A crash course in cryptocurrency and cannabis

In the wake of Bitcoin reaching over $10,000 USD for one coin, we recap our Q&A session with the cryptocurrency “Tokes” founders Michael Wagner and Gabriel Allred. So today, we are going to learn about blockchain and cryptocurrencies!

A reminder: cryptocurrencies (like Bitcoin) run on blockchain technology.

Here’s a quick rundown of how the technology works, from Michael:

  • The term blockchain is derived from the way in which transactions are grouped together in batches (called blocks), and processed at specific intervals.
  • As each block is processed, a piece of the code links, or chains, together a new set of transactions with the prior set of transactions, so that it can’t be altered at a later date.
  • By ‘chaining’ these ‘blocks’ of data together, it makes it significantly more difficult to change any one block in the history without changing ALL subsequent block data as well.

And why is it getting so much press?

Michael summarizes it this way.

  1. Decentralized: managed by the users based on consensus

  2. Peer to peer: users that use the network also make the network run

  3. Distributed: all users running a node store all of the history of the database

  4. Trustless: a result of being decentralized, there is no need to put trust into a central authority to keep accurate records of balances. All records are held by all users, and therefore can be reconciled as the network communicates with other nodes

People especially love that it is “pseudo-anonymous.” (Side note: there’s a whole movement called “cypherpunk” that believes that “activist advocating widespread use of strong cryptography and privacy-enhancing technologies as a route to social and political change.”)

As Michael says, “Blockchain and cryptocurrency provide significantly higher transparency than a cash transaction. Every single transaction is recorded on a public ledger, reviewable and auditable by anyone with the desire to do so. The pseudo-anonymity is a result of the fact that wallet addresses are not directly associated with an individual or business.”

And now we turn to cannabis.

The Tokes founders believe that blockchain will be specifically helpful to the industry because of this pseudo-anonymity.

Gabriel elaborates: “For an industry like cannabis, there is an obvious need for businesses to be transparent for taxation purposes, while still maintaining the privacy of their customers. A further issue here is the need to keep your financial records private from competitors. Blockchains can inherently serve all of these needs.”

What’s most exciting to the founders? The “disruptive nature of the technology. The basic consensus algorithms implemented on blockchains are decentralized, creating a trust-less ledger and transactional protocol. Succinctly, it removes central points of compromise from the system (e.g., central banking servers).

The distributed ledger provided by the blockchain could potentially make many conventional money transfer businesses obsolete, giving the power back to the user, and reducing transaction fees,” answered Gabriel.

And how would cryptocurrencies help both ancillary companies and licensed distributors?

Michael said, “While the end user of a cryptocurrency, dispensary customer, is pivotal to the entire system functioning, the larger volume transactions will certainly occur between parties such as a dispensary and cultivator, or possibly a dispensary and tax authority.

Transactions received on the ‘front lines,’ customer to business (dispensary), don’t need to be immediately converted into cash – although they can be stabilized to avoid market volatility.

In summary: a cryptocurrency for cannabis could be used for business-to-business transactions, making cash unnecessary.

However, not every point in the supply chain needs to liquidate their digital currency holdings. Rather, it would be more efficient for each of those points to continue moving their holdings up the supply chain to the next product input.”

It could be good for the industry in multiple ways.

Michael Wagner said, “a robust payment network on blockchain can solve issues with both e-payment processing as well as digitizing those assets and storing them securely and locally for these businesses.

It would allow users to be able to use supply chain data to provide transparency of products, integrate directly with legislative authorities, and be a provider of data points to businesses that would like to access that information.”

So how is the value of a cryptocurrency determined?

Stephen Atchison at Tokes explained that “the value of a cryptocurrency is determined by what people are willing to pay for it. Supply and demand. Just like other more tangible commodities like concert tickets. What could make something like Bitcoin become more valuable over time is the fact that it has limited supply. There will only ever be 21 million Bitcoins.”

Why can crypto be so volatile? 

Michael said, “The pricing in the majority of cryptocurrencies is derived based on economic forces of supply and demand. There are generally two methods in which cryptocurrencies are distributed, which can be referred to as an inflation schedule.

Point of Work vs BTC

The original incentive system, created by the Bitcoin protocol, is known as ‘proof-of-work.’ POW requires computing power to demonstrate your commitment to processing and validating transactional data on the network, and results in the supply of the token (BTC) increasing slowly over time at a relatively fixed rate.

Alternatively, and more commonly as of 2017, all tokens are created and issued in the genesis block (starting block), and will be distributed via a method like an ICO (initial coin offering). Individuals buy these tokens during the sale period, and they ultimately get distributed around as they are used or sold in secondary markets, the exchanges.

Ultimately, the pricing is dependent upon how many people are willing to purchase the circulating supply at a particular price. More buyers leads to the price going up, more sellers leads to the price going down.

Stability is generally realized as the depth of these trading markets increases. As the numbers of both buyers and sellers increase, it prevents any individual from being a dominant force in the markets.”

Where are the best websites to use for changing fiat like USD and EUR to digital currencies like Bitcoin, Ethereum, and waves?

Gabriel answered, For new users, I typically recommend a site like Coinbase (coinbase.com), which gives users access to easily purchase Bitcoin, Ethereum, and Litecoin.

If you wish to buy Waves (or Tokes), you have to utilize a more robust exchange platform like Bittrex (bittrex.com).  This requires you to first transfer your Bitcoin to Bittrex, and then purchase other tokens using BTC.

(Another vocab word: “fiat” currency can refer to currency that the government has declared to be legal tender but is not backed by any physical value. Cryptocurrency is an example, and gold is a counterexample of this.)

What can be dangerous about using a cryptocurrency? How do you keep yourself safe?

 Good news! As Michael said, “cryptocurrencies are stored securely via complex cryptographic functions on a local digital currency ‘wallet’. To the extent that a user follows standard security measures: uses strong unique passwords, backs up wallet files, keeps wallets offline unless sending transactions, and ensures they don’t have viruses or malware on their computer, a cryptocurrency wallet is virtually impossible to break into.”

But, Gabriel explained,

  • The first is the risk of losing your cryptocurrency.  This can happen in a number of ways, the most common of which is when funds are compromised on an exchange.
  • One prevention against this is to always use two factor authentication on your exchange accounts. That being said, even two factor authentication can be compromised if someone clones your mobile sim card (and you happen to be using SMS two factor).  
  • As such, I recommend that users always keep their funds on a wallet that they control locally, and remember to backup the private keys.
  •  Even better is the usage of hardware wallets that keep the private keys separate from the application that facilitates transacting the funds (e.g., Trezor or Ledger).
  • Users speculating on cryptocurrency should only purchase as much as they can afford to lose.

The future seems exciting for this technology.

Michael corroborated that “Everything from data storage, data distribution, identity management, payments, asset settlement, smart contracts, supply chain management, and countless others can be improved on blockchain.

Cryptocurrency faces some regulatory risk in that it does take some power away from governments. The fact that monetary policy cannot be dictated by a government authority in these types of systems is a threat to them.”

 

Join us next week for another Q&A session from an expert in the industry!