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What Is Counterparty Risk & How To Mitigate It

By Shawn Dexter / February 17, 2019

There’s been a lot of buzz around the most recent events surrounding QuadrigaCX.  For those of you who aren’t aware – QuadiragCX is a Canadian Bitcoin Exchange that have recently lost access to their customers funds. The entire incident is all rather suspicious, but we will not be diving into that drama over here. You can simply google “Quadriga Scam” to find out more. In this post, however, I want to discuss the risks that people tend to ignore when dealing with exchanges like QuadrigaCX.

Specifically I want to talk about Counterparty Risk.

In usual Mango-style, we’re going to break this concept down piece by piece. To understand what is Counterparty Risk, we first need to discuss precisely what is “Counterparty".

What is a 'Counterparty' ?

A counterparty is the person or organisation on the other side of a financial transaction. If you make a financial deal with someone, then the person on the other side of the deal is the counterparty. Here are a few examples of counterparties:

  • If you loan money to a friend, then your friend is the counterparty  (Credit Risk)

  • If you put money in the bank, then the bank is the counterparty

  • If you deposit money into a broker (or exchange), then the broker is the counterparty

Whenever you engage in a financial transaction with a counterparty, you are exposing yourself to Counterparty Risk.

What is Counterparty Risk?

Alright, so what is Counterparty Risk?  Counterparty risk is the risk that you are bearing incase the person on the other side of the transaction cannot fulfill their end of the deal 

Put briefly:
Counterparty Risk is the risk that the counterparty defaults or goes bankrupt.

In the previous section we listed a few examples of counterparties. In each one of those cases, you were also bearing Counterparty Risk. Let’s use those same examples when pertaining to Counterparty RIsk:

  • You lend money to a friend and he cannot pay you back

  • You put money in a bank, and the bank goes insolvent (due to bank-run, financial collapse etc)

  • You deposit money into an exchange, and the exchange gets hacked or loses all your funds.

By now, you’re seeing that it’s all pretty straightforward. Whenever you engage in a transaction with another party (counterparty), you are bearing the risk that the other party may not be able to deliver when the time comes to fulfill their end of the transaction

Difference Between Counterparty Risk & Credit Risk

I’ve received this question a few times now: What is the difference between counterparty risk and credit risk?

Counterparty risk is actually a subset of Credit RIsk. 

So essentially – Counterparty risk is a form of Credit Risk. Credit Risks typically refers to the risk you assume when the counterparty cannot payback a loan (for example when you buy bonds). 

​​​​Real Examples of Counterparty Risk

So, now we understand what Counterparty Risk actually is. But let’s go over a few examples how bad Counterparty Risk can get. A lot of people have lost a lot of money because they didn’t take counterparty risk seriously enough. Here are a few recent examples of counterparty risks that took a bad turn:

  1. The Flash Crash of EUR/CHF:  Several brokers actually went broke overnight on this one. In 2011, the Swiss National Bank (SNB) put a price floor on the EUR/CHF pairing. Essentially, they pegged the EUR/CHF at atleast 1.2 in an effort to facilitate cheap exports.  This caused a lot of traders to take advantage of the price floor.

  2. However, after a series of events – the SNB suddenly removes the price peg and the exchange rate dropped by 20% within the first minute. This caused a massive flash-crash. Traders not only lost their entire balance, but their accounts actually went into the negative! They owed more than they actually had.

  1. The Mount Gox Hack: Mt. Gox was a major cryptocurrency exchange back in the day. In 2014, it suddenly suspended all trading without any clear explanation other than “maintenance”. Apparently, a security breach/hack caused the exchange to go insolvent. They soon announced bankruptcy and closed trading altogether. Traders who had their funds in there lost everything.

  2. Death Of QudrigaCx CEO: This is the most recent event/example of counterparty risk at its truest form. QuadrigaCX is a Canadian Cryptocurrency Exchange. A few weeks ago, the CEO of the exchange dies while on vacation in India (apparently!). It was then uncovered that he was the only one who could access all the customer funds in the exchange. Furthermore, his laptop could not be found after his death  – making it impossible to access the cryptocurrency which was stored in a secure cold wallet. Almost $150 million dollars of customer funds have been lost. Some people lost their entire life savings.

How To Mitigate Counterparty Risk

While Counterparty Risk can be a scary thought, there are several ways to mitigate counterparty risk.  Taking the appropriate steps to mitigate these steps will keep your finances in tact even if a Black Swan event takes place.

  1. Divide your funds among Banks that insure your money:  Most banks provide deposit insurance on a your money up to a certain amount. You can reduce your counterparty risk exposure by placing your money in several different banks. This will ensure the most coverage.

  1. Don’t send your entire trading account to an exchange: If you’re a trader, it may be in your best interest to trade with only a portion of your funds and leverage the rest. For example you can send 20% of your account to the exchange, and keep the 80% in your bank. With a 5x leverage, you can trade the same amount while still protecting yourself in case the exchange goes down. If you’re looking for an good cryptocurrency exchange that allows for leverage trading, we recommend Deribit

  1. Credit Checks & Deposit Requests: If you’re renting out your apartment, or loaning money – it’s best to do credit checks on the counterparty. If you’re a landlord you can ask for security deposits. Banks and credit card companies do a credit check on your financial history for this very reason – to reduce their counterparty risk. They will assess their counterparty risk when dealing with you as a counterparty, and accordingly offer you an interest rate. Landlords do the same and ask you for a security deposit. The interest rate and deposit rate will cover any losses that they may incur in case you don’t fulfill your end of the deal (i.e payback credit card, and not damage property)

Conclusion: What Is Counterparty Risk?

When we engage in any sort of trade/ transaction with a counterparty, it’s more often a means to an end. In the process of achieving that end we often forget to account for counterparty risk. 

The rules & regulations that govern many counterparties ( banks, exchanges, businesses) usually evoke the feeling of safety and reliability amongst many of us. And while the crash of banks, exchanges and business is improbable, it is still possible.

Given that our world is highly reliant on counterparties for the purpose of trades and transactions, we can’t eliminate counterparty risk entirely. However, we can mitigate counterparty risk by doing the following: (limited to the scope of examples in the post)

  1. For those who are “banked” – Do not put all of your eggs in one basket. Divide your funds among Banks that insure your money

  2. For those of you who trade – Crypto, Forex etc – Don’t send your entire trading account to an exchange. Change the narrative around margin trading and use it to mitigate counterparty risk.

  3. loaners/landlords – Do a Credit Check, or ask for a Deposit Request

In short, always think of a means to protect your wealth in the case of a black swan event. Black Swan events are notorious for taking you for everything you’ve got and more.

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Double Spending Problem Explained Simply

By Shawn Dexter / February 3, 2019

The double-spending problem has been a conundrum in the digital-cash realm for decades. In fact, it was the double-spending problem that held back the advancement of peer to peer digital cash. It wasn’t until the arrival of the Bitcoin Network that a p2p decentralized digital currency really began to be viable. 

Many of us “know” that Bitcoin solves the double spending problem, but we still struggle to explain how Bitcoin solves this problem. In fact, it was only yesterday that I received this email from a regular Mango Reader:

“Hey Shawn,

Your cautionary post on the Bitcoin Doubler Scam got me thinking about the double-spending problem. 

Wont a miner be able to “double spend” his bitcoin by simply broadcasting a transaction on the  network and then quickly mine a block that sends the same bitcoin to another merchant?

Thank you,

Juan”

Good question, Juan. This is actually a common misunderstanding. But before I answer you, let’s quickly explain the double spending problem for the readers who may be unfamiliar with it.

Double Spending Problem Explained

Anything digital can be copied – anything. And more importantly: it can be copied exactly. This is a huge problem in the digital space when pertaining to digital rights management and… digital cash. Pirated movies, pirated music, pirated software etc. have all been birthed from our ability to copy anything that is in digital format. To most of you, this has been a blessing in disguise.

But imagine if digital cash could be pirated as well?
What would be the implications?
Hyperinflation, for one.

This is one of the primary reasons why we still rely on central authorities for our financing needs. The central authorities (like banks) maintain a ledger where they keep tab of everyone’s expenses. They ensure that double-spending doesn’t occur (..or try to!)

However, centralized solutions pose a single-point-of-failure problem. They can easily be hacked or compromised externally (bribed).  But for decades, it was the only solution we had – until Bitcoin came into the picture.

Satoshi Nakamoto proposed an elegant solution in his whitepaper where he explained how the Bitcoin Network would solve the double-spending problem.

Misunderstanding Double Spending Problem In Bitcoin?

Similar to centralized solutions, Bitcoin also uses a ledger to keep track of transactions. However, this ledger is stored across the globe at multiple locations (called nodes).

This global ledger is called the “Blockchain”.

