
Resources for understanding cryptocurrency and blockchain technology - todsacerdoti
https://a16z.com/2020/04/30/explaining-crypto-from-a16z/
======
Traster
I thought that A16Z would care about its reputation enough to make sure it's
fairly trustworthy when trying to "educate" people, but can someone explain
this claim to me:

> Blockchain Can Wrest the Internet From Corporations’ Grasp

In a way that doesn't involve A16Z cynically mis-representing blockchain as
some people's champion. I don't see at all, how you could claim there's
something fundamental to the technology that will lead to more consumer power.
Does Facebook's Libra look like a great shift towards an open internet? Does
Bitcoin decentralize control? Or does it hand that control to the tiny handful
of Bitcoin miners and exchanges that handle practically all of the work?

What this "educational" blog seems to be doing is telling you what the most
ambitious claims of crypto are, rather than telling you where crypto actually
is today.

~~~
cryptica
The future use case will be to use a cryptocurrency as an alternative to
company shares.

In 50 years, nobody will be using NASDAQ or NYSE to by shares of companies.
Company shares themselves will not exist, there will only be cryptocurrencies
and decentralized exchanges. Investors will be paid as capital appreciation
through token buybacks.

There are several major financial benefits for this:

\- Capital appreciation resulting from token buybacks is not taxed.

\- The price of a token accounts not just for the value of the output of its
community but also the value of its input since community members must
liquidate the token in order to purchase goods or other tokens. Communities
which produce more economic value than they consume will have more valuable
tokens. It incentivizes not just high production, but also low consumption
(which our current system fails to do).

Communities which consume less will hold on to more of their tokens. The
market cap of such communities will be more fragile/volatile but overall will
grow much faster than that of those communities which which produce the same
amount but consume more. This will create incentives for decentralization of
wealth because there will be a growth penalty for holding a particularly
liquid high-volume token.

I've written a simulation which demonstrates these effect.

~~~
paulgb
> Capital appreciation resulting from token buybacks is not taxed.

Why would we expect the tax code to treat this any differently from share
buybacks in the long run?

I'm having trouble understanding why the rest of the argument would apply to
crypto shares but not NYSE shares. I don't agree with the statement that our
current system incentivizes low consumption; the less you consume the more
capital you have to invest or consume in the future.

~~~
cryptica
The buy-back could happen in a country where it is not taxed, but token
holders from all countries would still benefit from token price appreciation
nonetheless.

Also, my simulations show that a cryptocurrency's market cap can be much
higher than the value of the underlying assets from which income is derived.
It depends on how strongly investors hold onto their tokens. It's a way to
maximize net-worth at the expense of accepting more fragile trade volumes.

So token investors can have a higher net worth and better growth of their net
worth if they're willing accept more fragility.

To understand this argument (as an extreme example), you can consider what
would happen if a group of people were to issue 100 million tokens of a new
cryptocurrency and then all together sell only 1 token each day for $1. The
cryptocurrency's market cap would be $100 million. It would be extremely
fragile in the sense that investors would not be able to cash out anything
meaningful without completely crashing the price, but it would have the effect
of giving them all a very high net worth. Moreover, my models show that this
type of extreme situations with low token supply deliver higher % returns on
net worth over time (assuming constant demand) but it requires extreme
collaboration between participants.

This is an extreme argument but hopefully it illustrates the point that there
is a spectrum of fragility which can be used to gain an economic advantage and
that blockchain adds an entirely new dimension to standard economics. The idea
of net worth becomes meaningless because it forces you to consider wealth
fragility as well.

------
febeling
"Blockchains are computers that can make commitments. Traditional computers
are ultimately controlled by people, either directly or indirectly;
blockchains invert this power relationship, putting the code in charge."

Great way to explain the concept. You could nit-pick all morning if it was
strictly "true" in every which way, but this kind of selective simplification
is what drives understanding. I'm sure many things which are well understood
today, if you look at the way they are understood now, the mental models
involved: many wouldn't have been generally be accepted in an initial pre-
understanding phase by people with insight.

Can you easily accept this explanation of blockchain?

