A long needed statement about #Crypto…

There are 2 sub-topics that I think need addressing:

  1. The unending crypto scams.
  2. What crypto actually IS.

These are two mutually exclusive topics. NEITHER defines the OTHER.

What are MY credentials to be able to speak about this?

I’m a software engineer with many decades of experience. I’ve been involved in cryptocurrencies since 2014. I have used many of the crypto services and many of the cryptocurrencies. I have traded dozens of cryptocurrencies and currently hold many cryptocurrencies. I have created my own blockchain from scratch and my own cryptocurrency completely from scratch with code. I’ve created neural networks and have trained them on price histories of cryptocurrencies to build price prediction AI. I understand the technology from top to bottom at a fundamental level and I understand the use of it and the tools and services built around it. I also understand the political thought processes involved in the creation of BitCoin as I hold similar, if not exactly identical beliefs as well.

Let’s talk about the scams first:

While crypto offers many benefits to humanity, scammers know that people are interested AND that people think they can get rich quick with crypto. They know it’s still relatively new and that most people are uneducated about it. They use those 2 facts AGAINST unsuspecting people and cheat them out of their money. This is a HUGE problem that NEEDS to be both addressed AND dealt with.

HOWEVER! The same is true for Gold, Stocks, US Currency, and anything else involving people’s hard earned income. This has absolutely NOTHING to do with “crypto”. Humans are a greedy species and that greed will and does manifest around everything. Crypto is no exception. The greed and scams are a fault of the greedy and the criminals, not a fault of the financial tools.

The PROBLEM is NOT the object of investment. The PROBLEM is the greed of the scammers (and to an extent, the greed of the victims, but that’s another story for another time).

Gold, Silver, precious metals, cash, and crypto are ALL vehicles of financial transactions and investments (well, cash is NOT an investment since it’s DESIGNED to devalue over time). Do NOT make the mistake of getting angry at the financial instrument simply because there are bad people out there taking advantage of people’s lack of education about them.

Let’s talk about CRYPTO in its own right:

I’ll precede this topic by stating that crypto exists to liberate you from the corrupt financial system controlled by tyrants and greedy and corrupt politicians. It WILL NOT liberate you from greedy, corrupt individuals that will do everything in their power to trick you out of your holdings.

Let’s examine whether or not it’s living up to that dream:

A basic primer on what cryptocurrencies ARE and then, what they are NOT

What Cryptocurrencies ARE:

There are many cryptocurrencies and not all are implemented with exactly the same backend technologies. My description will be as basic and non-technical as I can get away with while still providing you the facts you need to understand it. This will be a challenge (for me, not you), so bear with me. The REASON it’s a challenge is because I’m a highly technical person and have created my own crypto from scratch with code, so I understand that when I talk about things of this nature to non-technical people, I, like all technical people, have a language gap between me and you. I’ll do my best though:

To understand crypto, we must first understand the system it’s designed to replace. It’s NOT designed to replace “money”. It’s designed to replace an entire corrupt and tyrannical financial system. This includes central banks, regular banks, credit cards, payment systems, all of which have denied services to people in recent years simply because of the individual’s political opinions. But THAT phenomenon has occurred SINCE the first cryptocurrency (#BitCoin) was invented. It was invented to protect your liberties from such tyranny, but at the time BitCoin was invented, we were in the middle of the 2008 housing collapse that destroyed the life savings of MILLIONS of Americans (and others around the world). One person, who to this day is still anonymous, decided enough was enough and designed a new currency that could NOT be controlled by a centralized authority. It was to provide the following functional differences from the current system:

  1. Impossible to forge the currency
  2. Impossible for your holdings to be confiscated by tyrants
  3. Impossible for your transactions to be blocked by tyrants
  4. Impossible for banks to hold or steal your money
  5. Impossible for central authorities to willy nilly devalue the currency by printing more

Notice that I did NOT mention “get rich quick”? That is not and was never a reason for cryptocurrencies.

How Things Are Going…

At the time of this writing, it’s September 2023. The BitCoin #whitepaper was released in January of 2009. It’s been 14 years. let’s examine each intended benefit and see how they’ve turned out so far.

1. Impossible to forge the currency

This has held up, at least for BitCoin and most cryptocurrencies. There have been thousands of cryptocurrencies created since the invention of BitCoin and some of those have been poorly designed and crypto was able to be forged. But not with the vast majority of them and most importantly, not with BitCoin. After 14 years and hundreds of thousands of white-hat hackers and actual bad guys trying to break it, it’s never happened.

Conclusion: SUCCESS!
For the remainder of this discussion, we’ll limit it to BitCoin since the nuances of the thousands of others are too many to cover. I may mention Ethereum, Monero, and stable coins, as those are notable and important to the discussion.

2. Impossible for holdings to be confiscated by tyrants

This too has held up. However, no doubt you’ve been blasted with stories of millions of dollars worth of crypto being confiscated by law enforcement or scammers or cryptocurrency exchanges going belly up. These are NOT cryptocurrency being confiscated by tyrants NOR BY ANYONE!