Why? Well, because it’s simply a chain of “blocks”.  Each of these blocks contain transactions that have taken place in the network.

New transactions that are broadcasted to the network are picked up and put into these “blocks” by miners. Once the block is created, a miner will initiate his mining process where he attempts to solve the Cryptographic Puzzle.

The miner who solves the puzzle first wins the “right” to submit his block to the blockchain (the global ledger). They then move on to the block of new transactions.

This is where Juan’s question comes into play. He’s asking about this hypothetical scenario that explains the (misunderstood) double spending problem.

  1. Miner Joe has only 10 bitcoin in his wallet
  2. Miner Joe sends those 10 bitcoin to Merchant Alice
  3. The network & miners pick up the transaction.
  4. All the miners put together a block with this transaction:  “Joe sends 10 BTC to Alice”
  5. But sneaky Miner Joe makes a block with this transaction instead “Joe sends 10 BTC to Bob”
  6. Miner Joe wins the cryptographic puzzle, so his block goes through.

Is that a double spend?
No, it is not a double-spend at all. Sure – it is an attempted double spend.
But Miner Joe was not able to pull it off.

Why? Because Joe’s block with his transaction : “Joe sends 10 BTC to Bob” got added to the chain. This means that the blocks containing the transaction: “Joe sends 10 BTC to Alice” did not get added – and was never considered at all.

Double Spending Problem: Forks & Longest Chain 

Remember, Joe won the Cryptographic Puzzle race, so his block gets added to the chain, while everyone else’s block is rejected.

Ah, but what if Joe was not the only one who solved the puzzle?
Often, more than one miner may solve the cryptographic puzzle. This means that multiple blocks may be added to the chain at the same point – resulting in a blockchain Fork. 


So what if another miner – Miner Collin – also solved the cryptographic puzzle. We would now have two blocks with the following transactions:

Joe’s Block:  Joe sends 10 BTC to Bob

Collin’s Block:  Joe sends 10 BTC to Alice

Would this be a successful double-spend? It may look like it – but nope, this is not a successful double-spending attack.

The blockchain has forked into two different chains, one with Joe’s block as the newest block; and the other with Collin’s block as the newest block. It is here that the Bitcoin Network will have to pick one of the chains as its main chain. How does it pick it? It will essentially use the Longest Chain Rule.

I explain the Longest Chain Rule using a simple analogy in the post above. But I’ll quickly go over it here.

The Longest Chain Rule Summarized

Essentially, the network will pick the chain that is the “longest” as it’s main chain. This means that the network will have to wait for a few more blocks to be added to the chain before a decision can be made.

If the chain with Joe’s block outpaces the chain with Collin’s block, then Joes block will be valid since it will be in the winning chain. Collin’s block, however, will be considered “orphaned” and invalid.

Even if the opposite happens, it won’t matter – because only one of the two transactions will be considered valid. So the double-spending problem doesn't really come into play here.

Double Spending Problem: Confirmations are Key!

But what about Alice? Is she at risk here? In fact, Alice is actually at risk of being victim to a pseudo double-spending problem. I say “pseudo” because it is not so much a double-spending problem within the network, but “outside” of it.

Two transactions were broadcasted to the network:

Joe’s Block:  Joe sends 10 BTC to Bob

Collin’s Block:  Joe sends 10 BTC to Alice

Joe’s block was added to the blockchain and Collin’s block was orphaned. But remember, transactions are broadcasted to the network – regardless of whether they get added to the chain or not.  So Alice will have received a network message saying “Joe sends 10 BTC to Alice”

As a merchant, Alice may get tricked by this and give Joe some merchandise. However, this is not a fault of a network – but more so a human error. The bitcoin was not officially “double spent” inside the network.

This is precisely why it is always recommended to wait for “Confirmations” on your transactions. Each “confirmation” represents an additional block being added to the block which contains your transaction. 

Every time a block gets added (a confirmation), it means that there is an increased probability of your transaction being in the Longest Chain. At around 5-6 confirmations, you can be pretty sure that your transaction is safe – you won’t be at risk of a double-spending attack.

So...Is A Double-Spend Even Possible in Bitcoin?

Yes, a double-spend is technically possible in the Bitcoin Network. However, it's going to be extremely difficult and expensive to pull it off.

If Miner Joe wanted to actually commit a double-spend, he'd have to start mining his own private chain secretly. In the original chain he'd send the 10 bitcoin to Alice. But in his private chain he'd send the 10 Bitcoin to Bob.

He'd then  wait for Alice to receive her six or more confirmations. In the mean time, he would have to ensure that he mines fast enough so that his private chain outpaces the original chain.  If his private chain becomes the longest chain, the rest of the network will switch over to mining on his chain instead – because of the Longest Chain Rule.  This way he can pull off a successful double-spending attack. 

However, this is a lot easier said than done. In my post on Proof Of Work - Determining Majority Power, I discuss how CPU Power is a crucial part of the consensus process. Miner Joe would need to expend a lot of energy and have a lot of computing power to actually outpace the Bitcoin Network. 

It's possible – but far too expensive! A double-spending attack would need a lot of CPU Power

He would essentially need at least 51% of entire networks hashpower to outpace the network eventually. Remember, he has to solve a cryptographic puzzle for each an every block. And he only has a chance to win each block. His chance to win, however, is directly proportional to his hashpower. This is why the community tries to ensure that no particular mining pool has too much control of the Bitcoin Network. Anything over 50% makes the network vulnerable to an attack!

Hope this post helps! And keep the emails coming, guys! 🙂

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Bitcoin Doubler Scam – You will NOT Double Your Bitcoin!

By Shawn Dexter / January 31, 2019

There seems to be a scam going around that is picking up popularity. It’s called “Bitcoin Doubler”. I would have liked to believe that no one would be naive enough to fall for this. But then I realized that there are many new entrants in this space. Unfortunately, many of them entered at the peak of the 2018 bubble.  

As a result, people seem to be desperate to recuperate their losses at any cost. Ignorance + Desperation typically leads to careless actions.

Bitcoin Doubler: What in the world?

In the past week, I’ve received a few scary & surprising questions. Here are a couple of them:

Hi Shawn,

I was wondering what you think of Bitcoin Doubler sites?

They claim to be able to double my bitcoin instantly. Is this possible?

Thank you!”

Quick Answer: No, it is not possible. All of these websites are scams. They are designed to feed off the desperate by making them gamble with their Bitcoin.

And here is another one:

“Hey Shawn,

I received an email from a Bitcoin Doubler Expert who says he can double my bitcoin in 1 hour.  He says he is an expert in bitcoin and can double my bitcoin if I pay him.

Would like your thoughts,

Cheers!”

Now, hopefully, most of you are as surprised at these questions as I was. But if you’re not – I’ve clearly not been doing my job well enough.  Either way, I’m going to fix that in this post. But before I go any further, let me state in bold:

Do not , I repeat, Do not trust any website or person claiming to be able to double your bitcoin. It is most definitely a scam!

If you have any doubts or questions regarding this – don’t hesitate to email me. It’d be a real shame for any of you to get scammed – especially if you’re a Mango Reader. I mean… Bitcoin Doubler? Jesus Christ man…

What is Bitcoin Doubler? Does it really work?

Bitcoin Doubler is simply a scam. That’s all there is to it. Any website or person claiming to be a “Bitcoin Doubler” is trying to steal from you.  The website (or person) will coax you into sending them funds. Once you do, you will not hear from them again.

How does the Bitcoin Doubler Scam work?

There are several variations of this scam. Some of them claim to double your bitcoin in one hour for a fee . Others claim to allow you to “bet” your bitcoin for a chance to double it. Then there are some that are simply MLM-like scams (which can be even more dangerous). Let’s quickly go through some of these “bitcoin doubler” scam variations

The Bitcoin Doubler Expert Scam

In this variation of the scam, someone will likely email you and claim to be some sort of “Bitcoin Doubler Expert”. The person will use garbage terms like “black hat hacking” and will attempt to convince you that he can hack the network to double your bitcoin instantly. He will make lofty claims about having a “bitcoin doubler script” that he coded himself. All you will have to do is pay the person a fee for his efforts to develop the script. He may even try to sell you his magical bitcoin doubler script. Sigh.

Do not fall for this. No one can hack the Bitcoin Network to double your bitcoin for you. Bitcoin isn’t something that can be “hacked”. I won’t go into why in this post. It is tamper proof, immutable and decentralized. The weakest link to the Bitcoin network security is the actual user himself – i.e: The only way for you to lose your Bitcoin is if you give it away. So anyone claiming to “double your bitcoin” by hacking the network, is essentially trying to say that he is going to hack someone else's Bitcoin and give it to you. That is not possible.

