Root Causes 61: Anatomy of a Cryptocurrency

Hosted by

Tim Callan

Chief Compliance Officer

Jason Soroko

Fellow

Original broadcast date

January 10, 2020

In our ongoing series about blockchain, we explore the technology, process, and ecosystem needs for a successful cryptocurrency. Join our hosts along with expert guest Alan Grau as we discuss the technology and ecosystem specifics of cryptocurrencies, including blockchain and PKI.

Podcast Transcript

Lightly edited for flow and brevity.

Tim CallanThis is exciting because we are now on our second episode of our series on Blockchain with super guest, Alan Grau. Alan, of course, is VP of IoT and Embedded Solutions at Sectigo. How you doing today, Alan?

Alan GrauI'm doing great.

Tim CallanIt is great to have you back. I always love it when you're on the podcast with us. So, today, so we had a nice overview recently of the fundamentals of Blockchain and understanding just some of the basics. I think today we wanted to get into some of the more specific aspects of running a cryptocurrency with Blockchain. Is that correct?

Alan GrauYeah, and I think at the end of last episode, Jason said he wanted to learn how to get rich on Blockchain.

Tim CallanYes. Tell us that. We want to know that.

So, okay, so you know, I guess there's an implication here before we start that when you're running a cryptocurrency using Blockchain, it isn't just a single homogenous approach, right? There are actual decisions that can be made. I don't know if we want to call them technology decisions or process decisions that alter the nature and the quality and the strengths and minuses of the cryptocurrency. Is that right?

Alan GrauYeah. That's very true. You know, so, if you look at, you know, the cryptocurrency world - - I just looked it up and according to my latest Google search, there are over 1,300 different cryptocurrencies.

Tim CallanRight.

Alan GrauThere's the main, you know, Bitcoin is the main one, and there's others. You now, Minero is another significant one. Ethereum is another. Bitcoin actually has had a couple of hard forks. So, there's Bitcoin cash and some other Bitcoin derivatives and, you know, all these other ones that are called altcoins that, that people have created. And there are two fundamental reasons why there are a different set of cryptocurrencies. And one is what you just said. There are technology decisions that people can make in determining how to continue to operate their cryptocurrency network. So, you know, those come into things like, you know, what is the maximum block size for a transaction and how do you maximize, you know, the speed of the network? Or do you optimize for speed versus other considerations? You know, how do you address privacy? Or do you worry about privacy in the network? So, there's, you know, like any, you know, sophisticated network-based system, there's a protocol underneath that. There are database considerations underneath it. There's real world implementation issues. There are security issues that come into it. So, there are a lot of different technology considerations that come into play.

Tim CallanSo, like, let's like, let's talk about some of the, probably some of the main ones, right? So, if I said to you, fiat it versus crypto? What would you say to that?

Alan GrauYeah. So yeah, that's a great question. Right? If we started the very, very beginning of, you know, what is a currency, right? So, Jason is in Canada, so I'm assuming he's got some Canadian dollars in his wallet, right? I'm in the U.S., I've got some U.S. dollars in my wallet and those are what we call fiat currencies. And they were just by Fiat declared by the government that this is our currency and, and so you have a central authority that just said, this is a currency and if you're going to use do transactions in our country, this is what you have to use. Right. So, cryptocurrencies are a currency that essentially are based upon some sort of a Blockchain solution or Blockchain technology and cryptography plays a big role in implementing a Blockchain network; hence, the cryptocurrency name.

Tim CallanI guess what we're getting at here is why is a Bitcoin worth money?

Alan GrauRight? So, no, this is - - I remember I was like, you know, I don't know eight years old and I had baseball cards, right? And I would look up in the magazine that I would get in my, you know, my baseball card for you know, Pete Rose was worth 25 cents or whatever it was, and I’d tell that to my dad and my dad would say, you know, that baseball card is worth what somebody will pay you for it and essentially, Bitcoin is the same way. So, if you look at the history of Bitcoin, right, when it was first created, bitcoins were worth basically nothing and then a few people started to trade them among themselves and started to become worth a little bit, but there's a - - and, I have to look up the date of this but there's a, an early transaction where someone bought a pizza with Bitcoin and they were trying to get the network going, right? They had a bunch of Bitcoin because there weren't many people using it and the value of that pizza in today's Bitcoin dollars is now something like $25 million, right? So, at that point in time, people weren't willing to accept Bitcoin for anything, but over time enough, the network got enough momentum, enough people were using it, enough people were interested that it started to be worth real money. And so, now, we are at a point where, you know, Bitcoin is a legitimate currency that real institutions are investing in are using, you know, for transactions or to store, gives a store of value, a store of money, you know, and it's become a real, you know, a real currency that has real value.

