many cryptocurrency coin logos

Cryptocurrency: Mining, Staking and the Pursuit of Value

I have dipped my toe into cryptocurrency for quite a while. I’ve even made some pretty good returns, but to say I understand cryptocurrency – that’s a bridge too far at the moment. I am going to write this post to explain my current understanding and then I am looking for feedback to help translate the jargon-stream into words I can actually understand.

Cryptocurrency: 1-800-WHAT-NOW

In the late 80s or early 90s, I used to watch these TV commercials in Phoenix for a law firm, I think, and that was their phone number. That phrase has been part of my lexicon ever since – so clever. Let’s pour a basic foundation regarding the promise of cryptocurrency. Understand, just like nuclear energy, guns (pencils, too, if you are John Wick), interpersonal trust and pretty-much everything in life – cryptocurrency can be used and it can be abused. For me however, the promise of cryptocurrency rests in three core capabilities they bring to the table:

  • Cryptocurrency can be programmed: That’s right, in the world of automated transactions, wouldn’t it be great if money had some protections built-in? Programs that could say, “hey, this is not what I was buying!” or “You aren’t the person who should be receiving me!!” – I’m over-simplifying, but all cryptocurrencies are created from code, and in some blockchains, we can inject additional code to control how they will work during a transaction (sometimes called smart contracts – here’s ERC-20 as one example). As an added benefit, the code is usually open source, so everyone who cares to know can see exactly the logic in play. Try doing that with Dad’s silver dollar (note, I still love silver dollars).
  • Cryptocurrency can operate in a completely decentralized manner. Their coding forms their logic and there are far fewer hidden agendas. There might still be political or community battles, but ultimately the code controls how the cryptocurrency and its blockchain functions, and again this code tends to be open source and available to anyone who wants to see it.
  • Cryptocurrency value can be representative. More on this later, but in a world where traditional currency has become a mess, in a world where things like the “gold standard” are impractical (discussed below), cryptocurrency can tie value to almost any manner of activity.

And here we are at value. Cryptocurrencies can actually do a better job of representing value than our traditional currency. Let’s dive in.

Establishing value with currency and cryptocurrency

A currency needs to have value in order to be exchanged for goods and services. Box checked.

If that value is representative, the currency is tied to something which can help establish its value, such as precious metals. This is not the case for most currency used today. Most currency these days is fiat, which means it is backed by a government. I consider fiat to be funny money. In the days of yore, the US Dollar was backed by gold (it was representative). Then, in 1971 we lost the gold standard, we gained Starbucks, and we also gained Elon Musk and yours truly among over 120 million other amazing people #childof1971. So, in 1971, we apparently transitioned from gold backing to caffeine and ego. Jury is out how long that will last, but as long as we have buying power and some flavor of world dominance, I guess the US Dollar will abstractly reflect that in its value.

“Paper” fiat currency has already paved the way for our psychological adoption of seemingly baseless transactions. Still, people seem hesitant to make a similar leap for cryptocurrency, which I contend is near identical. For example, we already know that most transaction in US Dollars are done 100% electronically. We know, compared to the amount of US Dollars in circulation, very little of that is actually printed on real paper. In fact, it would be impossible to represent all US Dollars in their paper form without chopping down and processing a LOT more trees. Ergo, US Dollars mostly do not exist in printed form. Cryptocurrency, with the exception of a thing known as a “paper wallet”, also doesn’t exist in printed form.