“WHY?” you ask?

Great question! The confusion comes from the poorly written articles about these events and lack of understanding of what actually happened. Let’s discuss the first big event: Mt. Gox. This was the first cryptocurrency exchange. An exchange is bridge between the current legacy financial system and crypto. An exchange is where you go to exchange dollars for crypto and vice versa, as well as crypto for crypto.

AN EXCHANGE IS NOT CRYPTO! IT’S A CENTRALIZED AND PRIVATELY OWNED AND CONTROLLED BANK!

Mt. Gox was an exchange. It’s a centralized business… a bank. People would sign up with it, give their personal information, open an account, put fiat currency into it, and use the bank’s software (their website) exchange dollars for crypto and vice versa. All this did was update records in a database in the bank’s records. The customer didn’t actually own any crypto. They just had records in a centralized database that said that user could withdraw certain amounts of crypto. As long as they failed to withdraw the crypto they were entitled to into their own, personal wallet, it was never their crypto. It was the bank’s crypto. Many people didn’t understand that and many still don’t to this day. If you “have crypto” in an exchange, do do NOT have crypto. You have an IOU from the bank.

To actually “OWN” crypto, you MUST move it from the entity that holds it to your own, personal wallet where YOU possess the private cryptographic keys. Once you do that, THEN and ONLY THEN do YOU own the crypto. It’s that private key that makes you the owner. Your crypto absolutely, positively, MATHEMATICALLY CANNOT move without the use of that private key.

Mt. Gox got hacked.

Let me repeat that: —===>>> Mt. Gox got hacked <<<===
BitCoin DID NOT GET HACKED!

Mt. Gox was a centralized bank with bugs in their software. Hackers discovered the security flaws and used it to steal about a hundred million or so dollars worth of BitCoin FROM Mt. Gox! Why? Because they were able to control Mt. Gox’s software and instruct it to use Mt. Gox’s private keys to move the crypto.

This was a failure of Mt. Gox to protect their private keys. BitCoin functioned as it should have. The hackers did NOT break the encryption of BitCoin. They effectively stole the combination of the bank’s vault.

Not a SINGLE CUSTOMER’S BitCoin was stolen!

“But HOW can you say that? None of them have ever recovered their BitCoin to this day!”

Ah, but they NEVER POSSESED THE BITCOIN! It was NEVER THEIRS! Why? Because they never cashed in on their IOUs from the Mt Gox bank. Once Mt. Gox was drained of Mt Gox’s BitCoin, they lacked the BitCoin necessary to honor the IOUs that people’s fiat currency was given to them to purchase. This was a failure of a central bank. This central bank defeats the purpose of BitCoin.

YOU DON’T OWN BITCOIN IF IT’S IN A CENTRALIZED BANK! YOU OWN AN IOU!

in case it isn’t obvious at this point; If you purchase cryptocurrency from a centralized exchange, you must immediately move it to your own personal wallet were YOU control the keys. If you don’t do that, YOU SIMPLY DO NOT OWN ANY CRYPTO!

With the explanation of WHO actually owns BitCoin, let’s move on. We’re still examining the dream of “2. Impossible for holdings to be confiscated by tyrants”…

With the explanation above in mind, you’ve certainly heard of governments “confiscating crypto from people” by forcing a crypto exchange to hand it over to the tyrants. This is identical, technologically, to the Mt. Gox breach. It’s simply the government doing it rather than a hacker, but by force instead of a hack. Once again, they took resources in possession of a centralized bank. They did NOT hack the BitCoin blockchain nor did they control the BitCoin network to take it. The user’s simply did not own any BitCoin. The centralized bank did and they handed it over to the tyrants. If the user’s had already moved their claimed crypto into their own wallets, the tyrants would never have been able to take it.

Conclusion: SUCCESS!
The BitCoin blockchain has never been hacked. As long as you hold your private keys securely, your BitCoin can’t be taken.

3. Impossible for your transactions to be blocked by tyrants

No doubt you’ve heard about the Obama administration’s scheme called “Operation choke point”, where they unconstitutionally strong armed banks from doing business with gun stores? They intimidated banks into closing the accounts of 100% legitimate American businesses that sold firearms to American citizens for their constitutionally protected second amendment rights to bear arms.

You’ve also heard of Justin Trudeau’s Canadian government that locked the bank accounts of tens of thousands (might have been more) of Canadians because he disagreed with them for protesting. Not only did he lock THEIR accounts, but hey ALSO locked the accounts of individual citizens that were NOT protesting, but simply donated to the cause. In addition to THAT, he also ordered an American funding organization, GoFundMe, to hand over all donations that AMERICANS had made to the cause. Fortunately, GoFundMe refused.

These are just 2 well known examples, but this happens every day to various degrees.

