In this Part, I will show you how to set up your Fibonacci Retracement tool, how to customize and use it. I will then thoroughly explain some chart examples, what to look for, and how to apply other technical analysis concepts to retracements. This will help find areas of confluence that should give you an idea of how you can implement this into your own strategy to provide some extra edge.
Page 1: -> Setting up & customizing your Fibonacci Retracement tool.
Page 2: -> Example 1 is a simple bearish retracement & explanation. -> Example 2 shows how you can look for a higher low after a break in a downtrend. -> Example 3 shows how you can add an additional piece of confluence to your retracement.
Page 3: -> Example 4, a thorough explanation on finding multiple parts of convergence with your retracements. By using additional indicators, and other time frames -> Additional tips when placing a retracement. -> Summary of Fibonacci retracements.
Setting up the Tool:
Firstly, to find the Fibonacci Retracement tool on TradingView, navigate to the drawing tools on the left side. Click on the third option down from the top. Then select the ‘Fib Retracement’ tool.
Choose Fib Retracement
Next, you will want to set up your Retracement tool with the numbers I showed on the previous part, and any others you may want to add yourself.
To do this, you will need to place a retracement onto the chart anywhere, and then double click it once applied, or find it here by clicking on the Settings icon:
This toolbar gives you basic options such as changing the thickness of the lines, changing the colours, deleting it etc.
Customize your tool:
Here is what my Retracement tool’s menu looks like, feel free to use what I have or add/change the values and the colours on your own. I recommend using certain colours that you like to make your chart as personalised as possible, I find it makes charting easier when you are familiar with the style of your chart.
You can see I have some other Fibonacci numbers there, 0.886 & 0.236. Which I turn on and off depending on the scenario. If you want all of your lines to be the same colour, then click on the “Use One Color” option to do so.
If you prefer you can also turn on a background colour to make your retracement tool stand out more.
Now, once you have finished setting your tool up, I highly recommend following this next step:
When you have entered all of your levels, colours etc, setting it up as a template is definitely a good idea in case you lose the edited version, or if it accidentally resets to the default. This way you can quickly turn on your pre-made Fibonacci retracement tool with no worries.
Click on your retracement, or find this option in the settings menu. Then select the “save drawing template as” option.
Then give it a name. This is an example of how you may want to set them up:
Add the Fib Retracement to your favourites, this will display it on a Favourites drawing toolbar. (See next image).
Add to favourites, click or tap the star icon.
Displays the favourite toolbar. You can toggle this on/off by selecting it.
This is what my Drawing Toolbar looks like. You can also add any other tools to this, completely up to you.
I like to have the tools on there that I always use for my technical analysis.
First of all, I would like to point out in this series I will be covering Fibonacci retracements and extensions only for now. The reason being, I want to showcase the most simple and most mango way to implement Fibonacci into your own analysis.
Personally, I do not use these Fibonacci tools solely on their own, but in confluence with other indicators or methods of analysis which (I will touch on some briefly later in the series).
Fibonacci Retracements
Fibonacci retracements come from ratios used to distinguish possible reversal levels, or support and resistance zones (S&R* zones). These ratios are from the Fibonacci Sequence.
A Fibonacci retracement is made up by taking a low and high point of a trend, then dividing the distance between them by Fibonacci ratios (23.6%, 38.2%, 61.8%). This plots out horizontal levels between the two anchor points.
A retracement can be seen as a pause in trend, or a higher time frame pull-back, which can be an edge for getting into larger trends at possibly better entries when used in a strategy with other indicators. A retracement is not a reversal, because, after a retrace, the price will usually continue in the same direction as the former trend.
Furthermore, retracements are a stationary tool so naturally, they give confluence with already priced in areas of support or resistance. But also price usually respects them more compared to other “reactive” or “lagging” indicators like Moving Averages because they are not reacting to price action and are fixed S&R*.
Each retracement level represents a Fibonacci percentage or ratio. However, some traders may not strictly use numbers derived from Fibonacci, mainly as a personal preference. For example, I actually use 0.35, 0.5 & 0.65 as I have found these to add extra edge and confluence in my analysis’ which I will go over further in the series.
Simple Visuals for different Retracements:
Bullish Fibonacci retracement: Price is trending up, and has a pause in the uptrend, essentially creating a higher low. Also seen as an opportunity in the market to enter longs at lower prices to position for another impulsive move upwards.
