking formulas and the usual technobabble.
Wading through technical spaghetti isn’t going to help you.
So, if you’re not technical, but have a deep interest in cryptocurrencies and blockchain technology what can you do?
The 5%, the most successful and consistent speculators and investors, respect the technology but know understanding how the technology works is not going to be of much use.
It’s all about context. You may read about a particular feature of a blockchain or cryptocurrency, but unless you can understand the advantages and disadvantages the information is next to useless.
Because of Warren Buffett’s success, his investment strategy is surrounded by myth. For example, when reading about him at the broadest level, you’ll learn about his conservative investment approach and his long-term investing philosophies.
Dig a little deeper, and you’ll find out that this is not entirely true. You’ll discover, at the beginning of Buffett's career, he often used very large amounts of his investors capital, as well as his own, to back an investment idea.
This is in direct contrast to his myth. Cautious. Steady. The financial wealth management industry espouses diversification to protect you. Buffett it seems doesn’t read this playbook, and neither do many other of the world’s most successful investors.
Wall Street investment banks use very sophisticated models to discover value within an investment. While it’s true, nobody actually knows how Buffett makes his decisions, we have some substantial evidence to infer how he does it.
In Heatseeker, we talked about Alice Schroeder’s book on Warren Buffett — “The Snowball.” Schroeder spent 2,000 hours at his side when researching the book, and what she saw shocked her.
No complex computer systems. No complex cash flow analysis models. Just books, lots of books. According to Schroeder, Buffett’s methodology more closely resembled a bookie, than a Wall Street bank’s complex modelling systems.
Buffett himself writes a yearly financial report that’s disseminated at his company’s (Berkshire Hathaway) annual shareholders meeting.
All the clues into how his mind thinks about investment opportunities are told, hidden in a simple homespun vernacular.
If you’ve not got a technical background, and find the technical material on blockchain technology, not just overwhelming, but incomprehensible, don’t panic, it’s not the disadvantage you might think it is.
In Smart Dust, we talked about the insights gained from thinking differently than the crowd.
Buffett thinks differently. He goes in search of something that sets the technology, product, or service apart; something that makes it unique, and difficult to compete with. Something indispensable, some distinguishing feature that extracts value that others will pay for.
Drive a round trip of twenty miles or pay to use this toll bridge? Of course, you can choose, but Buffett bets the majority will pay.
If you’re not technical and you’re struggling to understand the complexities of blockchain technology, do what Warren Buffett does.
On November 3rd, 2009, Buffett bought the Burlington Northern Santa Fe railway company; the largest rail network in the United States. He described it as a bet on America. Nine years later, that bet is looking pretty good. Acquired in the aftermath of the 2008 financial crisis, at low prices, the cash flow from Burlington paid Buffett back in just a few years.
Now he’s left owning 50,000 miles of rail infrastructure. As the world contracts in on itself and government policies and trade wars bring jobs back to the US, Buffett owns the most competitive and cost-effective way to move goods around the United States.
In early 2018, Buffett announced that Burlington would be the first railroad to join the Blockchain in Transport Alliance.
When the blockchain article you are reading rapidly becomes a carnival of abstract technical nominalisation, just like that phrase, keep it simple, and attempt to uncover the toll bridge.
Finding situations using non-technical information is not new. Years ago, in the UK, a successful investor used the flagpole theory.
He invested in small-cap stocks and had figured out the high correlation between small companies unveiling their new head office and financial underperformance. Even more so, if they erected a flagpole out in front in a display of confidence. More often than not, it wasn’t long between flagpole and filing for bankruptcy.
Using Cardano as an example, if you spend any time researching online, you’ll find plenty of complicated explanations behind the Cardano philosophy. All written in tech speak. You’ll even find Charles Hoskinson, the CEO of IOHK, the organisation within the Cardano project that develops all the technology, giving helpful whiteboard explanations of what IOHK is developing, and their goals for the future.
If you’ve not got a technical bent, you’ll probably be lost just past hello.
At this point, instead of giving up and searching instead for an internet guru’s opinion on Cardano, which is, more often than not, just a rehash of the material on cardano.org, ask yourself how would Warren Buffett approach this?
Instead of concentrating on the technical minutiae, Buffett approaches things from a different perspective.
Buffett starts at the top and works down, leaving the cogs, gears, and levers alone, at least in the beginning.
