Day: January 23, 2018

10 Things About the Bitcoin Blockchain You May Not Have Known

If you are involved in startups, finance, or investing, you have likely heard of Bitcoin, Initial Coin Offerings (ICO’s), and Blockchain. You probably have a good idea of the basics and are aware of the social, philosophical, and economic issues. Here are 10 things you may not have known about how Bitcoin’s Blockchain actually works:

1: The Bitcoin Blockchain is a public ledger and anyone can inspect every transaction that has ever occurred

Here is the very first block #0 in the chain, and here is block #492435. Within each block there are many individual transactions, and the flow of value in a transaction can be explored visually, using tools like this one where we can click through any orange circle that represents a spent value. Because everyone can see every transaction, anyone can confirm that the flow is valid – such that the receiver of value always comes from sources that have sufficient unspent value.

2: Transactions are not from one sender’s address to a recipient’s address

The inputs to each bitcoin transaction in the blockchain are the outputs of previous unspent transactions. So, if Alice wants to send Bob 0.50 BTC (Bitcoin units of currency), she would do so by specifying one or more of her previous transactions where the total output is more than 0.50 BTC. This is a subtle but important difference from using Alice’s Chase or Paypal account as transaction deposits are not aggregated into a single identifiable account, and they remain anonymous.

3: Transactions spend all the inputs

In order to efficiently verify transactions, every transaction uses the total value of the inputs, and will create a new output address for any change. So for example, if Alice wants to send 50 BTC to Bob and she has 3 prior transactions where she received 25, 20, and 15 BTC, her bitcoin client or wallet software would use all three prior transactions to send 50 BTC to Bob and would result in 10 BTC to a new address as change, and all three prior transactions would be marked as spent and no longer usable.

4: The Bitcoin Blockchain Ledger stores every transaction and is currently ~140GB with over 11k copies in nodes distributed globally

Anyone can start a node, download the ledger, and start verifying and confirming transactions. This makes Blockchain highly resilient to data loss or central control. Natural disasters or individual or company failures will have no adverse effect as long as there are sufficient copies running.

The “Game” of Blockchain…

5: Confirming a block of transactions is a 10 minute guessing game

In order to prevent Alice from using the same coins more than once, all the nodes need to agree on the order of transactions so that once a previous output it used, it can’t be used again. This is achieved by setting up a difficult guessing game designed to take approximately 10 minutes to win so that a single order of transactions is accepted. Each player puts together a block of valid transactions that have occurred since the last confirmed block, including the hash of the last successful block, a special transaction to deposit winnings to the player, and a number the player can change called the nonce. The player then runs a hash function over the data and tries to win by producing a hash that is less than a certain target number known as the difficulty. If the hash result is higher than the difficulty, they change the value of the nonce and try again. When a winner succeeds, that block is confirmed and broadcast to everyone, and the game begins again with the next block containing the hash of the last one, hence the name, blockchain.

6: It generally takes a mind-boggling number of guesses to win each game

The process of confirming a block is called mining, and the players are called miners. The combined guessing rate, or hash rate, of all the miners was approximately 11 million TH/s at the end of October 2017, where 1TH/s is 1 billion hashes per second. At the current difficulty level, this means that it takes an average of approximately 6 billion billion (10^18) guesses. That’s:

6,000,000,000,000,000,000

7: The difficulty of the game adjusts every 2 weeks

Since the purpose of the game is to demonstrate Proof of Work and is designed to take 10 minutes to solve, the difficulty of the game is adjusted every 2016 blocks (approximately 2 weeks based on 10 mins per block) in order to keep the length of each game close to 10 minutes. This is done by adjusting the target difficulty number to be higher (easier) or lower (harder) proportional to the amount of time it took to complete the last 2016 blocks being greater or less than 2 weeks.

8: The winner gets rewarded in Bitcoin, until the entire 21M prize pool finishes by the year 2140

The first transaction in a newly confirmed block is the reward the miner awarded themselves according to the rules, and is called the coinbase. The reward started at 50 BTC per confirmed block, and is halved every 210,000 blocks, or approximately 4 years. You can see this yourself by looking at block 209999, and then block 210000. This mechanism results in a total supply of 21M BTC awarded, after which there will be no more new BTC entered into circulation. At this point, miners will be paid only by transaction fees for their work to confirm new transactions in a block.

9: Confirmed transactions are irreversible

By design, once a transaction is confirmed and added to the blockchain, every subsequent confirmed block creates an increasingly long chain making it virtually impossible to rewrite history and undo the transaction. This can reduce transactions costs because, similar to paying in cash, there is no need to account for charge backs.

10: Proof of Work currently costs more than $1.1B annually, using more electricity than many countries

While the blockchain mechanism is effective in its objectives, it has drawn criticism for the increased use of electricity and resources consumed by an activity that is an artificial means for introducing difficulty and effort. Several alternative mechanisms such as Proof of Storage and Proof of Stake are intended to address this.

For more information about the inner workings of the Bitcoin Blockchain, I recommend watching this excellent Khan Academy series hosted by cryptographer Zulfikar Ramzan.

“Man is by nature a social animal” – Aristotle

People are inherently social. Our ability to form personal cooperative relationships is one of the keys to our success as a species. These relationships are built up through layers and layers of individual interactions. Whether each interaction is brief or long, casual or meaningful, they all contribute to the nature of the relationship.

The strength of a relationship can be considered to be a weighted sum total of these interactions, and contrary to the opinion of Sheldon from “Big Bang Theory“, each exchange is additive. For example, the simple repeated interaction of a mutual “good morning” every day for years often results in a stronger relationship with your neighbor than a polite greeting to a stranger.