Tim CallanYeah, which is still, you know, it's, it's, it's a little bit of an interesting chicken and egg exercise, right? Like, like, it is a bit of a trick to spin that up. You know, if you think about, like you said, our existing currencies are government-backed currencies, they have a lot of advantages, like they're government-backed, or, you know, once upon a time, they were all backed by hard, you know, by hard value. They had gold, right? And we all still to this day, there's some gold in Fort Knox. And so, so, um, none of that existed, right? Nobody ever had a vault full of gold with Bitcoin.

Alan GrauYeah. And there are people who would argue that, while there's advantages to the fiat-based currencies, right, the people that created you know, Bitcoin, a lot of that was because of their perception of the disadvantages of fiat-based currency. And, you know, this is getting into a kind of a political conversation that's well outside of the scope of technology, but, you know, people that felt like governments were manipulating currency in a way that was not good for the general public, and so to have currency that couldn't be controlled by governments was inherently valuable and I think that's part of the reason that some of these cryptocurrencies have taken off is there are enough people that share that belief that it helped it to get some momentum?

Jason SorokoAlan, quick question for me here. You know, we've obviously seen a lot of volatility around the value of just but about all the major cryptocurrencies that are out there, and it's that volatility that I think has kept it from becoming more wide, widespread than it is. I think that, for example, I can't pay my taxes in Bitcoin right now. And so, you know, there's a lot of places where it is not accepted as a currency and so, even though there are some people willing to trade it amongst themselves, I think that's where some people make the argument, it's maybe not a currency yet, in the wider scope. But, you know, again, as you said, this is not a political conversation or a definition of currency podcast. I think where we'd like to go with this, Tim, is more in the direction of just the everyday tangible - how do you do it? How do you, so, Tim, a couple real simple questions for me, perhaps, that I know you know the answer to this probably better than anybody on the podcast here, which is, alright, I'm curious about Bitcoin, what do I do to acquire some? And you know, I've heard about Bitcoin mining? Is that an efficient way of acquiring? Or should I just go off and buy Bitcoin to acquire it? And then once I have some Bitcoin, how do I protect it? Because I've heard I've heard that it's, you know, there's some security issues with it, just, you know, what are some of the basics for somebody curious about a cryptocurrency and how to get into it, and how to protect themselves?

Alan GrauYeah, I know. Those are all really good questions. And, you know, the volatility that you mentioned, right, is very, very real. Right? So just a couple of stats on that. On October 25, Bitcoin went from $7464 per coin to $10,221 per coin, so a 35% increase in one day. Two days before, it had dropped 8% on one day, and, you know, a month before that, and it dropped about 20% on one day. So, the, the level of volatility is, you know, far beyond what you would see in even a very risky stock. So, it's, it's absolutely very, very volatile. And, you know, as you look at, you know, this the, Jason's original question of, you know, are we going to be able to get rich with Bitcoin? Well, it's, you know, completely a crystal ball type of question. But as somebody that does, you know, is involved in the space a little bit, I get some newsletters and it's almost every day I'll get a newsletter, or every week, a newsletter with predictions on Bitcoin price. And in that same newsletter somebody will be predicting that is going to hit $20,000 in the next month, and somebody else is predicting that it's going to drop to $5,000 in the next month. So, there's a lot of discrepancy there. And John McAfee, who's well-known from his work in the security world, and you know, decades past, is now a big advocate for Bitcoin. And he's made very, very public predictions that Bitcoin will hit a million dollars per coin by the end of 2020, or the end of 2021. So, the predictions are, in some cases, extreme and in almost all cases disagreeing with each other.

Tim CallanSo, then is there a concept of a fraction of - - I mean, if let's just say a Bitcoin was worth a million dollars or even for that matter, if a Bitcoin is worth $20,000, many, if not most of the uses, of that coin are taken away from you if you can't make change. So, you know, you talked about people using Bitcoins to buy pizza. Well, I can't use a Bitcoin to buy a pizza today unless I can use a fraction of a Bitcoin. So how does that work?

Alan GrauYeah. So, Bitcoin, it's not like shares of Berkshire Hathaway, where you need to pony up, I don't know what the current value is $60,000 or something for a single share? Bitcoin can be divided to very, very low fragments. So, you can go out and buy $5 worth of Bitcoin should you choose to do so. So, and this gets back to Jason's question of, okay, so I want to go about doing this, how do I go about acquiring Bitcoin? And there are there are a couple of ways to get started if one is interested in doing so.

