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The solution for digital asset securities investing — bringing together a blockchain-powered platform with the benefits of a securities-regulated marketplace.

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In this TBD Media/Washington Post broadcast interview, Aaron Kaplan discusses how Prometheum is bringing digital assets to the public market at the InterContinental Hotel in Davos.
See below for a link to the interview:
[https://player.vimeo.com/video/385048024](https://player.vimeo.com/video/385048024)


Hosted by TBD Media Group in partnership with The Washington Post, Aaron Kaplan, Founder and Co-CEO at Prometheum will be featured in an upcoming Davos 2020 Broadcast Interview Segment at the InterContinental Hotel in Davos, known as Davos 2020. 

Aaron will discuss the topic of “Shaping the Future of Investing,” one of the 18 World Economic Forum platforms featuring some of the world’s most significant global challenges. His segment, entitled “Bringing Digital Assets to the Public Market'' will explain Prometheum’s commitment to compliance and how we aim to upgrade capital markets. 

Stay tuned for the video broadcast! 

About Davos 2020 

Davos 2020 engages a wide range of experts and decision makers from around the globe who are attending this year's World Economic Forum from January 21st-24th. Prominent corporate figures and leading global experts will offer candid insight into their opinions and ideas about the current economic climate and the subject matter of this year's summit. To learn more, click here: https://www.prnewswire.com/news-releases/tbd-group-launch-davos-2020-campaign-300920615.html

Title III (Reg CF) and Title IV (Reg A+) of [the JOBS act](https://www.sec.gov/spotlight/jobs-act.shtml), both adopted in 2015, marked the genesis of online capital formation platforms and the ability to raise larger amounts of capital using the efficiencies of the internet. Over the past five years, the industry has grown and proven itself. It is an appropriate time to increase the capital limits for Reg A+ and Reg CF. Raising the maximum dollar limits for both Reg A+ (from $50 million to $75) and Reg CF (from $1.07 million to $5 million) will create new business opportunities for broker-dealers and fintech platforms (particularly online capital formation, and secondary market venues) that will allow those industries to flourish. [The proposed rules changes](https://www.sec.gov/news/press-release/2020-55) will also empower issuers with new technologies and allow for more creative markets - i.e., they are beneficial to the blockchain securities industry.

Welcome back, WBS’ers—glad to see you stuck around for part two—now let’s finish this adventure!  Today, we move away from technology and, instead, drop some legal knowledge on you.  And of course, no post related to the markets would be complete without understanding the issuers’ perspective. In this case, blockchain-based companies looking to raise capital by selling securities (you already know what kind!).

It feels a bit early for a bold font...but we’re jumping right in:

**Direct Regulatory Reporting and Auditing Functionality**

In the traditional securities model, exchanges/ATS’s, broker-dealers, custodians, and other market participants must provide daily reports, requested information, and real-time drop copies to regulators/SRO’s (Self Regulatory Organizations) and among themselves as required by regulation.  These participants are also required to provide access to regulators for auditing purposes.  By using a read-only node on the Prometheum blockchain, and a blockchain explorer, we can provide direct, uneditable transparency to regulators at any time and in real-time.  This may seem unimportant or not super significant, but regulatory oversight supports fair markets and they simply cannot function without it (by LAW).  So while it has been a long time coming, once the regulators get comfortable with this new technology - one of its key advantages will ultimately benefit them and, by extension, the markets as a whole.

We promised some legal knowledge, but it may not be what you expect - we’ll skip the typical summary of the whole Exchange Act and other securities related laws (we think highly of our readers!) to focus on a lesser-known, but equally important part, of the Exchange Act actually related to technological progress in the markets:

More bold font coming up...

**Improved Reconciliation, Clearing, Settlement and Custody Finality** 

Congress mandates the SEC (the SEC enforces Congressional laws related to securities) to keep the US markets competitive from a technology perspective.  We believe that blockchain technology represents what is referred to as “new data processing and communication techniques” - that are consistent with the Exchange Act Section 17A(a)(1)(C), specifically related to the clearing and settlement of Securities.  Let’s take a gander at the actual legislation shall we:

**(a)Congressional findings; facilitating establishment of a system**

1. The Congress finds that:
* The prompt and accurate clearance and settlement of securities transactions, including the transfer of record ownership and the safeguarding of securities and funds related thereto, are necessary for the protection of investors and persons facilitating transactions by and acting on behalf of investors.
* Inefficient procedures for clearance and settlement impose unnecessary costs on investors and persons facilitating transactions by and acting on behalf of investors.
* New data processing and communications techniques create the opportunity for more efficient, effective, and safe procedures for clearance and settlement.
* The linking of all clearance and settlement facilities and the development of uniform standards and procedures for clearance and settlement will reduce unnecessary costs and increase the protection of investors and persons facilitating transactions by and acting on behalf of investors.

To summarize, as it relates to the post trade settlement process, a blockchain will streamline the current model even with some level of manual oversight.   Multi-signature digital wallets are almost “too good” at settlement finality, and hot and cold storage provides an extremely secure means of protecting custody records.  Smart contracts allow for “intelligent” algorithms to automate clearing level reconciliation between exchanges and BD’s.  Lastly, public and private keys are generated for each transaction, thereby providing accurate and secure record keeping while protecting the privacy of the investors during clearance and settlement.  And that’s why Prometheum is building a blockchain-based securities ecosystem!  

Time to walk a mile in someone else's shoes and talk about what blockchain-based companies need from the capital markets.  These companies are the very reason we believe there is demand for a blockchain securities market (if we build it, they will come!)

As you probably know, there are a growing number of companies that can lower their costs, increase revenues, and/or out-compete others as a result of their utilization of a blockchain. Some call them “blockchain companies,” but you can call them the “future” of their respective industries.  For example, as an alternative to cloud-based storage, at scale, blockchain offers cost savings to data-heavy and analysis-dependent companies by offsetting hardware and energy costs to node operators with token incentivization.  Blockchain technology has a unique innate structure that can connect varied parts of a company, so while any application can be programmed to automate business functions, smart contracts can automate complete processes across even normally manual channels within a company.  There are also Blockchain as a Service (BaaS) companies paving the way for blockchain native companies by advancing the actual underlying technology and providing blockchain products and services to companies who may not have the resources to develop their own.    Examples of these include companies that offer enterprise blockchain solutions built to handle very high numbers of transactions per second (TPS), and interoperability across different blockchain networks giving different companies the ability to “connect” their businesses with other businesses.  Industries where blockchain offers real advantages are evolving rapidly and new ones are being created as a result of cost savings and/or higher efficiency, meaning there is an increasing number of companies that use a blockchain as a legitimately better technology to power their business model. 

Blockchain native companies aren’t all that different from other types of companies, and many of them need to raise capital to be successful.  One of the fundamental features built into a blockchain network is a unit of value - a token. Tokens are referred to as cryptocurrency when used as a means of payment or method of saving or storing value on a blockchain network.  Those same tokens can and often are used by blockchain companies to raise capital - unfortunately, during the early years of blockchain technology, many unreputable companies took advantage of investors by selling tokens with no potential for liquidity (no existing fair and orderly markets), no recourse for misinformation and even blatant fraud - these were known as ICO’s.  Fortunately, the U.S. already has the strongest regulatory infrastructure for securities in the world - and by leveraging those same laws, tokens can be registered and used to raise capital as blockchain securities. 

Now for a bit of well earned self promotion (these WBS’s don’t write themselves!)...Prometheum is a blockchain native company, and we have built a market singularly focused on supporting blockchain securities.  When approved by FINRA and SEC, our ATS will give investors liquidity and security, operate efficiently and fairly, and enable blockchain native companies to raise capital in a logical and compliant way by using our blockchain security framework for their tokens.  We’ll also clear and settle transactions the same day! (BOOM).  

That’s it for this week, folks; you made it through a two-parter!  We’ll now retreat to our little cave and come up with next week's topic in solitude (that’s a joke to pull on your heartstrings). If you have any suggestions or if there’s a topic you want to learn about, PLEASE (we’re practically begging here…) let us know by shooting an email to [wbs@prometheum.com](mailto:wbs@prometheum.com).

Have an awesome week everyone.

Welcome WBS’ers and get ready for a wild (and informative) ride (more like a road trip)!  We’re hijacking the next two adventures to explore something uncharted and dear to our hearts--why Prometheum is building a blockchain securities market in the first place.  We’ll bring together many concepts of prior WBS’s to explain why a market built from scratch is really the only way to issue, trade, and settle blockchain-based securities.  Don’t get us wrong, the U.S. markets, like the NYSE and NASDAQ aren’t broken - but they were created for something entirely different, stocks, which started as paper certificates!  Attempting to fit blockchain securities into the traditional securities model is counterproductive, like trying to fit a square peg (or a block perhaps!) into a round hole by sanding the corners - it’s possible (with a lot of time and effort) but may not be perfect.

First things first, let’s talk about why blockchain technology is “better” for certain applications - specifically, the capital markets.  Apologies if this is a bit of a re-hash for some folks reading this.

The U.S. equities securities life cycle takes two days to reach settlement finality--when cash or securities end up in an account as a result of a trade. It also involves numerous independent entities using both automated and manual processes resulting from nearly a hundred years of regulatory and technological evolution via forced adaptation to changing market conditions.  Most of these changing market conditions result from new technology adoption due to legacy technology constraints, or clear cost and/or time benefits.  Today, blockchain technology is that “new” technology, and it presents cost and time benefits, at scale, specifically when servicing securities that are also network tokens.  But it also requires some updating to securities laws (more on that later).

Blockchain has advantages over cloud storage, data centers, and database-driven processes, but only in certain industries and with certain applications (supply chain is a great example).  The most well known and touted advantage of blockchain is its inherent suitability for transactional record-keeping due to data or blocks (the ledger), once written to the chain, being immutable, traceable, reviewable, and distributed among many nodes (decentralized).  However, in many use cases, traditional centralized databases or more advanced distributed databases with an application layer (like the ones used by exchanges, post trade systems, and the DTC) can provide many of the same advantages as a blockchain and sometimes with even higher efficiency, ease, and throughput.  But, their systems can’t handle blockchain native tokens - specifically tokens that are securities, better known as “blockchain securities.”    

Blockchain securities are utility tokens that also function as securities (capital raising, trading, clearing, settlement, etc.) - and need to be compliant with federal securities laws and are regulated by the SEC and FINRA in the US. Unfortunately, the securities model used by US Exchanges over the last 50 years would require a major overhaul to technical infrastructure, regulation, and clearing and settlement processes to support blockchain-based tokens natively.  So it has to be built from the ground up, and that’s exactly what Prometheum is doing.  Let’s segue into the details and get a bit personal by using real world examples from our very own ecosystem!

**Accurate Recordkeeping and Data Transparency**

The Prometheum blockchain consists of distinct, sequential, and time-stamped records of asset ownership (blocks) resulting from the settlement of blockchain securities transactions “post trade.” The underlying distributed ledger technology enforces each new block’s accuracy in relation to both the new transaction information and the previous block. This technologically enforced sequential recordkeeping provides certainty that settlements recorded on the Prometheum blockchain are immutable, accurate, and independently confirmed in real-time by the validating nodes on the Prometheum network.  

Prometheum is responsible for updating the Prometheum blockchain through the addition of new blocks to the chain, the contents of which can be reviewed in real-time by participants (pretty much anyone with a read-only node).  Nodes provide anonymous data regarding the settlement status of transactions and resulting securities and cash positions. Over time, this will allow each participant (think broker-dealer, clearing firm, bank, regulator) to use the Prometheum blockchain in lieu of maintaining a separate internal ledger, which has the potential to eliminate the need to reconcile differences in settlement records, either with trading counterparties or with the omnibus position in its account at the central securities depository. 

Additionally, each Participant could allow its customers (including the end investors) to have direct and individually permissioned access to the Prometheum blockchain, providing the potential for enhanced investor protection as it would allow investors to independently confirm their ownership and possession of assets recorded to the Prometheum blockchain. This data visibility and accuracy could also be extended to regulators for the fair and consistent enforcement of market rules and regulations, and as a transfer agent service for blockchain securities issuing companies.

**System and Data Security**

Blockchain technology, due to its distributed nature, governance models, and consensus mechanisms, can be more secure than market infrastructure supported by centralized databases.  Additionally, because most of the traditional securities model’s independent components and manual processes can be recreated as participants or functions on a blockchain, a consistent level of defense can be maintained across the whole ecosystem.

**Operational Efficiency **

In a world where payments can be processed and debits/credits applied within seconds cross border, the two day settlement cycle of traditional securities cannot be considered timely or efficient.  We recognize that even using current (non-blockchain) technology, markets can provide near instantaneous settlement finality, but not without a nearly impossible tear down and rebuild of every component of the current market model, and how they connect to one another.  With blockchain securities, we have a relatively clean slate to create a model for same day settlement by capitalizing on efficiencies related to smart contracts/automation, interoperability, digital wallets, and tokenization.

Ok...this is as good a time as any to break and leave everyone in suspense for part two.  Join us next week for a dive into the regulatory side of (blockchain) technology as well as a look from the perspective of blockchain-based companies wanting to raise capital by issuing blockchain securities.  Have a positive and productive week everyone.

P.S.  If you have time for a detour, Google “SOES bandits” - it will explain why we believe there are parallels between the advance of blockchain technology into the capital markets today and the rise of the ECN’s (ATS’s), DMA platforms, and algo’s that resulted in significant changes to securities laws and market structure over the last thirty years as a result of computers and electronic systems becoming ubiquitous.  And if you’re on a permanent vacation - read “Flash Boys” by Michael Lewis.

Welcome back to the best 12 minutes of your week...seriously though, It’s really nice to know there’s someone out there reading the WBS! Our goal is to make you a better blockchain securities investor, or at least more knowledgeable about blockchain.  We have mentioned token standards in many WBSs, but today it gets all the love!  Let the token standards adventure begin! 

Token standards are pretty easily defined in concept - they are specific rules for writing smart contracts to implement tokens with specific features and functions.  Remember that tokens are just digital code (an identifier) created via a smart contract (like many things on a blockchain) that can be used on a blockchain to initiate and complete transactions, store value, assign rights, and represent and move data.  Tokens based on a standard can have information embedded into their code that interacts in different ways with other smart contracts depending on what exactly that token is meant to do.  Some examples are in order...let’s start with the BIG one:  value, just like the “$1” on a dollar bill, a token needs to represent an amount.  It may seem obvious that a single token is “1” token, but in the digital world everything must be written in code. and in the case of tokens, a smart contract can identify a token by its identifier and then confirm that this data does, in fact, represent 1 token by checking the blockchain ledger.  

Another good example is digital wallet compatibility.  There are actually quite a few different wallet providers - and they are not universal, as in they don’t hold every single type of token out there.  Tokens ideally need to be created based on a token standard that is supported by the wallet they are intended to be held in. New token standards require integration with existing wallets, or they need existing wallets to update their code, or completely new wallets to support them - so it’s a major factor to consider from a technical, business, and user perspective.  Token standards also apply to things like checking balances before a transfer or transaction between wallets - all done via smart contracts, of course.  And let’s not forget NFTs, they have specific token standards that allow for additional, unique data like an owner’s identifier to be embedded into the token for smart contract verification.  Tying this all together, the implementation of a token must be done to support the token standard, the blockchain it’s to be issued on, the smart contracts used on that blockchain (and related features/functionality) and the wallets that are commonly used on that blockchain.

They say “the devil is in the details,” so let’s discuss some actual existing standards.

You can’t talk about token standards today without mentioning Ethereum and the ERC-20 token standard.  ERC, or Ethereum Request for Comments, is the acronym used to identify different token standards on Ethereum.  Different numbers signifying different token standards that exist with Ethereum’s protocol follow the letters ERC.  In other words, ERC-20, the most popular token standard used to build Ethereum based tokens isn’t, the only standard; there’s ERC-223, ERC-721 (NFTs!), ERC-1400 and many more.  ERC-20 is pretty basic, it describes how to create tokens that have the following smart contract enabled functionality:  

* **totalSupply**: Returns the total circulating amount of tokens;
* **balanceOf**: Returns how many tokens exist in an account;
* **transfer**: Transfer an amount of tokens from the token owner’s account to another account;
* **approve**: A token owner can approve for a spender to transferFrom tokens from the token owner’s account;
* **allowance**: Returns the amount of tokens approved by the owner that can be transferred via the spender’s account, and;
* **transferFrom**: Allows a spender account to transfer an amount of tokens on behalf of the token owner to another account.