You’ve probably heard of a story recently in the news of the U.S. government going after a decentralized cryptocurrency mixer called “Tornado”. It allowed users to send a chosen amount of crypto to the mixer, give it multiple other crypto wallet addresses and it would take the crypto received from multiple other people, mix it up, and then send it out to the wallet addresses (think of a wallet address as a bank account number) specified by the users. This allowed the users to then own their crypto anonymously to achieve privacy in their transactions. Of course, the government has the tyrannical belief that they should know about every single transaction that ever takes places throughout all of humanity. They are wrong, but that doesn’t stop them from claiming otherwise. They ordered centralized exchanges to not honor any crypto that touched any of those wallets.

Did this block transactions?

Yes and no.

Yes in that if anyone that owned those wallets wanted to move their crypto into the exchanges, they were blocked.

No, in that the blockchain and the network was not blocking it. It was individuals choosing to not accept transactions from wallets the government told them not to. The owners of that crypt are still, to this day, able to transfer it to any wallet they want and to accept crypto from any other wallet. The attempt by the government to black list those wallets was embarrassingly stupid in that all a user had to do was spend 10 seconds creating a new wallet and moving their crypto to the non-blacklisted wallet.

Conclusion: SUCCESS! (with noted exceptions of individuals choosing to follow orders)

4. Impossible for banks to hold or steal your money

At first glance, knowing that exchanges are banks and can hold and steal your crypto, you might think that with dream was a failure. In fact, it’s quite the opposite.

Simply don’t give your crypto to a centralized bank. Problem solved.

Of course, the centralized exchange banks are necessary as they are the on and off ramps to and from crypto and fiat. But, not entirely. Also, if you claim your IOU immediately by moving your just purchased crypto into your personal wallet, you’re then safe. You can also acquire crypto in many other ways. For example, you can run your own cryptocurrency mining software that generates crypto for you. You can sell products and services by accepting crypto directly from the buyer into your own, personal crypto wallet, bypassing the centralized banks.

If your crypt is in your own wallet where you and ONLY YOU have the keys, then it is, indeed, impossible for any bank to hold or steal your crypto because they simply don’t possess it. In crypto, YOU are LITERALLY your own bank.

Conclusion: SUCCESS!

5. Impossible for central authorities to willy nilly devalue the currency by printing more

This one is the one that seems to be most misunderstood by the general public. And it’s because the average person does not understand the technology that makes up cryptocurrencies. They CONSTANTLY argue against crypto saying, “Well, crypto is made from thin air. They can just make more at any time!”

This is fundamentally and completely FALSE! Here’s why:

(Prepare for techno-talk. I’ll keep it as limited as possible)
BitCoin comes into existence in only 1 way: Complex software algorithms are used to hunt for special numbers in a huge universe of numbers. Once a special number is found, the computer that found it presents it to the whole BitCoin network. The network validates the number is in fact a genuine special number and rewards the finder with a certain amount of Bitcoin. Any validator that lies is kicked out of the network and black-listed. Any computer claiming to have found a special number and isn’t validated by the network is also black listed. It’s financially harmful to be dishonest in that network.

The amount of computation and searching for one of those special numbers is ENORMOUS. The BitCoin network is the most powerful supercomputer on the planet; leaps and bounds more powerful than any government supercomputer. A BitCoin represents the enormous amount of computational time AND power consumed to generate it. There is no central authority that can authorize more BitCoin. The network only allows the creation of new BitCoins when a miner finds one of these numbers and on average, the entire global BitCoin mining decentralized network finds only ONE about every 10 minutes. At the time of this writing in 9/2023, this number is rewarded by the network with the creation of 6.25 new BitCoins. Every 4 years, the network cuts that reward in half. At the next 4 year cycle, it will be cut down to 3.125.

This is designed specifically to prevent deflation of the value of the cryptocurrency and is a direct result of the central banks choosing willy nilly to print TRILLIONS of new dollars, intentionally devaluing all existing dollars. The BitCoin network software is also designed to stop producing new BitCoins once 21 million BiCoins have been generated. As of right now, nearly 20 million have already been created. But with the halving event of every 4 years, it will take another 140 years to mine that last 1 million BitCoins.

THERE WILL NEVER BE MORE THAN 21 MILLION BITCOINS

Conclusion: OVERWHELMING SUCCESS!

FINAL CONCLUSION

Don’t hate a financial asset and tool just because there are bad people in the world. 100% of all financial assets and tools have always been, are now, and will always be tools used by scammers too. An asset is not defined by the bad guys. It’s defined by it’s function.

Don’t let your previous anger at the scammers cloud your judgement on BitCoin. In fact, it’s to the tyrants advantage that you let it cloud your judgement, because they WANT you to remain in the tyrannical financial system where they are gaining more and more control over everything you can do with your own money. They’re desperately hoping that light bulb of awareness never turns on in your head.

Cryptocurrency is the key to your financial liberties. Don’t deny yourself and your family your freedoms because of your misunderstanding caused by scammers and propagandists that want you to remain in the system that THEY control.

BitCoin Just had its 2020 Halvening: Here’s what that means

What Happened?