Think of Buffett’s methodology like this. First Buffett tries to find a seam of gold. Then after it’s discovered he figures out how much it’s going to cost him to convert that seam into value. The price he has to pay against the value of the find, in the form of cash flow, is Buffett’s risk.
In reality, that seam of gold is a technology, product, or service, that acts as a toll bridge. Click, click, click, as drivers pass over the bridge. The bridge provides value to the users by giving them a benefit.
In the search for a toll bridge, the 5% start by asking general questions, and the good news is, the questions aren’t technical.
One of the first things Buffett does is to ask who’s in charge? And the 5% club do likewise.
The Cardano project is made up of three entities.
IOHK - Input/Output Hong Kong
Emurgo - Japanese Company
The Cardano Foundation — Swiss Company
Think of Cardano like this. IOHK is the brains. It’s where Charles Hoskinson and the propeller heads figure out how to implement and design the systems. Emurgo develops, supports, and incubates commercial ventures on Cardano, and the Cardano Foundation is the governance arm and acts as the supervisory and educational body.
Charles Hoskinson is one of the developers of Ethereum and left to set up his vision of a next-generation blockchain. He’s very well respected and is the CEO of IOHK.
IOHK is made up of a collection of mathematicians, scientists, and academics. A potential toll bridge is the methods used by IOHK to implement new ideas.
IOHK use a peer review system. What’s special about peer review is that ideas are shared with your peers for review and critique. Only after a formal process of reviews, does an improvement get added.
That’s how the internet was built. By peer review using documents called RFC’s, or Request for Comment. The way a smartphone connects to the internet, the methodology behind translating http://whateversite.com into an IP address, that in turn is translated into a media access control address, was built by peer review. This translation process from an address name you understand to a MAC address you don’t is called DNS — Distributed Name Service.
The Internet is open source and built on peer review. So is Cardano.
IOHK is run by Charles Hoskinson, one of the original developers of Ethereum. He’s well respected and has overseen the development of peer review based implementation systems for Cardano with a proven history of being successful. All this is positive, so the 5% club put a tick next to IOHK.
Another technique used by the 5%, is to do a simple check of a company website. After they’ve checked the track record and performance of who’s in charge, they look at the rest of the team, asking about their qualifications and experience.
One more key factor is skin in the game. The 5% ask if the people running the company have a vested interest in it.
Does the website use a clear and easy to understand language? One way to quickly check this is the level of abstraction used in the descriptions on the site.
Nouns made from verbs are the tell-tale sign of abstracted language. Here’s the point: abstracted language is difficult to understand, and if the company you’re looking at doesn’t realise it’s doing this, it might be missing the mark when marketing and promoting the product.
Does the team of people look like they can’t wait to get to work, or does it appear to be a nest of internal conflict and corporate gamesmanship?
Take a look at the Emurgo website. Ask yourself if it looks and feels dynamic. Does it look like they can get the job done? If you don’t feel good about what you see, then dig a little deeper and find out the nature of the relationship between IOHK and Emurgo. Ask, is there a contract and how long has it got to run?
During your research, keep it simple and ask what does Emurgo do? Is it adding to IOHK or is it an anchor around its neck?
What about the Cardano Foundation? If you took a look at who runs this division of Cardano, you’d find a few areas of concern.
Research who runs the foundation and ask if this person is a good fit with the other two divisions? Ask if the foundation has done a good job of promoting Cardano and overseeing its governance.
If you were in any doubt, on the 12th October 2018, Hoskinson clarified the situation with an open letter to the Cardano community asking the head of the Foundation to step down.
After completing non-technical research on Cardano, you may be of the opinion that Cardano is like a servant without a master — a group of leading mathematicians and scientists without a dynamic sales and marketing arm.
In October 2018, the 95% are posting questions, asking why Cardano has gone down so much. The 5%, with an understanding of the hype cycle and the price cycle see things from a different perspective. They understand the hype got way ahead of the actual product.
If you had taken a look at the Cardano roadmap in January 2018, you might have realised this too.
In the movie Apollo 13, the astronauts have to strip non-essential parts from their stricken ship to make a square peg fit in a round hole.