Other ERC token standards aim to improve on ERC-20 with things like transfers between wallets that support multiple token standards, additional levels of authentication, unique identifiers for NFTs, third party transfer, and even interoperability between different blockchains.

This is a great guide describing some of the more important ERC token standards:  https://coincentral.com/a-comprehensive-guide-to-the-different-ethereum-token-standards/.

Check this out if you want to see some code:  https://yos.io/2019/04/14/erc-standards-you-should-know-about/.

And if you want to go really deep - here is a comprehensive list of ERC standards (which include other changes and suggestions beyond just tokens) on their website dedicated to EIP (Ethereum Improvement Proposals):  https://eips.ethereum.org/erc.

Now, Ethereum isn’t the only game in town - there are other blockchain protocols that have their own token standards.  Here are a few names to throw around if you’re at a blockchain party: EOS, Waves, NEO, Ada, and Tezos.  From a functionality perspective, they aren’t all that different - they just have a specific technical specification (as in how the smart contract code is written to interact with tokens) that is different across these different blockchain protocols.

Here are a few articles about some of these token standards in case you find yourself hungry for more info:

Tezos:  https://medium.com/protofire-blog/tezos-part-5-token-standards-28b8733a3ce5

EOS:  https://medium.com/quillhash/eos-smart-contract-development-analysing-eos-standard-token-contract-9b627e781dff

NEO (NEP standards): https://github.com/neo-project/proposals

As the saying goes: all incredibly great (I think that’s right) things must come to an end!  And so closes the page on another riveting chapter of the WBS.  We wanted to drop one last bit of knowledge on you when it comes to token standards:  don’t think of it from the perspective of tokens, instead, think of it from the perspective of smart contracts and you’ll eventually get it - we promise.  

Adios, au revoir, ciao and, dasvidaniya - that means “goodbye and good riddance (HA)”!  Have a great week, everyone, and don’t forget to set aside 12 minutes next week for the next adventure.   

Welcome back!  We were thinking of renaming the WBS “adventure time” (because it is), but someone beat us to that name…(awesome show for kids AND parents btw).  This week we explore a topic that at first glance may seem oxymoronic, non-fungible tokens, but it turns out there are unique advantages to unique tokens.  

NFTs are exactly that, unique tokens - meaning one token that is issued by the same network (same chain) is not the same as another.  To put NFTs into context and for old times sake, let’s define the word Fungible and give you some real-world examples before we go full blockchain.  An asset or good is fungible when one unit of the same type can be exchanged for another unit of the same type.  It sounds confusing, we know, but an easy example of a fungible asset is a dollar bill (USD). For example, if you borrow a dollar, you don’t need to return the same exact dollar bill - you can use any dollar bill.  Currencies and most cryptocurrencies are also fungible;  one bitcoin equals (in value) any other bitcoin, and they are interchangeable.  Something like sugar is fungible as well, a pound is the same (value) as another pound even if the individual crystals are, obviously, all different.  The same goes for goods like barrels of oil or ounces of gold - in fact, futures (oil, gold, silver, gas, sugar, coffee, orange juice, soybeans, wheat - you get it) are all fungible.  Most tokens we’ve discussed throughout our many adventures are said to have “fungibility”; for example, blockchain securities (like the Prometheum Ember token!) are interchangeable (and tradeable!) and therefore fungible when issued using a registered offering to the public.  Fungibility is one of the core features that make tokens, currency, futures, and of course, money so easy to use as a form of payment, and it supports liquidity from a trading perspective.

You may be thinking: why on earth would someone want a non-fungible asset?  It seems like a good question, but remember that assets do not have to represent a form of payment (e.g., money).  Things have value without necessarily being liquid, easily exchangeable, or of equal value to everyone.  Consider something like a plane ticket - it has value, but only to the person whose name is on it, you can’t just sell it to someone else, and for good reason.  Baseball cards are another great example of why fungibility may be overrated in some cases; would you exchange a Babe Ruth rookie card for a minor leaguer?  Probably not, even though they may be issued by the same company and are both baseball cards - they have completely different values.  Now, let’s talk tokens!

You should already have a good understanding as to why fungibility is a considerable advantage and, therefore, a requirement for many network tokens.  Blockchain is all about efficiency, and it’s powered by incentives, so utility or “work” tokens need to move around frictionlessly and represent mutually agreed upon units of value.  But there are other types of tokens, and they can represent rights, products, or virtually any data that needs to move within a network.  Non-Fungible tokens are just a different type of token, and because they are unique, they are also rare - we all know how rarity or scarcity affects value in the real world.  NFTs are digital assets that aren’t fungible, so taking the previous example, if you had a company that created a blockchain network that tokenized baseball cards and each token represented a specific card - every token would be unique, likely have a different value and therefore be an NFT.  Another very popular use case for NFTs is art, specifically valuable art and digital art (that’s known as a crypto-collectibles).  You can create a token that represents ownership of the Money Lisa (ha)...I meant Mona Lisa, and it would be unique and, definitely, non-fungible!  Or a more realistic example, people can use NFTs to represent ownership of original works of digital art.  Even patents can be blockchain-based by tokenizing them with NFTs.  Lastly, you can’t have a conversation about NFTs without mentioning Cryptokitties.  If you haven’t heard about these tokens, it’s EXACTLY what you think:  each token represents a unique digital cat (and the related metadata).  While you may immediately think that this is an absurd concept, bear in mind that there are Cryptokitty tokens that sell for more than $100k, and it’s their uniqueness that creates rarity and therefore value.

Let’s talk about games, online games like Fortnite to be exact (seriously).  NFTs are incredibly well suited for use in multiplayer games where they can represent everything from special items to the actual unique characters that people create, modify, and individualize.  

Ok, let’s take a breather and suggest some extra credit reading:

If you have a lot of time on your hands, this aptly named NFT Bible is a great read:  https://opensea.io/blog/guides/non-fungible-tokens/

Don’t be embarrassed and go to this post, if you are at least “mildly” interested in learning more about the cutest digital cats ever - we won’t tell anyone:  https://blockgeeks.com/guides/cryptokitties/

Now, let’s dive a bit deeper shall we?  From a technical perspective, NFTs use smart contracts to make each token unique.  This is done by having unique identifiers for each token and smart contracts that can recognize these unique identifiers and react differently based on the network’s protocols.  Smart contracts can also be used to embed token ownership information right into the token as opposed to balances and transactions written to a blockchain-based distributed ledger.  There is also a common Ethereum token standard for NFTs called ERC-721 (there are others like ERC-1155 and ERC-998), which differs from the more popular ERC-20 used for most tokens issued on Ethereum that are built to be fungible.  Remember - common token standards aid in interoperability, and while NFTs are unique they still benefit from giving users the ability to trade them across different networks and decentralized exchanges.  We almost forgot to mention one very important fact about NFTs:  they are not divisible; they must be transacted as a whole token (unlike Bitcoin, which can be split into Satoshis, or Ethereum which can split into Wei).

“Official” explainer here for the ERC721 token standard:
https://eips.ethereum.org/EIPS/eip-721

As with most blockchain topics, NFTs are complex and varied, and there’s endless further readings and opinions out there.  But the torch has now been passed in terms of the basics, and, most importantly, you know about Cryptokitties...we can now sleep soundly tonight here at the WBS.  And with that, we’re out of adventure time (see what we did there??) - wishing a positive and productive week to all our readers!  WBS out (mic drop is what the kids who play Fortnite say these days).

Well, hello there - it’s great to see returning faces and new readers (yes, we’re watching you).  As we like to say:  new week, new WBS adventure! (it’s actually our first time saying it, but it's kinda catchy).  This week we’ll set the record straight about the terms “cryptocurrency” (or crypto coins) and “tokens.”  You may have seen these terms used interchangeably, we may have even done it ourselves a few times (sorry), but they are not the same.  While you may think you know the differences, it’s pretty nuanced, so we suggest you read on to make sure you’re never caught off-guard by a 14 year old with a Robinhood account asking you to explain.

Something to keep in mind before we continue: **all cryptocurrency are tokens, but not all tokens are cryptocurrency**.  Let that sink in, now you have some basic “taxonomy.”

Let’s start by breaking up the word cryptocurrency; crypto and currency.  Crypto refers to cryptography, and it’s one of the key elements underlying cryptocurrency and blockchain (one of the rare times we’ll provide [a Wikipedia link because it’s a must read](https://en.m.wikipedia.org/wiki/Cryptography)).  Cryptography is the study of ways to send information between two parties securely and without the possibility of a third party intercepting, deciphering, or altering the data (very nice [guide here](https://crushcrypto.com/cryptography-in-blockchain/))  Hash functions and public/private keys (aka asymmetric keys) are some examples of encryption-related features used in modern cryptology based technologies like blockchain ([very deep paper here](https://iopscience.iop.org/article/10.1088/1742-6596/1168/3/032077/pdf)).  Because of how ingrained cryptography is to blockchain, the word crypto has become synonymous with blockchain-based currency.

Currency or sometimes coins (hence Bit*coin*) are just that, a type of money or method of payment that represents a unit of value for storing and transacting like the cash in your pocket, your bank account, or your debit card.  In the case of cryptocurrency - it’s used within a blockchain network or group of networks built on the same unique protocol and sharing a dedicated distributed ledger to keep track of transactions across all those networks (this is important as you’ll realize in a minute).  And that is exactly what differentiates cryptocurrency from tokens:  cryptocurrency is the base or the fundamental digital asset (currency) for ALL blockchain networks built using the same protocol, while a token is specific to a (usually) single network derivative or built from an existing protocol that may not have it’s own distributed ledger to keep track of transactions between wallets.  Also, unlike cryptocurrency, which is typically only a form of payment, tokens can be used for things like voting rights, consensus, smart contract calls, products and services on their native network, DApp’s, etc. - that’s why they are often called “utility” tokens.  I know, that’s still a bit confusing...let’s take a detour here to explain a bit about protocols, and then we’ll come full circle with examples of crypto other than Bitcoin (sometimes referred to as Altcoins) and tokens that will connect the dots.

In computer science, **a protocol is a set of standards for communication between two or more devices (computers) on a network** ([free course on this and more here](https://learn.saylor.org/course/view.php?id=84)).  Protocols are sometimes called technical standards and are to digital communication what programming languages are to computer programs or computations...but I digress (start with Wikipedia and go from there if you want to learn more).  Blockchain protocols define things like how nodes communicate, the actual details related to consensus, how smart contracts are built, and technical standards for network tokens.  Understanding that most blockchain networks are built on the same few main protocols is the key to understanding the difference between cryptocurrency and tokens.

Ethereum’s Ether (ETH) is a great example of a cryptocurrency that has spawned numerous tokens.  Ethereum has many token standards; the most popular is called [ERC-20](https://blockgeeks.com/guides/erc20-tokens/).  This standard, or set of rules related to the specifications of how an Etherum based token is built and functions, allows developers to use smart contracts to create their own ERC-20 tokens that can be used to capitalize and serve as utility on a new network, but that utilize Ethereum's blockchain for keeping track of transactions (via the Ethereum ledger) between their participants, can take advantage of Ethereum's vast number of nodes, and, important to note, must pay gas fees in ETH.  ETH is in fact an altcoin, and there are at least a few other very popular ones you may want to explore:  Litecoin (LTC), EOS, Ripple (XRP), Stellar (XLM), Cardano (ADA), Cosmos (ATOM), Tezos (XTZ), and Tron - but keep in mind there are about 5,000 coins and counting!

Here’s another better, stronger, and cooler named example to (hopefully) give you some clarity and depth; Prometheum’s own Ember token (MBR).  MBR is a blockchain security of course, and yes, it’s a utility token - but it also behaves similarly to an altcoin or cryptocurrency, sometimes.  We use the words “similarly” and “sometimes” because the Prometheum blockchain is a smart contract platform with its own protocol (just like Ethereum) that is specifically created to support networks whose tokens are also blockchain securities.  When Prometheum maintains the ledger for “security” transactions of issuer tokens (on the Prometheum market), MBR is not functioning as a cryptocurrency because those transactions are not native issuer network transactions - regardless of the fact that gas fees/payments for those transactions are paid in MBR.  But, Utility transactions, for products or services, consensus or DApps, that take place on the native network of issuers and are written to Prometheum’s utility chain (and paid for in MBR) do check all the boxes for MBR to fit the definition of cryptocurrency in this specific use case and context. 

If that last paragraph is confusing at first, we suggest a re-read as it highlights the distinctions between crypto and tokens beautifully (if we don’t say so ourselves!) and will ultimately give you a deeper understanding of yet another deceptively simple concept from the world of blockchain. 

To quote the great pet detective Ace Ventura, “Aaalrighty then!”  We’re implementing a hard fork...sorry, meant to say hard stop (Freudian slip).  Hope you’re looking forward to next week’s post as much as we are - thanks for taking the time and joining us.  Have a great week, my fellow readers!     

Greetings and salutations, dear readers! It may come as no surprise to WBS readers that we are covering stablecoins right after mentioning them in the previous WBS, we tend to do that.

Let’s remember that this is the Weekly BS and not the weekly glossary--this is going to be a thought provoking discussion about stablecoins (If you’re expecting quick definitions, you’re in the wrong place, it’s a few paragraphs down!).   The hardest part of this WBS is using the word “adventure” to discuss a topic beginning with the word “stable” - and now that I’ve done just that (yes it counts) we can focus on the answer to this riddle:  What is (sometimes) mortally bound to the very thing it’s (figurative) kingdom seeks to destroy, and whose value is (sometimes) determined and backed by a thing whose value is not backed by anything?  A Stablecoin

Ok, maybe there are better ways to communicate the point. Still, it helps in understanding that stablecoins are pegged to the value of other (presumably more stable and trusted) assets, including fiat like USD - the very things a blockchain based economy is meant to replace.  Stablecoins are a type of token native to alternative digital economies like a blockchain network, but their value is often tied to very conventional things, like real-world currencies and commodities.  Don’t let that steer you into thinking that stablecoins aren’t useful or “authentic.” In fact, they are an elegant solution to the problem of token instability and they can act as a “bridge” between DeFi and TraFi (that’s short for traditional finance - trying to be innovative here).  And a big BTW, this isn’t all that new of a solution, since money itself (in non-fiat form) was [often backed by gold](https://www.investopedia.com/ask/answers/09/gold-standard.asp#:~:text=The%20gold%20standard%20is%20a,sells%20gold%20at%20that%20price), silver, and other commodities for the sake of stability.

Token instability is a problem we have discussed on numerous occasions, directly and indirectly. The price of a network token can be extremely volatile due to an imbalance between its utility value, speculative value, and liquidity - typical of newer or less popular network tokens.  This can result in a lack of trust in a network’s tokens and/or coins (cryptocurrency).  A lack of trust usually means participants will try to mitigate their exposure to price fluctuations (that’s risk) by either not accepting a token as a means of payment, or converting tokens into fiat or a more stable cryptocurrency as quickly as possible (hopefully on a registered/regulated market, maybe even one named after a [Greek hero](https://en.wikipedia.org/wiki/Prometheus), and not the movie! Though it was a Ridley Scott masterpiece).  Too much token conversion means too little HODLing and leads to the bad kind of high token velocity.  In case this isn’t clear yet, stablecoins aim to remove (to varying degrees) the need to convert tokens, and increase trust in token transactions and valuations by always being worth what a more stable and trusted asset is worth.

Stablecoins can also aid in bridging different networks, or interoperability - in both a blockchain and a classic sense.  As long as the majority of people’s financial activity and holdings still take place via fiat using (centralized) banks and cold hard cash, there needs to be a seamless connection between the traditional and the blockchain world of finance to attract more participants.  Having tokens worth exactly what popular currencies or commodities are worth just makes it easier for non-blockchain/crypto savvy people (who don’t read the WBS) to invest and interact with the emerging world of blockchain based finance (including Defi).  Additionally, stablecoins support blockchain interoperability by allowing participants from different blockchains to interact with each other by providing a stable, efficient, and recognized form of value transfer.  Basically, it means that digital payments and money transfers become routine and less risky.

