Blockchain Ask Me Anything Session 3 with Jae Yang, Blockchain Engineer #blockchainama


– Welcome everyone and thanks for coming, this is the third in the series that Jae has given on Blockchain, Ask Me Anything, you can watch the other two
videos on our YouTube account, which is Fintech Silicon
Valley, or Fintech SV1, I think on YouTube, so I wanted to first of all
introduce Daniel Clokie, he’s actually a patent attorney, and he’s been kind enough
to host tonight’s event, and he’s just gonna have a few words, we’re very grateful to Sheppard Mullin, because they’ve actually been sponsoring our events for over a year, and have been incredibly
supportive helping us grow this ecosystem, thank you Daniel. – Thank you very much, I appreciate it, I’m just gonna take a
few moments to say thank you so much for coming, a Blockchain series, cryptocurrencies, we believe like many of you in the audience believe that
it’s gonna change the world, and it’s gonna change the world in a way that none of us understand
or believe it well, I’m confident of that, is that the changes that will happen five to 10 years from now Will probably be a complete surprise to all of us, regardless of the regulations
that we might see, regardless of what people
maybe try to control, it’s gonna have a life of its own, what Blockchain is able to do by providing a secure distributed ledger, the way cryptocurrencies
are able to both a utility and a currency is a remarkable thing, and it’s exciting to be a part
of it at the very inception, another reason I’m
excited about being here at Sheppard Mullin as I get to be an engineer and I get to be a lawyer, and as an intellectual property attorney, it gives me a chance
to work with engineers and people like Jae
from the very beginning, and I get to see things growing and get to be a part of it, we have a really nice team
here both on the finance level, the security as well as the engineering, so we have a great team for
these kinds of technologies, it’s exciting to be a part of it, I’m so glad you came, I’m looking forward to
today’s presentation, I’m looking forward to the
presentations over the next five years to see where this goes, you so much. (audience applauds) – Someone said to me the other day there are so many Blockchain crypto conferences, and events in town at the moment, and that they are often
vaguely hidden advertisement for a law firm, and I have to say that
it’s totally opposite here at Sheppard Mullin, but in fact sometimes I even forget to name people which is dreadful, but they’re never in
your face and they really are great people, I’ve never found a law
firm that I feel like I could trust the people there, so thanks again, now I want to turn it over to Jae who is the most important person tonight, and he’s going to take it. – Right well thanks everybody, thanks for hosting the event, and thank you Timo for organizing it, so last two sessions I covered the basic foundational
knowledge for cryptocurrency, so I’ve already covered how it works what it does what it solves
and what it doesn’t do, so on today’s session I’m going to be talking about what actually
everybody is interested in, So there is a financial end to it, there’s mining, there’s all of that, so who are the stakeholders? So the first thing is I’m
sure I wrote this wrong, so I need legal scholars to
tell me I got this wrong, but please I’m just trying to help, don’t take this as financial advice, so support there, only two diagrams and enjoy. Okay so stakeholders, there are different types of stakeholders, holders and users, they’re all of us, hopefully everybody here owns a little bit of cryptocurrency, and secondly there are vendors and payment processors who use the
currency or receives it, or send some physical clues, or digital clues, there are miners, mining pools, mining equipment manufacturers, and these are the people who will give you the mining pick so to speak
to make sure that you can vouch that and validate the transactions and you get rewarded for it, and I’ll cover all of that. And finally there are exchanges, and there’s a really
important group of people that I didn’t cover here
and that is the developers, and I’ll cover that in
the last section where we talk about the present state of cryptocurrency and
future cryptocurrencies. Okay so vendors and payment processors, so the different classes of these people, so the first things is that there are decentralized
marketplaces like Open Bazaar, basically Open Bazaar as a platform where you can set up shop fronts like eBay, except unlike eBay these
are totally decentralized, so there is no centralized circuit where these things are being held, and as the payment component
of it they let you, the visitors to the sites
pay in cryptocurrencies. There are traditional e-commerce
integration like Overstock, they take bitcoin, and then the Escrow reputation
system which is sort of a missing link of cryptocurrencies because it solves the clearance of the transaction but it doesn’t solve the
physical delivery of goods, you need that because at some point you have to give them the money, or someone has to give you the goods, so there’s always a period of uncertainty where who has what. There are pay card companies
the deal with cryptocurrencies in a very traditional way where
you deposit cryptocurrency, they turn it into fiat
and then you have fiat to spend on your debit card. There are micro tipping
platforms where you can tip creators of
contents by using things like LApps which is a
lightning network apps, where you can pay a very
small denomination of bitcoin, there is MetaMask which
is a web integration, or Ethereum wallet, and you can pay using Ethereum, and you can store
various different tokens, for e-commerce you have plugins, I’m not too familiar with
this to be honest with you, lastly there are merchant and
peer payment next to last, where they are trying
to actually integrate into the rest of the society, where they need some
way to enable merchants to receive and process cryptocurrencies, and these are OmissGo, Metal, which is the company I work for is a disclaimer, and Coinbase, so those are some of the companies, and lastly we have content