One is you can just go out and you can buy Bitcoin and in order to get Bitcoin you need to you can start with, you know, US dollars or Canadian dollars, or euros or whatever your currency is, and use that to buy Bitcoin through a website. You know, those websites, you know, Coinbase is probably one of the larger ones in the US that can be used to buy Bitcoin. And when you do that, your Bitcoin gets stored in a Bitcoin wallet, which is a piece of software that uses public and private key pairs to allow you to communicate your address for doing transactions and do so securely. And so, the other - - then once you've got Bitcoin, you can trade them using your wallet. And one of the concepts in the Bitcoin world is there's the concept of an on ramp and an off ramp. So, a company like Coinbase, would be considered an on ramp and off ramp, meaning you can use Coinbase to transition from US dollars to Bitcoin and vice versa and then once you have Bitcoin, you can do transactions with other people who have a Bitcoin wallet.

Tim CallanAnd so, does that Bitcoin wallet, is that sitting on my computer or my phone? Or is that in the cloud somewhere and I'm logging into it? What is that?

Alan GrauIt could be any of those. There are people that make actual USB-based Bitcoin wallets with a dongle that has hardware for storing your keys securely. It could be on your hard drive. There's a rather famous anecdote of someone who lost their hard drive with their Bitcoin wallet on it, and it was sent to a landfill because they threw away the wrong laptop. And, you know, so he was spending his time now digging through the landfill, trying to find his hard drive because he lost his private key and couldn't discover it, and couldn't recover his Bitcoin without it. Or it could be on a cloud-based system. And there are there are companies, you know, Coinbase was one I mentioned, and there are a slew of others that provide that service where they will store the wallet for you and manage your Bitcoin for you in the cloud.

Tim CallanOkay, so I own this Bitcoin and I want to buy something with it. How does that happen?

Alan GrauSo, for the most part - - well, I guess there's a couple of ways that that could happen. One is you could use an off ramp to transfer it back to US dollars or Canadian dollars or whatever other fiat currency and into the transaction or you, a wallet is a piece of software that has the ability to do a transaction through the protocol to send money to someone else's wallet. So, if each of us have a wallet and you share your wallet address with me which is essentially, which is derived from your public key, then I can use that to send the amount of Bitcoin to you using the software portion of the wallet.

Tim CallanOkay, and then how do, how do we, and then at that point the Blockchain gets updated and that's how we know that the actual ownership has changed?

Alan GrauYes, exactly. And then the interesting thing is, you said that you can't pay your taxes with Bitcoin. I actually read that - - I think there was someplace in Europe where government was actually at least considering allowing if they haven't already allowed, use of Bitcoin for certain legal or for certain government transactions. There are companies that are developing Bitcoin-based credit cards. So, if I got a Bitcoin wallet with the company that that is offering the service, I could then essentially have a debit card that I could do transactions with that would transact in the local currency and I think that this was being developed for use with Euros initially, but then would debit from my or deduct the money from my Bitcoin store? So, we are starting to see use cases where people actually can use Bitcoin for kind of typical transactions.

Tim CallanSo, what are at are the advantages and what are the maybe disadvantages of a cryptocurrency model as opposed to a fiat currency model? Or for that matter, I guess a credit card? Where does this really shine? And where do you think it has challenges?

Alan GrauI think there's - - some advantages are for technical people like myself, that enjoy new technology, and it creates an opportunity to get involved with the mining piece. That was one of the things that Jason asked about earlier is, do I make money in mining? Or do I invest in, you know, just buying currency? So, the other, kind of the last piece of that transaction is that, you know, as you said, the Blockchain gets updated to register the transaction. Well, behind the scenes in the protocol, there's a lot going on. One of those is this concept of mining, which is people that own computing hardware, in many cases, purpose-built computer hardware, that is validating the transactions and performing these expensive computationally expensive validation algorithms to verify the transactions then the next block in the chain. So that process is called mining and that's something that I dabble in. I'm certainly not horribly, you know, heavily invested in that, but it's something that I play around with, but when you're doing mining, you actually get rewarded for that by being issued a little bit of cryptocurrency. So, whenever a transaction is complete, some small amount of cryptocurrency is then paid out to the miners, so they can make money that way. You know, how much they make, you know, is a function of the type of computing that they have. There's some chance involved. There's the cost of electricity kind of plays into it. And of course, the current value of the Bitcoin or whatever currency they're mining. But in terms of what Blockchain is good at or cryptocurrency is good at depends a little bit on the specific implementation. But in general, right, it's creating a distributed ledger.

