All Chains are Not Created Equal
A few weeks ago I received some questions about blockchain and cryptocurrency from good friend and loyal 👊🏽 Smoke Signal reader, Mr. K. I’ll do my best at providing a worthy response below. I’ve devoted some time to learning more about Bitcoin and the wider industry over the past few years so hopefully this is helpful.
There have been a few articles on the crypto vein and I wonder if it’s worth a discussion or maybe separation of cryptocurrency and blockchain? Or even a further discussion of the problems they solve for?
Blockchain defined
Unfortunately the term blockchain is either burdened by the fear of people who think it is a complicated technology or promoted by the optimism of those who think it could be a revolutionary panacea that will fix every industry under the sun.
It is neither of these things. A blockchain is best understood as a time-stamped database or ledger that records and connects the entire chain of transactions (i.e. bunched into blocks) on its network. A key point of differentiation from something like Microsoft Access ⌨︎ is that a blockchain ledger is replicated (i.e. stored) in a decentralized; synchronous manner (i.e. by more than one person or node) and made publicly available in a pseudonymous way (i.e. a unique identity is tied to each transaction without revealing the underlying transactor).
While there are also private and permissioned blockchains I won’t cover them here. My blockchain pro / con list below is not exhaustive but conveys the most salient features. If you think I’ve gotten something wrong or want a deeper explanation please let me know.
Blockchain pros
Transactions are validated and stored by thousands or conceivably millions of people rather than a sole bookkeeper who could be a single point of failure or bad actor.
The entire history of network transactions are publicly available; providing transparency. “If a tree falls in a
forestblockchain and no one is around to hear it, does it make a sound?": YESThe pseudonymous and decentralized nature of transactions distributes power to network users. A pure blockchain blocks the ability of a central authority to prevent users from utilizing the network; in other words it is censorship resistant - notwithstanding a government’s ability to make it onerous or illegal to interface with fiat on/off ramps.
Blockchain cons
Transactions are validated and stored by thousands or conceivably millions of people. It is inefficient and expensive to maintain the same database over and over again, so this is not a good in and of itself unless there is a specific reason for such redundancy.
If a blockchain proves that you own a physical asset keep in mind that such property rights may be difficult or impossible to enforce if the asset is subject to physical attack or appropriation. Moreover, if you trust or rely on a centralized enforcer to protect a physical asset then why wouldn’t you also rely on that same or similar central authority to manage the ownership database in lieu of a blockchain?
Blockchains (with integrity) are append-only or immutable; however this inability to change history may not be appropriate for all database scenarios. For example, since 2016 the privacy laws in the European Union - GDPR - provide the right to be forgotten; an immutable database would not be able to support such a law.
Cryptocurrency is …
Digital money that is validated and stored on a blockchain. Crucially, this type of money is secured using hashing algorithms that scramble inputs in a way that makes it impossible to reverse engineer. Cryptocurrencies can use different hashing algorithms but they are similar in principle. Bitcoin uses SHA-256; which converts any input regardless of size into a string of digits that is 2^256 (two to the power of two hundred and fifty six). Hashing is different than encrypting because the latter can technically be decrypted.
What problems do cryptocurrencies solve?
You may have heard the terms fiat money or fiat. Fiat means by decree. If "We the people" have confidence in the US Government to arbitrate value via its money then the money becomes an effective medium of exchange. The US dollar is the preeminent example of fiat because it is the global reserve currency; or the global unit of account. This enables the US Government to disproportionately puppeteer geopolitical events by expanding or contracting the supply of dollars.
The word currency is derived from the Latin word currere: to run or flow. Like an electric current, currency transfers value (energy) from one place to another.
However, a money does not necessarily have to also be a currency. Instead of viewing money as a static construct try to observe it on a continuum; to ascertain what kind of money you might come across:
Collectible -> Store of Value -> Medium of Exchange -> Unit of Account
Read more here if you are interested in what attributes make for good money.
Money is a confidence game; people exchange time for money, which they save, in order to exchange it for the time of other people at some point in the future. This rinse and repeat cycle requires confidence in the money that is used.
Bitcoin was launched in the aftermath of the Global Financial Crisis; a symptom of the degradation in trust in the fiat system. As a result of this waning confidence, proponents of bitcoin view it as a higher fidelity money; an insurance policy on abuse of monetary power. It is an emergent technology and therefore volatile; making it an easy target to dismiss or critique over shorter time frames.
But the numbers don’t lie. Let me leave you with some information on the US dollar, which might encourage you to do your own research:
At the turn of the century (23 years ago) the US M2 Money Supply was $4.7 trillion. Today it is $21.3 trillion; an increase of 450%! Let’s assume you had $1 million in a non-interest bearing savings account in the year 2000; in today’s dollars due to monetary inflation that account would only be worth $220,000 😳.
$1,000,000 ÷ 4.5319 = $220,657
While it was illegal for a US citizen to own an ounce of gold in 1971 (gold was not re-legalized until 1974) , if you could get your hands on said ounce it would have cost you $35. In today’s dollars that ounce of gold is worth $1,929 - which is another way of saying those $35 in 1971 turned into less than 2 cents today 🥺.