We promised definitions, and it’s actually essential for investors to understand what types of stablecoins are out there.  The main distinction is whether they are collateralized, meaning backed by a reserve of the asset they are pegged to (usually redeemable for that asset), or non-collateralized, with an algorithm adjusting money supply (supply vs demand) to control the stability of the price, known as Seigniorage shares based stablecoins ([really cool read here](https://smithandcrown.com/research/the-cryptoeconomics-of-seigniorage-shares-stablecoins-basis-and-carbon/) about two proposed Seigniorage based coins and the original Seigniorage shares [white paper here](https://github.com/rmsams/stablecoins/blob/master/paper.pdf)).  Don’t judge the non-backed stablecoins too quickly; theoretically, they’re the only ones that would survive the apocalypse since they aren’t correlated to any currencies, commodities, or crypto!

**Within collateralized stablecoins, there are a few variations (we need your undivided attention here):**

**Fiat Collateralized** - These are tokens typically issued by either a central authority like a country, bank, or corporation (centralized), or by a decentralized organization.  They are often backed by the US Dollar, or Yen, or some other national currency with different levels of reserve ratios.  Examples include *Tether/USDC, USD Coin, Paxos*.

**Commodity Collateralized** - These are usually pegged to commodities like gold, silver, precious metals, oil, even real estate (SwissRealCoin/SRC, they have a clever model).  As long as there is decent price discovery and stability, it can be a candidate for a pegging (what a difference “a” single letter can make).  These types of stable coins are usually issued by companies and often fall under the centralized category because of the singular and more vulnerable physical location of the asset reserves.  Examples include the infamous (and not actually collateralized) *Petro*, and the less notorious yet still popular *Paxos Gold (PAXG)*, and *Tether Gold (XAUT)*.

**Crypto Collateralized** - Well, you could have seen this one coming. These stablecoins are pegged to really popular (though not all that stable) cryptocurrencies, like BTC and ETH.

What’s interesting about crypto collateralized stablecoins is that they are sometimes over-collateralized, requiring a deposit or lock-up of more of the underlying asset than the value of the stablecoins received in exchange (as high as 2:1).  This measure is unique and necessary because crypto isn’t as stable as fiat currencies or commodities.  But, cryptocurrencies can be decentralized, therefore potentially removing the risk of a centrally located physical reserve such as in the case of commodities.  *Dai*, a token issued by *MakerDAO*, is probably the most well-known crypto collateralized stablecoin, but it’s pegged to the Dollar (the plot thickens).  Let me explain:  To get Dai, you would need to deposit ETH or BTC - and at that point in time, a spot USD value would be locked in and you would receive the equivalent amount of Dai (1 Dai = $1), minus a *haircut* (basically a reserve percentage of your deposit meant to protect Maker in case the collateral crypto tanks - that’s over-collateralization).

In thinking deeper and evaluating stablecoins and their real viability as a financial instrument, you have to look beyond the motivation of stability.  After assessing the underlying asset and collateralization (if any), how stablecoins are issued and by whom are the key questions to consider as an investor.  The “how” mostly relates to whether they are *on-chain* or *off-chain* and their degree of decentralization.  The “who” is an adventure in itself (you thinking what I’m thinking?).

There are major companies like Facebook and their Libra token, which is a stablecoin pegged (sort off) to a basket of assets and currencies in their reserve.  Interestingly, Libra seems to imply a decentralized on-chain model longer term.  Or the JP Morgan issued token backed by USD 1:1 - but only usable within the bank's network in their larger effort towards economically viable blockchain technology adoption.  Maybe this example will really resonate; Dai, the crypto-backed token we discussed, is meant to be on-chain, decentralized, and eventually interoperable across networks/chains in exchange for products and services - it is literally a more stable Bitcoin, at least conceptually.  Food for thought:  consider that stablecoins are not all that fundamentally different from existing financial instruments...even the most cutting-edge non-collateralized stablecoins are based on the same principle as fiat, and before the Dollar went fiat, it was backed by gold.

**And now a few reading suggestions:**

Here’s a [list of major stablecoins](https://defiprime.com/stablecoins) (Tether/USDT, PAX, DAI) that are pegged to a variety of assets (like USD, Gold, Euro, Yen, Bitcoin, etc.) and [prices](https://cryptoslate.com/cryptos/stablecoin/) (ca$h money).
Also, [this guide is a nice intro](https://cryptopotato.com/what-are-stable-coins-the-complete-guide).

This is a WONDERFUL (shoutout to JP) [post describing the need for stablecoins](hhttps://blog.ethereum.org/2014/11/11/search-stable-cryptocurrency/) written many years ago by Vitalik (skip a turn and go back 5 WBS’s if you don’t know who we mean) and check out this more recent and [much shorter post](https://cointelegraph.com/news/stablecoins-can-transfer-value-across-blockchains-says-vitalik-buterin) (we’ll cut to the chase, he suggests that smart contract and token protocols must have some sort of compatibility built-in so that stablecoins can be used cross-chain to facilitate true interoperability, which would be awesome).

In the words of Freddy Mercury “Well, aaaalriiiiight!” - meaning we’ve had a semi-deep discussion, provided some definitions, and even gave you some additional reading!  So (sadly) it’s time to wrap this WBS up. Have a great week everyone!

PS:  While it’s a small, relatively unknown school that you probably never heard of - Harvard Law School [released an excellent paper on stablecoins](https://corpgov.law.harvard.edu/2019/02/10/stablecoins/) that is an easy and informative read.

At the beginning of the movie “[Gladiator](https://www.youtube.com/watch?v=h8MtObh-wDo)” Marcus Aurelius tells Maximus that there used to be a “whisper” about the future of the civilized world, the dream known as Rome, and anything more than a whisper and it would vanish...well that’s sort of how we feel about Decentralized Finance, more commonly known as DeFi.  DeFi is the future of finance and one of the final frontiers for the application of blockchain technology. However, we almost hesitate to write about it because it’s still a relative secret - the potential only appreciated by a select few and dependent on increasing blockchain adoption.  And so, at the extremely small risk of scorn from the blockchain community, welcome to this week's adventure: DeFi, early access!  (this WBS is just an intro, DeFi is a massive space with a multitude of applications - and we’ll definitely revisit this topic in more depth)

DeFi is a very broad term; generally it's DeFined (couldn’t resist) as the types of financial products and services made possible by decentralized, smart contract enabled networks that feature an active unit of value overseen by a distributed ledger.  For the sake of sanity (and a shorter WBS), let’s focus on blockchain based decentralized networks.  As you read on, understand that smart contracts and Dapps integrating multiple smart contracts into a complete and automated business process are like the [mycelium](https://en.wikipedia.org/wiki/Mycelium) and the mushrooms (maybe not the best analogy, but fungi are VERY cool) of a DeFi ecosystem.

As adoption of blockchain technology grows and token-based monetary policy, or tokenomics, approaches the proper scale, interconnected digital societies with their own economies are emerging.  As these network economies grow and multiply, they want participants to hold native tokens for the long term (sometimes referred to as “[HODLing](https://en.wikipedia.org/wiki/Bitcoin#Term_%22HODL%22)."  Hodling (in your face spellcheck), or storing value via tokens is important because it represents trust (and reliance) in the current and future valuation and viability of a network, aids in stabilizing token price fluctuations caused by speculation, and you guessed it, manages token velocity!  Networks often incentivize longer term holding by using things like staking based consensus, which ultimately leads to demand for financial services like lending and borrowing tokens.  Network economic models can present an opportunity and a need for decentralized token-based alternatives (yes, DeFi) to traditional financial products and/or services (e.g., sending and receiving payments, interest-bearing token holding accounts [using digital wallets of course], token loaning and lending services, token trading and conversion, and token investing).  DeFi can also provide structured products that mimic different types of securities, including interest yielding (like bonds), and derivatives (like options).  Even things like insurance and credit exist in the world of DeFi.

There’s one more thing that deserves mention when discussing DeFi, Stablecoins.  Real-world fiat currency is more stable and widely accepted than network tokens or coins, but cannot be utilized on a blockchain.  Stablecoins are a type of network token pegged to the value of a country's currency (making them “stable”) but blockchain native - potentially acting as a bridge between TraFi and DeFi (quick [read here](https://hbr.org/2020/05/is-stablecoin-the-next-big-thing-in-e-commerce?autocomplete=true), but we encourage you to dig further as stablecoins and DeFi have an almost incestuous relationship in the short to mid-term).

It should come as no surprise that DeFi improves traditional finance by leveraging blockchain tech to increase efficiency and remove the need for a central authority.  Regular banks, investment banks, lenders, payment processors, and traditional brokers all rely on contracts and manual input to do things like agreeing on deal/loan terms, sending funds, running background checks (AML/KYC), and settling trades - and they add to the cost, time and complexity (not to mention errors) by serving as the central party.  Underlying nearly all of DeFi, smart contracts allow for the automation of these often manual and fragmented processes.  When combined with the advantages of DLT and using token-based consensus models like staking - central authorities are no longer required.  Speaking of consensus, the growth of the crypto mining and validating industry is both a result and a driver of DeFi.  There are “pools” today that combine resources and tokens from many participants to ultimately write more blocks and get more rewards.  Miners and validators do the heavy lifting that keeps all of the transactions resulting from DeFi moving along ([this](https://cointelegraph.com/news/layer1-stabilizes-texas-grids-with-bitcoin-batteries/amp) will give you some idea of current mining scale and tech: and for a REALLY “deep dive,” [check out this whitepaper](https://weis2019.econinfosec.org/wp-content/uploads/sites/6/2019/05/WEIS_2019_paper_30.pdf))

Let’s discuss some examples to solidify all this info floating around your short term memory (FYI: *Solidity* is the most popular programming language for implementing smart contracts).

The simplest example of DeFi is when a company sells tokens to fund its network development and future operations.  Capital formation, or the financing of a company, is obviously in the realm of finance.  And when you substitute tokens for fiat, and implement smart contracts that automatically execute investment transactions without the need for a central authority (like a bank, a central custodian, and/or a regulator), you have a prime example of decentralized finance.  Unfortunately, this simple example also highlights why DeFi is the future that isn’t quite here yet.  The ICO craze proved that until there is more information transparency and equality, as well as accountability - there is still the need for some sort of central oversight to protect investors and companies.  Coincidently (not!), that is what Prometheum has built with its blockchain securities market infrastructure.

Another example comes in the form of lending tokens for validating (PoS), shorting, or other purposes.  In these situations,  network participants (anywhere in the world) can create a loan agreement via a smart contract that executes when terms are met (may include interest rate, loan term, principle amount, KYC, AML, and a credit check), and smart contracts also automate and enforce a repayment schedule.

Some food for thought (and maybe some further reading??):  In the future, DeFi has the potential to replace current finance related businesses (think banks and Wall Street) with *decentralized autonomous organizations (DAO’s)* using decentralized applications (remember Dapps?) composed of interconnected smart contracts as well as utilizing newer consensus models, network monetary policy and governance, and interoperability between DAO’s.

We have to admit that was intense for an intro to DeFi...but it really is that vast of a topic, and more importantly, we have a lot of faith in our readers.  And on that complimentary note is where we end this WBS - have a great week!

Welcome back!  (we’ll never get tired of saying that) I would liken this WBS to a space adventure, a prelude to a space saga if you will - we’ll be exploring how the universe of all the different blockchain networks is destined to one day be interconnected, and where we are today in the story.

We are 100% confident that you know what a blockchain is, but just in case you aren’t familiar with the word “interoperable,” here’s a [definition](https://www.merriam-webster.com/dictionary/interoperability). Now, let’s also make sure you can pronounce “Interoperability” when the pressure is on, and you don’t want to look like a noob (took me a while).  Just break it up into two words:  “Inter” and “Operability,” now say it a bit faster, and voilà.

In a network sense, communication means sharing and being able to use data or information.  Think about everything you know about blockchain, and what type of data is potentially important to share if two networks are to be connected:  participant identifiers, wallet keys, transactions, token ownership balances, and all other block/ledger stored information. The blockchain community has used terms like “internet of blockchains,” “blockchain of blockchains,” and “inter-blockchain communication” to describe the same basic idea:  Blockchain Interoperability.

WARNING: We are moving towards deep space (9) very fast - better put your spacesuits on! (too cheesy?)

We’ve mentioned blockchain interoperability in the past, but let’s define the term before we blast off (still cheesy, we know).  In a perfect world, blockchain interoperability is the ability of two or more blockchain networks to communicate and affect each other without the need for an intermediary and without additional risk or loss of efficiency.  However, we don’t (yet) live in a perfect world...

The closest you can get to interoperability today is for two blockchains to be able to pass value and data cross-chain with different levels of additional complication, time, or cost depending on the particular solution (more on that later). In a highly efficient solution, two networks built on the same interoperability supporting protocol (clones), and using compatible and mutually agreed upon governance models may be able to pass information and process transactions seamlessly from the perspective of the user.  So, defining what is and isn’t a network intermediary within the context of vetting today’s interoperability solutions can get fuzzy since there is always some sort of additional system or process involved (like smart contracts, DApp’s, and even other blockchains!).  Additionally, while risk can be managed, efficiency will always be affected even if by a small degree.  It’s easier understood when you consider an example:

**Perfect blockchain interoperability** would be if participant wallets on chain A (BTC, for example) could send tokens or currency to wallets on chain B (ETH, for example), the same way they would within their own chains - without any added time, security risk or cost.  Keep in mind that means that the transaction would also be written to both chains, with blocks reflecting the full details.  In real-world interoperability, there would need to be a conversion from one chain’s token to another, and that involves another process and adds complexity.  And writing two separate blocks may add fees.  The key is that current interoperability solutions strive to make the process seamless from the perspective of the users and are therefore still a massive improvement from having to open a crypto account, transfer your tokens into a different wallet, place a trade on the exchange, wait to settle, transfer back, then send, and add in all the little steps and possible fees in between.  

Sending tokens frictionlessly across blockchain networks is just one example of how (and why) blockchain interoperability is important for continuing blockchain adoption and innovation, and ultimately the future of blockchain.  Consider a medical network or a hospital group that is using a blockchain to store records.  If a patient from another group needs care, how would they obtain the patient’s medical records if they are stored on a non-compatible computer system or blockchain?  (hint: intermediary - in this case probably a phone call followed by an email with the information...how early 2000’s)  Supply chains are another logical implementation of interoperability.  Logistically, to get a commodity (food, wood, steel, oil) from the production facility to the wholesale distribution facility takes multiple parties and potentially crosses multiple borders.  As of right now, some companies are using blockchain to solve a process previously full of manual procedures (remember Shipchain?), but that might be for only one leg of the journey.  And even if other blockchains (Block Array, CargoX, GrainChain) are used on other legs - data cannot be seamlessly passed from one leg to another, unless the chains involved are compatible or interoperable.

This is a good a time as any for full disclosure...this whole post was inspired by this [white paper](http://www3.weforum.org/docs/WEF_A_Framework_for_Blockchain_Interoperability_2020.pdf) (and hats off to BK for spotting it first - not Burger King btw). We strongly recommend reading this paper, though a word of caution, it’s long and technical.  But, it is extremely important for a blockchain investor to understand the application of interoperability; and why it can improve on current business models - especially supply chain, and this paper explains just that.  It also has a ton of examples and use cases that will make you really “get it” even if you skip the technical parts.  And for the overachievers out there, [this paper](https://www.ingwb.com/media/2667864/assessing-interoperability-solutions-for-distributed-ledgers.pdf) is excellent as well.

Ok, that was pretty high-level, now let’s get loooow (better??)

There are actually different ways that blockchain networks may need to connect, the two distinct ones are *value transfers* and *non-value data sharing*.

**Value transfers** are exactly what was described in the example of sending tokens between chains, but MUST be done efficiently and as securely as if it was the same chain.  **Non-value sharing** is like the medical group example, and it’s the more important and more difficult of the two as a result of additional requirements like how to transfer AND access the data, who can see what data, protecting data security, establishing the validity of the data on both chains and as it’s interacted with, and trust in the respective governance models.  A great example of the difficulty associated with this type of interoperability can be found in regulated industries like securities, and explains the current need for a centralized and permissioned model like Prometheum (bonus points for the tie in!).  If blockchain securities were to be traded between blockchains, regulators would want to protect investors.  That may include monitoring the trading, access to a consolidated historical trading ledger, and most importantly, they (and maybe the participants themselves) would want to make sure that participants on one chain had passed AML/KYC checks as equally rigorous as on the other chain.  To put it mildly, we are a long way off from “regulated” interoperability, but that is the future.