The "Double Your Bitcoin Instantly" Betting Scam

This variation of the Bitcoin Doubler Scam feeds not only on desperate people – but on reckless gamblers as well. These websites will claim that you can double your Bitcoin if you place a “bet” with your Bitcoin.  Most of these websites claim that your chance of “doubling” your bitcoin is more than 50%. The Bitcoin Doubler website will ask you to place your bet by sending your Bitcoin to their Bitcoin Wallet address. Once you send them your Bitcoin, it will be gone for good.

These guys are bit more “clever” with their scam. They have a good answer if you ever try to contact them. Since it is technically a “bet”, they can simply claim you lost the bet – and the victim is likely to believe them. You will also notice that a new Bitcoin Wallet address is generated each time you visit the website – this is a huge red flag! It allows them to cover up their previous victims.

The Bitcoin Doubler MLM Scam

This particular variation of the Bitcoin Doubler scam can be particularly insidious. The victim may actually be coerced into falling for this scam by his own friends or family – who are most likely victims of the scam too. It’s pretty much the same model as a Multi-Level-Marketing model (aka pyramid scheme). The scammers convince people to go out to their friends & family and trick them into sending them Bitcoin as well.

Conclusion: Bitcoin Doubler Sites are Scams! Beware.

While it’d be really nice to double your bitcoin instantly, life just doesn’t work out to be that easy. Be wary of anyone proposing to double/ multiply your bitcoin. Bitcoins are of limited supply, and the bitcoin blockchain is one of the highest standards of security achieved thus far. One can't just simply create bitcoin through sheer will of doubling their stack. 

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Ethereum Roadmap Update [2019]: Casper & Sharding Release Date

By Shawn Dexter / January 15, 2019

In this post Shawn discusses the recent Ethereum Update in regard to their roadmap for Casper & Sharding. Casper FFG with the 1500 ETH minimum stake will be removed from the Ethereum Roadmap and replaced with Casper v2 implementing a beacon chain. Shawn also provides us with estimates for the updated Ethereum Casper release dates

Ethereum Roadmap 2019:  Updates, Changes & Release 

If it’s been awhile since you last checked the Ethereum Roadmap – then oh boy, you’re in for some surprises. A lot has changed since the beginning of 2018 and even 2019!. We've seen sudden delays, timelines  extended and priorities have shifted (rightfully so…).

The biggest one of date has been the postponing of Ethereum's Constantinople Update for 2019. However Ethereum has also unveiled a "new" roadmap called Ethereum 2.0.

The most recent Ethereum updates have a lot of people confused. I don’t blame them. Crucial updates are found buried in comment sections across various forums and news websites have been vague. It's hard to keep up. 

Ethereum Roadmap:  Updates & Delays!

The recent delays and roadmap changes have created some confusion. Several people are misunderstanding Ethereum 2.0 – and I don't really blame them.

In this post, we will clear out any confusion in regard Ethereum 2.0 roadmap update (Serenity), the Constantinople Delay, the expected ETH PoS date and any other updates on Ethereum's Serenity release.

NoteThis post has been updated as of January 17th 2019 – and a lot may change from now. In the beginning of this article we discuss the roadmap update for Ethereum – which includes the big Serenity Release. We then discuss a keystone of the roadmap & Serenity – the Constantinople update and its delay in 2019.

Further down in this article we discuss Ethereum's casper release date estimations and why the release of POS has been pushed back. 

Ethereum Roadmap: Ethereum 2.0,  Constantinople & Serenity

Ethereum 2.0

Ethereum unveiled their new roadmap and dubbed it "Ethereum 2.0". But everyone seems to be misunderstanding the concept behind Ethereum 2.0. In fact, the core team has been receiving criticism for changing their minds too often. In truth, plans haven't changed much at all – they are simply more defined.

Ethereum 2.0 won't be a single big update release. Instead, it will be a series of updates that will lead to a more efficient, faster & scalable Ethereum.

Ethereum 2.0: Solving The Trilemma

Some of the major updates that will be included in Ethereum 2.0 will be:

  1. Sharding 
  2.  Proof Of Stake & Beacon Chain
  3.  eWasm.
Ethereum Roadmap Update Ethereum 2.0 2019

Ethereum 2.0: Roadmap Update 2019

The combination of these releases will synergise with each other in order to tackle the Blockchain Trilemma problem (read my analogy: The Village Trilemma) In essence, the Blockchain Trilemma forces a blockchain to pick two of the following:  

  1. Security
  2. Decentralization 
  3.  Scalability

However, Vitalik Buterin and the rest of the Ethereum team sought to find the right balance between the three. This was no easy problem to tackle. However,  the release of Sharding, Proof Of Stake and eWasm achieves just that. Ethereum 2.0 will be a huge milestone in the Ethereum roadmap.

Constantinople: Pivotal In The Roadmap

Another pivotal and much awaited milestone on the Ethereum roadmap is the Constantinople Hard Fork.  I provide a simple breakdown of the Constantinople and its major updates in a separate post. But I'll give you guys a quick rundown over here as well.

The Ethereum team has had three major roadmap milestones laid out for them since 2016:

  • Byzantium 
  • Constantinople
  • Serenity

Each of these milestones laid the groundwork for eventually moving to Proof OF Stake (Serenity). Byzantium provided the much needed security. And Constantinople was going lay the pieces to allow the transition to Serenity (Casper V2).  Constantinople was originally supposed to include a hybrid PoW/PoS model. However, the Ethereum developers decided to scratch that idea and move forward with another plan. This led to a delay in roadmap – and Serenity (proof of stake) would have to be pushed back.

I explain the reasons for the change in plan and the delay of PoS later in this post.

Ethereum Roadmap Before Update 2018

Ethereum's Roadmap: Byzantium, Constantinople & Serenity

Constantinople plays an important role in Ethereum's transition to Ethereum 2.0. The update is going to include major improvements such as the block reward reduction, reduced transaction costs and compatibility for State Channels.

A description of Ethereum's Constantinople Roadmap Update in 2019

Constantinople was key in the Ethereum Roadmap

The hard fork was initially scheduled for for January 16th 2019 but was delayed at the last minute due to a  discovery of a security vulnerability.

Ethereum's Roadmap & Release Schedule 2019 - 2021

The Ethereum Roadmap will always be evolving. However, the major goals of achieving the right balance of scalability, security & decentralization have never changed – and will be unlikely to change in the future. Ethereum 2.0 is simply a new label to define those  goals in a clear & concise manner.

Ethereum Casper V2 – Still Part Of The Ethereum 2.0 Roadmap!

At this point, some of you may be asking:

"Wait – what happened to Ethereum's Casper?"

As can be seen from the image above, Ethereum 2.0 includes Proof Of Stake and Sharding as its major updates. Both of these updates are the two major components of Ethereum Casper V2.  So in truth, Casper V2 is  included in the Ethereum 2.0 roadmap. 

The image below shows the estimated release schedule and roadmap based on the new Ethereum Casper Updates.

Ethereum Casper Release Date Updated 2018 - Infographic & Illustration

Updated Ethereum Casper Release Dates (2019 Estimates]

As you can see, the expected dates for Ethereum PoS (test & release) is somewhere in mid 2019. The exact date for Ethereum's Casper Proof Of Stake is uncertain. If you are an ETH investor or interested in investing, I suggest you read up on the events leading up to these delays. In the next section I explain transition from the Initial Ethereum Roadmap and the Updated Ethereum Roadmap with Casper Version 2.

Ethereum PoS Date & ETH Roadmap - The Quick Read on ETH PoS

I know some of you are busy and  want a quick overview on the Ethereum Roadmap and pos date. So I wrote this section in that vein. This section will likely evolve with the updates on the Ethereum Casper release dates.

ETH holders are probably excited for the Ethereum PoS release date. The Proof of Stake update will allow them to stake their ETH and become validators on the Ethereum Network. However, the Ethereum roadmap changed since the beginning of 2018 which has caused a few delays. This pushes the new Ethereum PoS date back to mid 2019. But it's not all bad news. In fact, for most ETH holders the new ETH PoS date may be a blessing in disguise.

Ethereum PoS Date & Delay - Not All Bad News

Casper FFG has been discarded and we will be moving directly to Casper V2. This will allow ETH investors to become a validator with as little as 32 ETH. This is a huge win for a majority of ETH holders and will also keep the network decentralised.  Initially, Casper FFG would require a deposit of 1000 ETH into the Ethereum Proof Of Stake chain. And the plan was to reduce the 1000 ETH requirement when Sharding would finally be released. During this time, only large ETH investors would be able to take part in the PoS process – which leads to centralisation and lack of inclusivity.

