Experts Explain Blockchains

Experts Explain Blockchains

There is a lot of confusion about what blockchains are. In this article, we try to address some of the misconceptions surrounding blockchains and to bring clarification on the matter by turning to expert opinion

Blockchain is not the underlying technology of Bitcoin

The bitcoin blockchain is what the bitcoin network produces using an innovative consensus protocol. The novelty of this protocol lies in decentralization. A decentralized system is one where parties act independently to establish the universal truth.

Blockchains are more than simply databases

While blockchains do record and store data, calling blockchains a database is greatly underestimating them. Blockchains enable decentralized control over data. Involved parties now do not need to trust each other or an intermediary, they only need to trust the code.

Bitcoin introduced the first blockchain, a new data structure, but this is not the only thing a blockchain is. Blockchains combine cryptography, economics, and distributed systems to bring a new way of establishing the truthful chain of events.

Blockchains cannot be hacked

The bitcoin proof-of-work protocol determines consensus by measuring the amount of computational power dedicated to a particular history of transactions. To compromise such a system, a malicious party will have to control more than half of the total computational power. According to various sources, the bitcoin network consumes 1% of all the world’s energy production. This effectively means that attacking the bitcoin network will require around 1% of the world’s energy production.

It is essential that people understand blockchains are not only a new way of storing data. The real innovation is decentralized consensus, which brings data record and storage to new levels of transparency, immutability, and security.


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Discovering Bitcoin Part 1: About Time

As anticipated in the introduction to this series, we will start exploring the period of monetary (pseudo)history prior to fiat money, which we call “Plan A,” focusing on the topic of time and on the question “When?” There won’t be much cryptography or computer science in what follows: It will all sound very simple, even … primitive! Indeed, I would ask you, dear reader, to try to forget your advanced education and your civilized manners, and pretend, just for a few minutes, to be a fish-eating caveman. This is the first installment of bitcoiner Giacomo Zucco’s series “Discovering Bitcoin: A Brief Overview From Cavemen to the Lightning Network.” Read the Introduction to his series here. From Immediate Consumption … to Storage … Your caveman life is based on immediate consumption: You use your bare hands and a pointy stick to catch two fish every day, then you go back to the cave and you eat them immediately. One fish would be enough to survive, two are enough to feel “Thanksgiving full.” Every day you catch and eat two. You don’t save. It’s always the same. Your “utility function” (this is what a fancy economist would call it) is constant with respect to time. But let’s try to think about the future for a bit! What if, instead of eating both fish, you eat just one and save the second (alive in a jar, for example)? Do it for two days in a row, and on the third day you will be able to eat your fill without even going out to fish! I will admit this is not a great improvement yet: You just give up some pleasure today and tomorrow, in order to get some rest on the third day. Not impressed. … to Investment! But what about spending that third day building a fishing rod (“capital good”), which would enable you to catch four fish instead of two, every day, forever? That’s called investment: You give up some pleasure for a while, but in return you get some productive and durable results. Congratulations, dear reader: You are a “low-time-preference capitalist caveman” now! With your brand new fishing rod, you can eat two fish every day and rest every two days! But why stop here? You could invest some of your day off in building a large fishing net, which you could use to get eight fish a day! By saving and investing, you can get more fish, thus have more time to build something more efficient, as long as there are improvements to achieve. The more time you spend saving and investing, the wealthier you get.  The growth is not even linear: Every improvement can build on top of the previous one! Soon enough, you will be “Captain Caveman”: commanding a huge fleet of wonderful fishing boats, getting 1,000 fish a day!  It’s easy to underestimate the deep implications of this process. Predisposition to invest (after having saved, delaying consumption) is linked to something economists call “low temporal preference,” which is, in turn, connected to very important effects on the well-being of people and of entire civilizations!  A very good account of the significance of these topics and of their relationship with monetary technologies and practices is given in the book The Bitcoin Standard by Saifedean Ammous. Read it, if you haven’t. Another great reference is the essay “Money, Bitcoin and Time” by Robert Breedlove.  Physical “Hardness” In order to be useful for this kind of process, a good must possess a good “hardness”: Any unit of said good should not significantly lose its ability to provide utility if stored over some period of time. (This means the good does not easily decompose, deteriorate or degrade, or it does so comparatively less than other goods.)  Other common terms for this attribute are “durability” and “salability across time.” (In the context of your currently solitary condition, you should interpret the “sale” part as “you selling something to your future self.”)  In all of the cases above, the expressions are often used beyond the physical scope to include the social and institutional attributes of goods as well. Since you are a lonely caveman, and there is no society or institution around you yet, we employ the term “hardness” only in the narrower sense of physical resistance to deterioration of the units of good, delegating other aspects to Part 3 (coming soon). The good we chose as our first example, fish, is not very “hard,” comparatively, at least not if you don’t perform some specific actions as soon as you bring it back to your cave. A trivial action would be to keep it alive in a jar, as mentioned. Without additional treatments, a fish kept alive is more durable than a dead one. A smoked or salted fish, though, would be even more durable than one kept alive.  A New Attribute: “Scaleness” Even dismissing social considerations, there is another reason for which unitary physical durability doesn’t really cover, alone, the broader concept of scalability across time. The fact is that the ability to store arbitrary quantities of a good is not dependant only on its unitary attributes! At the beginning of your virtuous cycle of saving and investment, you decided to eat one fish and to store the other alive. How convenient that, in order to survive, you needed to eat exactly one fish and not, for example, one and a half fish, leaving you with half a fish to store!  Indeed, a live fish isn’t great for divisibility. Smoked, salted or refrigerated fish would fare way better. On the other hand, considering that by the time you appointed yourself “Captain Caveman” you started storing 1,000 fish every day, keeping them alive in jars must be quite challenging. Again: Conserved fish would be way easier to store than living specimens. In these examples, the discriminant is not how well any unit of good maintains its value across time, but rather how well the overall good maintains it across “scale”: when you store smaller fractions of it vs. when you store larger multiples.  The former case is usually addressed in monetary theory with the term “divisibility,” the latter with the term “portability” (which often carries some movement-across-space connotations, but ultimately boils down to the fact that a portable good must possess high value in small bulk).  The composite attribute is sometimes called “salability across scale,” which, just like “salability across time,” is actually pretty neat. Since I like shorter terms, I will use the (almost made-up) word “scaleness” instead (I guess this is a case of terminology choice which would deserve a Trigger Warning as I described in my introduction). This attribute has more to do with the “What?” column than with the “When?” one, to be fair. It’s interesting to note the nice link with the word “scalability,” which usually means something else entirely (it refers to the property of a system to handle a growing amount of work by means of additional resources). Within the context of Bitcoin, however, it has been used to address the technical limitations on the number of settlement transactions per unit of time and cost (related to the fact that blocks are limited in size and frequency). In this very specific meaning, the “salability problem” could be reduced to a divisibility one (basically, it doesn’t make economic sense to transfer amounts that are less valuable than the transfer costs), thus the conceptual link is justified. So far, you’ve learned: to store your wealth, sacrificing immediate consumptionto invest your stored wealth, increasing your productivityto focus on goods that show good physical “hardness” and good “scaleness.” But what can you do with all of the fish you catch every day? Not much, actually, if you are still able to consume just two and you can’t exchange them, which is something you will learn about tomorrow, in Part 2. The post Discovering Bitcoin Part 1: About Time appeared first on Bitcoin Magazine.
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Taking a Look At Bitcoin Taxes Around The Globe