The one thing the fiat US Dollar “has” over cryptocurrency is this “fiat” designation. The US Dollar is backed by the US Government as a currency. But what does that mean? Take a look at some of the valuations we’ve already accepted under the fiat model:

  • A “.com” domain name can go for $9 or $90,000 depending on its perceived value
  • A top of the line cell phone is $1200, cheaper than a pound of Italian White Truffle by over $300
  • Need a house cleaning service? Need a civil engineer? A dog walker? A computer programmer? They are about the same price per hour depending where you shop
  • And don’t ask me how latex, the cornerstone of rubber, is produced by the poorest people on earth who are burning priceless trees to plant something that actually makes them some money
  • This list has about 147,000 more examples, but I cut it short…

We have to become increasingly open to the idea of pinning value on electrons (I don’t recommend pins though – duct tape has broader appeal and is less conductive), and I contend the “fiat” designation does not buy a whole lot when comparing US Dollar and other fiat currency electrons to the electrons used to represent cryptocurrency. It all still boils down to willing seller, willing buyer and market confidence. A confidence game. I guess there is a reason we call it the economy. Wow, that metaphor is better than I thought, oh my.

But not to worry, this post is about value, and how we establish value with cryptocurrency. We have a few more ideas to consider here — valuation approaches beyond what fiat can offer, which is why I get set so glossy-eyed over the idea of cryptocurrency.

My mining mindset

I remember, back during my start-up, the team and equity partners got into a discussion about possibly creating a cryptocurrency. OK, that was all cool stuff and ergo, I started researching cryptocurrency in earnest back in 2016.

Now, I like to talk about things in plain language. Something generally not popular when the various egos in any industry are spouting off their jargon to prove they are timely and trendy. Jargon creates hurdles, which in turn create competitive advantage. Yay jargon. Therefore, I cannot say that I am an expert on what I read, but I came to the conclusion, back in 2016, that mining was a dumb idea.

OK, maybe not dumb, but as an innovation matures, we have come to understand that mining is wasteful. The value of the currency is tied to computers “doing work” – but not useful work, or that would be awesome. Just random work. Here is how mining works in plain English:

Cryptocurrency: “Hey all you computers on my network! I’m thinking of a number! Guess what it is!”

All the Miners: [using thousands of computers, thousands of graphic cards, solve a puzzle to find the number]

First Miner to Solve It: “It’s 46!”

Cryptocurrency: “You are correct! Have a coin!”

First Miner to Solve It: “It took me $247,000 for that coin – I lost money!”

All the Other Miners: “Shut-up, we don’t get anything!”

Mother Earth: “You all just gobbled up $14,000,000 in electricity for that?”

Alright, these numbers are pulled out of the ether and greatly dramatized to “show texture” but the above guessing game is, in essence, the way “value” gets created for a proof-of-work cryptocurrency.

In a world struggling with energy conservation, it does not make sense to use electricity-intense computations to play guessing games as the cornerstone of any currency’s value. There are smarter-like ways to accomplish tying a cryptocurrency to some form of demonstrable value.

My staking mindset

Along comes staking. OK, here is a read on staking. It doesn’t sound bad, and I am going to explore it more during the case study below, but staking isn’t what I was expecting. In 2016, I proposed to my business partners that we approach proof-of-work differently. In the end, the venture didn’t move toward creating a cryptocurrency, and if it did, I am not sure my idea actually made it anywhere beyond my email.

But I was hoping to tap into the real work that computers do every day. Since “proof of work” already stands for the above guessing game, let me give this concept another name.

Proof of Value

Let’s call it “proof of value.” I have a customer who drew in big red letters on her whiteboard “work ≠ value” – absolutely true. The fox hunt done by current proof-of-work systems is indeed a lot of work, but the only outcome of those computations is the “minting” of a cryptocurrency coin. It’s like sending people to dig a hole and fill it back in, and then we give the one person who puts the last scoop of top a coin and we tell the rest, “best of luck next time we dig and fill a hole.” That’s just weird.

Computers do computations every day – they help us surf the internet, they help us read documents, they help us with science, with machine learning models, with industry, with architecture, with logistics and supply chain. Gazillions of calculations which could be considered REAL work serving a true purpose. This is the economy of alt coins I was hoping see emerge.

If every time I opened my word processor to type something I was earning “word processor coins” and then I play a game and earn “game coins” and then I go shopping online and earn “shopping coins” – if all the activities I did minted crypto coins based on the work it took to do those things (both my time plus computational power plus whatever algorithmic sauce was needed to balance this all out). . . that would be proof-of-value, and these are the kind of computations which should generate cryptocurrency. Imagine a decentralized economy based on that, ey?