Much like with consensus and scalability, there are many different interoperability solutions and functions--and unsurprisingly--developers have some cool names for them.  We’ll define some of them (very) briefly here:

**Notary schemes** - Two or more chains recognize a third party as having the ability to confirm transactions between chains, in a sense acting as a blockchain notary.  Usually involves a separate consensus model and a separate ledger, which sends a multisig to the chains that allow the transaction to execute.  This is the most centralized solution and also the least efficient.

**Sidechains/Relays** - This allows networks to communicate without the need for third parties, even with different consensus rules.  Usually, smart contracts exist within one chain that can interpret and interact with another chain - the sidechain runs a contract pegged to the other chain.  This solution requires some level of similarity between the protocol rules of the underlying networks.

**Hash-time locked contracts** - Triggers built into smart contracts, usually in the form of matching “secret” hashed information, execute when the preset parameter is met.  Atomic swaps are based on this model.

You should [start with this oldie but goodie from Mr. Buterin](https://www.r3.com/wp-content/uploads/2017/06/chain_interoperability_r3.pdf) if you want to learn more about these different solutions.

Blockchain interoperability is a self-fulfilling process...as more companies extend blockchain efficiencies beyond their own networks with protocols and BaaS (enterprise) solutions that allow for interoperability, competitors will be forced to use those blockchain models as well or be left “out of network” (boom) and possibly less competitive.  And that brings us full circle to a previous post we did about interoperable enterprise blockchain networks like Polkadot and Cosmos.  I love it when that happens.  Oh, and check out Chainlink, Ark, Aion, and Wanchain to see the different ways they approach interoperability. (pop quiz: who uses notary schemes, who uses sidechains, and who uses parachains?? And it may be a trick question...)

And...we’re out of spacetime.  This topic is one of those interoperable rabbit holes, feel free to go deeper, hop around, and explore whatever tangent topics pop up (rabbits do that, so it’s a decent ending).  Have a great week, everyone!

It’s nice halvi… I mean having you back - we hope this is turning into a habit!  You’ve logged enough hours on WBS (training) adventures, so it’s time for a solo flight where it’s on you to explore unfamiliar terms and venture into uncharted topics.  This week we’ll discuss a pretty significant event in the blockchain world: only the 3rd time in history that the reward for mining a block of Bitcoin was reduced by 50% moving forward.  This happens once every four years, so it’s actually a bigger deal than the Olympics (for miners!).  Most importantly, you are now equipped with the foundation not only to understand what the h*ll this halving event actually means but also why it’s significant AND how it relates to many of the topics we have discussed previously.  There are a few new terms here that are in italics purposely -- that’s our way of nudging you to look them up.  

Side note:  now that we’ve “aged” ourselves with this first current event related post...we hope that wherever and whenever you are reading this, you and your loved ones are healthy and doing well.

“The Halvening” happened on **Monday, May 11th, 2020**, at 7:23 UTC, and the reward for mining (using PoW consensus, of course) a block on the Bitcoin network was reduced from **12.5 BTC to 6.25 BTC**.  This was triggered by the mining of block number 630,000 (also the block height!), and the miner received exactly 6.25 BTC.  Here’s what block 630000 looked like using a blockchain explorer (remember: solo flight):
![](https://www.datocms-assets.com/44945/1628262875-wbs-tgh-1.png)


For a definition of a Nonce (because it’s the coolest sounding term) [click here](https://en.bitcoin.it/wiki/Nonce) and you can search the rest of the terms there as well (Han SOLO style).



**The way Bitcoin decreases block rewards** is kind of intriguing because every 210,000 blocks mined (so approximately every four years) the reward is cut in half.  The reward for mining a block was initially 50 BTC.  The first reward halving, at 210,000 blocks in 2012, cut the reward to 25 BTC, then 12.5 BTC at block 420,000 in 2016, and now 6.25 BTC.  This process of halving will go on until around the year 2140, at which point the reward for mining block number 21,000,000 will be .00000001 BTC - the smallest unit of Bitcoin, also known as a Satoshi.  When Bitcoin was launched on January 3rd, 2009, it was decided that the supply of Bitcoin would be capped at 21 million - that’s all that can ever be mined, and there will never be more Bitcoin in circulation.  Think about what that means for the flexibility of the network’s monetary policy -- the option to “print” money when needed does not exist. Furthermore Bitcoins get lost sometimes, so the max supply is actually less than 21 million.  Now factor in diminishing rewards for miners who have and continue making massive investments in mining infrastructure, electricity costs and overhead, plus increasing computational difficulty, and less and less Bitcoin left to mine - and you start to see just how BIG of a deal this is ([Click here](https://blockchain.news/analysis/bitcoin-halving-everything-you-need-to-know-in-5-minutes) for great charts).

Ok, a not so quick side-story:  Block 629,999 was mined by F2Pool (Interview with the founder), and it was the last block before the halving event (so the miner still received 12.5BTC).

Here’s block 629999:

![](https://www.datocms-assets.com/44945/1628184051-block-629999.png)


As you can see, the miner left this message in what’s called the coinbase data of the block: "NYTimes 09/Apr/2020 With $2.3T Injection, Fed’s Plan Far Exceeds 2008 Rescue.”  This is a reference to this article which was the miners’ way of paying homage to Satoshi Nakamoto, and his genesis block #0 containing the message “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”

BOOM:

![](https://www.datocms-assets.com/44945/1628184057-boom.png)


And smaller boom:

![](https://www.datocms-assets.com/44945/1628184062-smaller-boom.png)



Don’t forget, Bitcoin was launched at the beginning of 2009 - in the thick of the financial crisis.  The message was Satoshi’s (or the network creators) way of saying Bitcoin is a better currency model, specifically because of its monetary policies limiting total supply, controlling inflation/deflation with autonomous predetermined changes to mining rewards, and changes to mining difficulty.

Let’s talk about implications and where you may want to go exploring from here.  Bitcoin is the most mature blockchain network that exists, so learning from events in the Bitcoin lifecycle will prepare you to understand the dynamics of other blockchain networks in the future - and their token valuations.  There’s a pretty wide range of opinions in regards to what halving the reward will mean for the price of Bitcoin (short term vs. long term), how it will affect hash rates, and for miners in general.  As a blockchain securities investor you may want to go on a recon mission to see what big crypto investors like Tim Draper and Mike Novogratz are saying about the possible outcomes of halving, and what the biggest mining operations are doing in response.  You may also want to know exactly what happened to the price of Bitcoin the last two times the reward was halved (hint: it went down, then up, then down).  Right now, there are about 18.3 million Bitcoins that have been mined, and a little less than that in circulation due to lost coins - meaning there are only about 2.5 million Bitcoin left to mine.  But because mining is expected to continue until the year 2140, there will be increasing competition among miners for less coins AND less reward.  To maintain a balance between ever more powerful mining operations and less Bitcoin - the difficulty of mining a block needs to be increased, and that has implications on the profitability of miners with older (less efficient) equipment and by extension higher energy costs.  Another consideration for investors is how scarcity can affect the price of Bitcoin, and on a macro scale whether this makes Bitcoin a “safer” investment during times of market turmoil and/or FED (quantitative) easing, or as a hedge (strong suggestion to look up Paul Tudor Jones and Bitcoin).  Lastly, miners can mine other crypto currencies if they feel there is more profit with the same overhead costs and equipment; fewer miners means a greater probability for a 51% attack, which is pretty much a death blow to a network’s (and token) value.  However, traditional economic theory (supply and demand) counters miner concerns. So that while the reward is half, the price of BTC will rise due to less supply, therefore having no net effect on miners - and this has proven to be accurate so far based on the last two halving events.

**We STRONGLY** urge you to read the [Bitcoin whitepaper](https://bitcoin.org/bitcoin.pdf), it had a profound effect on this author's understanding of blockchain early on, and it’s mostly an easy and enjoyable read.

And for some fun, here’s a super interesting post about another hidden (but the same!) [message in Bitcoins code](https://thenextweb.com/news/bitcoin-easter-egg). Also, Satoshi had a lot of [great quotes](https://satoshi.nakamotoinstitute.org/quotes/).

As someone (pre-influencer) famous once said, “All good things must come to an end,” and so ends another chapter in the WBS.  This marks the first post that’s not solely focused on building your knowledge base, so if you enjoyed it, get ready to boldly go where no WBSer has gone before. We will remove the phrases “solo flight” or “training wheels” or “hand-holding” henceforth!!  Have a great week everyone.

P.S. If you’re itching to learn even more and have some free time on your hands, check out the next major event on Bitcoins schedule:  A soft fork that proposes to incorporate Schnoor signatures, Taproot schemes and Tapscript into the network base layer (L1) protocol.
[This article](https://bitcoinmagazine.com/technical/2020-and-beyond-bitcoins-potential-protocol-upgrades) is a great start.

We’re hoping you’ve recovered from the last few economics adventures, and glad to see you’re back for more!  We’ll try to keep this WBS on the less technical side, though this topic is deceptively simple.  So sit back, relax, and enjoy some hard and soft forking (childish, we know).

**The term “fork”** originates from traditional software development; it’s when a subset of a team of developers working on an open-source project decides to change/update/add code that was not agreed to by everyone.  The result may not be what’s best for the overall project: two versions of the source code that different sets of people are working on - hence the fork.

Go a little deeper here: Why Do Open Source Projects Fork?
Or put on your scuba gear for this paper: [A Comprehensive Study of Software Forks: Dates, Reasons and Outcomes](https://link.springer.com/content/pdf/10.1007%2F978-3-642-33442-9_1.pdf)

Forking works similarly on a blockchain network, except that nodes and/or token holders (depending on voting rights), are the team and the changes are made to either the protocol or to the actual ledger (chain).  On a fully decentralized network, any governance model can allow forks, and potentially have a negative impact on the original network - we’ll explain why that matters (to you) after the lesson in forking (ok, we’ll stop). 

Just like with any regular software (like a phone app), blockchain network related updates are necessary from time to time - that’s a type of fork.  Blockchain forks can be caused by three things:  an accident involving blocks being processed at nearly the same time, an intentional divergence based on an agreed upon change to the protocol, or a disagreement among nodes related to which chain or protocol rules are the correct ones. 

**Quick definition:**  Block height is a number found within every block, signifying how many blocks came before it (the age, in blocks, of the chain). Additionally, once verified, it can be used by nodes to confirm whether or not a new block received from another node is really a new block (chronologically) or potentially part of a divergent chain (a fork). 

In the case of an accidental fork, two different blocks with equal block height are processed and validated at almost the same time.  One group of nodes adds one block to its chain, and another adds the other block.  That results in the existence of two different chains, almost identical except the last block(s), and nodes basically choosing which one to acknowledge and continue adding blocks to.  Most of the time, the correct chain is identified fairly quickly because it’s the one that the majority of nodes support.  The fork is resolved when the less popular chain becomes stagnant due to decreasing node participation, and blocks added to that chain after the fork are “orphaned” and no longer valid.  

Most forks are people driven processes; they are not automated functions. Non-accidental (intentional) forks can lead to separate chains and split networks (eventually distinct) when there is a divergence of opinion in regards to a protocol rule or general inability to reach consensus.  For example, one subgroup of a network’s participants (nodes) may update their protocol and branch off by continuing the chain with blocks based on the updated protocol, and another group may stay on the old protocol and keep adding non-updated blocks like nothing happened.  Keep in mind that in terms of the ledger, both resulting networks have identical versions of the chain up to the last block before the forking event - so the chain of token ownership and transactions is intact all the way back to the genesis block, it just splits after the fork.  From the perspective of a node after a fork, their chain is the one correct chain (they don’t see or interact with two chains simultaneously).

As we wrote earlier, a fork can also be an intentional, agreed upon update to the network protocol - without resulting in two chains.  In that case, there is still only one chain post forking, but the blocks may be different after the fork, so visually more like a single bent chopstick (good luck coming up with a better food analogy).  The blocks may be different because a network protocol change may be related to block structure requirements, like block size, and the point where the chain starts to look different because the block structure has changed, is the fork.  This part is very important!  ANYONE can propose and put into effect a new or updated network protocol with the backing of the necessary number of miners or validators (nodes).  Even if the update isn’t supported by the network founders, it’s still an “agreed upon” intentional fork if the majority supports it.

**There are two types of intentional forks:  hard forks** and **soft forks** (for real).  

**Hard forks** are usually the result of consensus/mining and block structure related changes. Because these changes are so fundamental, every single miner/validator (in some networks every “full node”) needs to run updated software to do anything block related.  If a node doesn’t update, they will no longer be able to participate in mining, validation or adding blocks (since their blocks will be rejected by the updated nodes).  In addition, their chain will no longer be correct, and new proposed blocks will appear invalid to them.  However, if there are a bunch of people who decide they don’t want to update their node operating code, they can join together, stay on the old code and continue the old chain -  essentially becoming their own network.  That’s called a contentious hard fork.  And in so doing, their transactions (and any token attached to them) will no longer be accepted on the updated network, resulting in two distinct tokens.

**Soft forks** are a lot less dramatic from a blockchain perspective, but they are tricky to understand at first, so don’t skim this section.  Soft forks are caused by changes that don’t require everyone to upgrade to continue the “correct” chain post-fork, but a majority of nodes would need to be running updated software to validate and add blocks that complied with the update.  Nodes who did not update would still see the correct chain, they could even propose blocks (which would get rejected), and theoretically, they can keep running the node, but economic incentives would probably push them to update.  An example of a soft fork update may be something like an additional description field in the transaction message code - old nodes would see post-fork blocks, though likely without the additional piece of information.  But, if they tried to propose a block without the additional field, it would be rejected.

Now some recommended reading, it’s tough not to include [this post](https://hackernoon.com/hard-forks-soft-forks-defaults-and-coercion-ko9zn3pef) from Vitalik Buterin. 

Check out Bitcoins wiki for a c[oncise definition of hard and soft forks](https://en.bitcoin.it/wiki/Hardfork) within their network.  

![](https://www.datocms-assets.com/44945/1628262539-wbs-fork-1.png)


One of the better diagrams about accidental forks - pay particular attention to the top left text


And then there’s this great hand-drawn visualization of what happens when blocks are mined at almost the same time.

![](https://www.datocms-assets.com/44945/1628262548-handdrawn.png)


Bitcoin and Ethereum (and many others) have had numerous hard and soft forks.  [Here are a great infographic and explanation](https://bitcoinmagazine.com/technical/infographic-map-bitcoin-forks).  

There is a massive amount of info on this topic if you’re interested, just Google it!  Forking is one of those things that takes research and time to get comfortable with, and it really helps to see some examples of forking (miner* pun intended).

*extra points for using the word miner

Ok, let’s circle back and understand **why this is an important consideration for blockchain securities investment**.  Forks (contentious hard ones) have the potential to create a completely new token or network currency, based on a new network protocol.  These types of forks can be considered negative from the perspective of network stability, token economy, and long term network growth - for the original network, of course.  But, blockchain technology is meant to be (brutally) efficient, so either the network keeps evolving or it perishes.  This type of thinking is at the root of blockchain network rules (and people), so there is a perspective from which all types of forks are considered natural and must occur to keep a network competitive.  As a token holder, an investor may find the value of a token decrease if, for example, the network or chain with the “new” token becomes more popular among validating or full nodes (note: there are also “read-only” nodes).  Therefore, looking at the governance model of a prospective blockchain company’s network is very important when doing your due diligence.  Consider whether their protocol allows any node to initiate forks, how voting occurs, their consensus mechanisms, and whether their blockchain is truly decentralized and/or permissionless.  A public decentralized chain has a higher probability of forking.

Thathathathathat’s all folks!  Our apologies to the readers who would have preferred more humor related to soft/hard forks and forking - maybe if there’s enough of you, we can contentiously hard fork the WBS into WBSoriginal and WBSfunny...just kidding.  See you next week!

It’s great having you back for another adventure, and congrats, you’ve made it to the end of the WBS.  Just kidding, it’s only the end of the network economics series!  Now is a good time to tell you that we’re almost done with “Blockchain Securities 101,” and unless you flunk the final, you’ll be getting a (Reg!) A+.  

In the coming weeks, we’ll be transitioning the WBS to posts about what’s happening in the world of blockchain securities right NOW!  So stay tuned :) oh, and there is no final.

You’ll also notice links to papers and articles in this WBS.  If your goal is to become an expert blockchain securities investor, we suggest you explore advanced WBS topics further.  The good news is that we’ve done part of the work for you by providing links to resources we believe are worth reading.  

Now, let’s get on with this week's WBS on Token Velocity (TV or V for short), and it’s role in models for network/token valuation and, ultimately, the future health of a blockchain network.