monetization and Ad network, so problem with Ad network right now is it’s very centralized in
some ways and very scattered and fragmented in another, so for example your cookie
data is passing from one entity to another by
virtual open exchange, for the ad network participants, but at the same time on the flip side, you have entities like
YouTube where monetization is completely centralized, where they control your content, whether it gets shown, whether it gets monetized. So flipping that on its head, Brave browser and BAT is sort
of a different take on them, where you can give a micro-transaction to a content creator and so forth, interesting new model. So that’s all fine and good, but how does any of this
transaction get verified, so in most of the cryptocurrencies, where proof of work is used, and if you don’t understand the term, please let me know and I’ll cover that, and if you have a question
at any time please raise your hand, and the format is I want this
to be a very open dialogue. What are the miners, miners are supposed to validate a block of transaction records, and they do this by listening to transaction record broadcasts, and they take that and they organize it in a time-honored way, and then they make it into a block, and then they take that
what is called a digest and they run it through
a function and you get a certain signature of the digest, and in proof of work scheme, for example for bitcoin, you need to solve that problem to have a very specific signature with 60 zeros in the front of the resulting
hash so to speak, that doesn’t make any sense, bear with me, I’ll cover that as well, but miners are people who have equipment that run full node software
that solve these block problems, and then they get rewarded for it, in most cases the
cryptocurrencies have built-in mechanisms that reward people
who validate transactions, so instead of having
centralized authority, validating transactions
and subtracting balance from one giving it to another, you have these people
saying they look correct, this is the signature of
the transaction record, and these are the people who
are supposed to be sending it from receiving it to
and so on and so forth, so going to the heart of the matter, miners generally run open source miners, so they have either GPU
accelerated way to do it, or they have ASICs miners, and ASICs is an application
specific hardware, think of it like it’s
designed specifically to solve a certain problem, and it doesn’t do anything else, it just does that very well, whereas a GPU is very generic, it’s actually for gaming right, the massive parallelization
gaming required is also very useful for solving
cryptocurrency problems, and I’ll cover that in a little bit. So mining software sometimes
have built-in rewards, like something like a percent or half a percent or whatever it is, so you should look at that, and ultimately miners if you’re
just mining for yourself, the chances of you earning
full reward is very low, it’s statistically very low, you may earn it in some distant future, but you as a single entity earning that full reward is very low right now, so that what you do is you
group with other people, and you essentially divide up the reward, but solve different problems
to get to that reward. And by the way please, if you download anything binary
I would be very wary of it. So can everybody see this, is this too small? I’ll cover all of them, every single one of them, ASICs miner vendors, there are two or three main ones, and they sale ASICs miners in batches, so what they do is, their claim is that they
don’t know the exact demand, and therefore they can only
create a certain number of them, so you have to pre-order, and after one to 3 month
period when they have all the infrastructure to be able to make it and get it ready to be shipped, that’s when you get it, so when you actually purchase it you don’t get it right away, is not let you go to Amazon
and say give me an ASICs miner that has however many
gigahashes or whatever, you actually have to
wait two or three months, so when you do that, let’s say you’re a commercial miner right, or at least your raising money
to be a commercial miner, what do you do, you have to do a present value analysis, basically comparing it to, if I did something else
with it is it better than buying a miner, and you have to do very
minimum of our review model. What you will have to do is, and most miners miss this, cryptocurrencies have variant reward, and they also have variant difficulty, and difficulty is an important factor, because difficulty is a
variable that increases or decreases based on
the network hash power, so more people mining it’s
harder to solve the same problem, and therefore you may not be getting the reward that you expect, so consider the following scenario, let’s say that cryptocurrency price shot up through the roof, and because of that people
started buying the miners for it, it’s fine if the price continues to rise, but let’s say that the price falls, then you’re suddenly in
the loss-making business, and the difficulty because of the mad rush to be the miner that claims the reward, there are more entrants in
the system and therefore the difficulty goes up and you get less reward proportionally speaking. You should think about
that before purchase, as well as what happens
during the operation. And the next thing is you should run, and this is an embarrassingly
simple example of course, you should run some sort
of price stimulation, I wrote a Monte Carlo
simulation of the current price, it’s basically like a random
walk right and basically a Monte Carlo simulation you
take historical volatility, and you use that as an input to create a random price fluctuation, and use that as an input to
an operating revenue model, you can get very sophisticated with this, and I’m sure the audience
here is smarter than I am, so let me know if you come
up with a really good way. But the next thing is, the question is look, is historical volatility
really useful at all, and a coin that is in
price discovery phase, any speculative asset
class you have some sort of period in which no one