~~~
bildung
That is just meaningless marketingspeak, and obviously wrong. Blockchains are
just data, so at most "spreadsheets that can make commitments". And the latter
part is also wrong, as computers are controlled by silicon logic in exactly
the same way as blockchains are controlled by their code: They aren't. Someone
owns the computers, and someone owns the blockchains/ their data. And if a
dispute happens, that will get resolved by courts. I'm well aware of the
_promise_ of this being different with blockchains, but so far that never
happened.

~~~
Taek
> Someone owns the computers, and someone owns the blockchains/ their data.

That's the beautiful part. That _someone_ is the end user, who is running a
full node. The reason that blockchains require every node to have all the data
is so that every end user is in full control of the commitments made by the
blockchain.

Efficient? No. But does it invert the typical power relationship? Yes!
Blockchains put the user in control.

(fine print: this is not necessarily true for many Proof of Stake chains, also
not true many lite client models (including most Bitcoin lite clients), also
not true if you have on-chain governance, also not true if the blockchain
makes other compromising design decisions such as auto-updating, most
cryptocurrencies fall short in at least half a dozen ways)

~~~
bildung
If that were the case, why can a16z profit from that?

------
louwrentius
> Software is simply the encoding of human thought, and as such has an almost
> unbounded design space.

It's always this kind of vague, fluffy language that tells you all you need to
know about all cryptocurrencies.

All these companies are trying to fluff up demand for something that is only
valuable if (new) people invest.

Please Hacker News: please show me the concrete value of cryptocurrencies, I
don't see them.

I only get hypothetical answers, often including paranoid delusions about
governments and strange conceptions of freedom.

Cryptocurrencies seem to be an answer to a problem nobody has.

[https://louwrentius.com/cryptocurrencies-are-detrimental-
to-...](https://louwrentius.com/cryptocurrencies-are-detrimental-to-
society.html)

~~~
Engineer2Throw
Non centralized currency

Timestamps

Voting

~~~
louwrentius
what problem does this solve?

------
rwosync
We've gone from 'time to build' back to 'time to build speculative financial
products with no utility' pretty fast.

~~~
ashtonkem
To be fair, that was their jam before the pandemic. A16z is all in on crypto,
much to the detriment of their long term reputation, IMO.

------
say_it_as_it_is
I've noticed the positioning and messaging around blockchains evolve over the
years. It seems to have moved away from crypto-anarchist ideals towards more
traditional power structures. You can't disrupt those who you need to grow.

~~~
ema
I think there is a similar pattern during the early stages of many
technologies. At first they are made by tinkerers for themselves and so are
tool for individual empowerment. People then think of that as a core aspect of
the technology, but when the technology gets scaled up it turns out to be
incidental.

~~~
ashtonkem
I’ve found attempts to retrofit past technological growth curves onto current
technologies to be more an exercise in bias confirmation than anything else.
Such analysis usually hinge upon successful stories, often the internet, and
ignore all the failures and false starts.

------
seibelj
Token sales are a way to raise money for certain businesses, with different
pros and cons than traditionally raising money. If you mandate use of your
token for certain actions, then take a percentage of profits to buy-and-burn
the token, then it’s similar to a traditional stock.

The way to properly do this is to 100% avoid the United States, or any western
nation, and go offshore to a country that allows this (Antigua, Seychelles).

If you think what I’ve written is a horrible scam - that’s fine! No one is
making you buy such an asset. Ignore such assets. But there is a global pool
of crypto investors who will, and don’t care about what country such a
business is incorporated in or being unable to bring any court action. It’s
“buyer-beware” and the industry operates on trust to an absurd level.

There is something to be said for a model where you don’t have to grovel to
moneyed VCs to raise funding. It’s alternative and it’s an experiment.

~~~
ashtonkem
The problem is that most tokens have absolutely paper thin explanations about
what the tokens are supposed to be used for, aside from speculating. Most of
them have more than a whiff of fraud about them, such as Kodak’s plan to
somehow put copyright on the blockchain.