Much like in real-world economies, a blockchain network's (a mini-economy!) value is a factor in determining, on a macro level, the current and future health of a token economy.  One common method to determine a network’s value is to consider its “market cap” - just take the token price and multiply by tokens outstanding - we’ll call this perceived value.  But blockchain networks are not like traditional companies, and therefore the “real” network value must consider things like changes in token supply, utility vs. speculative token value (and resulting token hold times), the number of participants, the cost of the products or services, and of course how often the tokens are being transacted - the token velocity. (for an excellent paper on this, [click here](https://www.cis.upenn.edu/~fbrett/theses/yassine_elmandjra.pdf))

**Token velocity** is a critical variable that is linked with network value because it quantifies how many times a year, on average, a token changes hands, or moves between digital wallets, on a specific blockchain network.  Tokens changing hands, or transactions occurring, signify that network participants are using the token supply.  Why is that important?  Because it means a network is ACTIVE, but activity itself doesn’t mean much because it can be the result of a few participants transacting a lot, or many participants transacting a little - or anything in between.  Therefore it can have drastically different effects on real network value as opposed to perceived value.  Imagine a network with lots of token supply and a really high token price, but few transactions (possibly because the token is too expensive or there aren’t enough participants).  In this example, V is very low, and the network economy is obviously not doing well even though the perceived network value may be high.  You may be thinking that if in the above example there were LOTS of transactions (V is high), then the real network value and overall health would be higher -  but it’s just not that simple.


**Brace yourself, we're about to venture into a bit of algebra!**


There have been quite a few attempts to relate TV or variable “V” to a network's real value by incorporating other variables we alluded to in the last paragraph.  Most equations are derived from traditional economics.

In 1911, Irving Fisher formulated the **Equation of Exchange, MV = PQ**.  Where **M** is the average money supply (market cap), **V** is the velocity of money, **P** is the average price level for goods/services, and **Q** is the total expenditures on goods and services.

Many people in the blockchain world have proposed modified versions of Fisher’s equation (for a good summary, [click here](https://hackernoon.com/token-velocity-a455173d69e3)) by replacing the variables with ones existing in a token network economy. A few of the most notable proposals come from [Vitalik Buterin](https://vitalik.ca/general/2017/10/17/moe.html), Chris Burniske (read the book) and [Kyle Samani](https://www.coindesk.com/blockchain-token-velocity-problem).

Overall, what they all have in common is establishing the relationship between TV, the (token) cost and total volume of utility transactions (products or services paid for in tokens), and token supply.  And notice a very important inverse correlation in the formula: as V increases, the real network value decreases - unless more products/services are purchased and/or for higher prices.  Vitalik makes an interesting tweak, though, where he uses average token holding time instead of velocity - and for good reason.

While math is great for figuring out numbers, we’re here to explain what the numbers actually mean and why they are so important (and frankly, there’s just not enough space and time to get into equations).

Let’s revisit our example and think about how TV can be very high or very low and why average token hold times are so closely related to this.

High TV can imply that people on a network are selling their tokens very quickly after receiving them or using them very quickly after buying them.  This is usually because the tokens can only be used to purchase products or services on the network, meaning they only have utility value. Think about it; if you wanted to use a service or purchase a product provided by a blockchain company but had no native tokens, you would buy the necessary number of tokens right before (since that’s the only way to pay).  Participants receiving tokens for providing a service, like DApp creators or miners may also try to exchange them for FIAT money or more liquid cryptocurrency as quickly as possible - unless certain conditions encourage them to hold onto them.  In this case, a high TV means the tokens are not functioning as a healthy currency because people don’t want to hold them as they are either not a good means to store value, not stable, and/or have no speculative value.  Therefore the future of the network is not as promising as the activity suggests because there are not enough HODLers (that’s an intentional misspelling of holders - look it up!).  Unfortunately, this is a bit of a rabbit hole as stability of the token may mean it won’t appreciate, and speculation may have a negative impact on utility transactions.  Add to that token price supply/demand dynamics and artificial methods used to control TV such as incentives to hold, staking based consensus, token related voting power, high non-utility gas fees, profit share, and/or stablecoins, and you start to get a sense of why it’s so important to understand the details underlying TV and the role they play in evaluating the viability of a network long term.  And that my friends is why a blockchain network economy is so complicated!

Oh, and if you really like formulas, take a peek at these research papers:

[Token Economics Considering “Token Velocity”](https://basicattentiontoken.org/wp-content/uploads/2018/12/token-econ.pdf)

[The ICO Paradox: Transactions Costs, Token Velocity, and Token Value](https://bfi.uchicago.edu/wp-content/uploads/Malani-Anup-Holden-The_ICO_Paradox-8-30-19.pdf)

Remember, all of this is related to how an investor can determine the value of a blockchain security! For an example of the things that an investor needs to consider in analyzing a token economics model, click here.

And if you want to go deeper on modeling a token economy, [this is a great start for the math majors](https://hackernoon.com/utility-tokens-discussion-economic-model-and-simulation-in-r-798c0ff3d26c) out there.

Ok - unless we change the WBS to a weekly research paper, we’re done for this week.

Join us next week for...actually it’s a surprise (meaning we have no idea).

“A person who won’t read has no advantage over one who can’t read.” That’s Mark Twain telling you to follow the links!  (and no, we do not get paid for referrals to these sites, and I’m offended you would even think that).

We’re on a token economics roll here at the WBS, this week: Blockchain monetary policy, or BMP for short. You can almost call this “Tokenomics Part 2” because of how closely blockchain monetary policy and tokenomics are related, AND we promised we would have a WBS adventure dedicated to blockchain monetary policy!

Blockchain Monetary Policy (BMP) is a set of rules that control token supply and token velocity in an effort to create and maintain a healthy currency within a blockchain network economy.

Prepare yourself - this is a looong and more difficult WBS, but we promise it will be worth every second if you’re serious about blockchain securities investing. And you know we keep our promises!

The first question to ask yourself: how well do you know US monetary policy? (Econ professors shhh)

The US, like many countries, has an extremely complicated, politically influenced central bank (The Federal Reserve) model with different laws and organizations (US Treasury, open market committee, banks) some private and some public, dynamically controlling money supply with reserve requirements, treasury securities, the discount rate, and issuance/printing - suffice to say most people do not know or understand the model. It’s also Fiat currency based, as in money is not backed by a physical commodity, instead the government that issues it basically promises that it’s legal tender and can be used as a form of payment - at the minimum back to the government. A fiat model is pretty useful when the US needs to print money to pay bills, give loans, or inject money into the economy.

On a blockchain network, the monetary policy must be more efficient, automated, and set before going live. This is a key difference between BMP and most real-world MP’s where changes to the money supply, interest rates, and even related laws can be reactionary, without warning or public approval, and sometimes drastic. Also, BMP is clearly stated to all participants, and its relative clarity means it is actually known and understood by many participants. Lastly, on most blockchain networks, you can’t just print currency whenever you want. Bear in mind that depending on the governance model, it may also be difficult to change BMP quickly or often in response to problems without approval from network participants. But, there are advantages inherent in BMP.

It all starts with incentivization - using network currency/money as a reward, normally known as tokens. People want a stable, valuable, and liquid digital incentive to join and potentially contribute to a network and a method of storing value and making payments. Tokens have the potential to do it all. Tokens can also act as deterrents; for example, the more tokens someone has, the less likely they are to engage in behavior that may critically harm the network, thus depreciating the value of their tokens.

A blockchain network must plan on creating a sufficient amount of tokens ahead of time, and for their distribution (whether by mining, validating, investment, etc.) to be based on a predefined future “release” schedule so there are enough tokens in circulation to support the network - that’s called the token supply, the equivalent of money supply in traditional monetary policy. Some networks create a finite, pre-set amount of tokens, and that’s the max or capped token supply(Bitcoin, Filecoin, Tezos, BAT, Prometheum). Other’s do not set any limits (Ethereum, Blockstack, Venezuela/Petro!).

Controlling token supply is the core function of BMP, and it’s tricky. The principles of supply and demand apply to the token value. So the amount and rate at which tokens are released and how many are allowed to circulate must be considered even before the network goes live. Don’t forget there are different ways to get tokens in and out of circulation. Not all tokens are “mined,” so changing supply can be done by changing consensus rewards, by getting rid (burning) of tokens, encouraging (and discouraging) storage, by staggered or variable releases, and by not creating too many in the first place. You also need to factor in tokens that are lost by people who forget their wallet private keys. Token supply within BMP must strive to prevent inflation and deflation while making sure there are enough tokens for all the participants and activities on the network (and as it grows).

To effectively control token supply, other factors need to be considered.

All networks suffer from the same dilemma at the beginning: how to attract participants and have money for development, operations, and infrastructure (pretty universal!). For a blockchain network, tokenization is a big part of the solution because tokens are created from scratch and at no cost - but (hopefully) have value. The tokens must be valuable to the various types of participants: users of the product or service, DApps or 3rd party service or product providers, buyers, and sellers (if it’s a Multi-Sided Platform like an ATS;), node operators, and investors. This leads to a tokenized “chicken or egg” problem. How to attract the first wave of participants with a token whose intrinsic value is tied to the network activity, which is tied to how many participants there are in the first place? The answer is a token’s value being derived from not only it’s network utility right now, but its speculative value (as a blockchain security) derived from potential future increased network activity and possibly features like equity and profit sharing.

Speculation is a funny thing, however, and it can have both positive and negative effects. Speculation can be short term (think trading) and long term (think investing) and is correlated to risk tolerance and liquidity goals. The price of a token going up is generally good, but if it goes up too fast, is too volatile, or becomes too expensive, it can be bad for a network. The key is to use BMP to create both token traders AND token holders. This can be done by having liquid markets, with consensus algorithms like POS that require a stake of tokens to participate in consensus, or other means to encourage holding tokens - and that’s the perfect segway to token velocity!

TV (an unfortunate acronym) is the rate/speed at which a token is moving within a blockchain network. The only way a token can “move” is through a transaction, and it’s measured per year. If there are a lot of traders, or utility transactions, TV is high...if there are a lot of holders, TV is low. It seems simple, but it’s actually really complex and important to achieving a successful BMP.

Join us next week when we wrap up this blockchain economic series by going deep into token velocity.

After mentioning blockchain governance in last week’s post - we decided to book the adventure for this week’s WBS right away, and of course you’re invited!

You may be noticing a trend (you’re right) that many concepts in blockchain are derived from the real world, and the problems they solve are digital versions of real-world problems.  Tokenomics is economics - just based on a digital society. Digital wallets are just like real wallets - without making your pockets bulge. And surprise! Blockchain governance is just like real-world governance, with different governing models used by different networks.

The goal of most networks is to:

* grow as big as possible in terms of participants and transactions;
* be around for as long as possible, and;
* maintain the highest possible token value without negatively impacting the first two goals.
As we’ve explained in our discussion of consensus (which is a critical part of BG), blockchain as a technology strives to reach autonomy and efficiency within a digital network, but remember, network participants are human beings.  It’s these human beings, the node operators, and stakeholders (owners of tokens), that need to be governed. Since blockchain networks are, for the most part, economically driven enterprises, a simple, logical, and fundamental assumption is made:  participants of a blockchain network are all self-serving. To be clear, this means they only care about money, tokens, and power/control (shout out to The Lox).

Blockchain governance is broken down into two distinct models: On-chain and Off-chain.  (Bonus points for remembering that scaling solutions also fall into these two categories)

On-chain governance is newer, and business decisions are made by taking electronic votes among stakeholders (via a consensus algorithm).  The vote and resulting action/execution is fully automated and happens completely within the blockchains technology (via smart contracts).  This type of government, where every participant has a vote that directly decides the outcome, is a form of direct government or direct democracy.  The only twist is that more tokens equal more votes.

In Off-chain governance, decisions are made in the real world (or using social apps, of course) by the blockchain creators, a governing organization, stakeholders, developers, miners/validators.  These decisions are not fast or automatic and essentially happen by people talking to each other and lobbying/voting for whatever will result in more value for either their saved tokens (usually veteran core developers) or their mining rewards (you get it).  Bitcoin and Ethereum are both governed off-chain.

Off-chain governance can be split into three types:

**Benevolent dictator for life** - The creator(s), owners (Board, CEO or management team), or lead developer of the blockchain has all the power to make decisions.

**Core development team **- A group of dedicated developers who are responsible for maintaining and updating the actual underlying blockchain code make all decisions.

**Open governance** - A group of representatives elected by the network participants vote on final decisions.  This is a form of representative government or representative democracy, similar to what we have in the US!

Well, this is as good a point as any to wrap up for today - blockchain governance is a massive topic.  We’ll need an additional WBS on BG to dig into factors that determine which model to use, the pros and cons of different models, the types of decisions that come up, the battle between developers and node operators, hard forks, and real blockchain examples using different models.

“Every ending is a beginning” - We’ll catch up next week!

Another week already? Time flies when you’re adventuring!  Ok, let’s get serious...this week we’re discussing token economics, a broad term describing the economic model or system of a blockchain community (we were tempted to use the word society!).  You can call it tokenomics if you really want to impress your non-WBS reading friends (who you should invite to the WBS immediately).

As you can probably tell, this is an advanced topic, and it’s also the most important part of a blockchain network after the code and hardware the whole thing sits on.  To avoid any confusion, we’ll be using the word “token” more than normal to describe a digital asset (like a blockchain security) functioning as a means of utility on a blockchain, some might say a token’s true purpose.  A token’s utility is directly tied to its role as money or currency (cryptocurrency), and just like in the real world when we talk about money, we’re talking about economics.

Tokenomics is just like regular economics (there’s even macro and micro tokenomics), but with a focus more on monetary policy.  The goal of tokenomics is to create and maintain an efficient economy within a network of participants on a blockchain by using currency, or tokens, as an incentive.  To do this successfully, you need:

* A really good reason for lots of people to want to be a part of your blockchain ecosystem in the first place.  A network needs a clear purpose.
* A (token based) network governance model that may include attributes like voting rights, roles, accountability, and vested interests - tied to token ownership (deep breath - we’ll do a governance post soon!).
* A token offering and/or distribution model to fund the creation of the network.  This is where speculation and a token being a security come into play to create initial value.
* The token to have real utility;  in other words, people can, want and NEED to use the token to participate on the blockchain, and that creates the token’s inherent network value.
* A consensus and reward model for encouraging work and discouraging malicious activity.
* Control over token supply and demand via creation and burning to prevent inflation, and support token value stability.  A/K/A Monetary policy.
* The currency to be capable of scaling along with the network (remember scalability?)
* A liquid electronic market to efficiently determine token value and create liquidity or fungibility of the token into other assets.
In addition to the above, tokenomics needs to factor in how tokens can be used to positively affect the different types of participants on a blockchain network:

* Users/individuals/entities that use the products or services supported by the blockchain must be able to easily pay, make transfers and store value using tokens.
* Node operators need to be incentivized/rewarded with tokens to do work.
* DApp creators need to be attracted and motivated to build applications for the blockchain with tokens.
* Investors need to believe in both the intrinsic and speculative value of the tokens.
As you can see, tokenomics is just as complicated as the economic model of a small nation to some degree.  Tokenomic policy must be set ahead of time and adjusted based on future planning, but it must also be dynamic and able to adapt to changes in a blockchain’s ecosystem as they occur.  Without tokenomics, the alternative is some sort of barbaric, barter-based blockchain for savages...that’s a joke, don’t look that up!

It’s essential for blockchain securities investors to understand tokenomics and how it affects the value of a token.  Tokens, or let’s go back to calling them blockchain securities, aren’t always equity securities. Meaning they don’t always represent a “share” of equity in a company the way stocks do.  And even when they do, their network utility value and the economic model built to support that value should play significantly in your decision making as an investor.

That’s a hard stop, we appreciate you joining us...and if you feel overwhelmed by the implied scope of tokenomics, have no fear, we will be writing a lot more on this topic in the future.

“After all, tomorrow is another day!”

Welcome back to this endless weekly adventure - better known as the WBS.  As we get further along (consider this a warning), we’ll assume that any terms defined earlier do not need to be defined again.

In this second part about blockchain companies, we are introducing you to a few companies that use a blockchain to power their business.  It’s on you to expand your knowledge further by doing real research into companies like the ones mentioned here.

Blockchain-native companies are leading the movement towards this new technology.  They believe that the blockchain and, more specifically, features like smart contracts, consensus, digital wallets, and token economies can make their businesses more efficient and secure.  Plus, because their tokens have value derived from utility or usefulness on their networks, they can be used to raise capital by offering them as securities. Let’s look at a few.