Also, any shorts may exit their positions around the same Fibonacci levels, as they anticipate a higher low. They want to get out before the price starts moving against them, especially if it’s a bullish trend.
Bearish Fibonacci retracement:
Price is trending down, and has a pause in the downtrend, essentially creating a lower high. Also seen as an opportunity in the market to enter shorts at higher prices for another impulsive move downwards.
Also, any longs may exit their positions around the same Fibonacci levels, as they anticipate a lower high.
The Most Common Retracements:
For now, I will provide examples of the most commonly found retracement levels (or ratios), and ones that I have found to be respected the most.
0.236 or a 23.6% retrace.
0.382 or a 38.2% retrace.
0.618 or a 61.8% retrace.
0.786 or a 78.6% retrace.
Additionally, you can implement a 0.5 or 50% retrace, although it is not a Fibonacci number, often traders will use it as a midline or median point between a swing high and low as it frequently gets well-respected as a level.
[ *Tip: I added two extra retracements to my tool, the 0.35 and the 0.65 values. The reason I do this is to simply mark out zones so I can more easily find confluence with other tools like analysing horizontal support/resistance from price action. ]
Fibonacci levels have been marked out on the chart below as a visual reference.
In this example you can see how after Bitcoin bottomed out in the $3-4k region, it manages to retrace and find resistance firstly at the 0.382 zones, then also rejects the 0.618 retracements (this was almost to the wick high perfectly). What previously is resistance is then used as support as it based right along the top of the yellow 0.382 zone before breaking below it and seeing a deeper correction.
I used this Bitcoin example as I know a lot of you reading this will be familiar with this particular chart, and for those who haven’t seen this Fibonacci retracement example before you may find it interesting, to say the least.
Calculating Fibonacci Retracement values:
23.6% – This is when you divide one number by another number three places to the right in the sequence. For example, if you do 13/55, or 21/89. These equal approximately 0.236 or 23.6%.
38.2% – This is when you skip a sequence in the division. For example, if you do 21/55, or 55/144. Another way to get it is: 0.618². These equal approximately 0.382 or 38.2%.
61.8% – This is when you divide the current number in the sequence with the next number (starting from 13). For example, if you do 34/55, or 55/89. These equal approximately 0.618 or 61.8%.
78.6% – Simply put, is when you get the square root of 0.618. For example √0.618.
0% and 100% are not actually Fibonacci numbers but represent the start (first anchor point) and the end of the retracement (second anchor point). 50% is midline or the median between the two.
Fibonacci Extensions
Fibonacci extensions are ratios formed by the Fibonacci sequence, these ratios are applied to a high and low point that create extensions beyond the 100% retracement level (first anchor point).
Extensions are commonly used to establish projected areas of projected support and resistance that can form when assets are in price discovery (making new highs or lows), or where there is little/no price history for you to use obvious horizontal support and resistance lines (or other similar methods).
However, extensions can be used when a chart is not in price discovery as they can provide additional confluence to your levels using existing support and resistance zones or other indicators. (I will touch on some examples of this in another part of the series).
Simple Visuals for different Extensions:
Fibonacci extension – Uptrend: Price is trending up (higher highs & higher lows) and has a pause in the uptrend, essentially creating a higher low. Once the higher low is confirmed, the price moves up past the previous high and beyond.
Extensions can become targets for longs to exit positions, or to take profits.
Fibonacci extension – Downtrend: Price is trending down (lower lows & lower highs) and has a pause in the downtrend, essentially creating a lower high. Once the lower high is confirmed, the price moves down past the previous lows and beyond.
Extensions can become targets for shorts to exit positions, or to take profits.
The Most Common Fibonacci Extensions:
Here are some of the most common Fibonacci Extension ratios, I will point out the ones I would recommend as a start because you can always try new ones and implement them later. Ultimately you can decide which ones you would like to use, this is just a general guide to try to help narrow your focus.
1.272 or a 127.2% ratio.
1.414 or a 141.4% ratio.
1.618 or a 161.8% ratio.
2.36 or a 236% ratio.
2.618 or a 261.8% ratio.
4.236 or a 423.6% ratio.
As seen below, these are the Fibonacci extension levels I have decided to recommend for starting off.
This is a simple example of how to place an extension, you can see the values I have used here: 1.272, 1.618, 2.36, 2.618.
You can see how the price didn’t really respect the 1.272 level much, whereas with the other three extensions it respected them much more obviously (evident with the 2.618 around the top).