knows the exact outcome, what is the future expectation, or what it should do, pension stocks for example those are speculative stocks, some of them do very well and
a lot of them do very poorly, so when you build a revenue model based on historical volatility
is that the useful? I think so, but please talk to me if you
have a better take on it. There’s also fixed cost, which is the operating cost
to paying for the electricity, what happens is when you’re
running these miners these are very expensive to run in
terms of power consumption, in most cases, so you should think of that, before you jump in, and lastly please, be very careful when you
look at Ali Baba listings for cheap ASICs miners or whatever it is, a lot of times those
are not worth the money, sometimes they sell bricked or almost inoperable ASICs miners, and you buy them you’re
just throwing money away. But as an individual miner, it could take 10 years to
actually get a full reward, or you could possibly never get one, but the sort of statistical
certainty if you have a lot of participants in the system, so let’s say that every one of us are solving same problem
in a different way, and we share the winning and we distribute the earnings right, then there is a reasonable problem, you can get a small amount of reward in a reasonable time period, so what normally people do is they join whats called a mining pool, and they have the
proportional reward split, but the downside to that is, and it’s a mixed bag, so miners don’t generally
connect directly to the network, so they have to go through
the mining pools Gateway, or the handler that dispatches work to individual mining software
that it’s connected to, and it looks like this, it’s a very simple diagram, and basically you have
a cryptocurrency network that broadcasts the transaction records and receives potential solutions to those transaction blocks, and what happens is you
have mining pools basically take those transaction records, and say I want this miner to
solve the problem this way, I want you to solve this problem this way and so on and so forth, that’s a really grossly
simplified way of looking at it, but that’s what it is. Next thing is, so who are these people, people who are operating mining pools, who are these people? There’s a different way to look at it, there are people like you
and me they’re running a business like any other people, and they take a little
chunk of the earnings, a percent or two for every reward block, and how they operate is, they generally operate as a company, they also have some
governance functionality, so for example bitcoin
has a certain protocol, when you transmit a
message it has to conform to certain rules, and every once in a
while the developers have to change the protocol to make it better, or to scale and so on and so forth, so what happens is they go through this long discussion phase, and proof of concept phase, and then what ends up happening is, there are two main stakeholders, one is the developers, who are saying well we’ve
got to change the protocol, and then two there are
mining pools or miners who have to accept those protocols, or at least the mining
portion of the protocol, so mining pools by virtue of their size and this syndicalist view
of looking at the world, which is everybody pool
your resources together and then you get a
little bit of the reward, they have some say in how
the protocols turned out, so they can broadcast their willingness or unwillingness to change proposals, and they often act with
the delegated authority of the people who are involved. – [Woman] I have a question. – Sure. – [Woman] So is a mining
pool a piece of software that runs on a computer somewhere? – Yeah it’s actually both, the mining software
that I covered earlier, like GPU miners or ASICs mining software, they are generally a sub-part of the full software, so bitcoin for an example, if you check out their code, it’s a full node, and the mining part of the
software is a small part of it, generally what people do
then is they write something that interfaces with a graphics card, something like CUDA, and then they jam it
together so that they can take advantage of the graphics card to do the processing faster, but also it uses what is called a stratum network protocol which then
connects to other miners, and generally how you
connect to a mining pool is through this stratum protocol, so it’s a little different. – [Woman] So the miners, do they buy the same software
that the mining pool run or are they similar in the sense that they’re running part of it. – Right that’s a good question, so software doesn’t have
to be exactly the same, because all you care about is how it comes out when you transmit the message, so as long as internal
working can be very different, but as long as you solve
it somehow and then you transmit the message in
a predictable format, that’s all bitcoin network cares about. – And they follow the protocol. – Yeah exactly so there are
differences in how it’s specced. – [Woman] What happens if
two miners solve it all at the same time? – Right, so, yeah so that’s a good question, so what happens, one is that it’s almost
impossible for the validation, so what happens is when
the miner solves a problem the miner has to broadcast
it to the bitcoin network to be verified by some other full nodes and then get the reward, so it almost never happens that both of them get same verification
at the same time. – [Woman] But it’s
software they have to take care of that contingency. – So there are some ways to handle, in terms of if that sort of thing happens, I think it’s handled by the
oldest transaction records, there’s also a thing called coin age, but basically there is a transaction ID that that’s increasing, and then there’s the coin aged which is older coins get Handled first, there is underlying rules that settle, in cases where there is contention, where the time standard is exactly the same for the solution, then what happens, I think there is an internal, it looks at the Blockchain size and then it resolves it that way. That’s my understanding of it. Okay so, and pools are generally more risky, like with anything, if you have a start-up
and you have no idea who those people are, probably they might do a big exit scam. – [Man] If each miner is