Prometheum is a GREA...whoops, sorry - while we are, in fact, a blockchain native company, we’ll stick to other companies in this post!

We’ll start with Filecoin, their model is really cool and easy to understand.  They rent out unused storage space on computers and pay the owners in Filecoin tokens (at least they didn’t call themselves Filetoken).  Filecoin is like the Airbnb of storage, but they use a proprietary blockchain to track all activity and make payments. What makes their model so interesting is its use of a mining based consensus model to introduce dynamic competitive pricing for storage.  So you know how you have all that empty space on your hard-drive, you can earn Filecoin for pretty much doing nothing. And the best part is that the tokens aren’t just for use on their blockchain (those are called utility tokens), but they can be traded - meaning they are also securities.  Filecoin originated from Protocol Labs, whose founder Juan Benet, created a really well known protocol for distributed systems called InterPlanetary File System (IPFS), which is used in Filecoin. Oh, and since privacy and security are so important for data storage and hosting, the distributed and anonymous nature of blockchain is uniquely well adapted.

Blockstack is a blockchain native company that has accomplished a significant milestone in the world of blockchain securities. They were the first company to register their tokens in the US with the SEC as public securities (via Reg A+).  They spent four years building their proprietary blockchain based app platform. Think Apple App store for decentralized applications (DApps). Blockstack believes that blockchain is the best technology foundation for an economy of apps where fast and automated payments, secure and accurate records, privacy, and ownership of user data is key.

Ok - let’s recap a few more...we’re not writing a book here.  In the world of logistics, Shipchain (notice a trend in awesome names??) uses the blockchain as the underlying technology for an enterprise supply chain and shipping solution.  There’s a company called Mythical Games that creates virtual worlds with token currencies built on blockchains. Foam is a blockchain based GPS and mapping company that uses blockchain to manage crowdsourced location data.  One more cool one: BAT (Basic Attention Token) is an Ethereum-based token economy built to support the digital advertising industry. They have created a platform that maintains a network of content publishers and tracks and rewards consumers - and you guessed it, payments and records are done via the blockchain.

My editor is giving me a look that can only mean that we’re out of space and time - but don’t stop, there’s a growing universe of innovative blockchain companies out there for you to explore before you start investing.  By the time you’re ready, we’ll have a way for you to invest and trade their tokens - just call them blockchain securities if you ever visit our offices.

Hello adventurers, if this was some sort of school, today would be day one of a two-day field trip!

We’ve dove pretty deep into blockchain securities, but today we’re getting into blockchain companies.  It’s critical for investors to understand that different types of companies can issue blockchain securities:

* blockchain as a service (BaaS) companies or enterprise blockchain solutions (including protocol solutions),
* blockchain-based/native companies that actually run their business on a blockchain,
* token mining operations, and
* traditional companies who want their securities to be listed and traded on a market using a newer technology.
Let’s start with BaaS companies - the guys selling shovels (figuratively, of course).  These are companies that sell enterprise blockchain technology solutions to other companies, but what exactly does that mean? Companies who can benefit from using a blockchain, but who do not want to hire a team of blockchain developers can pay to use blockchain software created (and often hosted and maintained) by someone else and adapted to meet their requirements. Blockchain has inherent benefits for supply chain, logistics, fintech market infrastructure, data management for industries like healthcare and legal, and digital payments - so there is growing demand for outsourced solutions.

**If you have any doubts about blockchain enterprise viability, note that established tech companies are in the BaaS space already.**  IBM is part of the Hyperledger organization (Linux foundation founded) and builds blockchain networks for clients using the Hyperledger code base and technologies.  Microsoft has an in-house solution built into Azure, and Amazon hosts and manages blockchain networks built on Hyperledger or Ethereum code. Google, Samsung, Facebook, Deloitte, and even Salesforce have blockchain services and products.

Where it gets interesting is the newer players whose core business is to create their own unique blockchain technology, protocols, consensus models, and groups of corporate users (consortiums).

An example is Parity Technologies, founded by really early blockchain adopters like one of the guys that created Ethereum.  They have built an open-source technology called Substrate and a public blockchain called Polkadot, which is fast (relatively) and flexible in terms of permissions and consensus.  While you’ve probably never heard of them, their advantage is years of experience ahead of the big tech companies and the team’s authenticity from years in the blockchain community.  Polkadot is founded by the Web3 Foundation, they’re working on a little project to build the next (and improved) internet powered by their blockchain protocols.

R3 is another company that provides its own blockchain platform, Corda.  Their focus is fast and scalable solutions for supply chain, banking, financial services, and fintech companies.  A few other notable BaaS companies and/or projects you may want to look up: Ripple, Quorum, and the Ethereum Enterprise Alliance.  In fact, many companies and consortiums are competing to provide THEIR blockchain solutions to different companies and industries, similarly to how the biggest tech companies like Microsoft, Apple, and Google continue to battle for whose operating system powers your devices.  Interoperability is an important factor in who will become the next established tech players - because companies will need their blockchains to be compatible with other blockchains in the future.

That’s the Who and the What, so...WHY is this important?  Because these are either the types of companies or the underlying technology being used by companies that you can invest in via blockchain securities and the Prometheum market.  Concepts like nodes, smart contracts, and consensus should be familiar to anyone investing in the blockchain space. But, a responsible blockchain investor should have a broad and deep knowledge base.  Knowing about the companies mentioned above and their role in the evolution of blockchain is a big step towards that.

OK, we’re done for today. As you can probably tell, we’ve only scratched the surface on this topic - go ahead and take a spin around the world wide web if you have some spare time and want to learn more!

Join us next week for the conclusion of Blockchain companies: the natives.

Welcome back to another exciting and educational WBS!  Today you’re in for a treat as we discuss a topic that should be more familiar and is incredibly important for anyone investing or trading in the markets.  We’ve mentioned limit orders in a previous WBS about trading, but today we get into what makes this type of order so powerful: liquidity.

The most basic definition of liquidity is how easy it is to exchange an asset for cash.  But, when trading securities, liquidity is a two-way street: market liquidity is the ease with which you can buy OR sell a security.  “Ease,” in this case, is a combination of speed and getting a fair price. Demand and supply in the markets are the forces that drive liquidity.  if there’s demand for a stock (a lot of buyers), it’s easy to sell--it’s liquid for a seller. But in the same situation, if you’re a buyer, it may not be easy to buy because you must wait in line behind other buyers--it’s less liquid for a buyer.   Alternatively, if there is an ample supply of stock (a lot of sellers), it’s easy to buy(liquid), but it may be difficult to sell (illiquid). Point being, to have true market liquidity, you need to have lots of buyers and sellers!

Brace yourself because we’re about to go deep and cover a lot of ground!

At this point you know the definition of a liquid market, but how can you tell before you make a trade if it’s liquid at that moment?  The answer is market data, of course! Remember Level 1 and Level 2 data? If you see that there are a lot of bids from buyers and offers from sellers, you know there is liquidity.  Those bids and offers are all limit orders, and because they show you how liquid the market is, sending a limit order to the market is called “adding liquidity.” Now, there is a drawback to showing your “cards” by sending a limit order; other market participants will know your intentions and as a result, they may change their orders to get ahead of you or you may trigger a market order.  This is known as market impact. But there are two big advantages to sending a limit order: not paying the spread and rebates.

The spread is the difference between the best bid and the best offer, so, for example, a security may have a bid at $10.00 and an offer at $10.05.  If you send a limit order to buy at $10.00 and get executed - you paid $10.00 per share. However, If you were to send a market order to buy from the offer, you will pay $10.05 - the extra $.05 you pay per share is the spread.

This next part may sound crazy, but most equity exchanges (and the Prometheum ATS) use something called a maker-taker fee model that rewards participants who send limit orders. Maker is just another word for adding or “making” liquidity by sending a limit order, and a taker removes liquidity by sending a market order.  When a limit order is executed, the market actually pays money in the form of a rebate. In essence, it’s their way of saying thanks for showing your order and adding to the market's liquidity. But market orders are charged an additional fee instead because they removed or “took” liquidity and didn’t want to show their order.  Unfortunately, many brokers keep the rebate because most people don’t know about it. Hopefully, this WBS changes that!

It’s been a pleasure having you onboard, buh-bye (hoping there’s some SNL fans out there).

We know last week’s adventure ended in a cliffhanger - but relax, you’ve made it to this week’s WBS!

As discussed last week, one of the biggest obstacles faced by blockchain technology, if it’s to become the underlying technology for enterprise-scale networks is its ability to scale.  This week we get into the two most promising solutions: Layer 2 and Sharding. Note these aren’t brand new concepts created for blockchain, these are existing computer models adapted for blockchain.

We’ll need to keep this really high level unless you want this to be part 2 of 30.

In thinking deeper about scaling blockchain, it’s easy to come up with solutions - but the problem is how to come up with solutions that don’t fundamentally change what a blockchain is.  Let’s take consensus, for example, a major problem related to scaling and consensus is how do you get all nodes to agree in a short enough time period (we’re talking seconds here) and without massive computational burden so that thousands of transactions can be processed per second.  You may be thinking: “why not just have only a few nodes, or make sure they are all in one place, or make consensus really easy by just having all the nodes always agree!” But every one of these solutions goes against the very principles on which blockchain is built, and by extension, makes blockchain less secure.

Layer 2 technology is a scalability approach that allows a blockchain to be decentralized (with many nodes), and that still has a “real” consensus model driven by computational work.  Sometimes called an “off-chain” solution, it involves doing resource-consuming computational work outside of the actual blockchain; in addition, it allows for the storage of large amounts of data outside of the core, root, or “base” chain as well (that’s layer 1).  At the same time, the actual chain is still an immutable (impossible to change) record of all transactions that have been verified by node consensus. Layer 2 solutions address the resource, energy, and computational problems related to scalability, but they have yet to comprehensively solve the time issue.  Put another way, unless the processes moved off-chain are happening in a parallel universe or a time machine, they still take the same amount of time.

Speaking of time, think for a second how Henry Ford was able to mass-produce or scale (!) his car business.  He used the assembly line, and one of its advantages entailed breaking up the assembly process into pieces and having dedicated operators (!) so that you don’t have to assemble a whole car before working on the next.  That’s why he was able to build so many cars in a relatively short period of time - now that’s throughput! And it’s a perfect analogy to help you understand Sharding.

Sharding attempts to solve the throughput and scalability problem by breaking up the ledger into parts and having the parts distributed amongst groups of nodes.  This means that each node does not need to store the whole ledger, does not need to process every single transaction, but when necessary can connect to other nodes to view the entire chain.  Because the workload, storage, and consensus is divided, it means that transactions can be processed concurrently, and that results in much higher TPS. Unfortunately, it’s not a perfect solution because it comes at the cost of some amount of security related to its inherently split consensus.

Ok, this is where we leave you - it’s for your own good, you must have other things to do!
As always, thank you for reading and hoping you join for next week’s adventure!

Hello, and welcome to Jumanji...sorry wrong adventure!  It’s the weekly BS!

You’re joining us for an exciting topic: blockchain scalability.  This may not be your definition of exciting, but it’s something that keeps blockchain developers up at night and you really can’t go wrong with talking about something called Sharding--but that’s next week.

One of the biggest problems that blockchain technology faces today is scalability.  Scalability is the ability of a system or network to grow without negatively impacting performance or functionality.  This problem doesn’t only apply to technology, so to get a quick understanding of scalability we’ll digress and provide a real-world example:

There’s a bakery that makes the most delicious sourdough bagels.  As more people discover these bagels, demand goes up. Now the bakery needs to get more machines, more ingredients, and hire more workers.  At some point, they can’t fit any more machines or workers, or they can’t source enough ingredients, or they can’t process the orders fast enough - without making the bagels less delicious.  The bakery is not scalable.

In a public blockchain, as the number of requested transactions within a given time period increases (throughput), it takes longer to process those transactions.  Because consensus needs to be reached to process a transaction and add a new block, popular blockchains like Bitcoin and Ethereum can only process 5-30 transactions per second (TPS).  To put that into perspective, the Visa network reaches 10,000 TPS and NASDAQ, they can do a million! If blockchain is to become the technology that powers these types of networks in the future, it needs to be able to scale.

We’ve discussed different types of consensus algorithms in the past, and you may remember that Proof-of-work (POW) is one of the slowest due to its computational load.  Proof-of-stake (POS) and more modern solutions can be faster, but are still nowhere near the speeds required for enterprise networks. Even private, more centralized blockchains aren’t fast enough.

The reasons:

* If each node has a copy of the whole chain (which is typical for POW), the demands on each node grow proportionally to the growth of the network;
* All nodes need to communicate with each other to reach consensus;
* There is a physical distance between nodes;
* Gas costs; and
* Computational, hardware, memory and energy costs
But have no fear, technology always finds a way, and there are solutions.

Join us next week when we discuss the two main ones: Sharding and Layer 2 protocols!

Welcome back to the WBS, hoping you’ve had a good week!  Did you secretly miss us?

This week we’re discussing an interesting story called The Byzantine Generals Problem (an allegory!) from a thesis on how computer systems can operate with a few failing components. ([https://people.eecs.berkeley.edu/~luca/cs174/byzantine.pdf](https://people.eecs.berkeley.edu/~luca/cs174/byzantine.pdf)).  It’s such a perfect analogy for the problems associated with reaching consensus on a blockchain that the term Byzantine Fault Tolerance is used to describe a type of consensus algorithm, BFT.  We’ve mentioned BFT algorithms in the past, which happens to be the type of consensus algorithm used by Prometheum’s blockchain. They are considered to be one of the most efficient types of consensus algorithms from the perspective of cost, resources, security, and throughput.

Back to the adventure:

The Byzantine army has surrounded an enemy city and is planning their assault.  The army is composed of many divisions, led by generals, and each in a different section around the city.  The generals send messages to each other by way of messengers. But, there’s a problem: some of the generals and/or messengers may be traitors from the city trying to mess up the plan of attack.  The generals realize this and are forced to figure out how they can execute the correct plan while ensuring two key things:

1. All loyal generals agree on the same (correct) plan; and
2. A small group of traitors (bad generals or messengers) cannot influence the decision resulting in the wrong plan being carried out.
Let’s snap back to reality for a second and remember that this is a fictional story.  Don’t be too concerned about whether there is a “correct” plan, the poor city, or the meaning of life...

Here’s what you should be thinking about...the generals are functioning like nodes on a blockchain.  The “plan” is an update to the ledger with new information. And all of them agreeing on the plan is consensus.  The goal of any blockchain is to make sure a correct block is added to the chain - meaning a majority of nodes need to agree.  Note that this assumes that the majority of nodes are good, similarly to how the story assumes the majority of generals are loyal.

The story is deceptively simple, but if you consider how to solve the generals’ problem you’ll realize there really are no easy solutions.  You’ll need to read the paper to get the details because we can’t magically condense 20 pages into 1. The main part involves assigning the roles of commander-general, and lieutenant general (similar to the node that proposes a new block and the ones that need to validate it), and different types of rules related to how messages are sent and received.  The solutions get pretty complicated and require the type of resources that modern DLT technology can actually provide.

I hope you enjoyed storytime. We encourage you to read the actual paper.

Adventure complete! See you next week.

Hello BS’ers, and welcome to this week's sesh!

This week’s topic is one that is close to our hearts...hybrid blockchains!

You better strap in for this adventure.

First, let’s explain our excitement - Prometheum is powered by a hybrid blockchain model, and you’ll see, as we get further into this adventure, that there is really no other way to combine all the features required for blockchain securities into a single, public or private chain.

What is a hybrid blockchain (model)?

A hybrid model involves two blockchains, each serving a very important purpose.  In the case of Prometheum, there is:

* A private (permissioned) blockchain that can process transactions very efficiently but is centralized (to some degree); and
* A public chain (not permissioned) that has cost efficiency and open access.

The blockchains are connected by a token that can function on either chain (that’s called interoperability) by employing smart contracts to move tokens between chains.

If your recollection of public and private blockchains is a bit fuzzy, now is an excellent time to go back and review our weekly BS on the subject as it will help you understand the next section.

