Thread by @pesa_africa

Thread: Cryptocurrency Blockchains for Dummies

1. Trust Is An Issue

We are faced with a constant problem of having to trust 3rd parties - agencies, institutions, governments, central banks. But over and over again, they fail us - they abuse their authority. 1/

We have plenty of examples in Kenya

Ngenye Kariuki Stock Brokers
Imperial Bank depositors
Land registry
IEBC

its not just Kenya, its common problem

Nigeria's currency devlaution
Twitter banning accounts/censoring content
US banning donations to wikileaks. I could go on 2/

this problem is worsened by the fact that almost everything is moving online. How do we build an optimal internet economy on the internet if we are still held back by the 3rd party trustees of the past limited by geography and jurisdiction? 3/

"Twitter’s freedom of expression has been on an inexorable decline. "It’s enslaved to its US jurisdiction and politics." - Julian Assange, Wikileaks 4/

For many, the 2008 financial crisis was evidence of

a) how dependent we are on the current central bank model to centrally manage currency/money and
b) the huge risk that this posed to innocent people

Banks take all the risk, we pay for it 5/

The reliance of the internet applications and services today on corporations controlled by governments, also manifests the 'third party reliance' problem in social media.

If you run your content on twitter, they can shut you down. The US govt can ask twitter to shut you down 6/

How do we build a free web?
How do we build an economy that minimizes the role of 3rd parties?
How do we build a new economy on the web that is organic?

This was a huge problem, until 2008 7/

2. A peer to peer alternative

One way to work around the 3rd party trust problem is to have everyone participate in *whatever activity* Have everyone participate collectively in recording and auditing and verifying information - work done normally done by third parties 8/

It is like having everyone as a whatsapp group admin.

OR

Imagine if all of us could somehow, miraculously be in all the polling stations, taking part in counting, verifying, auditing and transmitting the election results? 9/

It will help if this process is transparent so all of us can see and verify. It is important that anyone can freely join or leave - access to all. What was traditionally entrusted to someone as a responsibility is distributed to a group of people - anyone 10/

Once we are all on the same transparent network, participating in record keeping and auditing, no one can cheat. The risk of trusting a single entity, person or institution is no longer centralized - it is distributed or decentralized.
Like the kids in a circle 11/

The creator of Bitcoin was motivated to use such a peer to peer network to solve the problem of reliance on Central Banks. 12/

Satoshi Nakamoto created one for managing a currency where instead of relying on a bank, or the Central Bank of Kenya, we can all take part collectively in managing a global internet digital currency. 13/

Characteristics of this distributed ledger

Transparent
Open to join/free to leave
Global,p2p
Immutability: Once something is written on it, cannot be changed
Any change to the contents requires everyone to see and approve
... more

this was the idea behind Bitcoin 14/

Because the ledger was transparent, open, public and immutable, if we record a fixed amount of currency called bitcoin on this record and say they'll never be more than 21 million, then its set in stone (almost*) 15/

So now all we need to do is record who owns bitcoin, how much they own and whenever a transfer of bitcoin happens, we just update the ledger and say there is new owner 16/

Think of what you mean when you say you own 1 acre in Kenya. . . you are basically saying there is a record at the land registry that says 1 acre of land in Kajiado at grid (x,y) belongs to Michael 17/

Same for cars.
Same for bank deposits.
Same for shares.

Its all about a record/ledger somewhere that says who owns what. What changes is *what* we record *who* does the recording/updates and *how* many items we have 18/

So when people say they own bitcoin, they mean there is a number of bitcoin, on the bitcoin ledger that has their name on it. Aaaand, crucially, there are a fixed number of 'bitcoins' recorded on this ledger. A peer to peer network ledger 19/

This peer to peer network works by everyone downloading a client, install it on a PC and use their computer power to secure the network. As more people joined the network, the more the computer power was contributed to the network and the more secure the network grew 20/

A decentralized peer to peer network for managing currency and possibly data representing other stuff

You can view the transparent ledger here blockexplorer.com 21/

3. Blockchain Incentives and economic models

Why would anyone want to take part in a peer to peer network and help secure it? What's in it for them? Mining costs *alot* of money

"bitcoin miners worldwide could be using enough electricity to at any given time to power about 2.26 million American homes." - Vice 23/

Today for example, if you want to join the network and contribute, you have to buy mining equipment, computer cards and specialized hardware + electricity costs and internet resources.

Mining chips are selling off the shelfs qz.com/1109011/tsmc-t… 24/

Its because there is a reward. If you contibute to securing the network, you get bitcoin, or litecoin or ethereum. Any person who helped secure the network, would be rewarded with newly minted bitcoins. 25/

Every four years, the reward to miners decreases by half - 1st 4 years it was 50, 2012 to 2016 was 25 now its 12.5 every 10 minutes, until all 21 million bitcoins are issued into circulation.

So the ledger just auto updates every 10 minutes to reflect new supply. 26/

People often ask where do bitcoins come from. Well this is how bitcoins are born. Every bitcoin in circulation today was first issued as a reward to a miner.