permitted to run their own code, what’s stopping them from
not sending their solution before directly claiming
it for themselves? – It’s more of a reputation, because it’s like with any other business, you want to keep customers right, so if the mining pool suddenly
stops giving out rewards, and people who are in the
mining pool will get suspicious, and they might just move, and it’s actually very
easy to change stratum, the IP address it points to, all we have to do is change one thing, and now the miners can
go to somewhere else, so there’s nothing that locks
the miners into a mining pool. It cuts down to the
essence of free market, you need to be a good faith
actor or you’re not going to be a long-term player in the game
if you just scam somebody. Let’s move onto the next one, so cloud mining, some people have gotten together and said I don’t want to buy any hardware, so I want someone else to
pick up the infrastructure, and I just wanted by a contract, and have some remote mining
location in Siberia or Iceland, and I want then to take
care of server management. Yeah you can do that, but it’s also a business
for cloud mining people, they operate these
facilities and they figured out how to make money off it, so most likely the profit margin is going to be very slim because of it, and they also have a lot
of contingencies where they can just terminate the contract at any time or whatever it is, read it very carefully, like with anything please be careful. So I’m going to talk about exchanges, and this is how you get
fiat converted into crypto, and vice versa, or just crypto converted into crypto, and surprisingly a lot of
these features I’m going to be talking about in
crypto exchange contexts, is exactly the same if you
talk about traditional finance, so if you talk about equities and options or whatever they are very similar. The only thing that’s different is that in crypto space there is a possibility of having a decentralized exchange system. Where in the traditional
equity space you have what’s called a dealer broker
network, they are connected to the exchanges by
electronic trading network, and you have dark holes
that serve the buy side, and they have all these
substructures that are built on top of each other over
a very long period of time, the difference in crypto is that, they started with exchanges
and basically said okay here connect to the exchange directly instead of going through a broker. I’m gonna be mostly
focusing on the centralized portion of it, because there’s a lot
of security information, and also as a user of an exchange you might get something out of it. Some exchanges are
margin trading of course, like you can borrow money to trade, and some have different levels of KYC AML, which is know your customer
and anti-money laundering, like if you’re just trading crypto some don’t even care who you are, you just put an email
address and that’s it, in other jurisdictions they do care, if you’re trading any kind of actual fiat or sovereign currency
into a cryptocurrency you do have to provide an identity, in most cases there are more severe than regular equity trading, which is surprising to me, but there are custodial
risks like with anything, if you entrust the money to somebody else, then you don’t own that money any more, it’s in somebody else’s hands and they can do whatever they want with it, generally institutions
have reputations to uphold, and they’re not just
going to steal your money, although those things do
happen once in a while. So that’s it from outside and exit scam from inside sort of scenario,
you have to be very careful, I’m going to be covering
both of them in a little bit, but in the context of network security, and if you are interested
in how these exchanges fail, you can go look at this website, and they have a list of
numbers of exchanges, and they are very, they’re scary, please take a look at it. So margin trading you have the makings of a giant financial bubble, but at the same time
you also have mechanisms to trade volatility well, there are futures already for bitcoin, and there are swaps in some cases, and there are options as well, so you can actually do these
volatility plays very well. And lastly on this list, exchanges have different pay structures, there’s things like maker and taker feeds, so you should really look into it, some places what makers and takers are basically makers of liquidity, and takers of liquidity, which means if you put order
up for someone to take, let’s say you’re a lemonade vendor right, and you put lemonade on the stand, you’re creating liquidity, if you are a buyer of the
lemonade you’re a taker, you’re taking away lemonade
from someone else to partake in, so similarly with any
financial instrument, you are either a provider
of liquidity or you are a taker of liquidity, and the pay structure is
different for your status, so let’s say you put a sell
over for what you already own, then you’re providing
liquidity for the buyers side, and therefore you’re
going to incur less fees, because exchanges generally want people to provide liquidity. Okay so moving on, fork crediting, so cryptocurrencies are codes, and pieces of code that have
certain lineage of history, and they can be forked at any given time, if they are open source
and they are generally are, there’s no guard against someone forking your cryptocurrency code, at bitcoin it has happened, and bitcoin has that happened
to it very many times, and a lot of people get a lot out of it, because people think this is going to stick around and whatever else, generally they don’t, but one can only hope, So people do trade them, some exchanges credit
forks in a different way, so one thing is that there are exchanges that credit forks by creating
a financial derivative, so for example they create
a token of their own, and say okay bitcoin is going
to fork at this block number, we know that’s going to happen in a month, and therefore we’re going
to already provide you with a financial derivative for
you to trade that fork, and then come settlement time you know exactly what it’s worth, so you can actually trade