Until recently, most blockchains consisted of a single network of nodes that, through a consensus process, write data to a single distributed ledger (a “blockchain”).  The first blockchains were public, permissionless, and decentralized. As distributed ledger technology (DLT) became more “mainstream” and adapted for business (enterprise blockchains), private, permissioned, and/or centralized blockchains were created. We’ve come a long way, but to scale these solutions to meet higher transactional activity (throughput) and accommodate specific business requirements, modern designs often use a hybrid blockchain. This can help with throughput (allowing more transactions to be written more quickly), regulated industry business requirements, or simply a company's desire to keep information private.

For example:

Prometheum’s ecosystem must comply with Federal Securities Laws (which means having some form of participant and activity controls and protecting the privacy of market participants, like you) and provide functionality for tokens and smart contracts. A hybrid blockchain model accomplishes both. One chain (the “Core” chain) is based on a permissioned model. This is better for the issuance and trading of blockchain securities as a result of its faster and less complicated consensus model (when node operators are vetted they are less likely to be malicious). The core chain was specifically created to meet regulatory requirements as well as activity generally associated with active electronic markets.  The other chain (the “Utility” chain) is a public blockchain like Ethereum or Bitcoin. It can be used to build decentralized applications (Dapps) that work with the blockchain securities issued and traded on the Core chain. The Utility chain is where blockchain securities are “just” digital tokens being used within a specific blockchain network for their specific purpose. These two chains are linked together with a combination of special smart contracts that can track and control interchain movement and processes at the clearing firm.

Ok, take a breath - that’s all for today!  There’s a lot more info on this topic, and if you want to dig deeper we encourage you to check out Prometheum’s architecture paper.

Greetings from WBS world - we hope your tank is full and, you’re ready for this week's adventure!

The term “Gas” has been mentioned in prior Weekly’s, so today we are devoting the entire post to this important and often misunderstood concept.  You can think of gas as the “digital fuel” that powers the blockchain.

As you know, one of the blockchain’s most important features is its ability to process and record transactions.   Blockchains rely on node operators all over the world to do this work, and whether it’s mining or validating transactions...no one works for free.  That’s where gas comes in (or out?)...anytime a transaction needs to be added to a blockchain, there is computational effort that is exerted by nodes.  Gas is a measure of this computational effort but presented in the form of a unit of measurement. So gas serves as an incentivization tool that tells a miner or validator how much they will earn for their work.  Every blockchain has a formula or algorithm that calculates the gas for an operation based on factors like time, memory, priority, processing power, real-world energy used, etc.

It may sound confusing when we say gas is a unit that measures the amount of computational effort needed to execute certain operations. However, gas is simply a form of measurement similar to gallons, and the gas price is exactly that - the price per gallon or unit of gas.

For example, on the Ethereum blockchain, before any operation is even started, it must have a gas fee attached to it.  The average gas fee on Ethereum is around 20 Gwei (the smallest unit of Ether) or .00000002 ETH (Ether). The originator of the operation must also set a gas limit and a gas price - the combination of which is the most they’re willing to pay for a transaction.   Different operations have different actual gas costs. For instance, if the costs of a complicated operation exceed the gas limit, a miner will stop mining, keep the gas for the completed work, and no transaction will be added to the blockchain. If on the other hand,  the operation costs less than the gas limit, the excess gas will be returned to the originator of the transaction (operation). The originator of a transaction can also choose to pay a higher gas price in order to have their transaction processed sooner. That’s because a higher gas price means a higher reward for the miner.

Gas is essential on the Prometheum blockchain because in order to clear and settle blockchain securities, you must pay validators for processing transactions. **A transaction can be a trade, distribution, or another type of smart contract operation.** For the operation to be written to the blockchain, the estimated gas cost of the computational effort by a validator needs to be determined and paid.  Similar to Ethereum and ETH, the Prometheum blockchain has its own fuel called the Ember (MBR) token, and the lowest unit of MBR is a Spark. You can think of Ember and Spark as dollars and cents - if you ask someone what the US currency is, they will say dollars - but dollars are broken down into cents. Most importantly, MBR powers the Prometheum blockchain!

That’s it for this week, we’re glad you’ve joined us for this adventure into the deep end! Looking forward to seeing you next week - same time (maybe) but definitely the same place.

Congratulations, you’ve picked a great week to join us for this adventure!

We recently covered topics relating to trading so it only makes sense to talk about what happens after a trade is completed, also known as clearing, settlement, and custody.  Note that there are hundreds of (very long!) books written about this process so we’ll try to keep this very high-level since you probably have plans tonight!

The ultimate goal of clearing and settlement is for a buyer in a trade to receive the securities and for the seller to receive the money.

**Clearing**

The process of comparing trades (reconciliation), and confirming the details of a transaction in a security between two parties is known as clearing.  There are several players involved in this process: the buyer and seller of the securities (counterparties), their brokers (broker-dealers), their clearing firms, and the exchange where the trade took place.

Clearing firms receive “end of day” (EOD) reports from broker-dealers (aka correspondents) and exchanges detailing all of the completed trades. “Post-trade” processing systems compare the broker-dealer’s and exchange’s reports against one another to ensure proper matching of trades. Once everything checks out, the clearing firm sends a report to the central clearing house and we move on to settlement.

Before we move any further, we need to clarify a few things:

* Broker-dealers don’t actually hold their client’s securities or cash - they are simply intermediaries.
* Securities CAN be held by a clearing firm, but in the U.S. equity markets, they are held by the Depository Trust Company (DTC), which acts as a central clearing house for all clearing firms.
* Cash is held by...you guessed it, a bank.

**Settlement**

Settlement is the process of taking instructions from different clearing firms, comparing the information to make sure it matches, and then actually changing the ownership of securities in the DTC electronic ledger (called electronic book entry). You may have heard that trade settlement in the U.S. equity markets takes 3 days (known as T+3 settlement), and now you know why it takes so long!

In addition to updating the electronic records of who owns the securities, DTC is responsible for sending settlement instructions to different banks that hold cash on behalf of clearing firms.  Settlement instructions simply tell one bank to move money to another to pay for the securities that have changed ownership as a result of a trade. This is done via a Fedwire.

**Custody**

Once the securities have “settled” and the money has been moved, the process is over, and we have achieved custody finality, meaning the buyer in the trade has custody of the securities, and the seller has custody of the cash.

**Adding Blockchain Securities to the Mix**

Contrary to what you may be thinking, the “BS” in the Weekly BS stands for blockchain securities. Therefore we need to explain a few essential things about how clearing, settlement, and custody is different with blockchain securities.

Remember T+3 settlement? Well using a blockchain (a general ledger, smart contracts and a digital wallet system) dramatically reduces the time for settlement, allowing for same-day settlement.

Same-day settlement means that banks don’t hold your money for three days, but rather that settlement is reached on the day the trade is executed.  Additionally, many of the processes related to clearing and settlement can either be fully automated or simplified. This is important because most trading fees (commission fees, broker fees, clearing fees, DTC/NSCC fee, etc.) are a result of the process being complex, manual, and time-consuming.  On a blockchain, the only fee that needs to be paid is the reward to the validator or miner for updating the ledger - that’s called Gas, and that’s what we’ll cover next week.

Welcome back to some more Weekly BS, today’s host: trading part-two.

Making an Actual Trade

Once you’ve done your market research, you may be ready to put your money where your mouth is and make a trade! But, just as there’s more depth to market data than level 1, there is more to making a trade than clicking buy.

Every trade involves a different order type and, while this may be hard to believe, there are actually hundreds of order types supported by the markets! There are stop orders, hidden orders, reserve orders (sometimes called iceberg orders), basket orders, pair orders, discretionary orders, and even algorithmic and automated orders. While we don’t have the space or time to get into all the different order types, the point is that learning and using them can help you be a more knowledgeable and seasoned investor. Most importantly, you should use a platform that has a variety of order types.

**Limit Orders**

Limit orders allow you to set your limit price for an order. So... if you want to buy stock or blockchain securities you can set the maximum price you’d be willing to pay. This works the same for sell orders except you would set a minimum selling price.

There are many reasons for choosing to send a limit order instead of a typical market order which is just an executed order at the best market price at that time. For example, if the price of a security is moving very quickly, or if there is a big difference between the best bid and the best ask (that’s called “the spread”) a limit order can be used to make sure you don’t get a bad price.

Limit orders allow you to be cautious and generally lower your risk. However, limit orders introduce the risk of simply not making a trade because no one in the market is willing to sell or buy at your limit order price (this is called “no liquidity”).

Ok - so now you have a limit order sitting in the market (aka the “order book”)...what's next?

**Order Matching Engine**

The market has an order matching engine or system that determines what happens to every order in the market/order book - which is arranged by price then time priority. For instance, if you enter a buy limit order with the highest price in the order book, before anyone, your order will take priority. To complete the transaction, you need a sell order, whether limit, market or otherwise, to “match” with your limit order price. Voila, now you have a position, meaning you own the securities.

**The Blotter**

Traders and investors rely on a blotter to see real time information related to: securities they own (their portfolio), limit orders pending in the market, their completed trades, and if there are canceled or rejected orders. The blotter also provides important details such as average price, limit price, amount, time/date, and side (buy or sell). Easy access to the trade blotter is critical because how else can you remember all this information while trading? The blotter is just a tool to make your life easier and more efficient.

This adventure is complete...please exit to your right!

In this incredibly exciting edition, we will discuss trading.

Ok, maybe not so exciting, but here is part one of our condensed overview about equity trading (including blockchain securities) that may be a review for some and hopefully useful for many.

When we say equity trading, we’re talking about trading stocks.  When trading stocks, the most important thing is information--and a big part of that information is market data which can be real-time or historical.

Real-time means trading market information sent to a trader immediately.  Examples of this are level 1 and level 2 data.

**Level 1 data** is the best bid price and the best ask price at that moment, as well as the last sale or executed transaction in the market.

**Level 2 data** is called “depth of book” because it shows many levels (deep) into the order book.  The order book is ALL of the buy limit orders (bids) and sell limit orders (asks), and includes the amount (known as shares in the equities world) as well.  Live orders are arranged in a price first, then time priority.  This means higher bids go to the top, but if there are two bids at the same price, liquidity will go to the first order entered.

Most professional traders use level 2 data because it gives them a much better understanding of the full supply and demand picture for a security.  For example, a retail trader may only have access to level 1 data and may see a stock trading for $1 and decide it’s cheap and a good buy.  But level 2 data can show a massive group of asks at different prices starting from $1.02 - meaning there is strong selling pressure and the price will likely go down.

Historical data shows a trader what has already happened in the markets.  It includes the time and sales which shows the older prints, and of course the charts. The past history of a security and the company that it represents can be analyzed endlessly to somehow predict what will happen in the future.

On the topic of charts: we will not even attempt to somehow squeeze “all about charts” in here.  But a few things: charts should always be looked at because they can at the absolute minimum give you the range in the trading price.  They can also make it easier to identify support levels because of their visual nature.  For people like technical analysts, charts have patterns that can be identified with tools like Bollinger Bands and moving averages.  These patterns can potentially predict where the price will be in the future.

News, balance sheets, quarterly reports, disclosures, etc. are all examples of information used in the markets, but not actually market data (it’s not generated by the market).  This type of information is generally historical (news is already old when you see it), and it is not always as straightforward as prices on a level 2. News is essential because it can trigger substantial price movements.  But validity, timing, and interpretation are always major concerns for traders and investors.

**Trading Blockchain Securities**

Blockchain securities are registered securities and trading them follows the same process as equity securities except the trade is being processed on the blockchain.  They must submit quarterly reports with balance sheets to the SEC - which then makes them publicly available.  Companies must also disclose all relevant business events to shareholders.

Ok, let’s pause here.  We’ll catch up next week when we go over order types, order matching, and reading the blotter.  All this and more in Trading Part Two!

Kick back and relax because today we’ll be discussing a topic that is a lot easier to digest: different investor types.  There are a variety of terms that you may have heard floating around in the investment space:

1. accredited investor;
2. non-accredited investor; and
3. qualified purchasers
It’s important to understand that each term has a specific meaning and, depending on which term applies to you, impacts how an investment into a company can occur.

FYI - You’ll notice several concepts appear here from an earlier Weekly BS.

First, let’s walk through understanding the term “public,” as used in "Initial Public Offerings,” (IPOs) meaning the offering of a company’s securities to the investing public for purchase. Going public gives companies the broadest possible reach and the greatest chance of raising capital because anyone can invest.

Where do different types of investors go to buy and sell securities? They go to the “public markets,” which usually refers to exchanges like NASDAQ and NYSE.  In this case, “public” just means anyone old enough to have a brokerage account (18 or 21 depending on the state).  Now, we don’t mean to quiz you but we hope you remember that Regulation A+ is also a public offering.

Defining Accredited Investors

But what about private offerings?  That’s where investor types become relevant and things get a bit more complicated. Most private offerings require **accredited investors** at a minimum. An accredited investor is defined by Federal Securities Laws (under rule 501 of Regulation D) as someone whose individual net worth, or joint net worth with that person's spouse exceeds $1,000,000 (without including a primary residence) OR a person whose had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years AND has a reasonable expectation of reaching the same income level in the current year.

What's a Non-Accredited Investor?

A **non-accredited investor**, sometimes known as retail investors, includes any investor whose net worth is less than $1 million and has an income under $200,000 individually (or $300,000 with a spouse) therefore not meeting the requirements of an accredited investor per the SEC.

Full disclosure: the definition of an accredited investor is actually really long and complicated, and a place where this adventure shall not venture!  However, if you're interested in taking a deep dive into the topic of "accredited investors," an excellent place to start is here.

What's a Qualified Purchaser?

This brings us to our final investor type, **Qualified Purchasers (QP)**.  You can think of a QP as a super accredited investor.  A QP as defined by the Investment Company Act of 1940, is any person who owns at least $5,000,000 worth of investments OR who invests for a group of people that collectively own $25,000,000.  Why would someone need to qualify as a QP? It has to do with exemptions from registration with the SEC, specifically if a hedge, venture or other fund wants to operate with more than 100 investors and not register, all of the investors must be QPs. 

At this point, you may be thinking, “why can’t anyone invest in anything they want?”  The answer is risk, and goes back to the SEC’s main purpose of protecting investors. The problem is that some investments are riskier than others, have little short-term liquidity, or may be very complicated to understand.  In order to prevent people from losing their shirts, the SEC wants to make sure that investors have enough money to withstand a big loss, and the investment experience to make informed decisions.

That’s the adventure for this week - and a big shout out to all the AIs, Non-AIs, QPs, and general public reading this!

Have a great weekend.  

Greetings and welcome to another Weekly BS! This week we are switching gears to discuss how you are protected by securities regulation when investing in blockchain securities.  Unlike ICOs/Crypto, blockchain securities are governed by the Securities Act of 1933 and Securities and Exchange Act of 1934 - that means blockchain securities investors are protected by customer protection rules and other features of the federal securities law.

**Let the adventure begin!**

The SEC and FINRA (and State agencies) are responsible for ensuring the integrity of the markets - their mission is to protect investors. What this really means is that the SEC has a responsibility to ensure that NASDAQ, The NYSE and other stock markets create and maintain a safe, fair, and efficient market for investors. Brokers and exchanges must do their absolute best to prevent things like false information by public companies, manipulative trading in the markets, and deceptive practices by brokers and issuers.  If they do not, they may feel the wrath of the regulators.

**Now a history lesson:**



**The Securities Act of 1933** was the first major legislation to regulate the offer and sale of securities and requires that investors receive accurate and up to date financial information from companies offering securities.  The Securities Act created a uniform set of rules to protect investors against fraud.

**The Securities Exchange Act of 1934** governs securities transactions (trading) on a secondary market - after issuance - ensuring greater financial transparency/accuracy and less fraud and manipulation.  This Exchange Act created the SEC and gave it the power to enforce federal securities laws. In 1938 the Exchange Act was amended by the Maloney Act to allow for the creation of Self Regulatory Organizations (SROs) like FINRA. The Exchange Act requires companies that have an effective registration statement or meet certain thresholds to report information regularly about their business operations, financial condition, and management.

The power of the SEC is derived from its ability to enforce securities laws by bringing actions against individuals, companies, brokers, and exchanges and referring criminal cases to state and federal prosecutors. The SEC interprets, enforces, and creates rules that govern the markets.  States have their own securities regulators that enforce what are known as "blue sky" laws. Blue sky laws cover many of the same activities the SEC regulates, such as the sale of securities, those who sell them, and trading, but blue sky laws are confined to state matters.
Self Regulatory Organizations like FINRA are responsible for establishing the standards under which their members (brokers-dealers, registered persons) conduct business and monitor member activity.  FINRA and other SROs protect the integrity of the markets by utilizing electronic systems that monitor the markets in real-time to identify malicious activity (insider trading, pump-and-dump, wash trading, etc.) that can potentially hurt honest investors and traders.