However, they have now decided to skip a step, and build Casper on the same chain that will be used for Sharding. This called the "Beacon Chain" which will serve as the ETH PoS chain and also serve as the base layer for Sharding. I explain this in more detail over here:  Casper V2: Sharding & Beacon Chain Explained Simply.  This is the fundamental reason why the 32 ETH deposit will be feasible. 

Ethereum: The Initial Roadmap

First, let’s quickly go over what the road map was supposed to be last year. Again, I’m going to keep this simple.

As of last year, the roadmap included two major milestones: Metropolis & Serenity

Both of these milestones were efforts to move towards eventual scalability with Proof Of Stake & Sharding. 

Ethereum Roadmap Before Update  2018

Ethereum Roadmap Before Update

Metropolis was divided into two phases:

Phase 1: Byzantine
The Byzantium update would bring privacy improvements. It took place on the Ethereum chain last year.  

Phase 2: Constantinople  
PoW/PoS Hybrid (Casper FFG) and more.  Constantinople was supposed to happen earlier this year. But all priorities were shifted to rolling out Proof Of Stake & Sharding as soon as possible.

Up until June 2018, Constantinople’s Casper FFG was still in play. However, that plan is now being dropped as well – for something more clean and efficient. This brings us to the new release-date milestone on the Ethereum Roadmap for 2018:  Casper V2

Casper 2.0: The Initial Plan

The initial plan was to transition to Proof Of Stake with Casper FFG. Casper 2.0 was to be a Smart Contract that allowed you to become a validator with a deposit of 1500 ETH. The Ethereum estimated this release date to be somewhere in 2018.

Proof Of Stake was to be implemented first and the team would roll out Sharding after. There were separate deposit pools for Sharding and Casper.  

To Summarise:

  1. Casper FFG to be a Hybrid PoS and PoW chain
  2. 1500 Ether deposit required to become a validator
  3. Casper rolled out first, Sharding rolled out after

​​​​Casper 2.1: The Confusion over the Releases

Due to some misleading posts and misunderstood comments, several people are confused. These are the two primary impressions that people have in regard to the Casper update:

  1. Casper and Sharding will be combined and launched together.
  2. Sharding will now be prioritized over Proof Of Stake

This is not true at all. And it’s important that expectations are set right.

Casper 2.1: The Real Roadmap

The plan for Casper FFG requiring 1500 ETH deposits will be scrapped.  Casper V2 will be implementing a “beacon chain” – onto which Casper and Sharding will be merged (here is where people get confused).

This does not mean that Casper and Sharding will be launched on the beacon chain together. It simply means that Casper and Sharding will be implemented on the same chain.  So, Casper could come first, and Sharding be implemented much later. Or vice-versa. 

Ethereum Roadmap Casper FFG vs Casper V2 Ethereum Update

Casper FFG vs Casper V2 Ethereum Update

So to summarise:

  1. A Beacon Chain that will be used for both: Casper & PoS validators

  2. Sharding and Casper will be worked on concurrently – they are independent efforts

  3. Only 32 Ether minimum staking deposits

The beacon chain was originally supposed to be used only for the Sharding implementation.

An Analogy For The Casper V2 Update 

The Casper V2 Ethereum Update has been confusing a lot of people. I don’t blame you guys – the information has been all over the place. But maybe this analogy will help:

Think of the Casper and Sharding as two cars going to a family picnic. To get there, both cars have to merge onto Highway 10. We’re not sure which car will merge on first. We simply know that:

  1. Both cars are headed there (Casper and Sharding are the two cars)
  2. Both need the Highway to get there efficiently (Beacon chain)
  3. Everyone needs to eventually get to the family picnic (scalability)

Similarly, Casper and Sharding are two independent projects – either could be completed first.This unified approach will allow for a minimum staking requirement of 32 ETH deposits.

Casper will most likely be launched first, but we can’t rule out the possibility of Sharding going faster.

Ethereum 2.0 & Casper Release Date:  Conclusion & Summary

Ethereum's release date for Casper FFG was scheduled for 2018. However, the new version of Casper will have a release date somewhere in 2019-2021. Yes, the rather timeline for release is vague, but there's good reason for that. Let's recap quickly:

PoS Release Date Delay: FFG was Scrapped

As mentioned, the initial plan was to roll out Casper FFG as a hybrid PoS/PoW. Casper FFG would have Proof of Stake (PoS) but would not have Sharding. With the PoS release, Validators would be allowed to deposit ETH in order to stake. However, they would require to 1500 ETH in order to participate in the PoS consensus. This wasn't ideal because it would entail a lot of centralisation.

Ethereum Casper Release Date Updated 2018 - Infographic & Illustration

Updated Ethereum Casper Release Dates (2018 Estimates]

In 2018,  the need for scaling became increasingly urgent. The Ethereum team shifted all focus to the key releases that would move the needle toward scalability; namely, the PoS release and Sharding release.  Casper FFG was to be the first PoS release, but would still use the PoW chain. This release date was estimated to be somewhere in 2018. The team was to release Sharding after PoS.

Ethereum Shifted Focus to Releasing Casper & Sharding ASAP

Casper FFG allow Ethereum to release a PoS quicker. However, it would entail "double work". Since Ethereum would have to eventually release/migrate to a pure PoS chain. Because of this, they decided to scrap working on Casper FFG. They will now be working toward releasing Casper V2 – which will have PoS on the beacon chain as well. Since Sharding will be implemented on the beacon chain as well, it allows Ethereum to have a unified approach for their releases.

Unfortunately, this  pushes back the release date for Ethereum Casper V2 to around 2019-2020. Sharding will be released on the same beacon chain that will be used by the PoS release. This does not imply that Casper and PoS are coming together.  I would estimate it's release date to be in 2021. But there's a possibility that it may beat the PoS to the release finish-line. 

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Ethereum Update 2019: Constantinople Hard Fork

Introduction

In a previous post we discussed the Ethereum Roadmap for the coming year. One of the key milestones on the roadmap update was the Constantinople hard fork. Constantinople was initially scheduled for 2018. However, due to inevitable software development delays, Constantinople was pushed to early 2019. That being said, the wait has definitely been worth it.

Ethereum Roadmap 2019

Ethereum Roadmap: Byzantium, Constantinople, Serenity

Constantinople has been much awaited by the community primarily because of the Block Reward reduction. The Block Reward reduction effectively reduces the inflation rate of Ethereum. I explain how in a simply post here: Ethereum Inflation Rate & Difficulty Bomb  However, aside from the Block Reward reduction, there are few other exciting improvement updates in Constantinople which is scheduled for Jan 16th 2019.

In this post I will explain these updates simply and briefly! 🙂

Ethereum Constantinople: What Is It?

So what exactly is Constantinople? Is it a Hard fork? If so, will you be getting two coins? (like all the other hard fork fiascos?)  Yes, Constantinople is a Hard fork - but you won’t be getting two coins. Unlike the other fiascos, this isn’t a “contentious” fork. To understand this, let’s go over a couple of terms quickly & simply:

What is a “Hard Fork”?

A “fork” is simply when the blockchain undergoes a software update. The fork may require all participants (primarily nodes & miners) to update their software to be part of the same network. This is because the software update is not compatible with the older version. This is called a “hard fork”

What is a “Contentious Fork”?

A contentious fork is when participants do not agree with software updates. In this case, they may choose to either stay with the old software or implement their own updates. Essentially, they choose to go their own way because they don’t agree with the direction of the core team (yay, democracy!)  This causes a “fork” in the original chain, and two new chains will begin to exist independent of each other.

Constantinople: Not A Contentious Fork

Fortunately, Constantinople is not a contentious fork. Everyone (for the most part) is on the same page with the proposed software updates on the Ethereum Blockchain. So what are the updates? In the next section I will provide a simple overview of the Ethereum Constantinople 2019 Hard fork!

Constantinople:  A Quick Overview

The Ethereum Constantinople 2019 hard fork marks an important milestone in Ethereum’s transition from Proof of Work to Proof Of Stake (Casper).

As mentioned in the previous section, the Constantinople hard fork is simply a software update. The software update will have improvements that have been accepted by the community. These improvements were proposed ahead of time and are simply called “Ethereum Improvement Proposals” (EIP).  There are five of these Ethereum Improvement Proposals that will be included in the Constantinople Update for Jan 16th 2019.

Ethereum Constantinople Update 2019

Ethereum Constantinople: EIP1234, EIP145, EIP1052, EIP1014, EIP1283

Performance Improvements:

  1. Block Reward Reduction ← A BIG ONE!

  2. Cheaper Smart Contract Execution

  3. Increased Efficiency on Verification of External Smart Contracts

  4. State Channels!

  5. Storage Cost Improvements

[EIP 1234] Block Reward Reduction: “The Thirdening”

This is the big one that everyone was waiting for all of 2018. The update falls under the EIP1234 proposal and will have two major changes:

  1. Block Reward Reduction
  2. Delaying The Difficulty Bomb

I explain both of these in more detail (with simple analogies) in this post, but I’ll go over them quickly here as well.