forks even before it happens. Alternatively exchanges can
just give you the tokens at the date of the time when
the coins are made available, because there are basically two different source codes right, and because they are two different, they operate on two different roles, they have two different coins, so one day you have one bitcoin, and the next day you have one
bitcoin and something else, happens a lot, some exchanges don’t credit them, so you might want to look into that, what is the history of there fore credit, because it is your money, whether I like cryptocurrencies
being forked or not, it’s really none of exchanges business, is not something that they should be defining how you take possession of it, so I encourage you to read that. – [Woman] I don’t think I’ve quite got it. What happens, let’s say I have a bitcoin, what is happening with that? – Okay so bitcoin has some, if you go to GitHub there’s a source code of bitcoin right, and let’s say there are disagreements in the development team or stakeholders, and they now suddenly have two copies of bitcoin source code, so that’s called forking. – [Woman] Is that going to
change the value of my bitcoin? – Not really, so generally if they do
the fork responsibly, they have two different currencies, so the old currency and the new currency. – [Woman] The new currency
that’s going to be generated? – That’s right, and then in
most cases if you already have money in the old currency, you’ll have an equal unit
number in the new currency, so that’s why it’s called a fork, cryptocurrency forking, there are different kinds of fork, so one where it doesn’t
go creating maintainable currency on the new one, they just let the old one die, they just say don’t use that, Use the new one, in other cases it you have rogue agencies create their own fork, and release that. – [Woman] And they will correct
the wallets I have in there, just do it automatically? – You’ll have to have a new wallet, because if they offer it
on different rules now, because they created two
different cryptocurrencies, and they probably have some
different ways in which the protocol handles your
cryptocurrency or the new one, which means that you need a new wallet, and if you’re technically
savvy you can go to the new forks source code
and build a wallet yourself and then enter in the wallet address that you had before with a
private key and there you go you have your new cryptocurrency, alternatively if you
have money in exchanges and they credit you the forked amount, let’s say I had bitcoin in one exchange, and there was a fork of
the bitcoin at some point, some exchanges will
give you the currencies by handling it themselves, they’ll just credit you. – [Woman] How often is
this forking happening? – Who knows, it’s human agency right, anybody can fork codes at any given time, so it really depends like, on a couple of things, one is how cohesive the
development team is, and how cohesive the community around cryptocurrency in question is, and if there is a split or
schism in the way that they think they should be going, the development process should be going, they generally fork, or it’s just a pure money grab, some people just say
bitcoin is worth 10,000, I’m going to make
something called bitcoin J and then market it, and now it’s a 200 dollars bitcoin, and people are going to buy it
because it has bitcoin in it. Sometimes it’s a money grab– – [Woman] I’m still confused about this. So let’s say somebody forked, and they say okay let’s split that, for each bitcoin I’m
gonna create bitcoin J, so would I have an option to
keep the original bitcoin? – So if you are technically savvy, and you built the wallet
from source code of both, you already have both actually. – [Woman] Will my money double? – Yeah technically, but it says nothing about the market value of the new coin right, I could fork the coin at any given time, but it would be worth zero
because you might not want it. – [Woman] There’s a lot
of scammers out there. – Absolutely, absolutely and that’s
what’s so great about it. (audience laughs) No. No. Okay, so, It’s great because it
brings to the surface what we already take for granted, what we already take for granted which is are scams happening under our nose and we just don’t know about it, or are they more prevalent, and time will tell, but I think there are more under our nose that we don’t know about. So bitcoin is a mirror to our
financial soul, so to speak. Okay so exchanges, there are some questions
that you want to ask, and these are the terms
you might be interested in, you might not be, they are in no particular
order of importance, so when you submit an order
and they get executed, by executed what it means
is it’s matching the order, sale order to buy order, and then it’s clearing that order right, so exchanges have different
order execution priorities, so there are exchanges that are open and are good and reputable, they generally publish how
they settle those orders, and you should look that up, exchanges that are not so reputable, might not just tell you
how they set up orders, so that might be something to look for. Does the exchange have circuit breakers, and this is a big subject, because you guys heard about flash crash and how people lost big money, and those are all due to some evil traders and all that stuff, part of it is true, but like with anything, like train wrecks and car wrecks, it’s less of a mouthpiece
than a runaway disaster, a disaster that they themselves get killed or they let themselves get maimed, only because they were driving recklessly not intending to kill people, so like with anything. And so what are circuit breakers, circuit breakers are
exchange mechanisms that are built in to stem the tide so to speak, so when there’s a huge
wave of people trying to sell something, there’s just no bottom, no one wants to buy, it keeps on falling and
falling and falling, there was a recent Ethereum
flash crash that went to almost nothing before it came all the way back up to what it started at, exchanges can kind of be a mediating force in that sense by providing
mechanisms where look, if there are certain