While Blockchain Securities are very new, and some people associate anything “Blockchain” with crypto and ICOs, it’s important to understand investor protection rules because they apply to ALL securities - including Blockchain Securities.

Thanks for spending your time with us this week.

Continuing where we left off last week, we are going to explore the **Proof of Stake (PoS)** consensus algorithm.

**Let the adventure of the Weekly BS begin.**

PoS is a consensus algorithm that favors speed and efficiency.  Peercoin and Ethereum v2 are examples of blockchains that use PoS.  Unlike Proof of Work (PoW), where energy-consuming hardware and computational power are required to validate transactions, node operators on a PoS blockchain require tokens to stake to be selected as a validator for each round of blocks and to receive part of the reward for adding blocks to the chain. Bigger stakes can lead to bigger rewards. These node operators are called “Stakers” or “Validators,” similar to “miners” on a PoW blockchain.  Unlike PoW, PoS validators have known addresses, can be required to pass an approval process (KYC/AML), and are tracked by the network for increased accountability. This makes PoS a consensus algorithm that can be used for private, permissioned and public blockchains.

Many different variations of PoS exist or are possible because while staking is an excellent solution to how a block creator is picked, it leaves the actual approval of the suggested block open for multiple solutions.  Some PoS blockchains require a vote by the validators before a new block is accepted, while others simply rely on economic incentives and penalties to keep validators from misbehaving.

Of course, PoS algorithms aren’t perfect - there are a number of complicated implementation details and the economic guarantees and deterrents provided by PoW don’t always apply on a PoS blockchain. For example, a common design issue for PoS blockchains is the “Nothing at Stake” problem. The idea is that if a validator is allowed and able to validate different versions of the blockchain at the same time, they can follow (or even create) malicious versions of the blockchain while also validating the “true” (non-malicious) version - without incurring a high financial cost to do so.  This type of outcome can lead to many forks/chains and no clear consensus. In a PoW blockchain, however, miners are economically discouraged from doing this because of the effort (and cost) in mining multiple chains. Different PoS implementations have different solutions to this problem, but it’s a common and nuanced issue that has to be dealt within PoS algorithms and blockchain designs.

The advantage of not requiring high computational power and resources is that PoS consensus algorithms can be faster and more scalable than PoW... meaning transactions are processed at a higher rate - making it a good potential consensus algorithm for blockchain securities.
If you’re feeling a bit overwhelmed about Consensus Algorithms, it’s totally normal - it’s a topic we will revisit in the future as we have just scratched the surface. There are so many different types of consensus algorithms that exist and they all have unique and complex solutions to the problems that human behavior introduces into any automated system, like a blockchain.

Happy to see you made it to the end of this week’s BS - same time, same place next week!

This week we’re covering a pretty complex topic with lots of info, so let’s jump right in.

Node operators are incentivized to run nodes on a blockchain that perform the computer work necessary to maintain a distributed ledger and to update it with every new transaction. But how do you ensure that every node updates the blockchain with the CORRECT block of information? A majority of nodes must agree on the update to the blockchain - that’s called **consensus**.

A consensus algorithm is a group of mathematical formulas or rules written in computer code and designed to solve a very specific problem: how to reach a general agreement among blockchain nodes to approve the addition of a new block to the chain.

The concept of consensus is vital to a distributed ledger because reaching consensus on each block serves as a defensive measure against those nodes with bad intentions and/or those that are unreliable nodes (security threats). A balance exists between security and adding blocks (groups of transactions) to a chain quickly (for example, NASDAQ can process 10,000 transactions per second!). There are lots of different solutions based on whether the priority is speed or security. These solutions are different types of Consensus Algorithms.

It’s tough to have a conversation about blockchain without mentioning Bitcoin, so it makes sense to start with Bitcoin’s consensus algorithm - **Proof of Work (PoW)**.  PoW is an example of a consensus algorithm that favors security over speed. Node operators on the Bitcoin blockchain are called miners. What if one of these miners wants to add a block of information that gives them a bunch of Bitcoin?

**Bitcoin blockchain uses an elegant and complicated solution.**

First, every new block of information generates a mathematical problem for all the miners using a hash function (we’ll cover this in the future). This problem is similar to guessing a completely random number when you only know how many digits it contains. Miners use their computers to generate random numbers very quickly in the hopes of being the first miner to guess the random number and win Bitcoin. This process is called mining hence why the nodes are miners.

Here’s where PoW becomes interesting.  Other miners must verify every new block of information added to the chain. It is VERY easy for miners to identify an incorrect block of information because of how blockchains fit together and continue a pattern. A new block can ignore the results of a previous block if it believes it to be incorrect (known as forking, we'll come to this later too). To introduce an incorrect block, a malicious miner must know in advance that they have the support of at least 50% of the other miners over a significant period of time. Because mining is costly (hardware, electricity, and so on), the cost of doing this is exceptionally high compared to the potential upside of a malicious transaction.

Join us next week when we discuss the Proof of Stake consensus algorithm!

We’ve come a long way from our first Weekly BS that explains what a blockchain is, and today we’ll be discussing the different types of blockchains.

There are two types of blockchains: **Public** and **Private**.

Public blockchains are characterized as decentralized and open to anyone (permissionless).  You may have heard of Bitcoin and Ethereum, two cryptocurrencies that live on a public blockchain.

**Public vs Private:**


**Public Blockchains**

Have nodes that are generally spread throughout the world;
Each node has access to all information living on the blockchain;
No central computer controls a public blockchain;
Anyone with a computer and some basic technical skills can “operate” a node;
"Operate" means anyone can review data (read data), mine/validate transactions (write data), and participate in activities on the network (creating smart contracts and decentralized applications (DApps)).

**Private Blockchains**

Require permission from a controlling authority for a participant to function as a node and/or to participate on the network;
The controlling authority has the ability to control how participants interact with the blockchain thus are centralized to some degree;
Sometimes called enterprise blockchains;
Companies use enterprise blockchains for business purposes that require information/data transparency thus holding node operators accountable for their actions;
Relevant to regulated industries like securities, banking and insurance.
Private blockchains are an obvious choice for blockchain securities because regulation requires certain entities to guarantee that participants on the blockchain are verified (anti-money laundering and know your customer), information about the person operating a node is available and documented, and that all participants are located in a jurisdiction that holds them accountable for wrongdoings.  These regulatory measures are required to protect the investor...you!

**A Dual Chain Approach**



This is where things get a little crazy - certain companies use both public and private blockchains to achieve their business needs. As explained above, blockchain securities function in a regulated universe requiring a permissioned blockchain. But what happens when someone wants to move their blockchain securities outside of this regulated  (permissioned) world for use as a means of value? This is where a public blockchain is connected to a permissioned blockchain, so investors can transfer blockchain securities between a regulated (permissioned) blockchain to a more flexible (public) blockchain.

Hope we have helped explain the distinctions between public and private blockchains.

Tune in next week as we build your blockchain securities knowledge. Until next time…

Welcome to week 5 of the weekly BS!  We bet that all of these blockchain terms are starting to make a LOT more sense.  This week we cover smart contracts and how they are an integral part of a blockchain!

A “smart contract” is another blockchain term that seems complicated and confusing, but can actually be simplified by breaking down the words: “smart” and “contract."
The word “smart” refers to a common type of technology that you interact with daily - a computer program.  Computer programs are written in computer code, and in general instruct a computer on what to do when they receive specific types of data or inputs which in this case is from the blockchain.

"Contracts" are agreements between parties that require both parties to perform their obligation(s), which allows for an intended result - also called execution.
Interestingly the definitions of “smart” and “contract” are quite similar.  It’s all about input (what goes in: information, data) and output (what comes out: documents, money, assets, actions).
Regular contracts are not smart and require a third-party to verify that the contract is executed, to enforce it, and for the intended result to occur.  Even digital contracts, like those executed by clicking “yes” or “I agree” when paying a bill online, are verified by a centralized third-party.

You may think digital contracts (electronic, online) are just like smart contracts, but think about how long it can take for a payment to clear, or to move your stocks to another brokerage account,  or when your tenant (who e-signed the lease) doesn’t pay the rent but is still living inside your apartment. Smart contracts can solve these types of problems because all the inputs and outputs come from functionalities existing on the blockchain.

**Let’s break this down further:**

Sending assets like money or blockchain securities from one person (or entity like a broker-dealer) to another on a blockchain is immediate and automated because of smart contracts.  A smart contract receives input from the blockchain - request to send assets, agreement to receive, confirmation that balances are adequate, verification of information - and automatically completes the transaction, ultimately updating the ledger.

Simply put, think about renting an apartment.  Renting an apartment can be automated as long as both parties have digital wallets, and the locks are controlled by a smart contract.  Both parties agree to digital lease terms linked to a smart contract, the rent is paid by a digital wallet transfer initiated by the smart contract after agreement, and the lock is unlocked once the transfer is completed and the correct code is released by the smart contract.
Smart contracts make blockchain securities more efficient than traditional securities like stocks. Smart contracts achieve this by automating many of the manual processes and third-party involvement built into traditional clearing and settlement systems currently used by brokers and exchanges. We’ll devote an entire future Weekly BS to clearing and settlement - so this is as far as we go in this one!

Phew - yes, we know, this was a lot to digest!  But have no fear, it will become a lot clearer as the weeks go by, and we define other concepts that will fill in the gaps.

This week we will help you understand how a digital wallet is used for investing in blockchain securities. Let’s dive right in!

Digital wallets are similar to everyday wallets in that their main purpose is to store assets - currency, tokens, securities, etc. The word “digital” implies that these wallets exist virtually in an electronic format, and not physically in your pocket!



**What Do Digital Wallets Hold?**

Digital wallets hold “digital assets,” which are just electronic versions of regular assets. Digital wallets are similar to a brokerage and/or bank account in that your stocks and/or money reside in an account that is accessible online.

It is important to remember that these terms are really just new iterations of everyday concepts.

Taking it one step further, digital wallets are essential because there is essentially no other way to “store” digital assets that live on a blockchain - including blockchain securities.
We’ve used the word “store” a few times so far, but when it comes to “storing” digital assets in digital wallets on a blockchain (aka blockchain wallets); it’s a bit of a misnomer.

A few weeks ago we explained, the blockchain is a ledger for all the blockchain securities transactions and balances. Digital wallets interact with the blockchain or ledger by sending and receiving blockchain securities, and by allowing owners of digital wallets to view their current balance and past transactions.
You see, it is the blockchain that “stores” all blockchain securities. The digital wallet serves as a unique identifier within the blockchain that says, “Hey, these tokens belong to this wallet.”
Digital wallets are very secure in that each digital wallet has a secret identifier called a private key that only the owner of the wallets knows. For now, think of a private key as a secret code that can be a mix of numbers and letters.

At this point you may be thinking that, while we have done an incredible job of simplifying digital wallets (hopefully!), it’s still a lot to digest. Well, here comes the best part! When it comes to blockchain securities, digital wallets for investors can be automatically created and managed by a broker. Meaning that investors log into their online account, akin to a traditional brokerage account, which is seamlessly linked to their unique digital wallet. From the investors perspective, all transactions, history and balances look and feel like they do in a traditional online brokerage account.

In last week’s BS we defined blockchain securities and mentioned raising capital as one of the primary reasons why companies issue securities.  This week, we explore how companies raise capital using blockchain securities and why that matters to you, the investor!

Whether a startup, revenue-generating, or a big established entity, companies are always seeking capital and use certain regulations to raise it. Startups are generally pre-revenue and operate at a loss, in the middle are small to medium enterprises (SME) that have proven their business model and may be revenue-generating. On the other end of the spectrum are companies that are revenue-generating and have raised significant funds.

![](https://www.datocms-assets.com/44945/1628101018-raising-capital-image.png)


Companies generally rely on one of the following four regulations to raise capital:

Regulation D;
Regulation S;
Regulation A+; and
Form S-1 (Initial Public Offering (IPO)).
Each regulation has its advantages and disadvantages.

Generally, startups use Reg D to raise capital from U.S. investors and Reg S from international investors.  These investors are generally friends and family, venture capital, and angel investors.

Regulation D is an exempt offering under the Securities Act of 1933, which means these securities are not registered with the SEC. Reg D securities can only be offered to accredited investors and QPs (Qualified Purchasers, a/k/a the wealthy), this leaves out a considerable part of the general population. As an exempt security, Reg D securities are restricted from being traded on a secondary market (an ATS) for about 6-12 months depending on the circumstances.

SMEs and developed companies desire a simple method of “going public” -  but what does it mean to “go public”?

“Going public” means offering securities to the general public. To raise money from the general public companies must register their securities with the SEC.  A company “goes public” when raising capital through Regulation A+ or through an IPO.

**Let's take a deeper look into Regulation A+:**

Sometimes called a mini-IPO, Reg A+ was created to help small to mid-sized companies raise up to $50 million from any type of investor (not only the wealthy!) in a given year.  As a result of registering with the SEC, investors can immediately trade their securities on a secondary market, and investors are protected by the SEC and FINRA. Regulation A+ filings have lower legal, accounting, and professional costs associated with the filing than an IPO, and are less time consuming vs. a bona fide IPO.
Another vehicle for a company to “go public” is through a full-fledged IPO which is expensive, burdensome, and time-consuming. However, IPOs allow companies to raise unlimited amounts from any type of investor.

It is important to remember, whether a company uses Reg D, S, A+ or an IPO, each security can be cleared, settled and custodied on a blockchain, thus making them blockchain securities!

In our last weekly, we helped to define the term ‘blockchain’ and introduced the concept of securities that live on the blockchain, called ‘blockchain securities’.This week we dig into ‘securities’ and why it’s so important for investors to understand the legal significance of this term.

While most people associate securities with stocks, it is, in fact, a much broader term with a legal impact. The concept of ‘securities’ was first defined by the Securities Act of 1933 and consists of a long list of assets such as stocks, bonds, ETFs, derivatives, etc. It also includes catch-all terms such as “investment contracts”….don’t worry we are going to explain this, so keep reading!

In 1946, as a result of the U.S. Supreme Court case, SEC and WJ Howey Co, a test was devised as a method to determine whether something is an investment contract security, called the Howey Test.

To wade a bit into legal jargon and history, it’s a set of criteria to determine whether something can be legally defined and regulated as an investment contract which in turn is a security. In order for a financial instrument to be dubbed an investment contract thus falling under the oversight of the SEC, the instrument must meet these four criteria:

it must be an investment of money;
with an expectation of profit;
in a common enterprise;
with the profit to be generated by a third party.
Not exactly the most modern of definitions…but what it tells us is that if a company issues some sort of contract (physical or digital) related to its business, in exchange for money from an investor who expects to make a profit at some future time from another’s efforts – that company has issued an investment contract, thus a security.

Coming full circle, companies that raise capital by issuing digital tokens or coins that are linked to a blockchain, are issuing blockchain securities – and are generally regulated by the SEC just like companies that issue stocks in an IPO, think NYSE or Nasdaq.

For further reading, and the 2017 SEC case that confirmed blockchain instruments are not exempt, please follow this link to the DAO Report: [https://www.sec.gov/news/press-release/2017-131](https://www.sec.gov/news/press-release/2017-131)

**The BIG question: What is a blockchain?**

A blockchain is a group of pages with data or “blocks” of data, connected together in chronological order inside a computer or data storage. Each page or block has information related to a movement of something (money, securities, fruits, ships, etc…) from one person (or entity) to another, like a digital accounting ledger. So if you try to imagine what a blockchain would look like, it would be a chain of data blocks.

Anytime a person gives or takes a unit of value on a particular blockchain (including buying and selling), everything related to that movement or transaction is written on a digital page or as we said earlier, a block. The information can be as detailed as required by that blockchain, and the nature of the blockchain ensures that the newest block is not malicious or false.

All copies of data in a blockchain are updated in real-time, and the only way to identify a “good” block is by confirming that all prior blocks match across each copy. Keep in mind that every single block in a blockchain can prove the whole history of the ledger up to that block. As a result, it’s not possible to add a false block because it won’t continue the pattern of the ledger.

Blockchains can be used for lots of different things – it’s not just for Bitcoin! They are really good at keeping track of money moving around, or any other unit of something that represents value – like a security!

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