Ethereum-inflation-rate

Block Reward Reduction: Constantinople will officially mark the reduction of the rewards issued to miners from 3 ether to 2 ether. This effectively reduces miner rewards by ⅓  and is often referred to as “The Thirdening“. This reduction in Block Rewards will significantly reduce the inflation rate of Ethereum.

Ethereum Inflation Rate Definition (Quick'n'Dirty)
 The speed at which each Ether loses it's purchasing power/value.

Difficulty Bomb:  Miners are issued rewards each time they successfully add a new block onto the chain. The Difficulty Bomb is a tool within the EVM that the developers can use to adjust how difficult it is for the miners to do this.  If the bomb “detonates”, it will get exponentially harder everyday for miners to find blocks. This was put in place to incentivise miners to transition from the Proof Of Work Chain to the Proof Of Stake Chain.

So why delay? Well, two reasons:

  1. Ethereum is not moving to Casper just yet - so there’s no reason to incentivise the miners to stop mining here just yet.

  2. The inflation rate has already been reduced by decreasing the issuance rate.

[EIP145] Cheaper Smart Contract Execution: 

Constantinople will include the EIP145 proposal which will introduce “Shifting operators” to the Ethereum Virtual Machine. Put simply, this will allow Smart Contracts to initiate certain instructions for only 3 GAS compared to the 35 GAS it would have costed without the Shifting Operators.

This is a drastic reduction in the cost of these operations and contributes to Ethereum’s efficiency improvements.

[EIP1052] Increased Efficiency on Verification of External Smart Contracts

This is another key efficiency improvement in the 2019 Constantinople update. Smart Contracts often need to perform verification checks on other Smart Contracts. Currently this is done by copying the bytecode of the external Smart Contract and then performing the needed verification. However, this can unnecessarily expensive when dealing with large Smart Contracts.  EIP 1052 tackles this problem by introducing a new function that will allow the Smart Contract to pull a hash of the bytecode instead.  This will make verifications far more efficient.

[EIP1014] State Channels!

The Ethereum Constantinople 2019 Update will also include a keystone update for State Channels in Ethereum. EIP 1014 will allow interactions be made with addresses on the main chain that don’t exist yet .  This may sound confusing but is a key milestone for the implementation of State Channels. The goal of State Channels is to have as little load on the main chain as possible while still remaining secure. Unnecessary calculations and processes will take place off chain – thereby increasing the efficiency of the main Ethereum chain.

[EIP1283] Cheaper Cost Of Storage

Constantinople will also include an update that will reduce the storage costs in Ethereum. EIP 1283  proposes a change to how gas is charged for EVM storage operations. The primary initiative of this proposal is to reduce excessive gas costs where unwarranted. And to enable new use-cases for contract storage.

With this, transactions that are making multiple updates to the same storage slot will cost significantly less!

Ethereum Constantinople Update 2019: Conclusion

Ethereum’s soon approaching Constantinople hard fork, while significant, is still only a piece of the larger puzzle that is Serenity – Ethereum’s transition to Proof of Stake. 

Ethereum Casper Release Date Updated 2018 - Infographic & Illustration

Updated Ethereum Casper Release Dates (2018 Estimates]

While Constantinople brings about a reduction in miner block rewards (EIP 1234), it must be noted that the hard fork is not a Contentious Fork.  All 5 EIPs within Constantinople gained majority approval across the Ethereum community as a whole, thus will not result in two coins after the hard fork on January 16, 2019.

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Radix Coin – Relatively Stable, Infinitely Scalable

In this post Shawn breaks down the Radix Coin (RDX) as a stable and scalable cryptocurrency. He discusses Radixs' novel economic approach to solving the pain point of crypto price stability for consumers and businesses.

Radix Coin – An Intensively Scalable & Stable CryptoCurrency

Radix DLT is beginning to garner increasing attention in the crypto-space. Radix rose from an obscure and exotic "coin" in 2017 to one of the most discussed technologies in 2018. Every week, I receive several questions on Radix’s Scalability & Sharding or on their Tempo Consensus Method.  But one of the more common questions goes something like this:

"Hey, what are your thoughts on the Radix Coin ? "

It recently dawned upon me that while I’ve discussed Radix’s infrastructure, I haven’t really delved into the “Radix Coin”.  While Radix does indeed sport a crypto coin, it is so much more than that. Radix DLT is a fully fledged distributed ledger technology platform. The platform will feature decentralised applications, mass scalability, and of course, the Radix Coin as well – 'RDX'.

In this post, however, we focus our discussion on the Radix Coin (RDX) and its purpose in revolutionizing the digital economy. If you’re interested in the Radix  DLT Infrastructure – mainly its Consensus and Sharding approach, then you can read the following introductory & simple explanations:

The following sections will discuss how the Radix Coin will serve and benefit from the Radix DLT infrastructure.

Radix (RDX) As A Stable Coin

The Radix Coin will be the token used on the Radix DLT platform to fuel various operations. However, the coin and the platform have special features that make the dynamic rather interesting. The Radix coin will be a relatively stable coin. Notice the word "relatively" – this is key. Several people mistaken the Radix Coin to be a stable coin. This can lead to confusion – especially for interested investors. 

Radix DLT designed the RDX token so as to have low-volatility. In that vein, the Radix Coin will initially be pegged against the US Dollar where 1 Radix Coin will be equivalent to $1 USD. However, after a certain period, the price of the Radix coin will float free.  Low-volatility and relative stability will be maintained by increasing the supply of the coins. 

“Wait, what the… what do you mean by ‘increasing’ supply of the coins? “

Don’t worry – we’re not talking about ‘Supply inflation’ here. Radix DLT will be using an algorithmic model that will monitor demand and accordingly increase as well as decrease the total supply of the Radix Coin at regular periods. The low volatility of the Radix Coin will help facilitate mass adoption. And the flexible supply should satisfy investor needs as well.

In the following sections, we will discuss how investors and merchants both benefit from this flexible supply system.

Radix Coin for Investors - Should Investors Worry?

Upon first hearing “stable coin”, cryptocurrency investors are immediately skeptical. After all, why invest in something if it’s going to be stable in value? This is an understandable concern since we’re conditioned to the volatility of cryptocurrencies. The Radix Coin, however, functions sort of like a Bond with a variable interest rate.  The value of each Radix Coin may not rise and fall substantially. But the investor will receive more RDX at regular intervals which should increase his total amount of RDX.

For example, let’s say John has  2000 RDX. At the time, each RDX is valued at around $1.10.

  • No. of RDX: 2000   
  • Value of each RDX:  $1.10
  • Total Value: $2200

In the coming months/years, the demand for the Radix Coin skyrockets! Now, each of John’s RDX will not increase drastically in value. Instead, the total number of RDX he has will increase.  His total Radix Coins will increase to 6000 RDX and each RDX will be worth $1.15 (Remember – the Radix Coin will be relatively stable.)

  • No. of RDX: 6000  
  • Value of each RDX:  $1.15
  • Total Value: $6900

Note: This is just an example – as details on the calculations have yet to be released.

On the flip side – if the demand for the Radix Coin reduces, the platform has mechanisms in place that will perform a token-burn process to reduce the total supply of the Radix Coin. Again, details on how this process is yet to be revealed. We will all have to wait for the economic white paper that should be released closer to their mainnet launch.

However, we can rest assured that investors don’t have to worry about their investments being “stale”.

Radix Coin for Mass Adoption

Relative Price Stability

One of the biggest reasons the Radix Coin features relative stability is to facilitate mass adoption. Without stability, mass adoption across the world will be near impossible.

As things stand, the general public find it troublesome to hold cryptocurrencies for anything other than a speculative investment. You may hear increasingly more reports of merchants accepting cryptocurrencies as a form of payment. However, most of these merchants are immediately converting their cryptocurrency back into regular FIAT.  Why? Well, simply because merchants need to be able to rely on their revenue holding value in the months that follow. Cryptocurrencies are far too volatile to offer the level of reliability that merchants need in order to run an efficient and sustaining business.

Similarly, regular consumers will only hold a fraction of their purchasing power in cryptocurrencies for similar reasons. With the current state of the market, it’s a serious gamble to rely solely on your holdings of cryptocurrencies to pay your rent or mortgage. The Radix coin will safeguard against violent price swings using an elastic-supply. This will allow merchants and consumers to hold their Radix Coins with reduced risk.