Earlier today (2020-05-11), the amount of new BitCoins awarded to each minor that hits the jackpot of finding the right hash to validate the latest block of transactions now gets rewarded HALF the amount of BitCoin that they would have been awarded for each block mined for the last 4 years. For the last 4 years, up until earlier today, every block that was mined, 12.5 BitCoins were awarded to the miner that mined it. Now, and for the next 4 years, any minor that mines a block will be awarded only 6.25 BitCoins.

Why did that happen?

Creating new BitCoins is like printing money. It shouldn’t be done unless it has to because doing so floods the market with new coins and reduces the value of every coin already in existence. This is called “inflation”. But, the miners have to be incentivised to run their expensive hardware and burn through their expensive electricity, therefore, they are rewarded with a small amount of new coins. But, also built into the algorithm is a maximum limit of 21 million total BitCoins. There aren’t that many BitCoins yet, and this halvening algorithm is part of the reason why. By cutting in half, the reward, every 4 years (more specifically, every 210,000 blocks mined), it will take 144 or so years before the last BitCoin is mined.

What does this mean?

For miners, it means their income is cut in half… but only in the short term. BitCoin is deflationary by design, so the value of BitCoin has been and it is expected to continue to go up over time.

For consumers, it doesn’t mean much, at least not in the immediate future. The price of BitCoin has not been immediately effected by prior halvening events. For the most part, it should be business as usual.

For HODL’rs (people that Hold On for Dear Life… saving for the long term), it should reinforce the future value of their BitCoin.

For day traders, given prior halvenings that turned out to be non eventful, they probably won’t experience much of a difference either.

Conclusion:

For the most part, there’s more hype than action… every halvening, but the algorithm for the halvening is critically important for the long term viability of BitCoin.

The Importance of Decentralized Apps & Services

First, a definition:  What IS a decentralized app or service?

A decentralized app or service, its data, and the user accounts are available from multiple locations.  If any one of them go offline, the app or service continues to be functional and distribution of the app or service does not cease, the data does not go away, the user accounts do not die, and no functionality ceases to function.

Let’s review how legacy (centralized) apps and services currently work…

Ordinary, legacy services that you’re probably used to are things like Google Maps, Google GMail, Google Search, Google Drive, Google Docs (seeing a pattern here?), Google’s YouTube.  Aside from the obvious fact that all of these are from A SINGLE COMPANY! they’re also centralized.  In spite of the fact that Google has a planetary wide system where they distribute their services and storage, they have the following centralized points of failure:

  1. They’re all owned by one company.
    1. Google could, in theory, go out of business.  Wait!  Stop laughing.  Where are you going?  Obviously, that’s not likely to happen any time soon, but it’s always a possibility, especially with the possibility that they may be broken up into multiple smaller companies, due to their gigantic control of virtually the entire internet.
    2. They can (and DO) censor.  THOUSANDS of YouTubers have had the following problems, increasing and accelerating in occurrences, frequently for political, not safety reasons:
      1. Demonetization.
      2. Shadow banning.
        1. Removing their videos or channels from “suggested videos”.
        2. Hiding their videos or channels from search results.
        3. Marking them as “age restricted”, which hides them from search results where “child safe” restrictions are enabled, such as public libraries and schools.
      3. Videos deleted.
      4. Channels deleted.
    3. Falsification of viewer counts.
    4. Blocking of voting.
    5. Blocking of comments.
    6. Simply not paying the creators what they’re owed.
  2. They’re all reliant on the centrally controlled DNS system.
    1. Though the DNS is a decentralized service, the CONTROL of it is NOT.  The CONTROL of the DNS is controlled by an organization called ICANN (Internet Corporation for Assigned Names and Numbers).  They’re the ones that can take your domain name away from you.  They used to be a U.S. based organization, but in 2016, the U.S. government, in a highly controversial move, transferred control to an international body that is not adherent to your first amendment rights.  At the time of this writing (2020/1/4), there are fears that tyrannical governments like Russia or China may start to get partial control of this too.  Both of them are already creating their own DNS and many countries block domains from their entire citizenry.
      1. See this:  UN Moves Towards Handing Dictatorships Power to Control the Internet
  3. They all have access to your PERSONAL data.
    1. Any data you enter into their apps or websites is viewable by them and stored on their servers.  YOUR data is controlled by other people.
  4. Your user account is proprietary for THEIR services
    1. You’ll have to create separate accounts for apps and services on OTHER centralized apps and services not owned by Google.
    2. Your user account and password are known and stored on these organizations servers.  They have access to EVERYTHING you do with their apps, and so do their employees and contractors!