This is only a brief explanation of how you can use this tool in your technical analysis but I will give a deeper explanation & tutorial in the upcoming part of the series, ‘Diving into Fibonacci Extensions’.
Calculating some Fibonacci Extension values:
127.2% – Is the square root of 1.618: √1.618
161.8% – Divide the next number in the sequence with the current number (these are covered in Part 1 when explaining where the golden ratio comes from).
236% – This is from removing the decimal place from “23.6%” and making it “236%”.
261.8% – Divide a number by two places to the left in the sequence and it equals roughly 2.618. Also calculated from 1.618².
423.6% – Divide a number by three places to the left and the ratio equals approximately 4.236. Example: 377/89 = 4.23595.
Other extensions that show up are actually not derived from the Fibonacci sequence, but use existing Fibonacci numbers that are and add 100% or 200% etc to the number. For example, the 361.8% & 461.8% ratios are just using the base of the 161.8% golden ratio and replacing the first 1 with 3 and 4.
The reason these ratios still may work is that as an asset continues to go further into price discovery the higher the relevant extension ratios become. Often traders will use these more ‘uncommon’ extensions like 361.8% or 427.2% as they might be the only way to gauge potential points of support or resistance.
This should give you a decent starting point and overview of Fibonacci Retracements & Extensions, and hopefully, you have learnt something new.
Part 3 is the next in the series, and that is solely focused on Fibonacci retracements.
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If you enjoyed this article and want to stay up to date with more to come, please join the discussion in our Community through Discord.
If you’re a trader, technical or fundamental analyst wanting to learn trading the Mango way, please check out the Mango Seed Program and join the Seed fam. Make sure to also reach out to some Seedlings who are in the program to get another perspective on their experience.
In this Part, I will show you how to set up your Fibonacci Retracement tool, how to customize and use it. I will then thoroughly explain some chart examples, what to look for, and how
The Fibonacci Sequence, one of the most well-known formulas in mathematics, was invented by the Italian Leonardo Pisano Bigollo (or Leonardo Fibonacci) in his book “Liber Abaci”.
Simply put, each number in the sequence is the sum of the two numbers that precede it. For example: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144… To infinity.
This sequence was then found to create what is known as the “golden spiral” which implements these numbers into a “golden rectangle”. Each square is a Fibonacci number timesed by itself (8×8, 13×13 etc).
To get the Fibonacci spiral, draw a line starting in the bottom corner of a golden rectangle within the first square (start of the blue line) and then touch each succeeding multiple squares outside corners, this creates a Fibonacci spiral that continues forever.
Fibonacci Golden Spiral
Fibonacci sequence is seen in many things of nature so here is a smaller list of examples: Fibonacci can be found in sunflowers, korus, snails, eggs, many vegetables like romanesque broccoli & spiralled chillis. In pinecones, chameleon tails, waves, shells, whirlpools, spiral galaxies, and may even be visible in your own fingerprints.
Examples of Fibonacci in Nature
The Fibonacci sequence is all about proportion, and the 1.618 ratios (or its inverse 0.618) is referred to as the “golden ratio” or the “golden mean ratio”. This ratio is essential in almost everything and you can find it throughout nature.
In the Fibonacci sequence, every number is approximately 1.618 times greater than the previous number. You can multiply one number by 1.618 and it will give you approximately the next number in the sequence.
Calculating numbers in the Fibonacci Sequence:
3 x 1.1618 = (5)
5 x 1.618 = (8)
8 x 1.618 = 12.944 (13)
13 x 1.618 = 21.034 (21)
21 x 1.618 = 33.978 (34)
34 x 1.618 = 55.012 (55)
To add to the importance of the golden ratio, here is another example. If you take any two successive numbers in the sequence and divide them, their ratio gets closer to 1.618 as you go further along in the sequence:
In the next part, I will show how you can implement Fibonacci into your technical analysis.
Our Mango Socials
If you enjoyed this article and want to stay up to date with more to come, please join the discussion in our Community through Discord.
If you’re a trader, technical or fundamental analyst wanting to learn trading the Mango way, please check out the Mango Seed Program and join the Seed fam. Make sure to also reach out to some Seedlings who are in the program to get another perspective on their experience.
First of all, I would like to point out in this series I will be covering Fibonacci retracements and extensions only for now. The reason being, I want to showcase the most simple and most
TLDR: Your leverage (3x , 5x, or 10x) does not change your Position Size or Portfolio Size ever. Your leverage only dictates how much margin you need on the exchange to EXECUTE the trade. The higher the leverage, the lower the margin/funds needed. But your position size is still the same regardless of leverage. MRM and YOU dictate the position size. Not the leverage
How To Position Size with Leverage?