$35 ÷ 1929 = $0.018
On January 1, 2020 (just before Covid hit the fan in the US) bitcoin was worth $7,202. Today it is $22,800; an increase of over 300% versus 19% for the S&P 500.
Based on today’s market caps there are only 10 American companies larger than bitcoin and during the same time period they have performed as follows:
Amazon +2%
Visa +12%
Johnson & Johnson +14%
Google +32%
Berkshire Hathaway +37%
Microsoft +45%
Exxon Mobil +72%
Apple +73%
United Health +168%
Nvidia +295%.
Unlike these 10 companies or any stock for that matter, Bitcoin does not have a CEO or anyone running the show; it never had nor will have any future cash flows therefore its performance is best measured against fiat money. Have a look at the FRED graph below. What does it tell us? → 30% of today’s money supply did not exist before January 1, 2020 😱.
($21.3 trillion - 15.5 trillion) ÷ 21.3 trillion = 27.7%
Are you interested in learning more about Bitcoin? Let me know what topics to dive into and I’ll do my best to provide a down-to-earth explanation or share relevant content in future letters.
Parker Injector Razor
I have been shaving for 30 years yet I never heard of an injector razor until last month. Most people are familiar with safety razors and cartridge razors as seen below.
But behold there is another type of razor that you might find to be a Goldilocks just right mix between the two: Parker’s Injector Razor.
I have been using this razor for a month and I just replaced the blade (after maybe 8 shaves). As the photos above show, you inject the key from the blade box into the razor and then do an old school carbon copy credit card machine motion to eject the old blade in order to install the new blade. I got it right the first time so rest assured you can do it too.
My verdict: 👍🏽 I really like this thing and I’m curious why this product isn’t more well known. It is less aggressive than my safety razor and better value for money than my cartridge razor. And it is adjustable so you can alternate between a closer or more stubbly look!
New subscription-led interpretations of both safety razors and cartridge razors (here and here) have experienced a renaissance over the last decade. So how come Parker isn’t getting in on the action?
FYI - In case you try it, the Internet says to throw away the pre-loaded blade on the Parker, which I did, because it dulls during transit. You still have 20 blades to go, which should last you over a year unless you shave every day.
Song of the week - Las Que Se Han Ido by Sandra Bernardo and El Búho
This is a perfect song for a 5Rhythms wave. Check out the rest of El Búho’s discography as well; he’s one of my favorites for Latin American vibes.
Bonus: Links
LOL: Rick Rubin on confidence - (he is the co-founder of Def Jam and considered a once in a generation type of record producer):
WTF: No dog alive today was on the planet when I was at university 😲:
LFG: click on this video for the best instruction manual on pull-ups. I have been doing pull-ups (sadly not frequently enough and apparently not correctly) since high school; I learned a couple of new things. Well worth 10 minutes of your time.
Well done for taking on a challenging and complex topic! Am a bit sleep deprived at the moment but might add some additional context for your friend:
In defining 'fiat,' it's useful to think of what existed prior to 1971, in that the US and many other countries were on the 'gold standard' meaning you could take your dollar to the bank and exchange it for the equivalent value in physical gold. So the dollar was backed by the limited global supply of a commodity, in this case gold. (Fun fact: The Wizard of Oz is actually a political allegory from a time when the US was debating to use gold or silver to back its money. The ruby slippers are silver in the book!).
It's also challenging to start with the US when thinking about fiat, because it holds such a unique place in the world, because as you say, it's the global reserve currency to which nearly all commerce is attached at some point. I would start with Venezuela, Argentina, Greece or everyone's favorite, Weimar Germany. Venezuela's economy is largely based on oil, and it began printing money after a change in government and subsequently the US sanctioning the country and its oil exports. Venezuela then experienced severe hyperinflation. Not doing the history full justice here, and the causes are varied and debatable (debt again in Argentina, and post-war sanctions in Germany), but there is a common thread of governments overspending and printing money, usually after an inflection point where the primary driver of GDP takes a downturn in value due to one of those causes.
I think it's easier to see how a smaller country/economy/government can fail, and then contrast that to the US which is not only a global economic engine, but also inextricably tied to the fundamental functioning of the global financial system and international trade. I think this is a problem that Bitcoin maxi's conveniently ignore when talking about Bitcoin as future money - one of these (USA) is not like the others. Full disclosure: I own BTC but more from an asset class/commodity investment perspective than the future money use case, though I do think that has merit for smaller countries, e.g. Ecuador, though they may be too early.
With #2 above, it's also important to point out that the change in value of gold is driven by an important additional factor outside of inflation/dollar devaluation, namely supply. Since 1971, a great deal more gold has been mined, but at the same time there are new industrial use cases for the metal, e.g. cell phones. This in part explains why the value deltas in 1 and 2 are not the same - it's not just about buying power deflation, but those economic fundamentals of supply & demand. Also, with #3 see also, commodity use case for an asset with fixed supply :)
That song bangs! Thank you for introducing me to the group back in December - ending up adding that song to an important playlist :)
Engaging read - Thank you!