Decentralized Transaction Scalability

Scalability has been one of the biggest limitations of current blockchain solutions. Most DLT consensus models have to make the tradeoff between throughput and decentralization. Radix, however, achieves high throughput, security and decentralization using a unique approach to Sharding along with their Consensus Method – Tempo .   The Radix DLT platform ensures that every single device can be part of the network and use the Radix Coin to transact with high speed across the globe.

Radix Coin - Conclusion

With "Stable Coins", like the Radix Coin, being the latest talk of the town, its no surprise that investors and enthusiasts alike are blazing with questions on how to seize opportunity on this relatively new crypto class.

The concept of price stability around the radix coin will be primarily based on elastic supply. Depending on the demand of RDX, there will either be a coin issuance to each RDX holder, or a coin burn. While much of the economic structure behind the Radix coin is yet to be unveiled, their scaling solution - Radix Sharding & Tempo Consensus – has been fully implemented and tested. 

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Ethereum Casper V2: Beacon Chain & Sharding Explained Simply

In this post Shawn breaks down the Ethereum Casper V2 update. He discusses ethereum's transition to Proof of Stake, and how beacon chain fits into ethereum sharding.

Casper V2: Beacon Chain , PoS , Sharding

There’s been a great deal of confusion in regard to Ethereum’s new approach to Casper. Part of the confusion stems from the updated timeline for Ethereum’s PoS (proof of stake). And the other part of the confusion stems from this new “Beacon Chain” thingy.  Yes, I said ‘thingy’.

So, in this post I’m going to try to break things down in an easy manner for you guys. What exactly is the Beacon chain? And what role does it play in Proof Of Stake and Sharding

As usual, I’ll keep it simple – and avoid the unnecessary details.

Ethereum: The Initial Roadmap

Before we go any further, allow me to break down the structure of Ethereum’s Casper V2.  There will be three chains that we are concerned with:

  1. The Ethereum PoW Chain
  2. The Beacon Chain
  3. The Sharding Chain(s).

All three of which will be linked together in Casper V2.

Ethereum Casper: 3 Types of Chains

Ethereum PoW Chain

This is the chain that Ethereum is currently using. It’s using the traditional Proof Of Work (PoW) consensus method. In Ethereum’s Proof Of Work chain, miners currently validate blocks by running the PoW Cryptographic Puzzle.

However, Ethereum will be using Proof Of Stake in Casper. Miners will have to transition to the Proof of Stake chain if they want to keep validating blocks for the Ethereum Network.  To do so, they will have to deposit 32 Ether into the Beacon Chain. Once they do that, they will become Validators on the Beacon Chain.

Important:  Miners are not the only ones who can become validators. Anyone can deposit 32 Ether from the Ethereum PoW Chain to the Beacon chain to become a validator

Ethereum Casper: PoW to PoS

The Beacon Chain

Alright, so the Beacon Chain is where all the confusion stems from. But it’s actually quite simple. The Beacon Chain serves two primary roles

  1. The main Proof Of Stake chain

  2. The base layer of the Sharding solution


  3. To Simplify: The Beacon Chain will link to the Shard Chains and “signal” which blocks from the Shards should be added onto the main chain. The main chain will be validated & finalized using Proof Of Stake. The main chain also resides on the Beacon Chain. The Beacon Chain will also play a crucial role with the Shard Chains. It links up to the Shard Chains to listen for blocks that will be included onto the beacon chain (the PoS chain).

The Sharding Chain(s)

Yes, there are going to be multiple Shard Chains. Remember, Sharding is an attempt to avoid having “every single node validate every single transaction”. This will allow for more scalability.  In order to do so, instead of having one single chain, we will have multiple shard chains. I explain Sharding in more detail in this article: Ethereum Sharding Explained Using An Analogy.

Essentially, you can think of the Shard Chain as a group/block of multiple chains. All the transactions will take place on these Shard Chains – and will be split between each shard.  The account data will also be stored on these shard chains.

Above, I mentioned the Beacon Chain links up to a Shard. Well, there’s also a link from the Shards to the Beacon chain. This link needs to be attested/signed-off by a sub-group of Validators that will be pseudo-randomly picked.

Ethereum Casper: PoW to PoS

Ethereum Casper: Validators vs Miners

Casper will be using Proof Of Stake which does not require “mining” to validate blocks. If a miner wants to continue validating blocks on Casper, he will have to deposit 32 Ether into the Beacon Chain like everybody else.

Once 32 Ether is deposited, the person will go into the “Queued Validator” pool and eventually get added to the “Active Validator” pool. Active Validators will be responsible for producing blocks, sign off on blocks and sign off on links (to shards).

Why “Beacon Chain”?

You may be wondering why the Ethereum team chose the term “Beacon Chain?”.  The Beacon Chain was originally only part of the Sharding spec. It’s role was (and still is)  to link up to Shard Chains and signal which blocks should be added to the main chain. 

The Validators utilize the crosslinks between the two chains to “listen” for new blocks on the shard chains. They then sign off on the block and the crosslink if it is to be included on the main chain.

Beacon essentially means “Lighthouse/signal” – and that’s precisely what the role that the Beacon Chain serves.

Disclaimer: I’m sort of taking an educated-guess at this one. To be honest, a lot of the terminology in Sharding & Casper PoS is sorta...confusing (e.g: proposer, collator, validator, committee...come on Vitalik!)

Conclusion

As you can see, the Beacon Chain in the new Casper implementation isn't all that complicated. All you need to know is that it will serve as the foundation for the Proof Of Stake and facilitate the communication via the Shard Chains (via cross-links).  You can become a Validator on the Beacon Chain if you deposit 32 Ether from the current PoW Chain. Once you do that, you can take part in the Proof Of Stake consensus process as well. ValidationFinality  will take place on the Beacon Chain. Transactions & Account Data will be on the Shard Chain.

Simple, eh? Tbh, maybe all you need to read is the conclusion of this post. Damn. Oh well.

Follow up Reads:
1. Casper Roadmap Update Explained
2. ​Ethereum Sharding - A Simple Analogy
3. Finality: Understanding Settlement & Finality

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3 Reasons Why You’re Getting Wrecked In Crypto & How To Fix It

By Shawn Dexter / September 15, 2018

Why Am I Writing This?

I usually refrain from posts like these. But recent discussions have made me wonder if there's a increasing lack of maturity in our community. I'm seeing a lot of posts on how much money people have lost and how they are "out" etc etc. To each their own – but I figured I'd share some of things I've learned in my journey thus far. 

1) You’re a victim and you don’t know it

We are ruled by our emotions. Almost every single buying decision we make is an emotional one. News sites, advertisers, salesmen and pro-traders all understand this very well –– and they use it against us. The question is: Do you understand this about yourself?

Last week the narrative was:
“Ethereum scaling issues, ICOs are dumping etc etc”.

This week there was a push for
“Breakthrough in Ethereum Scaling! Novo calling the bottom!”

I hope you see a pattern here. Think back to last year:  
“BTC mempool, BTC can’t get their shit together, China banning exchanges!”

A  good salesman uses emotion to make a great sale. Similarly, a good trader will use emotion to make a good buy (at the bottom). He’ll then use emotion to make a good sell (at the top). 

In a way, you can’t help but appreciate the art of it all. But do not be a victim to this. Your emotion is the sword they wield when they attack. But it’s your sword. You can keep in check.

​​​​How To Fix It:  Know thy enemy & know thyself.

I spend most of my time on the fundamentals/technology in this space. But that hasn’t stopped me from learning about how traders think & how market cycles work. I have read over 10 books on market psychology, trading mindset and market cycles/crashes. Does this make me a pro-trader? Absolutely not – but it does arm me with knowledge that keeps me from making bad decisions. 

So pick up some books/tutorials on the trading psychology, market cycles etc. If you have money invested, you owe it to yourself to spend time learning some of the basics. This doesn’t mean you have to become a trader yourself. This will simply help you become more aware of what’s happening around you

2) You’re trading and you don't even know it 

Many of us think that we are “investing” – but in truth, our behaviour leans closer to that of a trader.

“Woah..woah… I hate Technical Analysis! I don’t believe in that crap”

News Flash: You don’t need to be using TA to be trading. Here are some signs that suggest you are trading without realising: Are you making your buying & selling decisions based mainly on the price?  Are you trying to time the tops & bottoms to increase your stack? Yes? You’re a trader.

We’ve all heard the saying: “96% Of Traders Lose Their Money”. So the odds are already against you – but imagine being a trader and not even knowing you are one.  It’s like walking into a Ice Rink with soccer sneakers.

The truth is that most of us in this space behave like traders – and we don't even know it.

To be an investor, you need to speculate on the direction, fundamentals & adoption of the technology.

A trader on the other hand, mainly speculates on the direction of the price (and may use short-term fundamentals to strengthen his thesis) But since very few of us understand the fundamentals, it’s easier to speculate on the price.

How To fix this?