percentage price drops in a very simplistic way, within a certain time period, just stop the trade altogether, but free-marketer, diehard free marketer
that I am maybe that’s not so good solution, I don’t know it really depends, and it goes down to what
I said earlier which is, what is capitalism, what is a proper role of organization that is supposed to facilitate trade, is it to provide price discovery rule, or is it to provide a
well regulated market, so that sort of goes back to our question, things that we take for granted. And exchanges generally
that operate with a margin, they also have rules where, if the position moves against you, so much that you’re going to
lose your account anyways, we’re going to liquidate
that position on your behalf, so that the counter party, which is the exchange, or the lender of the money that used for margin trading also
don’t use their shirt, so they have to liquidate your position, if you are a trader worth your salt it has happened to you at least once. Is it auto-liquidation
or is it a margin call, margin call is sort of like, the company calls you and
says look your underwater we’re going to sell your position on this unless you deposit more money, or if it’s a very ruthless
algorithmic way of doing they’ll just liquidate
you if it goes below a certain percentage. Front running is on that same thing, but also at the same time most
people don’t talk about it, and jurisdictions have
different rules around it, and our cover front running
in more detail later, basically it’s retail traders submit an order and then that gets aggregated, but there are some in between
entities that can peak your order and then order
on opposite side of yours, thereby making that
little tiny bit of money, and then they can just keep going at it. So that’s the exchange
offer deep order book, an order book is sort of like your map of the orders that are out there, so it tells you what
kind of market machine you are operating under, like for example how many people want certain thing at a certain price, as opposed to close to half price, so if you look at the
exchange order book you’ll see bids at certain price, there are so many units
of certain financial instrument being wanted at that price, as opposed to so many being
wanted to be sold at the price, so you generally have near book visibility as a retail trader, but you may want to
see how far it extends, who’s putting buy orders so low, who’s putting sell orders so high, and NASDAQ if you trade
on brokers that also run orders from NASDAQ, you can also get deeper
and deeper an order book, but I don’t know if cryptocurrencies they offer that kind of service where you have different tiered APR’s. – [Man] Gdex is the biggest though right? – The Gdex is pretty large by volume, but internationally Gdex’s isn’t the dominant player internationally, so there are other exchanges. This is a really
simplified view of deposit and withdrawal mechanism
that exchanges have, I’m sure I messed something up, so please just take it
with a grain of salt, the client, that’s everyone of us, can deposit money in one
of three ways generally, we can just deposit the
cryptocurrency directly, you can wire the money, you can wire the fiat, or buy cryptocurrencies with credit card, and they go through a different process, so if you wire the money it
has to go to the exchanges bank account and then they
can credit the money, so it takes a few days, if you buy using credit card, that goes through payment
processing and they have to ensure that look you need some sort of profit margin to make
sure that if someone claims fraud then the exchange doesn’t lose that. Now the exchange account
management generally have account databases connected to it, but at the same time, for cryptocurrencies
they can’t just expose an exchange wallet to a
publicly available API where you deposit money, because then everybody knows how much there exchange has everybody’s
money and all that stuff, and less knowledge the
public has the better in terms of security in a financial sense. So exchanges generally have
what’s called a hot wallet, where they have our dynamically controlled wallet addresses, where when you deposit money
the exchange then knows how much money was deposited from whom and then it credits your account, hot wallet generally don’t have a full reserve of the exchange, the account holders of the exchange, that’s in the exchange, they generally have fractions, so if someone wants to get their money out in cryptocurrency, they have some available, just like when you go to the bank, you go to the bank, and the bank has a vault
but the vault doesn’t have all of the money the bank has, it has a small portion of
it in case it gets robbed, they’re not gonna lose out everything, and then there’s what’s
called a cold storage, and cold storage is
basically just a very secure way of storing bitcoin, or any other cryptocurrency, you basically have a paper
wallet or some other means, or a hyper-wallet, that basically pools all the assets that that exchange may have, and they generally are air gaped, and they’re not connected to
the rest of your Internet, so that no one can just
hack into your system and get all of the gold. Okay so I covered front running earlier, generally some disruptive exchanges will entice retail traders, that’s everyone of us with zero fees, and basically say you
can trade with zero fees, okay that’s great, and then when you submit
an order what happens, they batch them up and
say okay either they gave the information to a very
special privileged party, like institutional investors, or they have their internal
traders that can just look at this and say look we can just put the order on the other side
make a little bit of money, of course that’s very unethical. And you should really ask that question, does the retail trader have the same liability as
institutional traders? And that’s a harder question to answer, because a lot of times there
are legitimate functions that an institutional trader provides, but in some cases they just take advantage of you so you should be very careful. Okay, it’s impossible to see this, so I’m going to read it to you, this is sort of like my very opinionated view on liquidity and valuation, I know you’re here for cryptocurrency, but this is sort of like, cryptocurrency is a new asset, and because of that a lot of young people have gotten involved, and young at heart have gotten involved, and that’s great, but the problem is just