The closest thing I see in proof-of-stake is not quite there, but I am also candidly not well read on all the alts out there.

Case study: staking as value

With that in mind, lets revisit the staking approach. Let’s use one particular cryptocurrency as an example. I am going to pick on Hive, because I like their community (notice, though, I said like Hive . . .but I did not say I understand Hive – feel free to help me!).

I interact with the Hive community in a number of ways:

  • I type up this post, assign some metadata and click “publish.” I have clever plugin that will post this article to my hive blog. That effort doesn’t earn me any coins (it would under “proof of value” because all the computations done by WordPress would earn me WP coins or whatever)
  • People vote on my post – this sometimes earns my some Hive, and I believe this is them staking me. They put some of their Hive up in escrow for a few days, and as a result they validate my content (my transaction) and that validation generates value for me. I get coin.
  • People will comment on my post (not sure anything happens here)
  • I will vote on other people’s content (I earn nothing – under “proof of value”m the time I spent on the network would print me Hive coins). I believe, this is how I stake someone. I validate their transaction by upvoting their post and they get paid.
  • I will comment on other people’s content (I earn nothing – same as above)

Is that how it works? I really would like to understand this better.

This is a bit off topic but a couple other things that matter in the Hive ecosystem (and with other crytptocurrencies as well):

  • I initially ran into a problem posting (and voting/commenting) because I apparently didn’t own enough Hive currency in to order to “stake.” Remember that to complete staking, I have to put up some of my own currency for a period of time. The more active I want to be on Hive, the more currency I need to own for staking.
  • I bought $30 worth of Hive and become a fish of some kind (the scale ends in whale, and my little orange guppy seems to be several Pokemon evolutions shy of that). Now, I can do about 100 transactions a day.
  • There is also the concept of a witness. I would think a witness is the person who does the staking, but I don’t think I am correct here.

And based on the above it leads to more questions:

  • It seems the more HIVE I own, the higher my power – does that mean the amount of HIVE I earn/pay for a vote is higher as well?
  • Under this model, it appears then, the value of my post is determined by the community – they stake my post and I earn HIVE based not just on votes but on how powerful the voter is in the community. So if a whale votes up my post that pays me more Hive than if a kindred guppy votes up my post. Is that how it works…if so, that feels weird too because then only people in the cool club make money while the rest of the guppies scurry about trying to earn coin flakes (oh my god, that is breakfast cereal . . . I claim the patent! It’s on the blockchain!! Coin Flakes are mine, yo!)

Now see?! I had several paragraphs of smoothly laid out ideology, but things would just be a little smoother if I could understand this better. All in all, I end up here: up about 13 cents so far this year, while this author writes one post about his BBQ and scores $181.

Conclusion

Knowledge determines fish size. My conclusion is, I would like to understand the mechanics of staking better, and I would like to know if there are Proof of Value currencies out there. If not, hit me up and we can start one 🙂

What happens to Bitcoin’s value

People are concerned about the future of Bitcoin and they have a right to be, as with the future of the economy, our market, our planet and our species. No shortages of adventure to be had here. But, if you want my completely biased and fairly non-credentialed opinion, BTC needs to embrace that it was first to be taken truly seriously. Once it is all mined, it becomes a pool of transactional coins which are slower and don’t have any of the technological benefits of newer alt coins. That makes it feel to me more like a collectable. As NFTs have proven (out of scope but here is a link) people will embrace collecting virtual things. . . but a part of me says they should tie it to a physical representation of a coin that you can display in your house or something like that. Embrace the beautiful graphical representations of Bitcoins which have surfaced and allow people to piece a real one together for real somehow. That would be fun and an appropriate show of respect. It would probably violate treasury law if not handled properly, but . . . that’s why I said “non-credentialed opinion!”

many cryptocurrency coin logos

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