The block reward creates an incentive for miners to add hash power to the network. 27/

So i guess now the question is, whats all this hashpower for? Is it wasteful? So what if you get a bitcoin, what can you do with it? 28/

Well you can do several things with bitcoin that were *never* possible before.

+ you can send bitcoin from Alice to Bob on a peer to peer network anywhere in the world without a bank intermediating the transaction.

Big deal! 29/

Alice sends 1 bitcoin to Bob

ledger updates change of ownership from Alice to Bob

thats all. Just an update. So its a payment network. 30/

Every instance of updating the ledger incurs a fee. Like paying Mpesa fees to send money. All fees are collected and paid to the people who secure the network 'miners'

So people are mining and investing in mining to earn a reward + fees 31/

All transactions on the network are processed at intervals of 10 minutes (est). Transaction are batched and sequentially processed in 10 minute blocks. Every block, every 10 minutes rewards a lucky miner with

12.5 BTC (block reward)
X BTC (transaction fees)

see pic 32/

We can also see which lucky miner got the reward and transaction fees. This block was slushpool slushpool.com/home/ en.bitcoin.it/wiki/Slush_Pool 33/

Another quality of bitcoin that is valuable is how it is resistant to asset seizures. B/c the record of ownership is held on a peer to peer network (not a national bank, or corrupt gov agency), no one can change it.

If it says Alice owns 5 bitcoin, that remains forever true 34/

So say in theory @DavidNdii was detained by Muthamaki. And all his bank accounts frozen on decree of UK. Say his family fled the country to survive. They cant take their money.

With Bitcoin, they wld have an asset that cannot be seized by government. 35/

The family could flee with 100 bitcoins with no risk of seizure.

A bit extreme you say?

This has happened. Enough times for it to be a problem

+ Moi era in the 90s
+ Countries under dictatorship

Bitcoin is the first censorship resistant digital asset/currency. 36/

You will come across this quality emphasized in different settings

Refugees of war salvaging their wealth into a censorship resistant asset
Jews fleeing Holocaust Germany world war 2 who had to abandon their wealth
Argentina's economic crisis
Zimbabwe hyperinflation 37/

All of these may be problem *you* have never had to face. But they are *real* problems for people in other parts of the world.

The problem comes in different forms. I could list another thread of potential use cases.

I think it is a valuable quality 38/

I bet we can find atleast 1,000 people in the world today who use bitcoin as

+ a payment network
+ a way to store value against repressive regimes (political/economic) 39/

So bitcoin is not *useless* if 1000 more people find it useful for 2 points above, then surely it must have some *value* Someone wants it for a real pressing need.

There's one more thing bitcoin is good for thats often left out in simplistic diatribes against bitcoin 40/

The peer to peer ledger can also be used to record *other things. Its all data after all, numbers, 1 and 0s - it could represent a name or a number or a currency. Just throw it all on the ledger.

So now the Bitcoin ledger looks like

1. bitcoin
2. titles
3. names

41/

You can pay a transaction fee to insert data in every 10 minute block and it will have all the properties and qualities of bitcoin - p2p, censorship resistant, immutable.

Data can be anything

Adding stuff on this blockchain ledger costs fees
42/

Decentralized blockchains use incentives (like cryptocurrencies) to align real world resources to secure an immutable, p2p, censorship proof network that could potentially be useful in our economy (now or in future) for currency or other applications
43/

So i dont buy the argument that bitcoin is not valuable. Or it doesnt have intrinsic value. Or what have you

(personal opinion) 44/

4. Altcoins: Bitcoin is only the beginning

The greatest achievement of bitcoin was proving the concept could work. Bitcoin proved you could incentivize people to secure a network from resistance or attack by baking in an economic incentive secured by cryptography 45/

Others appreciated the concept and adapted to secure a network for *other applications* and use case besides Satoshi nakamoto’s alternative money system.

Like registering domain names? Or building decentralized applications like a decentralized twitter 46/

There was backlash against the high amount of energy used by bitcoin to secure the network. Could we build a blockchain with a different mechanism of consensus on the ledger w/out burning up electricity? 47/

The earliest pioneers of exploring other applications of blockchains besides securing bitcoins experimented on the bitcoin blockchain. Some added new layers on the ledger - application specific layers like Namecoin 48/

What is namecoin? a censorship-resistant top level domain .bit

en.wikipedia.org/wiki/Namecoin 49/

Or Counterparty @CounterpartyXCP

"Counterparty is a financial platform for creating peer-to-peer financial applications on the bitcoin blockchain." en.wikipedia.org/wiki/Counterpa… 50/

Or Coloured coins

Colored Coins" loosely describes a class of methods for representing and managing real world assets on top of the Bitcoin Blockchain. en.bitcoin.it/wiki/Colored_C… 51/

Or Mastercoin

"Omni (formerly Mastercoin) is a digital currency and communications protocol built on the bitcoin blockchain." en.wikipedia.org/wiki/Omni_Layer 52/