So it's this and that is highly immutable. So, you've got a record of transactions that can be examined by the public. So, you've got transparency and immutability. So, whenever those are important characteristics, that's something that it's very good at. And then transactions can be relatively low cost. So, there's also a lot of discussion around even large financial institutions using cryptocurrency-based transactions for doing international money transfers, right? Wire transfers are relatively expensive and cryptocurrency would provide a lower cost way of implementing those transactions, and potentially even replacing things like credit card fees with lower cost payment methods.

Tim CallanRight. And that might not be that might not be Blockchain, right? That could be an example of one of these, you call them alt currencies or altcoins, right? Where maybe there would be something that would be better suited for that particular use case.

Alan GrauYeah. I mean it might not be Bitcoin, but it could be one of the other altcoins and there are some that are designed specifically for fast transaction times for that reason.

Jason SorokoAlan, can you talk to us about Ethereum as a cryptocurrency and what it's used for?

Alan GrauSure. So Ethereum is one of the, I'd say the big five or the five largest cryptocurrencies and it was designed less to be a cryptocurrency and more to be a distributed Blockchain platform for developing what they called dapps or distributed apps. So it is, you know, a cryptocurrency, but it was, but unlike Blockchain, it wasn't built only to be a cryptocurrency. So, the Ethereum Blockchain is extensible. So, I can develop a distributed application on top of Blockchain that allows, you know, if I'm developing a new video game, and I want to reward people who are playing my game, based upon their performance, I could build that on top of the Ethereum Blockchain, and use that platform for managing transactions and for controlling who gets paid out under the video game that I'm developing.

Jason SorokoPerfect. And so, this is then similar, Tim, you might have heard of the, of course, the privacy browser called Brave. That it's a very similar idea where Brave set up its own cryptocurrency in order to incentivize various forms of using that browser, and allowing advertisers to monetize things. Alan, would you agree with that?

Alan GrauYeah. No, that's exactly the case and one of the interesting use cases. It'll be interesting to see how well that takes hold but it's a very good application of Ethereum type Blockchain.

Jason SorokoAlan, do you have a few more words perhaps about some others such as Libra? Which is a, you know, a big announcement of Facebook? What do you think about that?

Alan GrauI've been following Libra. I don't know that I've got an opinion yet on that. I've heard people that say that, you know, it's never going to go anywhere. You know, and that it really, and I've also heard people who say that, you know, Libra has been announced as something that was intended to be good for Facebook users and for the public in general and some opinions are coming out that well, it's probably really good for Facebook, but not so sure that it's good for their users as claimed. I think it's really too early to tell on that one, but it'll be an interesting one to follow. I do think, though, that there will be other companies that will launch their own cryptocurrency, you know, for specifically in the financial industry that that could be interesting, and have some really relevant use cases.

Jason SorokoTim, I really want to extend your question, just one more point with Alan here and that is with regards to the advantages to using a cryptocurrency. So, let's talk about the elephant in the room. Often Tim, you and I have an elephant in the room sometimes we have to address. And so, Alan, the elephant in the room, in this case, as an advantage to using a cryptocurrency is a form of privacy. So, if I was a bad guy wanting to transact something that was, you know, illicit goods, let's just call it that, would a cryptocurrency be of an advantage to me?

Alan GrauSo, great question and I think this is something that's important to talk about. So, one of the things that you asked early on is, so how did Bitcoin get to be a cryptocurrency that people were willing to trade? Right? That that somebody was willing to say, yeah, I'll take your Bitcoin. And a lot of that was from Silk Road, which was a, you know, a dark web site, where people were doing trading of illegal goods. And so, Bitcoin certainly has been used heavily for, for such transactions. Other cryptocurrencies have as well. The other art, so I guess there's a couple of points on that.

One is, early on, I think that was one of the big factors in the rise of some cryptocurrencies. I think that if, if one were to do a study now, and I'm sure people have, that the percentage of transactions being performed using cryptocurrency that are legitimate versus illegitimate that over time it's shifting away from, or at least towards, legitimate uses.

Tim CallanWell, sure. It’s digital cash, right. So, I, you know, certainly if I want to, you know, go buy a dime bag from my corner drug dealer, I'm doing that in cash. But at the same time, there's all kinds of other ways why cash is great to have, that are not even remotely illegal or questionable and, you know, this is going to be the same thing here. You know, it's great to have cash as one of the options that are available to you, and yes, that means sometimes people are on Silk Road, but it also sometimes means other things.

Alan GrauRight. And it comes back to it's analogous to the argument of, you know, should government have backdoors into crypto-based systems so they can decode, you know, potentially transactions from people that are suspicious or doing bad things. And, you know, anytime you enable that, right, you have problems with that and there are reasons for privacy. There's reasons for privacy in financial transactions. There's reasons for privacy in other information that's shared. And anytime you have that, there's still potential for abuse. So, there's no question that there's a potential for that. Yes.