  1. If you’re not interested in trading – and “in it for the technology” – then it’s time to start living up to the claim. Before you invest your money, invest your time to learn the underlying fundamentals. You don’t need to learn it all. Start with Bitcoin & Ethereum.  ​You can refer to my Blockchain Analogies page for simple explanation to various concepts

  2.  Realise and accept that you’re trading – and it’s what you enjoy. Trading is a competition/game. You’re going to keep losing if you don’t even know you’re playing. Learn “how” to trade – start with the basics, and start small.
     

Again, I understand that it’s a struggle to find good resources, so let me know you need help to find something specific. I’ve read a lot of great books, and a lot of shitty ones as well.

3) You are forgetting what this space is all about

It seems like we’re rapidly diverging from the ideology that gave birth to this space: Decentralisation. Most of us are focussed on the upcoming ETFs and the scaling issues of Bitcoin and Ethereum. Are we really excited for a financial tool that will allow for further centralisation and possible manipulation? Isn’t that precisely what we wanted to get away from?

“Oh but we don’t scale enough yet for adoption, we need this asap”

How To Fix It?  
Think back to why you really entered this space. Was it the ideology? Or the money? Make your decisions accordingly. But try not to get caught on the fence.

Final Thoughts

I'll end my rant here, but the takeaway is this: If you're playing the game, it's important to know that you're playing. And if you're playing – you better get good at it. If not, just stay in the sidelines (aka: buy & hodl)

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Ethereum Difficulty Bomb & Inflation Rate Explained

By Shawn Dexter / September 5, 2018

In this post, Shawn explains the Ethereum Difficulty Bomb. The recent debate around the Ethereum Inflation rate has many people discussing the current ethereum mining rewards &  "difficulty bomb".  But what is the difficulty bomb? Shawn explains it clearly and succinctly!

What Is The Ethereum Difficulty Bomb?

 With Ethereum's Constantinople update coming up on  January 16th 2019, there have been an increasing number of questions regarding Ethereum's "Difficulty Bomb".  Most other explanations out there are either far too complex are simply wrong. 

Ethereum Difficulty Bomb: The Simple ​Explanation

The Ethereum Difficulty Bomb simply refers to a tool within Ethereum. This tool allows the core Ethereum developers to adjust how difficulty it is for a miner to win a reward. ​Miners win rewards each time they create a new block and add it to the blockchain.  

When the Ethereum Difficulty Bomb is set to "detonate", it will get exponentially difficult for miners to win rewards via mining. But why would the developers want this? Because eventually they will want miners to stop mining and start validatingRemember, Ethereum is set to transition from Proof of Work to Proof of Stake. There is no mining in Proof Of Stake. We will have validators instead.

Ethereum Difficulty Bomb: A Dis-Incentive For Miners

Even though Ethereum may switch to the Proof of Stake chain, the miners may  continue mining on the Proof Of Work chain if not properly incentivised. In order to avoid security issues (like a fork), the developers wanted to give the miners a little "nudge" to switch to Proof Of Stake. The Ethereum's Difficulty Bomb would reduce their rewards on the Proof Of Work chain, and thus incentivise them to switch to the Proof Of Stake Chain.

Why Was The Ethereum Difficulty Bomb Delayed?

Unfortunately, the network upgrade to Proof Of Stake was delayed. And the entire point of the Difficulty Bomb was to incentivise miners to switch to Proof of Stake. So the Ethereum team decided to delay the difficulty bomb until Casper was ready.

Ethereum Inflation Rate & Difficulty Bomb

The delay, however, did not sit well with long term investors. Long term investors were looking forward to the difficulty bomb (and Proof of Stake). Why? Because lower Block Rewards would mean a lower Inflation Rate. This was going to be a very bullish update for long-term investors.

To understand this fully, let me quickly explain Ethereum's Inflation Rate. We will then discuss how the difficulty bomb & block rewards relate to it! Don't worry – I'll keep it super simple 😉

Ethereum Inflation Rate Explained

The past year has seen a back and forth debate between the miners and the rest of the community . The debate was about the current inflation rate in the Ethereum ecosystem. Essentially, the community wanted a reduction in the Ethereum Inflation Rate.

Ethereum Inflation Rate Definition (Quick'n'Dirty)
 The speed at which each Ether loses it's purchasing power/value. 

There are two ways the core-developers can decrease the inflation rate in Ethereum:

  1. Add A Difficulty Bomb in Ethereum
  2. Decrease the Ether Issuance to Ethereum Miners
Ethereum-issuance-rate

Ethereum Block Time vs Ethereum Block Reward

In this post we'll be discussing the Difficulty Bomb. However, please note that the Difficulty Bomb's purpose is not ONLY to adjust the inflation rate.

Ethereum Difficulty Bomb: What Is It? (In Detail)

The Difficulty Bomb is sort of a "tool" within the Ethereum consensus algorithm. It allows the core devs to elegantly adjust how difficulty it is to create a new block. For example, the Difficulty Bomb can be set to "detonate" at a particular time-period. Upon detonation, it would get exponentially more difficult to mine a block as the days passed (more on why later).

However, to understand the Difficulty Bomb and it's implications – we need to first understand how blocks are actually created. It's actually quite simple. Let's go over it quickly:

Ethereum Mining: How Are Blocks Created In Ethereum?

Each time you send a transaction on the Ethereum Network, it is being broadcasted to the Ethereum Miners. Ethereum Miners pick up your transaction along with a bunch of other transactions – and  put it into a "block".

But that's not the hard part. The hard part is getting the block approved by the rest of the network as "Valid".


To understand this bit, let's use my Lock & Key Analogy

Each miner needs lock the block before submitting it to the network. However, in order to "lock" the block, they need to find the key. A block is not deemed valid by the rest of the network until the minder "finds the key". (This is why you will find people using the phrase "finding a block".) 

(Note: This is a simplified explanation. You can find my simple explanation on the PoW Puzzle here)

Once the key is found, the block will be added to the main Ethereum blockchain.  The miner who "found the block" will get a reward issued to him.

Block Time & Difficulty Bomb in Ethereum Mining

However, finding the key is no easy task. It's much like trying to find a needle in a haystack: You could find it immediately, or it could take you a very long time. The time in takes to find the "key" or block – is known as the Block Time. 

The time in takes to find a block is known as the Block Time.

In Ethereum, we don't want either of the two extremes. Of course, taking forever to find a block is not good. But, nor will finding it too soon. We want the time to be...just right. Like Goldilocks & her soup.

ethereum difficulty bomb block time

Fortunately, Ethereum can adjust the average time it takes miners to find a block. It can be adjusted to either decrease the block-time or increase the block time. 

An adjustment to increase the block-time is known as a difficulty bomb

Why is it called the "difficulty bomb". Because Ethereum will make it more difficult to find the needle in the haystack. Another way to look at it is this:

​​​​​​​​​The time it takes a miner to find a block will increase. Hence, it gets more difficult for him to earn his rewards.

We will discuss how this is adjusted in another post. For now, this is all you need to know 🙂

Ethereum-inflation-rate

Ethereum Inflation Factors: Block Time & Block Reward

Conclusion: Difficulty Bomb, Ethereum Inflation & Prices

The Difficulty Bomb in Ethereum  can/will be used to adjust the time it takes a miner to find a block. This has a direct impact on Ethereum's inflation rate since it reduces the speed at which miners receive rewards. This, in turn, will reduce the total expected supply of Ethereum for the years to come. If supply goes down, prices will go up. If prices go up – then purchasing power  of each Ether increases. 

As of this writing, the average time it takes a miner to find a block in Ethereum is around 14 seconds. Remember, new Ether is issued to the miners as a reward each time a new block is created/validated. A difficulty bomb will decrease the rate at which these rewards are handed out And, in turn, reduce the inflation rate in Ethereum.

Ethereum's Casper was supposed to include a difficulty bomb along with Proof of Stake. As of now, both Casper and the difficulty bomb have been delayed

Ethereum Roadmap Update [2019]: Casper & Sharding Release Date
In this post Shawn discusses the recent Ethereum Update in regard to their roadmap for Casper & Sharding. Casper FFG[...]

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Ethereum Inflation Rate: Ether Issuance Debate 2018

By Shawn Dexter / September 1, 2018

In this post, Shawn provides a simple breakdown of the Ethereum Inflation & Issuance Debate. He explains the debate from the PoV of Ethereum miners, as well as community members.  In addition, he summarizes the 3 Ethereum Improvement Proposals (EIP) being considered by the core team. 

UPDATE:  Seems like EIP1234 has been accepted – on a conditional basis, however. Furthermore, the proposal still remains in a "draft" state, and minor changes may be made before finalisation. Read this post to know more!