Decentralization solves ALL of the above problems!  Here’s how:

  1. No centralized DNS.
    1. Decentralized apps do not rely on the centrally controlled DNS (Dynamic Name System).  Once you install and run the app on your local device, most of the functionality happens on your own device.  In cases where data needs to be shared, it’s either done so directly from your device to your friend’s device, if you’re having a private conversation, or it’s distributed to a decentralized, public data system like IPFS (InterPlanetary File System).
  2. Decentralized account management:
    1. Instead of creating a user account on a centralized web site for each and every website you visit, you create ONE account.  And you do this on your own device.  And you do not publish it (unless you want to).  This is how cryptocurrencies work.  You create your “wallet” using software running on your own computer.  It’s essentially a very large and random number, run through a cryptographic algorithm that generates TWO keys:  One private (that you hide from everyone) and on public (that you can share with the world).  These keys work in unison.  If you want to prove to anyone that you created content, you encrypt it with your private key.  Anyone with your public key can decrypt it.  Technically, that’s not what we call “encryption”.  It’s “digitally signing”.  If something can be decrypted using your public key, it’s proof that it was encrypted (or signed) with your private key, meaning only YOU.  If someone wants to send you something private, they’ll encrypt it with your public key.  It can ONLY be decrypted with YOUR private key.  This key combination is your “account” and you can use that on any decentralized app that uses that particular technology.  You can also create multiple accounts, if you like.
      1. You create your accounts on your own device.
      2. You use the same account everywhere (if you want).
      3. You can create as many accounts as you like.
      4. No one, but YOU has control over your accounts.  No one can delete them.
  3. Decentralized app deployment:
    1. Apps are made accessible on a network of nodes, rather than a centralized app store.  Some examples of decentralized networks are BitTorrent & IPFS.  This prevents a single entity (Like the Apple App Store or Google’s Play Store) from deleting them.  It also prevents a centralized authority, like ICANN from taking away the public’s access to your content via the DNS.
  4. Personal Data & Remote Storage
    1. While personal data does NOT need to be decentralized, decentralized apps SHOULD handle personal data ONLY locally, on the user’s device, OR, per the user’s intention, encrypt, then store on the user’s choice of cloud storage, preferably a decentralized cloud storage, like SiaCoin or FileCoin, or replicated (after encrypted) across multiple accounts on separate centralized cloud storage services like Amazon S3, Google Drive, DropBox, etc…
  5. Monetization
    1. Content creators should receive payments DIRECTLY from the consumers of their content, usually in the form of cryptocurrency.  The app providers need only provide the means for the content creator to accept cryptocurrencies.  This is usually done by the content creator registering their cryptocurrency wallet addresses with their content and users being able to tap or click it and then transfer crypto directly to the creator.  There should be no middleman involved.
  6. Elimination of DDOS
    1. Distributed Denial Of Services is an attack against a CENTRALIZED web site.  For example:  Multiple machines send thousands or millions of requests to a website, overwhelming the CENTRALIZED servers, causing them to be unable to respond to legitimate requests, because they can’t tell the difference.  If your services or content are decentralized, there’s no central server to attack.
  7. Faster Downloads
    1. When you download content from a decentralized network, you’re not relying on the limited server resources of a single organization or single server anymore.  The system finds the closest or fastest nodes to you that have the content and deliver it to you.
  8. Global bandwidth
    1. Decentralized distribution means closer physical transfers.  In other words, as a downloaded item gets distributed via the act of downloading, it spreads organically across the internet.  Each download is done via the closest neighbor, preventing clogging up the longer path connections, making the rest of the internet faster for everything else too.

Decentralization provides massive benefits for BOTH publishers AND consumers.

  1. For Consumers:
    1. As a consumer, the content you love cannot be taken away from you just because of the politics of the day or the preferences of the owner of an organization.
  2. For Publishers/Creators:
    1. You can’t be censored.
      1. Twitter, Facebook, & YouTube have gone on a massive censorship craze and in spite of being hauled in front of Congress multiple times and facing backlash from the public, they’re only accelerating their censorship.  Decentralization puts an end to that.
    2. You can’t be demonetized.
      1. A sinister part of censorship is demonetization.  In addition to silencing dissident voices, they’re also cutting off their funding and propping up the distribution of funding of only the voice they approve of.  Decentralization puts an end to that.

Speaking of Decentralized Monetization,

If you like my work, you can contribute directly to me with the following cryptocurrencies:

BitCoin:

bc1qx6egntacpaqzvy95n90hgsu9ch68zx8wl0ydqg
bc1qx6egntacpaqzvy95n90hgsu9ch68zx8wl0ydqg

LiteCoin:

LXgiodbvY5jJCxc6o2hmkRF131npBUqq1r
LXgiodbvY5jJCxc6o2hmkRF131npBUqq1r

The Cryptography of a BlockChain

[Updated on 2019-09-11]

By now you’ve all heard of a blockchain and that it’s the backbone of cryptocurrencies like BitCoin, Ethereum, LiteCoin and others.  I’m not here to tell you that blockchains are the solution to every problem or that blockchains are the next best technology that everyone will use.  You’ve heard that 100 times.  I’m going to explain, in as simple and straightforward a way as possible HOW a blockchain is put together and how cryptography is central and core to the whole thing.

You’ll discover, on your own, that putting a couple of old ideas together creates something phenomenally more powerful than the individual parts summed together.