The principle of reciprocity is what allows one side to initiate an exchange, and turn it into a mutual interaction. As explained in “Principles of Persuasion“, when one initiates an exchange, an obligation is created. There is a powerful socially conditioned response to honor this obligation, presumably because it is on this basis that the success of our species to create cooperative social relationships was built. If I help you with something now, you’ll help me with something later.

Surprisingly, the need to satisfy the obligation often overrides the importance of that “something” being equal. If you borrowed a dollar from me yesterday, it seems equal that I could ask to borrow a dollar from you today. But suppose you’ve always given me good advice when I needed it, and today you need help moving? How do we evaluate concepts such as thoughtfulness, context, and intention? When faced with complex valuations, we often fall back to generalizations and simply fulfill the obligation, even if the value is not equal!

So, relationships are composed of interactions, the principle of reciprocity motivates us to fulfill obligations, and exchanges are often complex and can be unequal. When developing relationships remember to look for everyday opportunities to create a thoughtful exchange in a meaningful way and you may be surprised at how your relationships grow and give back more than you expected!

How to raise $150k through AngelList in 3 days

I recently completed my first raise using the AngelList syndicate platform, with $42k more demand than my allocation in less than 3 business days. A huge thank you to the investors who backed this deal for Greg and the Kaleidoscope team!

I have been working with Kaleidoscope as a mentor for several months. They are an exciting company bringing the marketplace model to private scholarships and applicants. I knew I wanted to be involved and when the time came to close the seed round, I asked Greg if I could have an allocation to raise using the AngelList syndicate platform.

AngelList is a platform for raising funds from a syndicate, or group of private investors. A syndicate lead can bring a deal to his investors, who can choose to fund on a per deal basis using an SPV (special purpose vehicle) for each deal. This is different from public crowdfunding platforms like kickstarter where the average investments are generally smaller and are open to everyone, and also different from traditional investment funds including venture capital, private equity, and hedge funds, where LPs (limited partners) invest larger sums for many years under the direction of a fund managers over multiple deals.

I chose to raise using AngelList because I wanted to experience the platform as a syndicate lead, having participated as an angel investor in several deals. As an investor, I found it easy to back syndicates, and be invited to invest in the deals I found interesting, and I believe the syndicate model will emerge as beneficial for matching companies and investors directly.  Companies who are looking for funds are able to tap into the capital pool of direct investors, and investors are able to get access to direct deals. A benefit to both sides is the removal of the duration and returns focus of a traditional managed fund that may not be aligned with either the company or investor.

I started the process about six weeks prior to the timing of the close by gathering materials and putting together a short deck and an introductory investment thesis. Because I operate as a trusted mentor/advisor with operational experience, I tend to have several months of inside access to the operations of a company, including engineering, product, communications, finances, and business, which allows me to conduct extensive due diligence while simultaneously helping the company with advice.

Syndicates like AngelList often invest alongside the lead of a seed round, which means that the term sheet negotiations and/or selection of the lead investor when there is more than one bid, must be completed before the syndicate can start, and often leads to a small window as the close date has been decided.  For Kaleidoscope, the seed round lead was finalized during the holidays with a target close date of Jan 15th. After a final review and approval with Greg, I submitted the deal to AngelList on Jan 5th which would give me 10 days… and then waited…

For a first time syndicate lead, submitting a deal does not mean it will be immediately approved, and fundraising can only begin after the deal is published. AngelList needs to have some assurances that the deal can actually be funded, as there are $8k in setup costs, with presumably some portion of that being an upfront expense to setup the SPV, and some portion being a yearly cost for tax filings and administration. In a bit of a chicken and egg, the guidance is that one should have $300k in backers (which is unlikely for first timers since you have no submitted deals to back) in order to achieve the $80k minimum raise. At this point I had only 2 backers having just created the syndicate.

After contacting friends and colleagues to gauge support, and discussing with the folks at AngelList, the deal was finally reviewed, approved, and released in the afternoon of Jan 10th, which coincided with my arrival at CES with a full meeting schedule. I started by connecting with my first degree contacts on AngelList in spare moments, wrote introductory emails, and texted my network that the deal was live, and then grew my second degree contacts. Early supporters here really came through and I was amazed at the level of immediate support with no questions asked.

A delayed flight on Sat brought me back to NY with a realization that Monday was a holiday. Sunday is a quiet day, and while I was building out my network and new backers for the syndicate, most were still undecided about backing the Kaleidoscope deal. Fortunately, Greg was having good success with some of his original pre-seed investors who wanted to participate again in this round, although this this squeezed my allocation down from the original amount.

Monday morning started with a bang, and throughout that day and into the evening, commitments got signed both from my network and new investors. I quickly went from being under, to needing to reduce what people were asking for because I was running out of allocation. It was helpful to have solid company fundamentals, sales figures and projected pipeline, and pro-forma statements for projecting cash, revenues, and headcount in the coming year. Greg had shared the detailed product roadmap in JIRA with me so I was able to answer questions and clearly explain the company’s value proposition. Being fully informed and having access to detailed operational data allows you to cover a wide range of questions from many potential investors over a short period of time.

I finally closed the deal early on the 16th, and ended with $118k raised with $42k of extra demand I had to turn down and/or refund.

Some takeaways for next time:

  • Three business days is too short. 5-7 business days is probably the right amount of time to build momentum and include the range of decision making processes of each investor
  • New syndicate leads need help to get started. Like any community, it helps to make connections early and participate (ping me if you are a new syndicate lead and I’ll back you)
  • Plans change. Whether it is duration of campaign, amount of allocation, or commitments of backers, expect surprises and just roll with it

 

Michael Yoon

https://angel.co/l/25a2Vv

https://www.prnewswire.com/news-releases/kaleidoscope-group-closes-13-million-series-seed-funding-round-300596459.html

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