Ethereum Inflation: Introduction

The past thirty days have seen a prolonged debate on an important matter: Ethereum’s Issuance. But be it an important matter or not – few of us seem to understand what’s going on.

To be fair, this issue has complexities that has brought indecision to even the best minds of this space. So, it’s not surprising that many of us have decided to glaze over the issue. However, as a community, we owe it to ourselves to understand at least the basics of this issue.

In this post, I will break down the Ethereum Issuance debate as simply as possible.  This will be an easy read – and by the end of the post you will have a firm understanding of what is going on.

​​​​Ethereum Issuance & Inflation Rate

Ethereum is “inflationary”. You hear it all the time. But many don’t seem to understand how the inflation is caused. It’s rather simple.  Ethereum miners get rewarded for mining new blocks. These miners get rewarded/paid in Ether. But this isn’t “existing” Ethereum; this is Ether that is freshly minted/created.

Essentially, miners are rewarded by issuing freshly minted Ether into the system. This “inflates” the existing supply in the market.  Hence the term “Inflation Rate”

Ethereum Inflation Rate vs Issuance Rate

The Ethereum inflation rate and issuance rate are pretty much the same thing – for the most part. There’s a tiny ‘difference’ that is worth discussing.  Let’s think about this for a second. There are two factors that will affect Ethereum’s inflation rate:

  1. The speed at which fresh Ether is given out
  2. The AMOUNT of Ether given out each time

Analogy
I can give you one piece of candy every minute; OR give you ten pieces of candy every ten minutes. Either way, over time I inflate your candy supply  at the same rate. You’ll have 100 candy pieces in 100 minutes.

Ethereum-inflation-rate

Ethereum Inflation Factors: Block Time & Block Reward

Speed of Ether Issuance

Currently, the speed at which Ether is issued out is pretty stable. Ether is issued to miners as a reward each time a new block is created/validated. As things stand, the time taken to create a block is relatively stable at ~14 seconds.

However, if Ethereum increases the difficulty of “block creation”, then it will take longer to create each block. This is what people are referring to when they mention the “difficulty bomb”.  If it takes longer to create create blocks, then less Ether will be rewarded over a period of time

Analogy
I stop giving you 10 pieces of candy every 10 minutes, and instead give you 10 pieces of candy every 15 minutes. After 100 minutes, you’ll have only 66 pieces of candy (instead of 100)

Ethereum-issuance-rate

Ethereum Block Time vs Ethereum Block Reward

Amount of Ether Issuance

The amount of Ether issued for each reward is the next driving factor for Ethereum’s inflation rate. And this is the most debated factor at the moment. Ethereum is currently issuing roughly 5.5 Ether per block (as rewards) If Ethereum decides to reduce the amount of Ether given out per reward, then the inflation rate will drop regardless of the difficulty bomb.

Analogy
I keep giving you candy every 10 minutes. However, I give you only 6 pieces of candy each time – instead of 10. You’ll have only 60 pieces of candy after 100 minutes.

The Problem

Reducing the Ether issued will cut into miner profits. But not reducing Ether issuance will anger the rest of the community (more on why later)

What is the Debate About?

The Background

The current inflation rate is around 7.3% annually. The Ethereum community was promised somewhere around 2% - 4% with the release of Casper. (In fact, Vitalik once quoted ~0.5% as a feasible number – leading to even more expectations)

Casper Delay

So, the community has been patiently waiting on a reduction in Ethereum’s inflation rate. This was supposed to happen with the release of Ethereum’s Proof Of Stake: Casper. If you’re keeping updated, you know about the delay on the Casper release.

Casper was also supposed to include a “difficulty bomb” that would increase the time it takes to find a block. This would decrease the ethereum inflation rate

ethereum-supply-cap

Ethereum Inflation Cap Debate - Community vs Miners

Community Side

However, since Casper has been delayed, the community wants the matter of issuance being addressed right away.  If Ethereum has to delay the difficulty bomb, then the other course of action is to reduce the amount of Ether being issued per block. Many community members are advocating for a reduction of issuance that would align inflation rate to ~2%.  This would align the inflation rate to what it would be if Proof Of Stake was not delayed.

Miners Side

However the Ethereum Miners don’t like that idea – since it would cut directly into their profits. It’s important to note that Ethereum is still using Proof Of Work – which consumes a lot more power per block than Proof Of Stake would. Many miners claim that they would be forced off the network since the rewards would not be enough to cover their costs.

Why do we care about Miners?

Miners do more than just process/validate our transactions. Each miner contributes to the security of the network via their hashpower. If overall hashpower drops, the network is easier to attack. (I touch on this in a YouTube video on 1% Shard Attack)

Essentially, the more miners we have, the more security we have. If miners drop off the network, security will begin to drop – and we’re more vulnerable to attacks.

As you may now be noticing, this issue does not have an easy solution. But we can get a better idea of which direction to take. First, let’s quickly go over where we currently stand.

Ethereum Issuance: Blocks & Uncles

What is the Ethereum Issuance currently?

The current Ether that is being issued is roughly 5.5 Ether per block. It’s important to note that unlike Bitcoin, the reward issuance is not straightforward.  Here is a simplified breakdown of the rewards distributed:

  • Block Reward:  3 Ether
    Uncle Rewards:  ~2.4 Ether

  • Total Ether issued per block: ~5.4 Ether   (Issuance reduction will decrease this)
    No. of blocks per day:  ~6000 Blocks (difficulty bomb will decrease this)

  • Current Annual Increase:  ~7.3% (issuance reduction and/or difficulty bomb will reduce this)

Uncle Rewards...What the..? 

(If you know what are Uncle Rewards , then you can skip this section)

Unlike Bitcoin, Ethereum rewards miners that find blocks that don’t make it into the longest chain. These blocks that are considered “stale” in Bitcoin, and are orphaned. In Ethereum these are called Uncles and are rewarded for their work.

This is primarily because Ethereum has a much lower block-time (the average time required to find a block). This “small window” may result in smaller miners unfairly losing out on potential rewards due to network latency etc. As such, miners are rewarded for their work.

Of course, we cannot predict the exact number of Uncles – but we’re estimating that around 2.4 Ether will be given out to Uncles on average. Uncle Rewards are important because they:

a) Incentivise decentralization (small miners are less likely to join pools)
b) Increase the security of the chain. (more on this in another post)

Cool.. So What is Being Proposed?

Alright, now the fun part. There are three proposals – Ethereum Improvement Proposals  (EIPs) to be specific. Here’s a list and summary of each of them:

EIP-858:  Reduce block reward to 1 ETH

This would be a significant decrease from 3 ETH to 1 ETH. It would probably put several small/mid-size miners in the negative profitability.  Many miners may drop off the network. However, this would probably benefit miners who have access to cheap electricity since they will be able to accrue more rewards for themselves. Larger miners may probably benefit for the same reasons.

EIP-1294:  Keep block reward at 3 ETH. Reduce Uncle Rewards to ~0.56 ETH. 

This will be a significant reduction to the Uncle Rewards – from ~2.4 ETH to  ~0.56 ETH. Ouch. This will affect small miners the most since they rely on the Uncle Rewards. Furthermore, this reduces the incentive for them to remain independent; and may lead to larger shift of small miners to joining pools.  Of course, larger miners who aren’t affected by network latency issues do not get affected by this reduction. They benefit the most from this since the issuance will be maintained.

EIP-1234  Reduce block reward to 2 ETH

This EIP seems to be receiving the most favour from the community. It serves as a good middle ground. it will still eat into profits of miners, but not as significantly as the reduction that EIP 858 proposes. EIP-1234 does seem to have an air of “compromise”. It will offer developers enough time to develop & release Casper while keeping both sides of the community at bay. Is compromise the best way to go? -shrug-

So..What Has Been Decided?

 A vote took place – that lasted 30 days – where the community voted on their preference. Although the results were leaning significantly toward one side, these results are not binding. The vote was more-so to gauge community sentiment. Quite frankly, this issue is far too important to be decided over a vote like this. It requires serious consideration & research.

There was a core-dev meeting that took place last week where the matter was discussed. It seems like the developers are leaning towards EIP1234 – the reduction to 2ETH. However, I'm not certain if this has been confirmed.  If so, EIP1234 will be included in the upcoming hardfork scheduled for mid October.

I’ll keep you guys posted – and I will be updating this post regularly as news develops.

UPDATE:  Seems like EIP1234 has been accepted – on a conditional basis, however. Furthermore, the proposal still remains in a "draft" state, and minor changes may be made before finalisation

Ethereum Roadmap Update [2019]: Casper & Sharding Release Date
In this post Shawn discusses the recent Ethereum Update in regard to their roadmap for Casper & Sharding. Casper FFG[...]

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"The Mango Guide TO Understanding Blockchain"

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