First, let’s list the parts:

  1. A simple transaction (a record showing a FROM address, a TO address, an amount being transferred, and a time stamp).
  2. A “block”, which is just a list of transactions.
  3. Hashing (the result of a complex math problem using the numbers of all the bytes of a file (or a block and/or a transaction record)), to uniquely identify a larger chunk of data.
  4. Encryption

That’s it!  No, really!  A block chain and a cryptocurrency contain no more than that.  Well, a cryptocurrency needs computers to do the calculations for the hashing and encryption, etc…, but they just build  and validate the block chain.

So, here is what a block chain is in a nutshell:

  1. Every transaction ever taken place since the creation of the blockchain.
    1. The list of transactions are divided into “blocks”.  If you create your own blockchain, you get to decide how big a block is and how many transactions are placed in a block.  In BitCoin, for example, a block used to be 1MB max (it was updated in August of 2017 to be bigger).  A new block is added to the blockchain every 10 minutes… at least, on BitCoin, it’s every 10 minutes.
    2. The transaction is digitally signed by the sender so the network can confirm the owner of the cryptocurrency is truly authorizing the transfer.
  2. Each transaction in the block has a hash that uniquely identifies the transaction.  No 2 transactions will ever have the same hash.
  3. Once all transactions for the next block are ready, the hash from the prior block is added to the new block and that hash, plus all the transactions, are hashed to create a final hash of the new block.
  4. Critically important:  That prior hash being added to the new block is what LINKS the new block back to the prior block!  That’s what makes it a “chain”.  Each new block references the old one and the new block’s hash is dependent on the old one, which was dependent on ITS older one, and so on, all the way back to the first “genesis” block.  The new hash is the way it is because of ALL the older hashes are the way they are.  If any single transaction anywhere in the blockchain were different, so would ALL the hashes be different following that one.

That’s it!  Really, that’s all there is.

But, some really important things have happened as a result of those simple pieces:

  • Every processing computer on that network has a full copy of the entire blockchain.
  • There’s no central blockchain server.  The blockchain exists ONLY on the hard drives of the machines of the volunteers.

That means a hacker can’t hack “the bitcoin server” and change records, because no such central server exists.  He’d have to hack into EVERY bitcoin node and change it.  (Well, he’d have to hack at least 51% of them).

Something else important happens with the technology:

  • When a BitCoin node computes the hash of a block, it doesn’t just compute the hash ONCE, it computes TRILLIONS and TRILLIONS of hashes.  A single, home laptop, would probably take years to compute that hash.  Why? The network won’t accept just any hash.  The hash produced MUST match a pre-defined pattern.  Specifically, it has to, by pure chance, come up with a hash that begins with a bunch of zeros.  The amount of zeros needed increases over time as computers get faster, to ensure that Moore’s law doesn’t overtake the network.  These hashing computations NEED to take a long time.  MANY BitCoin nodes are competing with each other to find that magical hash value.  The first one that finds it, submits it to multiple peers on the network for confirmation.  Confirmation is instant.  Once confirmed, the block is accepted into the blockchain and it’s distributed to every node on the network so they can all add it to their local copy of the blockchain.  And the computer that found the hash is awarded with 12.5 new BitCoins (worth about $92,000 at the time of this writing).  Those computers that spend all their time crunching numbers to produce those hashes are called “miners”.

So, why are miners required to compute all those useless hashes only to find yet another useless hash?  Because it has to cost the miners something to do it.  It’s too expensive to do that if there’s no reward, so a hacker is not going to waste their time doing it.  If a hacker tried to submit a false hash, the network would reject the false hash and would ban them from the network.  So, only hashes that actually went through the full AND EXPENSIVE computational process are accepted.

When a miner submits their hash, and it’s confirmed by other miners, that hash is a “proof of work”.

Again, WHY?

Aside from making it too expensive and mathematically improbable to submit false hashes, it makes it impossible to change records in the blockchain.  If you tried to change a record from 24 hours ago, you’d have to rehash it, then rehash the next block (because remember, the NEXT block has been hashed with the prior block’s hash… the one you’re CHANGING!).  You’d have to rehash EVERY block after the one you’re changing.  It takes about $1,000 worth of electricity to mine a block and thousands of specialized computers to get it done in time.  In a 24 hour period, there are 144 new blocks, so it would cost you $144,000 to rehash them all.  Every 10 minutes back in time of a transaction you’re trying to alter will cost you another $1,000 in electricity.

Then, you’d have to somehow hack 51% of all bitcoin mining rigs and REPLACE ALL their local copies of the blockchain.

There simply is not enough computer power in the world to accomplish that task, not even if you add all the world’s supercomputers owned by the NSA, Oak Ridge National Laboratories, China, etc…  Because while you’re doing that, the bitcoin network (the fastest supercomputer on the planet), is still churning out new blocks every 10 minutes.  You’d need the combined computational power of the ENTIRE bitcoin network, PLUS MORE to catch up with them.

It’s no longer a hacking challenge, but a thermodynamic problem that you simply cannot do with current technology.  It’s expected that a quantum computer would eventually be able to do that, but the BitCoin developer teams are working on new algorithms safe from quantum exploitation.  Side note:  It’s believed that current AES encryption is likely quantum-safe.