Dodging SEC regulations is one thing, but it’s not an argument for large scale
growth and adoption. Heck, you don’t even need a cryptocurrency to do that,
just list your stock in they Seychelles instead of America.

~~~
seibelj
But the goal is to raise funds. Doing a traditional securities offering in the
Seychelles doesn't raise funds for your blockchain project. A token offering
raises funds, from a global pool of investors, without any legal resource for
the investors.

Like I said, this is an absurd amount of trust, and reputation is everything.
It's simply a different model.

~~~
ashtonkem
Dodging SEC regulations is a use case, although I’m dubious that you need
crypto for it. But more to the point this use case is extremely narrow;
dodging SEC regulations doesn’t provide a reason for said blockchain company
to exist or attract investors in and of itself, it’s just a tactic available
to them.

If you used blockchain to raise money for a non-blockchain company, that would
be understandable. But that’s not the pattern I’ve observed. Usually it’s “buy
token that’ll have functional utility and future monetary value”.

~~~
seibelj
I hear what you are saying. I work in this industry and am intimately involved
with all of this. Let me try and explain differently.

There are good reasons why a traditional stock, like Apple, would be valuable
on the blockchain. Imagine Apple stock was just like any other token or
cryptocurrency - it could be anonymously owned, traded on any exchange
(including ones that just pop up out of nowhere), can be traded 24/7/365, and
could be used as payment for coffee just as easily as cash. Clearly this is
advantageous for some people who want this. From the perspective of a
regulator, or citizen concerned of fraud, this is horrible! A nightmare! But
to others, they prefer this situation.

This is what a token is. It's _like_ a traditional stock, but also all of the
above. Plus it has utility according to however the project uses it. All of
the tokens tend to match the same protocols (on Ethereum it's known as ERC20),
so if a new service pops up ("Pay for Coffee with Token Service"), suddenly
any new token can be used in it. It's like automated plumbing.

You have to switch to the mindset of someone who is a "crypto native" person.
They don't think like a normal person. They have different values and
motivations.

~~~
ashtonkem
I think we’re starting to have two conversations in parallel, so I’ll do my
best to keep this straight.

It appears that there are two models; stocks on the blockchain, and tokens as
item of utility.

Stocks on the blockchain makes sense technically, especially for investing in
risky non-crypto small companies. Tiny use case, but reasonable.

I’m super dubious about paying with the crypto equivalent of stocks for purely
social reasons; it introduces a lot of exchange risk and negotiation into the
process of purchasing goods. One of the reasons money is good is that it
creates a common unit of account; I don’t need to find a barista that’s
interested in whatever stock I’ve got in order to buy coffee. Sure; I could
sell or exchange that stock for something my barista wants, probably money,
but the value to the consumers in question is getting pretty thin.

I will say though that stock markets are probably the only model I’ve seen
that fits cleanly into the blockchain model; stock trades pretty much stay in
the stock exchange itself, eliminating the oracle problem. If blockchain
latency could get lowered significantly, I wouldn’t be surprised to see stock
markets on the blockchain.

What I see much more of is the “token as utility” scheme. This is usually a
blockchain startup offering some sort of token that has a planned utility once
the company is operational. Kodak’s coin is on the top of my mind; the plan
was that you could use the coins to license work on the chain and pay
photographers.

These utility coins always seem super shady to me, and the justifications on
why the utility coin should have utility (and thus value) border somewhere
between nonsense and insanity.

~~~
seibelj
Yes - stocks on the blockchain make sense. But through this plumbing, the
barista wants USD. Imagine there is a coin the barista trusts is as good as
USD (a "stablecoin"). Or imagine that there is a service in the background
that has interfaced with the traditional credit card system as well as the
blockchain, and does a bunch of functions really fast.

Then, when the customer pays with a token, protocols just instantly convert it
in the background to the exact amount of USD of the coffee.

This stuff sort-of already exists. USDC is a US-dollar backed stablecoin
[https://www.coinbase.com/usdc](https://www.coinbase.com/usdc) and Uniswap
[https://uniswap.exchange/swap](https://uniswap.exchange/swap) is a
decentralized algorithmic protocol for auto-converting between any 2 supported
tokens. So if the barista takes USDC and you have some scammy token that few
people want, you can instant-convert (well, "instant" in Ethereum is 15 to 30
seconds) from your token to the USD to the coffee.

So what I'm saying is, you need to change your mind from buckets, where assets
are only in one bucket. The token is not either a stock or a "utility" token.
It's all of the above, simultaneously, and more as the plumbing keeps
innovating. As long as someone, somewhere, is willing to purchase it for some
price, it can function in a huge variety of ways.