So, the other day I received a question from new Mango Seedling in regard to Position Sizing when using Leverage:
"Hey Shawn,
“I’ve decided to start with a very small portfolio of a $1000 to get comfortable with longs and shorts
if i did a 3x leverage does that mean I will input $3000 instead under the portfolio amount? "
It seems like some of you are still confused on how to position size your trades when putting on a leverage trade.
I've received similar questions like this in the past. So I thought I'd address this in a post.
Leverage vs Position Sizing
There are actually two points I want to address in the question. But let's start with this bit here:
if i did a 3x leverage does that mean I will input 3000$ instead under the portfolio amount? "
Your leverage should NOT impact how you position size...ever!
Your position size is to be determined first, and your leverage only after the fact.
Mango Analogy: Position Sizing & Leverage
Think about a simplified mortgage example:
Let's say you wanted to buy a brand new 3-bedroom house.
After doing a lot of financial planning and thinking, you decide that you can afford a maximum of $500,000.
We can use this scenario to draw parallels to your trading:
2. "Afford maximum of $500,000" = Position sizing.
Now you tackle the big question of the down-payment.
Again, let's keep it simple and assume you only have to worry about liquidity and monthly payments.
After more thinking, you decide the following:
1. You have $100,000 of spare liquidity
2. You want to put 20% down-payment
Again, we can draw parallels to our trading here:
1. "20% down" = 5x leverage
2. "$100,000 liquidity" = The minimum you need to have in the exchange.
(In case you're confused here, let's break down the math:
You are buying $500,00 home. But you are putting down only $100,00 of your money, and borrowing $400,00 from the bank.
When you put down only $100,000 to buy a $500,000 home, you have essentially 5x'd your buying power.
You have taken a leverage trade on your house. )
So now you have determined your position sizing and your leverage. You go over to the bank, and talk to one of the useless mortgage brokers who pretend to know what they are talking about.
The broker says:
"Hey, you can afford a $1,000,000 home if you put a 10% down-payment instead of a 20% downpayment"
Hmm... let's think about this....What happened here?
By decreasing your down payment, the broker has:
1. Increased your position size
2. Increased your leverage.
And most importantly:
3. Taken control of your Risk Management.
Red. Frigging. Flag.
Take Control Of Your Own Risk
Your risk management should be dictated by YOU (and the MRM Tool Sheet if you're in the Seed Program) before you even enter the exchange.
The position size remains constant once your risk criteria has been determined.
Remember from the program modules:
Do NOT let the exchange dictate your risk management.
Again, remember that The Mango Way is: RISK FIRST
And your position size is a huge component of your risk.
Once you've determined your risk, your position size is determined as well.
You should NOT change your position size... no matter what leverage you decide to use after that.
In fact, it's the exchange and leverage that should mould to your risk, not the other way around.
Every exchange is going to have subtle differences in how you can EXPRESS your risk on the exchange.
The exchange is just a tool for your to express your risk.
Risk First, Leverage Second
Now let’s address this bit:
“I’ve decided to use $1000 for my portfolio….. my question is, if i did a 3x leverage does that mean i will input $3000? “
This is another example of letting leverage dictate your risk management (as opposed to the other way around).
Remember: Your trade does not dictate your portfolio size, your portfolio size dictates your trade size.
Same rules apply here. If you're in the Seed Program and you're using the MRM Sheet, then your portfolio size remains fixed for the duration of the trade. (In this example, the your portfolio size should be set to $1000.)
Furthermore, it worth emphasizing that leverage is not used for position sizing decisions EVER
It's only used to increase efficiency and reduce counter-party risk.
Final Thoughts
New traders, disastrously, allow the temptation of high leverage dictate their risk management.
Never do this. It's not the Mango Way!
Don't start with: "I want to 3x leverage so what should my position size be?" Instead, start with : "What should my position size be? Oh, the MRM Sheet is saying $1000?" Okay, that means I need to put around $350 minimum in the exchange to so I can use 3x leverage to get to $1000 position size
Why $350? Because 350 x 3 = $1050, this will be an approximate minimum of what you'd need to satisfy your MRM sheet.
But of course you can put more margin in your exchange account - for example $500.
However, if you set your isolated margin to 3x and position size to "$1000", it will isolate 330ish to give you the same position. And you'll have around $200 margin left over.