THAT is why any record written to the blockchain is permanent and unalterable.  That was accomplished with extra hashing of blocks and distributing copies of the blockchain all over the network.

Back to Cryptography

Hashing:  Again, hashing is taking a string of bytes, pushing them through a particular algorithm, and producing a fixed length, unique string of bytes, always the same size (for the SHA256 hashing algorithm, the one that BitCoin uses, that’s 256 bits long or 32 bytes long), regardless of the size of the original string.  A hash is non-reversible.  That means that you CANNOT reverse a hash to recreate the original data that was used.  Think of it in the same way you think of the remainder to a division math problem.  For example, 13/5 = 2, with a remainder of 3.  But how many other divisions have a remainder of 3?  An infinite number of them.  So, if all you have is the remainder, you have no way to determine what the original 2 numbers were.  That’s kind of how a hashing works.

Important to cryptocurrency (and blockchains):  You must have a “wallet” to keep your cryptocurrency in.  That wallet is simply this:  You create a new public/private encryption key pair.  Your private key is generated from random numbers put through an algorithm.  Your public key is generated from your private key by putting it through another algorithm.  Your wallet address is simply a hash of your public key.  You can freely give people your public key and your wallet address.  Your address is what you want people to have so they can send you money.

Signing:  For more details on signing, please see:

Understanding Encryption

But here’s a short explanation:  When you encrypt data, you use the recipient’s PUBLIC key.  When they DECRYPT your message, they use their PRIVATE key.  But, if you want to PROVE that YOU sent the message, you’d also SIGN it.  That simply means that you encrypt with your PRIVATE key.  The recipient DECRYPTS it with your PUBLIC key.  Anything encrypted with your private key can be decrypted with your public key.  Since your public key is public and anyone can decrypt your data with it that you encrypted with your private key, it’s not considered “decryption”.  And since ONLY YOU can encrypt anything with your private key and your public key can’t decrypt ANYTHING NOT encrypted with your private key, then that proves YOU are the one that encrypted it.  You digitally “signed” it.  That’s how you prove you created the content.

When you transfer digital money on a blockchain,  you digitally sign your transaction to move money out of your “wallet” (again, your wallet address is a hash of your public key).

The network refuses to transfer money from one address to another unless the transaction is digitally signed by the “from” wallet address’s owner.

Encryption: You don’t really encrypt anything in most blockchains, but I’ll mention encryption here, just so it’s not ignored from the conversation.  But “signing” and “hashing” are considered subsets of the larger “encryption” concepts.

Benefits of all these pieces of technology put together:

  1. An immutable (unchangeable), public ledger.  You never have to worry about someone changing a past transaction.
  2. Decentralized.  There’s no single place that a hacker can attack and no single place a dishonest website owner can manipulate, and no single place for a tyrannical government to shut down, and no single company to go out of business, tacking everything with it.
  3. You are 100% in control of your own cryptocurrency.  No one, not EVEN the government can technologically steal your funds or stop you from sending or receiving money on the blockchain.
  4. It’s virtually unhackable, not even someone with resources as deep as say the NSA.

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IRS Hell for BitCoin Users

Summary

2018 is the first year U.S. citizens have to file taxes on their cryptocurrency activities for 2017.  The limited “rules” the IRS has published do not cover the majority of types of activities and the information needed to accurately file taxes is simply not available to non programmers and is excruciatingly difficult to acquire, even for programmers.

Tax “Guidance”

In 2014, the IRS published a somewhat vague guidance on how to report cryptocurrency taxes.  It essentially boils down to:

  1. How much did you buy? 
  2. How much did you sell?
  3. What’s the difference?
  4. Send in 30% of your profits.
  5. Determine fair market value on the day of your transactions.

Here’s the actual 2014 IRS tax guidance document.

Reality

Unfortunately, reality is much more complicated than that.  Here are the real-world things that we have no clear rules on:

  1. What if I bought some prior to 2017?
  2. When I sell some, which of the MANY prior purchasing transactions do I apply the price to?  The price is different for every transaction.
  3. What about mining?
  4. What about mining hardware prices?
  5. What about price of electricity?
  6. I bought & sold on more than one exchange.
  7. I moved crypto between exchanges.
  8. I converted crypto from one to another.
  9. Prices at the moment of each transaction are not available when converting between currencies.
  10. Which price would we use, even if we had it?  There’s no universal price on any crypto.  Each exchange has its own, moving price that changes by the second.
  11. What about when a cryptocurrency forks, like BitCoin to BitCoinCASH and BitCoinGold?
  12. They say to use the fair market value of the day to determine prices on transactions, but that’s of no use since the price can swing thousands of dollars within a day.

My Experience

Since 2014, I’ve bought and sold crypto hundreds of times.  On some days, I’ve made dozens of trades in a single day.  In addition to that, I have accounts on 4 exchanges and also mine Ethereum.  I also traded between cryptos like converting BitCoin to LiteCoin and LiteCoin to Ethereum & Ripple & IOTA, etc., and moved crypto between exchanges like CoinBase, Kraken, Bitfinex, & Bittrex, and to and from my personal wallets,  and gained some crypto during forks, and lost some due to CoinBase not giving me my Ethereum Classic.