~~~
ashtonkem
I agree, that’s all solvable. But “we can make this work” is quite different
from “you want this”.

Credit cards work just fine for me, I’m even rewarded 1-5% for using them. I
can’t see why I’d want to switch over to this and deal with the nightmare it
would make my book keeping, not why my barista would want it over cash or
credit card.

~~~
seibelj
That is the endgame - paying for coffee with cryptocurrency tokens. That would
be if crypto really took off so much that payment networks for the average
person and physical businesses accepted cryptocurrency. This would be in the
future - if it happens at all. There are some moves to do something like this
for online payments - think "stripe for crypto" \- such as Circle's business
SDK for USDC [https://www.circle.com/en/](https://www.circle.com/en/) and USDT
on Tron for Pornhub payments
[https://www.theblockcrypto.com/linked/53826/pornhub-adds-
tet...](https://www.theblockcrypto.com/linked/53826/pornhub-adds-tether-to-
its-payment-options-via-tron-wallet)

I reiterate - this is a massive experiment. It's rethinking the entire
financial system to be rebuilt using open APIs and protocols. All sorts of
weird stuff is happening on it, most of which will fail. Just like in the real
financial system, which attracts lots of scammers who are constantly hounded
and penalized by regulators, there are lots of scammers here. Even more so
because they can't be arrested as easily (or ever). But it's open and anyone
can use it, for better or worse.

So the question is not why you won't use it for bookkeeping, purchases, credit
card rewards, etc. It's why is anyone using it at all? You know easily why
_you yourself_ won't use it. But Bitcoin is still worth $150 billion and
Ethereum $20 billion - clearly a lot of people want it, and value it. It's a
slow, difficult, complex, risky network. But people keep building on it,
experimenting, improving. People find it useful for certain things. As long as
those things stay useful, I believe it will at least maintain its value. But
if people build more things, and find more utility, then it goes up in value.

Do I personally have all of my wealth and retirement tied up in this? No,
absolutely not. Way too risky. But do I own some crypto, find utility in it,
speculate, and experiment? Yes! The ecosystem is so vast I can't briefly
explain all the use cases. There are many use cases, many reasons, many things
people want and use crypto for, and more every year. This is a multi-
generational experiment. It took hundreds of years for the modern financial
system to come, and only a decade for this new one, so it needs more time.

~~~
ashtonkem
I personally have always found the idea that “tons of people are using it” to
be a pretty unconvincing argument. Sometimes people invest huge amounts of
money and time into useful things, like the internet, but people have also
invested huge amounts of time and money into some really stupid bubbles too. I
would 100% be comfortable saying that thousands of people and $150B are
completely and utterly wrong. They might not be, but it wouldn’t be the
dumbest bubble in living financial history.

------
kaffeemitsahne
Funny to browse through their crypto portfolio for a while:
[https://a16z.com/portfolio/#crypto](https://a16z.com/portfolio/#crypto)

For example, they are apperently invested in cryptokitties (the Dapper logo).

------
new2628
Here's one useful resource to understand crypto: "This Time Is Different:
Eight Centuries of Financial Folly", paperback, 2011, authors: Reinhart &
Rogoff.

~~~
specialist
Thank you for the recommendation.

Do the authors address cryptocurrencies specifically?

I skimmed some reviews. I gleaned that this is a pro-austerity book, that the
author's conclusions were largely debunked by independent analysis of their
data.

Given this is true, does this book's treatment of cryptocurrency remain
useful?

~~~
new2628
The book does not address cryptocurrencies specifically just financial mass
delusions throughout the ages of which cryptocurrencies are a special case.

------
yc-kraln
I understand it just fine. Show me a business model that isn't built on
speculation or fraud, and then I'll pay attention.