like with any other asset class or any other financial instrument, there are some fundamental
truths in establishing value, and a lot of people missed
that and they also lose money, and that’s why you have, what’s the PT Barnum saying, there’s a fool born every
second or something like that, and my hope is that this will encourage you to look deeper into
the heart of the matter, and beyond cryptocurrency, and hopefully you’ll be smarter for it. So crypto markets are relatively new, cryptocurrencies are still
in the price discovery phase, a lot of them are, and if anybody says they know the future they’re obviously telling
you something else. And forward projection is uncertain, you have no idea what
cryptocurrencies are going to do, we don’t know, people are still figuring it out, what is it for and what is it good for. Prices are generally set by
last trade and exchanges, so when you see that price, in Market Cap or whatever,
Google Finance or whatever, that’s generally just
a price at last trade, it doesn’t tell you what
the weighted average of the price is or anything like that, it’s not volume weighted for sure, it’s just the last trade. Which sort of skews valuation, if there was a crazy event that everybody bought into or sold onto, and there was a freak accident, kind of like Ethereum flash crash, then it kind of skews the
valuation one way or the other. Which also says something
about cryptocurrency, because it’s such a
speculative asset class, you have a situation where
there isn’t a person on the other side who wants to buy or sell, which means it’s very liquid
comparatively speaking, if I have Microsoft, there’s always somebody to sell unless Microsoft really screws up, but if I have some no
name alt coin there might not be someone on the
other side of the trade who wants to buy this thing. Which means that a small sum
of money can rule the price, relatively, and have a high impact
relatively speaking, so I could go to, and it’s the same for penny stocks, I could trade penny stocks and for very small sums of money
I could pump it up, and people do this for a living, some people do it, I don’t but. So there is also exchange fragmentation, so in traditional equity space, if we’re talking about different exchanges that are linked together by brokers, generally you can route
the order from one broker to different exchanges and get
the best price so to speak, and there’s some added prices
that I’ll mention it later, but because of that sort of like built in way to route orders and what not, generally you get pretty good par, from exchange to exchange
in the regular equity space, but not so in cryptocurrency, the price is wildly different
in different exchanges, so the bitcoin price
in Korea is completely different from the bitcoin price in India, and it’s completely different from the bitcoin price in the United States, but it’s also very
difficult to negotiate that, what is called exchange arbitrage, where you buy from one, sell to the other, and then hopefully you make profit, usually it doesn’t work that way, it’s very operational, you have to be very, very exact, and you have to understand
how long it takes for money to go across
the pond so to speak, some people make a good living off it, but I personally find it very challenging. And there are different jurisdictions, which means you might
not be able to get your cash out of one country after
you turned it into cash, so you should be careful. So where am I, oh yeah fourth one, cryptocurrency exchanges
are generally decoupled, which means there’s no substructure that links them in one way or the other, in traditional equity
space you have brokers that are basically acting
quote unquote on your Behalf, you can route the order
from ARCA to NASDAQ to Ireland and so on and so forth, so there are different exchanges that brokers hold your money, but they can route your
order to different places, because you are dealing
directly with the exchange, exchanges don’t generally have inter exchange links which is a strange thing, but it works to their advantage, they want home-court advantage, they don’t want your money to move into different account system, or get better prices elsewhere, they want your fees. So what’s the solution? Adding a layer of broker
will definitely add cost, and the reason for it
is in traditional equity and finance system the
broker system was built because there were open cry option, and you were physically barred
from entering into exchanges, and you needed a broker
to have a dealer on the ground to be able to
route your order physically, so brokers historically
served a useful function in that the exchanges generally barred access to everybody else, and you have no way of
getting into it unless you have a license and so on and so forth, but the thing is that, the electronic trading network was built up over the years are
built on top of that, role-based system, where brokers are supposed to do this, and exchanges are supposed to do that, it’s suspect whether that’s
a really good solution, something that started with
direct access to exchange, but of course if you have a lot of money and you have a hedge fund, you can actually just use what’s called direct market access, and you can just send the market orders directly through that, it will take a lot of money
but you can set that up, and you can hire a lot of IT people, but at least in cryptocurrency you can just connect directly to the exchange, and they sometimes have Apis, so maybe a different solution is required. So one other thing, liquidity crunch, what’s liquidity crunch? Liquidity crunch is when all of a sudden there’s nobody on the
other side of the order, let’s say that there is
a hundred people wanting to buy something at some price right, and some event happens
and all of them cancel their order there’s
nobody else on the other side of the trade buying your stuff, then if you’re not patient and