But now I'm ranting, and we're digressing to a new topic.
Hmm...Do you guys want me to discuss more on the differences between Isolated Margin vs Cross margin?
If so, let me know in the comment section and I'll get on it 🙂
KEY TAKEAWAYS:
Do NOT let the exchange dictate your risk management. Your risk management is dictated YOU (and the MRM Sheet)
The exchange and leverage should mould to your risk, not the other way around
Your trade does not dictate your portfolio size, your portfolio size dictates your trade size
Leverage is not used for position sizing decisions EVER It's only used to increase efficiency and reduce counter party risk
Orion Protocol is the first decentralized platform that will allow users to trade across both decentralized and centralized crypto exchanges and swap pools (including an NFT marketplace) within one decentralized platform. Orion is a non-custodial gateway that will bridge the gap between centralized and decentralized worlds, allowing users to access the entire digital asset market from one terminal.
ORN Token Details
Orion Token has some of the best token utilities you will find in the crypto space. Orion now has now 18+ revenue streams that will give ORN holders huge benefits (these are likely to continue growing over time as they expand across the crypto space as well).
The ORN Token itself is currently an ERC-20 token, but the team have stated they are also open to migrating over to a native token if they need it.
“At this time we do not plan to migrate, but we’re always considering ways to improve and evolve the platform… If reasons arise and we need to migrate, it can be done successfully without affecting Orion’s functionality and platform.”
Revenue Streams: As shown in the image, all these revenue streams will drastically add to the validity and use case of the project long-term continuing to benefit ORN holders, through continuous revenue generation.
Orion’s Liquidity Boost Plugin will give any exchange instant access to the liquidity and volume of all exchanges through the platform. Any exchanges that may be struggling with daily volume can choose to quickly plug into the liquidity of Orion’s platform benefiting both parties, but also ORN stakers/brokers.
Partner exchanges using Orion’s liquidity means more transactions with trading fees that then raises the total Daily Volume.
If you would like a visualization of the process, check out this infographic.
Orion’s DEX Kit will allow crypto projects to build decentralized exchanges, employing their own chain. Trades completed through the DEX Kit will result in general trading fees which build Daily Volume and Staking rewards.
Licensing fees charged for utilising the Orion DEX Kit will be paid in ORN directly bought on the platform, removing them from the supply. This is an amazing feature for any DEX, building a user base and growing liquidity can take time and be expensive. So this can put them ahead of their competitors.
Holding ORN:
The ORN token is supply-capped with 100,000,000 as the max supply. But, the token supply is diminishing, this is for a few reasons:
Firstly, brokers hold large amounts of tokens and get rewards in ORN.
Secondly, stakers will lock their tokens away for great APY rewards paid in ORN.
Thirdly, all licensing fees are paid in the token (Orion’s DeFi solutions).
Lastly, the refund system (DYCO token sale) reduces supply, all ORN tokens that get refunded are destroyed.
Orion has made an ecosystem where they incentivize the community to hold their ORN tokens, they have made it clear they want to continue to add more functionality and benefits improving the value for holders even further.
Discounted trading fees on the platform: Save up to 20% on standard trading fees by paying with ORN.
Staking rewards: ORN holders can earn more tokens by staking and receiving a % APY in return. There is now a staking calculator which can give you estimates on potential staking rewards: https://calc.orionprotocol.io/ There may be some future rewards for stakers/holders including NFTs or NFTVs (vouchers) through Boson Protocol.
“Brokers and Non-Broker Stakers can earn extra transaction fees by staking ORN – with chances increasing along with the size of their stake”
Priority access: Holding ORN will unlock the ability to take part in new features, including first access to Orion Margin Trading and Orion Lending (likely coming in Q3).
Advanced Features: Unlocking of more premium services on the platform. Currently including advanced trading orders like controlling Take Profit and Stop Loss parameters.
dApp Marketplace Access: Future dApps in the marketplace will be available for holders, including apps for trading bots, payment gateways, and investments. These services will be available through ORN as payment.
How does the platform work, what are the benefits?
This saves time in ‘exchange-hopping’, and ensures the best prices across all exchanges on what can be looked at as a crypto-wide order book: Providing arbitrage opportunities across all exchanges, and also allowing you ‘whales’ out there to transact in large quantities without the associated risks of doing so on a single exchange.
There is no KYC involved for users on Orion as it is non-custodial. Orion uses a decentralized brokerage system (they do not hold any funds). However, brokers will hold funds and are KYC’d (the foundation for the entire platform).