------
jariel
This feels like 2015.

It's been 10 years of hype now where are those useful blockchain technologies,
used by regular people, regular business, regular commerce, regular banks?

We can all see the 'theoretical potential' but I think what a16z needs to do
now is start to understand and communicate 'why it's not working' and start
talking about more material opportunities.

------
hootbootscoot
Where are the resources for understanding why useless "proof-of-work" wankery
burns electricity and CPU cycles that could be spent folding viral RNA in
simulation or doing pattern-recognition DSP on radio-telescope data or
something useful?

What an utterly disconnected-from-the-real-world approach to bringing literal
VALUE in the world...

(speaking of current implementations of cryptocurrencies and their fan bases
aka vested interests. Not directed at this article even remotely. I didn't
even read the article. If you flag me for anything, flag me for this. TLDR;
lol)

~~~
sparkie
> Where are the resources for understanding why useless "proof-of-work"
> wankery burns electricity and CPU cycles that could be spent folding viral
> RNA in simulation or doing pattern-recognition DSP on radio-telescope data
> or something useful?

mises.org is a great place to begin to understand.

Bitcoin is bringing real value into the world by allowing people to save money
for a rainy day without making risky investments, and without subjecting the
wealth they've earned to the possibility of theft or seizure by the state or
anyone else.

As for "crypto," the kind being mentioned in the article here, your guess is
as good as mine. These are just scams intended to rake in money from naive
investors and speculators, based upon a complete misunderstanding of why
Bitcoin was designed the way it is.

As for folding RNA and other useful stuff - that's all nice, but somebody has
to pay the costs. That somebody, hopefully, is paying it voluntarily. I might
even be happy to volunteer some of my money to causes like that. The "steal
hard earned money from people to pay for pet projects" ideology is a non-
starter for me though.

~~~
sparkie
@z3rgl1ng - replying here as yours is marked [dead]

> Bitcoin

> saving without making risky investments

> I’m sorry, what?

Glad you asked, you heard correctly, but I'm not sure you understand the
nature of money.

Storing wealth with bitcoin is not really much different to storing wealth
with dollars. In both cases, the future purchasing power of your wealth can
change depending on the markets - it is in general, out of the control of any
particular entities - but is in the control of every individual making
transactions based on their own subjective value of the commodities they're
exchanging (of which the money is one).

In the case of Bitcoin, the value of other commodities relative to bitcoin is
subject _only_ to these markets of individuals making those choices. There is
nobody who can reduce or increase the value of a bitcoin arbitrarily. This
means "saving in bitcoin" is betting that the market will be favourable to
bitcoin in the long term such that you can maximize the return from the hard-
earned wealth you laboured for.

In the case of dollars however, the dollar is still subject to the same market
conditions as bitcoin - but it has an additional variable which can alter its
value - the federal reserve, which can simply elect (by the non-elected) to
devalue the dollar by arbitrarily increasing its supply. Since increasing the
money supply has become the de facto behaviour of this entity, saving in
dollars is an almost definite loss-making strategy. The money you obtained
through hard labour will simply not be worth the work you performed when you
come to spend it.

Any investment contains risk. Storing dollars in your bank account can be seen
as "investing in the dollar." A very poor strategy if you ask me. Although
you're pretty much guaranteed lose purchasing power on it, it is fairly low
risk that you're going to lose a significant portion of it quickly, but the
history of dozens of other currencies which have hyperinflated tells a story
that this could change at a moment's notice.

An "investment in bitcoin" is an investment in a future of sound money, and
not to be confused with "investing in the exchange rate of the dollar to
bitcoin," which is a gamble and of course, high risk, if you have have a high
time preference.

The future of sound money merely needs people who lower their time preference
to believe that their wealth can be stored in the long term in bitcoin without
being devalued, and the predetermined nature of bitcoin's disinflationary
currency release can give them some confidence in that. Hyperinflation of
bitcoin cannot occur, and since the supply will diminish, the value per
bitcoin is likely to appreciate unless demand also diminishes at the same
rate. However, since bitcoin targets self-interest, demand is likely to
increase - as more people decide to store their wealth, the value per bitcoin
increases, creating a feedback cycle which further incentivizes people to save
in bitcoin. This cycle is self-perpetuating and will gradually swallow up
larger and larger amounts of savings globally - and as it grows, the
volatility of the exchange rate to dollars will likely decrease too, although
there's the possibility that it could trigger further inflation of the dollar,
which would see even more volatility, but would only serve to increase
confidence in bitcoin as the fix for the problem of inflation.