The popularity of cryptocurrency has been steadily increasing over the last few years. People from all over the world are increasingly adopting cryptocurrencies as both payment tools and investment opportunities. And where there is money there is tax. While tax rules have been non-existent or quite vague in most countries, tax agencies have started waking up.  In the past two months alone, 4 nations have taken action on crypto taxes: Portugal made cryptocurrencies tax free, France declared crypto to crypto trades as non-taxable, the US sent out warnings to crypto traders and the UK demanded info on crypto traders from major exchanges. Such action is likely to continue as Bitcoin gains wider recognition. This article focuses on the taxation of bitcoin in a handful of regions around the world. USA In the USA, virtual currencies are treated as property and not as currency for the purposes of federal crypto taxation. 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For tax purposes, the fiscal treatment of bitcoin tends to differ between each country within the European Union. United Kingdom The UK also does not treat cryptocurrencies as money or currency. In this regard, the tax treatment is similar to other countries like the US. However, UK’s tax authority HMRC has classified cryptocurrencies into 3 distinct categories: Exchange token, Utility token, Security token. At present these are taxed in the same way but treatment is likely to change in the future. Bitcoin falls under the ‘Exchange tokens’ category. Any profits derived from selling/trading cryptocurrencies is taxed as a capital gain. The UK uses a pooling system for capital gains; in a nutshell a pool is basically the average cost of all coins within it. So, whenever you sell or dispose of crypto you have to use the cost of the pool to determine the capital gain/loss. Portugal Portugal recently released a statement that makes buying/selling/trading cryptocurrencies completely tax-free. It is so far the only European country to have taken such a stance. The statement follows Portugal’s closed tax system where only the items explicitly listed can be taxed such as stocks, bonds etc. This makes Portugal a lucrative country for crypto traders. Germany In Germany, bitcoin has been considered a form of private money since 2013. Bitcoin owners are subjected to capital gains tax, which is currently 25%. However, this tax is levied only in cases where bitcoin profits are achieved within a year after the owner acquired them. This means that taxpayers that hold this cryptocurrency for more than a year are not subject to capital gains tax.  Japan Japan identifies bitcoin primarily as a payment method. As of 1st July 2017, the Payment Services Act stated that the sale of bitcoin would be exempt from the Consumption Tax. 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