If Bitcoin was a first generation attempt to provide value via a decentralised blockchain, which allowed two parties to pay each other without the use of a third party middleman, Ethereum is the second generation. Ethereum built on the decentralised paradigm by attempting to become the world first global computer. Ethereum decentralises computation allowing code (smart contracts) to run on its blockchain.
But 1st and 2nd generation disruptive technologies rarely become the vehicle for mass adoption. Instead, they open the door for change.
How is Bitcoin scalable? How can you improve its transaction speed? And how can you improve its security going forward? To continually develop an idea it must be sustainable, and this is where some blockchains run into headwinds.
It is very easy to fall into the tech speak rabbit hole when describing blockchains. It’s because they are not simple. Blockchains are complex, but the 5% manage to get around this by using metaphors.
If Bitcoin and Ethereum are early generation blockchains, how are they being improved? Hard forks and bolt-on technologies have been used to enhance the performance of Bitcoin and Ethereum, but how can this be built on going forward. Another bolt-on technology? This answer is not sustainable or scalable. It’s a house built on sand.
The 5% use metaphors. The 5% club think of Bitcoin and Ethereum blockchains as an early home entertainment system. An inter-tangled web of wires, some for video, and some for audio.
What about Cardano? The 5% think of Cardano as a HDMI cable, compared to Bitcoin’s and Ethereum’s RGB video and external audio cables. Something that can be improved from the inside out, without changing the plugs.
Technical readers will probably guff guff at the oversimplification but if this kind of thinking is good enough for Warren Buffett. Then perhaps it’s good enough.
If you strip away the technobabble, an incomprehensible language addressing blockchains, it’s all about this.
How can decentralised blockchains talk not only to each other but also to the existing infrastructure, including the interbank payment system?
The Internet was built by consensus; most of the protocols (rules) were conceived and developed in the 1970’s and evolved over time. The technology being approved through RFC (Request for comment) documents.
This is the simplified OSI internet stack. Every device you own that connects to the internet uses this stack. It’s a seven layer model. Each layer can only talk to the layer directly above and below it.
At the application layer, data is sent down through each layer on the stack, and as it passes through, each layer encapsulates the data with a header and a footer. The data is routed to its destination using the information encoded into the headers and footers. As the data, known as a packet, arrives at its destination each layer reads the header and footer information added by the corresponding layer at the source. Eventually, the data is passed to the application layer at the destination.
But this technology was born out of an experimental set of rules called TCPIP. (Transmission Control Protocol Internet Protocol) In 1978, they split TCPIP into two. TCP was placed in layer four of the network stack and IP into layer three.
There are many technical reasons why this stack needs to be replaced. Security is one. But another is speed. Another problem is the inefficiency of several protocols within the stack encapsulating the data. For example, TCP requires a series of hand-shaking connection packets to be sent before a connection is made.
It’s at this point, you find yourself on the edge of the technobabble cliff, so the 5%, understanding the problem reframe it like this.
The old system needs to be replaced. It’s slow, inefficient and has poor security, requiring a lot of overhead.
One of the proposed solutions to the OSI TCP/IP stack is the Recursive Internetwork Architecture stack or RINA to its friends.
The 5% think of the old TCP/IP system as a slow serial connection, and they imagine this as a single lane freeway. RINA, the new system, will be a fully scalable multilane freeway whose only restriction will be the area on which they can lay the blacktop or bandwidth.
And this is what it’s all about. All the complex language, math, and boffins. It’s about controlling this space.
The internet as you know it is being re-engineered and not 1 in 100,0000 realises its happening.
The technology that can most effectively make use of this space wins the game. It will be the market leader, a household name.
And that’s what all the blockchain development is fighting for. Value in blockchain technology will be extracted from here. And this is what it’s all about. The race is on to become the standard.
Remember Warren Buffett’s purchase of Burlington Northern. Buffett was buying the infrastructure at knock-down prices.
For all its complexities, the OSI TCP/IP stack is the railway tracks of the internet. A system designed nearly 50 years ago.
The value is in the stack; it’s a fight to win this new virtual real estate.
The 5% don’t get lost in the technical complexities. They attempt to find the bottlenecks and restrictions of new technology so they can quickly eliminate them. Their first order is to find the most effective questions that reveal the likelihood of a new idea winning the game.
Like Jim Lovell’s mother in Apollo 13, if you want to have faith in the blockchain you’re investing in, look at who’s behind it and how many times they’ve successfully landed the plane.