Over the past week, I’ve spent about 6-10 hours or so JUST on trying to gather what I understood would be needed for my tax accountant for cryptocurrency (not counting my usual taxes).  From the list above, you’ll get a rough idea of what I was going through to try to collect the information.

It’s 2018-03-31 and I finally finished my taxes.  Here’s how the day went:

I was woken up around 9:45 am this morning (I like to sleep late on Saturdays) by my tax accountant.  We spent a SOLID FIVE HOURS on the phone, trying to resolve everything (95% of that was related to cryptocurrencies).  This is their first year dealing with this.  I had to explain a lot about crypto and even the IRS’s rules.  She, apparently, had the same, uninformative PDF document from 2014 from the IRS too and just assumed it’d be as simple as they explain.  Reality is hugely different.

She wanted me to make it simple for her.  I wanted her to make it simple for ME.  That’s kind of why I’m paying her, right?  I spent hours gathering everything she could possibly need (minus the information that was just not feasible to get, but that we actually DO need).

It was simply not enough information, not just the lack of data that I didn’t have access to, but the lack of rules from the IRS.

Conclusion

The amount of effort trying to figure out just HOW to report my cryptocurrency transactions to the IRS was a nightmare and equals about the same amount of effort I spent throughout the year transacting and buying, learning, and setting up my Ethereum mining.  And it was significantly more frustrating than the actual crypto activities.

The IRS needs to get their act together, learn what it is we actually do, and come up with REALISTIC rules that we can actually perform.

After all the time and effort I spent preparing my taxes for my accounted, PLUS the amount of time we spent on the phone afterwords was insane and we STILL didn’t get everything.  We probably got about 85% of what was needed and I guarantee that what we reported was not right, but that was the best we could do.  I had tens of thousands of dollars in transactions.  With the limited information we had, she simply ended up using what I sent to her from the website CoinTracking.com, which is ONLY good for a SINGLE exchange.  So, I reported a $200 profit and paid taxes on that.  At least that is small, to keep my taxes down AND shows a “profit”, which should keep the IRS off my back, since I’m actually paying them something.  I was told that if I reported a loss, it would likely trigger an audit.

What?  Were you hoping to come here for a resolution to YOUR tax problems?  Sorry.  All I can offer is comfort that you’re not alone.  The IRS needs to get their act together and YOU need to click this link to contact your U.S. representative and explain to them the nightmare they’ve created for us.  Click the following link:

Find Your Representative

 

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What is Bitcoin?

Production Of Bitcoins By Mike Caldwell of Casascius

BitCoin, also known as a “Cryptocurrency” is not as complex to understand as one might think.  To understand BitCoin, let’s first review what “real” money is (or what it’s supposed to be):

In the United States, “Real” money is paper and coins, manufactured by the Federal Reserve.  It has no real value on it’s own.  It’s a low cost representation of gold.  At least, that’s what it used to be.  When it’s backed by a real world and limited resources that can’t be duplicated, it can represent real value because the item behind the money (the gold) is rare, limited, and can’t be duplicated.  Instead of exchanging actual gold for goods and services, we exchange the paper and coin representations of that gold.

So, what about BitCoin?

Now, think of this:  You have a set of incredibly complex mathematical formulas that you want to calculate the answers to.  The problem is that it takes a high speed computer days (or more) of crunching numbers 24/7 before it can find an answer to just ONE of those formulas.  That’s what a BitCoin is!  It’s an answer to one of those complex numbers.  You can’t duplicate it.  You can’t fake it.  You have to mine it, just like you have to mine gold.  But instead of picks and axes, you use CPUs.  It’s still a LOT of work to “find” the “nuggets” of answers.  Additionally, there are a limited number of answers… about 21 million.  So, once the last one is mined, that’s it.  No more manufacturing of more BitCoins.

Now, as you know, gold is represented by paper and low cost metal coins.  How is BitCoin represented?  Well, it’s NOT represented with tangible things you can hold in your hand.  It’s just numbers… the numbers that represent the answers to the formulas.  You CAN print them out on paper and store them under  your mattress, if you like, so in a way, you CAN make paper representations of it.  But, you CANNOT counterfeit it.  When you buy something with BitCoin, you don’t just hand someone a printed piece of paper with a bunch of numbers on it.  I mean, you COULD, but that, by itself, won’t fly.  You give them the numbers (either electronically or on paper) and they then run the numbers through one of many transaction processors (actually, I think it goes through many).  The processors are servers run by many people around the world.  They VALIDATE that those numbers are, in fact, an actual BitCoin… an actual answer to one of the 21 million formulas.  Once validated, the person you’re buying form can accept it, then give you the goods or services you’re wanting to buy.

In short:

A BitCoin is a limited and non counterfeit-able asset, just like gold.  But instead of a tangible asset, it’s an answer to a complex math problem.  Your “money” in BitCoin is usually kept in digital form and is validated on each transaction as being real.

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