Jason SorokoAlan, I only have two last questions before we go on. And that is, you talked earlier about the different kinds of Bitcoin wallets? Do you have a strong opinion about what is the best practice within, you know, because technologies change quickly? What - - if I were to hold a lot of Bitcoin? Where should I do it?

Alan GrauSo, yeah, absolutely. So, there are companies that have come out that will actually do what they call cold storage wallets, right. Where your wallet is similar to other types of cold storage, right. So, it's not held online, but they have it on, you know, a physically secured device that's actually stored offline until you need to make a transaction. So, if you are doing large, you have large amounts of Bitcoin that you intend to hold, then that's certainly a best practice.

If you're using a cloud-based service, then the same factors that you’d use to evaluate any cloud-based service comes into play, right? What is the heritage of the company? How long have they been around? Have they been hacked? You know, what are their general security policies and practices. You definitely would want to use something that requires strong multifactor authentication, that you use just good password hygiene, all the very basics and then you do have the option of managing your wallet yourself, which again, has pros and cons. If you're doing that you want to make sure that you're using best practices for securing your private key and your wallet information, and, you know, it requires a little bit more work on your part than having a service do it. But those are all the trade-offs that you need to look at. And again, as you said, some of that depends on how much risk you're willing to take, how much cryptocurrency you have that could be a risk.

Jason SorokoI only have one last question for, Alan, and that is, are you Satoshi Nakamoto?

Alan GrauI am not. No. So, I have I’ve only begun to play with Bitcoin in say the last 12 months or so, so, I was not one of the people involved in getting it up off the ground.

Jason SorokoLikely response.

Tim CallanYes. That's exactly what Satoshi Nakamoto would say. So, wow, once again, as we've said, I think deep subject. Lots to cover but let me just ask my one last question, which is what do you see - - what do you imagine is coming in the future of cryptocurrencies? This isn’t all played out. So, like what do you imagine the future is going to have for us?

Alan GrauSo, I do tend to believe that, you know, the pundits on either side of the wild predictions are probably both wrong, right? I'm not expecting to see you know, Bitcoin hit a million dollars per coin in the next 24 months, nor am I expecting to see the bottom completely drop out of it and go away, right. People are saying, well, how do I know that Bitcoin, if I invest in it that it just won't disappear, that the government won't regulate it in a way that it will disappear. You know, we have seen government regulation. That's why we have these on ramp/off ramp companies that require, you know, what they call, you know, know your customer and AML law compliance. So, you have to prove that you are who you say you are, and they've got measures in place to prevent money laundering. So, we're starting to see it move towards more of a mainstream currency and I think we will continue to see growth in the adoption of both Bitcoin and some of the other leading cryptocurrencies and, you know, they will continue to grow in value over time, I believe. You know, I think it will continue to be a wild ride and you know, 30% changes in value over very short periods of time are not a thing of the past I don't think. But I think we'll start, you know, the day will come where you'll be able to walk into Starbucks and use Bitcoin in one form or another to buy your coffee, or to use a cryptocurrency of one type or another, to perform everyday transactions.

Tim CallanNow for that to happen it needs to really get - - it needs to become as easy and automatic as a credit card is. Right? I mean right now, just the fact that we have to have this podcast where we ask questions like, what is a Bitcoin wallet means that, you know, that as a mainstream micro currency, it's just, it's not ready. Right?

Alan GrauYeah. I, you know, I talk to a lot of people and you know, there are a lot of people that are still very, very skeptical of any cryptocurrency and when you talk about how you're going to use it, there's still some pretty significant barriers that need to be automated or made much easier to allow that to happen.

Tim CallanSo, okay, wow. All right. I think there's more. I don't think we're done with this topic, but maybe we're done with this topic for today. Alan, Jason, any last thoughts on anatomy of a cryptocurrency?

Jason SorokoYou know, Tim, I think from my standpoint, I'd love to have Alan and you and I really explore and discuss the underlying technologies and how it fits with security, how it fits with PKI.

Tim CallanYes.

Jason SorokoYou know, we were talking about the wallet and the key pairs. I think a lot of people who are interested in this podcast might be quite interested in some of those specifics and we'll probably have Alan on to help to explain that further in the future.

Tim CallanSo, Alan, I hope you're wanting to come back and talk to us about security, PKI and cryptocurrency and how they all fit together.

Alan GrauThat sounds great, Tim.

Tim CallanExcellent. All right. Well, then, thank you today. Thank you, Alan. Thank you, Jason. And thank you, Listeners. This has been Root Causes.

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