Stakers and Brokers:
The decentralized brokerage uses a Delegated Proof of Broker (DPoB) model that is the underlying support for the Orion ecosystem, made up of Stakers and Brokers that allows the protocol to function using the ORN token.
Non-Broker Stakers will stake ORN to ‘vote’ for a broker based on their offerings in reward shares. This incentivises Brokers to make their rates appealing to collect more ORN which in turn will increase their chance of being chosen (as a competitive ranking system).
Stakers and Brokers are rewarded via transaction fees on the protocol. Staking rewards are generated through volume on the terminal, and from all the other DeFi products in the platform, so as transaction volume increases on the platform the rewards will as well.
What else can we see on the platform moving forward?
Orion’s Main Net Terminal is live 31st of March 2021. So you can go check out their platform for yourself and get a feel for what it’s like!
Connect your wallet up and start trading across their current major exchanges like Binance, KuCoin, Bitmax and many more.
Main-net Staking is in final testing and is live in Q2, where you can stake ORN and get Rewards. In the meantime check out the Staking Calculator I mentioned earlier to gauge your potential rewards.
“Additional features to be added to the terminal later this year include lending, margin trading, leveraged ETFs, derivatives, contract trading, NFTs, and staking of any digital asset type”.
Most of these features will be coming in Q2 this year, margin and lending later in Q3. With the official launch of the Liquidity boost plugin likely in Q4.
Orion will be launching the first NFT Aggregator that will include every major marketplace all available into the Orion terminal. If you want to stay updated make sure to sign up for their updates!
Partnerships
For Orion, building many Partnerships is vital for the Ecosystem and they have been growing rapidly over the past few months. To give you an idea, here are some of them: Binance Smart Chain, Elrond, Avalanche, Coti, KuCoin, Boson Protocol, Polkastarter and YFDai. These are only a few on a long list, and I expect Orion to continue growing this list over the coming months and for years to come.
If you would like to learn more about how their Partner Ecosystem works I would highly recommend checking out Orion’s Partners page, and if you still need more information have a read through this: Partners Explained.
To sum it all up
Orion Protocol is a powerful all-in-one non-custodial decentralized platform that incentivizes users to hold ORN due to the many Revenue Streams, that will benefit holders over time.
Bridging the gap between DEX’s and CEX’s, users will take advantage of crypto-wide liquidity across all areas even including Swap Pools and NFT Marketplaces. All while still allowing users to secure their own wallets, and with no KYC requirements.
Our Mango Socials
If you enjoyed this article and want to stay up to date with more to come, please join the discussion in our Community through Discord: www.themangoway.com/discord
If you’re a trader, technical or fundamental analyst wanting to learn trading the Mango way, please check out the Mango Seed Program, and make sure to reach out to some Seedlings who are in the program to get different opinions on it.
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 isa 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:
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.
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.
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.
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.
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.
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
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)
For those who are “banked” – Do not put all of your eggs in one basket.Divide your funds among Banks that insure your money
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.
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.
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.
Miner Joe has only 10 bitcoin in his wallet
Miner Joe sends those 10 bitcoin to Merchant Alice
The network & miners pick up the transaction.
All the miners put together a block with this transaction: “Joe sends 10 BTC to Alice”
But sneaky Miner Joe makes a block with this transaction instead “Joe sends 10 BTC to Bob”
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 communitytries 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! 🙂
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.
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.
Note: This 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 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.
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:
Security
Decentralization
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.
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.
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.
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
Metropoliswas 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:
Casper FFG to be a Hybrid PoS and PoW chain
1500 Ether deposit required to become a validator
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:
Casper and Sharding will be combined and launched together.
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.
Casper FFG vs Casper V2 Ethereum Update
So to summarise:
A Beacon Chain that will be used for both: Casper & PoS validators
Sharding and Casper will be worked on concurrently – they are independent efforts
Only 32Ether 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:
Both cars are headed there (Casper and Sharding are the two cars)
Both need the Highway to get there efficiently (Beacon chain)
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'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.
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.
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.
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.
Increased Efficiency on Verification of External Smart Contracts
State Channels!
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:
Block Reward Reduction
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.
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:
Ethereum is not moving to Casper just yet - so there’s no reason to incentivise the miners to stop mining here just yet.
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.
While Constantinople brings about a reduction in miner block rewards (EIP 1234), it must be noted that the hard fork is notaContentious 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.