you have to sell right away, because you either borrowed the money to establish your position
or whatever it is, then you have to sell it right away, you have to reduce your risk, but if there is no one
else on the other side you have to keep lowering the price until someone wants to buy it, so that’s essentially liquidity crunch, in a nutshell. But these are generally
human decision led, someone made a system to do that, or there some sort of news
item that led it to happen, it’s not like, in a gross sense it’s
like a force of nature, but in the philosophical sense it’s human agency that makes it happen, maybe that’s one way to think about it. And it’s a natural consequence of market, so when you see prices
drop and swing wildly, it’s because, at a certain point there’s
nobody to buy and nobody to sell, and that’s why you see wild volatility. I talked a lot about prices, and cryptocurrencies are not stocks, someone made a currency, it’s not a representation
of a little piece of tangible asset or intangible asset, it’s just currency right, which means, stocks have what’s called book value if the entity went bankrupt, then there some assets, like real estate or whatever, or patent or whatever, that they can sell to
recoup the losses and give it back to the bondholders, cryptocurrencies have no such thing, I find it funny when
people say market cap, because it’s not market capitalization, no one ever says what’s the
market cap of the US dollar, have you ever heard that,
if you have let me know, but I’ve never heard that. Again it forces you to question the notion of what is a currency, what is an asset, what gives the value. Okay so decentralized exchange, so centralized exchanges
have a lot of things to, it needs a lot of infrastructure, it needs people, it needs customer support, it needs network security, it needs lawyers, there’s a role for centralized
exchanges because you need, whenever you deal with fiat and whenever you deal with US dollars or whatever, you need compliance, you need regulation, but when you’re dealing with
just pure cryptocurrency, and just exchanging
bitcoin for something else, maybe that’s a lot of overhead, and so people have come up with the idea of decentralized exchange, how do we then just exchange one unit of cryptocurrency to another
different kind of cryptocurrency, and in some ways it’s no different than if you do like kind exchanges
over real estate. So decentralized exchanges
are only for a single chain, and what that means
that is that blockchains have special properties that ensure that you record who has what, and now someone else has what right, and internal to the Blockchain
there is a consistent rule that ensures that there has been a fair exchange between one address, public address and another public address, that’s already built into
the cryptocurrency itself, the problem happens when
you want to exchange from one cryptocurrency to another, because the rules are different, number one, number two, they are not built to be interoperable, the protocols are not supposed
to talk to each other, which means that because
rules are different, and because protocols are different, and there’s no way to ensure trust between two different rule sets, it’s very difficult to have crossed chain decentralized exchange, because if you have a
centralized exchange, what happens is all you
have to do is change the amount that an account holds, it’s basically an Excel sheet that says Alice owns 10,000
bitcoin and 5000 Ethereum, after she sells it it’s just lower the one and increase the other, but the thing is that is only feasible, because there is a central
authority that basically says this is now the end state
of the ledger after trade, these centralized exchanges knowing that the rules are
different across chains, it’s very difficult to
ensure that that happens, and there are other things
that makes it different, for example, if you want to do a swap between bitcoin and Ethereum without centralized exchange, what would you have to do, someone has to give bitcoin
to one person and hope that he receives Ethereum
from the other person, but there is a split moment where, delivery is not guaranteed, Alice could give to Bob, but then Bob might not
want to part ways with her part of the bargain, I mean his part of the bargain, but there are, research is underway that
will guarantee that happens. – [Man] What about atomic swap? – Yeah yeah so that’s one of them right, so atomic swap is when you say, okay you demobilize the money and there are some conditional ways under which that money is released, it’s very similar to Escrow, now were going back to the old idea of money which is natural. Atomic swap is one, but atomic swap also has a lot off like, if you’re not tax heavy you’re
not going to do atomic swap, you just gonna give
somebody bitcoin and trust that there are going to give you Ethereum, if you’re tech savvy, even then it’s quite
difficult to set it up. So decentralized exchanges
on cross chain exchanges is a bit difficult,
people are trying though. – [Woman] We have to finish up here soon. – Okay yeah I’ll go real quick. How many? – A minute.
– A minute? (audience laughs) Okay, so order of inquiry, broader impact in increasing liquidity, decentralized exchanges
will cover all those, it’s kind of good, but decentralized exchanges there is no way to inject fiat. Every art and every inquiry, and similarly every action and choice, is thought to aim at some good, and for this reason the good has rightly been declared to be that
which all things aim. That’s Aristotle, very good, and if you want to ask questions
about that I’m covered, this is the current
state of cryptocurrency, and I can talk about some
of the more esoteric stuff like stable coin and
broader HFM deployment, so that’s like the hardware or security modules for exchanges, so that you’re safer. But Satoshi ultimately
is a programmer at heart. And there’s the future which
is cross chain exchange, decentralized exchanges, practical oracles, and I’ll talk about oracles if you want to ask questions about that, and a lot of things, when is mass adoption
every going to happen, thank you. (audience applauds)

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