At this point, I can't see how bitcoin could fail. The Federal Reserve has
just committed to infinite devaluing of the dollar, and Bitcoin is about to
enter its 3rd phase of "quantitative hardening." Will be fun to watch.

------
ForHackernews
All you really need to understand is proof-of-work blockchain (aka all
blockchains in real use) is a very slow database where recording a transaction
wastes as much energy as several western households use daily. And that energy
wastage continuously increases. It's anti-efficient by design.

~~~
evgen
The second thing you need to understand is that A16Z has placed some big bets
on cryptocurrency being more than a fad and will do whatever it takes to
convince you that this slow-motion pump and dump scheme is important or
relevant to your life/future.

------
LilBytes
Note to would be readers, this is an article on cryptocurrency and not
cryptography. I was hoping it was about the latter before opening the article.

~~~
amalcon
I get that we've lost that particular terminology battle, but I'm still a
little sad about a decades-old term being stolen to refer to a fad.

~~~
vntok
Cryptocurrency is a decades-old term as well (Bitcoin dates from 2009).

~~~
Harvesterify
So, one decade old, not plural decade old ?

~~~
vntok
1.1 > 1, so 1.1 decades old. That is how plurals work in most languages.

~~~
Harvesterify
Yeah sure.

~~~
vntok
French for example is an exception in that fractional numbers are only
pluralized over 2.

Note that in English "5 years old" would become "0.5 decades", using the
plural form as well.

~~~
legel
Your comment is about 0.000005 decades older than mine.

------
qilo
It’s about cryptocurrencies, not cryptography. Saved you a click.

------
l7l
oh, its just cryptocurrencies not cryptography..

~~~
lucb1e
I suppose this is why HN displays the domain, so you can see it's from
Andreessen Horowitz and skip it.

------
cordite
I am disappointed that crypto currencies conflate their name with
cryptography.

Although this is the title of the article, it is misleading.

~~~
cordite
Thank you to the mod that updated the title.

------
xzvf
"Blockchains are computers that can make commitments. Traditional computers
are ultimately controlled by people, either directly or indirectly;
blockchains invert this power relationship, putting the code in charge"

Really hits the crux of this futile effort. Trust cannot be formally defined.
Trust is an ever-changing subjective belief done in an unknown world.

The stereotype of a libertarian crypto advocate who is really into bayesian
inference is not a coincidence. They are micro-fascists: given time and
information supposedly everyone would converge on the same indisputable truth
(which I happen to currently hold) and act in the same optimal rational way.

The irony is that you don't even need to bring the human condition into the
argument. The mathematics they so revere practically scream that there are
fundamentally inherent limits. Solomonoff induction is incomputable. There is
no free lunch. Why continue this march of madness?

~~~
nlitened
I think you accuse people of fascism a little too easily.

~~~
new2628
He said micro though.

------
Hermel
A16Z has a few interesting crypto investments, the imho most promising one
being DFinity, which tries to build an “Internet computer”.

~~~
TheColorYellow
Has the network launched? Is the community active?

Haven't heard much of anything tangible since they raised funding.

Unfortunately Ethereum is still the leading layer 0 product for a world super
computer.

~~~
rwosync
It's pure vapourware, word is that they burnt through their runway hiring a
team of overpriced Haskell consultants who just built a new programming
language and didn't deliver a product.

------
yalogin
I understand they invested in a bunch of blockchain companies. I started
listening to their podcast and within the episodes it was lead that they
started the pod to only prop up their investments and quickly deleted it. This
post confirms that I am not wrong. “Blockchain will wrest control from
corporations “? Says a VC firm. Stopped reading there. I clicked on it then
boing it’s about crypto, they should say blockchain in the title.

